Stock exchanges battle in Silicon Valley

For years, technology companies seeking to go public—especially if they were from the San Francisco Bay Area—have listed their shares on the Nasdaq Stock Market, which celebrated 20 years in Silicon Valley last week when San Jose Mayor Chuck Reed rang the closing bell, remotely, from San Jose City Hall.

But the Nasdaq has been getting a run for its money lately from the New York Stock Exchange, which is trying to shed its white-glove, country club image and battle the Nasdaq for every new tech IPO.

In the last year or two, both exchanges have beefed up their staffs.

“I think it’s great that the Nasdaq has been around here for 20 years, but they were the recipient of being the only game in town,” says Doug Chu, a former technology investment banker who joined the NYSE two years ago as head of its Silicon Valley office. Chu says that he thinks he can get 80% of the local IPO market.

“We spend an inordinate amount of time focused on Silicon Valley because it’s the one area where we’re coming from zero,” Chu says.

Nasdaq officials refuse to acknowledge any pressure from the NYSE. At the San Jose event last week, Nasdaq celebrated its two decades in Silicon Valley with the IPO that day of venture-backed Financial Engines from Palo Alto, Calif. The company’s shares rose 44% in its first day of trading last week (see story, page 7).

“Silicon Valley is Nasdaq country,” Nasdaq CEO Bob Greifeld said.

Still, both stock exchanges are feeling financial pressures that didn’t exist a few years ago. Foreign exchanges, especially in China, have grown stronger and more competitive.

Meanwhile, the number of venture-backed companies going public in the U.S. plunged in 2008 and has not yet recovered. Overall, 11 venture-backed companies went public in 2009, raising $1.6 billion, according to Thomson Reuters (publisher of PE Week). That compares to six venture-backed companies that raised $471 million in 2008.

Then there is what Chu calls “the real competition,” such as dark pools, internal trades and electronic dealers, including DirectEdge, which the Securities and Exchange Commission approved last week to launch two new electronic exchanges.

“U.S. capital markets are not the center of the world anymore,” Chu says. “There is no new center.”

In response, both the Nasdaq and the NYSE are hustling. The NYSE spent $500 million to bolster two new data centers, going “from landlines to 4G overnight,” and lowered its listing standards to make it easier for smaller companies to qualify.

To list on the NYSE, the exchange requires a minimum market cap of $150 million. The Nasdaq has also said it will lower its listing standards, through its Boston license, to target small-cap companies

NYSE is larger than Nasdaq. NYSE had 8,500 listings with a combined market cap of $16.7 trillion, as of Dec. 31, 2008. The Nasdaq claims 3,700 companies with a combined $4.1 trillion in market value and calls itself “the biggest IT industry exchange” and the “biggest biotech industry exchange.”

Their fees are mostly comparable. Chu says that the annual fee to list on the NYSE runs about $45,000 a year, with Nasdaq charging about $3,000 less. The NYSE becomes more expensive for larger companies, such as when a company has more than 120 million shares outstanding. The exchanges each charge a one-time listing fee.

Both exchanges tout companies that they’ve persuaded to switch from the other exchange to theirs. Nasdaq says 24 companies switched to Nasdaq from the NYSE last year, including Mattel, Dreamworks Animation and R&R Donnelly & Sons.

The NYSE, meanwhile, claims several high-profile Silicon Valley tech companies have changed exchanges, including Juniper Networks and Charles Schwab. (Schwab started on the NYSE more than 20 years ago and just switched back.)

“With many of our business partners and customers already listed on the NYSE, joining them aligns well with our strategic goals and our marketing strategy,” says Juniper Vice President Melanie Branon in a statement.

The competition amuses some observers. “The tables are turned,” says one source. “It used to be that the elitist snob was the NYSE, and Nasdaq was the scrappy kid.”

The National Venture Capital Association works enthusiastically with both exchanges. In fact, the NYSE is sponsoring the venture group’s annual meeting in San Francisco in May.

“Both are hoping to see the market change, and when it does, they want to be part of the hopeful VC IPO resurgence,” says NVCA president Mark Heesen. “More power to the NYSE for being aggressive.”