With Three Exchanges Wooing IPOs, Japan’s Public Offerings Outdo Those In The U.S.

Despite raising less money than in previous years, Japan has nonetheless maintained a fairly robust IPO market in 2001.

At the close of September, 116 companies made it to one of the three major Japanese exchanges, raising a total of 428 billion ($3.5 billion), according to IPOTokyo.com, a central IPO information database in Japan. Tom Sato, president and CEO of IPOTokyo.com, is predicting about 150 to 160 deals will be completed by year-end. In the U.S., there have been 71 IPOs to date this year.

In Japan last year, 203 deals were completed, raising 1.3 trillion ($11 billion). This compares to the 414 that were completed in the U.S. in 2000.

For the first quarter of this year, the average opening price to first trade day’s close was up an average of 97%. But when Japan’s economy re-entered a recession in May following a two-year reprieve, IPOs began opening below their offering prices.

Since Sept. 19, companies that have withdrawn their IPOs include a spin-off of Nomura Securities, Nomura Research Institute. A deal in Japan is typically pulled if a company can’t price the IPO within four to six weeks after filing.

Scarce Private Equity

The average deal size in Japan is much smaller than in the U.S., averaging below $10 million. This is because large private equity financing rounds in Japan are difficult to get.

“Companies take the small amounts because in Japan, there is no large private equity financing,” Sato said. “Most venture capital financing is between $100,000 to $1 million. To go beyond that, you need to go to the market.”

Additionally, Sato added that companies pursue an IPO to improve their credit ratings. A company would raise a small IPO, and then find an institution to give it credit financing.

“The interest rate is so low that if they can borrow, it is a far better proposition for management,” Sato said. “However, banks are very cautious about lending to private companies and amount is limited unless you have collateral, like land.”

Furthermore, underwriters are willing to take on smaller deals, because the fee structure is different than in the United States. Domestically the amount of proceeds is what matters, whereas in Japan the number of deals completed is more important.

Exchange Competition

The introduction of the Nasdaq Japan in June 2000 changed the IPO listing methodology for companies, creating new competition among the exchanges.

Typically completing an IPO on an over-the-counter exchange, and then moving up to the Tokyo Stock Exchange’s (TSE) Sections 2 and 1, respectively, as they grew their assets, companies now have the option of listing directly on the Nasdaq Japan.

The Nasdaq Japan has 70 companies currently trading on it, capturing 26% of the new IPOs in Japan this year, according to Jackie Kestenbaum, senior director of media and marketing for Nasdaq Japan.

“When we started our market, we had a sales force. From what I understand, that was a new concept for a market in Japan,” Kestenbaum said. “The OTC market then had no sales force. Within a few months of us announcing our plans to open in Japan, TSE had pushed forward its own market for emerging companies, called Mothers. With the arrival of Nasdaq, this meant there were three IPO markets instead of one. And ours had a dedicated sales team and a strong global brand. We would like to think that we are a catalyst for change in this market, as we bring over the best practices from Nasdaq U.S. in building Nasdaq Japan.”

The competition has gotten fierce since Nasdaq Japan’s debut. The Jasdaq – renamed the Japanese OTC – was able to snag more IPOs this year than the Nasdaq Japan, in part because of its updated infrastructure and aggressive marketing tactics.

To combat the Jasdaq, the Nasdaq Japan implemented a group consisting of venture capitalists, securities brokers and investment banks to woo compies to its exchange.

While this battle was going on, the TSE Mothers was able to snag the top Japanese dotcoms.

Deal Central

Two of the highest profile IPOs in Japan this year were from American restaurant chains.

McDonald’s Co. Japan Ltd. (JAQ: 2702) went public in July on the Jasdaq. The company raised 112.6 billion ($927 million), and had 29 underwriters. It was the largest IPO in Japan this year.

The company sold 26.2 million shares at 4,700 ($38) per share, an increase of 400 from its originally stated offering price. The IPO was seen to re-ignite investor interest in the Japanese stock market, which is near a 15-year low. Investors buying into the deal numbered more than 139,000. The offering was expected to help offset a charge the company was taking for the closing of 250 underperforming restaurants.

In October, Starbucks Coffee Japan Ltd. (NASJ:2712) sold 20% of its 1.42 million outstanding shares to the public, and became the 71st company to be listed on the Nasdaq Japan. The company raised 17.9 billion ($149 million) by selling its shares at 64,000 ($530) each, and will use the proceeds for expansion and to fund a stock-option program for its employees.

An overhaul to an antiquated regulatory code in Japan this June made it easier for companies to do stock splits, reverse splits, spin-offs and stock options for employees, according to Sato, enabling these companies to complete their IPOs.

Frank Musero can be contacted at: Frank.Musero@tfn.com