Rude VC: To IPO or not to IPO? – Going public in France

May 29, 2012
Vote on Hacker News

Forgive the bastardization of Shakespeare’s Hamlet, because when it comes to French tech IPO’s, one could argue that MacBeth is more appropriate (“Double, double, toil and trouble. Fire burn and cauldron bubble…”).

In my last two columns we reviewed the basics of IPO’s and examined some of the challenges that venture-backed companies like Facebook confront in going public in the U.S. In today’s third installment of the series, we’ll focus on the ramifications of going public for venture-backed tech companies in France specifically.

A French tech company that is planning to go public has one main group of exchanges to consider for its IPO in Paris: the Euronext (now NYSE-Euronext following its sale to the NYSE in 2007), actually encompasses three distinct exchanges: the Euronext, the Alternext, and the Marché Libre. Although it is not impossible for a French company to go public on some other European exchanges, such as the Scandinavian OMX or the London AIM, the contortions involved make this very unusual. Of course, any French company can shift its headquarters to another geography and go public there (such as Business Objects did on the Nasdaq), or even pursue a dual listing (which Business Objects also later did), but such a move requires the company to achieve substantial scale before becoming worthwhile.

Of the NYSE-Euronext group in Paris, the Euronext is the dominant exchange. This is where all CAC40 companies are listed, among 635 other mid and large cap firms. Due to the size threshholds and extent of compliance obligations, it is unusual for tech companies with market caps below 100M€ to go public on this exchange. Accordingly, the most commonly viable IPO options for French tech firms are either the Alternext or the Marché Libre.

What a fricking joke

Let’s start with the Marché Libre. In my undoubtedly controversial opinion, and to quote Aravand Adiga’s protagonist in The White Tiger, the Marché Libre is a fricking joke. It offers, in my opinion, all of the drawbacks of the Alternext, almost none of the Alternext’s benefits, and a few disadvantages of its own. Perhaps the most salient drawback is its sleazy connotation. Think of the dreaded ‘Pink Sheets’ in the U.S. where penny stocks, shell companies, and firms of dubious nature lurk. Don’t get me wrong: I’m not suggesting that the 250 companies currently trading on the Marché Libre are illegitimate. It’s just that given the extremely light regulatory requirements, a few bad apples, and nominal liquidity, most professionals don’t take the Marché Libre companies seriously. Even the relatively good ones are subject to a valuation discount due to their ‘location’. The analogy might be that of a decent residential home which is current on all mortgage payments but has the misfortune of being located in a neighborhood of foreclosures.

Surely there’s a viable alternative ?

There is: the Alternext. French tech companies consider the Paris Alternext as a natural first choice when planning an IPO. There can be advantages to going public for tech firms, and the Alternext sometimes delivers.

Let’s recap the principal reasons for going public:

  1. Raising cash
  2. Attaining prestige, credibility
  3. Attracting and retaining key employees
  4. Establishing a ‘currency’ of stock to facilitate future acquisitions
  5. Providing a liquid return to investors and employees

On the first two points, the Alternext can deliver, at least up to a point. Raising money is certainly feasible on the Alternext, and even though France doesn’t have a strong culture of individuals playing the stock market, there is a handful of institutional money and tax-advantaged fund vehicles which are commissioned to invest in Alternext issues. And thanks to its modest regulation and respectable collection of 175 listed firms, a company that is public on the Alternext can inspire a degree of integrity and stability (the Marché Libre gives the opposite effect here).

Size (volume) matters

On points 3 ~ 5, however, I submit that even the Alternext falls short. The crux of the problem is lack of volume. Lack of volume, i.e. limited trading transactions on a given company’s shares, can be devastating to a small company. For one thing, it makes it difficult for insiders to sell the stock. Unlike when a small fry like me sells 100 shares of a high-volume stock like Microsoft and nobody notices, a sell order of even a modest size on a stock with low trading volume pushes the share price down disproportionately.

And on the Alternext, trading volumes are miniscule. Only 15 companies on the Alternext surpassed € 1 million worth of trading in a month. For comparison purposes, Microsoft exceeds $1 billion worth of trades every single day.

An even more pernicious effect of low volumes is related to the notion of market efficiency. Market efficiency, when a stock price fully reflects all publicly available information on a company, requires a high volume of buyers and sellers in order to work properly. When trading volume on a stock is low, the stock price is less likely to reflect the true (or intrinsic) value of the company. This means that a public company with low trading volumes will often be penalized with a liquidity discount and a valuation that is far lower than the fundamentals of the business would justify. I can think of several examples on the Alternext today of solid companies for whom this liquidity discount is severely punishing.

A low stock price, especially one that is artificially low, will be useless as a currency for acquisitions. In addition to demoralizing employees, a low stock price will also bias any future takeover discussions with would-be suitors. Think about it: a tech company with a strong position in France or Europe may represent an attractive acquisition target by a large American and Asian acquirer. As long as the company is private, it can pitch an elaborate and promising equity story about its prospects and future value. When the company is public however, the potential acquirer is going to use the company’s low market valuation as an anchor for any M&A negotiations.