LSE-TSX Merger: Didn't We Try This Already?

Includes: TMXXF, TSXPF
by: Mark McQueen

The London Stock Exchange’s official address is 10 Paternoster Square. Perhaps it was named after a super-elevator, first built in 1884 by Londoner J. E. Hall as the Cyclic Elevator, according to Wikipedia. “The name paternoster (‘Our Father’, the first two words of the Lord’s Prayer in Latin) was originally applied to the device because the elevator is in the form of a loop and is thus similar to rosary beads used as an aid in reciting prayers. Paternosters were popular throughout the first half of the 20th century as they could carry more passengers than ordinary elevators….”

How appropriate, then, that the benefit of the TSX/LSE merger is, first and foremost, predicated on the theoretical benefit that the combined entity will be able to do more for Canada’s publicly-listed companies than our backwater exchange. Put more firms on the same elevator, so to speak.

It wasn’t that long ago that Welsh-Canadian Terry Matthews was telling everyone in Canada that all of his VC-backed companies would only be going public on the LSE’s AIM Exchange. The time was 2006-07, and March Networks, Sandvine, DragonWave, Redline and Redknee were doing their Initial Public Offering in London on the LSE’s AIM exchange, rather than solely in Canada.

In 2011, guess how many of those five firms are still using the LSE AIM exchange as their key listing platform? Zippo. Hard to believe, I know.

According to Dragonwave’s (NASDAQ:DRWI) website, the company is only trading on the TSX (TMXGF.PK) and NASDAQ. March is just on the TSX. Sandvine (NYSEMKT:SAND) never really saw much trading on the AIM, and long ago must have figured out that London was a pig-in-a-poke. Redline and Redkneee are also in exactly the same TSX-only boat.

Sir Terry didn’t even bother with the LSE for his 2010 IPO of Mitel (NASDAQ:MITL); it was straight to NASDAQ for that one. Where’s is everyone’s institutional memory?

This all truly begs the question: Didn’t we already testdrive the LSE, merely four years ago, only to find out that the car didn’t start?

I dug up this blog from January 25, 2007, since we are re-living the “London is Better” mentality. This may remind you of that Groundhog Day movie:

Bizarro AIMo
January 25, 2007

Here are six things that you might not know about the much hyped AIM market (and they get more bizarre as you go down the list):

1. Unlike a local IPO, a Company can put out press releases while they are marketing an AIM IPO to investors. At home, everything that gets publicly discussed, starting weeks before the filing of the preliminary prospectus, must be referred to in the prospectus. No customer win announcements, no glowing CEO interviews with the local media, nothing that could be seen to be “influencing” the market. If the regulator thinks you’ve doubled your firm’s radio or billboard ad buy during the roadshow…expect a seriously mean letter from the OSC.

2. The Investment Bank (Nomad as it is called) leading an IPO is also the regulator for the Company in question. Not only are they responsible for quality control (as there are in North America), they also have to ensure that the firm’s accounting and legal standing are up to snuff.

3. As part of the marketing of the AIM IPO, the research analyst working for the lead underwriter (Nomad) puts out a “pre float note”. And the note often includes forecast financial statements. Huh? In Canada, a software analyst employed by the lead underwriter can’t even have lunch with the IPO candidate’s CEO prior to the roadshow, and he/she certainly can’t talk to the i-banker about forecasts; even with a compliance lawyer standing in the room.

4. Once the Company is public, the Nomad is now responsible for putting out your press releases. Have an earning miss release to put out? Fax it to the i-banker at the Nomad to read, edit, consent and issue. Have a material acqusition to laud? Fax it to the fellow/gal that might not have been advising you (ie., no fee) on the exciting transaction. And if your draft release should get mislaid at the fax machine, send it again. How’s that for confidential? If big firms can lose data files between cities, or fax confidential info to foreign scrap yards, how long before a top secret fax gets mislaid?

5. While it might not have been your goal when you marketed all over Europe, Canadian institutional money managers are still allowed to buy your AIM IPO shares. Even if the stock is only going to be listed on the AIM. As long as you planned to sell most of your shares overseas, you don’t need to file a prospectus with your local regulator. And even if more than half the deal winds up in Canadian hands, there’s still no prospectus required.

6. The most incredible thing of all is that — for competitive reasons — several local investment banks have been forced to set up shop in the U.K. as Nomads, even though they’re responsible for regulating their prospective client base as a result. The dicotomy is incredible. A Canadian research analyst at, for example, a bank-owned dealer isn’t allowed to go to lunch with his own i-bankers unless a compliance lawyer is present; and that analyst certainly can’t be involved in marketing an IPO. If that analyst has lunch with the client’s CEO in the lead up to the IPO some dealers won’t allow that analyst to cover the Company going forward. Yet a U.K.-based research analyst working for the same Canadian parent institution puts out a note during IPO marketing, complete with projections based (undoubtedly) on lengthly discussions with the client involved. A different planet than the local scene for sure.

As with the tech bubble of 2000, the ability to move your Fortune 500 corporate HQ to Bermuda in 2002 to avoid paying U.S. tax, the 2004 off-balance sheet strategies of Bulge Bracket Wall Street firms involving Nigerian barges, and the Income Trust party of 2003-06…this unsustainable model will also come to an end in its current unregulated form.

Disclosure: None