NYSE's Euro Vacation
Bad news for New York City
THE New York Stock Exchange's proposed merger with Paris-based Euronext, which runs four electronic stock exchanges in Europe, may seem like positive news 'for New York's economy —after all, the NYSE envisions the world's first global stock exchange headquartered right on Wall Street.
But if you look at one of the key reasons why the NYSE initiated the merger, you'll see storm clouds ahead.
Basically, the NYSE is reaching, across the Atlantic in part just to stay competitive.
Many companies, particularly up-and-coming entrepreneurial firms, are starting to see the New York market (or any U.S. exchange) as an obsolete place to do business — they're flocking to European exchanges instead.
In 2005, the NYSE and the Nasdaq won only 28 new international listings, a modest 16 percent rise from the year before. By contrast, the two major European exchanges, the London and the Luxembourg Stock Exchanges, won 50 listings between them — more than double their new listings in 2004.
What happened? Mainly, the Sarbanes-Oxley law that Congress enacted in haste just months after Enron's 2001 demise shook the financial markets. In the name of ensuring that every firm has adequate "internal controls" in place, the law imposes hefty new requirements on every company that's traded publicly in the United States.
The added costs run into millions each year — even for smaller companies. The Chicago-based Foley & Lardner law firm has estimated that for medium-sized firms, the "cost of being public" has risen 223 percent since 2002, due to new rules that result from Sarbanes-Oxley (S0x).
S0x's purpose is to minimize the risk of improper and inconsistent accounting practices —especially those that some managers employ to smooth over volatile quarterly numbers or to paint a falsely positive picture of their companies to investors.
But those activities are already illegal. Beyond that, regulators haven't spelled out exactly what they mean by good "internal controls" — so company executives must guess, adding massive uncertainty to the cost of doing business. The law also forces companies' chief financial officers to spend inordinate amounts of time shuffling through bureaucratic paperwork, instead of helping to map corporate strategy.
Most European and Asian companies ready to go public (like the vast majority of their U.S. counterparts) boasted rational accounting and auditing policies long before S0x. They understandably aren't interested in spending all that extra money just to list in New York.
And they're finding plenty of willing investors abroad any- way. "Five years ago, most big companies seeking public financing felt compelled to list their shares in New York. Today, non-U.S. companies are finding markets like London and Hong Kong equal to the capital-raising task," the Wall Street Journal reported last week.
Worse, foreign companies aren't the only firms that S0x deters from listing in New York. According to Wharton prof Christian Leuz, 198 companies delisted from American exchanges in the year after Sarbanes-Oxley went into effect —nearly triple the number the previous year. Among the factors pushing companies to delist: SOx-related costs like "higher audit and legal fees, new internal control systems...higher director and officer insurance premiums and a host of other expenses associated with compliance."
The NYSE may be trying to buy Euronext in part to encourage smaller and mid-sized U.S. companies to go public in Europe if it's financially prohibitive for them to do so here. American companies could list their shares abroad to raise capital in euros, and still do business in the U.S. But then they'd need bankers, stock underwriters, and financial advisers in Europe, not in New York.
One New York congressman has grasped how debilitating Sarbanes-Oxley will be for New York's economy. Rep. Gregory Meeks (D-Queens) has joined two southern colleagues to propose scaling back SOx as it applies to smaller companies. "We cannot lose our lead in America, and particularly here in New York," Meeks said last week, according to The New York Sun.
Chuck Schumer, call your office: 1t's time for the rest of New York's congressional delegation to wake up to this crisis in the making, and work with Meeks to fix this law.
As for Mayor Bloomberg: Perhaps the next time he wants to tell rich New Yorkers how to direct their political contributions, as he did last month when he told them to support national candidates who back New York on such foolish causes as getting more federal money for subsidized "affordable" housing, he should remember Sarbanes-Oxley.