SoftBank may move its big British tech stock to the Nasdaq

by James Mackintosh | UPDATED February 13, 2022 07:03 AM EST

There are good reasons to have big fish in a small pond

British finance is in an existential crisis moment after the owner of Arm Ltd. said it was leaning toward listing the chip designer—Britain’s largest tech company—on the Nasdaq rather than the London Stock Exchange.

Weight on the British mind: is London, for centuries the center of global finance, becoming a backwater? It has some go-go tech and biotech stocks that offer growth. The FTSE 100’s total value, the local benchmark, is only partially higher than that of Apple, and is dominated by the businesses of the last century: banks, oil, miners, tobacco and pharmaceuticals. There are only four tech stocks in the index, and as a result it is one of the cheapest markets in the world.

Still, Arm’s Japanese owner SoftBank Group should reconsider. The Nasdaq, of course, is the global market for technology. But that’s precisely why London has to be attractive, as it’s unlikely to get it on the other side of the pond, with local investors taking into account growth stocks. There are solid reasons to think that London will provide a valuation at least as good as New York, and it may well fetch a deficient premium.

Why London?

According to MSCI’s definitions, London’s tech sector may be small, but on a price basis, its valuation is higher than the US, Europe or Japan, which differ from the FTSE, with 12-month forward earnings. Still, MSCI is comprised of only three UK tech stocks (accountancy software firm Sage, industrial software group Avava and security, health and environment group Halma), so look at Arm’s own history.

Before SoftBank bought it in 2016, Arm—then with its primary listing in London—traded at a significant valuation premium to US chip makers and paid for earnings before interest, taxes, depreciation and enterprise value and advance PE. Was the most expensive of the two. Amortization Back then one would not have had trouble paying the premium for the arm.

London naysayers will point to two high-profile local flotations that flopped: food-to-the-door group Deliveroo and online retailer THG plc. Investors turned sour after the founder and CEO blamed short sellers for poor stock performance, and were further worsened when he told GQ magazine that listings in the UK “sucked from start to finish” and They should have been IPOed in the US to avoid attention.

Deliveroo fell a quarter on the first day of trading last March, and is now more than 60% below listing price. But its float fell in favor of pandemic winners, not only in the UK but in most parts of the world as Covid-19 retreated. By the end of November, Deliveroo’s shareholders would be unhappy, but the stock had lost exactly (adjusted for currency) as operators of rival food delivery services, Netherlands-listed Just Eat Takeaway and US-based Uber Technologies. Deliveroo’s stock has fallen sharply over the past few months, but that’s no reason to blame its pathetic listing experience.

What if Deliveroo had chosen Nasdaq instead of London? It’s impossible to be sure, but British companies Kazoo Group and Arrival are useful comparisons. Kazoo, an online car retailer, announced a deal to be listed in the US through a Special Purpose Acquisition Company, or SPAC, two days before Deliveroo shares began trading. The stock has fallen nearly as much as Deliveroo since then — and this applies since August 27, when the SPAC deal was completed.

Electric-bus maker Arrival completed its SPAC deal on the Nasdaq a few days before Deliveroo’s float, and fell 17% immediately before recovering—but is now down even more than Deliveroo.

Investors everywhere are less interested in fast-growing but loss-making companies and more concerned about the gig economy’s outlook, and the same applies to the few who blow up the Union Jack.

Arm will certainly be considered different from stocks like Deliveroo, as it has a long-established business on the edge of microchip design and is huge. Set to pay out $40 billion at the end of 2020, it will be ranked 21st in the London market, making it bigger than major UK market names such as aerospace and defense group BAE Systems and credit agency Experian . Arm will also be the largest tech stock. It should also qualify for British and European indices attracting passive funds.

The list will be just one of many in the US and Arm. With $40 billion, it would rank only as the 14th largest semiconductor stock and the 80th on the Nasdaq. As a British company with global sales, it probably wouldn’t qualify for the S&P 500, which brings in large amounts of passive money, although it should be in the Nasdaq-100 and the popular QQQ ETF.

There are three reasons why SoftBank might prefer the Nasdaq, other than the net valuation. The first is money: Having a big fish in a small pond helps attract attention, but means it’s hard to sell a lot of stock quickly. SoftBank has historically tried to keep a majority of its stake in a company after it’s IPO, but it may want to sell off its arm holdings faster to get cash.

Another reason is that British investors are firm about corporate governance, never SoftBank’s strong suit. London’s listing rules have been relaxed to allow for certain practices, such as dual share classes, common in US technology. But many British institutional investors continue to object to lower standards here and in other areas, such as the separation of chairman and chief executive, which American shareholders often slide.

The third is local expertise. It’s good for a company to have a deep pool of experts nearby, not least to perpetuate market misadventures, and the US has a plethora of tech-focused analysts and investors, unlike London. But there are enough; Other semiconductor stocks in Europe have no problem getting their message across.

Whether SoftBank chooses London or New York, it has serious work to do to have it ready by March 2023, as it hopes: Arm’s latest accounts have been apparently passed by its auditor due to legal problems in its Chinese joint venture. Wasn’t, a major black mark against an IPO on both sides of the Atlantic.

If Arm’s new (American, California-based!) CEO eventually goes with the Nasdaq, at least he’ll need a fair justification to make his case for British politicians keenly watching London’s financial rankings.