American dream: ARM's upside in US listing could be just an illusion

Data Insight ECM Explorer 13 January

American dream: ARM's upside in US listing could be just an illusion

As UK semiconductor firm ARM and its owner Softbank [TYO:9984] look set to rebuff the UK government's lobbying and pursue a listing in the United States, history shows that not all European companies that floated on a US exchange have fared well in public markets.

Europe-headquartered stocks listed in the US, excluding SPACs, have fallen by around 37.8% on a weighted basis since the beginning of 2018, underperforming domestic US IPOs which are down around 11% over the same period, according to Dealogic data.

IPOs in Europe have fared better than both, registering a weighted average return of around 5.3% over the last five years. All IPOs in the US have underperformed the US benchmark indices, dominated by mega-cap tech names, the S&P 500 and NASDAQ 100 are around 42% and 68% respectively over the last five years, despite losing ground in 2022.

The subpar performance of European companies such as Farfetch [NYSE:FTCH] and Oatly Group [NASDAQ:OTLY] following their US listings should serve as a warning to IPO candidates like ARM. While the US might offer punchier valuations to start with, stocks can quickly become orphans if they underperform and that valuation is then lost in trading.

It may be a bit of a truism, but companies that list on their home exchanges tend to garner strong local support from investors who are deeply familiar with their equity story. This is important not just for that sought-after punchy IPO valuation but also for longer-term support.

ARM is a UK stalwart, a tech giant that is well known and would have plenty of fans in its home market. In the US, it might be little more than another semiconductor company at a time when listed semiconductor peers like Nvidia [NASDAQ: NVDA], Qualcomm [NASDAQ: QCOM] and Intel [NASDAQ:INTC] have seen their stock prices fall rapidly as part of a broader equity sell-off that has been particularly painful for high-growth tech names.

Traditionally, issuers will opt for New York because it is considered a deep pool of cash and a market where tech-focused companies can find better valuations than in Europe, one ECM banker said. However, this is becoming much less true, after last year’s battering of tech stocks amid rate rises.

“The multiples were enormous on all the tech names, and that is no longer sustainable,” he said, adding that the higher rates will call for alternative investment strategies and severe resizing of valuation prospects.

For a source close to ARM's IPO, post-listing performance is not just a US problem, but one that has affected stocks everywhere. Large IPOs in 2021, such as Moonpig Group [LON:MOON] and Deliveroo [LON:ROO] have also significantly underperformed, he noted.

“I don’t expect this to become a deciding factor for management at ARM to change their minds and go to London,” he added.

However, without a dedicated universe of committed fans across the Atlantic to support them, many European issuers have found themselves in the cold once when their valuations were no longer burning hot.

For many, the American listing dream may have turned more of a nightmare.

ARM declined to comment on this story. Softbank did not respond to comment on this piece.

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