July 18, 2006
From the desk of Jane Galt:Our loss?
Dan Gross tells Rosneft we didn't want your stinkin' IPO, nohow:
Many people have lamented the fact that Russian state-owned oil company has chosen to do its huge, $10 billion-plus IPO in London, rather than in New York. The decision has been held out as an object lesson in how U.S. listing standards and regulations are deterring foreign companies from becoming NYSE and NASDAQ companies. But as Joanna Chung reports in the Financial Times, there's reason to believe this may not be our loss and London's gain.
Rosneft yesterday began selling itself to investors, warning of "material weaknesses" in its internal controls, a Kremlin-
controlled board that might not always act in the interests of minority shareholders and possible legal liabilities of at least $14.7bn (£8bn).The state-owned Russian oil giant published the preliminary prospectus for its float in London and Moscow next month. It hopes to raise $10bn-$11.7bn, making it one of the world's largest initial public offerings and valuing the company at up to $80bn.
As with any such document, Rosneft has been obliged to list all the conceivable risk factors to any investment.
Over 25 pages, the potential pitfalls are set out. As expected, the central threat to any investment lies in the legal challenges surrounding Rosneft's contentious acquisition of the former assets of Yukos, the oil company once owned by the now imprisoned oligarch Mikhail Khordokhovsky. Rosneft acquired Yuganskneftegaz, the main asset, in an opaque and forced auction.
. . . Rosneft's corporate governance might also prove offputting. The prospectus says the Russian government indirectly owns 100 per cent of Rosneft and that six members of the nine-member board are officials in the government. This means Rosneft may "engage in business practices that do not maximise shareholder value" and cause it to "take actions that may not coincide with the interests of minority share-holders".
Its accounting systems may not be as sophisticated as that of companies with a longer history of compliance with US accounting rules and "Rosneft's independent auditor has identified certain material weaknesses in Rosneft's internal controls".
I'm afraid that I don't get Dan Gross's point. Certainly, Rosneft may be a bad investment . . . financially or morally. But it seems to me that the IPO pretty unequivocally benefits London, at the expense of New York, whatever the drawbacks for potential investors. London will get a huge infusion of cash from the IPO, as well as for all the other IPOs it garners in return for its willingness to let rather unsavoury characters list on its exchange.
Now, in the case of Rosneft, we might say that there is some intangible moral cost to dirtying one's hands with such a transaction, which outweighs the financial benefit. But Sarbox and its brother rulings seem to me to be indisputibly also chasing away perfectly legitimate and sound businesses, particularly foreign ones, that don't want to spend the money or the talent on its enormous compliance costs. Perhaps that is the price we pay for protecting US investors, but "Good riddance" is hardly an adequate argument for its charms.
Posted by Jane Galt at July 18, 2006 10:49 AM | TrackBack | Technorati inbound linksWouldn't the point be that a collapse of Rosneft, and associated loss for investors, would have a damaging effect on the London market as a whole? That is, the loss wouldn't simply be confined to the particular investors in Rosneft, but would spill over into the rest of the London market. After all, the Enron debacle didn't simply affect investors in Enron, but affected the entire US market, dontcha think?
Just as a follow up - why do you think that markets have listing standards at all? After all, if we accepted your position, it would be in the interest of all markets to weaken or eliminate their listing standards, right? But they don't. It has to do with the overall confidence in the market - markets trade off between increasing revenues by letting iffy companies list and decreasing overall confidence in the market (thereby indirectly decreasing revenues) when iffy companies go bust.
Jane's point seems to be that as long as market insiders get a nice piece of change, it doesn't matter what happens to the dumb investors. Caveat emptor, right? But isn't that attitude exactly what earned Wall Street the thorough regulation it now "endures." And hasn't that regulation made the market far more significant to far more people than ever before? In other words, hasn't regulation made the market "better"? Jane, don't take your nom de plume too seriously. As Dr. Johnson might say, "You can talk speak Ayn Rand. It is a way of speaking in society. But don't think like Ayn Rand."
Forget Sarbox, that prospectus reads like a Milberg Weiss press release. I'd be tempted to buy shares just to get a cut of the class action.
I didn't get out of Jane's post what the first two commenters did. Of course, being too lax in listing standards can harm both the listing organization and investors. At the same time, being too strict in listing standards can harm both the listing organization and investors. There is a lot of sentiment in the accounting industry that our recent round of government imposed standards have gone too far. Sarbox, it is felt in some quarters, costs far more than the benefits it produces are worth. If this view is correct, and if companies choose London over NYC for their listing because of it, saying "We didn't want your business, anyway," is not a healthy response. Pointing that out, which is what Jane did, is not the same as endorsing no standards whatsoever.
Megan:
Guess who essentially conceded the argument about Sarbanes-Oxley in this piece?
Meanwhile, fewer foreign firms that trade on foreign exchanges are choosing to list their shares on American exchanges through a mechanism knows as "depositary receipts." The Financial Times reported today that some 7 percent of the firms with American depositary receipts—nearly three dozen—chose to delist them last year, thanks to Sarbanes-Oxley regulations and a lack of interest from individual investors. According to the Bank of New York, of the 106 non-U.S. companies that started depositary receipt programs last year, only 29 listed in the United States, while the London Exchange and the Luxembourg Stock Exchange attracted 50 between them. Most of the Indian firms creating depositary receipts did so in Luxembourg.
A similar—and potentially more worrisome—dynamic is playing out in the lucrative market for initial public offerings. Rosneft, the state-owned Russian oil company, plans to divide its massive upcoming $15 billion IPO between Russian stock exchanges and the London Stock Exchange. The largest IPOs of Chinese firms—like China Construction Bank's $8 billion offering and the upcoming IPO of Industrial & Commercial Bank of China—are going to the Hong Kong exchange. Dubai opened the new Dubai International Financial Exchange last fall. And earlier this month, Saudi Prince Alwaleed bin Talal, the huge investor in Citigroup and other American firms, used the exchange to take his Kingdom Hotels company public in a significant offering.
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Gross is saying that Rosneft is a bad example for the proposition that U.S. listing standards are too strict. He is not saying that U.S. listing standards are too. He is saying that London’s standard is too lax because it is listing a company with contentious legal claims on its main assets and corporate governance that is likely to screw the minority shareholders. You can infer that he doesn’t think the U.S standards may be more than modestly stricter than necessary especially for a company that wants to do $10,000,000,000 IPO.
I imagine meeting the standards are much more onerous for companies worth less than $100,000,000
Alan Vanneman,
I think you'll have more than a little trouble finding investors that Sarbox matters to. A company telling me that they somehow failed to meet up with Sarbannes-Oxley would pretty well elicit a shrug on my part. It does nothing to prevent fraud and focuses on controls that have little to do with the things that are likely to generate the next Enron or WorldCom.
We have more than a dozen Chinese companies listed on the NYSE (and we'd probably take the Chinese bank listings if we could get them), so it's hard to imagine that Rosneft can't meet our standards.
Regulation of stock exchanges, like all regulation, costs money. Large companies generally **LOVE** regulation (despite their claims) because it keeps down the competition.
In this case, the company was doing "jurisdiction shopping" to hold down its costs.
Large companies generally **LOVE** regulation
This may often be true, but the peope I know in both corporate America and Big Law hate Sarbox.
Considering how much lawyers can make off of compliance work and shareholder litigation, that's we call an admission against interest.
Rob, people in Big Law (love the notion of an antithetical Small Law) don't hate Sarbox. They bitch about it. Everybody allergic to a big bunch o' Congressional idiocy shoulda thought things through back around 1999. Or, judging from the subsequent post, today.
Of course, doing the Rosneft IPO in London is a perfect example of a decision that disadvantages minority shareholders. The current Russian government just can't bring itself to give the US its IPO business. It also gets hives at the thought of subjecting its prize cash cow to what I'm sure it sees as regulation easily manipulated and directed by an essentially adversarial government. They'd do it in the US govt's shoes, and they like us even less than they did 15 years ago.
billswift,
That doesn't really apply here since there are substitute markets and the firms in question have ready access to all of the markets. You basically acknowledge as much in pointing out that they jurisdiction shop to hold down costs. In effect, the regulation in question doesn't hold down competition, but penalizes those in that particular market.
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