Investor's Business Daily, May 17th, 2007
The U.S. has long been the go-to place to raise money in the capital markets. But its star has faded as European and Chinese markets have ascended.
U.S. officials know they can't rest on their laurels anymore. To attract more foreign listings, they're looking to ease up on regulations.
One key initiative that's now getting fast-tracked addresses how foreign firms must reconcile their accounting to U.S. generally accepted accounting principles, or GAAP.
Under the plan, foreign firms would be permitted to report in the simpler International Financial Reporting Standards used in Europe. The Securities and Exchange Commission also is mulling letting U.S. firms use either standard.
The SEC and its European counterpart have agreed to set 2009 as a goal to come up with a workable framework for eliminating GAAP reconciliation. U.S. and British financial oversight authorities also are working on converging the two disparate standards into a single one, which likely would take much longer.
To get a sense of the urgency in the U.S., America's share of proceeds from global IPOs dropped from 50% in 2004 to 26% last year, according to a PricewaterhouseCoopers report. Europe led with a 43% share in 2006. China -- including Hong Kong -- had 31%.
Foreign firms raised $1.8 billion on U.S. exchanges in the first quarter, or 15% of total proceeds, PWC said. That's down from $2.8 billion, or 24%, in first-quarter 2006. Three of the top 10 IPOs were foreign firms vs. four a year earlier.
The U.S. and London financial oversight boards -- FASB and IASB, respectively -- are working together to address major differences between the standards.
There are numerous differences between the rules-based GAAP and IASF, which is based on more subjective principles.
"Perhaps the biggest difference is what's not on paper: the level of detail in the standards," said Fred Gill, senior manager of accounting standards with the American Institute of Certified Public Accountants. "The U.S.' are more detailed, and the international standard has a conceptual framework that includes broad concepts."
Under GAAP, there are more than 180 items related to revenue recognition. Under IASF, "you probably have less than one page," Gill said.
GAAP's sheer volume of detail will make it tough for the two standards to find common ground. Still, some headway has been made in such areas as stock options, inventories and asset exchanges.
"The standards will come closer and closer together," Gill said. "Will they ever become identical? Probably not."
Cut Costs, Boost Choice
SEC officials say the solution does not have to be perfect, just simpler and easier to digest. The SEC already has decided to make it easier for foreign companies to delist in the U.S., a difficult procedure that made some overseas firms think twice about listing here.
Proponents say there are plenty of advantages to having simpler reporting requirements. The biggest is that doing so would make it easier and cheaper for foreign firms to list on U.S. exchanges.
"Anything that lowers resource requirements and reduces costs is a positive contributor in the decision-making process of non-U.S. companies on whether to list in the U.S.," said Noreen Culhane, executive VP of listings for the NYSE Group.
Markets would make more money and U.S. investors would have more stocks to choose from, experts say.
"There are advantages for everyone," Gill said.
U.S. multinationals wouldn't need different accounting systems for global subsidiaries. Financial analysts and auditors would have an easier time comparing companies from different countries.
The hard part is toning down the complexity of U.S. standards without sacrificing their intent, Gill said.
"When you make things less complicated, somebody may see that as an opportunity to do things they shouldn't be doing," Gill said. "Part of the reason for complexity is that the world has become more complex. Business has become more complex."
Some observers says accounting issues aren't a cure-all for the U.S.' waning status in global capital markets. Nor are changes to the Sarbanes-Oxley governance law.
"There's just a lot more liquidity in international markets today," said Scott Gehsmann, a capital markets partner in PricewaterhouseCoopers' Transaction Services group. "The world has become a smaller place than it was in the late '90s."
The late '90s were heyday years for U.S. IPOs, he said, despite GAAP, which "didn't inhibit companies or foreign issuers from listing in the U.S. in droves."
Global companies have a lot more options now.
"Do you have to list in the U.S.? No -- that's where the landscape has changed," Gehsmann said. "Today you can get a multibillion dollar deal done and avoid the U.S. through listing on one of the (international) exchanges."
More telling than the disparity between U.S. and foreign listings is the rise of private equity, others say.
"When normal, large firms go increasingly into private hands, that tells us that something is wrong with our public equity market," Charles Calomiris, professor of financial institutions at Columbia Business School, wrote in an e-mail.
He noted that private equity has become a desirable alternative to public listings. Private firms don't have to deal with onerous securities regulations, legal risks and executive pay issues.
If You Can't Beat 'Em
The NYSE NYX and Nasdaq NDAQ have offset some of their lost business to foreign exchanges by buying stakes in them. The NYSE bought Paris-based operator Euronext this year. Nasdaq has built up a 30% stake in the London Stock Exchange, though LSE has rebuffed a full takeover.
NYSE's Culhane stresses the continued advantage of a U.S. listing. Companies get a premium valuation when they list here, she says. And they broaden their shareholder base outside their home market.
"We're going through a transition period as it relates to the regulatory framework," Culhane said. "As it's addressed, we'll see more companies listing in the U.S."
