As Arm shuns London, tech investors question UK as an IPO destination

At a press conference in Tokyo on July 28, 2016, billionaire and SoftBank Group Corp. Chairman and Chief Executive Officer Masayoshi Son said of a screen displaying the ARM Holdings logo. talking in front

Tomohiro Ohsumi | Bloomberg | Bloomberg | Getty Images

The UK may be the perfect place to build a tech company.

This is a lesson some high-growth tech companies have learned in London.

when Deliver When it went public in 2021, the company’s stock quickly fell 30% at the height of the pandemic’s food delivery boom.

Investors have largely blamed the legally uncertain nature of Deliveroo’s business — the company relies on couriers on gig contracts to deliver meals and groceries to customers. This is of concern as workers seek recognition as staff with minimum wage and other benefits.

But for many technology investors, there was another, more systemic reason. That is cited as a factor behind chip design giant Arm’s decision to avoid a UK listing in favor of a US market debut.

According to some venture capitalists, the institutional investors that dominate the London market do not understand technology very well.

“The problem is not the exchanges, but the people who trade on them,” Hussein Kanji, founding partner of London-based venture capital firm Hoxton Ventures, told CNBC. “I think they’re looking for dividend-yielding stocks, not high-growth stocks.”

“Two years ago you could say something might be different or just take the chance. Now a lot of people have taken the chance and the answer has come. It’s not the right decision.”

It’s a move that has boosted investors’ hopes that more tech companies will be listed on the London Stock Exchange in 2021, and that more major tech companies will start appearing in the blue chip. FTSE100 standard.

However, companies that have taken this route have seen their stock penalized as a result. Since his March 2021 IPO of Deliveroo, the company’s share price has plummeted dramatically, with him down more than 70% from his £3.90 share price.

wisethe UK remittance business is down more than 40% since its direct listing in 2021.

There were some outliers, such as cybersecurity firms dark traceshares are up nearly 16% from their IPO price.

But the broad consensus is that London has failed to attract some of the big tech companies that have made their mark on major US stock indices. Nasdaq — and with Arm choosing to debut in the US rather than the UK, some fear the trend will continue.

“It’s no secret that London is a very troubled market,” Harry Nellis, general partner at venture capital firm Accel, told CNBC.

“London creates globally significant businesses, and the UK creates them. Arm is a globally significant business. The problem is that London’s capital markets are inherently inefficient. ”

A London Stock Exchange spokesperson told CNBC:

“This announcement shows the UK needs to move rapidly forward on its regulatory and market reform agenda, including addressing the amount of risk capital available to drive growth. We are working with regulators, governments and broader market participants to ensure that the UK capital markets offer the best possible funding environment for UK and global companies.”

The word “B”

The UK’s exit from the EU has also clouded prospects for tech listings.

Funds raised by London-listed companies plunged more than 90% in 2022 as the market cooled due to slowing economic growth, rising interest rates and fears over the performance of UK companies, according to a KPMG study.

Previously released figures for the first nine months of 2022 show that European funding is down between 76% and 80% annually, not as severe as the UK’s 93%. increase.

Hermann Hauser, who helped develop the first Arm processor, blamed the “ridiculousness” of Brexit for the company’s decision to list in the US instead of the UK.

“The fact is, of course, New York is a much deeper market than London, and partly because of the stupidity of Brexit, London’s image in the international community has been greatly tarnished,” he told the BBC.

Headquartered in Cambridge, Arm is often referred to as the ‘best jewel’ of British technology. Its chip his architecture is used in his 95% of the world’s smart phones.

SoftbankIt acquired Arm for $32 billion in 2016.

Arm has chosen to pursue a listing on the US stock market, despite three UK prime ministers lobbying for a listing in London. It secretly registered to list on the U.S. stock market last week.

Research and development of cutting-edge chips is a costly undertaking, and Japan’s SoftBank hopes to recoup its seismic investment in Arm through an IPO.

Arm expects about $8 billion in revenue and a valuation between $30 billion and $70 billion, Reuters reported, citing people familiar with the matter.

Arm eventually says it hopes to pursue a secondary listing of its shares in the UK following a US listing.

Is it all about the IPO?

Still, regulators have tried to lure tech companies to the UK market.

In December, the government rolled out a series of reforms aimed at attracting high-growth tech companies. Measures included allowing companies to issue dual-class shares.

Last week, the Financial Conduct Authority also proposed simplifying the standard and premium equity listing segments into a single category of for-profit company stocks.

This would remove eligibility requirements that could deter early-stage companies, allow for more dual-class equity structures, and remove mandatory shareholder votes on acquisitions, the regulator said. increase.

Despite the negative impact of Arm’s decision, investors remain optimistic about London’s prospects as a global tech hub.

“Fortunately, it doesn’t mean the UK isn’t attractive to investors,” Nellis told CNBC. “It means an IPO is just a fundraising event. It’s just a place, a place, to get more money to grow.”

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