The Power of Balance

Why Nasdaq is leaning toward even-smaller companies these days.

From building a flashy headquarters in Manhattan to trying to extend its reach across Canada, Europe, and Japan, Nasdaq has spent the past few years trying to position itself as a worthy competitor to the New York Stock Exchange for blue-chip stocks. This year, though, with an ambitious plan to polish up the OTC Bulletin Board (OTCBB), it may instead go head-to-head with the Pink Sheets.

In a sign of just how badly stock prices have been beaten down, Nasdaq is preparing to make the OTCBB a more-respectable home for companies that no longer meet the financial criteria of its major markets. Pending approval from the Securities and Exchange Commission, as early as midyear Nasdaq is expected to launch the Bulletin Board Exchange (BBX) — a new exchange that will require listing standards for member firms, offer more-seamless trading technology, and ultimately replace the OTCBB.

The move is a reversal of policy of sorts. Until now, Nasdaq, which provides the technology for the OTCBB’s brokers, has kept its brand a safe distance from it. The reason: with no financial-listing standards and fitful volumes, the OTCBB has been a market of questionable repute — a last resort for firms too small, or too weak, to meet Nasdaq or NYSE standards.

But given the continued migration of blue chips to the NYSE and little hope for another dot-com boom, Nasdaq sees a future in the alternative exchange. “The BBX will appeal to small, well-run companies that care about their shareholders,” Nasdaq told CFO in a written statement. “These are companies that are willing and able to meet corporate-governance requirements similar to those of the Nasdaq or Nasdaq SmallCap market, but that cannot meet the financial requirements of those markets.” Seen in a different light, “it’s a combination of cleaning up the bulletin board and providing a softer landing for companies that fall off the Nasdaq National Market,” says James Angel, a professor of finance at Georgetown University.

Delisted Dilemma

The plan to take over the OTCBB has been in the works for more than two years, as part of Nasdaq’s scheme to split off from the NASD and go public. But it’s taken on added importance as the bear market has pummeled Nasdaq’s finances.

Since 2000, the number of firms listed on Nasdaq has dropped by more than 20 percent. With another 10 percent facing delisting as share prices remain below $1, and barely a trickle of initial public offerings to replace them, the attrition is expected to seriously affect the $857.2 million Nasdaq’s revenues going forward. “Plummeting fees from the new millennium’s bear market will depress this contribution over a protracted period,” wrote Jefferies & Co. analyst Charlotte Chamberlain in a recent research note.

Consequently, the immediate benefits for Nasdaq are clear. For one, it will be able to recoup some fees from firms that it has forced to delist and collect new ones from the OTCBB companies that all currently trade for free. Plus, there’s the promise of additional transaction fees if the technology and brand-name upgrade push up trading volume. That’s a big “if,” though, since experts estimate as many as half the 3,700 companies now on the OTCBB won’t be able to meet the new criteria — and few expect those struggling on the bigger boards to flock to it. “I think it will be a case of having to go there rather than choosing to go there,” says Scott Bleazard, co-founder of North Las Vegas-based Management Consulting Services, an investor-relations firm.

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