Ultimately, however, Nasdaq’s hope may be to stem an even more embarrassing trend: the annual migration of some of its brightest stars to the NYSE. Last year about 40 firms, including Banknorth, Emulex, and BearingPoint (formerly KPMG Consulting), made the switch, in part for the prestige and global exposure they believe the NYSE provides. With any success, the BBX could potentially “create a farm system of companies that when they get bigger will go onto Nasdaq,” says Prof. Daniel G. Weaver of Baruch College.
For companies that do begin listing on the BBX, the benefits are mixed. They will still be exempt from most financial standards, such as the net-asset and share-price minimums that have pushed some 600 companies off Nasdaq in the past two years. But under the new regime, firms would have to pay annual listing fees of $4,000 to $10,000 and meet corporate-governance standards similar to those proposed for other national markets — which may include retaining an independent director with financial expertise. That could put compliance costs anywhere from $50,000 to $200,000, according to Bleazard.
Companies already trading on the OTCBB that have undertaken governance reforms have the most to gain. “We expect it to have more benefits than negatives because we’re already doing the negatives,” says Anthony Albanese, CEO of Michigan Heritage Bancorp Inc. While the BBX rules will add about $10,000 in costs, Albanese is optimistic about the extra credibility the exchange could afford. “We expect to see better analyst coverage and, hopefully, a higher stock price,” he says.
But other executives are unconvinced the upgrade will have the desired effects on institutional investors. “It’s a much tougher sell for Nasdaq to raise the credibility of the over-the-counter market than to take something that already has credibility, like the Nasdaq SmallCap, and make adjustments,” says Tim Bixby, president and CFO of $8 million LivePerson Inc., a New York-based provider of online sales, marketing, and customer-service solutions. With LivePerson’s stock price trailing under the $1-per-share price minimum for more than a year (the stock is now around 75 cents), the company moved to the SmallCap in May 2002, a move that Bixby says has had little impact on its investor base. However, he believes that dropping down to the OTC market — even an upgraded version — “would absolutely have an impact for some of our funds — they just can’t own those stocks.”
The biggest losers, though, will be those companies unable or unwilling to meet the higher listing fees or requirements. They will be relegated to the Pink Sheets, a market with no SEC reporting requirements, and about Nasdaq’s only competition for the penny stocks once the OTCBB disappears. Such a downgrade, though, will also reduce their access to capital, says Brad W. Smith, an OTCBB Advisory Board member and president of WBS&A, a capital-markets advisory firm. And for that reason, he is lobbying Congress to preserve the OTCBB as is. A BBX-only regime, he says, is “evidence that Nasdaq intends to take only the companies that are most profitable to it from the OTCBB and leave behind the regulatory cost” of policing weaker entities.
Truth & Consequences
At this juncture, Nasdaq is clearly looking for a win. After writing off $15.2 million to shut down its Nasdaq Japan exchange last summer, struggling to gain momentum with its two-year-old unprofitable Nasdaq Europe, and having its IPO stymied, growth prospects are dim.
Will the BBX help bolster those prospects? In terms of making up lost revenues, the answer is likely no. “We expect the BBX to be profitable, but to contribute only a small percentage of Nasdaq’s total revenue,” says the company. But creating a halfway house for its weaker stocks may ultimately make the main market a more hospitable place for healthy companies.
Alix Nyberg is a staff writer at CFO.