In the aftermath of FXCM’s and Gain Capital’s successful IPOs last December, a number of other Forex firms (and their shareholders) have begun to look more closely at going public as well. While we understand that a number of other firms would like to go public soon – and are looking at stock markets including the NYSE and Nasdaq in the US, the London Stock Exchange, and the Toronto Stock Exchange as listing options – the road to becoming a public company will in our view be a very difficult one for other Forex firms, certainly for the foreseeable future.
Why difficult? We divide our answer into two parts:
1)Forex Industry Issues.
a.Low trading multiples. Shareholders of Forex companies have to question whether they want to be valued at the relatively low valuation multiples which have been set in the market for FXCM and Gain. (For more on public and M&A valuation multiples see page 26 of our updated-for-2011 Online Forex Industry Report).
b. FXCM and Gain Capital IPOs have flopped. Like in many areas of life and business, in the IPO world success begets success (and vice versa). Nothing brings investors to an industry like the success of similar companies, and conversely nothing scares investors away from an industry like losses. And while we believe that just going public was a major success for FXCM and Gain Capital (Forex.com), both of those companies have been a flop as stocks. FXCM is down 17% from its IPO price, Gain is down 12% – and that is while global stock markets have been up significantly since FXCM priced on December 1 – the S&P500 is up 9%, the FTSE100 by 5% over that period. In Europe things have not been much different, with industry leader IG Group’s share price down about 9% since announcing a large Japan-related writeoff in January; London Capital Group’s shares are off 27% since mid February; and FxPro failed in its attempt at going public in London last fall.
FXCM and Gain share prices since IPO, vs. the S&P500 Index.
Not a pretty picture if you bought the shares.
Source: Google Finance.
c. FXCM’s and Gain’s low share turnover. A possibly even more troubling sign than just being down a few percent since IPO, the shares of FXCM and Gain have been relatively illiquid. In the month of March, FXCM has averaged daily trading volume of about 300,000 shares (or about $3.5 million), and Gain 110,000 shares daily (or about $0.9 million). Many leading institutional (and other) investors will not touch stocks with such low turnover, as even if an investor liked the company, they would find it hard to buy in (and sell out) in significant enough numbers, and without moving the market with all the buying/selling, to make it worthwhile. And, they would stand the risk of being stuck down the road holding illiquid stock.
d. Business has slowed. As we have pointed out in several recent pieces regarding Saxo Bank, FXCM and Gain Capital, and FxPro among others, industry trading volumes are flat to down recently, at the same time that revenue-per-volume is dropping as well. Not a great story to be telling investors – and perhaps the reason for the low valuation multiples we mentioned above.
…and then there are:
2) IPO Market Issues. Beyond the Forex industry itself, there are several issues conspiring to keep most Forex companies out of the IPO game. The IPO market itself has undergone a major shift over the past decade, post-Internet bubble. Simply put, it has become harder and harder for smaller companies to go public (i.e. those that have less than $100 million in revenues), for several reasons:
a. Regulation. The Sarbanes-Oxley Act of 2002 instituted much more onerous reporting rules for public companies in the US, making it much more expensive to be a public company – and pricing many smaller companies out of the IPO market.
b. Liquidity. In today’s relatively flat market (outside of commodities stocks), many institutional investors will not touch public companies with a market cap below $1 billion. Smaller companies typically attract little to no research coverage and suffer from low trading volumes, as we pointed out above in regard to FXCM and Gain.
For more related reading on the IPO Market see Jeffrey Bussgang’s article at peHUB, and a recent Wall Street Journal opinion piece entitled Whatever Happened to IPOs?