While Arm is avoiding London, tech investors are questioning the UK

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Global Courant 2023-05-08 13:10:40

Billionaire Masayoshi Son, chairman and chief executive officer of SoftBank Group Corp., speaks in front of a screen displaying the ARM Holdings logo during a press conference in Tokyo on July 28, 2016.

Tomohiro Ohsumi | Bloomberg | Getty Images

The UK may be a great place to build a tech company, but when it comes to taking the crucial step of marketing your business, the picture isn’t so rosy.

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That’s the lesson that several fast-growing tech companies in London have come to learn.

When Deliver went public in 2021, at the height of a pandemic-induced food delivery boom, the company’s stock quickly plunged 30%.

Investors largely blamed the legally uncertain nature of Deliveroo’s business – the company relies on couriers with gig contracts to deliver meals and groceries to customers. That has been a concern as these workers seek recognition as staffers with minimum wage and other benefits.

But for many tech investors, there was another, much more systemic reason at play — and it’s been cited as a factor behind chip design giant Arm’s decision to eschew a UK listing in favor of a US market debut. .

The institutional investors that dominate the London market lack an understanding of technology, according to several venture capitalists.

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“It’s not the stock exchange, it’s the people who trade on the stock exchange,” Hussein Kanji, founder of London-based VC firm Hoxton Ventures, told CNBC. “I think they’re looking for stocks that pay dividends, not high-growth stocks.”

“Two years ago you could have said, you know what, it could be different, or just took a gamble. Now a number of people have taken a gamble and the answers have come back. It’s not the right decision.”

Numerous tech companies listed on the London Stock Exchange in 2021, in moves that fueled investor hopes that more big tech names would appear in the blue-chip FTSE 100 yardstick.

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However, companies that have gone down this path have seen their stocks penalized as a result. Since Deliveroo’s IPO in March 2021, the company’s share price has plummeted dramatically, down more than 70% from the £3.90 it had priced its shares for.

Wisethe UK money transfer company, is down more than 40% since direct listing in 2021.

There have been some outliers, such as a cybersecurity company Dark trailwhose stock is up nearly 16% from its listing price.

However, the broad consensus is that London is failing to attract some of the massive technology companies that have become household names on major US stock indices such as the Nasdaq – and with Arm opting to debut in the US rather than the UK, some fear this trend will continue.

“It is a known fact that London is a very problematic market,” Harry Nelis, general partner at VC firm Accel, told CNBC.

“London creates, and the UK creates, globally important companies – Arm is a globally important company. The problem is that London’s capital market is fundamentally inefficient.”

A spokesman for the London Stock Exchange told CNBC: “Arm are a great British company and a world leader in their field, which we continue to believe can be very well served by the UK capital markets.”

“The announcement demonstrates that the UK needs to make rapid progress on its regulatory and market reform agenda, including addressing the amount of venture capital available to drive growth. We are working with regulators, government and wider market participants to ensure that UK capital markets provide the best possible financing environment for UK and international companies.”

The “B” word

Brexit has also clouded the prospects for technical quotations.

Funds raised by companies listed in London down more than 90% by 2022, according to KPMG research, with the market cooling due to slowing economic growth, rising interest rates and distrust around the performance of UK companies.

Previously published figures for the first nine months of 2022 estimate the decline in European funds at between 76% And 80% annually, indicating a less severe decline than the UK’s 93%.

Hermann Hauser, who was instrumental in developing the first Arm processor, blamed the company’s decision to list in the US instead of the UK on the “idiot” of Brexit.

“The fact is that New York is of course a much deeper market than London, partly due to the Brexit idiocy, London’s image has suffered a lot in the international community,” he told the BBC.

Cambridge-based Arm is often referred to as the “crown jewel” of British technology. The chip architectures are used in 95% of the world’s smartphones.

Softbankthat Arm acquired for $32 billion in 2016, the company now wants to take to New York after failing to sell it to US chip giant Nvidia for $40 billion.

Despite three British prime ministers lobbying for a London listing, Arm has opted to pursue a US listing. Last week it confidentially registered for a US stock exchange listing.

Developing research and development for advanced chips is a costly endeavor, and Japan’s SoftBank hopes to recoup its seismic investment in Arm through the listing.

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

Arm has said it eventually wants to pursue a secondary listing, listing its shares in the UK after a US listing.

Is an IPO everything?

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

In December, the government introduced a series of reforms to attract high-growth technology companies. Measures included allowing companies to issue dual-class stocks — which are attractive to founders because they give them more control over their business — in the main market.

Last week also the Financial Conduct Authority proposed to simplify the standard and premium segments into a single class for shares in commercial companies.

This would remove eligibility requirements that can deter early-stage companies, allow for more dual-class share structures and remove mandatory shareholder voting in takeovers, the regulator said.

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

“Luckily for us, this doesn’t mean the UK isn’t attractive to investors,” Nelis told CNBC. “It just means an IPO is just a funding event. It’s just a place, a location where you get more money to grow.”

While Arm is avoiding London, tech investors are questioning the UK

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