Muppet farce prelude to Frankfurt's tale of woe

Neuer Markt is worst performer among Europe's hi-tech stock markets, reports Stewart Fleming

IT MAY not be easy being green, as Kermit the Frog used to wail. But right now Kermit and his fellow critters on the Muppet Show, not to mention shareholders of EM.TV & Merchandising which owns the rights to the Muppet clan, are undoubtedly feeling extremely blue.

Last month EM.TV, a German company that was once one of the stars of Frankfurt's hi-tech Neuer Markt, confessed that it could not count. After it revealed that its half-year sales and earnings figures were inaccurate, its shares plunged 30% on the day. They are now languishing around e24, down from a year's high of e114.9.

The EM.TV shocker was just the prelude to what has been a horrible November for the Neuer Markt.

Within weeks Teamwork Information Management and Gigabell, a telecoms start-up, had both announced they were insolvent. A handful of other companies have also shocked the market with profits warnings.

A couple of casualties out of the almost 340 companies listed on the Neuer Markt should not be traumatic. But the failures are part of a wider malaise.

One third of the companies that have been floated this year are now trading below their issue prices.

The Nemax all-share index, an index just for the Neuer Markt, soared from 2680 in the autumn of 1999 to 8599 in the spring but is back down around the 3000 level - the worst performance among Europe's specialist hi-tech stock markets.

And DG Bank, which carved out a leading issuing-house role on the Neuer Markt, has implicitly confirmed critics' claims that banks were floating companies which were ill prepared for a public listing.

It announced publicly that it was tightening up the criteria for the initial public offerings it sponsored.

Even more significantly, because it is a covert sign that market officials are worried about some weaknesses, Volker Potthoff, a member of the board of the Deutsche Brse, which operates the Neuer Markt, said last week that it too was looking at ways of tightening its listing criteria.

There are two views of the controversy surrounding the Neuer Markt.

"It is more a problem of the collapse of the hi-tech sector worldwide than a fundamental problem with the market," is how the head equities dealer of a large foreign bank puts it. A former top Deutsche Brse official adds: "I am happy with the way things have developed.

"Investors have been reminded that this is a high-risk market and at the same time we are clearing out the dead wood, companies which are unlikely to survive the next five years."

Adrien Bommelaer, who covers Europe's hi-tech new markets for Credit Suisse First Boston, says: "It is good the Deutsche Brse is tightening up.

This will help to restore confidence."

Others are less sanguine.

"If this new market gets a bad reputation it could be the death of it," says a member of one of Germany's investor protection organisations. A Neuer Markt trader at a leading Frankfurt bank says: "The investment banks got carried away.

"They were ready to bring every company to the market whether or not it had a decent business plan."

Liquidity too is a problem, he argues: "In too many smaller stocks there is no bid side.

"In some, the market is so thin the proprietary traders at the banks have been able to virtually fix prices and the private investor has been stuffed."

Some well-informed observers, sympathetic to the Deutsche Brse, say privately it is not just the issuing houses chasing fees that were carried away by the euphoria that drove the Neuer Markt up. The Deutsche Brse too got sucked in.

"It let its ambitions to see the Neuer Markt as the foundation of a pan-European, not just a German, rival to the US Nasdaq market compromise its judgement about which companies it should agree to list," says a former government official.

Says a German venture capitalist who examined floating a hi-tech company in both London and Frankfurt: "The Deutsche Brse officials we spoke to were just not financially sophisticated enough for the job they were trying to do."

Others say the investment banks also lack analytical strength in Neuer Markt companies.

The fact that there is still a steady flow of new issues to the Neuer Markt, and that the private-investor tranche of the recent Deutsche Post flotation on the main market was eight times oversubscribed, suggests that with speedy remedial action by all concerned, confidence in the NM will recover.

But the stakes are high, and not just for Frankfurt.

Europe's new markets for hi-tech companies are one of the pillars on which the growth of the EU's venture capital and hi-tech business sectors are founded.

The risk of contagion cannot be ignored.

Copyright 2000
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