Who Needs Nasdaq Anyway? - Industry Trend or Event

Asian Internet firms are reconsidering listings on local stock exchanges. But it's not easy to hit home runs, even in your hometown.

EVER SINCE THE INTERNET ECONOMY took hold in Asia early last year, the region's entrepreneurs have viewed a listing on the Nasdaq as the ultimate prize. But now that stock market turmoil has put this prize out of reach, they're changing their tune. Maybe the Nasdaq isn't so great after all, they're saying. While listing on the Nasdaq bestows a certain cachet, the fact is that most Asian Internet companies have watched their stocks shrivel there.

Chinese portals Sohu.com and Netease debuted on the exchange over the summer; both are down 75 percent from their offering prices. IAsiaworks, which operates Internet data centers, has fared somewhat better, but is still down about 40 percent.

Those dismal performances are due in large part to the general downturn in tech stocks. Yet foreign firms are particularly vulnerable to market conditions when they venture into U.S. markets because they are often unknown to investors and reliant on their underwriters for promotion.

Now the Asian Net CEOs who once gunned for the Nasdaq face three options: Raise another private round at a depressing valuation and wait for the IPO window to reopen; throw in the towel and sell the company; or settle for a listing on a local market.

A few hardy startups are going for another private round of financing. Taiwan-based Kimo.com chose the middle path and decided to sell to Yahoo for $146 million in stock. That is a rather low valuation for the leading Internet portal in one of Asia's most technologically sophisticated countries. Other companies are leaning toward local listings on an Asian stock exchange.

Similarly, SeedNet, an Internet service provider in Taiwan, is considering putting itself on the block. In August it shelved its planned Nasdaq IPO. "We knew that it would be a very hard thing if we had made it," says CEO C.J. Cherng, referring to the ill fortune of those that did make it to the Nasdaq. If Cherng chooses not to sell the firm, he'll most likely list it on one of Asia's stock exchanges, with an eye to listing it later on the Nasdaq when conditions improve.

That's also the plan at Surfgold.com, a regional site based in Singapore that helps companies develop customer loyalty. It too had been aiming for the Nasdaq. But Managing Director Eugene Lee now says that if the firm does a stock offering, it "will be looking to do it in Asia." However, he adds that the Nasdaq remains a long-term possibility.

Assuming local markets stabilize somewhat next year, bankers say many companies will follow that two-step course, listing at home with the thought of approaching the Nasdaq later. Jonathan Chan, Salomon Smith Barney's top investment banker in Asia for Internet and technology deals, says firms that have sustainable business models will seek local listings so they can be ensured a place at the table when the Nasdaq recovers. "Those that can't will wilt on the grapevine," he adds.

Ideally, a local listing performs two functions: It creates excitement for a company in its home market, where analysts and investors understand the firm's business and background, while also landing international buyers who will eventually buy on the Nasdaq, too.

But that double-play isn't easy to pull off. While the main boards in Hong Kong, Singapore and Taiwan are well regarded, the same cannot be said of secondary exchanges for high-growth stocks. Hong Kong's second board, the Growth Enterprise Market, for example, has been tarnished by the poor performance of companies that were listed haphazardly at the height of the Internet frenzy. As a result, institutional investors often won't go near companies listed there and are unlikely to buy their shares when they jump to the Nasdaq.

There are other problems with local listings, concedes Daniel Mao, COO of Chinese portal Sina.com. "Nasdaq investors are more sophisticated in their understanding of technology companies," he says. Helen He, CFO at Netease, says that's why she would choose to list on the Nasdaq again, even though her company has been pummeled there. She suggests that issuing shares on a well-regarded Asian exchange could have yielded a worse result. "In the local markets, you have traders, not investors," she says. "It can be more damaging."

If an IPO goes badly in Asia, it "can be a death sentence" for a company trying to use that as a stepping-stone to the Nasdaq, says Brooks Entwistle, executive director of Goldman Sachs Asian High Technology Group.

Richard Char, managing director at Credit Suisse First Boston, says even if a local IPO goes well, the multiples on Asian exchanges are lower and often work to limit a later Nasdaq listing.

"They act as a ceiling on the price of the U.S. flotation," he says, adding that pending the reopening of the Nasdaq window, CS First Boston recommends a private placement to many of its clients.

Venture capitalist Bharat Kewalaramani of Chase Capital Asia Technology Advisors says some firms should proceed with a local listing in Asia but choose their venue carefully. For example, a software services company should list in Bombay because local analysts there follow those types of firms closely. "If you are a software product company, you are in the wrong place," he says.

The trouble is that nowhere seems to be the right place right now.

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