A farewell to Arm

Craig Coben is a former senior investment banker at Bank of America, where he served in various roles including global head of equity capital markets.

Just as medieval scholastics hotly debated how many angels could fit on the head of a pin, the various stakeholders on an IPO sometimes argue in minute detail about which stock exchange is most suitable for listing.

But unless the home stock market is demonstrably unsuitable, the presumption is that a company lists on its domestic exchange. Investors, governments, regulators, and the general public all expect it. Staying local demonstrates that the company has its roots in the country. It is also often the easiest for index membership.

Convention is therefore on the side of Rishi Sunak, who has appealed to Arm chief executive Rene Haas and Masayoshi Son, chairman of Arm’s shareholder Softbank, to float the chip designer on the London Stock Exchange.

Arm has been called “the jewel in the crown of British technology” and before being taken private in 2016 was listed in London, with American Depositary Shares quoted on Nasdaq. Cambridge-based Arm and Softbank of Japan are reportedly debating whether to list in the United States alone or whether to have a dual primary listing between Nasdaq and the LSE.

An appeal from the prime minister highlights the political stakes. London’s status as a leading financial center has been eroded by the loss of passporting rights with the European Union, political turmoil and the outflow of talent following Brexit. UK equities have underperformed since the Brexit referendum, with Paris surpassing London last November as Europe’s most valuable stock exchange.

“Convincing Arm . . . to have a listing in London would be seen as a significant vote of confidence in the UK market,” intones the FT.

For Arm and Softbank the decision on listing location hinges on two considerations. First, there are the capital markets implications: the listing arrangement should maximise investor demand, minimise execution complexity, and optimise IPO pricing and aftermarket liquidity.

Second, there are the public relations implications. Beyond placating the contingent concerns of the government of the day, PR extends to the way in which the company wishes to be perceived by employees, customers and broader civil society. The choice of stock exchange defines how a company sees itself in much the same way as the terroir gives identity to a wine.

That said, if news reports are accurate, Arm and Softbank have been leaning towards a primary US listing, and it is easy to understand why. Technology companies are often the exception to the home-listing rule: the critical mass of specialised investors and analysts, the willingness to entertain growth stories, the deep retail interest in tech, and the presence of listed semiconductor peers all militate in favour of the US. In addition, a US-listed share represents a more attractive “acquisition currency” for future dealmaking than even a London-listed one. No investor will think it strange for Arm to list on Nasdaq.

In other words, Arm should float in the US not because London has any particular flaws as a listing location, but rather because the scale, scope and depth of American capital markets make it a more compelling venue. Moreover, although Nasdaq has had its share of tech IPO flops, London’s track record has been marred by such debacles as Deliveroo, THG and Made.com, even if its listing regime was not the cause.

The UK government and the LSE understand this and have reportedly been lobbying Arm and Softbank for a dual primary listing or, to use the local terminology, a “premium” LSE listing as opposed to a “standard” (ie secondary) listing. Premium is the real deal: it imposes best-in-class disclosure requirements with strong governance and investor protections. A premium listing also enables a company to be included in the FTSE UK series of indices.

So the question is whether Arm should pursue what the FT calls a “rare dual listing that would allow the company to have a base on both sides of the Atlantic”.

Multiple listings have fallen out of favour in recent decades. In the 1990s large European companies floated on their home exchange and issued American Depositary Shares on the NYSE or Nasdaq to tap US investor interest. Since the turn of the century, a company located in an emerging market has often gone for a dual primary listing as well, IPO’ing on the local bourse as well as on a major developed market exchange (usually London).

But over time the trend has been towards single-country primary listing. Because companies could access global investor money on the domestic exchange, fund managers have become more comfortable with trading on local bourses. Indeed, liquidity on dual-listed companies often migrated to the home stock exchange anyway, making the foreign listing a distraction and cost-sink.

Multiple primary listings also mean additional complexity and cost. I’ve worked on dual- and even triple-listed IPOs, and even when there’s mutual recognition between countries (as in the EU), execution complications arise. In addition, coordinating different IPO workstreams amongst bankers, lawyers, auditors and other professionals is fraught for even the most straightforward companies listing on a single exchange.

In the case of a dual primary listing for Arm, the UKLA and SEC have similarly stringent standards, but they have very different rules and protocols in both form and substance. You can have faith in perfectly synched regulatory processes, but in my experience there is no such thing as immaculate inspection.

And the complexities linger after the IPO. The US and UK impose ongoing reporting requirements that again are not identical and are also subject to change — sometimes dramatically so, as when the US enacted the Sarbanes-Oxley Act in 2002. No government or regulator can guarantee there won’t be future rules changes.

A key argument for a premium London listing, the FT reports, is that it would attract “the sort of older and wealthier private investors who remember the early days of the company when it spun out of Acorn Computers in Cambridge’‘. The UK public has a history of supporting flagship IPOs, with Royal Mail’s 2013 IPO generating £4bn of retail orders, and Saga’s 2014 IPO another £842mn. Arm had a substantial retail following when it was taken private; it is anyone’s guess how much public interest there will be nearly a decade later, and anyway, retail offerings are often used in the UK as much for stakeholder engagement as for the quantum of demand.

Moreover, Arm can access UK retail without a premium London listing. In 2021 UK-based Membership Collective Group (owner of Soho House clubs) offered shares to its members and employees in the UK via a third-party digital platform, even though it listed solely on the NYSE.

The disclosure in the UK-approved prospectus was mostly recycled from the US registration statement, with limited additions. The SEC review drove the timetable. Though MCG has struggled mightily in the aftermarket, it offers proof of concept for separating listing venue from retail participation.

And this isn’t unique to the UK. In Japan, for example, companies ranging from Italian luxury outerwear maker Moncler to Belgian mail service Bpost have accessed the archetypal Mrs Watanabe through a POWL (no relation to Jerome) — a public offering without a listing.

Softbank and Arm will have to decide how to manage a request from the UK prime minister. But a Nasdaq-only flotation offers the broadest access to investors without the complications of two primary listings.