Are takeovers shrinking the ASX?

A lot of large companies have left the ASX in recent years after being taken over. The total market cap of companies in this category exceeds $175 billion in the last 3 years. At the same time, it is apparent that the number of IPOs has diminished and we have seen fewer large secondary raisings. At first blush, that suggests that there has been a net exit of capital from the ASX. That raises the question of whether the ASX is ‘shrinking’. 

In brief

• A large number of significant companies have left the ASX in recent years after being taken over. Together, they had a market cap of over $175 billion. At the same time, we have had fewer IPOs and secondary capital raisings.
• This raises a question about whether the ASX is shrinking.

Are takeovers shrinking the ASX?

An interesting aspect of our market in recent years has been the number of significant companies that have left the ASX due to takeover compared to the (lesser) number of large companies joining the ASX.

Companies that have left since the start of FY22 include Adbri, Afterpay, Allkem, Alumina, AusNet Services, Blackmores, Boral, CIMIC, Crown Resorts, CSR, Link, Newcrest, Oil Search, OZ Minerals, Pendal, Spark Infrastructure and Sydney Airport. Some of them have been acquired by other listed entities, but most have been acquired by foreign or private bidders.

Over the same period, 25 companies with a market cap over $500 million have joined the ASX. This includes Arcadium Lithium, APM Human Services, Block, GQG Partners, Guzman Y Gomez, Judo Capital, Light & Wonder, Newmont, Pacific Edge, PEXA, The Lottery Corporation and Ventia Services.

A few comments can be made about the two lists.

First, the newly listed companies are, with a few exceptions, generally smaller than the companies that left after being taken over.

The market cap of the companies that have left mentioned above was $175 billion. This exceeds the market cap of the newly listed entities. I calculate that as around $70 billion.

The new joiners include three foreign companies which have a dual listing on ASX and in the US and listed via CDIs following a local takeover. The $70 billion figure only includes the value of the CDI securities listed on ASX, not the value of other shares in the entity which are listed on the foreign exchange.

The $70 billion also includes $10 billion for The Lottery Corporation, which demerged from Tabcorp. That could be viewed as re-cycling of existing capital.

Over the period since the start of FY22, the largest new listings that actually raised fresh capital were Abacus ($225m), Metals Acquisition Corp ($325m), APM Human Services ($342m), Guzman y Gomez ($335m), Judo Capital ($654m), PEXA ($1,175m) and GQG Partners ($1,187m).

What does ASX say? The ASX says that the net new capital added to ASX since 1 July 2017 is $452 billion. Since 1 July 2021 (the period mentioned above), the ASX states that the net new capital is $138 billion. However, that includes $96 billion attributed to BHP’s reunification, which, while it clearly adds to the ASX, arguably was not a new capital raising at all. Even allowing for that, the ASX’s figures suggest that the ASX is not shrinking.

At the same time as questions have been raised about whether the ASX is shrinking, private capital is increasing. The ASX states that the total domestic equity market capitalisation was around $2.5 trillion at 30 June 2023, compared to $66 billion of Australian private equity and venture capital assets under management. That implies the shift to private markets has a long way to go to rival the ASX.

Despite those statistics, there are concerns about the trend towards private equity ownership, rather than IPOs, and the lower levels of visibility about the underlying companies as a result. The Chairman of ASIC, Joe Longo, was reported as saying that the issue was ‘floating to the top’ of his in-tray.

This topic has a lot of nuances and themes. It is undeniable that private equity (and private capital more generally) is rising steadily. Many businesses benefit from being away from the glare of public markets, particularly if they require radical restructuring to address commercial issues. The growth in pension funds in Australia and elsewhere means that there is a huge demand for investment opportunities around the globe. Meanwhile, governance rules on public markets do not suit all businesses and many capable directors do not like the strictures these rules impose. Some directors are concerned that rules designed to protect investors (like the ASX Corporate Governance Council Principles and Recommendations) may be deterring companies seeking a public listing. There will always be a central place for public markets, but it will be alongside private markets.

The UK changes to listing rules

Many people in the UK have been expressing concerns that London is losing its importance in world markets too. There has been extensive discussion on this topic for many years as a number of high-profile major companies chose to list on NYSE instead of London, often due, it was said, to more relaxed listing rules on NYSE (such as allowing dual class of voting shares, which enable founders to retain control of the company, despite holding a minority of issued shares).

On 14 July 2024, the UK Financial Conduct Authority announced changes to radically restructure the listing requirements in London with a view to attracting (and retaining) more listed entities.¹ The new rules start on 29 July 2024. They have been described as ‘monumental’ and the ‘most significant changes in three decades.’

Under these rules:

• shareholder votes will no longer be required for significant/Class 1 transactions (essentially, a transaction with a value more than 25% of the listed company’s value);
• shareholder votes will no longer be required for related party transactions;
• a modified sponsor regime will remain a cornerstone of investor and market protection;
• relationship agreements with controlling shareholders will no longer be mandatory; and
• there will be significant changes to the eligibility requirements for IPO candidates, moving to a disclosure-based, rather than rules-based regime, as well as adding institutions to the categories of people who can hold enhanced voting rights in a company with a dual class share structure.

There are no current moves for Australia to follow down a similar path. However, it may be the case that allowing multiple classes of voting rights would encourage founders and families to list their stock, which could see some of the successful founder led companies coming to market earlier than they otherwise would. It will be worth watching to see whether the UK benefits from its new approach. If it does, that may renew calls for the ASX to allow dual classes of voting shares.