A view from frankfurt

When the Neuer Markt, Frankfurt's segment for growth stocks, was launched in March 1997, it was welcomed as Europe's first serious answer to Nasdaq and a boost for Germany's embryonic equity culture.

With high admission standards and listings of almost 350 companies from Germany and other countries, it became the most important initial public offering (IPO) platform in Europe. Unfortunately, it has not fully lived up to expectations: since January 2001 the Nemax 50 (the index comprising the 50 most important Neuer Markt companies) has declined by 52.5 per cent; hence the listing on the Neuer Markt has become more of a burden than a benefit.
In a move intended to help restore confidence in the battered growth stock segment, the Frankfurt Stock Exchange recently announced new regulations under which the exchange can delist a company if its shares fall below euro1 (61p) each and its total market capitalisation becomes less than euro20m (£12.3m), or if insolvency proceedings are commenced or rejected to be commenced for the lack of funds. Companies falling below the share price and capitalisation levels for 30 consecutive trading days will be given 90 trading days to improve performance. Failure to do so for at least 15 consecutive trading days within that period will result in the delisting. The new rules will become effective on 1 October this year. They mirror similar regulations that were introduced on Nasdaq in 1997.
It is not easy to say whether the new rules will restore investor confidence in the Neuer Markt. They are, as the Frankfurt Stock Exchange admits, more a symbol than an effective remedy, as the new rules cannot turn the clock back and reverse the mistakes that have already been made. The press was quick in identifying a number of scapegoats: companies whose businesses were immature; chief executive officers (CEOs) who failed to communicate properly with their shareholders; investment banks pushing immature companies without paying attention to quality; fund managers and the investing public who got carried away. However, it should not be forgotten that there are companies listed on the Neuer Markt whose businesses were mature for the going public; there are CEOs who communicate properly with their investor bases; and there are investment banks whose track records are almost spotless. One could really say that there are two Neuer Markts, the one consisting of the questionable companies, which are responsible for the Neuer Markt's current bad image, and the other one, which consists of the good companies that deliver fair value and which play by the rules. The latter, if they wanted to, could switch the trading of their shares to Frankfurt's official list, and depending on their size and other parameters, be included in the exchange's mid-cap index, MDAX, or the small-cap alternative SMAX.
It remains to be seen whether the farewell symphony on the Neuer Markt will equal the dimension of the exodus from Nasdaq, with 525 companies having left that market since January. On the Neuer Markt, about 20-30 stocks among the 342 listed companies have been trading below the euro1 level in recent weeks, and 11 are in, or close to, insolvency. According to the timetable, the first delistings under the new rules cannot take place before spring 2002.
With the new rules, the Frankfurt Stock Exchange has made it clear that it wants the Neuer Markt to stay. The move has been widely welcomed. The Neuer Markt, as an intermediate financing stage between venture capital and a mature low-risk stock market, is beneficial for the German economy. Certainly, the experience of the downturn was beneficial for the German equity culture, too. Investors have learned that it is the content rather than the rulebook that matters, and that corporate failures are a normal part of the evolutionary process.
Hartmut Krause is a partner at Allen & Overy's Frankfurt office