The NASDAQ market has repeatedly delayed plans to sell its own stock in an initial public offering, but NASDAQ shares are trading anyway on the over-the-counter NASDAQ Bulletin Board.
As a stock, NASDAQ hasn't performed very well, falling from US$15 a share on the first day of trading, on July 1, to US$7.50 on Friday.
PHOTO: NY TIMES
At that price, though, NASDAQ may be a bargain, said Charlotte A. Chamberlain, an analyst at Jefferies & Co, the New York investment bank, which owns 126,000 NASDAQ shares. She believes that Nasdaq has a universal brand and will generate earnings for decades to come. "It's like Coke," she said.
Chamberlain warned, however, that NASDAQ shares are traded so thinly that small purchases can move the market. "A trade of 500 shares can make an individual investor feel like George Soros," she said.
Investors buying shares under these circumstances face considerable risk, said Samuel L. Hayes III, an emeritus professor of investment banking at Harvard University. "Any significant block of shares that comes to the market could destroy the price," he said.
This state of affairs is a far cry from the dreams of the NASD, which voted in April 2000 to spin off NASDAQ in a series of private sales to broker-dealers and large companies listed on the market. The idea was to move quickly to a big initial public offering, establishing NASDAQ as an independent, actively traded company for the first time.
Times change
"Everybody was so caught up in the market, no one had the idea that we wouldn't be a public company a year and a half later," said Hardwick Simmons, NASDAQ's chairman and chief executive.
With the cooling of the market for IPOs, however, NASDAQ postponed its own IPO several times. In the meantime, the lockup period, in which the sale of stock was prohibited, expired on June 28 for 33.2 million shares sold in 2000 and 2001. On July 1, some investors began unloading their holdings on the Bulletin Board, an over-the-counter market generally reserved for weakly capitalized companies that do not meet listing requirements of Nasdaq or the major stock exchanges.
Simmons called the situation "unfortunate," but said there wasn't much he could do to discourage trading of the stock in this way. "We don't think the Bulletin Board trading accurately reflects the value of our company," he said.
When the Bulletin Board trading began in July, NASDAQ's market capitalization was pegged at more than US$1.18 billion. It has since plunged below US$590 million. Fewer than 10,000 shares of NASDAQ trade on a typical day, or less than 0.00013 percent of the company's 78.6 million fully diluted shares.
In addition to the 33.2 million common shares sold privately, the NASD holds 43.3 million shares underlying warrants sold to institutional investors. The warrants give investors the right to buy shares at prices ranging from US$13 to US$16. NASDAQ employees received the remaining shares.
The NASD, which regulates the NASDAQ market, retains voting control over it through a separate class of stock. This stock would be eliminated if the Securities and Exchange Commission granted NASDAQ status as a stock exchange. NASDAQ is now classified as a market and would become self-regulating if it were an exchange.
Eliminating NASD's control over NASDAQ would make Nasdaq more appealing to large investors, said John Coffee, a Columbia Law School professor specializing in securities law.
At this stage, NASDAQ's goal in selling shares through an IPO is not to raise capital, said Patrick Healy, a managing director at Hellman & Friedman, a private equity firm in San Francisco that is a large investor in NASDAQ stock.
"They don't need to raise new capital," Healy said. "The point of an IPO would be the debut of NASDAQ as a company and the creation of a liquid market for shares."
Many investors have little interest in trading NASDAQ shares on the Bulletin Board, simply because the market is so illiquid, Coffee said. And Franklin R. Edwards, a professor of economics and finance at Columbia University, said, "There is substantial uncertainty about what the price should be."
Chamberlain, one of the few Wall Street analysts to issue a report valuing the company, puts the short-term value of NASDAQ shares at US$9, which would give it a total market capitalization of about US$700 million.
Based on an average share price of twice book value for a range of similar companies -- including publicly traded stock exchanges in Europe, financial data companies like Dow Jones and Reuters and information technology consultants to the financial services industry -- the implied price for NASDAQ shares would be around US$7, she said. The average price-to-earnings multiple for this group is 18, however, suggesting a share price around US$14 based on her 2003 earnings estimate of US$0.75 a share.
SuperMontage Success
Chamberlain said the shares could move to US$14 if NASDAQ had a big success with SuperMontage, a new trading platform it introduced in October. It spent US$107 million developing the system in response to a challenge from electronic communications networks, which have eroded NASDAQ's share of stock trading. Recently, the networks have taken more than 35 percent of the trading volume in shares listed on NASDAQ, while NASDAQ's own trades slipped to less than 30 percent, according to Jefferies. The remaining shares trade on regional exchanges or in direct trades by broker-dealers and market makers.
Roughly half of Nasdaq's revenue comes from executing trades in NASDAQ-listed stocks. Thirty percent is from selling data, and 20 percent from fees paid by NASDAQ-listed companies.
The number of listed companies has declined to 3,765, from a peak of 5,556 in 1996. Still, revenue from listing fees grew to US$25.9 million in the third quarter, up 24.5 percent from a year earlier, because of a fee increase at the beginning of 2002. And NASDAQ is considering a change in its rules to make it easier for companies with share prices below US$1 to remain listed on the market.
Revenue from new stock offerings has dried up. In the third quarter, six companies had IPOs on Nasdaq, versus 11 in the period last year and 244 in the second quarter of 1996, the peak for IPOs. Current earnings do not fully reflect that decline because an accounting rule requires NASDAQ to spread revenue from IPOs over six years and from secondary offerings over four years.
"It makes us look better now," Simmons said of the accounting rule. But in a couple of years, when revenues from the IPO market of the late 1990s start to fall off the books, he said, "there may be a hole in our revenues."
He said he hopes to offset that with revenue from SuperMontage, trading single stock futures, which began last week, and from ventures abroad.
The height of the bull market, NASDAQ executives envisioned a global, 24-hour stock market centered in New York, Europe and Japan. In August, the company shut NASDAQ Japan, taking a US$15.2 million write-off.
Octavio Marenzi, an analyst at Celent, a consultant based in Boston, said he believed that Nasdaq would capture 70 percent of trading in NASDAQ-listed issues by 2005, but that it must first endure "a period of very tough competition with Instinet-Island."
NASDAQ, meanwhile, will be doing its best to protect its reputation as a marketplace. "NASDAQ is known all over the world, and we have to be very protective of that brand," Simmons said. "People think of it not only as a marketplace, but as a key to capital formation. We can't go public and then surprise people with our own earnings."
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