Nikkei Net had this article on Mother's a few days ago. I've been gone for a week so I may just be repeating things. I have always thought that Nasdaq Japan was going to win the Exchange competition. Son will have control of the entire IPO apparatus although He will attempt to leave the subsidiary companies the freedom to list wherever they want to. Softbank's success in floating the new IPOs on the new Nasdaq Japan will determine Softbank's future. The first three or four listings will be very important. They should trade Worldwide and not just in Japan.
Issued: April 17, 2000
Investors quickly cool to Mothers market
Party's over Analysts point to liquidity problems, low standards, but market officials preach patience
MAKOTO SATO
Staff writer
When the Tokyo Stock Exchange gave birth last December to Mothers, the new market for emerging and technology-based companies, investors rubbed their hands with anticipation over the fortunes to be made. Here, they cooed, was just the high-stakes, high-growth market Japan needed to join the global stock craze.
But somewhere along the way, the ardor has cooled. Mothers is now the target of much criticism about its standards and organization. And this week it will face extra pressure as investors react to the plunge on April 14 of the Dow Jones industrial average and the Nasdaq Stock Market index in New York.
Many analysts have been skeptical about Mothers from the start, but the recent worldwide tanking of high-tech stocks and the fact that the Nasdaq market is scheduled to launch in Japan in June has left no doubt that Mothers is facing its first big test.
Market watchers' main criticism is over Mothers' insufficient listing standards. No minimum net asset amount is required; a company with virtually no sales can list its stock on Mothers.
Of the seven companies already listed on Mothers, five are losing money. Only Snova Corp. and Met's Corp. are turning a profit.
Analysts point out the case of Liquid Audio Japan Inc., a Tokyo-based Internet music wholesale company (affiliated with Liquid Audio Inc. of the U.S.) and Mothers' first listing on Dec. 22, 1999.
Liquid Audio's sales figures are a confusing roller coaster. It posted sales of 52.085 million yen ($487,000) for the fiscal year through June 1999. In turn, for the first half of the fiscal year through June 2000 the company reported sales of just 333,000 yen. Liquid Audio claims it will somehow increase revenues enough to reach a target of 56 million yen for fiscal 2000.
Liquid Audio President Masafumi Okanda defends his company's practices and its right to be listed. "I wish to be criticized after observing our market capitalization five years later," he said. "Mothers is a stock market designed for incubating companies. Our business model has been tested in the U.S. for three years. Our current stock price is 3 million yen per share, but I am confident that we will raise the price to a few hundred million yen per share."
Last week, shares of all seven companies trading on Mothers closed below their listing prices.
Critics also are questioning Mothers' auction-based exchange system, which they say is not suitable for trading low-liquidity issues. And traders say there just isn't enough buying and selling going on yet.
To be sure, some of the criticism leveled at Mothers could also be leveled at Nasdaq - or probably any emerging-company exchange. Low trading levels are always a problem early on. And in some ways, Mothers' regulations are stricter than others. Its rules state that only 1,000 issued shares are required for listing; Nasdaq-Japan plans to require issuings of only 500 shares.
Still, analysts like Sadakazu Osaki, head of the capital-market research unit at Nomura Research Institute, say they don't think the Tokyo Stock Exchange has been doing its best. Osaki says Mothers' liquidity problem cannot be resolved just by increasing the number of shares in circulation. "Increasing liquidity does not solve the fundamental problem. The TSE should consider introducing a quotation-driven system rather than the current order-driven system."
Osaki also recommends that the exchange allow investors to borrow stocks from the company owners while increasing the number of floating stocks.
The Tokyo Stock Exchange remains reluctant to implement stricter regulations for Mothers. Hiroshi Shirahashi, a manager of the listing department of the exchange, thinks tighter regulation does not fit with the concept of Mothers. "Mothers is a market for emerging companies. The most important point is balance. If the regulations are too tight, it may reduce the chance for a promising company to expand business by raising funds from the market," he said.
He said it is not Mothers' place to judge the future growth of companies. "We mainly check the transparency of the company, namely the disclosure information," he said. "Future profitability of the company is inspected by questioning the underwriting lead manager."
The liquidity problem, however, is something that concerns Mothers. The exchange has been advising companies that wish to list their stock to try to increase the number of floating shares.
"We advise companies to conduct a stock split or allocate new shares to a third party to increase liquidity," said Shirahashi.
As Shirahashi noted, many new markets face similar liquidity problems. He points to the experiences of Der Neue Markt, a German stock market for emerging companies, that also faced liquidity problems for the first one or two years but became one of the world's most successful markets.
The TSE created Mothers partly out of worry about future competition from the New York Stock Exchange and Nasdaq in the U.S. With an increasing number of Japanese companies listing there, the TSE felt forced to provide another option to emerging companies, say analysts. Japanese entrepreneurs have been frustrated by the long time it takes to list their stocks. Even on the over-the-counter market, which is designed for emerging companies, it takes at least three years for a company to list its shares.
The announcement last June that Nasdaq-Japan would launch forced the TSE to hurry its launch of Mothers, which had been in the works since 1998.
Some say Mothers' problems largely result from the nose dive in tech stocks in recent weeks. On April 7, the exchange suffered its first listing cancellation: Nextel Corp., an affiliate company of Hikari Tsushin Inc., a cell-phone retail-chain operator. Due to the high volatility of tech stocks, Nextel reckoned that it couldn't raise enough capital. It also didn't help that Hikari Tsushin, which holds 22% of Nextel's shares, has been watching its own stock plummet in recent weeks.
Osaki of Nomura Research thinks the current state of technology stocks has little to do with the exchange's problems. Mothers' philosophy of nurturing emerging companies is flawed, he says. "TSE should not forget their markets are public. The market operator should consider the protection of the investor first and foremost. The incubation of a company is the responsibility of the Ministry of International Trade and Industry," said Osaki.
But he added: "The Tokyo Stock Exchange can defend itself with stricter standards when screening the listing application. I do not wish to say the damage is already done."
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