Ep.103: The Demise Of The London Stock Exchange As Arm And CRH Choose New York

Okay, hello and welcome to episode 103 of the Market Maker podcast, where as usual I'm joined by Piers Curran to talk about some of the main things in markets. But more specifically, there's been a big headline in regards to slightly dramatized fears for the future of London. London has fallen was my subject line in yesterday's newsletter, if you follow that. And the reason for that is because SoftBank and the world's largest building materials group— you might not have heard of them, CRH— they've shunned the city in favor of New York. Um, so we're going to talk a little bit about that. More specifically, SoftBank this week rejected a London listing for Cambridge-based chip designer Arm despite intense lobbying from 3 successive UK Prime Ministers. That sounds like a long time, but actually it really wasn't. That's one of those journalistic—

it's about 2 weeks. Yeah, 2 weeks of hard lobbying.

In your, in your mind you're thinking, what, 15 years they've been lobbying over 3 Prime Ministers? No, actually it was probably more like 3 months. Um, but beside that, I think this story, as much as it's super interesting, acts as a good— um, there's also elements to talk about in particular about the history of the London Stock Exchange, the LSE, why New York right now is seen as more attractive, what can London do to reclaim its kind of former glory. So we're going to use the story of CRH and ARM to kind of explore some of these key issues. But before I begin, Piers, you were telling a story a few episodes ago about how you got spotted and stopped on a train Oh yeah, we're back from Birmingham. So last night I was teaching a session with the master's students on the hedge fund strategies module at UCL, and I didn't get out of the building until pretty late and got back to London Bridge Station. So it was about half— well, 11 PM I'd say. And night shift, had my headphones on, walking to my train, some guy just grabs my arm, stops me Hey, hey, hey. And I was like, oh, here we go. I was like, this is all I need. I just want to go home. Um, and he goes, are you Anthony Cheung? And I was like, uh, maybe.

Who wants to know?

Do I really want to say? And, uh, yeah, he said, um, he was a Loughborough student. Okay, Loughborough student listens to the podcast.

Yes.

And, uh, had done a Finance Accelerator. And has said that the podcast, he had learned so much, it helped him land a graduate position at HSBC in investment banking.

Love it.

I thought, oh wow, he just said, I just wanted to say thank you, I thought it was you, and then he just went on his way. And I was like, I didn't even get his name.

Oh, you didn't get his name?

So he probably is listening.

She should be. Yeah.

So if he's listening if that was you, please do message me, find me on LinkedIn, drop me a line.

So our pointless ramblings, they maybe do have some positive effect somewhere.

Who'd have thought? Love that story. Yeah, well, look, let's jump in and maybe you could start by explaining to me a little bit about the ARM story. That's probably the one that's a little bit more, a little bit more sexy than building materials.

Um, can I just say, your headline— I, I'm definitely a, uh, when it comes to sensationalist headlines, as you well know, I'm not a big fan.

Oh yeah, you loved yesterday then.

But I would say your headline from yesterday, whilst it is sensationalist, um, if anything, uh, downplays the situation rather than over exit, for clickbait. I'm talking about the demise of the kind of London Stock Exchange and the London investor scene. We've talked about this on this podcast over the months in previous episodes. But it's pretty depressing, I have to say, London's decline. And it's pretty epic and spectacular. We'll talk about it. But like with Arm, it's yet another chapter. In this, this what is a long-term trend. And I know often people will think about, yeah, the long-term trend being, you know, maybe since over the last two decades, because we'll talk about why London's declined. One of them, one of the absolute key factors is technology and the rise of the tech sector and the fact that London just doesn't have any, uh, arm being used to be the London Stock Exchange's kind of one single poster child tech stock. But unfortunately for London, the decline hasn't just been in the last 20 years. The decline that we have been on— and I'll talk a bit about the history— but we've been on a steady decline in London for 170 years. That's how old the decline of the significance of the London Stock Exchange on the global standing has been going on for. Anyway, we'll get onto the old stuff later. But Arm's front page news this week. And so Arm, obviously, is a big chipmaker, one of the world's biggest chipmakers. You'll find their chips all over the place. Smartphones and all the rest of it, right? Huge player in the global chip market. SoftBank snapped up and bought Arm. So SoftBank, their kind of chief, the very famous Masayoshi Son, he's a pretty opportunist, might be a good one of the ways to describe him. So basically what happened in June 2016, Brexit. What happened to the pound? Collapsed. What did Masayoshi Son do? Stormed in and bought ARM, basically took ARM private. So that means that they buy all their shares so that they're no longer listed on a stock exchange. They're no longer a publicly traded company. So that you take that company back private, okay, delisting. So Arm come out of the FTSE 100, you know, they're not tradable on the London Stock Exchange anymore. SoftBank own all the shares, okay. So he stepped in and took them private in 2016, taking advantage of the collapse in the pound at the time. Um, so that was 2016, right? And like with all of these kind of investment firms like SoftBank, they're looking for generating a return over a few years, let's say 3 to 5 years, and then they're looking to flip it and book their profit. And so SoftBank have been trying to sell Arm now for actually for a few years. They've had a couple of big obstacles along the way, one being this crazy, crazy saga in China. So Arm China, which is their— obviously their Chinese ARM. See what I did there? They had a big issue because their chief, the chief of ARM China, basically wasn't doing a very good job, so they fired him. Except he entirely ignored the firing order and basically took over the company as some kind of renegade CEO. And he had basically took control of it. Everyone in China was loyal to him. This caused a massive nightmare for months and months and months and months. In the end, they had to send in literally a team of heavy security to physically remove this guy from the building, and then wrestle back control of their Chinese entity. Anyway, this was a bit of a saga that rumbled on, delaying SoftBank's exit, because obviously you can't You can't go to investors and sell the company when, oh, hang on. Yeah, we don't have control at the moment of one of our subsidiaries. So they needed to tidy up that mess. So that got tidied up. Then they tried to sell it to Nvidia, who's the US chip giant. And the offer on the table was 40— well, it was a stock and cash offer, right? And this was in 2020, I think. In September 2020, they basically agreed the deal in principle, and the purchase was going to be part Nvidia stock and part cash. But by the time we got round to 2022, the start of 2022, the deal still hadn't been done because the regulators And not— it was the US regulators, it was the UK regulators, it was the EU regulators basically raised serious concerns about how this would create such a dominant global chipmaking giant that it would be anti-competitive. And so the regulators blocked it. By the way, by the time they made that decision and the deal was off, so that was the start of 2022, about 12 months ago. The valuation or the deal to SoftBank went from being worth $40 billion in September 2022— sorry, September 2020, $40 billion. That was the deal they'd agreed in principle, but it was part Nvidia stock. But the share price of Nvidia went up so much between September 2020 to the start of 2022 that that deal value to SoftBank went from $40 billion to $66 billion. I mean, the regulators kiboshed it, so it didn't happen. But yeah, they were sat on a great exit, SoftBank, bearing in mind that they bought Arm for, I think it was $32 billion in 2016. They almost flipped it for double, $66 billion, by the time we got to 2022. Anyway, it didn't happen. Regulators got involved. So ever since that deal fell through, so for the last 12 months, there's been a bit of a battle going on because SoftBank said, "Okay, if we can't sell this to Nvidia, fine, we're just going to list it and we'll take it back public." So we'll do an IPO and we'll list it. And the whole thing is, where will we list it? On what stock exchange? In what territory? And obviously, the situation when you look at it from a global situation, and SoftBank are a Japanese company, they have no loyalty to the UK. This is a bit tricky because Arm is a UK company. It's based in Cambridge, headquartered in Cambridge. That's where it was born. That's where its roots are. That's where its history is. But it's owned by a Japanese outfit. And so they're like, "Well, we have no UK loyalty. Where's the best place on the planet to list?" And the best place on the planet from their point of view is the place where they're going to get the highest price. They're an investor. They're in the business of making as much profit as they can. And clearly the outstanding winner is New York and listing it on the New York Stock Exchange.

And just having a look at the stock exchanges in themselves to give some kind of context to some of the numbers that you were saying about this. Yeah, the decline of Britain.

Yeah.

So here's a question for you, um, if you're looking at the major stock exchanges in the world by the market cap of the listed companies.

Yeah.

NYSE being the biggest. Yeah, where would you say the LSE stands in that ranking?

Uh, it's a good question. Where you've got— what about the NASDAQ? That's obviously number 2. Yeah, I was gonna say, um In terms of other countries, you've got to look at Asia and the Shanghai Composite.

Number 3. Okay, so here we go, the rationale's kicking in. Uh, think of continents.

Well, yeah, well, I'm thinking, well, is Japan up there as well from an Asian point of view? It's probably not number 4, but maybe.

So you're next. Number 4. Japan Exchange Group, number 5.

Number 5, right. So you're next. Okay, then you're like, okay, now you're probably thinking London's going to come in, um, and it's probably vying. I'd probably say London next, but you're probably going to tell me I'm wrong.

Okay, Shenzhen next.

Oh, okay.

Yeah, then Bombay.

Then who?

Sorry, Bombay Stock Exchange.

Oh wow, right.

Then Hong Kong Stock Exchange. Okay, then the Saudi Stock Exchange.

No, what is above the London Stock Exchange?

Well, I mean, according to data, that's because Saudi Aramco IPO'd, right?

I think if you took Saudi Aramco off that, I think, I think that's a little bit—

yeah. So LSE ranks outside top 10, number 11.

Wow.

And one of the headlines that was in circulation yesterday did actually happen last year as well at one point, is that Um, the Paris Bourse has overtaken actually London. And one of those— one of the main things there was that, um, you probably would have heard of a guy called Bernard Arnault.

Yes, indeed.

Oh yeah, it's the luxury good empire of LVMH.

And yeah, I think richest man on the planet now that Tesla stock has dumped.

Well, actually, I think they flipped now. Oh, he's back in the money again on his trade. Um, but, but nonetheless, so, well, Tesla sold off 9—

didn't they sell off 9% yesterday?

Because, oh, they had their investor day that was just—

Musk tried to do a Steve Jobs and it really didn't work. Didn't quite have the charisma of the, uh, of the legend.

So you were talking about, uh, Aramco in Saudi, and the Paris one's a fairly similar story actually. So it's a little bit misleading. LVMH's share price has doubled in the last 5 years, um, and that's been predominantly driven by this insatiable appetite coming out of Asia really for the demand of luxury goods.

Yeah.

And that trend is likely to continue kind of this short-term COVID situation aside, as they become more affluent as consumers, they continue to purchase these goods and so on. And the market cap of LVMH has got up to around the €350 mark right now.

As comparison, €350 billion, right? Yeah.

So what would you say the market cap of HSBC is?

Uh, um, £75 billion.

It's actually £125 billion. Okay, so it's a bit bigger. What about Barclays?

That's smaller than HSBC, so I— well, if you've said HSBC is £125 billion, I'll say £100 billion.

It's £32 billion.

Oh wow, miles off.

What about Vodafone? Up there near the top of the FTSE.

Yeah, that's gonna be punchy. Uh, 65 billion.

27. Okay, so if you took the market cap of HSBC, BP, Glaxo, Barclays, and Vodafone, that's LVMH.

Wow. Okay. Yeah. So look, I get— okay, so if you check, so Paris and Saudi are benefiting from an absolute behemoth, a single behemoth, but it still doesn't hide the fact that being British, that's just embarrassing. We're not even in the top 10. I mean, I've got a chart here. I'm looking at it going back to 1800. OK. So I've said the decline's been going on for a while. In the 1800s, basically between 1800 and 1850, this was during the height of the British Empire. So in terms of— so why— what makes the market cap of a stock index so large? And really, it depends on where's the money. Because the whole point of going public, the whole point of taking your company and IPOing, and issuing shares, and listing on the stock market, the whole point is to raise capital.

Right?

The company raising capital to invest in growth, or if you're SoftBank, you're raising capital— well, you're not, you're kind of selling, right? You're wanting to turn, you know, sell that company and make a profit, right? But it's about raising capital. So where is the money? Okay, it's like, show me the money, where is it? And it used to be in Britain, right? Enjoying the Industrial Revolution, the British Empire, we absolutely dominated. And in the 1800 to 1850, if you're taking the total stock market capitalization of the world, Britain made up 75% of the entire world. That's where the money was. Then— well, actually, that was pre-Industrial Revolution. So there was investing in the railways and all of these trends. Then the Industrial Revolution happened and the US started to really start to become a powerhouse. OK, so some of that shifted to the US. So by the time you get to 1900, the UK had about 45% of the global market, still the absolute dominant player. OK. What happened then was kind of 3 things happened in the 20th century that kind of were the nails in the coffin for the UK. Number 1, it was World War I and World War II. Which happened in Europe, which meant that stock exchanges got shut down. It meant that obviously all the money was going to fuel the war effort. There was just a complete lack of capital anywhere. And so the default was to just go to the US where they weren't as involved in the war. Of course, they were involved, but later on the war wasn't on their territory. And so the US started to become that kind of dominant player, OK? World War I and World War II. Secondly, then post-Second World War, where the US became the dominant player. And look, by the time you get to 1950 here, right, both wars are done. The US is now making up about— yeah, about 75%. It's kind of a complete flip. By then, the UK, you're looking at about 15%. Okay, so we declined from 75% of the market share in 1860 to 15% by the time you get to 1950. Okay, that's number 1. Number 2, nail the rise of Asia. So this is where you get Japan first, and then obviously China following on from that, and now you might want to say India as well. Okay, these, these big giant centers of So there's way more capital generation in those regions as those economies evolve and become giants. Okay. And then number 3, nail in the coffin, the UK has just entirely missed the technology revolution. And apart from Arm, I mean, if I were to list to you the top 10 companies in the FTSE 100, okay, here we go. Top 10 companies by market cap. Shell, number 1. AstraZeneca, 2. HSBC, Unilever, BP, Diageo, Rio Tinto, British American Tobacco, Glencore. Any tech in there? Uh, no. Basically, the FTSE 100 is financials, it's healthcare, it's energy, it's mining. And it's dull, right? It's just not a particularly exciting dynamic, you know, in this day and age, they're not kind of exciting growth dynamic businesses at all. So, and actually, if you look at the stats, the proportion of the FTSE 100 that's made up of the sector weighting of technology in the FTSE 100 index is 1.4%. In the FTSE 350, it's 1.29%. So it's not just at the top index in the FTSE 100 we got an issue of a lack of tech, it's all the way down. Compare that to the S&P, the S&P's tech weighting is 28.1%. The Dow Jones Industrial Average, Right, that's got 21.7% tech. And my final stat for you: Google, Apple, Amazon, Facebook, Microsoft— the big five— if you add up those market caps together, those five companies are worth more than the entirety of the market worth of all of the stocks listed on the stock— London Stock Exchange. That's 1,964 companies. Are listed on the LSE, those 5 US tech stocks are worth more than all of them.

I was just looking at— okay, so what does the UK do to stop the rot? And one of the things I was— that I am aware of is that people often refer right now as the UK being a fintech center in terms of world investment, right? Which is part of this attempt to pivot, I guess, on this trend. And I was just like having a quick look. So in terms of the, the number of companies, so the UK is home to around 1,600 fintech-related firms, and that's predicted to double by 2030 according to the government. And so despite the obvious, the Brexit the shrinking of the economy. It is a top destination. It's only behind the US, so it's bigger than India, Europe, European countries. And actually, in fintech investment per capita as a percentage of GDP, the UK is only second to Singapore, right?

Yep. So I mean, yeah, if I was in government— and it sounds like they are It's almost like I think they've just consigned themselves to the fact that, look, we missed the tech thing. We missed the tech bubble. Just spectacularly got it wrong. And it's almost like, let's just write that off. What's next? And what's next is fintech and it's AI. That's going to be the next big multi-decade secular trend. And they are right to be targeting that, to try and reinvent ourselves and kind of get London back on the map in terms of a place where businesses can come to find capital, and that there's capital here to be deployed. And that— and in the end, right, If you're a seller, well, you want demand. You want demand for what you're selling. The higher the demand, the higher the price you're going to get. And obviously, if you're trying to sell your business, then you want the highest price you can possibly get. So where's the demand? Well, obviously it's in the US, right? And actually, one measure on that in terms of the valuation differential. So we've talked about Arm, right? But you mentioned CRH. Were in the news this week as well. And they're the big building materials company. They're worth about £30 billion sterling at the moment, and they're listed on the LSE. But the bulk of their profits are actually generated in the US as a business, and they're benefiting from things like Joe Biden's infrastructure investment plan and so on. They're all over that. But they're looking to just jump out of the UK and, and go and list in New York instead. And one of the main reasons, other than these days as their business has grown multinationally, more revenue is now generated in the US than anywhere else, so you could say that in itself would be a reason to shift focus across to the US. But if you check out the valuation gap, so basically right now CRH trades at 13 times their price-to-earnings, okay? So that's a 13x PE ratio on the London Stock Exchange. If you look at similar companies in the US, they're trading on the New York Stock Exchange with a valuation at 25 times PE. So basically CRH, if they delisted in London and listed in New York would basically double their value overnight. So when you put it in those terms, it's like, well, why isn't everyone— why isn't everyone doing it? And there are others, right? And there's smaller companies you might have heard of. There's a company called Ferguson, which is a big plumbing and heating supplier. They used to be called Wolseley, which which maybe is a name you would be familiar with. There's a newer company called Flutter, which is a big gambling company. They're FTSE 100. They're pushing aggressively into the US now. They're looking for a secondary listing in New York. So a secondary listing is where you don't delist in London and then relist somewhere else. You basically keep your London listing, and then you have a second one simultaneously in parallel somewhere else. Flatterer looking to do that, which you would thought is the first step towards them, you know, fully going New York Stock Exchange. And then finally, and most worryingly, because who's the most valuable company of the whole lot in the FTSE 100? Shell. And apparently, according to the FT earlier this week, Shell's top executives are exploring moving the company to the US.

So if, you know, there's no way that would happen. I mean, Shell is by far and away the largest company. So at the moment, okay, how do you stop it? You stop it by just putting a big Band-Aid on the problem, and you do that by basically this whole tax that they've put, um, this energy, like, profit surplus tax that came off the back of So the first thing I'd do if I was Rishi, yeah, I'd be like, okay, Shell gets some kind of other concession, which basically is reducing the fee that they pay to keep their board shareholders happy in the short term, to let the— this wash over. And then whilst— so that's the quick fix to stop any irrational decisions that happen at Shell. And then you need to start talking about more like regulatory and licensing, all these different types of things where we're out of the EU, we're not in the US. Let's let— but that takes time, that's the problem. So you need to like—

wouldn't it be, wouldn't it be a bit of a political own goal though if he just steps up and says, uh, right guys, you know what, you know those, that windfall, uh, yeah, but you know what Shell, here you go, you can have your money back, right?

So that's when the spin doctor goes to work. It definitely is not framed in that way. It's done through quite a complicated, legally worded, yeah, way that the normal Joe Public just won't even register. And yet they'll siphon off billions on the back of it. And then that's— this is how the real world works, right, in terms of They cannot afford to lose such a powerhouse like that. The game's over at that point because what would be— other companies will just jump ship as well. I mean, some of the other things here, the other thing was, apart from relisting somewhere else, was company takeovers and being taken private. Yeah, well, like, um, right, so there's the extraction out of companies, particularly who are the companies that people want to buy? High growth, ones that have real potential, they're the ones that people want to buy. So, uh, Veeva, Micro Focus, um, Avast, which is a cybersecurity company, obviously really boomed during pandemic. Yeah, they all got taken out. And these are all potential, again, semi-technology, some of them ones that they would have staked a lot of hope on to, to pick up some of that growth potential in the exchange that have just gone. So as much as it's like a— there's two leaks here. Yeah, that needs plugging at this point. And the things I read that I know you, you mentioned before about Jeremy Hunt and some plans, so right now they've looked at changing listing rules. We've just said it already though, the regulatory change happens at a snail pace, and I think that's probably largely a problem for a lot of these deal-making. Like you said, you wait like SoftBank, 18 months later, then the share price can move, deal structure can change, and yeah, things can look very different. So, you know, the listing rules in the UK, they've talked about differences for dual-class shares, SPACs, making that more accessible, reducing free floats, things like that. Um, but I guess ultimately the overregulation side of things is, is ultimately key. I mean, one of the things I saw as a stat was companies listing in London has dropped 40% since the global financial crisis. And between 2015 and 2020, in terms of the world IPOs, every, every IPO that happened in the world in the 5-year period from 2015 to 2020, the UK attracted 5%.

Yeah, it's just, as I said, it's embarrassing. I mean, also stuff like you, you gave me a stat which I was blown away by. The trading volumes on the FTSE 100. So it's still the same 100 companies that you can trade, right? But if you go back, the kind of average daily volume in 2007— was it you that gave me this stat, or did I find it somewhere else? The average trading volume in 2007 was like 14— I think it was I lost— I've lost the stat now. I think it was like 14 million a day, okay? Whereas the average trading volume now is 4 million. Uh, yeah, the daily average volumes have dropped like— yeah, sort of— that— yeah, they've dropped like 70%.

So the average daily trading volume on the FTSE All Shares Index is the equivalent to about £4 billion in February this year, compared with nearly £14 billion in the same period in 2007.

Right.

So pre-GFC.

That's just— yeah, I mean, the money's just not there. Um, so yeah, we've got a massive issue. And I think one— look, you could— you need all of these things to happen simultaneously. You need big regulatory overhaul like brave, big change. But of course, that comes with risk. So there'll be massive pushback against that. The global financial crisis, it was only 15 years ago, right? So a lot of this regulation was put in place to avoid that ever happening again. Well, here we are 15 years later, and the clear side effects of that are now for all to see. So how much of that regulation do you roll back in order to reverse that trend, but then opening the door for more crises in the future perhaps. So you've got a bit of a double-edged sword there. But definitely the long, long, long-term play to try and be a much bigger global player in the next big multi-decade secular trend of AI and fintech specifically, because Because look, financial sector has always been the biggest sector in the UK. Well, I say always, for the last whatever, 50 years, right? And so marrying together technology and the financial sector makes sense for the UK. So if we can get that right, I think that would be— if that strategy can be deployed effectively, I think that's the only way back. Regulatory changes, sure, that can help along the way. But in the end, you just need money though, as well. You need capital. And that, I don't see how we're ever going to compete with the likes of the US. I mean, ever, given that the size is just so spectacularly bigger. But maybe we can get back into the top 10.

And the rate of change happening obviously even faster outside of the US and China. Yeah. And subsequently will be in the decades to come in both India and probably Africa in countries like Nigeria.

Nigeria for sure. Yeah. They're coming. Indonesia.

Yeah. The other area apart from, you know, fintech, blockchain, these types of things, regulatory framework changes was a research paper. I, I would say I read— I pick up a Cambridge research paper from the PhD students and I'm like, 250 pages. I know exact man for the job. ChatGPT.

You just summarize that part for me.

That 200-page doc into ChatGPT, translated into layman's terms, please. And, um, in 200 words. And on the other side, it also talked about, um, becoming a sustainable place for ESG investing, socially responsible investing. Essentially could be an avenue to, to pursue alongside the fintech approach and be known for that. Yeah, in those areas. Because I guess when it comes to the socially responsible side of things, I'm just thinking off the top of my head, but when you talk about China, India, Nigeria, yeah, hard, I think, for them in their governance, kind of governance alarm bells, right? So what you need is the opposite. You need political— well, I was going to say political stability. That would be incorrect to say for the UK, but relatively, you probably could still claim that. Um, obviously infrastructure you know, all these different things, regulatory oversight, right? So I think this could be also a good direction.

Okay, so the future's bright is what you're saying. It's just the present is an absolute hell zone, but the future looks good.

Let's see. That's okay. I mean, I'm half Chinese, so I'm, I'm, I'm covered. All right, good stuff. We'll end it there. Um, so thanks very much, Piers, and everyone for listening. We'll be back again same time next week. So enjoy your weekend or whenever you listen to this episode and take care.

Yeah, have a good weekend.