The Irish Stock Exchange is on its way to losing 35-40 per cent of its value in 2023. Its two biggest companies, CRH and Flutter, are eyeing up the exits. 

CRH, the world’s biggest building materials company, has been Ireland’s biggest company by market capitalisation for a long time. It’s worth €28 billion. And having nearly doubled in value since July 2022, Flutter is close to surpassing CRH. It’s worth €26.8 billion. Those are pretty big companies by any standard. They’d be among the top 25 biggest companies in the UK.

More than half of each company’s market value comes from its US business. That’s part of the reason both companies are thinking of listing in the US. 

Both companies outgrew the Irish Stock Exchange years ago. They have cross-listings in Dublin and London — like other big Irish companies Diageo, Bank of Ireland, AIB, Kingspan, Ryanair and Smurfit Kappa. The London listing gives them access to a deeper, more liquid pool of capital. 

Liquidity is important. It refers to how cheap and fast it is to buy and sell shares. In a liquid market, you can buy or sell quickly, and get a good price for your shares. In an illiquid market, there’s less competition, and fewer trades, and middlemen get a bigger cut of every trade.

Liquidity is a big factor for investors. Over and above the cut that goes to middlemen, there’s a further discount on the value of illiquid assets. Alternative assets like buildings and private equity funds are often worth less than they claim, because they don’t properly account for the liquidity discount.

Liquidity could plausibly account for the difference between listing in Ireland, where there are few traders and investors, and listing in London. But why are CRH and Flutter looking at moving from London to the US?

The London stock exchange is in a bad place. Its flagship index, the FTSE 100, has barely moved for the last 24 years. It’s now just 16 per cent higher than it was in 1999. In the same time period, New York’s S&P 500 index is up 215 per cent.

The London stock exchange is failing to attract exciting technology companies. Two weeks ago a London listing was rejected for the UK’s biggest homegrown technology success story, the chip designer ARM. This is important — the technology industry is accounting for a greater and greater share of total stock market value. At a point in 2021, for example, Apple was worth more than the entire FTSE 100.

At the peak of the 2021 technology boom, the London Stock Exchange attracted 119 IPOs, which collectively raised £16.8 billion (or $20.9 billion) in capital, according to EY. New York exchanges, by contrast, raised $300 billion that year.

GAN and Dole-Total Produce

The most exciting technology companies are listing in the US because that’s where they get a bigger valuation. GAN, the Irish-founded gaming technology company, is a dramatic example. When it announced its decision to de-list in London and list on the NASDAQ in March of 2020, it was worth £55 million; less than a year later it was worth $1.2 billion. 

Dundalk-headquartered Total Produce is another company to voyage across the Atlantic in the last two years. Part of the justification for its merger with Dole PLC was to de-list from London and set up in New York, where it was hoped it would be awarded a bigger multiple.

London’s big-name companies in the FTSE 100 are underperforming. It’s a cold house for exciting technology companies. And even its boring mid-market stalwarts are getting out. Many have been bought out by private equity. In 2021, private equity funds bought £25 billion worth of public UK companies. The big names include the supermarket Morisson’s, infrastructure group John Laing, telecoms group TalkTalk, drivers’ group The AA, and generator business Aggreko. The number of companies listed in the UK fell 20 per cent between 2008 and 2020. 

The benefits of a US listing are widely understood. Foerster and Karolyi (1999) found stocks that cross-list in the US outperform by 19 per cent in the year before listing. Doidge et al (2004) found companies with a cross-listing in the US are valued 16 per cent more highly than equivalent firms in non-US markets. 

The causal mechanism posited in those papers goes as follows: the US has better legal infrastructure and protection for investors, and that’s reflected in share prices. That seems plausible for companies cross-listing from developing markets. But is it really the case that the US’s legal protections for investors are so much greater than the UK’s?

It seems like something else is going on. Brexit is a plausible candidate — European indexes such as Amsterdam’s are reporting much greater volumes since 2016 — but the timing isn’t right. London has been slowly declining for twenty years. Maybe the pool of investors isn’t deep enough to do good peer comparisons in increasingly specialised modern companies?

Whatever’s going on, it’s no good for Ireland. The natural progression for an ambitious capital-hungry Irish company has been to list in Ireland first. That allows it to bring in outside investment when it had reached a value of a couple hundred million euro. A company of that size wouldn’t be big enough to list in London. At the peak of the boom in 2021, London firms raised an average of £141 million. That would mean they’re worth something in the region of £800-1.1 billion.

Big Irish companies then cross-list in London. The likes of AIB, Bank of Ireland, Ryanair, Kingspan, Glanbia and Kerry cross-list in London to get access to a deeper pool of capital. The cross-listing means more liquidity and in theory, a higher valuation. 

The lagging UK market means Irish companies don’t see the full benefit of their cross-listing. The ones that are big enough to cross-list in London (but not big enough to list in the US) get saggy valuations. 

Then, the ones big enough to list in the US — like CRH and Flutter — aspire to be listed in the S&P 500. The guardians of the S&P 500 don’t want to see a dual Irish listing. So the Irish Stock Exchange ends up losing its most important companies. That’s bad for the Irish stock market ecosystem — the brokers, advisors, dealers, and market makers. It makes the environment tougher for the next crop of companies trying to grow. Good as it may prove to be for CRH and Flutter’s shareholders.