New Japanese Exchanges Hoping to Capitalize on Appetite for IPOs

Like the U.S. before it, hordes of Japanese companies seek to tap the markets for capital.
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TOKYO -- Minoru Takata, a senior fund manager at

Partners Asset Management

, couldn't believe the chaos at a seminar on initial public offerings he attended a month ago. The neat rows of chairs had disappeared, along with traditional Japanese decorum, as men maneuvered to squeeze into any empty space. Those left standing muscled each other to get a spot against the wall.

"It was a circus in there," Takata laughs, describing the program sponsored by the

Tokyo Stock Exchange

and the Japanese government for venture capital companies. "But the energy I felt was quite powerful. It will eventually flow into the market."

That energy made its way to the market on Wednesday, when the Tokyo Stock Exchange ushered in the latest installment of Japan's IPO craze, the


board for venture firms. Shares in the two companies listed on the board,

Internet Research Institute


Liquid Audio Japan

, an arm of

Liquid Audio


, saw price indications nearly double in value. IRI ended bid-only at 20.7 million yen against the premarket offer price of 11.7 million yen, while Liquid Audio closed bid-only at 6 million yen vs. 3 million yen.

The two companies aren't the only small firms in Japan looking to participate in the IPO craze that began in the U.S. and is now sweeping the rest of the world. No longer reliant on bank lending to fund expansion, Japanese entrepreneurs, long conspicuous by their absence, are going directly to the equity market to raise cash. And while IPO levels in Japan aren't on par with U.S. levels -- 148 this year, compared with 50 in the U.S. in December alone -- 2000 is expected to be a boom year, with an estimated 500 companies looking to list. Stock exchanges, like Mothers, are starting to notice.

Mothers, the forced acronym for the unwieldy

Market of the High Growth and Emerging Stocks

, isn't the only exchange looking to cash in on the IPO frenzy. Earlier this year, Japanese Internet conglomerate


and the U.S.'

National Association of Securities Dealers

announced plans to create a

Nasdaq Japan

. And the

Japan Securities Dealers Association

already runs the


, an exchange similar to the U.S.'



The increase in IPOs, especially those associated with the Internet, will undoubtedly keep fund mangers busy. However, critics complain that the expected boom won't be enough to support all of those exchanges and create liquid markets.

Even though 1,000 companies have expressed interest in going public, Mothers has officially signed up only 21 firms. Competition from Nasdaq Japan could come in about six months; the venture hopes to have operations up and running by mid-2000. And both may find it difficult to lure companies, which can take their shares to the Jasdaq or even the Nasdaq, as

Internet Initiative Japan


did. Some start-ups have indicated they will first examine how other newly listed shares perform. Any fumbles could push back the bulk of the expected IPOs to 2001.

Investors will also need to be picky. Each of the exchanges has different listing criteria and some observers worry that the requirements might be too loose. Companies can go public on Mothers just two months after incorporating. By comparison, the average age of this year's IPO crop was 34 years, according to the TSE.

While the looser requirements will encourage an entrepreneurial spirit that Japan has lacked, critics warn that spectacular Japanese IPOs, just like those in the U.S., could fall quickly under gravity's spell when investors start to focus on fundamentals. While America's Nasdaq requires listed companies to have a capitalization of at least $50 million, Mothers requires only a little more than a tenth of that, which is not a lot of capital to slog through in tough times.

"The IPO boom will probably die out in the latter half of next year," says Akio Sakanaka, CEO of

Sovereign Asset Management

, an investment consulting firm. "You can't have companies going public without any credentials."

The TSE says it's taking precautions to ensure that investors won't be left in the dark should business conditions of Mothers-listed companies turn sour. Rather than the standard half-year earnings results the exchange demands for its first-section firms, Mothers companies will have to offer results on a quarterly basis and conduct investor relations presentations twice a year.

Nevertheless, many remain optimistic that Japan's new exchanges will foster strong returns. Fund manager Takata is also optimistic. His


small-cap fund has 6.7 billion yen ($657 million) under management and he's confident that next year's IPO harvest will help him repeat a performance that's pushed his fund 122% higher in the year to date.

"The new tech bourses are extremely attractive. Just like some firms in the OTC market, it's going to give birth to a new generation of millionaires," Partners' Takata says.