Since writing on the New Zealand Stock Exchange for the latest Weekend Herald, I have had the opportunity to spend time with Mark Weldon.
The exchange's new chief executive is extremely impressive and his appointment should be a major turning point.
Weldon, who is 34, has degrees in commerce, arts and economics (master's with first class honours) from the University of Auckland and a doctorate in jurisprudence from the Columbia University School of Law in New York.
He worked for Skadden, Arps, one of New York's top law firms, where he specialised in securities law. He went on to McKinsey & Co, where he had an advisory role with the New York Stock Exchange and a number of other large organisations in the investment industry.
The exchange is extremely fortunate to find someone with an excellent academic record and extensive exposure to US securities markets through Skadden, Arps and McKinsey.
Weldon's first task is to develop a long-term strategy. This analysis, which should take about 90 days, will be the blueprint for the exchange.
He gives a strong impression that he will recommend a dramatic change in direction - he sees the exchange becoming a marketing-oriented organisation with a strong emphasis on attracting new investors and new listings.
The exchange has been so inept at promoting itself that it looked as if its recovery from the 1987 crash would take longer than it took the New York Stock Exchange after the great crash of 1929.
The Dow Jones Industrial Average did not return to its pre-crash high until November 23, 1954, 25 years, two months and 20 days later. The NZSE-40 Capital Index (then known as the Barclays Index) peaked at 3969 in 1987 and will have to return to this level by November 8, 2012, if it is to make a quicker recovery.
Before Weldon's appointment, there were severe doubts that the NZSE-40 would reach 3969 by November 2012. His appointment is a major turning point and there is now a realistic chance that the 10-year target can be achieved.
New Issues
Weldon's ability to reform the exchange will be severely tested by the entrenched behaviour of brokers, particularly over new issues.
Most new issues are distributed through brokers and there is no public pool. Floats are advertised extensively, yet shares are available only to clients of broking firms or golfing partners of brokers.
Can you imagine Mitsubishi Motors creating advertising-driven demand for a new model but making it available only to previous owners of their cars or dealers' golfing buddies? If Mitsubishi tried this approach, it would lose all public credibility, but brokers get away with it because the exchange is a monopoly.
The NZSE has three options:
It can continue to allow brokers to distribute shares to a select number of privileged investors but, if so, pre-float advertising should be banned (it is in most other countries).
It could allow pre-issue advertising but insist that a minimum number of shares be available through a public pool. The public pool should represent at least 25 per cent of the total issue and be administered by the exchange.
Allocations could be determined on a tendering basis, with brokers pooling bids on behalf of individual investors.
The present situation is totally unsatisfactory because the advertising stimulates demand but a large number of potential investors cannot obtain any shares.
Investors on the privileged list feel obliged to take shares in less-attractive floats to stay on the list and, for the same reason, investors feel obliged to accept a firm allocation before seeing the prospectus.
If the exchange wants to attract a wider body of individual investors, it must either encourage brokers to take a less selfish approach to new issues or introduce regulations that achieve this outcome.
Vertex
The Vertex issue is similar to Skellmax in several areas, including an attractive price/earnings ratio, a large dividend payout and high yield. The proceeds go to existing shareholders, and there will be no major controlling shareholder after issue.
The float is being extensively advertised through the media, but shares are available only to existing clients of broking firms.
Individuals who call the 0800 number are being told that they will not be given any shares or be sent an investment statement unless they are clients of JBWere, the organising broker.
Why have full-page newspaper ads when many respondents are told that they cannot participate in the issue or receive an investment statement?
Is this the best way to encourage widespread participation in the sharemarket?
Vertex, which is a leading supplier of plastics-based moulding and packaging products, was sold by Carter Holt Harvey to Pacific Equity Partners of Sydney in October 2000. Carter Holt did not disclose the sale price, nor has it been revealed in the Vertex prospectus.
Pacific Equity is now selling its entire 29.3 million shares at $2.05 each. The offer closes on June 28 and the company will list on Monday, July 1.
Why is Vertex paying costs of $350,000 associated with the offer when the proceeds are going to the vendors?
Vertex is a mature company with a dominant or number two position in its main market segments in New Zealand. Its growth prospects are dependent on new product development and exports.
The company forecasts an adjusted net profit of $6.3 million for the March 2003 year compared with actual earnings of $3.8 million last year.
Vertex will be a successful float if it can match or exceed its profit forecasts.
Frucor, which was Pacific Equity's previous sale, failed to achieve its prospectus forecasts and only time will tell whether Vertex will do better.
Vertex's valuation (in line with Skellmax):
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