Nasdaq’s plan to overhaul its sprawling markets by carving out a new tier for top-grade companies could become a sparkplug for M&A activity. Many deal pros believe that the plan will accelerate sales by mid-cap and small-cap firms already struggling for investor acceptance while influencing hosts of private companies to bypass IPOs in favor of sales. Their view is that creation of an “elite” segment, which Nasdaq says initially will house more than 1,000 companies, will increase pressures on the firms “being left behind.” By giving top billing to the stars, they say, the new tier could offer big-ticket investors and large-cap-wedded analysts another excuse for shunning the larger corporate populace. Steven Bernard, Director of M&A Market Analysis at Robert W. Baird, notes that the reorganization “might be the final straw for some firms that already have limited attention from the investment community and limited research coverage.” Howard Turetsky, Associate Professor of accounting and finance at San Jose State University who analyzes capital markets, likens the proposed structure to the bond market, which functions through ratings of the creditworthiness of issuing companies. “Like the bond market, it could be costly to the companies not in the select group,” he says. Under the plan, scheduled to start operations on July 1, the Nasdaq Stock Market will function through three groupings, topped by the newly formed Nasdaq Global Select Market. Qualification is based on a series of mix-and-match criteria driven by trading volume and financial performance, e.g., 1.1 million-share average annual trading volume, $850 million average market cap, $110 million in revenues, $27.5 million in three-year aggregate cash flows. These are just selected samples of the quantitative standards, and the number of potential variations is almost infinite. However, the benchmarks suggest that the companies that won’t make the cut are the very same firms that are now having the most trouble gaining analyst and investor attention. Under the reorganization, the remaining firms will be divided among the Nasdaq Global Market, a new name for the current Nasdaq National Market, and the Nasdaq Capital Market, which has operated as the Nasdaq Small Cap Market. Peter Coffey, a veteran M&A lawyer at Michael Best & Friedrich and a former chairman of ACG, fears that the market reorganization will tarnish some of the benefits of being a publicly traded company at the very time smaller and mid-sized firms are wrestling with the expenses of complying with Sarbanes-Oxley. “It potentially has consumer branding implications – a seal of approval, if you will,” he says. “If you incrementally take that away or reduce the benefit to a second-tier level, it’s clearly like treating someone like a second-class citizen.” Mix the cost of SOX compliance with the struggle to attract investor and analyst attention, Coffey says, and “the pressure becomes so intense that these companies are forced to take some action.” “Companies may not be in the most liquid market if they’re in the third tier,” notes Bernard. “This may be one more reason for a firm not to remain public. Conversely, companies considering whether to go public at some point may sell rather than go through the IPO process,” he says. Unless private companies are in favored industries such as technology or biotechnology, Bernard adds, they already face formidable challenges in going public if they lack size. Turetsky points out that the theory behind the market revamping is to promote “a race to the top,” with smaller firms working harder to make it to the top tier. He questions, however, whether it will work, saying that it can “restrain the liquidity of these companies and may hinder them from getting into the race. So they may seek other exchanges, go private, or sell.” Also being watched is whether the reorganization will impact private equity exit strategies by closing off IPO options for smaller portfolios firms. That could increase sales to strategic acquirers or to other private equity buyers but it also could favor larger build-up plays to create mass demanded by buyers of IPO shares. (c) 2006 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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