Axiom Telecom's confirmation that it plans to offer shares to the public is rightly seen as another sign of a nascent revival in the UAE's capital markets. But there was another, less obvious winner: NASDAQ Dubai, the stock exchange where Axiom plans to list the shares. The Dubai bourse has played second fiddle to the larger, more liquid Dubai Financial Market (DFM) for most of the past year, and few NASDAQ companies apart from DP World and the contractor Depa are actively traded. But Axiom's move to list on the NASDAQ proves that the exchange still presents an attractive option for companies looking to go public.
There are two main reasons. The first is that NASDAQ allows companies to list as long as they "float" a minimum of 25 per cent of available shares; the minimum on the DFM is 55 per cent, so companies that want to raise capital without selling a majority stake will obviously look to NASDAQ. This appears to be one of the motivations for Axiom, which said yesterday that it would float as many as 35 per cent of its shares.
The second reason is the way shares are valued before they are offered to the public. On the other UAE markets - the DFM and the Abu Dhabi Securities Exchange - shares are initially sold at a fixed price of Dh1 regardless of the issuing company's fundamentals. This usually means the shares are undervalued and investors clamour to subscribe to the initial offering in order to flip the stock quickly and pocket a quick profit.
By contrast, NASDAQ Dubai establishes the list price on the basis of a "book-building" process in which banks spend months in advance of the offering trying to determine a fair value for the shares. The company then makes its own decision on where to price the shares. The book-building process is the standard in most developed markets because it allows companies to get more accurate valuations on their shares. In most cases, this means they can raise more money. After all, that is the whole point of a public offering.