The takeover of Deliveroo by DoorDash has brought to light the growing divide between the UK and US stock markets. DoorDash’s bid values Deliveroo at £2.9 billion, creating a company with operations in over 40 countries. However, the contrasting fates of the two companies highlight the shifting fortunes of their respective markets. While Deliveroo has recently turned a profit, its stock has struggled, whereas DoorDash has seen its market value soar over the past few years.
Contrasting Fortunes of US and UK Listings
Deliveroo and DoorDash both started as food delivery services, expanding their offerings to include other convenience items like nappies and pet food. Both companies raised capital via IPOs around the same time – Deliveroo in London and DoorDash on the New York Stock Exchange. However, DoorDash was valued five times higher than Deliveroo at the time of its IPO, and today it is worth 35 times more.
Investors in DoorDash have seen an 84% increase in share value, while those in Deliveroo have seen a 56% decrease. This discrepancy can be partially attributed to the greater ability of US companies to raise funds, especially given their access to US capital markets. As a result, DoorDash is in a stronger financial position to take over Deliveroo.
Reasons for the UK’s Struggles
There are many factors contributing to the UK stock market’s struggles, particularly the valuation gap. The average value of the 500 largest US companies is 28 times their earnings, compared to just 12 times for the 100 largest UK companies. The dominance of successful companies like Alphabet, Amazon, Apple, and Microsoft in the US has driven this disparity.
Moreover, UK investor demand for UK stocks has dwindled. Over the past 30 years, the share of UK market ownership by UK financial institutions has fallen from 50% to less than 5%. UK pension funds, seeking safer investments, have shifted away from UK stocks, opting instead for US markets where returns have far outpaced those of the UK. Over the past five years, US stocks have returned 116%, compared to just 45% for UK stocks.
Potential Solutions and Reforms
Despite these challenges, there are signs of change. The UK government’s Edinburgh Reforms aim to make the UK stock market more attractive by reducing the proportion of a company that must be available for public sale, allowing founders to retain more control. These reforms could make the UK a more appealing place for companies to list.
Additionally, financial giants like Larry Fink of BlackRock and Jamie Dimon of JP Morgan have expressed optimism about the UK market, noting that it is undervalued and has outperformed the US so far this year.
The Impact of US Takeovers on UK Companies
Despite these positive comments, many UK-listed companies are being acquired by US buyers. Companies like Arm Holdings, Morrisons, and CRH Holdings are no longer part of the London Stock Exchange, and Deliveroo could soon join them. This trend highlights the challenge the UK stock market faces in retaining high-profile companies.
Although pension funds and investors can buy shares listed anywhere, a UK listing generates significant business for the country’s financial services industry. The UK’s financial sector still contributes over 10% of the nation’s economy, but its once-dominant role in global finance has diminished. The London Stock Exchange continues to serve as a key center for financial activity, but it is facing growing competition from US markets.
Ultimately, the takeover of Deliveroo by DoorDash illustrates how the US capital market’s superior financial resources are enabling US companies to expand and acquire rivals, further highlighting the UK market’s struggle to maintain its competitive edge.
