STORY OF THE WEEK/Irish Stock Exchange: With few companies showing an inclination to float on the exchange, the ISEQ could become nothing more than a sideshow in the international market, writes Arthur Beesley

Two events this week present differing perspectives on the state of the Irish Stock Exchange. Though not exactly sickly, neither is the market in the rudest health. Fundamental questions abound while the ISEQ index mirrors the international scene's downward tilt.

The first significant development was the decision on Monday of a board sub-committee at Jefferson Smurfit to recommend an offer by Madison Dearborn, the Chicago private-equity firm.

Second was the disclosure by the drinks and snack group Cantrell & Cochrane (C&C) that it would push ahead with an initial public offering on July 8th. If it goes ahead, the flotation will provide a fillip to the market, bucking a trend that has seen tech and telecom firms favoured over all else in recent years.

On a different scale altogether is the likely sale of Jefferson Smurfit, which may prove to be something of a psychological staging post for the Dublin stock market. The bid values Smurfit at about €3.75 billion, more than three times the €1.1 billion valuation mooted for C&C.

The bellwether stock was once the biggest company on the index, a success in an era when Irish business was rarely out of the doldrums. But the group's share price has failed to match its earlier promise in recent years. Nor did the generous €6.6 million remuneration package paid in 2000 to its then executive chairman, Dr Michael Smurfit, endear the company to investors.

Whether or not the major shareholders who own Smurfit take the Madison Dearborn offer, the development chimes with a trend that has seen far more firms leave the market than join it.

Attention today may be on the prospect of the C&C offering but it comes only weeks after the teleconferencing firm Spectel cancelled its market launch in May.

The C&C flotation is likely to be the only one on the Dublin exchange this year, observers say. This follows the solitary flotation last year of Conduit and three initial public offerings in 2000 when Riverdeep, Datalex and Paddy Power, then Power Leisure, joined the market.

Contrast that with nine delistings two years ago, 11 in 2001 and four this year already. The trend seems clear. With Green Property also in play - it is the subject of three approaches - there may be yet another delisting.

Also of concern is the way many tech firms shunned the Irish exchange for the US and London markets when the tech boom was at its height.

No one suggests the exchange will wither away altogether but the disappearance of a slew of prime stocks would leave it looking more and more like a sideshow. Investors would need to look elsewhere for decent opportunities.

According to one senior figure in the equity market, this could create a domino effect.

"If you start losing companies, you start losing fund managers and you start losing brokers," he says.

Not a pleasant vista. But indicators in the Irish market appear at odds with the general strength of the economy. Despite the downturn, the Irish growth rate is still faster than any other OECD country.

Asked whether there was an anomaly, the chief executive of the Irish Stock Exchange, Mr Tom Healy, points out that much of the domestic growth is generated by foreign corporations. From a trading perspective, he says, turnover is increasing.

The fall-off in flotations is attributed to the dotcom collapse, which dulled the shine of the techs and the appetite of potential investors. No replacement sector has emerged.

While C&C is expected to take off, albeit at a discount to its preferred range, the company is alone at the starting blocks.

Mr Shane Nolan of Merrion Capital says only National Toll Roads is likely to emerge as a flotation candidate any time soon. Yet, citing Anglo Irish Bank and Ryanair, he says the market has demonstrated the capacity to generate added value from within.

When Mr Healy introduced the ITEQ technology market in September 2000, he spoke of up to 40 firms lining up to float. Now he says that market will not revive until the Nasdaq in New York turns around definitively. With the spotlight in the US on the lies purveyed by certain brokers to support basket-case flotations during the tech boom, that could be a long time coming.

The departure from the Dublin exchange of tiny transport firm Seafield, minnow exploration stock Tuskar Resources and others of their scale is not likely to have sent stockbrokers on Anglesea Street into mourning.

But the loss of big-ticket stocks such as Eircom and Smurfit and mid-range groups like Hibernian, Norwich Union and Golden Vale is not to be ignored. What's more, questions surround the future of other big stocks on the exchange.

Drug group Elan is looking highly vulnerable after a restructuring plan announced this month failed to impress the market. By market capitalisation, Elan amounted to almost a quarter of the Irish market not long ago. But, under fire due to uncertainty about its accounting policy and the failure of a drug for Alzheimer's disease, the company's stock is trading at about one-10th its value of a year ago.

Then there is the banking sector. Bank of Ireland chief executive Mr Michael Soden has made no secret of his desire to merge with AIB. Such a link-up is unlikely to be a runner from a competition perspective but Mr Soden was keen to couch the proposal as a protective measure to fend off foreign predators. In doing so, he reflected a commonly held view that a major international bank will, sooner or later, move on either Bank of Ireland or AIB.

Again, it is a trend that has already begun. KBC, Bank of Scotland and Rabobank all increased their Irish presence by respectively acquiring IIB Bank, ICC and the ACC. This indicates a firm willingness by foreign groups to nose into the Irish financial scene, which may ultimately lead to major changes in the composition of the Irish banking sector.

This is reasonable to assume according to one broker, who says stocks in companies exposed to the Irish market are still a strong play for international investors.

The most recent concern about the future of the Irish market has centred on the introduction of the euro. The creation of the single currency meant fund managers could focus on sectoral rather than national investments.

It also led to increased internationalisation of shareholdings - by foreign institutions in Irish groups and by Irish fund managers in foreign groups. However, mooted mergers between European and US exchanges failed to materialise.

Mr Healy says the departure of Smurfit is negative from a public relations perspective. "What's disappointing with Smurfit is that it's almost as if an entire sector isn't there. It's unfortunate in terms of the impression given," he says.

One broker said there were two clear reasons for the reluctance of companies to float right now. First, interest rates at an all-time low mean it is much easier to borrow money than to raise equity to fund development. Second, companies are reluctant to go to a market in which the stock price might leave them with a market capitalisation below their absolute cash level. This is the unfortunate predicament of certain Irish tech firms, he says.

So is there a future at all for the Irish exchange?

An NCB Stockbrokers spokesman says: "There are pressures that concentrate things away from the local markets and you see the start of erosion."

Still, he added, there would always be a desire on the part of domestic companies to float on local markets. For investors, there is greater access to domestic company management while, for the company itself, there is greater scope to put its story across.

All very well, provided the candidates are coming through.