In a move that has sparked debate within the music industry, billionaire activist investor William Ackman has called for Universal Music Group (UMG) to relocate its stock listing and legal headquarters from Amsterdam to the United States by next year. Ackman, whose hedge fund Pershing Square Capital Holdings owns a significant stake in UMG, believes this shift could significantly increase the company's value. However, financial experts are divided on whether this move would truly benefit the music giant.

Tapping into the Vast U.S. Retail Investor Market

One of the key arguments made by Ackman is that a U.S. listing would grant UMG access to the massive and growing U.S. retail investor market. According to the University of Missouri study, more than 30 million new investors have opened brokerage accounts since the start of the pandemic, driven in part by the Reddit-fueled surge in stocks like GameStop and AMC. This influx of retail investors represents a significant opportunity for UMG to tap into a vast and engaged pool of potential shareholders.Erik Gordon, a professor at the University of Michigan's Ross School of Business, believes that a U.S. listing could "noticeably increase UMG's value" by providing access to this lucrative market. He explains that while the move may result in higher taxes and increased legal expenses, the benefits of reaching the U.S. retail investor base could outweigh these drawbacks.

Improving Liquidity and Index Inclusion

Another key factor in Ackman's argument is the potential for improved liquidity if UMG lists in the U.S. Currently, four institutional investors control nearly 60% of UMG's stock, and only a small portion of the shares frequently change hands. Ackman believes that a U.S. listing could address this lack of liquidity, making the stock more accessible to a wider range of investors.Furthermore, Ackman argues that a U.S. listing could pave the way for UMG's inclusion in major stock market indexes, such as the S&P 500. This inclusion, he believes, would create additional demand for the company's shares as mutual funds and exchange-traded funds that track these indexes would be required to purchase UMG's stock.

Valuation Considerations

While Ackman's arguments have merit, some financial analysts are not convinced that a U.S. listing would necessarily increase UMG's value. One equity analyst, for example, believes that UMG's shares are already trading at a premium compared to those of its competitor, Warner Music Group (WMG).According to J.P. Morgan's analysis, UMG's shares should trade at a significant premium to WMG's, reflecting the former's greater scale, better growth track record, and stronger management and governance. This suggests that UMG's current valuation may already account for its market-leading position, potentially limiting the upside potential of a U.S. listing.

Navigating the Challenges of a U.S. Listing

While the potential benefits of a U.S. listing are compelling, UMG would also face some unique challenges. One significant concern is the increased operational expense associated with shareholder litigation, which is more prevalent in the U.S. market compared to other jurisdictions.Michael Poster, a music industry lawyer at Michelman & Robinson, explains that U.S.-listed public companies must manage a higher volume of shareholder lawsuits, which can be costly and distracting for management. This added burden could offset some of the potential gains from a U.S. listing.

A Delicate Balance

As UMG and its stakeholders weigh the pros and cons of a potential U.S. listing, it's clear that the decision will require a careful balancing act. While the access to the vast U.S. retail investor market and the potential for improved liquidity and index inclusion are enticing, the company must also consider the operational challenges and the potential impact on its current valuation.Ultimately, the decision to relocate UMG's stock listing and legal headquarters to the U.S. will have far-reaching implications for the company and its shareholders. As the debate continues, industry observers will be closely watching to see how this pivotal move unfolds and what it means for the future of the music industry's global powerhouse.