INBU 4200: Lecture 9

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INBU 4200 Lecture 9

• Sourcing Globally Equity Financing

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Objectives for Lecture 9

• Designing a strategy to source equity globally
• Analyze the motivations and goals of a firm
  issuing new equity shares on foreign equity
  markets
• Recognize the many barriers to penetrate
  effectively foreign equity markets through
  cross-listing and selling equity abroad
• Identify the various financial instruments which
  can be used to source equity in the global equity
  markets
• Review major stock exchanges outside of the
  United States
• London, Tokyo, Continental Europe (Frankfurt and
  Euronext)

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Strategy for Sourcing Equity Globally

• Observations
• Most firms sources equity locally within their
  own domestic markets.
• Most firms are unknown in global markets.
• Move into international bond markets combined
  with cross listing of outstanding equity shares
  to gain recognition.
• Test equity offering in smaller markets.
• Eventually, list and offer in target equity
  market.
• London Stock Exchange or NYSE

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Cross Listing of Shares

• Definition The listing of shares of stock on
  two or more stock exchanges.
• Cross border in nature.
• NYSE and London NYSE and Tokyo!
• There are fees involved.
• There are disclosure requirements involved.
• How can shares be listed?
• Actual shares or depository receipts.

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Cross Listing on the TSE
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Foreign Listing Requirements in Japan

• Minimum number of share to be listed
• Depends upon average price (on home exchange).
  Varies from 20 million shares (average price less
  than 500) to 20,000 (average price 100,000 or
  more)!
• Market capitalization of listed shares and time
  of incorporation of company
• At least 2 billion at least 3 years since
  incorporation.
• Financial statements to be provided
• Minimum 2 years, audited independently
• Initial listing fees
• Examination fee 1 million
• Fixed fee 2.5 million
• Annual listing fee
• 0.0225 x number of shares listed (to a maximum
  of 13.5 million)

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Possible Reasons for Cross Listing

• By cross-listing and selling its shares on a
  foreign stock exchange a firm typically tries to
  accomplish one or more of the following
  objectives
• Improve the liquidity of its existing shares and
  support a liquid secondary market for new equity
  issues in the foreign market.
• Increase its share price by overcoming mispricing
  in a segmented and illiquid home market
• Increase the firms visibility and political
  acceptance to its customers, suppliers, creditors
  host governments
• Establish a secondary market for shares used for
  acquisitions in foreign country
• Create a secondary market for shares that can be
  used to compensate local management and employees
  in foreign subsidiaries

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Depository Receipts

• Depositary receipts are negotiable certificates
  issued by a bank to represent the underlying
  shares of stock (which are held in trust at a
  foreign custodian bank)
• Global Depositary Receipts (GDRs) refers to
  certificates traded outside the US.
• American Depositary Receipts (ADRs) are
  certificates traded in the US.
• ADRs are sold, registered, and transferred in the
  US in the same manner as any share of stock with
  each ADR representing some multiple of the
  underlying foreign share (called the ADR ratio).

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ADRs

• An ADR is a dollar-denominated negotiable
  certificate that represents ownership of shares
  in a non-U.S. company.
• The structure of an ADR includes a ratio, which
  correlates the amount of underlying shares to the
  receipt.
• Ratio the number of underlying shares
  represented by one American Depositary Receipt
  (ADRShares)
• The ratio is typically depicted as, for example,
  13, where one ADR represents three underlying
  shares.
• Or, if the home share price is very high, for
  example, a 21 ratio would indicate two ADRs
  representing one underlying share (might also be
  expressed as 10.5).
• ADR web site http//www.adr.com/

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Examples of ADRs (Japanese Companies, end of 2003)

• Company Name ADRShare Ratio Sector
• ALL NIPPON AIRWAYS 1 2 AIRLINES
• BRIDGESTONE CORP 1 2 AUTO PARTS EQUIPMENT
• CALPIS CO LTD 1 10 BEVERAGES
• CANON INC 1 1 OFFICE EQUIPMENT
• DAIWA SECURITIES 1 10 FINANCIAL SERVICES
• FUJI PHOTO FILM CO LTD 1 1 MANUFACTURING
• HONDA MOTOR CO LTD 2 1 AUTO MANUFACTURERS
• KIRIN BREWERY CO LTD 1 1 BEVERAGES
• KOMATSU LTD 1 4 MACHINERY
• PIONEER CORP 1 1 ELECTRONICS
• YAMAHA CORP 1 1 ELECTRONICS
• Honda could also be expressed as 10.5

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ADRs (October 2003) by Country

• Country Number of Companies
• Sweden 7 Companies
• Venezuela 2 Companies
• Argentina 10 Companies
• France 23 Companies
• Turkey 1 Companies
• South Africa 6 Companies
• Brazil 33 Companies
• Norway 5 Companies
• Portugal 3 Companies
• Switzerland 11 Companies
• India 6 Companies
• Italy 12 Companies
• Russian Fed 19 Companies
• Japan 29 Companies
• Denmark 3 Companies
• Taiwan 3 Companies
• Netherlands 27 Companies

• Country Number of Companies
• United Kingdom 62 Companies
• Philippines 5 Companies
• Hungary 4 Companies
• Hong Kong 14 Companies
• Chile 15 Companies
• Finland 4 Companies
• Austria 3 Companies
• Spain 7 Companies
• Australia 12 Companies
• Peru 2 Companies
• New Zealand 1 Companies
• Ireland 6 Companies
• China 5 Companies
• Israel 6 Companies
• Germany 24 Companies
• Luxembourg 1 Companies
• Indonesia 2 Companies

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Worlds Major Stock Exchanges

• U.S.
• NYSE
• NASDAQ
• London
• London Stock Exchange (LSE)
• Japan
• Tokyo Stock Exchange (TSE)
• Continental Europe
• Frankfurt (Deutsche Borse)
• Paris based Euronext

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London Stock Exchange

• Founded in 1792.
• Initially used by British Government to raise
  funds (war with France).
• Big Bang in 1986 series of reforms liberalizing
  commissions and introducing a screen based
  trading system. Paved the way for foreign
  ownership.
• Currently lists around 2,900 stocks, depository
  receipts, and bonds. Largest market in Europe!
• As of Sept 30, 2003, 445 companies from over 60
  countries are trading on the LSE (60 are U.S.
  companies).
• Major stock index is the FTS 100 (largest 100
  U.K. firms).
• Official web site http//www.londonstockexchange.
  coml

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FTSE 100
http//finance.yahoo.com/m2?u
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Examples of Foreign Listings on LSE

• Company Year Listed
• All Nippon Airways 1991
• American Express 1977
• Anheuser-Bush 1986
• Bank of America 1996
• Campbell Soup 1982
• Daiwa Securities 1990
• Euro Disney 1989
• Ford Motor Co. 1966
• General Electric 1973
• Honda Motor Co. 1981
• J.P. Morgan 1983

• Company Year Listed
• Kirin Brewery 1990
• Merrill Lynch 1972
• Sara Lee 1981
• Sony Corporation 1971
• State Bank of India 1996
• Tiger Brands 1947
• Toshiba 1980
• Toyota Motor 1999
• Vietnam Fund 2003
• Xerox 1972
• Zurich Financial 2000

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Frankfurt Stock Exchange

• Traces its history to a long tradition of trading
  (bills of exchange and government bonds) back to
  the 1600s.
• Lost its status as an international market during
  most of the 20th century as a result of World
  Wars regained its international position in the
  mid-1950s.
• The Frankfurt Deutsche Borses major stock index
  is the DAX (representing the 30 largest German
  firms).
• Official web site http//deutsche-boerse.com/

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DAX
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Euronext

• Euronext (Paris based holding company) formed in
  September 2000 by the merger of
• the Amsterdam and Brussels Exchanges and Paris
  Bourse. Added the Lisbon Exchange and London
  International Financial Futures Exchange (LIFFE)
  in 2002.
• Has created a cross-border, electronic market for
  European and international equities and bonds.
• Approximately 1,500 companies trade on Euronext.
• Is currently Europes second largest exchange.
• Euronexts major stock index is the Euronext 100
  (representing the 100 largest European
  companies).
• Official web site http//www.euronext.com/

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Tokyo Stock Exchange

• One of the oldest stock exchanges in Asia founded
  in 1878 (the oldest is the Bombay Stock Exchange
  founded in 1875).
• There are four separate sections within the TSE
  market.
• The first section is for the largest, most
  successful companies - often referred to as 'blue
  chips'.
• The second section is for smaller companies with
  lower trading volume levels.
• Mothers (market for growth and emerging stocks),
  established in November 1999, is for newer,
  innovative venture enterprises.
• The foreign section is for companies from
  countries other than Japan.
• Official web site http//www.tse.or.jp/

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Tokyo Stock Exchange

• Currently 2,147 companies are listed on the TSE
  (Oct 17, 2003)
• First Section 1,525
• Second Section 560
• Mothers 62
• Foreign 32
• Major index is the TOPIX (TOkyo stock Price
  IndeX. all First Section listed shares)
• The section for foreign stocks was opened in 1973
  (when the TSE pushed to become an international
  exchange). By 1993, 120 foreign companies were
  listed on the TSE. However, through delisting
  since that time, 32 foreign companies remain. Of
  these 14 are from the US, and 7 are from Germany.
• Why the delistings?
• Japanese economy and Japanese stock market
  performance

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Japan Economic Performance
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TOPIX Index (Jan 1986 100)
http//www.tse.or.jp/EREALIDX/
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U.S. Versus Japan
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U.S. Versus U.K.
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U.S. Versus Germany
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Methods of Sourcing Equity Funds

• Alternative instruments to sourcing equity in
  global markets include the following
• Sale of a directed public share issue to
  investors in a target market
• Sale of a Euro equity public issue to investors
  in more than one market, including both foreign
  and domestic markets
• Private placements under SEC Rule 144A
• Sale of shares to private equity funds

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Direct Public Share Issue

• Directed Public Share Issues
• Defined as one which is targeted at investors in
  a single country and underwritten in whole or in
  part by investment institutions from that country
• Issue may or may not be denominated in the
  currency of the target market
• The shares might or might not be cross-listed on
  a stock exchange in the target market
• A foreign share issues, plus cross-listing can
  provide it with improved liquidity

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Euro Equity (Offshore)

• Euro equity Public Issue
• Gradual integration of worlds capital markets
  has spawned the emergence of a euro equity market
• A firm can now issue equity (underwritten and
  distributed) in multiple foreign equity markets
  sometimes simultaneously with distribution in the
  domestic market.

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Private Placement

• Private Placement Under SEC Rule 144A
• A private placement is the sale of a security to
  a small set of qualified institutional buyers
• Investors are traditionally insurance companies
  and investment companies
• Because shares are not registered for sale,
  investors typically follow buy and hold
  strategy
• Rule 144A allows qualified institutional buyers
  (QIB) to trade privately placed securities
  without previous holding period restrictions and
  without requiring SEC registration

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Private Equity Funds

• Private Equity Funds
• Limited partnerships of institutional and wealthy
  individual investors that raise their capital in
  the most liquid capital markets
• Then invest these funds in mature, family-owned
  firms located in emerging markets
• Or purchase distressed firms in overseas markets.
• Popular in Japan!
• Long Term Credit Bank of Japan (1998)