copyright © 2003 pearson education, inc.slide 12-1 prepared by shafiq jadallah to accompany...

Copyright © 2003 Pearson Education, Inc.

Slide 12-1

Prepared by Shafiq Jadallah

To Accompany

Fundamentals of Multinational FinanceFundamentals of Multinational FinanceMichael H. Moffett, Arthur I. Stonehill, David K. Eiteman

Chapter 12Chapter 12Sourcing Equity GloballySourcing Equity Globally


Slide 12-2

Chapter 12Sourcing Equity Globally

Learning Objectives• Design 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


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Designing a Strategy toSource Equity Globally

This requires management to agree upon a long-run financial objective and then choose among various alternative paths to get there


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Alternative Paths

Domestic Financial Market Operations

International Bond Issue --Less Liquid Markets

Equity Listing -- Target Market

Equity Issue -- Less Liquid Markets

Equity Listings -- Less Liquid Markets

International Bond Issue -- Target Market or Eurobond Market

Euro equity Issue -- Global Markets


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Sourcing Equity Globally Depositary 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 and denominated in US dollars

– 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


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Sourcing Equity Globally

Depositary Receipts– This multiple allows the ADRs to possess a price per

share conventional for the US market

– ADRs are either sponsored or unsponsored

– Sponsored ADRs are created at the request of a foreign firm wanting its shares traded in the US; the firm applies to the SEC and a US bank for registration and issuance


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American Depositary Receipts

Publicly traded firmoutside the U.S.

Shares traded on localstock exchangeShares

Shares held on depositat custodial bank

Shares

Receipts for shareslisted on U.S. exchange

Receipts

ArbitrageActivity

Traded by U.S. investors


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Depositary Receipt Programs


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Foreign Equity Listing & Issuance 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• Increase its share price by overcoming mispricing in a segmented

and illiquid home market• Increase the firm’s visibility and political acceptance to its

customers, suppliers, creditors & host governments• Establish a secondary market for shares used for acquisitions• Create a secondary market for shares that can be used to

compensate local management and employees in foreign subsidiaries


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Improving Liquidity


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Effect of Cross-Listingon Share Price

If a firm’s home capital market is segmented, that firm could theoretically benefit by cross-listing in a foreign market if that market values the firm more than does the home market• This was the example of Novo A/S


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Other Motives for Cross-Listing

Increasing visibility and political acceptance• MNEs list in markets where they have substantial

physical operations

• Political objectives might include the need to meet local ownership requirements for an MNE’s foreign joint venture

Increasing potential for share swaps with acquisitions Compensating management and employees


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Barriers to Cross-Listingand Selling Equity Abroad

Commitment to disclosure and investor relations• A decision to cross-list must be balanced against the

implied increased commitment to full disclosure and a continuing investor relations program

– Disclosure is a double-edged sword

– Increased firm disclosure should have the effect of lowering the cost of equity capital

– On the other hand, this increased disclosure is a costly burden to corporations


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Alternative Instrumentsto Source Equity

Alternative instruments to source 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• Sale of shares to a foreign firm as a part of a strategic

alliance


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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 Public Issue• Gradual integration of worlds’ capital markets has

spawned the emergence of a euro equity market

• A firm can now issue equity underwirtten and distributed in multiple foreign equity markets; sometimes simultaneously with distribution in the domestic market


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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• 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

Strategic Alliances• Normally followed by firms that expect to gain

synergies from one or more joint efforts


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Summary of Learning Objectives

Designing a capital sourcing strategy requires management to agree upon a long run financial objective

The firm must then choose among the various alternative paths to get there, including where to cross-list its shares and where to issue new equity and in what form


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Summary of Learning Objectives A firm cross-lists its shares on foreign stock exchanges for

one or more of the following reasons• Improving liquidity of its existing shares through depositary

receipts• Increase its share price by overcoming mispricing by a

segmented, illiquid home market• Support a new equity issue sold in a foreign market• Establish a secondary market for shares used in acquisitions• Increase the firm’s visibility & political acceptance to its

customers, suppliers, creditors and host governments• Create a secondary market for shares that will be used to

compensate local management and employees in foreign subsidiary


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If it is to support a new equity issue or to establish a market for share swaps, the target market should also be the listing market

If it is to increase the firm’s commercial and political visibility or to compensate local management and employees, it should be in markets in which the firm has significant operations

If it is to improve liquidity of a firm’s shares, the major liquid stock markets are New York, London Tokyo, Frankfurt and Paris


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By cross-listing and selling equity abroad, a firm faces two barriers• Increased commitment to full disclosure

• A continuing investor relations program

A firm can lower its cost of capital and increase its liquidity by selling its shares to foreign investors in a variety of forms

Sale of a directed share issue to investors in one particular foreign equity market


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Sale of a Euro equity share issue to foreign investors simultaneously in more than one market, including both foreign and domestic markets

Sale of a foreign subsidiary’s share to investors in a host country

Sales of shares to a foreign firm as part of a strategic alliance

copyright © 2003 pearson education, inc.slide 12-1 prepared by shafiq jadallah to accompany...

Documents

sourcing equity

foreign equity markets

source equity

issuance slide

new equity shares

global equity markets

pearson education

underlying foreign share