INBU 4200: Lecture 9

Sourcing Globally: Equity Financing

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)

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

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.

Cross Listing on the TSE

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)

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 firm’s 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

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).

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 (ADR:Shares) – The ratio is typically depicted as, for example, 1:3, where one

ADR represents three underlying shares. – Or, if the home share price is very high, for example, a 2:1 ratio

would indicate two ADRs representing one underlying share (might also be expressed as 1:0.5).

• ADR web site: http://www.adr.com/

Examples of ADRs (Japanese Companies, end of 2003)

• Company Name ADR:Share 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 1:0.5

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• Belgium 1 Companies• Czech Republic 1 Companies• Malaysia 2 Companies• Thailand 1 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 Zealand1 Companies• Ireland 6 Companies• China 5 Companies• Israel 6 Companies• Germany 24 Companies• Luxembourg 1 Companies• Indonesia 2 Companies• Singapore 4 Companies• Greece 3 Companies• Korea 5 Companies• Mexico 18 Companies

World’s 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

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

FTSE 100

http://finance.yahoo.com/m2?u

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 Electric1973• 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 Financial2000

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 Borse’s major stock index is the DAX (representing the 30 largest German firms).

• Official web site: http://deutsche-boerse.com/

DAX

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 Europe’s second largest exchange.• Euronext’s major stock index is the Euronext 100

(representing the 100 largest European companies). • Official web site: http://www.euronext.com/

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/

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

Japan: Economic Performance

http://www.tse.or.jp/EREALIDX/#

TOPIX Index (Jan 1986 = 100)

U.S. Versus Japan

U.S. Versus U.K.

U.S. Versus Germany

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

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

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.

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

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)