Returns on different emerging markets asset classes
Emerging markets equity issuance and Nasdaq returns
P/E ratios in Asia
P/E ratios in LA
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Tootsie Roll (NYSE)
Oct-99
Jul-99
Apr-99
Jan-99
Oct-98
Jul-98
Apr-98
Jan-98
140
Oct-97
40
Jul-97
Apr-97
Jan-97
Oct-96
Jul-96
Apr-96
Jan-96
Oct-95
Jul-95
Apr-95
Jan-95
Oct-94
Jul-94
Apr-94
Jan-94
Oct-93
Jul-93
P/E ratios
180
160
Tsingtao Brew ery "A"
120
100
80
Red October
60
S&P 500
20
0
Lukoil
Hostile Bid for Red October
• Hostiles common in the U.S., but small fraction of total
deals:
– Jensen (1988, J Econ. Perspectives) finds 40/3300 deals in
1986.
– They get lots of publicity, often negative
• Hostiles very common in UK.
– Franks and Meyer (JFE, 1996, p. 165) find that 25% of UK deals
are hostile.
• Hostiles very Uncommon in some developed economies.
– Very rare in Japan (Kesterm, p. 260)
– Very rare in Germany. Franks and Meyer (1996) find 3 since
WWII.
• Hostiles are virtually non-existant in emerging markets
– Give the Russian capitalist economy is only FOUR years old,
Why do we see a hostile takeover?
What Happened?
Menatep failed to get 51% of the shares (got < 25%)
On July 25, 1995, Grant and Menatep issue joint press release:
• RO and Koloss had agreed to “work together constructively to promote the interest of all the
shareholders of Red October.”
•RO and Menatep sign a standstill agreement:
Menatep gets:
– two temporary seats on the board
– can run two directors at Annual Meeting 4/20/96
– will not purchase more shares for five years
– agreement ends if Menatep people not elected
* I think Menatep is hoping for this so they can take
another run
Red October gets:
– vote on poison pill at Annual Meeting 4/20/96
– expand production and sales in Moscow and the provinces
– implement new strategy: cut prices and increase production
•Milner:
“We didn’t have anything when we started and now we have a shot at two seats on the
board, so I don’t see this as a failure – rather it’s a reasonable compromise.” (NYT, p. D3,
7/12/26/95)
•Menatep probably got side payments??
Was it a publicity stunt??
•“RO is always under threat of takeover b/c of the land…
If we don’t have it, someone else will. If not this year,
next year or 97 or 98?”
(This is Milner.)
•“Now (3/96) is the wrong time to judge what happened,
it’s too early.”
I wouldn’t do anything different, nothing.” (Milner)
RO sells 20% stake to the Moscow city government
•CEO Daursky: “We want to have…political protection, which is very
valuable now.”
Annual shareholders meeting in April 1996
•Shareholders approve the poison pill
•One Menatep director is appointed to the board
Summary
How to apply financial tools in emerging markets
•Does capital asset pricing model work?
What essential assumptions of CAPM are violated?
– Is the market diversified enough? A complete market?
Market risk = economy-wide risk?
– Risk-free rate??
– Efficient market?
What information is contained in stock prices when bid/ask
spread equal 50% of the stock price?
– From whose perspective?
Should you be concerned about total risk? Or systematic risk?
•Can you use comparable analysis across countries with different
inflation rate?
•Can you trust cash flow projections?
•The KEY is to reconsider basic assumptions
Mechanical application of valuation models is WRONG and can lead to bad decisions.
Market for corporate control
•Objectives
– Make firm more efficient
Under performers are vulnerable
– Get assets to highest value users (to managers who maximize value)
Jensen’s argument
– Get assets to correct values, bring efficiency to market pricing
– Show that market works, tell the world, attract new $
•The risks
– No one will go public? no more IPO
– But firms need to go public, need access to capital to grow/restructure
– Unfair to common workers, don’t know finance, sell out too cheap
– Hostiles break implicit contracts between management, workers and
other stakeholders, and redistribute wealth to stockholders.
don’t create value – Shleifer and Vishny’s argument
– Undermine political support for reform
Russian privatization and financial market
Insider Control
•It is designed
– privatization plan gave generous privileges to insiders
– “bribing” them in order to obtain their support.
– insiders secured control of an average 65% stake in companies
– Red October is an exception.
– The reward for being more “Western” is a hostile.
•Policy makers hoped that insiders’ stake would soon dwindle
– diversification – holding both job and stock in one company?
– consumption – cashing out
•This only happened on the margin
– top management increased their shares
* could be an efficiency gain
* could also be a defensive strategy – the control premium exceeds
the benefit of diversification
– workers reduced their shares
•Outside shareholders, including investment funds, hold minority shares