International
Equity Markets
Prof. Ian GIDDY
Stern School of Business
New York University
Emerging Market Financing
Equity
Emerging markets
Debt
Copyright ©2003 Ian H. Giddy
Equity markets 2
Primary Market for Equities
Private Equity Placement
Initial Public Offering (IPO)
Subsequent Offering
Stock Buyback?
Management Buyout?
Copyright ©2003 Ian H. Giddy
Equity markets 3
Investment Banking Arrangements


Underwritten vs. “Best Efforts”
Underwritten: firm commitment on
proceeds to the issuing firm
Best Efforts: no firm commitment
Negotiated vs. Competitive Bid
Negotiated: issuing firm negotiates terms
with investment banker
Competitive bid: issuer structures the
offering and secures bids
Copyright ©2003 Ian H. Giddy
Equity markets 4
Secondary Market for Equities
Private Equity Placement
Initial Public Offering (IPO)
Subsequent Offering
Secondary Market Trading
Copyright ©2003 Ian H. Giddy
Equity markets 5
Institutional Investors and Money
Managers
Institutional Investors
Money Managers
Mutual Funds
Insurance Companies
Money managers
Pension Funds
Hedge funds,
Central banks, etc.
Copyright ©2003 Ian H. Giddy
Stocks
and
bonds
Equity markets 6
Mutual Funds
Open-End
Stocks
and
bonds


Variable
number
of shares
Not traded on an
exchange
Price = NAV (less fees)
Copyright ©2003 Ian H. Giddy
Closed-End
Stocks
and
bonds


Fixed
number
of shares
Traded on a stock
exchange
Price may not = NAV
Equity markets 7
Raising Capital for Emerging Market
Companies
Debt
Equity
Copyright ©2003 Ian H. Giddy
Equity markets 9
Raising Capital for Emerging Market
Companies
Domestic market
Debt
Foreign market
Euromarket
Equity
Copyright ©2003 Ian H. Giddy
Equity markets 10
Raising Capital for Emerging Market
Companies
Domestic market
Debt
Foreign market
Euromarket
Equity
Copyright ©2003 Ian H. Giddy
Equity markets 11
Raising Capital for Emerging Market
Companies
Domestic market
Debt
Foreign market
Euromarket
Equity
Domestic market
Foreign market
Euromarket
Copyright ©2003 Ian H. Giddy
Equity markets 12
Raising Capital for Emerging Market
Companies
Domestic market
Debt
Foreign market
Euromarket
Equity
Domestic market
Foreign market
Euromarket
Copyright ©2003 Ian H. Giddy
Equity markets 13
Raising Capital for Emerging Market
Companies
Domestic market
Debt
Foreign market
Euromarket
Equity
Domestic market
Foreign market
Euromarket
Copyright ©2003 Ian H. Giddy
Equity markets 14
Debt
Equity
Domestic market
Foreign market
Can globally mobile investors capture value & control?
no
(Russia)
Copyright ©2003 Ian H. Giddy
yes
(S Africa)
Equity markets 15
What International Investors Look For
Macro
Factors
Structural
Factors
Firm-level
Factors
Copyright ©2003 Ian H. Giddy
• Currency overvaluation
• Capital restrictions
• Acctg & disclosure requirements
• IAS compliance
• Bankruptcy regime
• Creditor rights
• Govt-corporate nexus
• Trading infrastructure
• Price-Value ratio, Sharpe ratio, EVA
• D/E ratio
• Currency & maturity mismatch
• IAS conformity
• Insider control
• Objective research coverage
• Trading liquidity
Equity markets 17
Investment Banking
and Underwriting
Prof. Ian Giddy
New York University
Underwriting Sequence





Engagement: Mandate
signed by issuer
engaging lead manager
Due Diligence:
Conducted by Lead
manager
Documentation: Loan
agreement, Prospectus
Signing: Underwriting
agreement signed and
issue priced
Closing: Settlement of
the offering
Copyright ©2003 Ian H. Giddy
“Beauty Contest”
Engagement
Due Diligence and
Documentation
Signing and Pricing
Closing
Equity markets 21
Distribution
Lead Manager
Book-Runner
“International Coordinator
Joint Co-Lead
Joint Co-Lead
Manager
Joint Co-Lead
Manager
Managers
Lead
Lead
Manager
Lead
Manager
Managers
Manager
Manager
Managers
Copyright ©2003 Ian H. Giddy
Co-Lead Manager
Question 1:
Which banks were
involved with the DT
IPO, and what were
their roles?
Selling Agent
Equity markets 25
Pricing
Debt Instruments




Equity
Bonds priced according  Mature issue: based on
to yield over benchmark
current market price and
(spread)
market conditions, small
Yield too low – issueQuestion
2: for dilution;
premium
does not sell
comparables
What
price
should
DT
Yield too high – too
 IPO:have,
comparables
and on:
shares
based
much given away
discounted cash flow
Generally syndicate(a)Book value
analysis
holds price for a day; in
a successful issue (b)P/E ratio
yields gradually tighten
(c)Future cash flows
Copyright ©2003 Ian H. Giddy
Equity markets 35
Deutsche Telekom:
Group work 11:20-12:20
Question 1:
Which banks were
involved with the DT
IPO, and what were
their roles? Question 2:
What price should DT
shares have, based on:
(a)Book value
(b)P/E ratio
(c)Future cash flows
Copyright ©2003 Ian H. Giddy
Equity markets 36
Raising and Pricing
Equity
Prof. Ian Giddy
New York University
Raising Equity:
The Investment Banker’s Job
Market conditions
 Corporate needs
 Valuation
 Information
 Distribution

Copyright ©2003 Ian H. Giddy
Telekom
Equity markets 39
Deutsche Telekom: The Sequence

See case Exhibit 2
Copyright ©2003 Ian H. Giddy
Equity markets 40
What’s a Company Worth
to Investors?
Required Returns
 Types of Models

Telekom
Balance
sheet models
Dividend discount & corporate cash flow
models
Price/Earnings ratios
Option models

Estimating Growth Rates
Copyright ©2003 Ian H. Giddy
Equity markets 41
Equity Valuation:
From the Balance Sheet
Value of Assets
 Book
 Liquidation
 Replacement
Value of
Liabilities
 Book
 Market
Value of Equity
Copyright ©2003 Ian H. Giddy
Equity markets 42
Deutsche Telekom: Book Value

See case Exhibit 3
Copyright ©2003 Ian H. Giddy
Equity markets 43
Relative Valuation

Do valuation ratios make sense?
• Price/Earnings (P/E) ratios
 and variants (EBIT multiples, EBITDA multiples,
Cash Flow multiples)
• Price/Book (P/BV) ratios
 and variants (Tobin's Q)
• Price/Sales ratios

It depends on how they are used -- and
what’s behind them!
Copyright ©2003 Ian H. Giddy
Equity markets 44
Deutsche Telekom:
Ratios and Comparables

See case page 9
Copyright ©2003 Ian H. Giddy
Equity markets 45
Discounted Cashflow Valuation:
Basis for Approach
t =n CF
t
Value= 
t
t =1(1+r)
where

n = Life of the asset
 CFt = Cashflow in period t
 r = Discount rate reflecting the riskiness of
the estimated cashflows
Copyright ©2003 Ian H. Giddy
Equity markets 46
Deutsche Telekom: Earnings

See case page 8
Copyright ©2003 Ian H. Giddy
Equity markets 47
Valuing a Firm with DCF:
An Illustration
Historical
financial
results
Adjust for
nonrecurring
aspects
Gauge
future
growth
Projected sales
and operating
profits
Adjust for
noncash
items
Projected free cash flows
to the firm (FCFF)
Year 1
FCFF
Year 2
FCFF
Year 3
FCFF
Year 4
FCFF
Discount to present using weighted
average cost of capital (WACC)
Present
value of free
cash flows
Copyright ©2003 Ian H. Giddy
+ cash,
securities &
excess assets
- Market
value of
debt
…
Terminal year FCFF
Stable growth model
or P/E comparable
Value of
shareholders
equity
Equity markets 48
Telkom South Africa
1.
2.
3.
4.
Why did South Africa follow its initial 30%
privatization of Telkom with an initial public offering?
What are the advantages and disadvantages of a
public listing for a company?
What is an ADR? Why did Telkom use the ADR
technique in conjunction with its Johannesburg
IPO?
What does a company have to do to ensure a
successful IPO? What makes shares attractive to
investors?
Was the Telkom IPO priced correctly? How would
you value a company in order to judge the price for
an IPO?
Copyright ©2003 Ian H. Giddy
Equity markets 49
Copyright ©2003 Ian H. Giddy
Equity markets 50