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)
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Company Name
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ALL NIPPON AIRWAYS
BRIDGESTONE CORP1 : 2
CALPIS CO LTD
CANON INC
DAIWA SECURITIES
FUJI PHOTO FILM CO LTD
HONDA MOTOR CO LTD
KIRIN BREWERY CO LTD
KOMATSU LTD
PIONEER CORP
YAMAHA CORP
•
*Honda could also be expressed as 1:0.5
ADR:Share Ratio
Sector
1:2
AIRLINES
AUTO PARTS & EQUIPMENT
1 : 10 BEVERAGES
1:1
OFFICE EQUIPMENT
1 : 10 FINANCIAL SERVICES
1:1
MANUFACTURING
2 : 1*
AUTO MANUFACTURERS
1:1
BEVERAGES
1:4
MACHINERY
1:1
ELECTRONICS
1:1
ELECTRONICS
ADRs (October 2003) by Country
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Country
Number of Companies
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Country
Number of Companies
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Sweden
Venezuela
Argentina
France
Turkey
South Africa
Brazil
Norway
Portugal
Switzerland
India
Italy
Russian Fed
Japan
Denmark
Taiwan
Netherlands
Belgium
Czech Republic
Malaysia
Thailand
7 Companies
2 Companies
10 Companies
23 Companies
1 Companies
6 Companies
33 Companies
5 Companies
3 Companies
11 Companies
6 Companies
12 Companies
19 Companies
29 Companies
3 Companies
3 Companies
27 Companies
1 Companies
1 Companies
2 Companies
1 Companies
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United Kingdom
Philippines
Hungary
Hong Kong
Chile
Finland
Austria
Spain
Australia
Peru
New Zealand
Ireland
China
Israel
Germany
Luxembourg
Indonesia
Singapore
Greece
Korea
Mexico
62 Companies
5 Companies
4 Companies
14 Companies
15 Companies
4 Companies
3 Companies
7 Companies
12 Companies
2 Companies
1 Companies
6 Companies
5 Companies
6 Companies
24 Companies
1 Companies
2 Companies
4 Companies
3 Companies
5 Companies
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
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Year Listed
All Nippon Airways
American Express
Anheuser-Bush
Bank of America
Campbell Soup
Daiwa Securities
Euro Disney
Ford Motor Co.
General Electric
Honda Motor Co.
J.P. Morgan
1991
1977
1986
1996
1982
1990
1989
1966
1973
1981
1983
• Company
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Year Listed
Kirin Brewery
Merrill Lynch
Sara Lee
Sony Corporation
State Bank of India
Tiger Brands
Toshiba
Toyota Motor1999
Vietnam Fund
Xerox
Zurich Financial
1990
1972
1981
1971
1996
1947
1980
2003
1972
2000
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):
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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
TOPIX Index (Jan 1986 = 100)
http://www.tse.or.jp/EREALIDX/#
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, familyowned firms located in emerging markets
– Or purchase distressed firms in overseas
markets.
• Popular in Japan!
• Long Term Credit Bank of Japan (1998)