Sourcing Equity Globally

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Chapter 12 Sourcing Equity Globally
To Accompany
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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
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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
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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 firms 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 firms 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 MNEs
  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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Alternative Instrumentsto Source Equity

• 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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Alternative Instrumentsto Source Equity

• 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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Alternative Instrumentsto Source Equity

• 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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Alternative Instrumentsto Source Equity

• 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 firms 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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Summary of Learning Objectives

• 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 firms 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 firms shares,
  the major liquid stock markets are New York,
  London Tokyo, Frankfurt and Paris

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Summary of Learning Objectives

• 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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Summary of Learning Objectives

• 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 subsidiarys share to investors
  in a host country
• Sales of shares to a foreign firm as part of a
  strategic alliance