Chapter 11: Sourcing Equity Globally. Stock Markets Around the World

Transcription

1 Chapter 11: Sourcing Equity Globally Description of World Stock Markets Market Structure and Liquidity Strategy for Sourcing Equity Globally Cross-Listing: Pro and Con Alternatives to Cross-Listing Euroequity Issues Suggested Exercises: 1-4, W2, W3 1 de 12 Stock Markets Around the World See Exhibits 11.4, 11.5 or fibv200.xls or Market Capitalization - 10 biggest stock markets in the world in 2000 a NYSE 11,534,612.9 Nasdaq 3,597,085.9 Tokyo 3,157,221.8 London 2,612,230.2 Euronext Paris 1,446,634.1 Deutsche Börse 1,270,243.2 Switzerland 792,316.4 Toronto 770,116.3 Italy 768,363.4 Euronext Amsterdam 640,456.3 a. Figures in 000,000 USD. Ranking gets very crowded after 4th place. Contrast with # of listings. Contrast with % of GDP 2 de 12

2 Structure of Stock Markets & Liquidity Liquidity is the ability of the market to absorb a large volume of transactions without affecting market prices. Markets differ in the way they provide liquidity. Dealer Markets: Dealers give quotes at which they stand ready to buy or sell standard amounts. the fx market is a dealer market, as is NASDAQ. Dealers typically pick and choose which securities they deal in. If they want, they can sit on the sidelines for a time. Several may compete. Dealers risk their own capital in trading. However, the liquidity they provide is beneficial to the market. Specialists are essentially dealers associated with certain stock exchanges. They give quotes for the securities they cover, risk their own capital. The exchange assigns them an exclusive range of securities for which they must deal at all times. The intent is to guarantee liquidity; spreads are regulated. Specialist markets are rare, but important: NYSE, Frankfurt, AMEX. 3 de 12 Structure of Stock Markets & Liquidity (cont.) Order-Driven Market: In some markets, liquidity is guaranteed in the absence of dealers by matching different kinds of orders. Limit Orders: Orders that are executed as soon as the price is right. sell once price is high enough, buy once price is low enough. Market Orders: Orders that are executed immediately for the best avail. price. Order-Driven Markets are usually computerized, with computer keeping track of best limit orders (highest buy, lowest sell) in the system at any time. Market orders simply matched to best available limit orders. Quotes always available: the best limit orders in the system. Buyers matched directly with sellers: no private capital at risk by dealers. Most stock markets are hybrid systems. Automated order markets with dealers active; some with specialists. There are debates over which is better: note circuit-breakers on NYSE. 4 de 12

3 Liquidity of Stock Markets Around the World Textbook classes markets into liquid, semi-liquid, and illiquid. Capitalization is not a great guide to liquidity. How much trading is there? How high is velocity? (Turnover / Capitalization) How much is primary market? How much is secondary market? How much is accounted for by a few big firms? What is the cost of equity capital? This is a snapshot of a rapidly changing industry. Illiquid markets becoming more liquid. Inter-exchange competition and consolidation in Europe. LSE and NYSE most prestigeous, but feeling the heat. The fall of Tokyo Firms considering a foreign listing interested in their relative importance. share of listings, new listings share of trading volume 5 de 12 Strategy for Sourcing Equity Globally Why Source Equity on Foreign Markets? Last week we talked about illiquidity, segmentation & cost of capital. How to Source Equity on Foreign Markets Hire an investment banker to advise on: markets to target? (See spreadsheet) sequence of steps? (See Exhibit 11.1) cross-list or new issue? use of alternatives mechanisms? 6 de 12

4 Why Cross-List? Main reason for cross-listing is to escape segmented, illiquid markets This should lower cost of capital, raising the value of the firm. The more illiquid the home market and the lower the cost of capital in the host, the bigger the potential gains from cross-listing : foreign firms cross-listing in US tend to increase share price : cross-listing via ADRs in US tends to increase share price : gains bigger for firms from emerging markets, esp. with free cap flows : new equity issue at time of cross-listing boosts value even more? Other Reasons for Cross-listing 1. Improve liquidity for existing shares among foreign (and global) investors. Useful if shares used to acquire other firms, compensate foreign employees. 2. Raise firm s profile, political acceptence in host country. (e.g. Japanese firms.) 7 de 12 Why Not Cross-List? Barriers to Cross-listing Costs of marketing (managing investor relations) in multiple places, languages. Disclosure US disclosure laws are the most strict in the world. Non-US firms seeking to tap US capital markets face a costly burden. US firms seeking to tap non-us markets face a much easier time. One view is that wide disclosure is always in a firm s best interests. Lowers cost of capital by reducing uncertainty facing investors. Lowers it more for better-than-average firms. Those who have tried it say that meeting US disclosure standard is costly. Must respect US GAAP, frequent updates, timeliness, completeness. Daimler-Benz (later Daimler-Chrysler). Encourages firms to cross-list in non-us, but liquid, markets. 8 de 12

5 Alternatives to Cross-Listing: ADRs Definition: An American Depository Receipt is a certificate, traded on a US stock exchange, which entitles the owner to shares of foreign company held in trust at a US bank. Similar instruments in other markets called Global DRs. See Exhibit 11.2 ADR denominated in USD, pay dividends in USD. Often for multiple shares (to give nicely sized values.) Faster settlement, simplified withholding taxes, legal issues (e.g. probate.) Sponsored ADRs created at request of foreign firm by applying to SEC. Unsponsored ADRs created by US securities firm, with foreign firm s permission. Main difference is who pays costs of creating ADR. Exhibit 11.3 summarizes different levels of ADR programs. Some allow issuance of new shares (requires prospectus), some do not. Trading on major exchanges requires US GAAP. 9 de 12 Alternatives to Cross-Listing (cont.) Directed Public Share Issues: Target investors in a particular country with your share issue. shares might not be cross-listed in that country, denominated in that currency. typically requires prospectus, underwriting by in target country. Examples: Novo s 1981 US share issue, Nycomed in 1989, Private Placement and SEC Rule 144A: Private placement means that shares are not widely traded after initial sale. This usually means less strict regulations on their sale. SEC 144A creates a pool of Qualified Institutional Buyers (mostly insurance companies, pension funds, etc.) who may buy and trade such securities among themselves. Portal trading and listing system. Most of these investors buy and hold, however, so additional liquidity limited. Low-profile, with limited or no effect on firm valuation. (Boubakri & Cossett.) 10 de 12

6 Alternatives to Cross-Listing (cont.) Private Equity Funds: Raise capital in liquid markets to invest in illiquid ones. If Mohammed won t come to the mountain,... Typically limited partnerships, institutional and wealthy individual investors. Typically investing in successful, mature, closely-held firms in emerging markets. Venture capitalists focus on start-ups, shorter investment horizon. Exit strategy may be difficult for these firms, so longer horizon required. Strategic Alliances: Such alliances may occur for all kinds of reasons unrelated to financing. share technologies, economies of scale or scope, marketing efforts, etc. Creates incentives for stronger partner to help weaker partner obtain financing. gains to stronger partner exceeds return on financing, due to maintenance of strategic relationships. examples include Phillips and B&O, AA and Canadian. 11 de 12 Euroequity Public Issues Definition: A Euroequity is a stock trading outside its country of origin. (See eurobond, euromarket, europaper, etc.) For very large issuances of new shares, market liquidity is a worry. One approach is to sell the new issue in tranches (e.g. batches.) Another is to sell it in multiple markets at once (whether or not the shares are cross-listed.) Privatisation: The typical example of such a huge new issue is the result of privatising a big government (quasi- or former-) monopoly. e.g. phone company, oil company, airline, water company, rail, electricity... mature company, often stable cash-flow, sometimes very, very, very big. happens in developed nations: British Telecom, Deutsche Telecom happens in developing nations: Telefonos de Mexico, YPF Sociedad Anónima privatised firms typically do better financially, higher employment, sales, investment, etc. 12 de 12