Prepared by Shafiq Jadallah

1. Chapter 12 Sourcing Equity Globally Prepared by Shafiq Jadallah To Accompany Fundamentals of Multinational Finance Michael H. Moffett, Arthur I. Stonehill, David K. Eiteman

2. 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

3. 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

4. International Bond Issue -- Less Liquid Markets International Bond Issue -- Target Market or Eurobond Market Equity Listings -- Less Liquid Markets Equity Issue -- Less Liquid Markets Equity Listing -- Target Market Euro equity Issue -- Global Markets Alternative Paths Domestic Financial Market Operations

5. 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

6. 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

7. Receipts Shares Shares held on deposit at custodial bank Publicly traded firm outside the U.S. Receipts for shares listed on U.S. exchange Traded by U.S. investors Shares traded on local stock exchange Shares Arbitrage Activity American Depositary Receipts

8. Depositary Receipt Programs

9. 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 firm’s 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

10. Improving Liquidity

11. Effect of Cross-Listingon Share Price • If a firm’s 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

12. 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 MNE’s foreign joint venture • Increasing potential for share swaps with acquisitions • Compensating management and employees

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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 firm’s 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

21. 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 firm’s 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 firm’s shares, the major liquid stock markets are New York, London Tokyo, Frankfurt and Paris

22. 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

23. 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 subsidiary’s share to investors in a host country • Sales of shares to a foreign firm as part of a strategic alliance