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Should you List on a Foreign Exchange?

Democratization has been the volcano of current world affairs, changing the map of the world overnight. Next door to the …

Democratization has been the volcano of current world affairs, changing the map of the world overnight. Next door to the erupting national governments are established financial markets poised on the verge of sweeping changes. Just as they are striving to keep up with both shifting capital resources and the EC unification timetable, new market economies are being born, adding to the pie. Though it comes as no surprise that our markets in North America are no longer the majority rule of the global capital market, it’s not a fact that corporate America has assimilated gracefully. We have good cause: It was not that long ago that our market represented two thirds of the world’s market capitalization; now it represents one third. In the European Community alone, their combined stock markets currently equal one half the size of the New York Stock Exchange.

Our economy, too, has shrunk as a percentage of the gross world product, to a level of about 33 percent. The forecasters tell us that European economies will soon outperform our economy at home. The greatest growth in pension fund commitments to global equity markets, analysts say, will come not from the U.S. but from Dutch and Japanese money managers.

The U.S. challenge is what to do to ensure that your company not only weathers the shifting economic plateaus, but thrives on them. Depending on your company’s long-term business and capital objectives, listing on a foreign market could provide the bridge you need to survive in the brave-new-world marketplace. Thinking through some of the following issues may help you in making that crucial decision.

IMPROVING YOUR BUSINESS PROFILE

A high profile on a foreign market makes it easier to establish relationships in the business community and to find opportunities for alliances, acquisitions, or other cooperative business ventures. A recent example is a French oil company, Elf Aquitaine, which listed in New York earlier this year. Despite solid earnings, Elf lacked the international profile that could improve its price-earnings ratio, which remains relatively low compared to other international oils. As part of its long-term objectives, and to heighten both its profile and its multiples, the company timed its Big Board listing to coincide with an aggressive search for mergers and acquisitions opportunities in the U.S.

Visibility is one of the greatest advantages of listing. A listed security receives more local publicity and has daily stock prices quoted in the local papers. In most countries, the press is far more likely to cover a listed security because a local price is available and information is accessible through the local exchange.

Although it is difficult to quantify how much this exposure adds to the direct purchase of securities on the home market, the attention of the local press is a powerful source of continuing public exposure that can both support business and marketing efforts, and keep potential and existing shareholders informed. German companies, Volkswagen and Bayer, recently listed in Milan. Among their objectives for a cross-border listing was the need to establish greater visibility with their customers in the Italian marketplace.

EASIER ACCESS TO CAPITAL

As a result of such visibility, a listing can enhance your company’s reputation. By providing more information to a capital market, your company becomes more credible, and reciprocally, the continuous flow of information allows the capital market to make faster, more responsible decisions. Over the years, studies have shown that the increased visibility from a listing can reduce the cost of capital by a few basis points.

Waste Management is in the process of spinning off its European operations and is listing in London in order to position itself for self-financing. On the Japanese market, Avon Products, Levi Strauss, and PepsiCo have made IPOs of their Japanese subsidiaries for capital-raising purposes.

Today it is commonplace for corporate issues to have an international tranche. Of the IPOs launched this year, even several relatively small offerings included a portion of shares placed in a foreign market. Once a CEO decides it is appropriate to raise capital outside the home market, the level of access to these markets becomes extremely important. Since the Crash of 1987 in particular, when investors realized there was potential risk in any market, they find it reassuring to have the local market commitment and access to information.

EXPANDING YOUR SHAREHOLDER RAISE

Conversely, it’s reassuring for CEOs to have a broader base of investors. A diversified shareholder base can increase the liquidity in your shares. Several years ago, BHP listed in New York and London to diversify their shareholder base. They were the perfect example of a large multinational that had become too big for their local market. In BHP’s case, the Australian institutions and individual investors owned as much stock as they could handle. BHP needed international shareholders.

Granted, the major European institutional players have bought and will continue to buy foreign securities on the home market with few obstacles. While the British historically have had large percentages of their equity portfolios in foreign securities, the Continental Europeans still have lots of room to expand their international equity allocations.

LISTING AS A MARKETING TOOL

Considering the likelihood that your investors on any soil may also be your customers, and vice versa, listing becomes a good marketing tool. At one time or another, most private investors have considered an investment based on a quality product they have owned or heard about. This works internationally too. Certainly Sony is a good example of this. There was also the case of Laura Ashley five or six years ago when it went public on the London market: A number of Americans made valiant efforts to purchase shares and were disappointed to find how difficult, if not impossible, it was to participate in a security not available in the U.S.

SUPPORTING YOUR INTERNATIONAL RECRUITMENT

If you currently have or are planning overseas operations, a listing signifies a long-term commitment to a market, which in turn attracts top echelon managers and quality employees. It also provides a local market for direct employee ownership and a basis for employee stock ownership plans. IBM chose its recent listing in Milan partly because it is a large employer there and the fact that Italy is headquarters for its Mideastern operations. Centocor, which essentially has dual headquarters in Holland and the U.S., recently listed in Amsterdam to provide a local market for employees to trade shares.

WEIGHING THE COSTS

Choosing not to list often comes down to a question of cost, weighing both the time and costs related to an initial listing and the maintenance of that listing. It’s useful to look at Europe concerning costs, because stock exchange and market dynamics are changing much faster there than elsewhere in the world.

Currently, much of both the time and cost of listing is based on the cost of document translation, which in the past has been prohibitive. Fortunately, Europe is addressing this problem with the proposed Listing Directive of the European Community in its 1992 unification process. What the Listing Directive will establish is a reciprocal acceptance of documents among all EC exchanges. Within the next few years, a single document in the home country language will be accepted for both new listing and continuing listing requirements. In other words, a French company will be able to submit filing documents in French to Frankfurt, and an Italian company won’t have to translate to English to list in London.

In Amsterdam, the stock exchange already accepts the filing documents of foreign companies in any of five languages. For U.S. companies, SEC reports in English are acceptable. One of the more open and international exchanges in the EC happens to be Holland, where home market standards for foreign securities’ listings and trading have been accepted since 1980. Under their Amsterdam Security Account System (ASAS) introduced in that year, American securities, for example, are traded in U.S. dollars and according to the rules of the U.S. markets for trading and settlement.

Just how widely do listing fees vary? Worldwide, there is Tokyo at one extreme, costing a few hundred thousand dollars annually, or much more than the average price of a house in the U.S., and a European exchange such as Amsterdam, where the annual fee is about $1,200, or considerably less than the cost of a business class ticket to Europe.

It’s fair to assume that the cost of foreign exchange filings will come down in the not-too-distant future and that once the bulk of translation costs are eliminated, exchanges will need to either reduce their listing fees or provide added value in the form of additional services for that fee. For European listings, that day is not far away.

SHAREHOLDER EQUALITY

With the internationalization of securities markets over the past few years, there are several technical reasons why listing on a foreign exchange may benefit your company. The securities regulatory agencies of several countries are currently working together to protect the interests of all shareholders. The SEC and their counterparts tend to feel more comfortable about a company’s securities when they know a local authority is monitoring the trading and shareholder practices.

This is particularly true in the area of insider trading, where an EC directive requires minimum standards in each country against the abuse of inside information. The markets are also cooperating with each other by sharing information dealing with insider trading. Some time ago, Swiss banking secrecy law was lifted in connection with insider dealing violations in the U.S.

In the Netherlands, the Amsterdam Stock Exchange instituted a model code in 1987 condemning the use of confidential price-sensitive information for market gain by insiders in corporate managements or the financial community, including the press and financial relations representatives. A year later, Parliament passed an insider trading law covering all Dutch citizens and providing for penal sanctions.

CROSS-BORDER TRADING IN YOUR SECURITIES

In the past, trading volume has seldom proved to be a justification for listing. For most U.S. companies listed in Europe, average trading volume amounts to only several hundred shares per day. There are stories of companies spending enormous amounts for listings in Tokyo only to see trading dry up quickly and the shares float back to the U.S. While the majority of trading in security will be in the home market for the foreseeable future, because that is where the liquidity is, stock exchanges worldwide are making efforts to facilitate the purchase of foreign shares in their local markets.

One of the major concerns for CEOs considering a listing abroad has been the clearing and settlement systems of foreign markets. With fixed settlement dates becoming commonplace, Europe appears to be moving ahead quickly in this area. Right now, each company listed on a European exchange belongs to its local clearing and settlement system.

An important part of the plans for unification, however, is to link the clearing and settlement systems of each EC exchange to other home market systems before the end of the decade. A centralized clearing and settlement system means a more efficient trading system, which not only eliminates the risks involved in settlement of domestic and foreign securities, but also reduces overall trading costs per share.

WHEN NOT TO LIST

Several months ago, a small U.S. company decided it would seek a listing on the Dutch market. Its objective was simple but urgent: to raise cash. Because the company had no business interests or existing operations in the Netherlands, however, the Dutch banks felt there would be little or no interest from the Dutch investment community, and the listing never took place.

For small or mid-sized companies with no business outlets or other interests on foreign soil that are simply looking to raise capital, it’s likely that a foreign listing is not the answer. There have been exceptions, of course. There was a period not long ago when foreign investors were buying up U.S. utility stocks because, at the time, most foreign utilities were government-owned, and the issues were kind of a novelty. It was an interesting concept-interesting and translatable. If either your business concept or your business interests cross borders, then perhaps your stocks should too, and a foreign listing may be beneficial. On the other hand, if neither is the case, chances are you ought to stay home.

ENHANCING YOUR GLOBAL IMAGE

The number of CEOs who have chosen a listing abroad over the past decade and the past year is impressive. At the end of 1990, there were close to 2,000 foreign listings on the 12 EC country stock exchanges. While part of that number consists of corporations that have multiple listings, it remains substantial. Most of these companies are represented on the International Stock Exchange in London, with the remainder in Amsterdam and Paris.

Among the EC stock exchanges, the number of foreign listings increased substantially between 1989 and 1990, with 40 companies listing in that year alone.

From a business development or capital standpoint, U.S. companies of all sizes have stepped up their participation in international markets. Just as developing and promoting your products and services abroad requires a commitment to the local communities, so does the raising of capital in foreign markets require conformity with local standards, particularly now, as the continental gaps are closing. Should we expect more exemptions for ourselves than we allow foreign companies entering the U.S.?

Americans have strongly encouraged foreign enterprises to comply with U.S. reporting standards by filing with the SEC and listing on our markets. A common complaint of U.S. investors is that foreign company managements generally don’t spend enough time visiting American shareholders, nor do they always provide adequate or timely information. Should not U.S. companies, therefore, seriously consider equal treatment for their foreign shareholders? At least theoretically, this would call for listing on a foreign stock exchange.


Mary Jo Dieckhaus is president of DD&W, a New York City-based investor relations firm, and U.S. Representative for the Amsterdam Stock Exchange.

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