Though the patriotic call to list and trade stock on domestic markets is strong, the magnetic pull of the US capital market is hard to avoid for Canadian companies seeking funds and new investors. The litany of strengths has been often recited: the US market is the deepest, fastest, and broadest in the world. And more and more Canadian companies are heeding the call to seek US exposure in tandem with home listings. Many succeed in their bid to broaden the shareholder base and reduce the cost of capital; others discover that the costs outweigh the benefits.
‘The American capital market is not the nirvana many companies seem to think it is,’ says David Mills, vice president, financial/investor relations at Edelman Public Relations Worldwide. ‘A US listing makes sense for some Canadian companies. Still, it does not automatically cure an illiquid stock for small caps, or increase valuation for larger companies. Management should carefully consider the pros and cons of US listing before taking the leap.’The first steps are practical ones. Hiring US counsel, accounting to conform to US standards, and listing costs all add up to a significant outlay before a company arrives on the US stock ticker. Once listed, companies find themselves in a more competitive securities environment than they would experience at home. The competition for US capital is intense. Some companies’ peer groups are enlarged ten times when compared to US stocks. For that reason, investor relations managers have to be more aggressive in getting their message across.
Being aggressive means, for one thing, refining investor presentations to have more impact in a shorter time. In Mills’ experience, while Canadian institutional investors are quite happy to spend up to two hours meeting management, US one-on-ones can last for as little as 15 minutes.
Companies should also be prepared for more volatile trading in their stock. ‘The time horizon for holding an investment is shorter in the US,’ Mills comments. ‘Investors are quicker to react to earnings disappointments or analyst recommendations.’ (Mills will moderate a seminar on listing in the US at the Investor Relations Conference held by the Canadian Investor Relations Institute (Ciri) and Toronto Stock Exchange on May 27-28 in Toronto.)
For Royal Bank of Canada, the country’s largest bank, meeting US listing standards has been hard work. But, the process was not too excruciating, according to Nabanita Merchant, manager of Royal Bank’s investor relations. Listing on the NYSE in October was an integral part of the bank’s plan to raise its proportion of US and inter-national earnings. According to Merchant, it was a timely move to raise the percentage of shares held by US investors. In the last year, that percentage rose from 4 per cent to 7 per cent. The current target is 15 per cent.
‘We are taking the opportunity to increase our US shareholder base,’ says Merchant. ‘The greater the interest in the stock, the greater its liquidity. The stock price can benefit too. The price to earnings ratios of American banks are higher than Canadian banks. As a result, raising awareness of Royal Bank among US institutions could translate into higher valuation.’
Royal Bank’s Big Board debut was celebrated with a luncheon for New York institutions, with chairman John Cleghorn earlier making the first trade on Royal stock at the opening bell.
The IR team returned to the US early in the New Year, spending a day in Boston meeting with key institutions there. Merchant notes that one difference between US meetings and Canadian meetings is that there is more discussion on the Canadian financial system and economy in the former. Canadian analysts, on the other hand, tend to cut straight to Royal Bank strategy and outlook. Royal has a strong retail component to its investor base in Canada, but Merchant’s US IR programme is directed at institutional investors.
Imperial Oil is not a new face to US investors. After all, the $9.5 bn Canadian blue chip has been trading on the American Stock Exchange since early in the century. Still, the last few years have seen Imperial make a concerted effort to attract more US shareholders, increasing the amount of shares in US hands from 10 per cent to around 40 per cent since 1992.
Last year, some 46 per cent of the value of Imperial shares traded in the US, up from 36 per cent in 1994. That made it the third most actively traded stock on the Amex, maintaining a tradition that has seen Canadian stocks leading the trading rolls on the exchange over the years.
‘We realised Canadian investors were paying more attention to junior resource companies,’ says Jean Ct, IR manager at Imperial. ‘There was a risk of downward pressure on our stock as Canadian investors moved into small growth stocks. In the US, there are large value investors looking for companies with a solid financial position and a reasonably high dividend. We fit the profile, and targeted those institutions.’
Ct’s campaign started with increasing Imperial’s coverage from sell-side analysts. Only two covered the company at the start of Imperial’s initiative. Having worked in Exxon’s IR department, Ct knew the community well and has been able to increase US coverage to over ten analysts. Part of the effort is taking management on quarterly visits to New York, with side trips to Boston two or three times a year to take part in analyst conferences and one-on-one meetings with institutions.
When it comes to targeting analysts and investors, few Canadian companies can challenge Newbridge Networks Corp in terms of sheer diligence.
The Ottawa-based networking company is listed in Toronto and New York, but two-thirds of shares outstanding are in US hands. Newbridge employs a full-time investor relations research analyst to find and evaluate likely shareholders. According to John Lawlor, vice president of public and investor relations at Newbridge, targeting is a major focus of the company’s aggressive investor relations programme.
Starting with a Technimetrics database that identifies current stakeholders as well as investors who hold shares of Newbridge’s peer group, Lawlor and his team oversee a heavy programme of fax, mail and electronic distribution. The programme includes a popular Web site much used by the high tech investor constituency.
Lawlor describes Newbridge’s investor relations as ‘a steady rain that soaks.’ Management attends every major investor conference in North America, and increasingly in Europe. Lawlor also leads a quarterly roadshow to cities in the US.
‘The targeted approach really does work,’ says Lawlor. ‘On our January roadshow we met with many institutions for the first time. After our presentation, a significant number took a position in Newbridge for the first time.’ Another area of concerted Newbridge effort is the West Coast. Lawlor expects new coverage from at least two California institutions imminently. With US successes in hand, European investor interest is picking up, and some 150 European institutions are represented in the Newbridge database, up from fewer than 20 two years ago.
Investors and analysts are encouraged to make field trips to Ottawa, and Lawlor points out that all sell-side analysts covering Newbridge – amounting to twelve Canadian and 35 US analysts – visit the company once or twice a year. Analysts meet with senior management and visit the heads of each business and R&D unit. ‘We open the kimono fully,’ adds Lawlor. With around 40 per cent of Newbridge sales in the US, the company has managed to attract an inordinate proportion of US shareholders. Last year, $10.7 bn in Newbridge shares changed hands, with 76 per cent of the trading taking place in the US.
While Newbridge toils under a rain of US analyst attention, other Canadian companies with US listings struggle to get noticed.
Biomira Inc receives few American visitors to its Edmonton, Alberta headquarters, despite 31 per cent of its shares being held in the US and over half the total value of shares traded occurring there. ‘It’s hard to convey our scope by visiting an analyst’s Wall Street office,’ says Jane Jack, IR coordinator at the $240 mn biotech firm. ‘But after visiting the company, analysts gain a totally different perspective and seem to understand the value.’
Biomira listed on Nasdaq in late 1991, and Jack remarks that the US listing contributed to the success of a subsequent $54 mn cross-border share offering. Still, although Jack communicates regularly with some 65 US biotech analysts and ten Canadian ones, only two of the Canadian analysts have initiated coverage.
Jack believes the lack of US sell-side coverage contributes to heavy demand for information from Biomira’s large proportion of US retail shareholders – 85 per cent of US-held shares are with individual investors, compared to just 51 per cent in Canada. ‘The retail side are a demanding lot. They need a lot of reassurance,’ Jack comments.
At the other end of the spectrum from small cap Biomira is Barrick Gold Corp. With a market capitalisation of around $14 bn, making it the third largest company in Canada, Barrick is listed in Toronto, Montreal, New York, Paris and Switzerland.
Belle Mulligan, senior vice president of investor relations, notes that Barrick’s size makes it inconceivable for the company to rely solely on the Canadian capital market. Mulligan is co-chair of the 1996 Ciri conference. And Peter Munk, the founder and chairman of Barrick, will deliver a keynote address entitled Creating Shareholder Value.
‘It’s important to Barrick to be listed in the US as well as Canada,’ comments Mulligan. ‘The NYSE listing gives us access to the huge US capital base. Meanwhile, overseas listings raise the company’s profile elsewhere. Major institutions invest in Barrick because it’s a good company to own – not just because it’s a gold mining company. We have managed to attract investors from around the world on the basis of our strong growth story. The result is a well diversified shareholder base which carries us beyond being just a gold holding, and buoys the stock during periods when gold funds are out of favour.’
The basis of Barrick’s investor relations programme, whether it’s targeted to domestic or foreign investors, is a strategic approach. ‘Investor relations is not just a series of meetings and events,’ Mulligan states. ‘We formulate specific objectives, then establish a programme of activities that helps us to achieve them. Our objectives are to expand and diversify our shareholder base, and we have been successful.’ So successful, in fact, that Barrick was number one in 1987 in terms of trading value on the Big Board, and the company has maintained a high profile in the US market.
As Edelman’s Mills warns, there can be pitfalls awaiting interlisted companies. Some CFOs have paid heavily for US listings then failed in a bid for liquidity and become orphaned. Royal Bank’s Merchant adds that caution must be exercised in the face of America’s litigious environment.
But, whether large cap or small, value or growth, the companies described above have found benefits in interlisted trading. It may not be the dream ticket to listing heaven, but liquidity and a diversified base of shareholders are the hallmarks of Canada’s interlisted companies.
TSE Battles Back
Canada’s exchanges may be the underdog in the battle of neighbours for interlisted trading, but they’re not out of the race yet. Consider a recent survey by Technimetrics showing Toronto as the world’s eleventh largest city in terms of institutional equity holdings, and the sixth largest in North America. Montreal ranks eleventh in North America ahead of Baltimore and Pittsburgh.
The Toronto Stock Exchange (TSE) claims 2nd place among North American stock markets in terms of trading value, and is number twelve worldwide. Last year Canadian exchanges started regaining their share of trading from US markets, landing 55 per cent compared to 49 per cent in 1994 in terms of trading value. Still, the number of Canadian-based interlisted companies increased to 200 from 172 in 1994.
The Big Board traditionally competes fiercely to trade big Canadian stocks like Seagram and Nortel. Meanwhile the Amex has fought for small and medium-cap oil companies and the TSE has battled to hold onto listing and trading of home-grown high tech stocks in Canada instead of on Nasdaq. ‘The US markets have beaten us hands down in terms of marketing,’ confesses Rowland Fleming, TSE president and CEO. ‘They have convinced many people, including traders who ought to know better, that a bigger market means better value and greater liquidity. But if you look at the hard data, it’s not necessarily so.’
Fleming says that in terms of market depth and price continuity, the TSE provides the best, most liquid market for Canadian interlisted stocks – better than the NYSE, Amex or Nasdaq. The Canadian exchange offers extremely competitive pricing, and claims the tightest average market spreads on interlisted names. ‘The challenge for the TSE, then, is to let the US buy-side know about the pool of liquidity to the north that offers such competitive prices,’ Fleming adds.
In terms of dual IPOs, Fleming summons up the adage, ‘If you chase two rabbits, both will escape.’ Fleming also cites complaints from companies about the cost of an American IPO ranging from the ultimate cost of capital raised – $18 mn raised in one case against $15 mn the company put in the bank – to the unconscionable fees charged by New York legal counsel.
Certainly the numbers speak for themselves when it comes to listing costs: The TSE’s charge of $10,000-$50,000 is some 30 per cent less than the Amex, which costs the same but in US dollars. The Big Board charges a hefty minimum US$100,000 for a non-US listing, and companies usually spend up to three times that amount.
On top of that there are the annual maintenance fees – up to $500,000 for the NYSE but not more than $24,000 in Toronto. Nasdaq is competitively priced, charging $5,000 -$50,000 for a National Market listing, with a ceiling of $10,000 on Small Cap Market issuers.
Fleming has stirred up Canadian bourses by advocating good working relationships to ensure they don’t compete against each other when their common interest is fighting competition from the US. What really incenses Fleming is Canadian companies bypassing the Canadian markets altogether. ‘Frankly I am tired of hearing about the superlative earnings multiples available south of the border without the qualifying ‘ifs’ – if you are a strong enough player, if you can communicate with the huge market, if you can afford the cost, and so on.’
