When the DaimlerChrysler merger took place last year the world witnessed much more than the creation of a new automotive conglomerate. What the merger also heralded was the emergence of the first ‘global share’.
Dubbed by its advocates, including the New York Stock Exchange, as the first truly ‘seamless global instrument’ the stock was initially held in equal measure on both sides of the Atlantic. This all changed with the decision by the S&P 500 not to include DaimlerChrysler in the index because the share was registered in Germany. Stateside holdings significantly reduced to around 25 per cent, and New York trading volumes have been only slightly higher than for the former Daimler Benz ADR.
Such facts may lead some European IR managers to suggest a ‘wait and see’ approach, if their senior management team is toying with the idea of adopting a global share. Indeed, some observers from the depositary banking sector would support such caution, suggesting that trying to make a non-US registered security fit with US securities law is asking for trouble on various counts.
Lack of trust
Take, for example, a beneficiary of a trust in the US which holds a registered share like DaimlerChrysler. Where and how do issues arising under the terms of the trust get resolved?
The answer is Germany, of course. This sounds fine, except that German laws don’t recognize certain aspects of US trusts. DaimlerChrysler is rising to the challenge of convincing such doubters that this new instrument is wholly appropriate and workable.
Its Stuttgart-based spokesman Eckhard Zanger says: ‘We are a global company which means we also wanted to have this mirrored in having a global stock in the same form for all shareholders, representing the equal halves of two equal parts of our new company. At that time we aimed to be in the S&P 500. This hasn’t happened, and we would still ideally like to have more US investors.’
Exclusion from the S&P 500 is not an insurmountable problem, according to Zanger, because the intrinsic value of the share will show through in the longer term.
In any case, the shift in equity holdings to around 65 per cent held in Europe was as much to do with a high demand for the stock on the Continent ‘especially among German investors’ as with the decision by the S&P 500 to exclude it from the index. ‘It remains the case that this method makes it much easier and much quicker to achieve cross-border settlement and to transfer a larger number of shares for a minimum price,’ Zanger adds.
Long time coming
The New York Stock Exchange had been devising a model for the registered share long before the DaimlerChrysler merger was ever mooted, and does not view the latter’s recent experience as indicative of the concept’s long-term merits or of any inherent flaws.
Georges Ugeux, group executive vice president international and research at the NYSE, says DaimlerChrysler decided to create one single security worldwide, including the US market, but the exchange recognizes this may not be ideal in all instances. Different shares traded in parallel may be a preferred option for other companies. He accepts there are many issues still to be resolved before the concept is wholeheartedly embraced.
‘For example, we are looking at how to create such a share for the UK market, and we are looking at such issues as how to deal with the question of stamp duty and other factors to enable us to make such an idea workable for the UK market,’ Ugeux says.
It’s too early to talk about the ultimate configuration of the DaimlerChrysler stock, Ugeux adds, agreeing with Zanger that there were specific circumstances that caused the reduction in US holdings.
Country-by-country, the NYSE intends to build what is needed for the US settlement system to create something very close to a US book entry mechanism via the local registrar and clearance systems. ‘We cannot keep the US market isolated by the existence of a different instrument from the rest of the world, the ADR,’ he says. ‘The world of bearer shares and bearer instruments is on the decline, and will gradually disappear. The physical exchanges of paper in today’s world are not very effective cost-wise. The global trading we propose would be based on an online interconnection of the various clearing and depositary mechanisms around the world.’
Higher chance
The Bank of New York (BoNY), US registrar for the DaimlerChrysler share, says the structure was preferable to an ADR because DaimlerChrysler thought it would have a better chance of being included in the S&P 500. Despite what has since transpired, an ADR would have put the company ‘on a very steep incline’ with the S&P, says Chris Sturdy, BoNY’s managing director for ADR programs in Europe, Africa and the Middle East.
‘The question for an IR professional to ask is an obvious one: what are you trying to achieve by adopting such a new concept?’ Sturdy says. ‘Usually, the answer is that we are trying to achieve a base of shareholders beyond that which we get automatically from just being an important constituent of our own market indices. In other words, shareholders beyond those top 50 institutions which buy directly on overseas stock exchanges.’
But he says it would be impossible to have a similar structure for a UK company. ‘If you have stamp duty due and payable, it is neither legal nor practicable to do that in the US with the same share; an ADR gets round that. In France, too, shares are dematerialized and it would be another hurdle which would have to be overcome in trying to implement a registered share structure.’
Diego Espinosa, international portfolio manager at Scudder Kemper Investments – ‘an organization which manages more than $245 bn of assets for institutional and corporate clients’ – tends to agree with Sturdy about one of the prime reasons for a company to adopt such a new instrument.
‘It’s not a huge issue for me because, of course, I’m buying shares in the respective local markets anyway. This is more relevant to companies needing to increase their profile across a broader group of investors – a group which, of course, dwarfs global investors like ourselves. The issue of having a global currency is key, because if companies are trying to be competitors on a global stage, the US is a key ingredient because this is where innovation in technology, products and processes so often comes from. So, if you are going to acquire a US company, it’s very difficult to do so with cash. Stock-for-stock swaps are the ideal M&A vehicle of the day,’ Espinosa concludes.
To him it’s not realistic to see such an instrument replacing ADRs. ‘I think there will be a tier of companies for which this is relevant. It’s not going to be every company, but it’s going to be those companies that want to access what I call a global cost of capital or those that want to make a global acquisition,’ Espinosa adds. ‘They will separate themselves from their peers by their ability to do so.’
No global solution
The London Stock Exchange believes the US-registered concept is just another way to affect international trading, but it’s certainly not a universal panacea.
‘We already have a wide variety of access routes for foreign companies needing access to our market,’ a spokesman says. ‘But we believe liquidity is the key driver to a successful market, and we would only consider changes like the trading of registered shares if this did not damage liquidity.’
The benefits of having an electronic settlement system include the fact that bid-offer spreads are greatly reduced, he explains. If these spreads were lengthened as a result of global trading, this could damage liquidity, and reduce the attractions of trading on the London Stock Exchange.
Clearly, if any investor relations professionals in Europe or Asia hears their CEO talking passionately about the registered global share concept, they should take note and start making plans to increase the IR budget, because those companies which believe a global share is right for them may not only be exposing themselves to 24-hour trading. They may also require an IR function which stays open all hours to support it.
