The US market holds an understandable attraction for most non-US companies. Put simply, it is full of capital searching for investments. But how best to attract that capital in a changing world?
The traditionally favored American depositary receipt route has picked up a number of critics in recent times who argue that such a vehicle is no longer necessary. After all, big institutions can easily invest directly without the need for an expensive helping hand on the part of the company.
But this is by no means a universally-held view; indeed, it’s far from being the approach adopted by most non-US companies to attract all US investor audiences. Many still prefer the old tried and tested depositary receipt in one of its various guises; others opt for some kind of combination of the two approaches.
Simon Smith, the investor relations manager at C&W HKT – previously known as Hong Kong Telecom before Cable & Wireless increased its stake to 54 percent – says his company is an example of one which originally chose the traditional ADR approach. But it also courts US institutional investors through direct access in the home market.
With the big boys
‘The company was the creation of a merger ten years ago between a public telephone company and an international business which was private,’ explains Smith. ‘It then re-floated through an IPO, raising capital in the US and Hong Kong. Being listed in New York gives you a higher profile and for a large company with US$30 bn market cap, we really wanted to be up there with the big boys on the New York Stock Exchange.’ And for a vehicle which represents about 3 percent of the total stock on issue, trading of its level II ADR is pretty active. ‘There’s a lot of turnover,’ says Smith.
‘The rationale for having the listing is firstly profile, secondly the distribution that it gives you in the States in US currency,’ Smith adds. ‘The way we do it, using ADRs, means that we can attract investors who are looking for US-denominated stock; and they can then trade it locally in their own currency, which is good.’
SAP, the German-based business software manufacturer, has also taken the idea of an ADR very much to heart because, as with C&W HKT, it believes this enables the company to be comparable with its peers. ‘We wanted to raise our profile in the US market which is easily the most important market for information technology companies; if you are a player in this market you really do need to be present there,’ explains investor relations manager Gundolf Moritz.
SAP’s level II ADR is fairly actively traded with an average daily volume of around 635,000 shares. Indeed, according to Moritz, it is currently the most heavily traded German company in the US capital market after DaimlerChrysler.
SAP has 61 mn common and 43.6 mn preference shares. The ADRs listed on the NYSE are constructed from the latter; and all preference shares could in theory be accessible to US investors via ADRs if there were sufficient demand for the stock in this form.
After a slight dip in US share ownership last year due to factors which affected the entire market for technology stocks, there are now signs that SAP has turned this particular corner. US holdings are on the increase once more. This has a lot to do with the proactive stance the company has adopted in its US investor relations program.
‘We have been doing roadshows for a long time as well as participating in various industry conferences arranged by brokers,’ notes Moritz. ‘Each spring the company stages its own investor workshop in New York and then in the autumn we invite analysts and investors to our software user events which are basically staged for our customers.’
Grandfather BAT
Ironically there are also echoes of this kind of proactive investor relations activity at a company which can boast one of the very first ADR programs, but which has chosen not to use them at all anymore – BAT Industries. BAT’s head of investor relations, Ralph Edmondson, explains that the company’s ADR has ‘grandfathered’ status, as a result of having been one of the first UK companies traded in the US market. This means that there is no requirement for BAT to file any detailed information with the US authorities.
Since those early days, BAT has not seen the need to create a new ADR program. ‘We haven’t raised capital through ADRs in living memory,’ says Edmondson. ‘The only capital we ever raise in the US is through the bond markets on a 144a program, but we haven’t done that for sometime either. However, in terms of trying to broaden our shareholder base we are pretty active in the US.’
BAT does not formally set a target for US investor numbers, according to Edmondson, but it does try to get the best proportion it can. These efforts have reaped rewards, with US stock holdings increasing from about 4.5 to 11 percent in the last three years.
Increases in BAT’s burgeoning US investor base are mainly down to its investor relations activities in the US, because this is where the major institutions wish to see the company and to hear the company’s arguments for buying the stock. ‘We tend to visit New York, Boston, Philadelphia, Chicago and the west coast once a year for detailed one-on-one meetings,’ explains Edmondson. ‘I think there is more value in going to the US in this way than just sitting here and expecting the UK end to do it all.’
Will that be ADRs or ordinaries?
Deutsche Telekom has not spurned the ADR concept as a route to US investors; rather the German telecoms giant sees it as a complementary part of the mix. The company’s second offering to the market this summer offered US investors a choice: ADRs or ordinary stock. There were some 250 mn shares on sale and it was left up to investors to decide whether they wanted them in the form of shares or ADRs. There was no pre-allocated ADR tranche.
‘ADRs are most important for attracting US retail investors,’ explains Deutsche Telekom’s director of investor relations Nils Paellmann. ‘We have had quite a lot of retail demand in the US for ADRs this time. Most of these came through the major brokers. The interesting thing about this is that although there were no special incentives offered for the retail investors in the US – as there were for Europeans – there was still quite a lot of interest.’
Indeed, the total retail demand for common stock and ADRs, for the US and Japan combined, was about 60 mn shares, reports Paellmann, of which more than 20 mn came from the US. The final allocation was of course much smaller than this, with only about 6 mn being made available to American investors.
‘We didn’t differentiate between our ADRs and our ordinary shares and so we have no clear indications who bought what. As far as the institutional shareholders are concerned, we know that we have some big ADR shareholders and that they had rights offerings but we are not sure to what extent they made use of them.’ Paellmann explains that, whereas nearly all of the rights were taken up, Deutsche Telekom does not know whether or not the existing ADR holders exercised these rights or sold them on to other investors.
Overall Paellmann says that most of the company’s institutionally held shares are in the form of ordinary shares, rather than depositary receipts. This is because many of the larger investors like the liquidity of the home market, so they prefer to deal there.
Dutch direct
Dutch insurers Aegon chose neither a listed ADR program nor to rely on US investors directly accessing its stock via the Amsterdam market. Instead the company first listed its common stock on Nasdaq in the late 1980s before switching to the New York Stock Exchange in 1991. The aim, as in the case of all the companies already mentioned, was to give the company a higher profile and better access to US investors.
The question is, though, which approach is the right one? Clearly, Aegon thinks its solution is the best. ‘What we have are basically the same type of shares as are traded here in Amsterdam,’ explains Michiel Van Katwijk, senior vice president and group treasurer. ‘The difference with ADRs is that they are freely transferable out of the register into a normal Aegon share. Of course our listing in New York is in dollars so there is something of a currency issue, but we think that there is an advantage to having New York shares because they are freely transferable. This route does not create a second class of shareholder within your shareholder base.’
Aegon provides all the necessary information required by US regulators and, Van Katwijk asserts, to Aegon’s shareholders it doesn’t really make any difference whether they hold plain euro-denominated shares or the New York dollar-denominated variety.
Approximately a quarter of Aegon’s total free float is held by US investors and this looks set to increase to around a third following the imminent completion of the deal with financial services company TransAmerica.
The TransAmerica deal is also set to increase the company’s currently swelling number of retail shareholders, whom it already actively courts, in addition to the US institutions. There’s no need, in Aegon’s mind, however, to consider launching a depositary receipt to approach the retail element.
‘The main focus of our group is on institutions and we would like to see more of our shares traded on the New York Stock Exchange,’ says Van Katwijk. ‘However, we realize that the most liquid market for our stock is in Amsterdam. Our usual US daily trading volumes are 100-200,000 shares. This is out of 585 mn common shares in total. Compare this with the Netherlands where, on a normal day, we trade around 3 mn shares.’
Going by air
In stark contrast, Australia’s Qantas Airways decided to go for a private ADR placement as the most useful route to US investors in July 1995, while it was still courting investors in its home market.
Qantas’s restricted 144a global depositary receipt program through the Bank of New York took the form of a private placement. The GDRs could only be sold to eligible US and non-US Qualified Institutional Buyers (Qibs). This was done through a non-public offering of the unregistered securities, which are now traded on the Portal market.
However, this move does not seem to have done a great deal to enhance the airline’s profile among US investor groups. ‘ADRs currently represent less than 1 percent of total shareholdings,’ concedes a Qantas spokeswoman. ‘At the time of the float, depositary receipts represented 9 percent.’
The rationale behind the Qantas depositary receipt program, according to the same spokeswoman, was that it would both be an effective means of raising capital and a way of building and fostering the company’s profile on the US markets. An ADR program also has the added benefit of facilitating trading in the stocks of non-US companies by US investors by reducing or eliminating settlement delays, high transaction costs and other inconveniences associated with international securities trading, she adds.
Clearly the 144a listing is just one of the weapons in the Qantas arsenal for targeting US investors. The company is also committed to running two international roadshows each financial year, the first one following the half year results, and the other following the full year results. These give overseas investors and institutions a chance to meet with executive management and be given an update on the company’s operations and financial performance. The roadshows are held in the US as well as in Asia and the UK.
Really useful?
But, leaving aside Qantas’s other efforts to woo US investors, how many investment banks would advise it or other companies to choose the private placement ADR route to American capital? For it seems that even some experts from the major depositary banks who help companies set them up are unconvinced that they are of any real use.
This is certainly the view of Patrick Colle, vice president of ADRs for Europe, Asia and the Middle East at JP Morgan, toward both 144a and level I ADRs. ‘There has been too much selling of level I programs with the result that the market is full of empty, inactive over-the-counter programs,’ Colle maintains. ‘It also seems that issuers have realized that for 144a private placements the ADR is, with a few exceptions, of no use. We’ve been saying that for a long time.’
The 144a ADR route is limited to sale and re-sale among Qibs who are, by definition, the more sophisticated investors. Colle points out that these are the very people who are more likely to be able to buy the shares direct in the home market. ‘For level II or III programs the ADR is still the most exclusive route to support a US listing, but there are some slight variations. You now have the New York shares, used particularly by companies like Royal Dutch and by Unilever; and the global share of DaimlerChrysler. The New York share, for example, is administered the same way as an ADR.’
Shopping with ADRs
An important recent trend is the use of American depositary receipts as an acquisition currency. The BP Amoco merger recently became the largest ever transaction to use ADRs. Now witness Vodafone-AirTouch; and there are a number of others too.
‘This really is a ground-breaking trend, because it totally changes the scope of the ADR,’ says Colle. ‘It has increased the liquidity of certain ADRs dramatically and has demonstrated that the instrument is still extremely well accepted in the US investment community as an investment vehicle.’
Nevertheless, the advice from Schroders investment bank in London to big clients with sizeable business interests in the States is that the starting point should be the investor relations program – actually getting round to see the big institutions – not the choice of instrument. As a spokesman explains: ‘The type of people you are seeing are all sophisticated international investors who are quite capable of buying the stock in London – or wherever – if they like your story. One of the key traits of the US capital markets is that you need to build up a level of trust and knowledge over a period of time. Typically you don’t start seeing results until your third or fourth visit.’
Even then, it’s not just a case of seeing the top 35-40 investors in the US and then finding, as if by magic, that they’re suddenly all buying your stock, he says. It’s more tied in with their medium-to-long term plans.
‘ADRs are really a secondary step: once you have established a platform and developed a dialogue with key investors, then an ADR program may be more useful. Looking at the history of UK companies and ADR programs there have been some fairly mixed responses and reactions. Our view is that it doesn’t materially enhance a UK company’s profile or prospects of getting a larger US shareholder base.’
