You know what they say – misery loves company. And so in 2001, with IPO activity down some 60 percent, stock market listings in the US down around 45 percent and M&A activity by European companies also down considerably, the value of capital raised through ADR offerings also dropped in sympathy – to $8.4 bn from the previous year’s high of $30 bn. Meanwhile, according to Citibank, ADR trading value plunged $700 bn from the previous year.
But even if non-US companies were shying away from capital raising and investors were in retreat from trading, new ADR issuance held up pretty well. It only dropped by around 20 percent from 2000 levels, as foreign companies continued to establish programs for strategic reasons, and in some cases purely for the prestige.
For this year, industry observers expect to see the continuation of many of the trends that have ensured the decade-long rise in the popularity of ADRs among investors and issuers alike.
Key trends
Non-US companies realize that the quickest way to secure a global presence is often by M&A; and strategic listings continue to provide flexible acquisition currency. Last year’s slowing US economy may have put a dampener on global M&A activity, but there were still some large transactions involving ADRs. Traditionally, the highest value and highest profile mergers have been between European and North American companies; and while that trend has not waned – 2000 saw Deutsche Telekom’s acquisition of VoiceStream, and Credit Suisse Group’s merger with Donaldson Lufkin & Jenrette, to name but two – another trend has emerged: Asian companies have been jumping into the fray.
Last year saw the first ever acquisition of a US-based IT services company, SeraNova, by an Indian e-business and IT firm, Silverline; and a number of Taiwanese and other Indian companies are expected to be active in the future. Industry wise, much M&A activity will come from the financial and insurance sector this year.
Asian companies also had considerable success at ADR capital raising in 2001, despite the adverse market conditions. Korea Telecom topped the chart, raising $2.24 bn; while Korean compatriot Hynix Semiconductor was second in the league with its successful $1.25 bn fundraising exercise. More activity is expected from emerging Asia, where large privatization programs are underway and some markets are doing relatively well.
ADR-linked employee share plans continue to be popular with non-US companies as a means of rewarding non-domestic employees. Many blue-chip companies – including, for example, Siemens, Vivendi Universal and Dr Reddy’s Laboratories – have established ADR-linked share plans.
As for investor appetite, industry observers expect demand to come from a wider array of players this year, with keen interest in ADRs anticipated from hitherto domestically-focused US institutions as they diversify and spread risk in a down economy. However, overall demand is expected to be flat. This has perhaps led to another key trend expected this year – the restructuring of ADRs into GDRs by large-cap companies as a method of capturing a multinational shareholder base.
Whatever the specific developments, no-one who has monitored the growth and innovation in ADRs over the last ten or twelve years expects to see this market held back for any serious length of time.
Case study 1: Nasdaq pioneer
Infosys, the Indian software company, likes to be the first.
It was the first registered Indian company to list on Nasdaq and the first to have an ADR program. But being first is never easy. Infosys had to work closely with the Indian government to set up the framework and regulations to allow for Indian companies to have ADRs.
According to PR Ganapathy, Infosys’s investor relations officer for the US, between 50 and 60 new rules and regulations had to be put in place to allow the company to make its Nasdaq debut. Finally, some two years after the company set the chains in motion for an ADR program, the framework was ready for the IT consultant’s placement. Alas, world markets were not. Owing to the negative market sentiment towards all things technology-orientated, Infosys balked at its first approach in 1998, but in February 1999, following intensive global roadshows, the company finally debuted its ADR, raising $70 mn in the US market.
The US accounts for more than 70 percent of Infosys’s revenues and this was a significant factor in its decision to list there. ‘We wanted to increase the visibility and level of comfort for our clients,’ states Ganapathy. Another important driver was that ADRs provided a means by which Infosys could reward its overseas employees with company stock options. ‘Even though we have an employee share scheme for local shares, because the rupee is not convertible, these were not of any value to our overseas employees,’ explains Ganapathy. Thirdly, issuing ADRs meant Infosys would have a hot M&A currency in its hands.
An ongoing challenge for Infosys is increasing the liquidity of its stock to make it more attractive to global technology funds. ‘We listed only 3 percent of outstanding stock and therefore, the stock has been thinly traded. As the ADRs have been trading at an average premium of 70 percent, funds are not interested unless we have sufficient liquidity as well,’ explains Ganapathy. Infosys is trying to persuade the Indian government to allow a certain number of domestic shareholders to convert their holdings to ADRs in order to increase liquidity.
In his experience, Ganapathy finds US investors are highly focused on financials and have a deep sensitivity to quarterly reports. ‘They don’t like hot air,’ he says frankly. ‘You have to share your metrics and report your numbers in a transparent way.’ Another point he stresses is that ‘eyeball’ time is particularly important to ADR holders, so senior management must easily accessible and communicative. Also, he recommends a dedicated IRO in the US on hand to present at conferences and go on roadshows. Ganapathy himself attends ten to twelve conferences a year and goes on roadshows once a quarter.
Case study 2: Merger of giants
When Novartis listed on the NYSE in May 2000, industry observers smelled a merger in the air. The Swiss drug and chemical maker’s new ADR program would be cost-efficient, and ideal merger currency. And so when Novartis spin-off Novartis Agribusiness and AstraZeneca spin-off Zeneca Agrochemicals merged later that year, few were surprised that ADRs were used in the complex deal to compensate US shareholders of Novartis and AstraZeneca and as part of the share structure of Syngenta, the newly formed company. The merger of the two giants was not without complications. The entity was to be listed on four major stock exchanges: Switzerland, London, New York and Stockholm. Jennifer Gough, global head of IR at Syngenta, explains that the listing prospectuses and presentations for the investment community had to bring together the financials of Novartis and Zeneca. Working with pro forma figures, a key challenge for Gough and her colleagues was to create a cohesive picture of the new company. And for the US listing, the financials had to include US Gaap reconciliation. Another challenge was to raise the profile of agribusiness, which was short on sectoral coverage from analysts. ‘We had to educate the financial community about our business,’ recalls Gough. This meant analyst presentations and an intense roadshow schedule before the flotation, followed by more roadshows, presentations at investor conferences and one-on-ones with analysts and investors during the new company’s first year of operations. Share ownership has changed considerably since flotation, with around 60 percent of the shares changing hands in the company’s first month of existence.
Gough observes that US buyers of Syngenta’s ADRs ‘are among the more demanding’ of Syngenta investors. ‘They are very value-oriented and are attracted by the fundamentals of our business, so it is important for us to be able to convey not just financial information, but also information about the business and industry itself,’ she comments.
The US market is currently one of the main points of focus of Syngenta’s investor relations efforts, and the company has an IR representative in New York who concentrates on the needs of US analysts and investors. ‘The US is our largest single market in terms of sales and I believe our share ownership should reflect that,’ states Gough. One of her objectives is to increase awareness of the company in agricultural regions, so that users of Syngenta’s products will also become the company’s shareholders.
Case study 3: Grand debut
In the largest ever-international equity offering from Taiwan, United Microelectronics Corp (UMC) raised $1.3 bn in September 2000 with its ADR debut. This impressive performance played on improving global sentiment towards semiconductor stocks, bucking the downward trend of domestic stocks.
The decline of the Taiwanese stock market at the time made it all the more imperative for UMC to establish an international investor base. This thought was uppermost in the mind of the investor relations team at UMC, recalls Chitung Liu, spokesman and director of investor relations at the Taiwanese integrated circuit foundry.
‘We are a multi-purpose, capital-intensive company and constantly need funds for expansion and to gain market share,’ Liu elaborates. ‘By listing in New York, we took a step towards becoming a major international company that is attractive to international institutional investors, transparent, and with an IR program that is up to worldwide standards.’
Putting UMC on the global stage has raised the profile of the IR department within the company and even formally upgraded it to become a top level priority at UMC, says Liu proudly. Indeed the investor relations team was working harder than ever as US investors called and continue to call for a more time-consuming ‘macro picture’, Liu states. ‘The type of information US investors seek focuses on the macro picture and UMC’s business cycle, for example what our major customers are doing in Asia. This is different from Asian investors who are focused on financial details like profit and loss. Europeans come somewhere in between.’
During the launch of the ADR, tackling investor questions about external pressures on the company in a fickle market was very difficult, Liu admits. And although he cites US Gaap reconciliation as being one of the other challenges faced by the IR team, the company prepared by working on Gaap reports well in advance of the issue.
Currently Liu, a former equity analyst, ensures that senior management goes on the road once a quarter and attends several broker conferences at year. The company also now webcasts its quarterly results announcement in addition to using traditional means.
Case study 4: keeping cool
When the telecommunications market plunged last year, Germany’s telecoms giant Deutsche Telekom refused to sweat it, and instead continued its strategic focus on getting a foothold in the US through its acquisition of Washington state-based VoiceStream, finalized in May 2001, using ADRs as acquisition currency.
Deutsche Telekom’s ADR program was already well established, having been in existence since its simultaneous triple listing on the Frankfurt, New York and Tokyo exchanges in 1996. Still, the company issued at least 265 mn new ADRs, which primarily went to institutional investors, to close the deal. Why? ‘We wanted to increase the demand and recognition for Deutsche Telekom ADRs in addition to ordinary shares,’ says Nils Paellmann, US vice president of investor relations. ‘In the US, investors tend to favor ADRs to broaden their portfolio, especially retail investors. They can get their dividends in dollars and, for long-term investors, the holding cost of ADRs is lower. Also, with certain institutions, their mandate prevents them from holding foreign shares.’
However, Paellmann recalls that when Deutsche Telekom’s ADRs first appeared on the US market, trading volume was very low. But since the much-publicized acquisition of VoiceStream, things have turned around for the German company. ‘More than 1 mn of our ADRs are traded every day now,’ observes Paellmann. Numbers surged as high as 4 mn a day during the acquisition process because of arbitrage trading, which Paellmann says helped reallocate shares from former VoiceStream shareholders wanting to sell out.
Apart from liquidity, the other challenge for the now transatlantic communications operator was changing its accounting practices to comply with US Gaap. Also, with a lot more US shareholders on board, investor relations took on a whole new meaning. ‘Investor relations can make more of a difference in the US than in Europe,’ observes Paellmann. He recommends that senior management do at least two road shows a year and raise their profile by presenting at various investor conferences in the US. Many actively managed investment funds in the US will not invest unless they have had enough contact time with senior management, he explains.
Going forward, Deutsche Telekom will play on the appeal that ADRs have for US investors and aim to increase the number of retail ADR holders. The company is participating in US retail investor fairs and is working with prominent retail brokers to raise the awareness of its ADR. Paellmann says Deutsche Telekom has no immediate plans for further acquisitions, though he says further ADR issuance is likely as the 43 percent state-owned German company further privatizes over the next few years.
