It all depends on who you talk to. Some would fervently defend the advantages of the American Depositary Receipts, while others say the good times are over and ordinary shares make more sense. The figures seem to support the latter assertion: out of the $1.6 bn Americans invested in foreign equities last year, 40 percent was in ADRs with the remainder in ordinary shares, according to Citibank.
Spanish utilities company Endesa confirms the trend, with 80 percent of its US shareholders trading directly on the Bolsa de Madrid. ‘This is partly because the Bolsa has developed a much more sophisticated trading system than it used to have and the information channels are also more efficient. We have 50 times more trading volume in Madrid than on the NYSE. In general, ordinary shares are more liquid than ADRs,’ explains Miguel Temboury, director of IR at the Madrid-headquartered firm.
Endesa, with around E12 bn in market capitalization, was the first non-US utility company listed on the NYSE. ‘When Endesa was privatized back in 1988, the largest part of its free float was on the NYSE. But nowadays ADRs don’t bring much benefit for us,’ adds Temboury. And yet the company still complies with Gaap, Edgar filings, Reg FD, the Sarbanes-Oxley Act and other legal, disclosure and accountancy requirements in the US.
Whence they came?
Like the capital markets themselves, ADRs have evolved in sophistication and in volume since they were born almost 76 years ago. In tandem with the globalization of equity markets, they’ve helped non-US companies broaden their shareholder base and raise capital in the US while serving as a handy currency in M&A.
With different levels of ADRs and GDRs, which trade in markets like London, the product has grown exponentially since its birth, now supporting around 2,200 issuers from more than 80 countries. It’s a market valued at over $500 bn. According to JPMorgan, ADRs hit their peak in 2001, with trading volume topping 30 bn shares. Then the crash. Not surprisingly, the number of new ADR offerings dropped 50 percent in 2002.
Investment tool
ADRs are popular with retail investors who like the convenience of dollar-denominated foreign stocks and consistent, English-language reporting. For this reason, according to Temboury, ADRs make more sense for companies with products addressed to retail customers such as Nokia, with retail investors often investing in brands they’re familiar with and whose products they can recognize.
And it’s important not to underestimate the importance of retail investors. ‘Between 40 and 50 percent of the NYSE’s $1 tn capitalization is in the hands of individuals,’ says Hernán Rodríguez, vice president of Latin American ADRs at the Bank of New York. His data show that around 10 percent of retail investors’ portfolios are invested in international assets.
Rodríguez explains that ADRs are also important to institutional investors that want international exposure but have mandates that don’t allow them to invest directly on international stock exchanges: ‘The California State Teachers’ Retirement System (Calstrs), for example, has all its international assets allocated to ADRs because they can’t hold positions abroad otherwise.’
In light of these facts, those who consider ADRs to be in decline should think twice and realize that the current turbulence the instrument is suffering may be caused by the same financial storm affecting markets overall. Investor relations officers at non-US companies with US listings should keep looking after ADR investors because this is a market that is still alive and kicking.
But what kind of care do ADR investors require? Are they different from those investing in ordinary shares? Should IROs prepare special roadshows and other presentations for ADR holders?
According to Alan Cathcart, senior vice president of IR at Amsterdam-based Philips Electronics, ‘Going to the US means just going to another country. The job we have to do is always the same no matter who we meet with: inform investors about our company without breaching fair disclosure standards. Wherever we go, the story remains unchanged.’
Still, Cathcart says it’s important to remember each region’s distinct culture and style to get closer to investors. ‘Even within the US, the differences in style among states are remarkable. For instance, on the east coast meetings are more formal than on the west coast, where investors tend to dress more casually.’
Philips’ IR team travels to the US four times a year, visiting the main financial centers such as Boston, New York, San Francisco and Chicago and also other cities like Denver, Florida and San Diego as well as Toronto or Montreal in Canada. Typically, a transatlantic trip lasts about five or six days and is likely to include up to eight different meetings a day. ‘It’s normal that on a trip to the US, we visit up to twelve cities in a few days,’ says Cathcart.
Normal madness
That hectic pace is not the exception but the rule among investor relations officers at large-cap European companies. Deutsche Telekom’s Nils Paellmann, vice president of IR, points out another characteristic of these trips: CEOs and CFOs go to the US twice a year to visit large fund managers already familiar with the company, while IROs tend to do ‘missionary’ trips. These consist of several two or three-day trips during the year contacting smaller players who are potential shareholders. ‘While directors visit those who just want to know the company’s latest results and strategy, my colleague and I are in charge of presenting an overview of DT to those who are unfamiliar with us,’ notes Paellmann.
DT believes a US presence is key to seducing buy and sell-side analysts, and it has had a New York IR office since 1998, two years after it listed. ‘This way we show a local IR commitment,’ Paellmann stresses. ‘Being here allows the investment community to contact us at any moment and get up-to-speed, while for us it’s easier to collect information about our peers and competitors.’
Cemex concurs. The Mexican cement producer has an IR office in New York with a team of four people. ‘About three times a year directors meet with the usual shareholders to talk about the future of the company, giving them a broad picture of where the business aims to be within the next ten years. But for the day-to-day contact with investors we act more like guides to the company,’ explains Beate Melten, Cemex’s IRO for US retail investors.
A similar strategy is employed by Endesa, which has also an IR team in New York: ‘IROs over there are always traveling to those places not reached by the CEO and the CFO,’ explains Temboury, who held the New York post for two years.
Meeting the right person
Despite tight agendas, the reality is that a few day-trips are not enough to see all existing shareholders – never mind potential investors. As Susana Rey, IRO at Enersis in Chile, puts it, ‘We wish we could visit everyone but this is impossible. So we have to identify which are the largest funds and who is interested in our shares.’
It’s the typical dilemma faced by IROs. Company management tend to visit ‘the usual suspects,’ says Diane Faulks, vice president, investor relations counsel at Citibank Depositary Receipts Services, referring to the major analysts and investors in big financial centers. ‘However, issuers should expand their presentations to other metropolitan areas,’ she states. The big DR depositaries, Citibank, JPMorgan and the Bank of New York, all help out with databases to target those not-so-popular individuals.
Hernán Rodríguez explains that such databases help identify contacts it would be worthwhile meeting, for instance weeding out quantitative funds. ‘Corporates shouldn’t waste time visiting index fund managers because they don’t care about strategies; they are only interested in the shares’ behavior in relation to the market.’ One oft-neglected contingency is the hedge fund world. ‘Hedge fund managers are often short-term investors. They are very quick and very unfaithful but, at the same time, they provide liquidity.’
Another advantage of meeting with hedge fund managers is that they are ‘totally frank,’ Rodríguez says. ‘They tell you honestly what is the market perception of your company.’
For Faulks, knowing the investment profile of the audience, their needs and what they want to know about a company allows IROs to tailor their presentations. Adds Rodríguez, ‘Having a good database allows us to know who owns our competitors. Then, when meeting with investors, we can ask them why they prefer our peers to us, why they have sold our shares, who they have bought instead, and so on.’
Accommodating IROs
While IR teams do much of their own detective work, they also rely on brokers to arrange appointments with institutional investors and manage the logistics, from hotels to planes, taxis, meals and so on. Brokers have ongoing relationships with investors, so it’s easy for them to arrange company visits, make changes in the agenda if necessary, and follow up. Temboury says Endesa uses the services of five or six brokers in the US to avoid always meeting with the same circle of analysts and investors. ‘We choose brokers who know the domestic market well and have relationships with the top ranked firms as well as with other less popular houses,’ he concludes.
Danielle Poulain, deputy head of equity corporate relations at JPMorgan, works on logistics for ADR client roadshows in the US. ‘We work with our US sales forces to prepare targeted lists of domestic and international investors to meet with throughout the US,’ she says. ‘They have relationships with institutions of all sizes in the US, and can advise corporates on which investors have international funds and which would be interested in buying the ADR. This way the company can get to know new investors.’
Based in London, Poulain and her team coordinate transatlantic and domestic flights, limos and hotels for company management with the roadshow team. In fact, Poulain says, flights and accommodation are ‘free of charge’. The idea is that brokers recoup the expenses in trading commissions generated by the roadshow.
Meanwhile, some ADR issuers are asserting their independence. ‘Because of budget constraints and the fact that we have a large, experienced IR team, we now prefer to do all the preparations ourselves,’ says DT’s Paellmann.
Brokers usually go along with company management and the IR team to the meetings then conduct follow-up. Adds Poulain, ‘Still, some IROs don’t want brokers to attend the meetings unless they bring some added value, for example taking notes or asking questions.’
For Temboury though, ‘the quietest brokers remain the best.’ After a meeting, brokers ask investors their views on the company and whether they are going to buy shares. Temboury admits that investors tend to be more honest with brokers than with companies when providing feedback because of the closer relationship they enjoy.
Once back home, investor relations officers analyze the success or failure of the meetings and recharge their batteries for the next trip back to America.
