In March 2008, Visa will be undergoing the largest initial public offering (IPO) in
U.S. history. Visa will issue $17.1 billion dollars of stock, half of it to the public and the other half to Visa’s member banks. The money raised will be used to streamline its operations, expand its presence further into emerging markets, and invest in new technologies. Visa hopes to follow Mastercard’s IPO success, whose stock (as of March 2008) increased 408 percent since it went public in 2006. in U.S. history.1
When companies, such as Visa, seek to expand, capital is needed to accomplish large-scale growth. In order to raise capital, companies can go public (IPO) and the general public and shareholders buy debt (stocks). Another option includes mergers and acquisitions, in which the company is bought out (such as Google’s acquisition of Youtube). Private equity firms are often involved, by either providing funds to help the company grow, buying a significant portion or majority of the company’s stock, and helping the companies go public. Often the company is broken down into parts, but sometimes it remains intact.
Public and private investors are able to buy stocks on local exchanges, as well as on international exchanges. In today’s globalized world, localization and globalization of the stock market is taking place; companies are going public locally, but exchanges are increasingly becoming standardized to attract international IPOs and investors. The exchanges are developing stronger rules for corporate governance, the role of boards of directors, insider trading, and internationally accepted accounting practices.
2007 Trends in the Global Stock Market
From January to November 2007, 1739 companies went public, up from 1729 in all of 2006, and $255 billion dollars was raised. In 2007, China led the world in the number of IPOs (209) and capital raised ($52.6 billion). The U.S. ranked second for capital raised ($38.7 billion) and third in terms of IPOs (178 IPOs). Brazil ranked third for capital raised ($29 billion) and Australia ranked second for IPOs (189).2
In general the emerging markets drove global IPOs in 2007, accounting for 14 out of the 20 largest IPOs. None of the 20 largest 2007 IPOs took place in the US (there was only one top 20 US IPO in 2006- Mastercard). Russia’s second largest bank, VTB, went public in May 2007 becoming the largest IPO for 2007, raising $8 billion dollars.3
The Ernst and Young publication, Globalization: Global IPO Trends Report 2007, analyzes these global trends. The Ernst and Young report covers global and country-specific trends in terms of IPOs, exchanges, roles of private equity firms, liquidity, mergers and acquisitions (M&A), and de-equitization.
Summary of Ernst and Young Findings4
In 2006, 51 exchanges existed worldwide, with a total market capitalization of US$50.6 trillion. The top six exchanges include New York Stock Exchange (NYSE), Tokyo, NASDAQ, London Stock Exchange (LSE), Euronext, and the Hong Kong Stock Exchange (HKSE). The NYSE, LSE, and the HKSE are the most popular exchanges for international IPOs and cross-border listings. In 2006, 90 percent of all IPOs took place in domestic markets. The remaining 10 percent went public on international exchanges, most likely because the local exchanges could not provide enough capital. Local exchanges are popular, because the domestic population is familiar with the company and the company is familiar with domestic regulations and market expectations.
Another global trend is global liquidity. Hedge funds and private equity firms have a lot of money to spend and are looking for outlets. Private equity firms are purchasing companies and quickly selling them to the public market; in addition large corporations are creating subsidiaries and taking those public as well.5 One manifestation of this trend was the increase of global mergers and acquisitions in 2006, which reached $3.8 trillion dollars. A second manifestation of this trend was the increase of de-equitization, whose global value reached $150 billion in 2006; nearly triple the amount of de-equitization in 2004.
The U.S. exchanges are considered to be the most stable over the long-term, with high liquidity, transparency, proper disclosure laws, and straightforward accounting rules. Despite the stability and the long-term presence and prestige, the LSE and the HKSE are attracting global IPOs and the U.S. exchanges (especially the NYSE) are losing out.
The U.S. has two major challenges in attracting IPOs and cross-borders listings. Sarbanes Oxley, implemented in 2002, is cumbersome and time-consuming; there can be many delays due to SEC reviews. Additionally, litigation is used as de facto regulations; which is expensive and not desirable.
One of the regulations that has encouraged foreign companies to take advantage of U.S. capital markets is Rule14A, which allows foreign stock issuers to sell to “qualified institutional buyers” (QIBs) in the U.S. Those companies that comply with Rule 14A are exempt from SEC regulations. Rule 14A does not allow foreign companies to trade publicly on U.S. exchanges. The top three 2006 IPOs applied for Rule 14A listings.
In 2006, Europe’s exchanges raised the most funds, $95 billion (35 percent of the total of all funds raised). The London Exchanges were the world’s most popular destinations for cross-border IPOs in 2006 (London Stock Exchange and the AIM). London’s IPO underwriting fees are usually only 3-4 percent vs, 6.5-7 percent in the U.S. London also completely revamped its technology by implementing TradeElect, a new trading system.
Similar to other regions, another trend in Europe is the growth of mergers and acquisitions, reaching $3.6 trillion dollars in 2006. De-equitization is also taking place, for example, the British equity market shrunk by four percent (double the U.S. rate and four times the rate for all of Europe).
One of the most interesting developments in Europe was the April 2007 merger of Paris-based Euronext and the NYSE, the world’s only transatlantic exchange. Euronext has exchanges in Paris, London, Brussels, Amsterdam, and Lisbon. There are 4,000 companies, with a $28.5 trillion dollar market capitalization, listed on the NYSE Euronext. This merger increases the trading hours to 13 hours. It also decreases the cost of trading on the two exchanges. U.S. companies gain visibility in Europe and vis – versa. Investors can buy and sell stocks in dollars and Euros, depending on which currency is stronger. Global companies that do not want to comply with Sarbane Oxley or other US regulations, can now list on Euronext and be regulated by European regulations, but gain the benefit of visibility in the U.S. markets. The merger does not include a standard set of regulations to govern both exchanges.
One of the main drivers of the European market has been Russia. Rosneft’s IPO (a former state-owned Russian oil company), was the third largest IPO in 2006 and the largest European IPO. Roseneft listed in both Moscow and London.
China, along with other emerging markets in the BRIC countries (Brazil, Russia, India, and China), are have higher growth rates than most developed countries (such as the U.S. and most of Europe). Because these economies are growing at such high rates, investors look to buy stocks from these regions as there is a potential for high returns.
In China, two main sectors, second-tier financial institutions and insurance companies, are privatizing and going public. The largest IPO in history took place in China in 2006, when China’s largest state-owned bank, Industrial Commercial Bank of China (ICBC), went public and raised $22 billion dollars. China’s 2nd largest bank, Bank of China, raised $11.1 billion when it went public. Both of these banks went public on the HKSE, which allows foreign investors. The Shanghai Exchange is a closed system, only open to Chinese nationals. Chinese nationals can only buy stock in local exchanges, which leads to high trading on the local exchanges due to lack of alternatives. China’s currency, the renminbi, is not freely convertible either. Most Chinese companies though do a Rule 14a listing in the U.S.
The Indian stock market had 78 IPOs in 2006, raising $7.23 billion dollars. In 2006 India ranked eighth in the world for the number of and value of IPOs. More than half of the 2006 Indian IPOs were energy companies. While most Indian companies go public in India, more than 75 percent of the investors are foreign institutional investors. India has 23 exchanges with 9,000 listed companies. Similar to Rule 14A, India has Qualified Institutional Placements (QIP), which allows foreign investors to invest in Indian companies without these companies having to list in foreign exchanges. Private equity is powerful in India, reaching $7 billion in 2006.
There were 21 Russian IPOs in 2006, bringing in $18 billion dollars. Many Russian companies issued a Rule 14a listing in the U.S. and a GDR in London. All Russian companies must go public on a domestic exchange and list 30 percent of its offerings domestically. Seventy-five percent of Russian listings are commodities-based companies. Many companies went public in 2007, since it was unknown how the Russian elections and new president would influence the market. The Russian Parliament is reviewing a new law allowing offshore companies to list on the Russian exchanges, via a Russian Depositary Receipts (which are similar to GDRs). Similar to the Middle East, the Russian exchanges are flush with petrodollars.
The stock markets in the Middle East were unstable in 2006, due to excess liquidity, irrational retail speculation, and lack of market depth. In 2006, the Saudi exchange lost half of its value; the Dubai exchange lost two-thirds of its value (the worst performer of 2006). These decreases were preceded by a bubble, in which Middle East markets increased ten-fold in a five-year period (2000-2005). The excess liquidity is a factor due to the strong oil revenues of the Gulf states, which was coupled with few investment opportunities; only 1,600 companies are listed on 14 Middle East exchanges.
Looking to the Future
The globalization of stock markets has brought about increased competition for listings as well as for investors. Many companies are able to go public locally, but access foreign capital via foreign investors, private equity, and cross-listings. No longer is the NYSE the only viable option. Nonetheless, well-established exchange like the NYSE and the LSE offer more stability and depth than many emerging market exchanges.
Regulations need to protect, as well as to attract and regulators need to consider the rest of the world and foreign exchanges and investors when developing new laws and fixing old ones. It is interesting to note while regulations play such an important role in public exchanges, private investors are increasing exponentially around the world and these investors do not have to comply with many of the rules encumbering public investments.
As the U.S. stock exchanges are being hit by the subprime mortgage crisis, low value of the U.S. dollar, and a possible recession, it is clear that the rest of the world will be affected. No exchange is an island, as the world learned on February 27th 2007, when the Shanghai Exchange (a closed exchange) fell by nine percent, with reverberations around the world. As companies globalize, exchanges will need to keep up, as noted by Donald Straszheim, Vice Chairman, Roth Capital Partners, LLC:
“We now talk of Toyota as a Japanese car company. Increasingly in the future we may talk of Toyota not as a Japanese car company, but simply as a car company, as they produce, distribute, market, and sell all over the world. This phenomenon will likely grow over the coming years…”6
1 Dash, Eric. “Visa planning largest IPO in U.S. History.” International Herald Tribune. February 26, 2008. http://www.iht.com/articles/2008/02/26/business/26visa.php
2 Lesova, Polva. “Emerging markets drive record IPO activity.” MarketWatch. December 17th, 2007. http://www.marketwatch.com/news/story/emerging-markets-drive-global-ipo/story.aspx?guid=%7B3D345195-EBA1-4A70-B837-AC31D8D14A64%7D
4 “Globalization: Global IPO Trends 2007 Report.” Ernst and Young. http://www.ey.com/Global/assets.nsf/International/SGM_IPO_Trends2007/$file/Global_IPO_Trends_2007.pdf
5 Wieseneck, Larry. Head of Global Finance, Lehman Brothers. Interview. Globalization: Global IPO Trends 2007 Report.” Ernst and Young. http://www.ey.com/Global/assets.nsf/International/SGM_IPO_Trends2007/$file/Global_IPO_Trends_2007.pdf
6 “Globalization: Global IPO Trends 2007 Report.” Ernst and Young. http://www.ey.com/Global/assets.nsf/International/SGM_IPO_Trends2007/$file/Global_IPO_Trends_2007.pdf
* The picture of the New York Stock Exchange was by Luigi Rosa: http://www.flickr.com/photos/lrosa/172087436/