The challenges and opportunities of listing internationally
Any IR team hitting the road with a depositary receipt program right now could probably do with a few high-strength Powerbars. The combination of new regulations under Sarbanes-Oxley and a laggard US economy has made for a more challenging environment for foreign issuers looking to raise capital internationally. Still, IR professionals remain convinced that the DR route is the most direct way to tap into broader capital pools.
Fu-Fu Shen, head of IR at Taiwan's giant Chunghwa Telecom, saw the immediate benefit of an ADR after the company listed on the New York Stock Exchange this summer. On July 18, with Bank of New York as its depositary, Chunghwa listed around 96 mn ADRs through a secondary offering of shares owned by Taiwan's Ministry of Transportation and Communications, raising a total of $1.37 bn.
Chunghwa was well prepared for the ADR process. The company's accounting department has long used US Gaap and is committed to financial transparency. 'Our reports are really not very complicated,' says Shen. 'We don't have consolidated reports. It's all very easy to understand.'
Chunghwa doesn't yet have any local US representation, often deemed vital for building stateside investor contacts. Shen is currently looking for an IR consulting firm to help in that process. 'We need help on a daily basis to show us how we should be communicating with investors and when,' she says. Shen is also busy planning a roadshow schedule for the US and Europe.
Anglo-Australian resources group BHP Billiton, which is dual listed on the Australia and London stock exchanges, inherited two ADR programs following the merger of Billiton and BHP in 2001. Now the combined company has a NYSE-listed ADR.
BHP Billiton's IRO, Francis McAllister, emphasizes the need to expand the scope of IR efforts when launching an ADR. 'We already have an IR office in Houston that manages the roadshows and IR responsibilities in the US,' she says. 'But since the listing of the new ADR, we have visited investors in New York, Boston, Ohio, Chicago and Atlanta, amongst others. We are also planning on visiting investors on the west coast in August.'
This proactive approach is fundamental, says John McInerney, a director at IR consultancy Citigate Financial Intelligence. 'You need to target potential investors you have a genuine interest in rather than trying to stimulate interest in a scattershot way. Call it doing more with less. It's quite a conundrum: you have a difficult market and a sell-side channel in the US that has been narrowed. Companies now have to fill that channel with their own activities, taking messages directly to investors or using the sell-side sales channel to help deliver the message more broadly.'
While foreign issuers are not required to abide by the US Securities and Exchange Commission's Regulation Fair Disclosure, compliance is advisable because it demonstrates a company's commitment to disclosure. Anyway, savvy companies want to meet market requirements, not just regulatory ones. McAllister, for example, embraces Reg FD as a 'positive development that helps the flow of information to our investors.'
Alan Cathcart, IR manager and senior vice president at Philips Electronics, agrees that ADR issuers benefit from compliance with Reg FD. He suggests it leads to a more disciplined IR strategy. 'When we have analysts and investors in for special divisional days, we send press releases out saying exactly what we're going to tell them beforehand in order to ensure there's no market confusion about what we're telling people,' he says. 'The difficulty is that you have to estimate the sort of questions you might get. If, however, additional information is disclosed, it may be relevant to follow up with a press release – I haven't seen other people follow us here.'
Even though compliance is not mandatory, it is advisable for ADR issuers to understand the implications of Reg FD and create internal disclosure policies to meet those requirements. 'Some people think a webcast is public fair disclosure,' adds Cathcart. 'However, if something is price sensitive, we have to send it to the stock exchange first. The more information you've formally disclosed, the more you can talk about the subject with investors. And the more they know about your company, the better position they're in to value it correctly – one of our ultimate goals.'
Some companies need to do a bit of housekeeping in preparation for a DR program. Improving accounting and disclosure standards was a vital prerequisite for South Africa's Telkom, which listed an ADR on the NYSE in June. 'We reviewed all our peer disclosures and asked the investment analysts what the disclosure requests would be,' says Belinda Williams, head of IR at Telkom. 'We also went to great lengths to make sure our 400-page prospectus comprehensively covered our business.'
Williams says that although 40 percent of the company's free float is already offshore, a stronger US shareholder base is there for the taking. 'We've set ourselves targets by doing analysis on peer ownership and other South African companies' foreign ownership,' she says. 'Since our IPO roadshow four months ago, we've also done another two marketing trips. The hardest thing about roadshows is keeping management's energy high, especially when you're doing eight to ten meetings a day.'
Still, a hectic travel schedule and tightened reporting standards do have their rewards. Although the overall amount of US investment in foreign stocks has actually dropped, the trend toward diversifying into foreign equities continues, according to a recent report produced by JPMorgan. It shows that in the first quarter of 2003, US investors had over $1.2 tn in foreign investments compared to $1.3 in the fourth quarter of 2002 based on figures from the Federal Reserve. It also concludes, however, that 'long-term movement of US investors into foreign equities appears intact, and has been thoroughly tested, given the 2000-2002 market declines.'
For the moment, the number of new ADR listings remains down, notes Joel Papernik, a lawyer with New York-based firm Mintz Levin Cohn Ferris Glovsky & Popeo. 'I'm not seeing them,' he comments, adding that unsponsored, over-the-counter traded programs are more likely than sponsored, exchange-listed programs given the current down market. He also notes that some existing exchange-listed DRs, just like some of their domestic US counterparts, are struggling to maintain their Nasdaq listings.
Unlike Reg FD, foreign issuers are not exempt from the famous Sarbanes-Oxley Act. There are, however, certain accommodations and exceptions for companies whose home market rules differ from the SEC's requirements. For example, foreign issuers can be exempt from the rule mandating that audit committees be composed entirely of independent directors if that rule conflicts with their home countries' legal or listing requirements.
While the rigors of Sarbanes-Oxley may have deterred some firms from pursuing an ADR, others foreign issuers have embraced the new requirements. Many European firms, for instance, have already met new SEC standards under Sox, notes Cathcart. 'In the UK you've had non-executive directors for some time,' says Cathcart. 'In Europe the two-tier system exists. So the independent director element which Sox demands is often already there.'
The ultimate risk of erecting a high regulatory fence is that foreign issuers will lose interest. But Sox is not going to dissuade foreign issuers from tapping into the world's largest capital market, according to Stephen Rahn, ADR group country officer for JPMorgan. 'Yes, they've raised the bar, but ultimately that's what the investor wants,' he says. 'Giving the CEO personal responsibility for what they sign off on is a move in the right direction. At the end of the day it all sounds very strict, but it just encourages companies to put the right procedures in place. It is for the better – and issuers should view it that way.'
Experts agree that embracing the spirit of new disclosure and accounting standards gives companies a leg up with investors everywhere. They also say companies currently considering a DR program should not be put off by current market conditions.
'The imperative,' warns John McInerney, 'is to resist the temptation until the market starts to look a bit better. You can't use market timing for buying a stock or a DR – you've just got to be consistent. Marketing discipline is very much needed. The companies that are successful in the US market come here regularly. They're disciplined at dealing with investors face-to-face and use technology as a way to enhance personal relationships, not to replace them. They have to be well prepared and committed to this market and not treat it as a secondary market. It's a huge commitment.'