Financial Times: Euro Markets 5/31/00

Financial Times: Euro Markets 5/31/00

Global shares face a long uphill battle

With the globalisation of financial markets, there should be a growing need for one class of security for all investors, says William Hall

UBS’s decision to list its shares on the New York Stock Exchange in the form of global registered shares has raised the question of whether a single global share will eventually drive the $750bn (£505bn) American Depositary Receipt (ADR) market out of business.

UBS is the first international bank to issue a global share and regards itself as a pioneer. “A globally traded share is symbolic of UBS as a global firm,” Marcel Ospel, UBS’s chief executive, says.

The ADR market, by contrast, looks elderly and inefficient at firsts sight. J.P. Morgan created the first ADR in 1927 to allow Americans to invest in Selfridge’s, the British retailer. Since then hundreds of foreign companies have been converting their own shares into US dollar-denominated ADRs to raise capital in the US.

The foreign issuer typically chooses one of three US banks—Citibank, J.P.Morgan or Bank of New York—to act as a depositary to hold the underlying security and support the ADR programme.

The cost of cross-border settlement can be higher for ADRs than global shares, and the latter can be traded around the clock and around the world, unlike ADRs. With the globalisation of financial markets and increased cross-border merger and acquisition activity, there ought to be a growing need for one class of security for investors worldwide.

It not only avoids the need to crate a separate class of securities for trading in the US, but helps to create a market system that is efficient and investor friendly, the NYSE says.

“Global shares provide a distinct advantage in allowing buyers anywhere to trade Celanese stock without going through intermediaries,” said Perry Premdas, chief financial officer of Celanese, when the company’s global share was listed on the NYSE last October.

However, such enthusiasm is far from universal. So far only DaimlerChrysler, the car giant, Celanese, the specialty chemicals company, and UBS, have issued global shares. By contrast, the Bank of New York estimates that more than 500 non-US companies have ADRs listed on US stock exchanges. Trading volumes has been growing at an average of 22 per cent during the past decade.

Tim Oldfield, sales director of Citibank Depositary receipt Services in London, says the pipeline of new ADR programmes in Europe has “never been stronger”. Patrick Colle, a J.P. Morgan’s European ADR chief, agrees. “Over the last two years we have had three global shares and about 150 new ADRs.”

In spite of the ADR market’s apparent inefficiencies and potentially higher cross-border settlement costs, it retains considerable attractions, especially for US investors who cherish US securities, UBS’s global share is not a US security: it is a “non-US original listing”.

ADRs are more flexible than global shares. One of the reasons that Novartis opted for an ADR rather than a global share was because Swiss stock exchanges rules prevent it splitting its share price to a level that is comparable to its US peers. With an ADR all it needs to do it adjust the ADR conversion ratio to suit its needs.

The settlement costs disadvantages of ADRs can also be overstated. A J.P. Morgan study found that only 8 per cent of trades in big liquid ADR programmes resulted in issue and cancellation charges.

The disappointing experience of DaimlerChrysler’s global shares has also coloured sentiment. Not only did DaimlerChrysler fail to make it to the S&P 500 index, but its share trading has gravitated back to the German home market.

US turnover in DaimlerChrysler shares last year totalled $15bn, compared with $45bn in the ADRs of BP Amoco, which has consummated an equally ambitious trans-Atlantic merger. Trading in UBS global shares has average about 33,000 shares against the 200,000 a day expected in an active ADR programme.

In terms of improving liquidity and trading volumes, the case for global shares has yet to be made. The idea that global shares make it easier for foreign companies to do deals in the US is misplace. Vodafone bought AirTouch and BP bought Amoco without global shares.

“The instrument, whether it is an ADR or global share, does not make much difference,” J.P. Morgan’s Patrick Colle says. “What matters is the trading volume and liquidity. The record to date suggests that global shares have a long way to go before they can match the attractions of the big liquid secondary markets of established ADR programmes.