Bidding Without Boundaries

Dec. 21, 2004
Public manufacturing companies will need to reach out to a world of investors as stock exchanges go global.

While it's true that no one can predict exactly where stock prices are headed, it's fairly clear where the stock exchanges themselves are going: global. Over the next five to 10 years, transactions increasingly will be between companies and investors from different countries. This will have a profound impact on publicly held manufacturing companies. As investors find it easier to directly buy and sell shares in businesses that hail from all corners of the globe, they're going to put more of their dollars into those companies that offer the likelihood of greatest reward -- regardless of the location. Marginal firms -- even those that supposedly should have the hometown advantage -- will be left struggling. As a result, executives will need to take their companies' financial stories to investors around the world, much as they market their goods and services to customers in any number of countries. "Companies need to treat the global investor pool as one that can be segmented and accessed, just like selling products," says Keith Stock, a New York-based global financial services consultant with Cap Gemini Ernst & Young. The World Federation of Exchanges lists 56 members and says its members represent 97% of the world's stock market capitalization. A variety of exchanges are members, from the world-renown New York Stock Exchange (NYSE) to the lesser-known Ljubljana Stock Exchange, which was established in Slovenia in 1989. Several forces are driving stock market globalization. Institutional and retail investors are increasingly focused on higher returns and won't hesitate to head to other countries to get it, says Jos Schmitt, global head of the capital markets business with Capco, an Antwerp, Belgium-based consulting and technology provider to the financial services industry. For instance, frustrated with the generally lackluster performance of European stocks, more institutional investors there are investing in U.S. equities, says John Edmunds, associate professor of finance at Babson College, Babson Park, Mass. In addition, the hardship on countries and economies that lack a vibrant capital market is becoming more apparent, so more countries are courting investors. "The absence of exchanges leads to major costs in terms of lack of growth and challenges to creating jobs," says Glenn Yago, Ph.D., an economist with the Milken Institute, Santa Monica, Calif. Without deep, liquid equity markets, promising new ventures can't get the funding they need to get off the ground. Signs of globalization can be seen on several continents:

  • Euronext was formed through the merger of the Paris, Amsterdam and Brussels exchanges in September 2000. In late January of this year, Euronext announced that the Portuguese stock exchange had decided to join it. As of the end of October, 2001, about 1,500 companies were listed on Euronext.
  • virt-x, formerly Tradepoint, is an electronic trading platform that links the Swiss and London exchanges.
  • Across the North Sea, Norex is an alliance of the Scandinavian exchanges: the Copenhagen Stock Exchange; Iceland Stock Exchange, Oslo Brs, and Stockholmsbrsen. Regional exchanges will continue to proliferate, predicts Charles Geisst, author of "Wall Street: A History" (1997, Oxford University Press). That's particularly true in Europe, where most exchanges are fairly small. For example, the market value of the companies listed on the Deutsche Brse last year was about $1.1 trillion; the comparable figure for the NYSE was ten times that. The advent of the Euro also makes ongoing regional consolidation in Europe natural. On this side of the Atlantic, the U.S. equity marketplaces also are feeling the march of globalization. Their switch from pricing shares in "sixteenths" (one-sixteenth of a dollar, or about 6 cents) to pennies, facilitates global trading, says Dirk Koerber. He is head of DK Strategic Communications, an investors relations consultancy in Woodland Hills, Calif. "We're starting to deal in the same currency, at least from a mathematical point of view." The two largest capital marketplaces in the U.S., the NYSE and NASDAQ, are taking steps to harness the forces of globalization. The NYSE is able to leverage its reputation as the most liquid and prestigious exchange to entice companies from around the world to list with it. One example: In late January, Bayer AG joined some-400 other non-U.S.-based companies, and began trading on the Big Board. "The NYSE represents the 'who's who' of companies," says Michael Preuss, spokesperson with the Leverkusen, Germany-based company. Leonard Rosenthal, professor of finance at Bentley College, Waltham, Mass., predicts that the NYSE will continue courting firms headquartered outside the U.S. and bringing them to the NYSE. And although things appear to be moving slowly, the NYSE has several other globalization initiatives underway. Several years ago, it introduced Global Shares as an alternative to ADRs, or American Depository Receipts. (An ADR is a receipt on a security that is held in another country. Traditionally, investors buying shares of foreign companies use ADRs.) Global Shares are shares of non-U.S. companies that trade in the U.S. in the same form as they trade in their home country. As a result, investors don't incur the costs involved in converting ADRs to ordinary shares. So far, however, just a handful of companies are using Global Shares. "They have to find their way in the market, as they're a new product," says Bob McSweeney, senior vice president with NYSE. In mid-2000, the NYSE announced alliances with exchanges in Asia, Europe, Canada and Mexico. At this point, the initiative is still under development, as the exchanges integrate their electronic platforms with the auction market, says McSweeney. At NASDAQ, officials appear to be moving quickly to establish operations abroad. NASDAQ Japan was launched two years ago, and now has 70 stocks, says Hardwick Simmons, NASDAQ chair and CEO. Six months ago, NASDAQ Europe was formed. Eventually, NASDAQ would like to "tie together pools of liquidity in Europe, Asia and the U.S., so there's trading 22 or 24 hours per day," says Simmons. To be sure, the equity markets won't become cross-cultural melting pots overnight. The reasons have more to do with politics, law and culture than with the technical difficulties of facilitating transnational trading. In order for global capital markets to work, the shareholder protections that are the norm in the U.S. would have to be established or strengthened elsewhere. "In most parts of the world, except for the U.S. and the UK, buying paper (stock) is not a good idea," says Edmunds of Babson College. "There's not good protection of minority shareholders. You have issues regarding disclosure, governance and penalties for violations." As a result, people just don't invest. While about 50% of Americans hold stock, either directly or through mutual funds, that number drops to below 20% in Japan and Europe. To invest, people need confidence in the financial statements put forth by the companies listing there. That can only happen with some sort of globally accepted accounting standards. While many countries, particularly those in Europe, are adopting international accounting standards, significant differences remain. Not all are easily reconciled, says Elliot Posner, a doctoral candidate at the University of California at Berkeley, who is studying stock exchanges. "Accounting systems are tied deeply to other parts of the political economy, like pensions, labor arrangements and the way in which people save for retirement," he says. "It's not so easy to isolate it." In fact, several experts say that the establishment of commonly accepted accounting standards is likely to lag the development of regional or cross-border exchanges. "I'd say that consolidation will take place before the standardization of accounting rules and securities laws," says David Colbert, author of "Eyewitness to Wall Street: Four Hundred Years of Dreamers, Schemers, Busts and Booms" (2001, Broadway Books). Although that may sound like a case of putting the cart before the horse, Yago of the Milken Institute notes that is the typical order of things. "Ownership of property has been at the base of the advance in democracy," he says. "Throughout history, it was the building of markets that preceded political entities. Through markets, you can build interest in the rule of law." As the equity markets becomes increasingly free of borders, corporate executives will need to keep pace. The primary task will be making sure that they can communicate with investors around the globe on a 24/7 schedule, says Koerber. "As things happen around the world that can affect the value of the equity, they'll need to respond to that." The payoff? "If companies can access different pools of capital, in theory, their cost of capital should go down," notes Stock of Cap Gemini. In other words, as the supply of funds increases, the price should go down. U.S.-based companies in particular could benefit, says Edmunds. Their financial statements are considered by many to be among the most credible and transparent in the world. Investors in other countries are interested in owning U.S. firms and are willing to pay. World Markets Here is a partial list of the world's stock markets: American Stock Exchange Athens Stock Exchange Australian Stock Exchange Barcelona Stock Exchange Bermuda Stock Exchange Bolsa de Comercio de Buenos Aires Bolsa de Comercio de Santiago Bolsa de Madrid Bolsa de Valencia Bolsa de Valores de Bilbao Bolsa de Valores de Lima Bolsa de Valores de Lisboa e Porta-BVLP Bolsa de Valores do Rio de Janeiro Bolsa de Valores do So Paulo Bolsa Mexicana de Valores Bourse de Luxembourg Bourse de Montral Budapest Stock Exchange Canadian Venture Exchange Chicago Board Options Exchange Chicago Stock Exchange Colombo Stock Exchange Copenhagen Stock Exchange Deutsche Brse Euronext Amsterdam Euronext Brussels Euronext Paris Helsinki Exchanges Hong Kong Exchanges and Clearing Irish Stock Exchange www.ise.le Istanbul Stock Exchange Italian Exchange Jakarta Stock Exchange JSE Securities Exchange, South Africa Korea Stock Exchange Kuala Lumpur Stock Exchange Ljubljana Stock Exchange London Stock Exchange Malta Stock Exchange NASDAQ New York Stock Exchange New Zealand Stock Exchange Osaka Securities Exchange Oslo Brs Philippine Stock Exchange Singapore Exchange Stock Exchange of Thailand Stockholmsbrsen SWX Swiss Exchange Taiwan Stock Exchange Corp. Tehran Stock Exchange Tel-Aviv Stock Exchange Tokyo Stock Exchange Toronto Stock Exchange Warsaw Stock Exchange Wiener Brse
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