international equity markets prof. ian giddy stern school of business new york university
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Copyright ©2003 Ian H. Giddy Equity markets 2
Emerging Market Financing
Emerging markets
Equity
Debt
Copyright ©2003 Ian H. Giddy Equity markets 3
Primary Market for Equities
Initial Public Offering (IPO)
Subsequent Offering
Private Equity Placement
Stock Buyback?
Management Buyout?
Copyright ©2003 Ian H. Giddy Equity markets 4
Investment Banking Arrangements
Underwritten vs. “Best Efforts”Underwritten: firm commitment on
proceeds to the issuing firmBest Efforts: no firm commitment
Negotiated vs. Competitive BidNegotiated: issuing firm negotiates terms
with investment bankerCompetitive bid: issuer structures the
offering and secures bids
Copyright ©2003 Ian H. Giddy Equity markets 5
Secondary Market Trading
Secondary Market for Equities
Initial Public Offering (IPO)
Subsequent Offering
Private Equity Placement
Copyright ©2003 Ian H. Giddy Equity markets 6
Institutional Investors and Money Managers
Institutional Investors Money Managers
Mutual Funds
Insurance Companies
Pension Funds
Hedge funds,
Central banks, etc.
Stocks
and
bonds
Money managersMoney managers
Copyright ©2003 Ian H. Giddy Equity markets 7
Mutual Funds
Open-End Closed-End
Stocks
and
bonds
Variable
number
of shares
Not traded on an exchange
Price = NAV (less fees)
Stocks
and
bonds
Fixed
number
of shares
Traded on a stock exchange
Price may not = NAV
Copyright ©2003 Ian H. Giddy Equity markets 9
Raising Capital for Emerging Market Companies
Debt
Equity
Copyright ©2003 Ian H. Giddy Equity markets 10
Raising Capital for Emerging Market Companies
Debt
Equity
Domestic market
Foreign market
Euromarket
Copyright ©2003 Ian H. Giddy Equity markets 11
Raising Capital for Emerging Market Companies
Debt
Equity
Domestic market
Foreign market
Euromarket
Copyright ©2003 Ian H. Giddy Equity markets 12
Raising Capital for Emerging Market Companies
Debt
Equity
Domestic market
Foreign market
Euromarket
Domestic market
Foreign market
Euromarket
Copyright ©2003 Ian H. Giddy Equity markets 13
Raising Capital for Emerging Market Companies
Debt
Equity
Domestic market
Foreign market
Euromarket
Domestic market
Foreign market
Euromarket
Copyright ©2003 Ian H. Giddy Equity markets 14
Raising Capital for Emerging Market Companies
Debt
Equity
Domestic market
Foreign market
Euromarket
Domestic market
Foreign market
Euromarket
Copyright ©2003 Ian H. Giddy Equity markets 15
Debt
EquityDomestic marketForeign market
Can globally mobile investors capture value & control?
yesno(Russia) (S Africa)
Copyright ©2003 Ian H. Giddy Equity markets 17
MacroFactors
• Currency overvaluation• Capital restrictions
StructuralFactors
• Acctg & disclosure requirements• IAS compliance• Bankruptcy regime• Creditor rights• Govt-corporate nexus• Trading infrastructure
• Price-Value ratio, Sharpe ratio, EVA• D/E ratio• Currency & maturity mismatch• IAS conformity• Insider control• Objective research coverage• Trading liquidity
Firm-levelFactors
What International Investors Look For
Copyright ©2003 Ian H. Giddy Equity markets 21
Underwriting Sequence
Engagement: Mandate signed by issuer engaging lead manager
Due Diligence: Conducted by Lead manager
Documentation: Loan agreement, Prospectus
Signing: Underwriting agreement signed and issue priced
Closing: Settlement of the offering
EngagementEngagement
Due Diligence and
Documentation
Due Diligence and
Documentation
Signing and PricingSigning and Pricing
ClosingClosing
“Beauty Contest”“Beauty Contest”
Copyright ©2003 Ian H. Giddy Equity markets 25
Distribution
Lead ManagerBook-Runner
“International Coordinator
Joint Co-Lead
ManagerJoint Co-Lead
ManagerJoint Co-Lead
Managers
Lead
ManagerLead
ManagerLead
Managers
ManagerManagerManagers Selling Agent
Co-Lead Manager
Question 1:Which banks were involved with the DT IPO, and what were their roles?
Copyright ©2003 Ian H. Giddy Equity markets 35
Pricing
Debt Instruments Bonds priced according
to yield over benchmark (spread)
Yield too low – issue does not sell
Yield too high – too much given away
Generally syndicate holds price for a day; in a successful issue yields gradually tighten
Equity Mature issue: based on
current market price and market conditions, small premium for dilution; comparables
IPO: comparables and discounted cash flow analysis
Question 2:What price should DT
shares have, based on:(a)Book value(b)P/E ratio(c)Future cash flows
Copyright ©2003 Ian H. Giddy Equity markets 36
Deutsche Telekom: Group work 11:20-12:20
Question 1:Which banks were involved with the DT IPO, and what were their roles? Question 2:
What price should DT shares have, based on:
(a) Book value(b) P/E ratio(c) Future cash flows
Copyright ©2003 Ian H. Giddy Equity markets 39
Raising Equity: The Investment Banker’s Job
Market conditions Corporate needs Valuation Information Distribution
Telekom
Telekom
Copyright ©2003 Ian H. Giddy Equity markets 41
What’s a Company Worthto Investors?
Required Returns Types of Models
Balance sheet modelsDividend discount & corporate cash flow
modelsPrice/Earnings ratiosOption models
Estimating Growth Rates
Telekom
Telekom
Copyright ©2003 Ian H. Giddy Equity markets 42
Equity Valuation: From the Balance Sheet
Value of Assets Book Liquidation Replacement
Value of Liabilities
Book Market
Value of Equity
Copyright ©2003 Ian H. Giddy Equity markets 44
Relative Valuation
Do valuation ratios make sense?• Price/Earnings (P/E) ratios
and variants (EBIT multiples, EBITDA multiples, Cash Flow multiples)
• Price/Book (P/BV) ratios and variants (Tobin's Q)
• Price/Sales ratios
It depends on how they are used -- and what’s behind them!
Copyright ©2003 Ian H. Giddy Equity markets 45
Deutsche Telekom:Ratios and Comparables
See case page 9
Copyright ©2003 Ian H. Giddy Equity markets 46
Discounted Cashflow Valuation: Basis for Approach
where n = Life of the asset CFt = Cashflow in period t r = Discount rate reflecting the
riskiness of the estimated cashflows
Value = CFt
(1+ r)tt =1
t = n
Copyright ©2003 Ian H. Giddy Equity markets 48
Valuing a Firm with DCF: An Illustration
Historical financial results
Adjust for nonrecurring aspects
Gauge future growth
Adjust for noncash items
Projected sales and operating profits
Projected free cash flows to the firm (FCFF)
Year 1 FCFF
Year 2 FCFF
Year 3 FCFF
Year 4 FCFF
Terminal year FCFF
Stable growth model or P/E comparable
Present value of free cash flows
+ cash, securities & excess assets
- Market value of debt
Value of shareholders equity
…
Discount to present using weighted average cost of capital (WACC)
Copyright ©2003 Ian H. Giddy Equity markets 49
Telkom South Africa
1. Why did South Africa follow its initial 30% privatization of Telkom with an initial public offering? What are the advantages and disadvantages of a public listing for a company?
2. What is an ADR? Why did Telkom use the ADR technique in conjunction with its Johannesburg IPO?
3. What does a company have to do to ensure a successful IPO? What makes shares attractive to investors?
4. Was the Telkom IPO priced correctly? How would you value a company in order to judge the price for an IPO?