Stock Issues Heard Round The World
Earlier this year, Wellcome PLC, the British pharmaceutical giant, decided to raise no less than $4 billion in new equity. Just a few years ago, the offering would have been impossible. There was nowhere near that much demand for Wellcome stock from British investors. And though it makes the AIDS drug AZT, Wellcome was not well-known among foreign investors, since most of its stock was held by a charitable trust.
Ever-resourceful investment bankers, though, are offering a new service that enabled the Wellcome deal to get done: the global equity offering. The lead firm, acting as the "global coordinator," mobilizes separate but linked underwriting syndicates in markets throughout the world. While global deals have been around since the 1980s, it wasn't until this year that the technique came into its own. In May, 1992, for instance, General Motors Corp. raised $2.1 billion by selling 40 million shares in the U.S., 6 million in Britain, 4.5 million in Europe, and 4.5 million in the Far East. According to London's IFR Securities Data, raised some $14.9 billion in international equity, stock sold outside the issuer's home country. That's up from $8 billion for all of 1990.
STRONG LURE. Investment bankers are falling all over themselves to get this business, which is becoming the 1990s' version of mergers and acquisitions. Big global equity deals are still a virtually virgin market, and firms are scouring the world trying to win over governments and companies with potentially huge equity needs. The big lure of a megadeal is the megafee (table). "That's why this business is worth fighting for," says Tony Brooks, managing director at Lehman Brothers.
U.S. firms along with British investment banks, are easily outstripping competitors (table). The global coordinator for the Wellcome deal was the British firm of Robert Fleming & Co. But a team of U.S. investment bankers, led by Morgan Stanley & Co., sold one of the biggest slices of stock. From February to July, 1992, bankers worked on the Wellcome deal throughout the U.S. Morgan Stanley filed with the Securities & Exchange Commission the first "pink herring," similar to a red herring, or preliminary prospectus, which allowed it to start marketing the deal a month early. In July, after the stock market began pummeling drug stocks, Morgan Stanley CEO Richard B. Fisher hosted a lunch for institutional investors in New York to revive interest.
Morgan's salesmanship paid off. U.S. firms ended up selling one-fourth of the total offering, or $1 billion in dollar-denominated American depositary receipts to U.S. investors. This was the largest chunk of a foreign company's stock ever sold domestically. U.S. firms raked in a quarter of the massive $143 million in fees, a nifty $36 million. "The firm went all out to get this done," says Morgan Stanley Managing Director Vikram S. Pandit. "While there is a lot of risk associated with these transactions, you've got to have them on the marquee."
It was then-Prime Minister Margaret Thatcher who got the global equities market rolling in the 1980s by privatizing British companies. To sell stock in massive government agencies, Britain needed to tap buyers worldwide. While U.S. investment banks participated in the early offerings, they were at a disadvantage in Britain's cumbersome, often risky "fixed price' system, where the British issuer sets the offering price a few weeks before the stock goes on sale.
The markets are now moving toward the U.S. "book-building" system. Before the effering price and deal size are set, customers around the world are informally solicited for their preliminary interest, a process known as building a book of orders. Just before the deal is sold, the lead manager sets price and size on the basis of demand, reducing the chance of mispricing the issue. The Wellcome deal, which turned out very successfully, was the first to be done fully with the book-building method. "This is the way deals will be done around the world from now on," predicts Morgan Stanley's Pandit.
GROWING NEEDS. Also helping the competitive position of U.S. firms is that U.S. institutional investors are buying foreign stock in record volume. U.S. managers now view international equity as nearly as acceptable as international debt, which they've been buying for years. U.S. issuers, meanwhile, are proving to have growing global capital needs as well. "The more diverse the market, the more interest you can generate," says Charles E. Golden, GM's treasurer.
Wall Street is betting on a continuing supply of global equity in all parts of the world. The biggest issuers are expected to be cash-strapped governments eager to raise money quickly by privatizing everything from railroads to phone systems. Much action is expected in France, where three large insurers, Gan, UAP, and AGF may be put on the block. "The experience of privatization in the mid-1980s showed that the French government chose largely foreign banks as advisers," says Francois Beauchamps, the director of privatization at Credit Lyonnais' investment bank.
U.S. firms are enjoying significant success in winning global coordinator mandates in smaller "emerging growth" markets. Robert E. Rubin, Goldman, Sachs & Co. co-chairman, personally spearheaded the firm's push into Mexico in the late 1980's, a step ahead of U.S. competitors and just before that market took off. In April, 1991, Goldman was chosen to manage the huge Telefonos de Mexico global equity offering and pocketed the largest share of the $85 million in fees, say competitors.
The four major Japanese brokerage firms have fared poorly. The precipitous drop in the Japanese stock market has decimated the new equity market for the past two years. Their only high-profile global coordinator assignment, garnered by Nomura International PLC in London for the $1 billion offering by Irish aircraft-leasing company GPA Group PLC earlier this year, ended in failure when the deal was canceled. "If we fly to Asia for a potential deal, often the Americans are there ahead of us," says Masayasu Ohi, general manager of international investment banking at Daiwa Securities Co. "We try, but in practice we have little chance."
A continuing boom in global deals is not assured. Privatization in Eastern Europe has slowed. European equity markets are weak because of limping economies and political uncertainties. But given the strong worldwide demand for capital and the incentives U.S. investment banks have to raise it, the stampede for global equity business is probably just beginning.
By Leah Nathans Spiro in New York, with Stephanie Cooke in London, Bill Javetski in Paris, and Karen Lowry Miller in Tokyo
A SURGE OF BLOCKBUSTER ...WITH U.S. FIRMS DEALS... DOMINATING THE ACTION Largest global stock issues using U.S. underwriting practices Issuer Amount Country Date Fee to Bankers Billions(Dollars) Raised Millions(Dollars) British Telecom-2 10.1 Britain 11/91 100 Wellcome 4.1 Wellcome 7/92 143 GM 2.1 U.S. 5/92 53 Telmex-1 1.9 Mexico 4/91 85 UAP 1.8 France 2/90 68 San Paolo di Torino 1.2 Italy 5/92 36 Repsol 1.1 Spain 4/89 39 China Steel 0.9 Taiwan 5/91 33 Jan.-June 1992 Lead Amount Market share Manager Billions(Dollars) Percent Goldman Sachs 3.0 20.5% Morgan Stanley 2.4 16.3 Shearson Lehman Brothers 1.3 8.8 Merrill Lynch 1.0 6.8 Banco Roberts 0.9 6.3 S.G. Warburg 0.9 6.0 Credit Suisse/CSFB 0.8 5.7 Paribas 0.8 5.6 *Securities sold outside issuers' home countries DATA: IFR SECURITIES DATA, S.G. WARBURG GROUP