Is There Anything U.S. Investors Won't Buy?
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Consider it a case of
exquisitely bad timing: Just as stock markets around the world were diving in
response to currency troubles in Hong Kong and general unease about the future
of Asian economies, China Telecom--that country's largest provider of
cellular-phone service--went public. When the initial public offering was first
announced, Hong Kong investors acted as if tickets to a Beatles reunion had
gone on sale, lining up before dawn outside bank branches to procure the
application forms needed to buy shares. By the time China Telecom actually made
it to market, though, those same investors had other things on their mind--you
know, minor things like whether the entire Hong Kong real-estate market was
about to fall to pieces.
The same
was true, to a lesser extent, of investors in the United States, to whom China
Telecom must suddenly have looked less like a savvy investment in an infinitely
expandable market and more like an overvalued investment in a region plagued by
dubious financing practices and even more dubious accounting. The result was
predictable. Where most IPOs this year have been strikingly successful--AMF
Bowling, of all things, being just the latest company to see its share price
jump--China Telecom's shares fell by 10 percent in the first three days of
trading.
Of course, even with the bad timing, China Telecom did
raise $4 billion, including $424 million in the United States alone, in the
IPO. And the investment banks that underwrote the offering took home close to
$100 million. So it'd be hard to call the deal a failure, especially when you
consider that the company's shares rebounded sharply when the U.S. market
rallied. In fact, from a certain angle, and especially given the turmoil in
Asia, China Telecom's IPO looks like a real triumph, the kind of triumph, in
fact, that makes you wonder, "What won't investors buy?"
That
question is especially pertinent here in the United States, because the
combination of a booming stock market at home and the privatization of
state-owned enterprises abroad has meant a dramatic upsurge in the number of
foreign companies whose shares are listed on U.S. exchanges. Through the end of
August, 73 foreign corporations have gone public here this year, raising a
total of $7.5 billion in capital. Since then, France Telecom, Bell Canada, and
China Telecom all have been added to the list. (France Telecom did it in style,
bringing cancan girls onto the floor of the New York Stock Exchange for the
first day of trading.) By the end of the year, the number of foreign IPOs
should surpass last year's record 98 offerings.
Foreign companies, of course, want their shares
listed in the United States for the same reason that Willie Sutton robbed
banks. The U.S. capital market is the world's largest. All the money that
continues to pour into mutual funds has to go somewhere, and the rhetorical
drumbeat of globalization has made investors more comfortable with companies
like Spain's Telefónica de España and Brazil's Telebras, let alone companies
like Toyota and Sony. The U.S. capital market is also exceptionally liquid, and
price-earnings multiples are high. Foreign companies believe that U.S. listings
both increase trading in their shares and improve valuations. An IPO, then,
becomes a lucrative and relatively painless way of raising capital.
It's
especially painless because the vast majority of the shares of foreign
companies trade in the United States in the form of something called American
Depositary Receipts. The ADR was invented--as was so much else--by J.P. Morgan
in 1927, when he created the device so that U.S. investors could trade shares
of a British department store called Selfridge's. Essentially, an ADR is a
security, issued by a bank--the depositary--that represents a share in a
foreign corporation. In most cases, the owner of the ADR does not have voting
rights. In selling shares in the United States, then, foreign corporations can
raise loads of money without suffering a dilution of the control they exercise
over their own affairs.
"So what?" you might justifiably ask. After
all, the overwhelming majority of U.S. investors never bother with their voting
rights in U.S. companies, and the decline in the practice of paying out
dividends means that most American stockholders care about only one thing: the
price of their shares. And you can care about the price of an ADR just as
easily as you can about the price of a bona fide share. If China Telecom's
share price is going to double over the next year, why shouldn't you buy
it?
If it is
going to double, then you should buy. There, wasn't that easy? The problem,
though, is that the ADR phenomenon has created a situation where U.S. investors
are pouring billions of dollars into companies whose standards of financial
disclosure and corporate governance are dramatically different from our own and
which are, in some cases, nonexistent. That means, in turn, that it's hard to
figure out whether a company will be profitable next year, let alone whether
its stock price is going to double. And without full voting rights, there's
nothing that investors--even institutional investors--can do if things go
haywire.
Take Tsingtao Beer, for instance. It went
public in 1993, and its shares were quickly snapped up. Instead of using the
money it raised from the IPO to expand, though, it lent the $110 million to
other Chinese state enterprises and then watched many of those loans go south.
Needless to say, these plans had not been in the prospectus. Similarly, China
Telecom has said that it will "explore opportunities for strategic investments
in [China's] telecommunications industry." But it's not clear whether this
really means "strategic investments" or whether it means "investments to prop
up companies run by aging members of the CP." Of course, it's possible that the
pressure from China Telecom's chief competitor may keep it on track. That
competitor, incidentally, is a joint venture run by the People's Liberation
Army, which brings new meaning to the words "price war."
The point is not that
investing in foreign companies is necessarily a mistake. U.S. investment, in
fact, is likely to improve standards of disclosure and accounting in many
foreign corporations. And foreign investment is often crucial to a company's
development. The U.S. railroads, for instance, would not have been built
without British capital. But foreign investment takes place in a realm, even
today, where the rules that govern U.S. markets do not always apply. "It has
been most demoralizing," a British emissary to a U.S. company wrote his bosses
in the late 1890s. "Even one of our own Directors in New York, when asked to
give us some information as to what had become of the English capital sent
out--what do you think he said? He told us, 'Well, really, Sir, that is what I
am always asking, but which I can never get to know.' " It's not that hard to
imagine a similar message being sent home by someone investigating what
happened to Tsingtao.
What the fad for foreign
IPOs ignores is the massive uncertainty still attached to foreign markets, even
as it has led U.S. investors to overlook everything they take for granted at
home: regular reports, corporate accountability, open books, the Securities and
Exchange Commission. After all, transparent and efficient markets are not
natural but rather man-made. And what the triumph of capitalism in the last
decade has hidden is the reality that in most places, those markets have not
yet been built. Caveat emptor, indeed.
