1. International Equity Markets Prof. Ian GIDDY Stern School of Business New York University

2. Copyright ©2003 Ian H. Giddy Equity markets 2 Emerging Market Financing Emerging markets Equity Debt

3. 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?

4. Copyright ©2003 Ian H. Giddy Equity markets 4 Investment Banking Arrangements l Underwritten vs. “Best Efforts”  Underwritten: firm commitment on proceeds to the issuing firm  Best Efforts: no firm commitment l Negotiated vs. Competitive Bid  Negotiated: issuing firm negotiates terms with investment banker  Competitive bid: issuer structures the offering and secures bids

5. Copyright ©2003 Ian H. Giddy Equity markets 5 Secondary Market Trading Secondary Market for Equities Initial Public Offering (IPO) Subsequent Offering Private Equity Placement

6. Copyright ©2003 Ian H. Giddy Equity markets 6 Institutional Investors and Money Managers Institutional InvestorsMoney Managers Mutual Funds Insurance Companies Pension Funds Hedge funds, Central banks, etc. Stocks and bonds Money managers

7. Copyright ©2003 Ian H. Giddy Equity markets 7 Mutual Funds Open-EndClosed-End Stocks and bonds Variable number of shares n Not traded on an exchange n Price = NAV (less fees) Stocks and bonds Fixed number of shares n Traded on a stock exchange n Price may not = NAV

8. Copyright ©2003 Ian H. Giddy Equity markets 8 Active vs. Passive Management Active Management l Finding undervalued securities l Timing the market Passive Management l No attempt to find undervalued securities l No attempt to time l Holding an efficient portfolio

9. Copyright ©2003 Ian H. Giddy Equity markets 9 Raising Capital for Emerging Market Companies Debt Equity

10. Copyright ©2003 Ian H. Giddy Equity markets 10 Raising Capital for Emerging Market Companies Debt Equity Domestic market Foreign market Euromarket

11. Copyright ©2003 Ian H. Giddy Equity markets 11 Raising Capital for Emerging Market Companies Debt Equity Domestic market Foreign market Euromarket

12. 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

13. 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

14. 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

15. Copyright ©2003 Ian H. Giddy Equity markets 15 Debt Equity Domestic market Foreign market Can globally mobile investors capture value & control? yesno (Russia)(S Africa)

16. Copyright ©2003 Ian H. Giddy Equity markets 16 Debt Equity Domestic market Foreign market Can globally mobile investors capture value & control? yesno (Vulnerable)(Robust)

17. Copyright ©2003 Ian H. Giddy Equity markets 17 Macro Factors Currency overvaluation Capital restrictions Structural Factors 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-level Factors What International Investors Look For

18. Prof. Ian Giddy New York University Investment Banking and Underwriting

19. Copyright ©2003 Ian H. Giddy Equity markets 19 EquityBankingFixed Income Investment Banking: Organizarion “Coverage” Corporate Finance Mergers & Acquisitions Investment Banking Debt Capital Markets (DCM) Syndicate Marketing Sales Institutional Retail Trading (proprietary) Risk Profits Structured Finance Credit Research Private Placement Loan Syndication Equity Capital Markets (ECM) Sales Trading Research

20. Copyright ©2003 Ian H. Giddy Equity markets 20 Investment Banking: Organization New Deal Pitch Team l Coverage/ Investment banking l Product (DCM or ECM) Commitment Committee l Investment banking l ECM/DCM l Senior sales/trading l Research

21. Copyright ©2003 Ian H. Giddy Equity markets 21 Underwriting Sequence l Engagement: Mandate signed by issuer engaging lead manager l Due Diligence: Conducted by Lead manager l Documentation: Loan agreement, Prospectus l Signing: Underwriting agreement signed and issue priced l Closing: Settlement of the offering Engagement Due Diligence and Documentation Due Diligence and Documentation Signing and Pricing Closing “Beauty Contest”

22. Copyright ©2003 Ian H. Giddy Equity markets 22 The Beauty Contest Criteria for Selecting a Lead Manager 1 l Experience with similar transactions (sector, market, currency, maturity, high or low-quality issuers) l Ranking in League Tables l Placement power with institutional and/or retail investors l Standing in secondary market as “market maker” and commitment to secondary market trading

23. Copyright ©2003 Ian H. Giddy Equity markets 23 The Beauty Contest (Cont.) Criteria for Selecting a Lead Manager 2 l Quality/reputation of research l Proposed marketing strategy (pricing, timing, issue size, etc.) l Proposals for “Roadshow” l Relationships with potential co- managers l Senior management commitment to backing issue with people and capital

24. Copyright ©2003 Ian H. Giddy Equity markets 24 The Roadshow l Organized by global coordinator and lead managers l Informal presentation by management to potential investors l Attendance limited to professional intermediaries and investing institutions l Content must be consistent with information in draft version of prospectus or offering circular.

25. Copyright ©2003 Ian H. Giddy Equity markets 25 Distribution Lead Manager Book-Runner “International Coordinator Joint Co-Lead Manager Joint Co-Lead Manager Joint Co-Lead Managers Lead Manager Lead Manager Lead Managers Manager ManagersSelling Agent Co-Lead Manager Question 1: Which banks were involved with the DT IPO, and what were their roles?

26. Copyright ©2003 Ian H. Giddy Equity markets 26 Securities Underwriting: Relationships Issuer AgentsInvestment Bankers Debt: Fiscal agent Equity: Depositary institution Lead manager/Bookrunner Registered offering: Underwriting Agreement Unregistered: Purchase Agreement Co-managers Agreement Among Underwriters Prospectus/Offering Circular Institutional BuyersRetail Buyers

27. Copyright ©2003 Ian H. Giddy Equity markets 27 Subscription or Underwriting Agreement l Between issuer, global coordinator and all managers l Signed after pricing when “book-building” completed l Firm commitment to underwrite, subject to delivery of certain confirmatory certificates and no “material adverse change” or “force majeure” l Indemnity: By the issuer in favor of Global Coordinator and Managers against liability arising as a breach of warranty, material inaccuracy or omission l Lock up: Issuer will not offer other securities for a period of time (eg six months)

28. Copyright ©2003 Ian H. Giddy Equity markets 28 Debt Equity Domestic market Foreign market (Depositary Receipts) BNY ADR Index -7.47% -13.54% -19.28% MSCI Index -28.23% -25.64% -36.53% Asia Lat Amer Emerging Markets (1996-98) What Form of Issue?

29. Copyright ©2003 Ian H. Giddy Equity markets 29 ADR (American Depository Receipts) INVESTORS LOCAL DEPOSITARY INSTITUTION U.S. BANK U.S. investor buys certificate which represents a foreign market security. It receives the same treatment as a U.S. security and trades freely in the U.S. Holds shares of non-U.S. issuer on behalf of investors NON-U.S. ISSUER Non-U.S. issuer gains better access to U.S. market and may provide superior disclosure

30. Copyright ©2003 Ian H. Giddy Equity markets 30 Debt Equity Domestic market Foreign market (Depositary Receipts) UnsponsoredPrivate placement Exchange traded Exchange traded IPO Private placement IPO Global issue or GDR Depositary Receipts: Alternatives

31. Copyright ©2003 Ian H. Giddy Equity markets 31 Underwriting Economics Instructions: This is an embedded graph. To edit this graph simply double- click anywhere on the graph. When you’re done editing the graph, click outside of the graph to return to PowerPoint. Management Fee: Normally shared equally among managers (may be subject to a praecilium for Global Coordinator or Lead Manager) Selling Concession: Payable as a percentage of allocation (determined by book-runner) Underwriting Fee: Based on underwriting commitment (often less expenses of offering)

32. Copyright ©2003 Ian H. Giddy Equity markets 32 Who Gets What Fees, percentFees, amountNet price Price paid by investor (in theory)101.50 Price paid by member of selling group60%0.90100.60 Price paid by member of underwriting group 60%+20%0.90+0.30100.30 Price paid by managers (plus "praecipium" paid to lead manager)60%+20%+20%0.90+0.30+0.30100.00

33. Copyright ©2003 Ian H. Giddy Equity markets 33 Equity-Linked Eurobonds l Eurobonds with warrants  Marui l Convertible Eurobonds  Battle Mountaingold l Index-linked Eurobonds  Bank of Montreal

34. Copyright ©2003 Ian H. Giddy Equity markets 34 Equity Financing Choices Equity Warrants Conver- tibles ADRsCommon

35. Copyright ©2003 Ian H. Giddy Equity markets 35 Pricing Debt Instruments l Bonds priced according to yield over benchmark (spread) l Yield too low – issue does not sell l Yield too high – too much given away l Generally syndicate holds price for a day; in a successful issue yields gradually tighten Equity l Mature issue: based on current market price and market conditions, small premium for dilution; comparables l 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

36. 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

37. Copyright ©2003 Ian H. Giddy Equity markets 37 Pricing and Fees The Business n Telecoms n Dot-Coms n Avons (How much volatility?) Debt Equity Fees 0.15% to 1.5% 5% to 7% Pricing T+Spread L+Spread Comparables/Ratios The market Future cash flow valuation The Issuer

38. Prof. Ian Giddy New York University Raising and Pricing Equity

39. Copyright ©2003 Ian H. Giddy Equity markets 39 Raising Equity: The Investment Banker’s Job l Market conditions l Corporate needs l Valuation l Information l Distribution Telekom

40. Copyright ©2003 Ian H. Giddy Equity markets 40 Deutsche Telekom: The Sequence l See case Exhibit 2

41. Copyright ©2003 Ian H. Giddy Equity markets 41 What’s a Company Worth to Investors? l Required Returns l Types of Models  Balance sheet models  Dividend discount & corporate cash flow models  Price/Earnings ratios  Option models l Estimating Growth Rates Telekom

42. Copyright ©2003 Ian H. Giddy Equity markets 42 Equity Valuation: From the Balance Sheet Value of Assets n Book n Liquidation n Replacement Value of Liabilities n Book n Market Value of Equity

43. Copyright ©2003 Ian H. Giddy Equity markets 43 Deutsche Telekom: Book Value l See case Exhibit 3

44. Copyright ©2003 Ian H. Giddy Equity markets 44 Relative Valuation l Do valuation ratios make sense? Price/Earnings (P/E) ratios q and variants (EBIT multiples, EBITDA multiples, Cash Flow multiples) Price/Book (P/BV) ratios q and variants (Tobin's Q) Price/Sales ratios l It depends on how they are used -- and what’s behind them!

45. Copyright ©2003 Ian H. Giddy Equity markets 45 Deutsche Telekom: Ratios and Comparables l See case page 9

46. Copyright ©2003 Ian H. Giddy Equity markets 46 Discounted Cashflow Valuation: Basis for Approach  where  n = Life of the asset  CF t = Cashflow in period t  r = Discount rate reflecting the riskiness of the estimated cashflows

47. Copyright ©2003 Ian H. Giddy Equity markets 47 Deutsche Telekom: Earnings l See case page 8

48. 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)

49. 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?

50. Copyright ©2003 Ian H. Giddy Equity markets 50

51. Copyright ©2003 Ian H. Giddy Equity markets 51 Contact Info Ian H. Giddy NYU Stern School of Business Tel 212-998-0426; Fax 212-995-4233 Ian.giddy@nyu.edu http://giddy.org