I.3. Reasons Pleading for Foreign Cross-Listing
"[Dual listing] is an innovative concept that ratchet's up the
debate regarding the quality of the trading environment for securities - and
what is best for shareholders."
Jeffrey Sonnenfeld, Associate Dean, Yale School of Management
Cross-listing's rationales may be depicted into three main
motivations: business, corporate governance and financial. Generally, the
decision to initiate a foreign cross-listing results from a combination of
these three types of motivation.
I.3.a. Business Motivations
In a study surveying European managers about the benefits of
foreign listing6, managers were used to pointing out the visibility
and the notoriety as the main gains. While the visibility facilitates relations
with clients and suppliers, the notoriety helps the recognition of a brand in
foreign market.
Moreover, in some cases the question of prestige regarding the
listing place may be taken into consideration. Indeed for some companies, being
listed in financial centers like New York or London has become a mean to
distinguish themselves from their competitors. Such notion had also been
confirmed by the study of F. Bancel and C. Mittoo6.
6 F. Bancel and C. Mittoo, 2001, "European Managerial
Perceptions of the Net Benefits of Foreign Stock Listings"
I.3.b. Corporate Governance Motivations
Regarding corporate governance matters, there are several reasons
pleading in favor of foreign cross-listing.
Firstly, one of the most evoked elements by managers is the
gain in recognition, since both media and financial analyst coverage increase
after a foreign cross- listing. The more a stock is covered by analysts, the
more it draws the attention from the market and investors.
Secondly, a foreign cross-listing may be useful for companies
based in countries providing low domestic regulatory standards. By being listed
in a major financial place and by adopting higher accounting/governance
standards, the company sends positive signals to the market by providing more
reliable and more qualitative information to investors.
Thirdly, the management may be attracted to broaden, to
diversify and to internationalize the company shareholder basis. A foreign
cross-listing allows the company to access to a greater range of institutional
and individual investors. Nowadays, international markets remain in a certain
way relatively segmented, domestic investors keeping a strong motivation
(legal, fiscal and cultural) to invest in domestic stocks. This is notably the
case in the United States where some pension funds, one of the most important
types of investors, have limitations for their foreign investments (e.g. can
only hold dollar denominated instruments or have a threshold for foreign stocks
corresponding to a percentage of their total assets) and thus have a limited
access to international markets. By being directly listed on the local American
stock exchanges, foreign companies may get round this problem.
Moreover, in 1987 R. Merton7 explained that investors
are usually inclined to invest in companies they know, that is to say in
domestic shares.
Fourthly, there is a matter of quality investor's right.
Indeed, for investors one of
the most fundamental determinants is the
protection of their rights, evidence
7 R. Merton, 1987, "A Simple Model of Capital Market
Equilibrium with Incomplete Information"
showed by W. Reese and M. Weinbach8. Furthermore,
R. La Porta, F. Lopez de Silanes, A. Shleifer and R. Vishny(9 and
10) arrived at the conclusion that "the legal system is the primary
determinant for external financing in a country" and "the common-law system
provides better quality protection for investors than civil-law systems".
Nowadays, the common law system is widespread in countries with British
heritage like the United Kingdom, the United States, South Africa, Canada,
Australia and so on.
Fifthly, foreign cross-listing may also be a mean to
facilitate merger and acquisition operations (M&A) with foreign companies,
notably by providing the possibility to pay the target by the mean of share
exchange. Such evidence had been pointed out by P. Tolmunen and S.
Torstila11, through the study of "196 European firms cross-listed in
the U.S. showing that cross-listed firms are significantly more active than
matching pair firms in U.S. acquisitions. Cross-listed firms are also somewhat
more likely to use equity payment, particularly in the year of cross-listing.
The act of cross-listing, however, does not in itself increase the likelihood
of U.S. acquisitions for any given company: rather, cross-listed firms are
likely acquirers both after and before the cross-listing. After cross- listing,
however, the proportion of aggregate M&A volume financed with equity
increases, as cross-listed shares are used to finance large acquisitions".
After an important M&A operation with shares exchange, the
buyer often asks for the admission of its shares on the target's main listing
places. The goal is to remain close to the target's main clients, suppliers,
investors, banks and authorities. This point is more public relationships than
pure financial preoccupations.
Furthermore, foreign cross-listings consecutive to M&A
operations allow to comply with an element thereby called in this research
"national sensibility" or simply "economic patriotism". Sometimes, it appears
to be unthinkable and politically inconceivable that a national champion
completely disappears after being acquired by a foreign company. For the buyer,
becoming cross-listed on the stock exchange of the target's incorporation
country allows to maintain a part of the target's identity and may facilitate
the transaction with local investors and authorities.
8 W. Reese and M. Weinbach, 1999, "Protection of
Minority Shareholder Interests, Cross-listing in the United States, and
Subsequent Equity Offerings"
9 R. La Porta, F. Lopez-de-Silanes, A. Shleifer and R.
Vishny, 1998, "Law and Finance, Journal of Political Economy"
10 R. La Porta, F. Lopez-de-Silanes, A. Shleifer and
R. Vishny, 1997, "Legal Determinants of External Finance"
11
P. Tolmunen and S. Torstila, 2002, "Cross-Listings and M&A
Activity: Transatlantic Evidence"
There are different cases of M&A operations:
4 Hostile takeover: e.g. in 2006 Mittal Steel and its
successful takeover bid on Arcelor. The new group ArcelorMittal had been
admitted for listing on Euronext Paris, Euronext Brussels, BME Madrid and
Bourse de Luxembourg, in addition to Mittal's listing places Euronext Amsterdam
and the Nyse (further details are given in part IV.5. ArcelorMittal's Case
Study).
4 Merger: e.g. in 2007 Unibail-Rodamco which had been created
by the merger between the French Unibail and the Dutch Rodamco. Since, the new
created company Unibail-Rodamco is cross-listed in both countries and is a
constituent of the two national reference indexes (CAC 40 and AEX).
4 Merger through a dual-listing: InBev, one of the world
leading brewers resulting from the combination (2004) of the Belgian InterBrew
and the Brazilian Ambev. As a result, InBev is now listed on Euronext Brussels,
whereas Ambev remains listed on the Brazilian Bovespa. In 2008, InBev launched
a successful bid on the biggest American brewer Anheuser-Busch, and will
consider a new listing in Anheuser-Busch's home country, i.e. the Nyse.
4 Spin-off: in 2008, Suez Environnement has been cross-listed
on Euronext Paris and on Euronext Brussels, i.e. the two main listing places of
its mother company, GDF-Suez.
Finally, we may consider that two different types of foreign
cross-listings may occur:
4 Active cross-listing, where the foreign cross-listing
operation results from the management's decision.
4 Passive cross-listing, where the foreign cross-listing
operation results from a M&A operation.
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