Developing-country companies can place ADRs in the United States by two means (Greene, 2001). The first is a public ADR offering. To offer an ADR publicly in the United States, the company must obtain a listing on a U.S. exchange-the NYSE, AMEX, or NASDAQ. In several recent cases, developing-country officials have modified domestic accounting and underwriting regulations to help domestic companies obtain listings on United States exchanges and to make public equity placements in the United States. In the case of the May 1991 public offering of ADRs by Telemex (the Mexican telephone company), the U.S. Securities and Exchange Commission worked closely with Mexican officials to facilitate the offering, granting several technical exemptions to S.E.C. underwriting rules (SEC Release).
Private placements have been a second means of issuing developing-country ADRs in international markets. During 1990-92, private ADR placements by developing-country companies were four times as numerous as public offerings (Greene, 2001). Private ADR placements by developing-country companies received stimulus from the June 1990 adoption of Rule 144A by the U.S. Securities and Exchange Commission. Rule 144A exempts qualified institutional buyers-institutions that own and invest on a discretionary basis at least $100 million in securities-from a rule that previously required them to hold privately placed securities for two years before trading them (SEC Release). The adoption of Rule 144A increased the liquidity of privately placed developing-country ADRs and thus enhanced the attractiveness of these securities.
Before 1990, international equity placements by developing country companies were quite rare. In 1990, Compania de Telefonos de Chile became the first Latin American company to list ADRs on the NYSE (International Finance Corporation). The successful $1.2 billion Telemex offering of May 1991, however, marked a watershed for developing countries. International equity placements by developing-country companies increased from an estimated $1.2 billion in 1990 to an estimated $9 billion in 1992. As a result, the share of total international equity issuance attributable to developing-economy companies increased from an estimated 15 percent in 1990 to an estimated 40 percent during 1992 (International Finance Corporation). Mexico has clearly been the dominant issuer of ADRs among developing countries, having raised $6.3 billion in international offerings during the past two years (www.citibank.com). Issuance of Telemex ADRs accounted for $2.4 billion of this total. By 1992, Telemex ADRs had become the most actively traded issue on the NYSE in terms of dollar volume. The dollar volume of trading in Telemex ADRs on the NYSE exceeded $23 billion during the year, compared with less than $16 billion for the second most actively traded ADR, the British pharmaceutical company Glaxo Holdings (International Finance Corporation).
Today the stock market and corporate America are again in ill repute. After years of ignoring dividends, a chastened nation is falling in love with them all over again. The clamor began more than a year ago--one of the early clamorers was Ralph Nader, who berated Microsoft for not sharing some of its $40 billion cash hoard with its owners (Fox, 2003). The chorus grew during the summer and fall, as market seers argued that dividends were just the ticket to lure Americans back into stocks. President Bush's proposal to (mostly) exempt them from taxation marked a new high point in the dividend resurgence--although it appears to be running into trouble with Congress. Then came Microsoft's blockbuster Jan. 16 announcement that it would start paying a dividend (Fox, 2003).
The resurgence comes after several decades during which dividend yields declined and ever more companies chose to pay no dividend at all. Even now, the market's dividend yield--1.8% for the S&P 500 as of Dec. 31--is at a depth never plumbed before the mid-1990s (www.citibank.com). Most dividends now stream from a few dozen New York Stock Exchange denizens--with Exxon Mobil, General Electric, and Philip Morris leading the way--that have been paying them since practically the dawn of time. Meanwhile, a new stock market for new companies, Nasdaq, has arisen. Most Nasdaq companies have yet to make enough money to contemplate giving any back to shareholders. But even Nasdaq success stories like Oracle, Cisco, and Dell don't share that success with investors in the form of dividends. While Intel and now Microsoft do, they pay out only a minuscule share of their earnings.
Whether those companies and their dividend-disdaining ways are the wave of the future or just a bull market aberration is something we'll find out over the coming years. Whatever happens next, their rise has been a striking development in the history of the modern corporation. For non-U.S. companies this trend does provide some advantages. By not paying dividends the company keeps more of the money to itself. More money equals more capital to use for growth and expansion. These growing trends within the U.S. market along with the global exposure provided by the U.S. stock markets make it definitely worthwhile for most non-U.S. companies to list on U.S. exchanges. The exposure alone creates potential investments that far exceed anything available in most foreign markets.
As has been the case throughout the history of the U.S. stock market, every "bear" is followed by a "bull" and vice-versa. For every down swing there WILL be a corresponding upswing. In addition, for the past hundred years there has been steady growth. That being said, despite the challenges of raising capital, foreign companies who have the opportunity to list on the American exchanges should jump at the opportunity. Despite some lulls in the past 5 years, the market is bouncing back and today might very well be the perfect time to jump in for many foreign companies. For developing countries, ADR's are a relatively safe way to help raise capital and promote entry into the U.S. market to shareholders. For companies in more developed countries, the challenges are not quite as great but are still there. Regardless, by shying away from the U.S. market, a non-U.S. company is depriving themselves from access into the most powerful economic exchanges in the world and passing up the opportunity to access millions of investors that they previously could not reach.
References:
Fox, Justin. 2003. Show us the money. Fortune Vol. 147 Issue 2, p76.
Greene, Edward. 2001. Cross Border Equity Offerings: A Discussion on of Some of the Critical Issues.
International Finance Corporation, Emerging Stock Markets Factbook, 1992, p. 3
SEC Release No 33-6862: "Resale of Restricted Securities, Changes in Method of Determining Holding Period of Restricted Securities Under Rules 144 and 145.
www.citibank.com