Foreign Companies Discover Shortcut to the U.S. Equity Market : Capital investment: American Depositary Receipts allow access without all the securities regulations.
When Daimler-Benz AG listed its shares on the New York Stock Exchange two years ago, it got more than access to U.S. capital markets. It got U.S. securities regulations.
Rather than repeat Daimler’s experience, which requires the auto maker to keep separate books according to German and American accounting standards, other German companies are pursuing an easier route to the U.S. equity market--ADRs.
ADRs, or American Depositary Receipts, are certificates from U.S. banks representing ownership of foreign stocks. As more and more German companies are discovering, ADRs give them access to U.S. capital markets without having to meet all U.S. regulations.
Investors benefit because ADRs sell for and pay dividends in dollars. ADRs also are affordable: Daimler shares that trade for 689 marks ($502.92) in Frankfurt are packaged in ADRs worth one-tenth of a share and trade for $49 in New York.
German companies are eager to tap U.S. investors because the supply of equity is outstripping demand in Germany. That problem will become more acute next year, when Deutsche Telekom AG, the national telephone company, is expected to sell as much as 15 billion marks worth of new shares.
“The German market alone won’t be enough,” said Andreas von Buddenbrock, board member at Merrill Lynch Bank AG in Frankfurt. “We need more money and America is willing to supply it. It’s just a question of tapping it.”
So far, 12 large German corporations--from Bayer AG, the chemical company, to RWE AG, the big utility--have sold ADRs. Others, including Deutsche Bank AG, the country’s largest bank, plan to do so this year, and SAP AG, a software company, plan to follow soon.
Among European countries, Britain has the largest number of companies with ADRs, 60. Analysts said Germany should narrow the gap rapidly.
“More will come, certainly in this year,” said Rainer Wunderlin, managing director of securities at Bank of New York (Frankfurt), which handles about half of all German ADR programs. “ADR programs could be viewed as the first step to a full listing, but for many they will be the last step.”
The sheer size of the U.S. market justifies its appeal. The market capitalization of the whole German equity market, or the total value of the shares issued, was 774 billion marks, or $560 billion, at the end of last year, compared to $5.5 trillion on the New York Stock Exchange alone.
The problem: Companies that list shares directly on U.S. markets are required by the Securities and Exchange Commission to conform to “generally accepted accounting procedures,” or GAAP. German companies don’t accept those U.S. procedures.
Daimler-Benz has produced two sets of annual accounts since it opted for a New York listing, leading to large discrepancies. In its first set of accounts, for example, Daimler posted a net profit of 615 million marks under German accounting principles but a loss of 1.8 billion marks under GAAP.
In Germany, companies routinely smooth out year-to-year or quarter-to-quarter swings in their profit-and-loss sheets by creating or draining hidden reserves, something not allowed under U.S. accounting rules.
Because of their concern about how such discrepancies look, “some companies will never use GAAP,” said Wunderlin.
Deutsche Bank spokesman Juergen Haug, for example, said “different accounting cultures” was the primary reason why the bank opted for ADRs instead of a full stock listing in the U.S.
Similarly, Commerzbank AG has had an ADR since 1989. Han-Hermann Mindermann, vice president of investor relations, said there is “no chance” the bank will list in New York as long as the SEC insists on GAAP.
Interest in German and other European ADRs started booming when the devaluation of the Mexican peso last December led that country’s main stock index to fall by 50%, leading many investors to reconsider so-called emerging markets.
In the first six months of this year, 35 non-U.S. companies, 22 of them European, raised $3.6 billion through ADRs, the Bank of New York said. Trading volumes rose 42% in the period, to $133 billion.
