Global Initial Public Offers

Ever since the era of globalization, the world has started operating like one single market. The concept of a global village is often mentioned in the financial markets. This globalization has also had an impact on the investment banking business. Earlier, companies were limited to the stock markets of their home country when they wanted to raise cash. However, now, with the globalized world, the options are basically unlimited. Companies can choose to raise money in one of the several markets across the world.

In this article, we will have a look at what global initial public offers are and how they are differently managed.

What are Global Initial Public Offers?

Normally, companies raise funds within the stock markets of their own country. For instance, if a company is incorporated in the United States and conducts an initial public offer in the United States itself, it will be called a domestic initial public offer.

On the other hand, some companies choose to raise funds from a different financial market. For instance, a company incorporated in the United States may choose to raise money from the London Stock Exchange or the Tokyo Stock Exchange. In this case, the initial public offer can be called an international IPO.

There is a third possibility also. In some rare cases, companies choose to raise funds from a combination of markets. This means that an American company can choose to raise funds within the United States and then also from the London Stock Exchange. Since money is being raised from both the international markets as well as domestic markets, it is called a global IPO.

Why do Companies Decide to List Abroad?

There are several advantages that companies derive when they list abroad. Some of them have been mentioned below:

  • New Sectors: Global IPOs are particularly useful for companies belonging to the technology sector. Often, companies in lesser developed markets produce products and services which will be used by developed markets. Investors in the developing markets do not have the financial knowledge to understand the extent of application of the new technological breakthrough. This is the reason that whenever a new technology is created, it almost certainly gets listed in the more developed exchanges of the world. This is because these exchanges have investors who understand how the new technology will impact lives and hence have the information required to price it correctly.

  • Disclosure Requirements: There are many companies in the world that are not comfortable with the extensive public disclosure guidelines promoted by certain exchanged. They may want to incorporate in the country due to lower costs. However, when it comes to raising money, they prefer stock exchanges where they have to disclose minimal information. This is important to some companies since they protect their competitive advantage by delivering as little information as possible.

  • Increased Liquidity: When companies list in multiple markets, they provide their investors with more liquidity. They also make sure that the shares price cannot be controlled by a group of investors. If a stock is listed on many exchanges, arbitrageurs are continuously monitoring its price looking for arbitrage opportunities. Hence, there is an active market for the shares almost all the time. Many shares can be sold and purchased for the entire twenty-four hours since they are listed on different stock exchanges.

  • Foreign Sales: Companies that sell a large percentage of their goods abroad have more brand recall in foreign countries than they have in their own countries. Hence, when they list on the stock exchanges of foreign countries, they get a better response than they would have in their home country. Hence, the home country is used because of the low cost of production, but the funds are raised from a foreign location.

  • Investors with Deep Pockets: Companies may choose to list abroad because it is possible that the macroeconomic indicators in other countries may be more favorable. For instance, if a company wants to raise money, but their own domestic economy is in a slowdown, they will choose to raise money abroad from other countries where the market is still in a boom stage. Also, developed capital markets have more institutional and accredited investors who have deep pockets and can buy significant stakes in the company.

  • More Efficient Markets: The capital markets of developed countries also tend to be more developed. This means that there is more competition among investors. More competition means that the company has to pay a lower cost of capital to access these funds. Lower cost of funds can be a source of competitive advantage in the long run. However, companies need to be careful that by raising funds, they are also exposing themselves to foreign exchange risks. Sometimes adverse foreign exchange movements tend to negate the price advantage.

The bottom line is that the global initial public offerings have been a huge opportunity for certain investment banks. For instance, when companies want to list in multiple exchanges, they often choose bulge bracket investment banks since these banks have established networks abroad as well. Also, investment bankers are generally paid higher commissions when they help companies list abroad. This is because the complexity, as well as the risk, is higher.

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