Information For Intelligent Stock Investing

The Vodafone-Mannesmann fight rode a wave of American-style European merger activity that erupted in early 1999 with major hostile takeover battles. In France, Banque Nationale de Paris launched a $38 billion hostile bid to take over its two major French banking rivals, Societe Generale and Paribas, after they had recently announced their own plan to merge with each other. In Italy, Olivetti launched a $60 billion hostile bid to acquire its major rival, Telecom Italia, which in turn erected a series of substantial defensive tactics designed to thwart the overture, including a white-knight alliance with Germany's Deutsche-Telecom.

In another cross-border battle, France's LVMH Moet Hennessy Louis Vuitton waged a protracted and intense battle to obtain control of Gucci, an Italy-based but Netherlands-incorporated company which also strenuously resisted the unwelcome overture. TOTAL-FINA made a hostile bid for Elf Aquitaine in mid-1999, shaking up the French industrial and governmental establishment. These kinds of deals—in both their offensive and defensive modes—are reminiscent of U.S.-style merger activity, which had been unprecedented in Europe.

Scores of friendly global alliances have reinforced the spread of stock market model behavior in Europe and Japan. Led by the merger of Daimler and Chrysler, the worldwide auto industry consolidated through cross-border deals once considered too intractable to achieve. Industry capacity ranges up to approximately 70 million vehicles annually while average annual demand generally peaks at 50 million, and only about 10 of the world's 40 auto manufacturers are profitable. Some results: Ford bought control of Mazda, Volkswagen acquired the United Kingdom's Rolls Royce, Renault bought Sam­sung (Korea) and a third of Nissan, and Daimler-Chrysler bought a third of Mitsubishi.

Many other industries stand on the brink of similar global consolidation. In the publishing industry, Germany's Bertelsmann pursued an acquiring and joint-venturing spree with other European and U.S. counterparts; in apparel, after surviving its own battle to resist a takeover by LVMH, Gucci took over France's Yves Saint Laurent; in finance, Deutsche Bank bought Bankers Trust, UBS bought Paine Webber, Credit Suisse bought Donaldson Lufkin Jenrette, Dresdner bought Wasserstein Parella; British Petroleum bought Amoco; and Nabisco and a U.S. buyout firm sought to buy Britain's United Bis­cuits only to be outflanked by a consortium of French, German, and British buyers. These and scores of other proposals on the docket of the EU merger panel have created unmatched uniformity of practices and expectations in the corporate world.

There are few ways in which a corporate board can destroy shareholder value as dramatically as through mergers and acquisitions. As globalization advances, more opportunities for deals arise. Some will be desirable; many will not. Paying close attention to the activity in this field is of great importance to investors and is addressed again later in this part.

Capital Stock Markets

The aggregate stock market capitalization of Europe is larger than that of Nasdaq and over half that of the New York Stock Exchange. (Given Mr. Market, the aggregate market capitalizations can change dramatically in short time periods, but as of early 2000, the amounts were about $7 trillion, $4 trillion, and $11 trillion, respectively.)

The Frankfurt and London stock exchanges announced in July 1998 a plan to integrate their facilities and permit the trading of each other's listed securities on both exchanges. France, unhappy with its exclusion, quickly gained admission to the Frankfurt-London alliance (although as a 20% player, compared with 40% for each of the founding exchanges). Soon after France announced its inclusion in the emerging pan-European exchange, exchange officials in Milan, Madrid, Amsterdam, and Brussels echoed a similar eagerness to participate in the venture.

Although the European alliance had difficulty agreeing on a common trading system, the group quickly elected to permit stock trading between the various exchanges. While negotiators struggled, the once-snubbed French Bourse took advantage of the delays by signing itself up with exchange partners from Amsterdam and Brussels. This troika's single market—a full integration of these three exchanges called Euronext—boasts listings with a combined market capitalization equal to over a quarter of that of Europe as a whole.

As the Euronext group forged this deal, the London and Frankfurt exchanges agreed on a merger. The two formed iX, standing for International Exchanges, a market poised to integrate blue chips and tech stocks from the two dominant European capitals and boasting a total capitalization of over half of that of Europe as a whole. That deal was interrupted when OM Gruppen, operator of the Stockholm (Sweden) stock exchange, made a hostile bid to buy the London Exchange. However the dust settles on this array of parties, these historical deals will not end capital market integration in Europe, the pace of which races on despite the presence of a dozen or more unintegrated exchanges on the continent.

The U.S. National Association of Securities Dealers (NASD) launched its own Nasdaq Europe stock market, one that will have strong links to the emerging continental hybrids. This signifies a major step toward creating a 24-hour-a-day global stock market that began with the NASD's similar venture in creating Nasdaq Japan, a joint effort with the Softbank Corporation of Japan that is linked to the Osaka Securities Exchange. All this will compel the convergence of these markets in awesome ways, impacting finance, accounting, disclosure, takeovers, governance, and ultimately what investors expect and what managers deliver.

Evidence of integration is pervasive in securities listing and trad­ing. Foreign firms for years have pushed for global listing, most famously achieved by Daimler-Benz's listing on the NYSE beginning in 1993. These crusades continue, with rising success. After the repeal of Glass-Steagall, the Swiss bank UBS filed with the SEC to seek an NYSE listing, chiefly to give it a U.S.-listed stock to pay for new acquisitions of U.S. financial services firms. This started with its acquisition, a couple of months later, of PaineWebber.

SAP, a 2 5-year-old German software firm, was listed on the NYSE in early August 1998, ten years to the day after its initial public offering on the Frankfurt stock exchange. SAP is famous for generating "U.S.-style growth" and "U.S.-style rewards." SAP executives characterized its listing on the NYSE as evidence that SAP had "outgrown" the Frankfurt stock market and evolved into a transnational company combining features of a variety of governance models.

Clear-cut signs of the conglomeration of international securities trading include the creation of the International Securities Exchange (ISE) for options trading. An on-line brokerage firm, E*Trade, and a group of broker-dealers led by Adirondack Trading Partners in­vested nearly $80 million to establish this all-electronic options exchange. The founders touted their ability to slash transaction costs while simultaneously conducting staggering sums of electronic trades which transcend geographic boundaries.

Stock Investors should not ignore the shape of capital markets. How trades are made, by whom, at what cost, and over what time periods significantly affect price volatility and have an impact on market efficiency. Equally important, exchange rules often dictate accounting requirements, and so the ease of international listings can impair the integrity of financial reporting.

A practical barrier to cross-border deals has been yielding. It concerns the nature and amount of available information regarding a counterparty. In market model countries such as the United States and the United Kingdom, a wealth of information is available concerning the targets organized therein. These countries tend to operate systems of public recordation for real as well as intellectual property. Well-developed securities and mergers and acquisitions (M&A) industries strengthen such an information culture.

Buyers and sellers in M&A transactions understand the need for information to allow proper valuations and the need for contractual protection to preserve confidentiality. Sellers customarily meet these needs by executing confidentiality agreements early in the exploration process and providing the buyer with substantial proprietary data before discussing agreements any further.

The culture in European and Asian countries contrasts remarkably with that of the U.S./U.K. market model. Access to property records is limited, and information is more jealously guarded. Sellers are reluctant to share information with a potential buyer who can walk away from a deal if she doesn't like what she sees; confidentiality agreements that protect such a seller in the United States and the United Kingdom simply don't do the trick. That may be sensible, since a less well-developed system of legal enforcement for such agreements justifies a seller's apprehension about a buyer's confidentiality.

Cultural disparities became acute in the Vodafone-Mannesmann battle. Mannesmann sued Vodaphone's adviser, Goldman Sachs, in a U.K. court, trying to prevent it from advising Vodaphone on the grounds that Goldman had previously represented Mannesmann and possessed confidential information about it. The British court dismissed the lawsuit after a brief hearing and in a short time, basically telling Mannesmann that its claim was frivolous.

Substantively, the type of information understood as relevant also varies between the models. In the market model and especially in the United States, disclosing potential environmental or retiree liabilities is a time-honored practice. Other countries have only recently developed environmental regulation. Also, other countries traditionally rely more heavily on public social security systems, removing private plans from center stage (even in countries such as Germany, where such liabilities are often substantial and unfunded). For stock investors, U.S. corporations disclose far more than do those in Europe or Japan. U.S. federal and state law, as well as stock exchange rules and general market pressures and expectations in the United States, result in corporations disclosing extraordinary amounts and types of information. Other countries impose more limited and far less effective disclosure requirements.

As global corporations as diverse as DaimlerChrysler and SAP increasingly list shares on U.S. stock exchanges and stock exchanges around the world, they will find themselves subject to U.S.-style disclosure requirements as a matter of both regulatory mandate and market expectations and demand. As the same group consummates cross-border transactions requiring the disclosure and evaluation of information, pressures toward uniform disclosure requirements will emerge in a wide variety of settings. In fact, participants find that U.S./U.K.-style information disclosure is consistent with existing corporate traditions in most countries, most notably Germany. Accordingly, broadening global corporate laws to require such disclosure seems quite possible.

Public regulators have undertaken just such an effort. The SEC is working with the International Organization of Securities Commissions (IOSCO) to develop a set of international standards for nonfinancial statement disclosure. These efforts are intended to facilitate cross-border financing and listing by transnational companies while holding them to a single global standard of disclosure. The IOSCO issued new rules about certain kinds of cash transactions and offerings and listings of common equity securities and is working to extend them to tender and exchange offers, business combinations, privatizations, and other affiliated deals.

High-quality information is essential for intelligent stock investing in the modern global marketplace. Ignoring the garbage and disinformation piling up on the Internet is becoming increasingly difficult as more countries develop information-based corporate and stock investing cultures and as more citizens of those countries learn the ropes of the systems.