GLOBAL INVESTING: ADRs a hit among the acquiring classes MORE AND MORE OVERSEAS COMPANIES ARE USING THEIR US-LISTED STOCK TO FINANCE M&A ACTIVITY:

Financial Times, Apr 16, 2001
By ALISON BEARD

Prudential made its bid for American General in a deal valued at Dollars 27bn just last month. But the UK insurance company announced its acquisitory intentions eight months earlier when it listed 7.5m American Depositary Receipts for Dollars 208m on the New York Stock Exchange.

The American General deal is expected to fall through now that AIG, a US rival, has made a bid. But Prudential would have used its ADRs to help finance the bid, with a stock swap instead of paying cash.

Thirteen non-US companies used their ADRs to purchase US and Canadian companies last year, and industry watchers expect the trend to continue despite the economic downturn and a slowdown in M&A activity.

"There are less ADR issues coming to market, but even a simple US listing without an offering (of new shares underlying the ADRs) gives you M&A currency," said Patrick Colles, global head of J.P. Morgan's ADR group. "Stock acquisitions are about relative valuations. You may be down 50 per cent but if your target is down 90 per cent, it's still a good deal."

Stock swaps accounted for more than half of all takeovers of public US companies in 2000, up from 7 per cent in 1988, according to J.P. Morgan. In cross-border deals using ADRs, US investors and employees kept dollar-denominated shares and options usually free of taxes. They also saw the stock's liquidity boosted.

There is one problem. Some investors, including pension funds that have restrictions on non-US holdings and index funds, cannot own depositary receipts because they represent foreign shares. US investors have not traditionally been big buyers of overseas companies' shares, even if given the choice. But, with US ownership nearing Dollars 400bn, ADRs appear to be more widely accepted than previously.

"In the end, ADRs make it much easier for US shareowners to accept shares in non-US companies," said Kurt Schneiber, global managing director for Citibank's depositary receipts division. "Since (they) prefer to hold dollar-denominated, locally-listed stock, they are more predisposed to share swap deals involving ADRs."

Deutsche Telekom, the German telecommunications group, launched its ADR programme on the NYSE in 1996 in what Mr Schneiber calls "an aggressive move toward globalisation". Last year, the company announced that it would use those ADRs to finance an acquisition of VoiceStream Wireless, a deal that is valued at Dollars 51bn and still awaiting regulatory approval.

Other ADR-financed mega-deals include British Petroleum's 1998 purchase of Amoco and Vivendi's acquisition of Seagram last year. Spain's Telefonica launched an ADR programme to spin out its Terra Networks affiliate, which then used the ADRs to acquire Lycos, the US internet company.

Some countries, including Japan, prohibit companies from using ADRs to finance cross-border mergers and acquisitions and allow only cash transactions. But India has just relaxed its rules, and others may follow.

The primary depositary banks, J.P. Morgan, Citibank and Bank of New York, are understandably eager to see more ADR deals. "The strategic use of ADRs as acquisitions currency creates exponentially larger ADR programmes," Mr Colles said. A company may use Dollars 100m of its ADRs to buy a US entity worth Dollars 1bn. The US company's stock then folds into the ADR programme, and the depositary bank has that many more receipts to issue and cancel. Copyright: The Financial Times Limited 1995-2002