British Telecomm

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British Telecommunications
Case Study

Foreign Equities Valuation
U.S. investors should value foreign equities as a way to diversity their portfolios and reduce risk. Since foreign markets and U.S. markets do not correlate exactly it is likely that if U.S. markets are to perform poorly then foreign markets are likely to be performing better, and vice versa. Thus an investor that has a well-diversified portfolio is more likely to obtain a better combination of risk and return than another investor who does not diversify in foreign equities.

In the U.S. most foreign equities are traded in the form of ADRs, American Depository Receipts. ADRs are stocks that trade in the United States but represent a specific number of shares in a foreign corporation, typically one. In order for a foreign company to sell an ADR they must divulge certain financial data to the SEC to meet their requirements. These financial data fillings can be used by investors and analysts to help value and assess foreign companies on an individual basis. Another benefit for U.S. investors of ADRs is that they save money by reducing foreign administrative costs and avoiding foreign taxes on each transaction.

Equity Underwriting Risk
The major issue with underwriting risks of equities from the banks side is that the lead-syndicating bank is responsible for all of the new issue shares. So there are various ways they attempt to limit this risk. The most popular technique is undervaluing the initial public offering to attract more investors. Another tool lead-syndicating banks use is to have institutional investors sub-underwrite the shares, meaning that these institutional investors then become responsible for selling the shares they are allocated. In return for taking on some of this risk institutions retain a portion of the underwriting spread. In additional to the risks stated above every country’s stock exchange(s) have their own rules for issuing new stock to the public and what conditions must be satisfied by the lead-syndicating bank. For example, in the U.K. they must offer existing shareholders proportional amounts of the new issue shares to their previous holdings in an attempt to prevent involuntary dilution of their initial ownership value. There is also underwriting risk for the firm that is looking to go public. The most major risk being that the syndicating bank undervalues the initial offering in order to limit their exposure and risk and therefore part of the company’s value isn’t realized.

Multimarket Offering Benefits/Risk
There are two main benefits to an issuer of distributing an equity offering in multiple markets simultaneously. One of the benefits is broadening of the base of investors. According to the case, the IPO of British Telecommunication was the largest equity offering in London. With such large offering, BT faced a risk that their shares may not be fully claimed, due to government restriction on foreign investor and incapacity of domestic market. Distributing offering in multiple markets allows issuer to increase the exposure of the firm to the international market, and allows the stock to be traded 24hours a day. The second benefit of distributing equity offering in multiple markets is that it facilitates the acquisition of foreign firms. Issuer can acquire foreign companies through the payment of shares in the foreign market, thus it reduces costs and make entrance to foreign market easier.

Risks to issuer involving distribution of equity offering in multiple markets are exchange rate fluctuation risk, inconsistency in accounting standards, and government restriction on foreign firms in overseas market. Unfamiliarity of foreign policies can be quite costly for both issuer and investors as well. Regardless of the risks, British Telecommunication should have attempted a multimarket offering. The equity offering of BT is exceptionally large in size, and domestic investor and institution may not be able to fully...
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