Global Registered Shares Jeff Bijas Thomas

Agenda n American Depository Receipts n Global Registered Shares n Comparison of Methods n Daimler. Chrysler’s Initiative n DCX Results n Deutsche Bank’s GRS Issue n GRS Future Outlook

American Depository Receipt (ADR) n A certificate that represents ownership in a non US company’s publicly traded securities that may be traded on a listed or unlisted exchange in the US n Ordinary share deposited in trust with a local custodian bank n Primary method for the majority of US investors to invest abroad n US dollar denominated

ADR - Example Ex. Sony in Japan ¥ 30, 000 per share $1 = ¥ 100 10 shares = 1 ADR Conversion fee = 5% per share per transaction Mr. Jones wants to hold 100 ADRs 1. US investor Mr. Jones Invest: (¥ 30, 000 1000) ($1/¥ 100) = $300, 000 Conversion fee: ($0. 05) (1000) = $50 Total cost: $300, 000 + $50 = $300, 050 2. US Custodian Bank JP Morgan Chase Receives $300, 050 Keeps $50 conversion fee Converts dollars to yen 3. JAP stock market JP Morgan Chase buys shares of Sony Deposits shares in custody account Delivers 100 ADRs to Mr. Jones

Global Registered Share (GRS) n Alternative to ADR with greater flexibility n Similar to ordinary shares except that investors can trade it on stock exchanges worldwide – they are not domestic securities representing a foreign interest n Make shares easily accessible not only to US investors but also to investors in other countries n Local currency denominated

GRS – Example Ex. Sony in Japan ¥ 30, 000 per share $1 = ¥ 100 Transaction fee = $5 Mr. Jones wishes to hold 1000 shares 1. US investor Mr. Jones Invest: (¥ 30, 000 1000) ($1/¥ 100) = $300, 000 Transaction fee: $5 Total cost: $300, 000 + $5 = $300, 005 Mr. Jones receives 1000 GRSs of Sony 2. Global Registrar Clears and settles trade using two-way electronic link between the exchanges

Comparison of Methods ADRs GRSs n Conventional method of n No additional accessing international equity markets since 1927 intermediaries n Fully fungible n Bundling feature adds to liquidity n Depository bank maintains ADR ownership records, processes corporate actions n Conversion fees Source: A. Karolyi, “Daimler Chrysler AG, the First Truly Global Share” n High initial costs n Flat transaction fees n All shareholders have equal status

Introduction of the GRS n Daimler. Chrysler established in 1998 to create a global, diversified manufacturer and distributor. n n German company Daimler Benz with market capitalization of $36 billion US company Chrysler with market capitalization of $23 billion n Share-for-share exchange effected with new global registered share (GRS) facility n n . 6325 new DCX shares per Chrysler share 1. 005 new DCX shares per Daimler Benz share Source: A. Karolyi, “Daimler Chrysler AG, the First Truly Global Share”

“Equity could follow the sun…” n Only one equity vehicle to be issued to all DCX stockholders n Dual-listing could keep the US and the German company on even terms n Global share would allow Daimler. Chrysler to keep Chrysler’s spot in the S&P 500 Source: A. Karolyi, “Daimler Chrysler AG, the First Truly Global Share”

GRS Structure n Single, bilingual, multi-jurisdictional certificate applicable in both US and Germany n Issued in registered rather than bearer form n Eliminates need for each share to be accompanied by dividend coupons n Share registration and transfer handled by the US and German-based agents/registrars Source: A. Karolyi, “Daimler Chrysler AG, the First Truly Global Share”

Dynamics of GRS Trading Source: A. Karolyi, “Daimler Chrysler AG, the First Truly Global Share”

GRS Outcomes n Greater trading activity and enhanced liquidity n Significantly higher value of combined trading n Significantly lower intraday bid-ask spreads n Tremendous migration of order flow back to Frankfurt NYSE retains only 5% of total global trading volume of stock n DCX dropped from S&P 500 n n Volatility of returns increased dramatically

Trading Activity Source: A. Karolyi, “Daimler Chrysler AG, the First Truly Global Share”

Bid-Ask Spread Comparison Source: A. Karolyi, “Daimler Chrysler AG, the First Truly Global Share”

Deutsche Bank issues GRSs n In 2001, Deutsche Bank chose to list on the NYSE via GRSs, making it the fourth foreign company to ever issue such shares n Critics suggested that a GRS listing would lead to a lower trading volume on the NYSE

Deutsche Bank’s Goal "Deutsche Bank, with a share traded globally, is increasing its flexibility and -above all in the U. S. A. -- its ability to actively take advantage of business opportunities, " including "the financing of future acquisitions. “ -- Press Release, 2001

Deutsche Bank (DB) Performance

Conclusion n Not enough companies are willing to endure the up- front costs of GRS’s to determine if they are a viable and worthwhile means to make international investing more efficient and accessible to investors. n Results from Daimler. Chrysler, Deutsche Bank, etc provide inconsistent data with unclear results n Small number of sample cases makes testing general hypotheses on GRS’s very difficult n GRS’s are simpler for the average investor and cheaper for high volume institutional investors