Global IPO Activities: Results and Forecast
Davron Rustamkulov, Head of Transaction Advisory Services in Central Asia and Caucasus, Ernst & Young
According to the results of the Ernst & Young international survey of IPO trends, IPO activity gained momentum for a second successive year in 2005. Capital raised around the world rose by one-third to hit $167 billion, the highest level since 2000, while deal numbers remained steady at 1,537 deals, compared to 1,516 in 2004 (diagr. 1).
The biggest deal of the year was the $9.2 billion launch of China Construction Bank (CCB), China’s largest IPO ever. The IPO of Electricité de France was also larger than the top IPO of 2004, Belgacom, which raised $4.4 billion.
Europe, the Middle East and Africa (EMEA) saw the largest increases of any region in 2005. IPO proceeds totaled $71 billion, an increase of 106 percent on 2004, and representing more than 40 percent of the global total in 2005 (diagr. 2).
A particularly striking feature of the year was the increased activity in Europe, which were mainly were fueled by several large IPOs and bouyant markets in many European countries. In 2005 France and the UK both ranked in the top five countries by total capital raised in IPOs in 2005.
Activity in the Americas remained steady compared with 2004, with the U.S. once again achieving the highest amount of capital raised in IPOs by any single country in the world.
IPO activity continues to reflect the shifting landscape of the world economy with a significant increase in the emerging markets. While a key trend in 2005 was an increase in IPOs in China, Israel, Russia, and Poland, the outlook for 2006 shows an increased interest in markets including the Middle East, South Korea, India and Brazil.
No fewer than 29 countries – including Russia, Brazil, Egypt, Greece, India, Israel, Kazakhstan, Malaysia, Poland, Saudi Arabia, South Korea and the UAE – each hosted more than $1 billion worth of IPOs last year, marking a globalization trend set to continue through 2006 (Table 1).
A key trend in 2005 was an increase in emerging market activity, principally driven by China, Russia, and Poland. The strength of emerging economies, and foreign and local investors seeking out growth opportunities, led to an increase in both local and cross-border transactions by emerging market companies. Much of the cross-border transaction activity was supported by exchanges actively marketing themselves abroad to attract international talent.
The growth story in China continued to drive activity in Asia, while activity in North America remained steady.
Continued Globalization of the Capital Markets
In 2005 70 countries around the world hosted IPOs, and many of these transactions were cross-border. To a large extent IPO activity reflects the changing pattern of the global economy — for example, growth in China and India and the maturation of Western markets. For example, of the 20 largest IPOs of 2005 only one was listed in the U.S. Significantly, the fact that China Construction Bank, the world’s biggest IPO in five years, elected to go to market in Hong Kong challenges the long-held assumption that companies above a certain size need to list on a U.S. exchange in order to raise significant capital.
Increases in Emerging Market Activity
Closely tied to globalization are the increasing numbers of IPOs by companies from the emerging markets, particularly China and Russia. IPOs are no longer just the domain of companies from the advanced economies of the U.S., Western Europe, and Asia that they were even three or four years ago, and the balance is now shifting towards the emerging markets. For many large investors, a global strategy that does not include China, India, Kazakhstan and Russia has become a contradiction in terms. Increasingly investors are also looking beyond the traditional emerging markets for investment opportunities. One area of note is the Middle East. In the next few years, assuming the necessary political stability, the Middle East is likely to increasingly become an important source of IPO activity as oil revenues are recycled into the local economy.
Competition Through Stock Markets and Regulatory Regimes
Part of the rich IPO environment is diverse stock market and regulatory regimes, with the established, highly regulated markets of the U.S., Western Europe, and Japan at one extreme, and infant exchanges in some emerging markets at the other. The Sarbanes- Oxley legislation adopted in the US in the wake of several high-profile corporate scandals caused a major shift in this landscape, with repercussions all around the world. As with all complex new legislation, time and effort has been needed for both companies and advisors to fully digest and interpret its requirements. This may have contributed to a stagnant U.S. IPO market — for example, by changing the short term balance of attraction between an IPO and M&A for some firms. However, after three years the cost and other implications of the U.S. rules have become clearer, as have their attractions or otherwise compared with regulatory rules in other countries.
Overall the regulatory environment continues to evolve. In the U.S. there is ongoing dialogue around Sarbanes-Oxley with some discussion of exempting smaller companies from some of the rules. In Europe, last year saw a substantial overhaul of previous reporting standards with the introduction of international financial reporting standards (IFRS), the reorganization and launch of second-tier exchanges in France and Germany, and the launch of the prospectus directive in July. More European regulation is in the pipeline, although the suggestion is that it will leave some room for national interpretation.
Meanwhile, most observers believe that international consolidation among stock exchanges is likely in the long term to meet customers’ demands for lower costs and wider global reach. The NYSE has led the way by acquiring Archipelago, and the London Stock Exchange has for some time been a bid target, there have been discussion on Euronext and Deutsche Borse merger. Competition between exchanges and the efforts of regulators will continue to shape the IPO environment over the next few years.
IPO market in the CIS
In 2005 CIS companies attracted 8.8 billion USD from initial and secondary exchange offerings. At the same time 1.4 billion came from Kazakhmys and Kazakhaltyn. On the whole, the CIS market was defined by an increase in IPO and proceeds from IPO (table 2).
In 2005 Kazakhmys launched an IPO on the main London Stock Exchange, which was the first of its kind in the history of the CIS as all previous IPOs involved either shares on an alternative investment market or global depositary receipts. At the end of 2005 Kazakhmys shares had been included on the FTSE 100 listing.
It is worthwhile noting the largest transaction in the history of IPO in Russia – the IPO of AFK Systema’s global depositary receipts, which attracted 1.6 billion USD.
We also analyzed the proceeds from the IPO of companies from CIS countries over a two-year period. Between 2004 and 2005 Russian companies earned roughly 74% of total proceeds, while Kazakhstan companies earned 22% (diagr. 3).
An analysis of the CIS IPO market with respect to sector structure over recent years suggests that IPO was most common in the metallurgy and mining industries (diagr. 4). The interest in natural resource companies is due to excellent growth prospects, relatively low cost base and high commodity prices supported by rapid global economic growth rates. You should realize that investors are looking for companies that are able to demonstrate high growth potentials. So far, natural resource industries in Kazakhstan offer the greatest upside potential. Companies in other industries are yet to demonstrate their ability to earn significant returns for their investors.
In view of the planned 2006 IPOs of large CIS companies from the oil and gas and banking sectors, we expect that the sector structure of IPO proceeds in 2006 may change significantly.
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