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 KAZAKHSTAN International Business Magazine №3, 2004
 A Public Shell, or How to Enter the US Stock Market
A Public Shell, or How to Enter the US Stock Market
Oleg Batratchenko, President of THOR. Group of Companies
 MBA in Finance from Wharton School, M.A. in International Political Economy from New York University, M.A. in Economics from IMEMO. 11 years of financial experience at Neuberger & Berman, Berkshire, Safian and Thor United. Expert in multi-level financial analysis, innovative asset management technologies, derivatives hedging and investment banking. New York State Registered Investment Advisor. US securities licenses Series ?7, 63, 24, 27, 28. Member of American Management Association and Capital Asset Management Benchmarking Council.
High free market prices for oil have had the effect of determining the balance of payments position and have resulted in further strengthening of Kazakhstan's foreign economic relations. At the end of the first quarter of 2004, surplus of the balance of payments current account made up US$349 million. Exports of goods amounted to US$4.1 billion (a 29% increase against the same period in 2003). At the same time, fixed-term loans of various kinds, which are subject to redemption, are the main source of additional funds for small, medium-sized and moderately large companies, the annual turnover or assets of which do not exceed US$200 to 300 million. This situation is hampering economic development and having an adverse effect on high-technology industries. The fact is that borrowing is, first of all, a question of security, so a company that has a sound turnover, but which has not yet accumulated the liquid assets necessary for security, cannot claim large loans, especially in its initial stages of activity.
This problem is becoming more pressing in view of the underdevelopment of Kazakhstan's stock market and its financial capacity. The situation in the US stock market, which accounts for more than half of the total volume of trade on all the world's markets, is different. Thus, the capitalization of the NASDAQ electronic stock exchange is US$2.5 trillion. The total volume of initial public offering (IPO) of shares on this exchange amounted to more than US$220 billion during 1995-2003. Even after a three-fold decrease in stock exchange quotations over the past three years, for NASDAQ companies the average ratio of capitalization to annual turnover is 2.0 and to internal funds is 3.0. This is several times more than the values for the Russian and Kazakh stock markets. The daily turnover on NASDAQ makes up some US$23 billion (1.5 billion shares), i.e. each of the 4,900 companies trading on this exchange accounts for US$4.7 million on average.
Taking all the foregoing into account, penetration of the US stock exchanges—primarely NASDAQ and the OTC Bulletin Board—by Kazakhstani companies, and further financing by additional share issues is the most efficient method of raising capital. The advantages of this decision are obvious: obtaining access to high finance, and the higher valuation and liquidity of companies' shares when compared with those traded on Kazakhstan's stock market.
Financing by additional share issues in the USA entails neither a debt burden nor a liability to pay principal and interest. Furthermore, such financing does not necessarily entail loss of the controlling block of shares by the original shareholders in the company. The sale of shares through international stock exchange instruments means selling to many small shareholders (rather than a sole proprietor), who are unable to control the issuing company's business individually and in any case are not trying to do so.
A further advantage of penetrating the US stock market is strengthening the economic security of the owners of a company that has obtained the status of a US public company, by transferring administrative, political and country-related risks to an international level.
By turning shares in their company into liquid instruments traded on prestigious floor spaces, the owners can then use them as a security to obtain debt financing or as funds to acquire other companies, to pay for consultancy and PR services, and to remunerate senior and middle management personnel. Access to the US market enhances the company's standing, credit rating and goodwill, facilitating the establishment of business relations and the ability to raise funds from abroad where money is much cheaper and available for a longer term than in Kazakhstan.
THOR, a financial group from the USA, offers a quick, low-cost and highly efficient programme to companies that want to enter the US stock exchange, in order first to gain a distinct identity, and only then to choose the right time to issue additional shares at the best price (i.e. IPO and subsequent placements). This programme is THOR's core investment banking technology, which allows companies to gain access to the US stock market by a so called reverse take-over of an existing public umbrella company in the USA (shell corporation).
A shell corporation is a US company which at one time held an initial public offering of its shares and obtained public company status but then, affected by unfavourable market conditions or other factors, unloaded all its assets to meet its obligations, shut down operations and became a sleeping company. Despite a company of this kind having discontinued its operations and freed itself from debt and court proceedings, it does not lose the status of a public company and must submit all current reports to the US Securities and Exchange Commission (SEC). Few market makers continue operations with these companies' shares, which are admitted to the listings of over-the-counter systems—OTC Bulletin Board or NASDAQ—and in which transactions are sometimes still made.
The acquisition of such a corporation enables the owners of a Kazakhstani enterprise to enter the US stock market. This programme can be applied in Kazakhstan at the present time, however, it requires structural adjustment because there are some legislative restrictions on foreign exchange regulation. At the same time, unlike most financing mechanisms developed recently, the above financing programme serves the interests of both the state and private entrepreneurs. This convenient scheme of long-term financing of individual enterprises promotes foreign investment in Kazakhstan's economy and allows numerous individual investors from the USA to invest their money staying in the USA, in shares of US holding companies which are under the control of Kazakhstani companies and which operate exclusively in Kazakhstan.
The core of this scheme is as follows: a shell corporation acquires a foreign enterprise on a pro forma basis in exchange for 85-90% of its shares. In practice, the owners of the foreign enterprise turn over control of the company to the US public company and acquire 85-90% of shares in the latter. Some 5-10% of shares in the former shell corporation are kept by its original shareholders who generate the liquidity of the shares at the initial stage of trading. This is their price for selling the status of a public company. The remaining 3-5% of shares in the shell corporation are handed over to the THOR Investment Banking Group, which acts as an adviser in this transaction, as remuneration for implementing the programme and subsequently promoting the company on Wall Street. This makes it clear that THOR takes a direct interest in further penetration of the company into the US market.
As a result, the Kazakhstani enterprise grows into a holding company comprising the US parent public company (under the control of the enterprise owners) and the manufacturing branch operating in Kazakhstan. 
The balance sheets and statements of the holding company are consolidated; thereby the US parent company (the former shell corporation) shows the assets, turnover and profit of its foreign branch and changes from a dummy company into an operating enterprise.
A holding company may issue additional over-the-counter shares even before reaching full liquidity. Initial financing often takes place in the process of the reverse take-over when a shell corporation converts its bank balances (which sometimes amount to several million dollars) into additional shares handed over to the original US shareholders. However, the realization of all the advantages of this programme depends on an increased exchange turnover of shares in the enterprise that has penetrated the US stock market.
Specialists from THOR provoke interest in the new public company on Wall Street and familiarize the US public with it. They hold seminars and road shows for existing and potential investors, market makers and brokers, publish its details in the press and on the Internet, prepare periodic analytical reviews, and submit quarterly statements to the US Securities and Exchange Commission.
As trading in the company's stock becomes more vigorous (including trading through the Thor Capital brokerage house, which acts as a market maker) and the liquidity of shares grows, THOR arranges an additional share issue (specifically, IPO) and places the shares with the US public market (as private placement either in the USA or in Europe), thereby attracting investment for its business customer.
The main point in financing in this way is possibility of refinancing. As soon as the Kazakhstani enterprise has a strong presence in the US stock market, gains a credit history and makes its shares liquid, it gains a mechanism for almost unlimited raising of funds, provided that the proceeds from each share issue are used efficiently and improve production and financial results. At the same time, specialists from THOR select additional instruments and mechanisms for raising funds for its business customer—structural and trade financing, leveraged buyout, or bridge financing—which is easily applied due to the status of a US public company.
Strictly speaking, the programme of international financing described is not new. Penetration into a stock exchange by reverse take-over is an everyday occurrence. Every month some 30-40 companies undergo this procedure. About 30% of them are non-US enterprises merging into a US shell company. Over the past 15 years or so, this mechanism of financing privately-owned enterprises from Europe, South-East Asia (mainly China) and Latin America has allowed foreign companies to gain access to the US capital market, by combining the advantages of the US market's capacity, stability and development, on the one hand, with the potential for accelerated industrial development in the home countries, on the other.
The THOR Group introduces effective methods of raising funds, investing ready assets, optimizing corporate financial flow, and business management through conferences which it holds twice a year in cooperation with the Association of Russian Banks. These forums have been held over the past seven years in leading financial centres and famous resorts all over the world, attended by representatives of the banking business, investment companies and funds, and senior managers of industrial, commercial and financial companies from Russia, Kazakhstan, CIS countries, Western and Eastern Europe. 
The International Finances and Economic Security of Business Conference was held in the Algarva (Portugal) in June 2004, attended by more than 150 people from 20 countries. 98 companies and organizations were represented at this conference, including 32 banks, 17 financial and investment companies, 16 law and consulting firms, seven governmental and non-for-profit organizations, and five news agencies.
The next (14th) conference, which will be named International Capital Markets and Present-Day Banking Business is scheduled for 6 to 8 November 2004 in Deauville, a resort town in France. This conference will focus on applying state-of-the-art technology in world financial markets, aimed at efficient attraction of foreign funds, stabilization of financial flow at enterprises, and enhancement of their capitalization and profitability.
The THOR Group, which registered its representative office in Kazakhstan in March 2004, invites all interested persons to attend the conference.

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