One of the primary reasons that China Mobile opted to issue equity in the international markets was because experts doubted the capacity of the Hong Kong market to absorb a multi billion issue the size that the company wanted to float. Due to the anticipated demand for funds, the cost of capital would have risen considerably and increased the cost of the issue which the company had intended to keep as low as possible. Another aspect that informed their decision was the ability of the Hong Kong market to subscribe all the shares that were on offer.
There was a possibility that a local equity share offer would be undersubscribed thus frustrating the aims of the company. By extending the issue to international markets, the company benefited in that it tapped into a larger market than was available in the home country (Litterman, 2003). This led to an oversubscription of about 3 times the expected investment and worked in favor of the company by pushing up the offer price as a consequence of demand and supply dynamics. In the bonds sector, the company was able to lower the interest rate payable on the security because of the high demand hence reducing
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As a consequence, the company gained by getting extra funds at the least cost factor. By offering equity in foreign markets, China Mobile spread its risks well. Overconcentration in a single market can lead to wide fluctuations in prices when the economy undergoes various adjustments. In the event that the Hong Kong stock exchange suffered serious setbacks, the stocks of the company could have plummeted as market players reacted to secure their financial investments. With the stocks being traded in various markets, the effect of one stock exchange crashing would not have a dramatic knock on effect on other bourses.
Despite global economic recessions affecting all economies, the degree is felt differently in each country. The situation in one market may lead to falling prices while another may experience a bullish bourse. Equities will face mixed results with prices higher in those economies least affected by the recession and the reverse true in those economies worst afflicted. Similarly the shareholders will react according to the prevailing local economic conditions. A foreign equity may be more attractive than local alternatives thus spurring demand for the former.
If the foreign company is posting good results and issuing high dividends, investors will shift demand to the equity thus forcing up the price. This will in turn increase the market capitalization of the firm and enhance the marketability of the equity as well as improving the profile of the company (Litterman, 2003). 2. Pricing of the equity in US dollars had to do a lot with the internationalization of the currency. Offshore transactions of a particular currency are an indication of how convertible and acceptable the currency is (Quinn & Voth, 2008).
The Hong Kong dollar is not as widely used in international transactions as the US dollar is and as such it was advisable to use the currency that would contribute more to ease of operations. Foreign investors wishing to purchase the stocks may have faced challenges getting hold of Hong Kong dollars to remit to the participating stockbrokers especially if their country faced a deficit of the currency. Such a scenario could lead to fewer than expected investors managing to beat the deadline for subscribing for the equity and in the end analysis the company would have failed to meet its objectives.
Internationalization of a currency also depends on its volatility and ability to act as a store of wealth. The Asian financial crisis exposed the weak structures of the region’s monetary system and any investor would be concerned at the prospect of losing their investment as a result of a local economic crisis. Devaluation of a currency reduces the basket of commodities that it can purchase and consequently decreases the value of one’s investment. Since the US dollar has more stability than the Hong Kong currency it was better to use it to set the price for the equity.
3 Interest payments on the bonds are paid in dollar rates to the bearers at a predetermined rate. As long as the exchange rate is stable the burden of servicing the bonds is manageable. However if the local currency depreciates against the US dollar, China Mobile will find it more expensive to finance the interest payments. This will relate to higher overheads and reduce overall profits as opposed to a situation where the bonds were issued in the home market and payments made in the local currency.
Economic conditions in international markets determine the attractiveness of the bond when compared to other alternatives. Whereas the dividend offered in the local market may be attractive to shareholders, the same may not be true in international markets. This situation will lead to low prices of the stocks in those markets as supply may outstrip demand. As a consequence, the company’s market capitalization will be adversely affected and the profile of the company lowered in the eyes of investors (Choudhry, 2004).
Similarly, if a bourse is facing a bearish market, the stocks may be traded at prices well below their real market value. This will reflect badly on the share’s attractiveness to investors and limit the ability of the company to raise funds through additional share offers or bond issues. For China Mobile to continue attracting foreign investors to take up bonds and shares it may have to increase the interest rate or the dividends paid out so as to better the local alternatives.
For example, if the average bond rate in a certain market is above that being paid on the company’s bond, then there will be few if any takers for the security (Choudhry, 2004). While this situation may prevail in the international markets, the same may not be true in the home country. Ultimately the company may find that the cost of floating bonds in the international market may be higher than that of servicing them in the home country. By floating the shares internationally the company opened its doors to shareholders globally and thus increased the number of people it was responsible to.
As a consequence there will be demands for greater accountability on the part of the management and more restrictions on the activities of the company if it is to comply with the rules and regulations of the country it is operating in (Quinn & Voth, 2008). For example, companies seeking to list on the New York stock exchange will have to comply with the dictates of the relevant authorities tasked with overseeing securities. While regulation is not a bad thing, the different rules that a company may have to abide by in the countries it is listed in may be confusing and at times conflicting.
In attempting to be compliant, it may cost the company a lot of money in administrative and regulatory costs that would have been avoided if it were based in the home country. References Choudhry, M. (2004) Corporate Bonds and Structured Financial Products. Butterworth-Heinemann Litterman, B. (2003) Modern Investment Management: An Equilibrium Approach. Wiley Quinn, D. , and Voth, H. (2008). “A Century of Global Equity Market Correlations. ” American Economic Review, 98(2): 535–40.