Novo Industri Case Study
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International Financial Management Case study about Novo Industri
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Novo Industri Case Study
- 1. Novo Industri A/S-- 1981 Group 2 Case Study Jasmine, Stephen, Chris International Financial Management
- 2. ● Introduction ● Dilemma ● Recommendations & Conclusion Outline
- 3. Course Objective 11: The use and benefit of the international capital market in establishing a multinational corporation’s capital structure and its cost of capital. Learning Objectives
- 4. “ Capital structure is the particular distribution of debt and equity that makes up the finances of a company.
- 5. “ Cost of capital is the minimum rate of return an investment project must generate in order to pay its financing costs.
- 7. 7 August Krogh Thorvald Pedersen Harald Pedersen “What are you going to do?” “We will make insulin.” “Well, you’ll never manage that.” “We’ll show you!”
- 10. 900,000 B shares Novo Industri A/S: 450,000 A shares Novo Foundation Founders & Families Novo Foundation 75% of voting rights 1940
- 11. 1975 Novo Industri A/S: 1974 Copenhagen Stock Exchange +90,000 B shares 19741975Rights issue +450,000 B shares +DKr46.8 million 1977 Rights issue +112,500 A shares, +395,860 B shares, +DKr56.5 million 1977
- 12. “ A Eurodollar bond is a bond issued by a foreign firm and held in foreign institutions but is denominated in US dollars.
- 13. “ Private placement is the sale of stocks, bonds, or securities directly to a private investor, rather than as part of a public offering.
- 14. 1980 1975 1978Novo Industri A/S: 1974 Copenhagen Stock Exchange +90,000 B shares Rights issue +450,000 B shares +DKr46.8 million 1977 Rights issue +112,500 A shares, +395,860 B shares, +DKr56.5 million 1978 Convertible Eurodollar bond +$20,000,000, due 1989 1980 Rights issue +123,750 A shares, +732,150 B shares, +DKr125.2 million 1977
- 15. Pharmaceuticals Novo Industri A/S: Enzymes DKr135 million DKr96 million 50% of non- captive market DKr1.6 billion 1980
- 16. International Expansion: ╺ Denmark ╺ France ╺ Switzerland % of business outside Denmark 97% ╺ South Africa ╺ United States ╺ Japan 1980
- 17. 2. Novo Industri A/S Largest Insulin Producers: 1. Eli Lilly & Co. 85-90% of US 60% of Europe 1980 Increasing competition over genetic engineering opportunities
- 18. Dilemma 18
- 19. 19 Late 1970s Highly Integrated Global Oligopoly High Cost of Capital Internationalize Its Cost of Capital
- 21. A Second Convertible Bond Either in the Eurobond Market or in the US A general public offering either in London or the U.S. A preemptive rights offering Three Alternatives 1.) 2.) 3.)
- 22. 22 Option 1: Convertible Bond ❖ A type of debt security that can be converted into a predetermined amount of the underlying company's equity at certain times during the bond's life. ❖ To minimize negative investor interpretation of its corporate actions
- 23. 23 Option 1: Convertible Bond ❖ Conversion Price: DKr 770 per DKr 100 par value B shares ❖ Fixed Exchange Rate of DKr5.365 per Dollar ❖ Coupon Rate: 8%
- 24. 24 Option 2: A Preemptive Rights Offering ❖ A privilege that may be extended to certain shareholders of a corporation that grants them the right to purchase additional shares in the company prior to shares being made available for purchase by the general public
- 25. 25 Option 2: A Preemptive Rights Offering ❖ Subscription Price: 10-15% Below Market ❖ Raising new equity capital without diluting the ownership share ❖ Risk: The issue might not be fully subscribed
- 26. Option 3: General Public Offering 26 London: Restricted general public offering without preemptive rights
- 27. Option 3: General Public Offering 27 United States: Prerequisite: American Depository Receipt System (ADRs)
- 28. “American Depository Receipt System (ADRs) 28 ➢ A security that represents shares of a non-U.S. company that is held by a U.S. depositary bank outside the United States. ➢ Denominated in U.S. dollars ➢ Holders of ADRs realize any dividends and capital gains in U.S. dollars ➢ Examples: Alibaba(China), Toyota(Japan), Volkswagen(Germany)
- 30. 1. Convertible Bonds 2.) Preemptive Rights 3.) Public Offering in London or U.S. Recommendations After analysing, the third option seems more appropriate to fund the Novo’s expansion planned for the next several years. 33
- 31. Why option 3 Meets the Considerations of Making Decision 1. Novo’s present and future need for funds. a. The third alternative is the surest way of rasing new capital b. The third alternative can effectively securitize corporate assets, enable financing and transactions, and maximize scale and efficiency. c. The third alternative can expand the financing channels for funds. 34
- 32. 2.) The cost of the capital raised. a. Internationalize capital costs to obtain more sources of capital to reduce capital costs. b. Internationalization of capital costs can reduce domestic bias, and greater global risk sharing will help reduce capital costs. c. According to their report, accounting transparency helps reduce capital costs. Why Option 3 Meets the Considerations of Making Decision 35
- 33. Why Option 3 Meets the Considerations of Making Decision 3.) The likelihood of a successful offering and its effect on Novo’s reputation. a. By purchasing reports in English, investors can access to more information of Novo, thus brings a positive effect to Novo’s reputation b. The third alternative is conducive for Novo to establish a corporate brand and improve corporate image. 36
- 34. Why Option 3 Meets the Considerations of Making Decision 4.) Current shareholder control of the company. After publishing in U.S., Novo’s stock price increase, which is a good new to the current shareholders. 37
- 35. Conclusion As the Novo story amply demonstrates, the primary purpose for firms to list their shares on a foreign stock exchange is to reduce their cost of capital. Indeed, there is overwhelming empirical evidence that when firms cross-list their shares their market value increases-in other words, their P/E ratios also increase, which is tantamount to a lower cost of equity capital. P/E ratio=Price per share/Earnings per share 38
- 36. “References 36 ★ Jacque, L. L. (2014). International corporate finance website: Foreign exchange, currency derivatives, and risk management in the global capital markets. Hoboken: John Wiley and Sons. ★ Schulz, A., & Staking, K. B. (1999). Financial disclosure: A first step to financial market development. Washington, DC. ★ Dullum, K. B., & Stonehill, A. (1983). Towards an International Cost of Capital. Nationaløkonomisk Tidsskrift, 33. Retrieved May 28, 2018, from https://tidsskrift.dk/nationaloekonomisktidsskrift/article/view/63492/90282.
- 37. 40
Editor's Notes
- August & Marie Krogh, founders of Nordisk, Thorvald Pedersen--fired over disagreement, Harald Pederson--brother, quit out of loyalty
- Founded 1925, producing insulin (pharma) and enzymes, invented Novo syringe
- Incorporated in 1940, with exports to 30 countries. A/S refers to Aktieselskab, meaning “stock company” is the Dutch name for a stock corporation
- All in 1980
- *the capital raised this year represented 25% of total new equity funds raised in Denmark that year. It became apparent Novo would need to start sourcing capital from other countries. Two options: private placement of straight debt in the US, or convertible bond issued in the US or Eurobond market. Private placement ruled out due to info asymmetry--Novo wasn’t well known in the US.
- *the capital raised this year represented 25% of total new equity funds raised in Denmark that year. It became apparent Novo would need to start sourcing capital from other countries. Two options: private placement of straight debt in the US, or convertible bond issued in the US or Eurobond market. Private placement ruled out due to info asymmetry--Novo wasn’t well known in the US.
- All in 1980
- All in 1980
- All in 1980
- Bsed in Denmark but generating 97% of its sales outside Denmark , Novo has to compete in the late 1970s with other multinationals such as Eli Lilly in the contax of highly integrated global oligopoly. Novo management decided that in order to finance the planned future growth of the company, it had to tap into international capital markets. Novo could not expect to raise all the necessary funds only from the Danish stock market, which is relatively small and illiquid. Also, Novo management felt that the company faced a higher cost of capital than its main competitors. Novo thus decided to internationalize its cost of capital in order to gain access to additional sources of capital and, at the same time, lower its cost of capital.
- In the early January 1981, members of Novo’s top management met in Copenhagen with financial advisors from Copenhagen Handelsbank(from Sweden), Morgan Grenfell(from UK), and Goldman Sachs(from the United States). The agenda of the meeting was Novo’s 1981 funds needs and a plan to execute the financing that would be necessary.
- A type of debt security that can be converted into a predetermined amount of the underlying company's equity at certain times during the bond's life. Issuing convertible bonds is one way for a company to minimize negative investor interpretation of its corporate actions. For example, if an already public company chooses to issue stock, the market usually interprets this as a sign that the company's share price is somewhat overvalued. To avoid this negative impression, the company may choose to issue convertible bonds.
- A second convertible could be offered with terms similar to the first, expect that under current market conditions the conversion price would likely be set at DKr 770 per DKr 100 par value B shares at a fixed exchange rate of $=5.365. The coupon on the bond would probably be fixed at 8%.
- A preemptive right is a privilege that may be extended to certain shareholders of a corporation that grants them the right to purchase additional shares in the company prior to shares being made available for purchase by the general public in the event of a seasoned offering, which is a secondary issuing of stock shares.
- Preemptive rights offering to existing shareholders could be set at a subscription price 10-15% below market A preemptive right offering would present a means of raising new equity capital without diluting the ownership share of existing Class B shareholders, assuming all such shareholders exercised their subscription privilege. The risk of a right offering was that the issue might not be fully subscribed, thus yielding less capital than required by the company.
- Surest way of raising new equity capital immediately at current market price. One possible approach was to issue share directly in London, where the stock were already listed. But, London stock Exchange rules restricted general public offering without preemptive rights for existing shareholders to a size of Novo’s equity offering to 15,626 Class B shares
- Another possible approach was to issue share in the US. To have general public offering in the US, Novo would have to consider setting up an American Depository Receipt system, as a prerequisite to listing on one of the exchanges.
- In today's world of multinational dominance and rapid globalization, investors can buy shares of foreign companies quite easily. For U.S. investors, these shares typically come in the form of American depositary receipts, or ADRs. An ADR is essentially a certificate issued by an American bank that represents a certain number of shares of foreign stock. This was usually accomplished by having a US bank or trust company hold the newly issued shares against which American depository receipt would then be issued. By using ADRs, American wishing to buy shares of foreign companies could execute all transactions, including the receipt of dividends, in the US dollar. Like Alibaba, Toyota, and Volkswagen are ADRs that trade on American exchanges like the New York Stock Exchange or NASDAQ.
- In today's world of multinational dominance and rapid globalization, investors can buy shares of foreign companies quite easily. For U.S. investors, these shares typically come in the form of American depositary receipts, or ADRs. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes. An ADR is a security that represents shares of a non-U.S. company that is held by a U.S. depositary bank outside the United States. Like Alibaba, Toyota, and Volkswagen are ADRs that trade on American exchanges like the New York Stock Exchange or NASDAQ.
- In today's world of multinational dominance and rapid globalization, investors can buy shares of foreign companies quite easily. For U.S. investors, these shares typically come in the form of American depositary receipts, or ADRs. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and holders of ADRs realize any dividends and capital gains in U.S. dollars, but dividend payments in euros are converted to U.S. dollars, net of conversion expenses and foreign taxes. An ADR is a security that represents shares of a non-U.S. company that is held by a U.S. depositary bank outside the United States. Like Alibaba, Toyota, and Volkswagen are ADRs that trade on American exchanges like the New York Stock Exchange or NASDAQ.