1. Why might a company be interested in executing a Euro-equity offering? What risks and opportunities does such a deal entail?
A Euro-equity offering has many benefits that both the corporation and the investment bank could enjoy. These benefits include the issue size of the offering may be too large for the domestic market to handle. By going outside the market the company is able to pick up on demand that may not exist in the home country. Because the offering is occurring internationally the ownership will be broadly based and this group will not be able to control or monitor the company's management very effectively. The company may also enjoy an international reputation and be traded on many different exchanges, rather than only one.
A Euro-equity offering does have costs, however. The expectation of foreign owners may be very different than the expectations of owners in the home nation.
This could pull management in several directions and force much needed energy to less productive areas. International reporting would cause further costs and complications for accounting and financial personnel. In turn the company must increase its expenses to ensure international shareholders are receiving the correct information.
2. Should the price of a share in a Euro-equity offering be identical to the home-market price? Why or why not?
3. Why was the Fiat deal so problematic? How much weight do you give to factors such as the offering size, pricing, timing, deal structure, information management and syndicate management in explaining the outcome?
There are four primary reasons that the Fiat deal failed. First the offer size was much too large for Deutsche Bank to handle. The bank had handled deals as large as $1.52 billion in the past, successfully. This offering, however was much larger and structurally more complex than Deutsche Bank's historical accomplishments.
Before offering Deutsche Bank the deal, Fiat had approached Italian banks with the offer. These Italian banks declined the offer because they felt it was too large for the market. Secondly, Deutsche Bank as the lead investment bank mishandled its responsibilities. Deutsche Bank sold many of its shares before the other member of the syndication began selling theirs. To complicate the matter Deutsche Bank sold these shares to clients of other investment banks. When it came time for the sub-syndication members to begin selling shares they discovered that Deutsche Bank and other investment bank had already contacted the client. To complicate the matter some markets had more shares than it could sell while other markets did not have enough. Thirdly the structure of the offering involved ordinary shares, preferred shares, and savings shares. This type of structure limited the type of investor that would be interested in the offering. It took a sophisticated investor with time and financial resources to price and evaluate the various parts of the offer in order to determine his/her interest. This greatly limited the number of investors that were interested. The offering would only be liquid in Milan, which had strict regulations regarding taxes and tradability of the assets. Lastly, Deutsche Bank had trouble communicating to investors for various reasons and as a result the investors became unsure of what the settlement procedures were for the security. The investment banks panicked and began liquidating their shares on the Milan exchange depressing Fiat's price and further complicating the matter.
Because Deutsche Bank was forced to act quickly and was unable to build a book of business, problems that could have been avoided, developed. This was further complicated by the lack of communication with investors and investment banks in charge of selling the issue. These four factors greatly affected the outcome of the offering and the reputation of Deutsche Bank.
4. What are the implications of the Fiat deal for the execution of future Euro-equity offerings?
Because the Fiat failure was due to information and poor investment banking decisions, its impact to future Euro-equity offerings should be negligible. This assumes that the market's perception of the failure places the fault to Deutsche Bank, syndicated banks, and poor information transmission. This should serve as an example to future corporations who are interested in a Euro-offering that diligence and the proper investment banking choice are necessary to a successful offering.