Financial challenge

Daimler Benz AG's decision to list its shares on the new york stock exchange*

On October 5, 1993, the shares of Daimler-Benz AG, the parent firm of Germany's maker of Mercedes Benz automobiles, began trading on the New York Stock Exchange. Although this listing attracted considerable at­tention, it is only one instance of a growing trend of foreign public and private offerings of debt and common stock in the U.S. capital markets. The volume of foreign debt offerings in the United States grew from less than $10 billion in 1985 to nearly $100 bil­lion in 1993. Foreign stock offerings in the United States grew from about $1 billion in 1985 to a figure in excess of $10 billion in 1993.

Foreign firms that want to have their shares listed and traded in the United States must meet strict Security and Exchange Commission (SEC) rules regarding the preparation of fi­nancial statements and disclosure of accounting practices. Daimler has a long history of reporting steady prof­its. Part of this success can be attrib­uted to aggressive manipulation of the financial statements through the use of "off the books" hidden reserves, accumulated from past periods of high, but nonreported earnings. In years when product demand declines and actual operating losses are in­curred, these reserves are tapped, thus enabling the firm to report profits. To qualify for listing on the New York Exchange, Daimler had to overhaul its accounting practices and eliminate the use of these reserves. As a result, Daimler was forced to report a loss for the first half of 1993 of $592 million; its first loss since the end of World War II. Why would Daimler agree to such radical changes in its financial reporting just to see its shares traded in the United States³?

Multinational firms, such as Daim­ler, are eager to acquire capital in the markets where it is the cheapest. In Daimler's case, the urgent need for additional capital, combined with what it perceived to be a large clientele of over 300,000 rich, happy Mercedes owners, who would be potential buyers of its United States shares, was enough to convince management that the benefits were worth the cost of greater financial disclosure. The listing corre­sponded closely with Daimler's deci­sion to build a plant in Alabama. By raising capital in the United States, Daimler will be able to hedge some of its foreign exchange risk associated with the U.S. venture.

How has this decision benefited Daimler-Benz? Daimler's management believes that its ability to raise capital at the lowest cost will be greatly enhanced by its entry into the U.S. capital mar­kets. Indeed, since the time Daimler announced the plan for the New York Exchange listing, the value of its shares rose more than 30 percent, far exceed­ing the 11 percent gain recorded by the Dow Jones Equity Market Index for Germany over the same time period. Daimler officials and U.S. investment bankers attribute this gain to increased demand for the shares by U.S. investors who found it difficult to acquire Daim­ler shares when they traded only on German exchanges. Many other Euro­pean firms, such as Nestle SA, are now considering the best way for them to tap into the tremendous capital-raising potential of U S. capital markets.

This chapter develops the underly­ing principles of the operation of in­ternational financial markets and the market for foreign exchange. An un­derstanding of these principles is es­sential for managers who make resource allocation and capital-raising decisions designed to maximize share­holder wealth.

*For a more complete discussion of foreign firm financing in the United States see "Foreign Firms Raise More and More Money in the U.S. Markets," Will Street Journal (October 5, 1993) A1, A8.