Wk7 discussions-DUE: tomorrow

Student’s post 1

Prada required additional capital to clear outstanding debt and promote organizational growth (Zargani, Kaisar & Jones, 2011).  Prada’s debt totaled $693.5 million Zargani, Kaisar, & Jones, 2011).  When choosing where companies chose to issue an IPO factors relating to finances are at the top.  This can include offering a diverse equity base, increased equity and out-of-pocket costs of the IPO listing. 

Hong Kong has been known as a dominate force within the global IPO market, for over $120 billion raised from listings from 2009-2011 ("J.P. Morgan's adr.com | Strategic Thinking for Hong Kong IPOs," 2012).  Prada chose to issue its IPO in Hong Kong (HK), based on revenue growth within the country.  It was forecasted that luxury product consumption would grow by 18% leading to $27.5 million by 2015 (Barreto, 2011).  The advantage to issuing the IPO in Hong Kong is the direct relationship with diverse Chinese markets as well as opportunity to have both primary and dual listings (JP MORGAN).  Another advantage is the opportunities to expand mainland markets and increase currency equity and leverage ("J.P. Morgan's adr.com | Strategic Thinking for Hong Kong IPOs," 2012). 

A disadvantage with issuing the IPO would have been the time-table; if steps were left out during the IPO process it would have delayed the origination of the IPO.  Another disadvantage is extra compliance measures to weed through.  Although this did not happen with Prada, Chinese market volatility could have resulted in a loss of stock prices (Hurt, 2008). FINRA warns investors of this possibility (Hurt, 2008). 

The circumstances that may make a foreign IPO such as Prada ineffective include the country of origin’s governance and level of protection from the issuer’s country.  The costs related to listing the IPO can make it ineffective.  The demand for the products that Prada is selling can also determine the effective or ineffectiveness of the IPO ("To IPO, or Not to IPO | Intelligence | BoF," n.d.).  Michael Kors another big name in the fashion industry, had a very successful IPO with great quarter results, but due to demand/purchase of products dwindling, share prices fell and they saw a 8% drop in market capitalization ("To IPO, or Not to IPO | Intelligence | BoF," n.d.).  

Financing options that were available to Prada include bonds from other countries, such as the U.S., Europe and even Hong Kong.   This would have enabled Prada to still be in control of their operations.  Prada could have also sold current stock to finance ventures.  The currency exposure risk facing Prada is exchange rates, the Yen’s value to the U.S. dollar and the Yen’s value to other countries’ currencies. The risk also includes interest rates.  This could have been mitigated by investing or increasing risk management operations and increasing current insurances (Ben-David, 2013).  Risks can be hedged by selling enough to cover liabilities in the foreign currency.   Prada could also maintain an equal level of foreign receivables to foreign payables to avoid exchange rate risks (Ben-David, 2013).

The dilution effect of Prada’s IPO could have had a small impact on the control the company.  The prior share valuations and equity held by the family could have declined in the beginning due to the pending IPO.   The owners would have the opportunity to buy back shares as growth occurred, stabilizing their interest in the company.

References

Barreto, E. (2011).  Prada raises $2.1 billion in HK IIPO. Rueters. http://uk.reuters.com/article/2011/06/17/uk-prada-idUKTRE75G00520110167

Ben-David, T. A. (2013). The effectiveness of hedging foreign exchange rate risk: an emerging market perspective.

Hurt, C. (2008). Initial Public Offerings and The Failed Promise of Disintermediation. Entrepreneurial Business Law Journal, 22, 704-742.

J.P. Morgan's adr.com | Strategic Thinking for Hong Kong IPOs. (2012). Retrieved from http://www.adr.com

To IPO, or Not to IPO | Intelligence | BoF. (n.d.). Retrieved from https://www.businessoffashion.com/articles/intelligence/ipo-ipo

Zargani, L., Kaisar, A., & Jones, N. (2011, January 27). Bertelli’s bold move: Prada’s long-awaited IPO planned for Hong Kong, WWD, 201(19), 1

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Student’s post 2

Ecuador began utilizing the USD after their economy collapsed and many of its citizens sought USD valuations as a safe haven to protect their assets. In 1999, Ecuador’s economy had contracted by 7.5%, suffered an inflation rate of over 60%, and the sucre had lost two-thirds of its value (OANDA, n.d.).

Ecuador’s decision to dollarize was a very good decision at the time to help bring stability to the country in a time of economic crisis. There was some negative impact to dollarization, that involved a percentage of the population expatriating, and an uptick in unemployment (Berríos, 2006). Furthermore, Berríos wrote that, since the dollarization, the economy has recovered and macroeconomic balances, including fiscal health, were in large measure restored (Berríos, 2006).

Transparency of the financial system is extremely critical when a country decides to dollarize. In order to restore credibility, the country needs to be as clear as possible regarding their economic plans in order to satisfy the requirements of the IMF, as well as bondholders and other stakeholders. Additionally, the more transparent the system is, more input could be received in regards to their budget plans and financial institutions oversight.

For the most part, dollarization has been mostly positive, but it has not benefited every sector in the same manner. Sectors such as finance, transportation, communication, tourism and hospitality, have all showed very positive improvement due to dollarization; however, agricultural and other village oriented activities have not (Schnurer, 2014). In contrast, the dollarization has impacted the oil industry. Since the country does not have the ability to print more money, or inject more cash into the economy, it is believed that they are not able to increase growth. Furthermore, the reliance on the dollar places the country more at risk of a deflating economy. A majority of Ecuador’s economy is centered around the oil industry, and with oil prices on the decline, the country is lacking much needed revenue. This decline in prices has led to Ecuador posting annual deficits since 2009, eliminating much needed cash from the economy. Lastly, the country implemented new methods of currency transfers by digitizing the dollar to reduce costs in the transport of money and the associated transfer fees (Gill, 2015). The slump also led to the country putting up a percentage of their gold reserves as collateral for a $400mn loan from Goldman Sachs, and they are further expected to seek loans from China and other lenders to aide in offsetting the increasing deficit costs.

Berríos, R. (2006). Cost and Benefit of Ecuador's Dollarization Experience. Perspectives on Global Development & Technology, Department of Economics, Clarion University of Pennsylvania. Clarion: Brill Academic Publishers.

Dejuana, C. (n.d.). Ecuador Accepts Dollar as Its New Currency. Retrieved from ABC News: http://abcnews.go.com/International/story?id=82666&page=1

Gill, N. (2015, January 29). Ecuador’s Dollar Reliance Worsens Impact of Oil, Correa Says. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2015-01-29/ecuador-dollar-reliance-worsens-oil-drop-s-effects-correa-says

OANDA. (n.d.). Ecuador Sucre. Retrieved February 17, 2017, from OANDA: https://www.oanda.com/currency/iso-currency-codes/ECS

Schnurer, E. (2014, May 2). Outsourcing the Money Supply. Retrieved from US News and World Report: http://www.usnews.com/opinion/blogs/eric-schnurer/2014/05/02/why-ecuador-and-other-states-dont-use-their-own-money

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Session 7 - Topic 3. Lessons Learned

Student’s post 3

I believe that our team can learn several broader lessons from the readings this week. First in terms of the Ecuador case; our team should pay particular attention to the political stability of the country that we are looking at expanding into. In the case of Ecuador, the political environment made it very difficult for a stable and improving economy to persist (Berrios,2006). Three presidents had been ousted via uprisings (including via military coups) since 1996 in Ecuador, and they had six different presidents in a period of 10 years (Berrios, 2006, pp.57 -60). Political problems, border wars, and natural disasters negated the effects of a strong national market of oil and natural gas (Berrios, 2006, p.57).

As our team looks at expanding into Israel, we should take a look at the governing bodies and examine how effective they have been at working together to solve national issues. If they are unable to solve simple issues, it will be highly unlikely that they will also be able to solve financial issues in a time of crisis. We should look at other issues that could affect the economy like border conflicts and natural disasters.

Doron & Arian (2014) provide a good overview of the effects of Israeli border conflicts and the effect they had on the economy of Israel. While Israel has been a poster child of economic reform that has become a global high tech leader, its economy is affected by the political costs of conflict (Doron & Arian, 2014). Its economy could support a 2014 conflict; costing nearly 2.8billion USD (Doron & Arian, 2014, p. 445). If these conflicts became more frequent or longer term operations, more strain might be placed on the economy.

In the case of Parmalat, I believe there are two major lessons our company could learn. First, when investigating governance structures, it is important to fully understand the risk that common corporate governance structures in the host country present to a larger corporation. While Parmalat failed to adhere to some of the Italian best practices, it still had a particularly Italian flavor of ownership that lead to an environment where fraud was hidden (Melis, 2005). In particular “ownership and control structure … and the board of statutory auditors” demonstrated Italian characteristics (Melis, 2005, p. 487). In our case, it will be key to understand the typical Israeli characteristics of Israel’s corporate governance and what possible problems that could produce.

Second, we should also pay attention to the history of any audits that were conducted by other companies. In the case of Parmalat, they were initially audited by the “Italian branch of Grant Thornton International” (Edmondson & Cohn, 2004 p. 46). When Deloitte overtook this work, they largely took Grant Thornton’s previous audits at face value and did not perform their due diligence; taking more than four years to find Parmalat’s fraud (Edmondson & Cohn, 2004 p. 47). Depending on our entry strategy, we should perform due diligence and thorough investigations on any potential partners in Israel.  

References

Berríos, R. (2006). Cost and benefit of Ecuador's dollarization experience.  Perspectives on Global Development & Technology, 5(1/2), 55-68. doi :10.1163/156915006777354491 Retrieved from http://ezproxy.umuc.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=iih&AN=20927137&site=eds-live&scope=site

Doron, G., & Arian, O. (2014). Introduction: the many faces of Israel's political economy. Israel Affairs, 20(4), 445-451. doi:10.1080/13537121.2014.955651

Edmondson, G., & Cohn, L. (2004). How Parmalat went sour. Businessweek, (3865), 46-48. Retrieved from http://ezproxy.umuc.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=11815706&site=eds-live&scope=site

Melis, A. (2005). Corporate Governance Failures: to what extent is Parmalat a particularly Italian Case?. Corporate Governance: An International Review, 13(4), 478-488. doi:10.1111/j.1467-8683.2004.00443.x Retrieved from http://ezproxy.umuc.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17450117&site=eds-live&scope=site

Student’s post 4

The article discusses the implications of the changes U.K.’s equity benchmark is introducing. These changes will impact how the benchmark assigns nationality to firms and their index score. It is possible for changes to affect the benchmarks by GBP 2 trillion. These rule changes will cause companies to rethink their IPO listings and how they fundamentally operate for the equity benchmark is a key driver for many investors, and being part of it, is beneficial to many corporations.

https://www.bloomberg.com/news/articles/2017-02-15/better-in-britain-ftse-100-might-become-a-bit-more-national