November 24, 2009
Talk about Going Rogue, Brazil is Knocking Folks’ Socks Off
Posted by Kristin Johnson

Oprah Winfrey interviewed Sarah Palin last week and hinted that the former VP candidate may be in talks to launch a talk show. “Should I be worried?” Oprah asked with a coy smile (she would announce retirement days later).  If Oprah is not above paranoia about job security, who are we to rest on our laurels? Admit it. Even as the financial markets show signs of stabilization, some of us are still keeping an eye trained on our competition.

The NYSE may want to watch the competition closely. Last week’s edition of the Economist featured a replica of Cristo Redentor (Christ the Redeemer) atop Corcovado Mountain in Rio de Janeiro rocketing into the heavens. According to President Luiz Inácio Lula da Silva, "[i]t is Brazil's time." Should we really be surprised by Brazil’s success? Maybe. Maybe not. But I think we should be thoughtful about what Brazil’s success means for competition among international stock exchanges for listings of publicly offered securities.

Brazil is silencing critics and earning its place in Jim O’Neil of Goldman Sachs’s creative acronym “BRIC.”  Economists use the term BRIC to describe the fastest-growing developing economies in the world, Brazil, Russia, India and China. In the recent financial crisis, Brazil stunned economist and pundits with strong performance - making it one of the last in and first out of the crisis. Brazil’s economy seems poised to experience continued positive growth despite the crisis.

Brazilian companies are active in the currently ripe mergers and acquisitions market. Two deals that indicate that Brazil companies are strong contenders on the mergers and acquisitions dealbook map-  InBev’s acquisition of Anheuser-Busch and Vale’s acquisition of Canada mining company Inco (much to the chagrin of North American competing bidders Falconbridge and Phelps Dodge). Last year, rating agencies awarded the country’s sovereign debt an investment grade rating; impressive for a nation that nearly defaulted on its sovereign debt less than a decade ago. Rising real wages have lifted 24 million Brazilians above the poverty line in the last seven years. Record prices on commodities such as soy, iron ore, and steel exports contributed to the government amassing a healthy a $224.2 billion stock pile of international reserves. Yes, real problems persist. While its record 6.8% growth in the third quarter of 2008 will not be sustainable, economists do expect that Brazil will enjoy a healthy growth rate of 4-5%. The real (Brazilian currency) has enjoyed strong appreciation in the last year. During the same period foreign direct investment rose 30% (presenting some concerns explored in an interesting piece by Rachel Anderson).

Foreign issuers have historically chosen to list on an international stock exchange such as the NYSE because international exchanges offer lower costs of capital, increased liquidity, access to a deeper, more diversified shareholder base and higher visibility. In recent years, scholars like John Coffee have debated foreign issuers’ preference for listing their publicly traded securities on domestic exchanges in lieu of listing on a national exchange and cross-listing on an international exchange such as the New York Stock Exchange. In a forthcoming piece, I examine Brazilian and other emerging market issuers’ increasing share in the global capital markets listing race. These issuers’ smart use of depositary receipts to gain access to American and European capital without undertaking the onerous and expensive listing process and on-going reporting requirements is noteworthy. While in private practice, I had the privilege of working on Regulation S and Rule 144 exempt offerings of American Depositary Receipts (ADRs) or Global Depositary Receipts (GDRs) by a number of Brazilian issuers launching IPOs on Brazil’s national stock exchange (BOVESPA) and listing ADRs or GDRs in Luxembourg or a similar jurisdiction. The growing use of ADR and GDR markets challenges arguments that U.S. capital markets will sustain their competitive edge as developing economies present increasingly present interesting capital investment opportunities. Another interesting issue that is changing the competitive landscape is corporate governance reform initiated by stock exchanges emerging market countries.

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