Global Finance (March 2006)

59 Pages·2006·6.926 MB·English

HUNGER FOR YIELD BRAZIL SHOWS IT CAN EUROPEAN CORPORATES
DRIVES LEVERAGED SAFELY NAVIGATE LEAD IN USE OF EQUITY
LOAN GROWTH CHOPPY WATERS DERIVATIVES
PAGE 22 PAGE 25 PAGE 47
S U R V E Y W O R L D ’ S B E S T T R A D E F I N A N C E B A N K S
MARCH 2006
Lucrative GOING
PAGE 18
payouts are
fueling a
growing
controversy
FOR GOLD
over executive
compensation

CONTENTS
MARCH 2006 | VOL.20 NO.3
COVER STORY COVER STORY
REGULARS
BY GORDON PLATT
18 Going For Gold
With M&A activity heating up, 2 Dear Reader
concerns are growing that A letter from the editor.
executives’parachutes may be
getting too billowy and their 4 Newsmakers
landings too soft. New Fed chief Ben Bernanke staves off a
slump in the dollar; Morgan Stanley CEO
FEATURES John Mack loses out once again;
Argentina’s Kirchner begins to win
22 Leveraged Loans SECTOR FOCUS
BY LAURENCE NEVILLE grudging respect; and the Enron trial
Yield-hungry investors are piling starts with a whimper, not a bang.
into a market that offers high
returns,reduced risks and a much- 8 Milestones
appreciated degree of inflation Flows between countries in the southern
protection. hemisphere now account for one-third of
all FDI going to developing countries; RZB
25 Country Focus: Brazil COUNTRY FOCUS: intensifies its push into Russia; private
BRAZIL equity flows into India are skyrocketing;
After enduring some stormy
BY ANTONIO GUERRERO and Japan’s consumers open their purses.
times,Brazil is beginning to see
the results of President Lula’s
12 Emerging Markets Roundup
careful—but often controversial—
The latest news from India, China, Brazil
economic management. and Russia.
31 World’s Best Treasury AWARDS: TREASURY & 16 Emerging Markets Investor
Providers CASH MANAGEMENT
Key information for investors in emerging
BY ANITA HAWSER
Global Finance selects the best markets.
treasury and cash management
banks and the best providers of 49 Global Equity/DRs
treasury management systems and Russian energy companies, as well as banks
and industrial corporations, are scheduled
services by category.
to raise billions of dollars of capital in the
GDR markets in London and Luxembourg
47 Equity Derivatives CORPORATE TOOLBOX
this year.
BY DENISE BEDELL
As the trend toward using equity
derivatives in corporate finance 52 Foreign Exchange
sweeps Europe,the situation in the The dollar’s yield advantage to the euro and
US couldn’t be more different. the Japanese yen is supporting the
greenback, despite worries about the US
current account deficit.
54 Corporate Debt
The recent increase in worldwide mergers
and acquisitions is resulting in a rise in
large corporate bond issues to help pay for
the takeovers and to take advantage of low
long-term rates.
55 Mergers & Acquisitions
Sparks flew when Mittal Steel, the world’s
largest steel company, which is 88%-owned
by the Mittal family of India, made a hostile
bid valued at $25 billion for Arcelor, the
world’s number-two steelmaker, based in
Luxembourg.
2006 MARCH 1
DEAR READER
MARCH 2006 | VOL.20 NO.3
An Investment In Openness
T
here can be few things in the corporate world that are
more complex,contentious and,frankly,confusing than the
EDITOR IN CHIEF AND CHAIRMAN: PAOLO PANERAI
issue of executive compensation.It is into this confounding
PUBLISHER AND PRESIDENT:JOSEPH D. GIARRAPUTO
and controversial area that we wade in this month’s cover story.The
ASSOCIATE PUBLISHER:MATTEO GABBA
timing is no coincidence:With expectations running high that
2006 will turn out to be another record year for M&A,the chances
EDITOR:DANKEELER
are that multi-million-dollar payouts to top executives of takeover
EUROPE EDITOR/LONDON:ANITA HAWSER
targets will making headlines once again.
CONTRIBUTING WRITERS:
While the details of the payouts may be new,the premise of the GORDON W. PLATT, JR., DENISE BEDELL,
LAURENCE NEVILLE, ANTONIO GUERRERO,
headlines is likely to be anything but.Every so often a story THOMAS CLOUSE, AARON CHAZE, KIM ISKYAN
emerges that triggers a wave of condemnation for the ever-
PRODUCTION MANAGEMENT (MILAN):
increasing size of payouts to senior corporate managers.It usually GIULIANO CASTAGNETO
follows the revelation that a departing executive is leaving a ART DIRECTION:ER CREATIVITY/ENRICO REDAELLI,
CLARA CIOCCHINI
company with his pockets stuffed with cash.This year it is more
COPY EDITOR:TINA ARIDAS
likely to focus on accusations that an executive primed a company
for takeover specifically so they could get their hands on a lucrative
MANAGING DIRECTOR, EUROPE AND ASIA:GRAEME McQUEEN
golden parachute.
VICE PRESIDENTS, SALES:SEBASTIAN CAZEIRO,
By and large the arguments trotted out by supporters and critics LEWIS GALATI, PETER RIORDAN, THOMAS GEORGIADES,
RICHARD SCHOLTZ, SALES MANAGER, EUROPE
alike are much the same.Proponents of mega-payouts will always say
they encourage executives to act in the shareholders’best interests.
MKT’G COORD, SPECIAL PROJECTS/EVENTS:
Critics will invariably point out that the managers’and shareholders’ NATASHA TRAJKOVA
best interests are very often quite different.Unfortunately,both sides PUBLISHING ASSOCIATE:
LAURA GALLETTI
of the argument are flawed.Rare is the manager who can honestly
MANAGING DIRECTOR, OPERATIONS:
say they act only for the shareholders,disregarding his or her own
CHRISTOPHER GIARRAPUTO
personal interests.Similarly,though,it’s hard to find fault with the
ACCOUNTING MANAGER:YAWO GBEGNEDJI
assertion that a manager who is promised a rich reward for doing
ADVERTISING OFFICES
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NEW YORK 1-212-447-7900
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those shares become more valuable? ADVERTISING REPRESENTATIVES: Bulgaria:Elka Koleva, Adia
The problems arise in the details.Some compensation schemes Advertising Agency. China: Mary Yao, Media Gateway
International Ltd. Hong Kong, Singapore:Godfrey Wu, MHI
are so complex that it is almost impossible for investors or regulators Limited. India:Faredoon Kuka, Ronny Mistry Assoc. Pvt Ltd.
Indonesia:Rita Jayadi, PT Mediarep.Israel:Asa Talbar, Talbar
to assess their fairness or appropriateness.Others may simply be Media.Japan:Shigeru Kobayashi, JAC Media.Malaysia: Adil
Jilla. Mexico & Costa Rica: Xavier Romero Goytortua.
badly designed,offering the executive too many opportunities for Philippines:Abdel Teodoro. Russia/CIS Baltic States:Arkady
self-enrichment and too few incentives to enrich the company. Komarov.South Korea:Heinz Kim, Heinz Communications Inc.
Taiwan: Keith Lee, Advance Media Services Ltd. Thailand:
The SEC’s efforts to force companies to calculate and reveal the Nartnittha Jirarayapong, N.J. International Media Company, Ltd.
Turkey:Lemi Tanca
true value of their top executives’compensation packages (see page
GLOBAL FINANCE MEDIA INC
20) are laudable.If successful,the new rules should ensure investors CHAIRMAN:P. PANERAI
VICE CHAIRMAN:A. BASODAN
have access to much more information than ever before.But DIRECTORS:G. CAPOLINO, J. GIARRAPUTO,
A.MATTEI, I. MAJEED, V. TERRENGHI
legislation is not enough.Corporations must be more open about SECRETARY:L. PANERAI
FOUNDING EDITOR:CARLG.BURGEN
the lengths to which they are going to attract and retain their key
March 2006, Volume 20, Number 3. Global Finance (ISSN 0896-4181/USPS
top executives.After all,if the company is confident the executive is
006-578) is published monthly except a combined July/August issue in July
worth the investment,why keep it a secret? by Global Finance Media Inc, 411 Fifth Avenue, New York, NY 10016. Telephone:
1-212-447-7900. Fax: [phone]. E-mail: [email protected]. London
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2 MARCH 2006

G
NEWSMAKERS GLOBAL F FINANCE AROUND THE WORLD
UNITED STATES
UNITED STATES
BERNANKE SAVES THE MORGAN STANLEY’S CEO LETS
ANOTHER BIG ONE GET AWAY
DAY FOR THE DOLLAR
In his first semi-annual additional interest rate John Mack,
testimony before Congress increases might be needed to CEO of Mor-
on February 15,the new contain inflation were enough gan Stanley,
who took over
Federal Reserve chairman,Ben to lift the dollar,which has
the firm last
Bernanke,sounded more like a been sensitive to rate
June follow-
grizzly than the “Gentle Ben” differentials between the US
ing the ouster
that some analysts had and other major economies.
of Philip Pur-
anticipated.His upbeat “The economy now appears
cell, made it
assessment of the US economy to be operating at a relatively
clear that ma-
and hawkish comments on high level of resource
jor acquisi-
monetary policy kept the utilization,”the Fed chairman
tions would be
dollar from falling on said.“The risk exists that, a significant
simultaneous news of a sharp with aggregate demand part of his
decline in foreign demand for exhibiting considerable game plan for
US treasury securities.A momentum,output could reinvigorating
source of critical financing for overshoot its sustainable path, the company.
the US trade and current- leading ultimately—in the Last Novem-
account deficits,foreign buying absence of countervailing ber Morgan Still looking:Morgan Stanley’s John Mack
of US treasury bonds dropped monetary policy action—to Stanley offered
to a six-month low in further upward pressure on to buy hedge-fund manager FrontPoint Partners, but the deal
fell through because the price was too high. Now Mack has let
December of $18.3 billion inflation,”he said.
another big target slip away.
from a record $54.5 billion a Bernanke made it clear that
BlackRock, one of the largest investment management
month earlier.The falloff raised monetary policy will depend
firms in the United States, agreed last month to combine with
worries in the currency on a careful analysis of
the asset management business of Merrill Lynch to create an
markets about a potential economic data.With the
independent company with nearly $1 trillion in assets under
reversal of petrodollar flows to economy appearing to remain
management. Two weeks earlier, Mack broke off talks to buy a
the US bond market that strong,economists have begun
controlling stake in BlackRock, after failing to agree on a price
could undermine the dollar. talking about the possibility with Pittsburgh-based PNC Financial, which holds 70% of
Bernanke’s hints that that rate increases could BlackRock’s stock.
continue in the second Merrill Lynch agreed to sell its asset management business
half of 2006,which to BlackRock for a 49.8% stake in the combined entity. Spin-
would be bullish for the ning off the asset management segment reduces the per-
dollar.For his part,the ceived or real conflicts of interest that may occur when
new Fed chairman advisers sell products that are sponsored by their own firms,
managed to get through says Fitch Ratings, which affirmed Merrill Lynch’s ratings af-
his first Humphrey- ter the announcement. Stan O’Neal, chairman and CEO of Mer-
rill Lynch, says, “We will gain what amounts to a half-interest
Hawkins testimony,as
in a firm twice the size of our unit, with enhanced growth
the ritual is known,
prospects.”
without making any
BlackRock CEO and chairman Laurence D. Fink will keep
blunders and,in fact,
those posts in the combined firm. Fink was one of the people
winning some praise
wooed by Morgan Stanley to succeed Purcell last year, but he
from market participants
told the search committee that Mack would be a better choice.
and analysts for his
Meanwhile, look for Mack to make a significant acquisition of
straightforward
an asset manager before too long, if he can find one at the
Simon Zadek
presentation. right price. –GP
Bernanke:Straightforward presentation
—Gordon Platt
4 MARCH 2006

G
NEWSMAKERS GLOBAL F FINANCE AROUND THE WORLD
ARGENTINA
KIRCHNER’S SUCCESS CONFOUNDS HIS CRITICS
After being regarded as the fueled by a 21% increase in negotiated temporary
scourge of the government spending,an price controls with key
international financial average 20.3% wage hike that retailers.
community when he sparked domestic demand,and Kirchner,one of the
completed the largest-ever record exports of $40 billion leaders of Latin
sovereign debt restructure—a (versus $26 billion in 2002). America’s “pink tide”of
more than $100 billion deal The economy is expected to left-leaning regimes,
with somewhat draconian expand by 6.5% in 2006. was happy to rid
haircuts—Argentine president In fact,some analysts are Argentina of IMF
Nestor Kirchner is redeeming concerned that the economy controls by prepaying
himself.Investors can hardly is perhaps overheating. its $9.8 billion debt to
Kirchner:Making new friends
ignore Argentina’s recovery, Inflation remains worrisome, the multilateral.The
with GDP expanding by 9.1% hitting 12.3% last former three-term governor So far,his compatriots are
in 2005—the fastest growth December—the highest jump of Santa Cruz province is also standing firmly behind their
rate in 13 years. since May 2003—and 12.1% proud of the drop in leader.Recent polls show
Last year marked the third in January 2006,compared unemployment from a peak Kirchner enjoyed a 75%
consecutive year of growth with 7.2% a year earlier.While of 25% in 2002 to 10% in approval rating in February,
above 8%,following a four- economists argue that January this year.He hopes to making him one of Latin
year recession unleashed by increased investments will bring joblessness below 10% America’s most popular
the 2001 $95 billion debt serve to thwart inflation, next year.He reports poverty leaders.He now needs to get
default that produced a 10.9% which should end the year rates also fell to 34% in 2005 investors back onto his
GDP contraction in 2002.Last closer to 10%,economy from 57.5% when he took bandwagon.
year’s strong showing was minister Felisa Miceli has office in May 2003. —Antonio Guerrero
UNITED STATES
‘TRIAL OF THE CENTURY’ BEGINS WITH EMPTY SEATS
The landmark trial The case may yet grab the attention of the American public,
of Jeffrey Skilling, however, once the government’s star witness, Andrew Fastow, for-
Enron’s former chief mer chief financial officer and the architect of Enron’s off-the-
executive, and Ken- books partnerships, takes the stand. Television ratings will surely
neth Lay, its former rise if Skilling and Lay testify in their own defense, as they say they
chairman, could have will, to prove their innocence.
a widespread effect One of the early witnesses, Ken Rice, former CEO of Enron
on corporate gover- Broadband Services, said that he had lied to Wall Street analysts,
nance in America and his employees and the company’s board about how the EBS busi-
the confidence of in- ness was faring. “I knew that Mr. Skilling and I had misled investors
vestors in financial on a number of occasions about the prospects of our business at
Ken Lay arriving at the courthouse markets. One would EBS,” he said under cross-examination. Skilling is facing 31 charges,
never know the stakes including conspiracy and fraud. Lay, once one of Houston’s most re-
were so high, however, judging by the empty seats in the courtroom spected philanthropists, is facing seven charges.
when the Enron trial finally opened, more than four years after the Skilling and Lay are expected to testify that they truly believed
company collapsed in December 2001, destroying thousands of that Enron’s prospects were as bright as they portrayed them, even
jobs after it was revealed that an estimated $40 billion in debts had when the company was on the brink of disaster. The prosecution
been hidden in secret accounts. The Houston courtroom of US Dis- could have a difficult time of proving the defendants were lying, es-
trict Judge Sim Lake was seldom more than three-quarters full in pecially when they are forced to rely on witnesses who admit they
February, and the trial is expected to run well into May. were lying as well. —GP
6 MARCH 2006

G
MILESTONES GLOBAL F FINANCE TAKING NOTE
GLOBAL
JAPAN
“SOUTH-SOUTH” FDI ECONOMY BOOMS AS JAPANESE
FLOWS GROWING SHOPPERS LOOSEN PURSE STRINGS
India’s Tata group was south-south FDI typically Japanese
putting the final touches on reaches very poor and remote consumers,
a proposed $2.5 billion developing countries. known for their
investment in power,steel, Multinational companies tight-fisted
fertilizer and coal projects in based in emerging markets are s p e n d i n g
Bangladesh as Global Finance more familiar with the often- habits, are fi-
nally beginning
went to press.The company difficult local conditions and
to loosen up.
warned that it may move the practices.They also like to
This change in
projects elsewhere if its terms invest close to home,although
behavior could
are not accepted,but some of the larger multi-
be a blessing,
regardless of the outcome,the nationals from the south have
not only for the
proposed deal highlights a become global and have made deflation-rav-
growing trend in foreign significant south-north aged Japanese
direct investment in emerging investments.Mexico’s Cemex, economy, but
markets.An increasing share for example,acquired British for Japan’s
of the FDI is coming from construction-materials neighbors and
countries in other emerging company RMC last year in a trading part-
ners as well. The urge to splurge:Demand is on the rise
markets,often neighboring $4.1 billion cash transaction
Japan’s econo-
nations. that included the assumption
my, the second largest in the world, grew at an annual
So-called south-south FDI of debt.
5.5% rate in the fourth quarter of 2005, thanks largely to
now accounts for one-third of Overall FDI flows to
the revival in consumer demand. That was five times high-
all FDI going to developing developing countries
er than the 1.1% annualized rate of growth in the US econ-
countries and is growing continued to rise in 2005, omy in the same period and three times higher than GDP
much faster than north-south gaining 13% to a record $274 growth in the eurozone in the fourth quarter.
FDI,according to a study by billion,according to Japan’s GDP deflator was softer than expected in the fi-
Dilek Aykut and Joseph Battat UNCTAD data released in nal three month of last year, however, declining at a 1.6%
of the World Bank.This is January.For the first time year-over-year rate, and most likely delaying the end of
good news,they say,because since 1999,however,FDI to the Bank of Japan’s zero interest rate policy. “No wonder
the yen didn’t know which way to turn,” says Charles Du-
China,the largest
mas, chief economist at London-based Lombard Street Re-
recipient of any
search. “The economy is booming and deflation
developing country,did
intensifies!”
not increase.FDI to
The quarterly growth rate of Japan’s GDP has risen
South Korea and
4.5% over four quarters, making up for the 2004 slow-
Malaysia fell last year.In down, Dumas says. This pickup in growth was not thwarted
Latin America,such by the Chinese domestic demand and import slowdown in
major economies as early 2005, which for a while held back Japan’s net ex-
Mexico,Brazil and Chile ports. Later in 2005, the US boom took over as the domi-
all registered smaller nant factor for net exports, but the chief force for Japan’s
inflows of FDI than in GDP growth has been domestic demand, according to Du-
mas. Japanese consumer confidence is at a 15-year high.
2004.In Russia,FDI
The current acceleration in the US economy could mean
more than doubled,
that Japan’s GDP will grow even faster in the first and sec-
however,to $26 billion
ond quarters of 2006, Dumas says. Now, if only Americans
last year,as high oil
can learn to save more, while the Japanese spend more,
prices stimulated inward
global imbalances could begin to correct themselves.
investment. —GP
—Gordon Platt
8 MARCH 2006