Global Finance (June 2005)

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Argentina Settlement Casts A Cloud Over Emerging Markets

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Argentina Settlement Casts A Cloud Over Emerging Markets

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rgentina’s finance minister, Guillermo Nielsen, was clearly thrilled last month when he learned that his country had won a resounding victory in its battle to push through its controversial debt swap deal (see cover story, page 12). But even he must have been aware that there is every chance the victory will turn out to be a Pyrrhic one. By forcing through such a draconian settlement, Argentina has arguably done a disservice to the world’s emerging markets. Already wary, investors will almost certainly be looking for richer returns when they lend to emerging markets in future. Added to that, Argentina’s move comes at a time when many yield-hungry investors have been becoming interested in emerging markets debt for the first time.Those that have not already taken the plunge may well back off after seeing their peers taking such a severe haircut on their Argentine bonds. It remains to be seen whether Argentina’s actions will provoke a long-term backlash among lenders to the emerging markets. Certainly, calls will grow for an international court to administer sovereign defaults—something many wealthier nations have been hankering after for years.The establishment of such a court is by no means a foregone conclusion, though, as even some of its proponents are concerned that its existence could actually encourage sovereign defaults. They are right to be skeptical.The court proposal is backed by the IMF, which was one of the chief cheerleaders that helped to inflate the Argentine bubble. Some contend the IMF is as much to blame for the Argentine default as was Argentina itself, claiming it was behind many of the policy mistakes that led to the eventual financial maelstrom in 2001.Whether this is true or not, the organization should certainly shoulder some of the responsibility for Argentina’s financial crisis. Ultimately, Argentina may be the only nation to suffer in the longer term from the fallout after the debt swap. Emerging markets investors should be smart enough to recognize that one country’s default will not necessarily trigger a rash of other copycat defaults. Once the shock subsides, they should revert to valuing emerging markets risk rationally on a case-by-case basis.They will continue to treat Argentina with extreme caution, though, and it is this fact that will cause Argentina the most pain. Revitalizing its economy is dependent on improving its infrastructure and accomplishing that will take a great deal of foreign investment. For the foreseeable future, that will be hard to come by. Until next month,

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CONTENTS

COVER STORY 12 Winning by Default

With the shockwaves from last year’s election debacle subsiding, Ukraine is poised to embark on a phase of explosive—and potentially traumatic—growth.

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Awards Ceremony: Stars of Russia, 2005

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Dear Reader A letter from the editor.

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AWARDS CEREMONY STARS OF RUSSIA 2005

Stanley, can’t seem to catch a break.

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VOICE TECHNOLOGY BY DENISE BEDELL

Newsmakers Mexico City mayor Andrés Manuel López Obrador consolidates his position as frontrunner in the race for Mexico’s presidency; Sir Roy Gardner, chairman of Manchester United and CEO of UK energy company Centrica, vows to cut his ties with JPMorgan Chase; Mark Hurd takes over helm at HP and wins rave reviews; and Philip J. Purcell, CEO of Morgan

COUNTRY REPORT: UKRAINE BY LAURENCE NEVILLE

Voicing Approval Already recognized as a key element of any CRM strategy, speech recognition technology is only set to grow in popularity as prices come down and products become increasingly sophisticated.

REGULARS

COVER STORY BY MARK LEHANE

Argentina’s default and subsequent meager settlement for creditors will change forever the rules for emerging market investors.

FEATURES 16 Country Report: Ukraine

JUNE 2005 | VOL.19 NO.6

Milestones Washington is snubbed as the Organization of American States appoints Chilean interior minister José Miguel Insulza as secretary general; prospects improve for convergence of international accounting standards; Hong Kong adopts a currency band that foreshadows a float of China’s currency; and regulators take steps to trim the costs of Sarbanes-Oxley.

24 Regional Report: The Middle East Skyrocketing oil prices have brought a flood of liquidity into the Middle East, providing vast opportunities for fleet-footed investors and financial institutions.

30 Markets: Dubai Financial Exchange Dubai’s international financial exchange, due to open in September, aims to provide a much-needed arena for drawing in international capital.

32 Best Investment Banks It’s been a busy year for the world’s investment banks as they have vied with each other to win a greater slice of an ever-growing pie.

REGIONAL REPORT: MIDDLE EAST BY JONATHAN GREGSON

DUBAI INTERNATIONAL FINANCIAL EXCHANGE BY ANITA HAWSER

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The US Securities and Exchange Commission is getting ready to reform the securities-offering process, hoping to attract more foreign issuers to the US markets; Brazil’s low-fare airline GOL issues shares; and Maybank starts an ADR program.

52 Foreign Exchange The dollar bulls are running again as US economic data come up rosy and European growth disappoints.

AWARDS WORLD’S BEST INVESTMENT BANKS

Correction: The CEO of Austria’s Erste Bank is Andreas Treichl. In our April 2005 issue we mistakenly identified him as Andreas Treichi.We apologize for this error. 2

48 Focus: Global Equity/DRs

54 Corporate Debt Credit spreads widen following early GM, Ford downgrades, as investors seek safety in US treasury bonds.

55 Mergers & Acquisitions Latin American companies are seeking acquisition targets in the US to participate in the fast-growing Hispanic market.

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HAPPY HONEYMOON FOR NEW HEAD OF HEWLETT-PACKARD

FOX CLIMB-DOWN OPENS WAY FOR AMLO’S BID FOR PRESIDENCY

ark Hurd, chief executive and president of Hewlett-Packard, took the reins at the Palo Alto, California-based computer firm only at the end of March, but already he is being given credit by some investors for turning the company around. HP’s stock rose sharply May 18 after it reported earnings that were one cent ahead of expectations. In his inaugural call with analysts, the straight-shooting Hurd, former CEO of NCR, which was once known as National Cash Register, acknowledged that HP’s overall performance leaves room for improvement. But he left no doubt that he intends to get that improvement, even if it means letting more workers go and sending more jobs offshore.

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HP in February fired Carly Fiorina as chairman and CEO for failing to cut costs and boost profits fast enough following the acquisition of PC-maker Compaq. Whether Hurd will be able to work the same magic at HP that he did at smaller NCR, whose stock price tripled under his stewardship, remains to be seen. One key will be reviving HP’s storage business, Hurd says. New products, including the company’s first virtual tape library, offer some reason for hope in this regard. But there are no quick fixes, Hurd says. He has yet to reveal whether he will spin off the company’s printer or PC units and concentrate on data warehousing.The broad outlines of the new HP remain murky, and some investors appear to be jumping to conclusions. If HP does manage to make a comeback, however, it could prove just how much difference a CEO can really make. Optimism prevails for now, but major restructurings don’t always go smoothly. Hurd needs to take advantage of his honeymoon period to make some tough decisions, and many are betting he will do just that. —Gordon Platt

When the Mexican government moved to keep Mexico C i ty m ayo r A n d r é s Manuel López Obrador— commonly referred to by his initials, AMLO—from seeking the presidency next year, some 250,000 M ex i ca n s to o k to t h e streets. The outcry forced the Vicente Fox administration to back off, consoli d a t i n g A M LO ’s ro l e a s frontrunner for the July AMLO: Ready for the race 2006 election. While Fox cannot seek a second term due to a reelection ban, getting AMLO, of the opposition PRD party, out of the way could have improved the ruling PAN party candidate’s chances. The plan was to hold AMLO in contempt of court for a 2001 case involving his failure to halt road construction on land expropriated by the city but under dispute by previous owners. The case would not have yielded criminal charges but would have kept AMLO out of the race, as Mexican law bans anyone with pending legal cases from running for president. Polls give AMLO a 13-point lead over other hopefuls. He will resign as mayor on July 31 to run for the PRD nomination in August. A conciliatory meeting between AMLO and Fox after the government dropped its case was regarded as a virtual handover of power and eased market concerns that the political climate was deteriorating. “While some [marginal investors] have begun to reduce their exposure, I am concerned that the political drama that is just beginning will only serve to accentuate the contrast between Mexico’s relatively good economic fundamentals and its precarious political environment,” wrote Grey Newman, chief Latin American economist at Morgan Stanley, as Mexico’s Congress voted to lift AMLO’s immunity. Yet he feels the traditional economic upheaval at the end of every six-year presidential term may be a thing of the past. If elected, AMLO faces important challenges. A World Bank study contends Mexico’s governability hit a low point last year in such areas as political stability and government efficiency. A populist, AMLO wants to tackle poverty, though analysts are encouraged by the fact that central bank independence will not allow him to tweak monetary policy. Unfinished structural reforms, some feel, are also making Mexico less competitive at a time when competition from China is rising, —Antonio Guerrero

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UNITED KINGDOM

MONEY TALKS, SIR ROY WALKS Emotions flared in the UK last month when US billionaire Malcolm Glazer, owner of the Florida-based Tampa Bay Buccaneers football team, gained control of Manchester United, the revered British soccer club. Sir Roy Gardner, who chairs Man U and whose day job is CEO of Centrica, the parent company of British Gas, let rip. He vowed to cut his ties with JPMorgan Chase because of the US investment bank’s role in financing Glazer’s bid. JPMorgan provided the $500 million debt facility that Glazer used to buy out J.P. McManus and John Magnier, the Irish horseracing tycoons who held a 28.7% stake in United. Added to his previous holdings and recently acquired shares, that gave Glazer 77% of the club idolized by his three sons. Sir Roy says JPMorgan had a conflict of interest in the transaction as a result of its recent merger with Cazenove, the UK investment bank that advised Man U on the other side of the deal. Cazenove partnered with JPMorgan to gain access to the US firm’s capital so that it could play in the big leagues and try to become the UK’s leading investment bank.

The Glazer deal will make Manchester United the world’s most-valuable sports franchise, beating out the New York Yankees baseball team. Perry Capital and OchZiff, two of the hedge funds that helped Glazer pull off the $1.5 billion takeover, are connected to The Children’s Investment fund, or TCI. Sir Sir Roy: Roy: Lets Lets rip rip London-based TCI led the campaign that ousted chief executive Werner Seifert from the Deutsche Boerse, along with chairman Rolf Breuer, who agreed to leave by the end of this year. TCI was instrumental in forcing the Deutsche Boerse to abandon its unpopular bid for the London Stock Exchange. Unlike Man U, apparently, the LSE was not for sale. — GP

UNITED STATES

MORGAN STANLEY’S PURCELL FEELS HEAT FROM FLORIDA RULING Philip J. Purcell, the embattled chief executive of Morgan Stanley, can’t seem to catch an even break. A Florida jury ruled last month that Morgan Stanley, the world’s biggest securities firm by market value, must pay billionaire investor Ronald O. Perelman $1.45 billion, including $850 million in punitive damages. The verdict came less than two months after eight former executives of Morgan Stanley, led by former President Robert Scott, began a campaign to oust Purcell. Jurors in a West Palm Beach state court ruled that Perelman, now chairman of cosmetics-maker Revlon, was deceived by Morgan Stanley back in 1998, when he sold his camping-equipment company, Coleman, to Sunbeam. Perelman alleged that Sunbeam conspired with Morgan Stanley to mislead him about the consumer-products company’s sales and prospects. Sunbeam filed for bankruptcy protection in 2001, making the shares that Perelman acquired

in the leveraged buyout worthless. Purcell said the court decision was a great injustice and that Morgan Stanley will appeal. “Far from being a part of the Sunbeam fraud, Morgan Stanley was a victim of that fraud, losing $300 million when Sunbeam collapsed,” the investment bank said in a statement. It also criticized the trial judge for imposing highly prejudicial rulings in the case. The retired executives who are trying to unseat Purcell tried to make the most of the Florida ruling. They said it was the latest example of the legal setbacks suffered by the firm under Purcell and Donald G. Kempf Jr., Purcell’s longtime friend, who was named chief counsel in 1999. Purcell became CEO of Morgan Stanley in 1997, when Dean Witter Discover acquired the firm for $10.4 billion. To help calm the firm’s critics, who want to split the firm in two, Morgan Stanley’s board has announced the possible spin-off of its Discover credit-card unit. —GP

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US RECEIVES BLOODY NOSE FROM THE OAS

FINANCIAL LEADERS CALL FOR UNIFIED REGULATION

ashington was dealt a blow when neither of its two candidates to head the Organization of American States (OAS)—considered a US-dominated regional organization—garnered enough votes. Instead, Chilean interior minister José Miguel Insulza was elected secretary general with support from most Latin American and Caribbean governments, ending the organization’s most contested election since its founding in 1948. The US initially backed former Salvadoran President Francisco Flores for the OAS post, in what was viewed as a reward for Flores’s decision to send troops to Iraq. El Salvador is the only Latin American country remaining in the US-led coalition.When Flores failed to gain enough support, the US then backed Mexican foreign minister Luis Ernesto Derbez. Derbez ultimately withdrew his candidacy after voting in April gave him and Insulza a

With companies on both sides of the Atlantic contemplating a raft of regulatory measures around financial accounting, leading European commentators called on European and US regulators to seek a “common international approach.” In a damning speech, Paul Druckman, president of the Institute of Chartered Accountants in England & Wales (ICAEW), warned that “regulatory overkill” could destroy any hopes of convergence on both Paul Druckman sides of the Atlantic, which could ultimately impede investment and job creation. Referring to the myriad regulations facing listed companies in developed markets, Druckman said, “Standards of thousands of pages impose costs that inhibit growth. The problem is particularly acute for developing nations that want to join in the global economy,” adding that international standards should not be the preserve of “an exclusive club.” Druckman made the comments at an ICAEW conference in Brussels on the challenges facing business and government in the development of global capital markets. Not missing an opportunity to poke holes in the controversial US Sarbanes-Oxley legislation, Druckman said companies in developed countries questioned whether the benefits of such legislation outweighed the cost of compliance. In an aside, he added that talk of convergence between US GAAP and International Financial Reporting Standards (IFRS) would result in more “rules-based” standards. “The upshot of all this may be that the potential economic powerhouses of the future are simply unable to adopt global standards,” he said. At another conference on transatlantic convergence, in Luxembourg in April, James Leigh-Pemberton, chairman, Credit Suisse First Boston’s European investment banking division, had called on financial leaders participating in the US-EU Summit in Washington this June to urgently address the issue of regulatory convergence of transatlantic capital markets. He called on the Committee of European Securities Regulators (CESR) not only to consistently implement across Europe recommendations that formed part of the European Commission’s Financial Services Action Plan, but also to work closely with their US counterparts. “The EU is on the brink of a tremendous reform opportunity, and the securities industry in the EU and the US has an important role to play,” he stated. “We need to continue pushing for the harmonization of the EU internal market as well as the ultimate convergence of the transatlantic market.” —Anita Hawser

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17-17 tie. Eighteen votes were needed to win. Insulza won in May, with 31 votes, two abstentions (from Chile’s traditional foes Bolivia and Peru) and one blank ballot. The US reluctantly backed Insulza after Derbez’s withdrawal. The election is a setback for US diplomacy, hit hard by the region’s push for a homegrown trade bloc to replace the nearly defunct USled Free Trade Area of the Americas (FTAA), congressional hurdles in Washington and Central America for passage of CAFTA, and the Bush administration’s controversial immigration reform proposals. Insulza’s election was made more sensitive by the fact that Washington is host to OAS headquarters, and the US provides some 60% of its annual budget. Insulza, elected for a fiveyear term, is expected to focus on strengthening democracy and helping find solutions to issues of poverty and insecurity. He will also have to plug the OAS’s $17 million budget gap. As a pro-market Socialist, Insulza is likely to work well with the region’s administrations, most of which are led currently by leftist and center-left leaders. His relations with Washington— where he will now reside— may be a bit icier. —Antonio Guerrero

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LOOSER CURRENCY PEG COULD FORESHADOW MOVE BY CHINA The Hong Kong Monetary Authority on May 18 loosened the Hong Kong dollar’s 22-year-old peg to the US dollar, allowing the currency to trade in a band of between 7.75 and 7.85 to the greenback.The move likely was vetted by the Chinese authorities, analysts say, and could be a trial run for a similar move by China to gradually free the yuan to trade in a narrow band. All signs are pointing to an imminent revaluation of the Chinese currency, say market strategists at JPMorgan Securities in London. China has fixed the value of its currency at 8.27 to the US dollar since 1995, allowing it to move in a tiny band of 0.3% around this level.That band could be expanded to 1% or 1.5% soon and to as much as 10% by the middle of 2006, according to JPMorgan. Although the US treasury last month stopped short of naming China a currency manipulator, it warned that it will do so in October unless China moves toward a floating exchange rate. Treasury secretary John Snow says he fully expects China to loosen its peg in the next few months. The only reason the treasury avoided calling China manipulative, he says, is that this

could have incited US lawmakers to take action to restrict Chinese exports to the US. “I shudder to think how Loosening ties: the markets Joseph Yam, head of would respond the Hong Kong if they saw the Monetary Authority US turning its back on open markets,” he said. Analysts say Hong Kong’s adoption of a currency band was an effort to increase local interest rates and to discourage speculators from using the Hong Kong dollar as a tool to speculate on a yuan revaluation. Two of Hong Kong’s biggest banks raised their borrowing rates the day after the peg was loosened. — Gordon Platt

UNITED STATES

REGULATORS ACT TO CUT COSTS OF COMPLIANCE WITH SARBOX US regulators took two steps last month to reduce the costs of complying with the Sarbanes-Oxley Act, saying that companies and auditors should use more common sense in applying the new rules on internal control over financial reporting. The Office of the Chief Accountant of the Securities and Exchange Commission issued a statement that, in effect, gave management some wiggle room. “Management is not required by Section 404 of the act to assess other internal controls,” it said. “Further, while ‘reasonable assurance’ is a high level of assurance, it does not mean absolute assurance.” The SEC staff statement also suggested that public accounting firms should recognize that there is a zone of reasonable conduct by issuers that should be recognized as acceptable. The staff said it believes that management should become more efficient in completing future assessments of controls over financial reporting through the natural learning process. Meanwhile, William McDonough, chairman of the Public Company Accounting Oversight Board, said too much effort is being expended in some cases to verify financial statements. The board issued a statement of its own clarifying the rules, which it said

would tend to reduce the costs of compliance. Under Section 404 and the rules the SEC adopted to implement the section, each accounting firm that prepares or issues an audit report on a company’s annual financial statements must attest to management’s assessment of internal control. While identifying control deficiencies is important, the overall focus of internal-control reporting should be on those items that could result in material errors in the financial statements, the SEC McDonough: “Too much effort expended” staff statement said. Corporate executives have complained that the costs of compliance are high, and the main effect has been to increase the earnings of their accountants. —GP

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CRACKS APPEAR AS PUTIN FACES ONSLAUGHTS ON ALL FRONTS

wo of Taiwan's political leaders were met with enthusiasm from the Chinese people and the domestic media during recent visits to the mainland. Lien Chen in late April became the first chairman of Taiwan's Chinese Nationalist Party to return to the mainland since the party fled in 1949 to Taiwan. And James Soong, the leader of another of Taiwan's political parties, traveled there in May. Both reaffirmed commitments to peaceful “reunification” and continued economic cooperation, while China offered various incentives—including two pandas—to win support from Taiwan’s 23 million residents. Taiwan’s president Chen Shui-bian has challenged the validity of commitments made by Lien and Soong, who represent minority parties rather than Chen’s proindependence Democratic Progressive Party. Chen Shuibian has repeatedly rejected the “one China” principle, but he will probably now face increased pressure, both domestically and abroad, to meet with Chinese President Hu Jintao. While China’s diplomats were buttering up Taiwan’s

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opposition politicians, the country’s finance ministers were coming under growing international pressure to abandon China’s currency peg to the US dollar.While North American and European countries threatened possible sanctions, speculators bought heavily on rumors of an exchange rate change. New requirements from China's State Administration of Foreign Exchange (SAFE) have blocked a method for Chinese private companies to raise capital in overseas markets. In the past, Chinese companies circumvented rules limiting foreign investment by setting up foreign shell companies.The new requirements force residents to register any assets transferred abroad. —Thomas Clouse

Taiwan’s Taiwan’s president president Chen Chen Shui-bian Shui-bian

A spate of high-level diplomatic contacts between the United States and Russia underscored America’s harder stance toward the Kremlin. During visits to Russia in early May, both Secretary of State Condoleezza Rice and President George W. Bush took Russian President Vladimir SWITZERLAND, GERMANY, Putin to task for his policies of centralizing power, clamping down on the independent media and his anti- Protesters in Uzbekistan oligarch campaign. After months of uncertainty, in mid-May the Russian government announced that it would scrap plans to merge state oil company Rosneft with gas giant Gazprom. Instead of merging the two companies to raise the state’s stake in Gazprom to a majority holding, the government will pay some $7 billion for a 10.7% share held by the gas giant’s subsidiaries. The move should pave the way to the long-awaited liberalization of the market for Gazprom shares. The spate of Russian corporates raising capital on international markets continued, with Pyaterochka Holding, the country’s largest supermarket chain, raising nearly $600 million in early May by selling a 30% stake to investors. Shares were sold at the bottom of the targeted price range but were nevertheless at a valuation premium to peers. A few weeks earlier carmaker Severstal-Avto raised $135 million in an IPO, although it also was forced to sell shares below its targeted price level. Meanwhile, Russia’s largest steelmaker, Evrazholding Group, announced plans to launch an IPO. As investors awaited with baited breath the verdict in the trial of former Yukos head Mikhail Khodorkovsky, markets were shaken in mid-May by the announcement that electricity monopoly Unified Energy Systems faced a $131 million back-tax claim from 2001. While Putin’s control over his own tax authorities was beginning to look shaky, his influence in Russia’s backyard was also coming under renewed threat with unrest rocking Uzbekistan, as press reports indicated that hundreds died in anti-government protests. —Kim Iskyan

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RIDING THE IPO WAVE As the Brazilian central bank hikes the benchmark lending rate to curb inflation, resulting high interest rates are prompting a streak of IPOs on the São Paulo stock exchange (Bovespa), as corporates shun loans to raise financing through equity issuance. Companies have raised more than $1 billion through IPOs over the past year, with the boom in issuance being fueled by institutional investors looking to reduce their exposure to government debt instruments by diversifying into stocks. Investors have been encouraged by strong first-quarter corporate earnings that continue to point to the country's economic recovery, with the IMF predicting in April that the Brazilian economy will grow another 3.7% in 2005. Bradesco, Brazil's largest private bank, doubled its net income during the first quarter to $490 million, prompted by a 22% yearon-year rise in loan revenues. Itausa, whose subsidiaries include Banco Itaú, reported a 37% year-on-year rise in net profits to $531 million. Gol, a no-frills airline, posted a 64% year-on-year rise in profits to $45 million, while Gerdau, Brazil's largest steelmaker, saw profits soar by 90% to $399 million. The outlook for second-quarter earnings remains positive. Nevertheless, with the central bank pushing the benchmark lend-

ing rate to 19.5% and oil prices remaining high, there are concerns that the country's re c o v e r y c o u l d grind to a halt. Private sector economists have revised Lula (bottom right) hosts an Arab/Latin-American summit their inflation forecasts to 6.15% for the year, compared with earlier predictions of 5.68%. Industrial output grew by a meager 1.7% in March, as consumer demand is beginning to ease. A strengthened currency is also threatening to curb export production. In a move to reduce Latin America's dependence on investment and trade with the US and EU, Brazilian President Luiz Inácio Lula da Silva hosted an Arab/Latin-American summit in Brasilia in May. The meeting also appears to be part of his strategy to take a regional leadership role, including his support of a Latin American inSWITZERLAND, UNITED tegration scheme GERMANY, that competes with theSTATES US-led Free Trade Area of the Americas (FTAA). —Antonio Guerrero

INDIA

NEW INVESTORS STILL FACE OLD HURDLES IN INDIA lans for India’s single biggest direct foreign investment project were in turmoil in mid-May after mining giant BHP Billiton, one of two potential investors, was reported to be pulling out of the $10 billion iron ore mining and

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Indian iron ore mining project under threat

steel manufacturing project in India’s eastern mineral-rich region. BHP was to mine ore that would be processed by its joint venture partner POSCO of South Korea, but it emerged that BHP Billiton may be refused a mining license because it has no equity stake in the steel plant—a prerequisite under the state government’s policy. POSCO, the world’s fifthlargest steel manufacturer, will still go ahead with its plans. The Indian government’s

taste for using IPOs to facilitate its partial disinvestment from state-owned industries is showing no sign of weakening. Over the past few weeks several public sector giants such as NHPC, Indian Airlines and Air India have announced IPOs. Now the latest to join that bandwagon is Powergrid Corporation, India’s largest power transmission company. It is planning to raise around $330 million through a share issue of approximately 10% of its outstanding equity. The latest growth figures reported by the Indian insurance sector—particularly private sector insurance companies—are providing strong support to India’s

efforts to open up the sector to investment. Many of the private sector insurance companies are in joint ventures with global giants such as Sun Life, Allianz, Prudential, New York Life, Standard Life and Old Mutual. Despite some having been in operation for only a few years, the group as a whole reported 129% growth in new premiums for fiscal year 2004-2005 to $1.2 billion.The industry giant, the public sector Life Insurance Corporation of India (LIC), reported 22% growth in new premiums to $4.2 billion despite seeing its market share fall to 78% from 87%. —Aaron Chaze 2 0 0 5

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EM INVESTOR NEWS

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STATE STREET TO MANAGE PAN-ASIAN BOND FUND

MERRILL LYNCH INTRODUCES ADR INDEX

tate Street Global Advisers, or SSgA, was selected to manage the ABF Pan Asia Bond Index Fund, or PAIF, which was initiated by 11 Asian and Pacific central banks and monetary authorities. “Modeled on cost-effective and efficient exchange-traded funds, PAIF brings the opportunity to enhance development of the bond and capital markets in the Asia-Pacific region,” says Vincent Duhamel, chief Vincent Duhamel executive of

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SSgA Asia, based in Hong Kong. The fund will invest in domestic currency sovereign and quasi-sovereign bonds from China, Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore and Thailand. “With its modest cost and planned accessibility to a large group of investors, this fund can help to broaden and deepen the region’s investor base,” Duhamel says. International Index developed the index on which the fund is based. The Asian Bond Fund initiative was begun in 2002, when members agreed to pool $1 billion of reserves to invest in bonds of Asian issuers. —Gordon Platt

COMPANY TO WATCH: SATYAM COMPUTER SERVICES/INDIA

MAKING IT PAY atyam Computer Services started as a software services provider in 1988 in India’s twin cities of Hyderabad and Secunderabad. Today, those cities rival Bangalore as the information technology capital of India, thanks in large part to the fast growth of Satyam, which is

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now a global IT consulting and services provider with 21,800 employees in 46 countries. Satyam helps companies compete globally by integrating business processes and technologies across enterprises so that IT resources provide a higher return on investment, says B. Ramalinga Raju,

Merrill Lynch has launched a proprietary index of American depositary receipts, the MLADR index, comprising 180 large, actively traded stocks, many of which its analysts cover. The index is designed to present the opportunities that ADRs as an asset class offer to US domestic investors, says Sarah Franks, global strategy analyst at Merrill Lynch. “The goal of the index is to build a framework for investing in ADRs, bringing international stock ideas to domestic investors in a structured way,” she says. The MLADR index, together with 10 sector sub-indexes, as well SWITZERLAND, GERMANY, UNITED STATES will allow a direct as European and non-European breakdowns, comparison with US sectors, says Franks. To be included in the index, an ADR must trade on the New York or American Stock Exchange or Nasdaq and have an average daily trading volume of $1 million in the past 12 months. In addition, the market capitalization of the local listing on which the ADR is based must be in excess of $1 billion, and the local shares must have been traded for at least four and a half years. Merrill Lynch will reconstitute the index twice a year. By adding selected ADRs to their portfolios, domestic investors can gain international exposure and broaden their stock universe, Franks says. Merrill Lynch analyzes the portfolio holdings of US mutual funds once a quarter. Of the 150 mutual funds it sampled in the first quarter, 77% own ADRs. The average mutual fund owns four ADRs accounting for 3.5% of the fund’s total portfolio. —GP

founder and chairman. “We enable our 390 customers to create and share knowledge across their organizations so they can work smarter and build on experiences instead of repeating them,” Raju says. Satyam provides the right mix of offshore and onshore capabilities, drawing on alliances with 50 technology companies to serve a growing

range of industries from automotive to telecommunications. In April 2005, Satyam acquired London-based Citisoft, an investmentmanagement consulting firm, to expand its expertise in financial services. —GP B. Ramalinga Raju

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COVER STORY ARGENTINA

BY MARK LEHANE

WINNING B

Argentina’s default and subsequent meager settlement for creditors will change forever the rules for emerging market investors. Raising funds will likely get much more difficult. iullermo Nielsen is wearing a big smile these days—as well he might. On Friday, May 13, the Argentine finance minister got the news he wanted:A New York court had thrown out an action by a small group of hedge funds seeking to impound $7 billion of defaulted Argentine eurobonds. The ruling removed the last legal hurdle to a debt swap launched 19 months earlier—an exercise crucial in Nielsen’s eyes to his government’s efforts to put the Argentine economy back on its feet after its plunge into economic disaster and, in December 2001, default. That debt swap was breathtaking in its scope and unprecedented in its implementation. Throwing convention to the winds, the Argentine government played hardball with investors, eventually offering them just $0.35 on the dollar. The government also defied pressure from the international financial community, including the International Monetary Fund, to cut a better deal for investors. In pushing through the swap against those odds, the Argentine government might just have changed forever the rules of the game when players ponder what to do when nations go bust.

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“Other countries are certainly going to look at Argentina and ask,‘Why can’t I do that, too?’” says one emerging markets investor who holds defaulted bonds. That’s certainly what Argentina itself wants. “We believe we are in a most valuable position to share our experience with other emerging sovereigns and with the international community at large,” says finance minister Nielsen. “We have firsthand knowledge of the effects of an economic meltdown, of a default and the problems associated with the restructuring of so immense a debt, while keeping current almost half of our public debt.”

It’s this that is giving the sweats to the people concerned with maintaining the international financial order: If Argentina can successfully push through a restructuring, it might result in higher prices for lending to emerging market countries and ultimately to disruption in flows to capital-hungry regions. As more and more investors take emerging market debt into their mutual funds or pension plans, those flows— already substantial—are growing steadily. Washington-based think tank the Institute for International Finance forecasts that $311 billion of emerging market bonds will be issued in 2005, up

Mexico’s Gil Diaz (below): Opposed to international bankruptcy court

Finance minister Nielsen: Keen to share Argentina’s experiences

Deutsche Bank and IIF’s Ackermann: Wants more orderly restructurings

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from $303 billion last year and $208 billion in 2003.

Calls Grow for Global Debtors’ Court In reality, the Argentine episode is just the latest salvo in a battle that has been raging for some two decades. In one camp stands the IMF and most of its developed country shareholders, marshaled in the G7 group. They want to develop a standardized, collective

procedure for working out sovereign debt restructurings. Called a Sovereign Debt Restructuring Mechanism (SDRM), the process would be based around a legally binding international bankruptcy court. Set against the advocates of the SDRM are most of Wall Street and the countries that borrow from emerging markets investors. They view the SDRM as clumsy and unworkable.

Worse, making a default easier to sort out might make it more appealing for countries to go bust in the first place. Politics is in the mix, too. Many emerging markets sovereigns privately argue that if the IMF is a rich man’s club, then any court it administers will inevitably dispense one-sided justice. The SDRM is the brainchild of Anne Krueger, the ferociously bright first deputy managing director of the IMF. 2 0 0 5

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CAN’T PAY, WON’T PAY: WHEN A COUNTRY DEFAULTS ON DEBT hen Argentina stopped paying on $81 billion of bonds in December 2001, it was the largest sovereign default ever. Three-and-a-bit years later the country has finally completed a brutal restructuring in which luckless investors took a bigger bath than ever before.

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Economy minister, Roberto Lavagna, says the Argentina could not afford to pay more

Buyers who accepted the offer from the one-time darling of the international market received just $0.35 on the dollar—half the going rate for similar distresseddebt workouts. What’s more, as part of the deal, they had to extend their IOUs to 42 years—an almost unimaginable maturity in a continent where no large government has ever paid back a 30-year bond. “The perfect crime of debt repudiation, with no consequences,” is how Christian Stracke, an analyst with New York-based credit research company CreditSights, describes it.

Argentine President Nestor Kirchner sees things very differently, of course. For the populist left-winger, the bond swap has allowed his country to shave the debt load to a level where it won’t squash the country’s faltering fightback from the perfect storm of devaluation, shuttered factories and torched pocket-books that swept Argentine citizens off their feet in the first years of the 21st century. The Argentine government has played a skillful hand, say observers. First, it shunned deals with overseas creditors, relying instead on a domestic debt splurge that stuffed hometown pension funds and insurance companies with peso-denominated debt. Many bond buyers couldn’t stand the pain and sold their securities at dime-store prices. And when the government offered a bond exchange in January this year, saying it’s this-or-nothing, most of the rest submitted. The Argentine treasury says 76% of buyers had signed up for the offer. As for the rest, they had missed the boat, according to the Argentines. Some of the highest-profile holdouts included “vulture funds” such as NML Capital—easy hate figures in today’s Latin America. But banks had sold barrow-loads of Argentine bonds to mom-and-pop savers in Germany and Italy, too. These two countries are members of the G7 group of leading industrialized economies and key shareholders at the IMF. It’s the IMF that investors are pinning their hopes on; Argentina soon has to roll over $15 billion of loans advanced by the multilateral lender, a lever the IMF may yet pull to nudge the government into a deal with the stand-firm investors. That hope may prove illusory: The government is forbidden by law from re-opening negotiations on the debt, while Argentina’s economy minister, Roberto Lavagna, says that in any event the country could not afford to pay more. But if the IMF does decide to play hardball, it may turn out that Argentina can’t afford to not to cut a deal. Rising economic activity is pushing production up against capacity, stoking inflation. The country urgently needs investment in roads, power plants and new production lines. The bulk of that can only come from abroad. That’s unlikely to be forthcoming anytime soon: Argentina is already locked in a bitter dispute with overseas power providers over government-imposed rate capping since the 2001 crisis. That has played well to the country’s hard-pressed citizens, as has the tough stance with overseas financiers. But if the lights start going out, Argentina may discover that treating investors badly might produce short-term gains but also leads to long-term pain.

Like her (intermittent) backers in the US treasury, Krueger views the SDRM as a sovereign version of Chapter 11— the US bankruptcy provisions that allow companies to restructure their debt in an orderly, court-administered process and then move on to a new life.

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For a while, back in 2002, it looked as if the SDRM was set to move off the drawing board. The IMF’s key policy making forum, the international monetary and financial committee, endorsed the proposals. But a fierce fightback by opponents has meant that the SDRM’s

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proponents have yet to garner the necessary 85% of votes within the IMF. That doesn’t mean the proposals are dead. At the IMF spring meetings this year officials attempted to craft a set of principles that would create a broader consensus around the SDRM. Indeed, some observers argue that the nature of the Argentine debt swap may have reinvigorated proponents of the SDRM by swinging some doubters behind the proposal. “It would be ironic if the Argentine restructuring gave renewed momentum to the SDRM proposals,” says Lee Buchheit, a partner at law firm Cleary Gottlieb Steen & Hamilton and a veteran of sovereign debt restructurings. But if the Argentinean restructuring has changed the nature of the debate, many of the positions on the SDRM remain as entrenched as before. “We fought tooth and nail against that idea before,” says Francisco Gil Diaz, finance minister of Mexico, “and if it reemerges, we will fight tooth and nail against it again.” Instead, in a variety of ways, countries that borrow and their advisers are seeking more amicable ways to deal with debt default.When it became clear that Uruguay could not service its $11.1 billion debt burden in March 2003, it entered into a voluntary, market-based swap. Investors were asked to buy new bonds with similar interest rates but with payment dates pushed much further out. “We wanted a solution that maintained our good relations with the market,” says Carlos Steneri, Uruguay’s financial agent in Canada and the US. Steneri points out that the successful exchange was conducted in the face of stiff opposition from the IMF. More than 90% of Uruguay’s bondholders voted for the exchange, compared to 76% in the Argentine case. Corralling enough voters to force out refusniks is key to the success of any market-based restructuring. That has been complicated by the changing nature of capital flows in emerging markets. In the past, a small number of

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banks lent large amounts of money to countries. When those borrowers got into trouble—which they all-too-frequently did—all the creditors could sit around one table to hammer things out. Now, a country’s creditors are likely to be spread across the globe and to come in all shapes and sizes. Argentina’s bondholders included tens of thousands of retail investors in Germany and Italy, mutual fund managers and—increasingly, as financial Armageddon loomed nearer—vulture funds.These funds buy distressed debt, build up blocking stakes and resort to the courts in the hope that they will be bought out at a premium to ensure the restructuring goes

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through. In the mid-1990s, Elliot Associates, a fund linked to one of the litigants in the Argentine case, forced Peru to pay $58 million for a stake for which it had paid just $11 million. Even without vulture funds on the scene, marshaling enough votes for a market-based restructuring can be tricky. Critics say the 76% by value of bondholders who said “yes” to the Argentina offer was low compared to similar exchanges.Argentina may, in fact, be closer to developing norms than it seems. Just look at collective action clauses (CACs), the provisions increasingly written into sovereign eurobonds.

IMF: MIA. HOW THE GLOBAL INSTITUTION STUMBLED INTO CONTROVERSY t used to be so much simpler. When a country got into trouble with its debt, the IMF stepped in, lent money and negotiated a recovery regime. No longer. Now that countries have started to actually default on their debt, the role of the Washington-based institution—a key part of the post-World War 2 Bretton Woods financial architecture—is coming under scrutiny as never before. “The IMF has become part of the problem and not the solution,” says Carlos Nesteri, financial agent for the government of Uruguay. It’s not just that its proposals for a centralized, standardized sovereign debt workout mechanism are wrongheaded in the eyes of its critics (see main story). It’s not just that it necessarily acts in the interests of its main shareholders, the Western industrialized countries.

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Its dual role as both lender and adviser to distressed countries compromises it, say observers. J.D. Buetikofer, an emerging markets portfolio manager at Julius Baer Asset Management, who has so far refused to swap the defaulted Argentine bonds he holds, believes the IMF is suffering a deep conflict of interest. That conflict of interest is irking investors even more than usual in the Argentine case. Paul Blustein, author of And The Money Kept Rolling In: Wall Street, the IMF and the Bankrupting of Argentina, points out that with its officials paying more than 50 visits in recent years to Argentina, the IMF was a key player in the policy missteps that led the country into economic meltdown. Yet, unlike other creditors, it took no haircut on its loans. Some accuse Nestor Kirchner of exploiting the inherent conflicts of interest at the IMF

Critics say those wrong calls continued even after Argentina first announced the initial terms of the restructuring. Typically, when a country is in need of a debt workout, the IMF works with the financial management team of that country to establish what level of primary fiscal surplus the treasury can run. That free cashflow effectively determines what level of debt the country can service—and so acts as a proxy for a fair recovery value for creditors. The IMF signally failed to perform that role this time. “Missing in action” is how one debt restructuring expert describes the IMF’s role. Others say that the IMF’s inaction reflects the ambiguity felt toward the Kirchner government by the US treasury, the key shareholder in the IMF. The IMF, of course, argues that it can’t set fair value in a market-based restructuring it doesn’t agree with. Still, there is little doubt that the mixed signals sent out by the IMF in the Argentine episode has further eroded its standing in emerging markets.

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These explicitly allow for the bonds to be restructured, provided a fixed percentage of holders agree. That figure is typically set at between 75% and 85%, with the lower figure rapidly becoming the benchmark. Collective action clauses illustrate just how fluid is the ongoing debate over what to do when countries go bust. First proposed more than a decade ago, CACs proved as controversial then as the SDRM is now. Critics, led by a very vocal Gil Diaz at the Mexican finance ministry, argued they carried within them the fatal flaw of all such attempts to deal with the issue of sovereign default: Making it less painful made it more likely in the eyes of investors. Yet Mexico became the first country to issue a bond with the clause attached in May 2003. For now, Gil Diaz and his compatriots are hoping to steer a middle way between the confrontational approach of the Argentines and the legalistic bent of the IMF. That is why they have seized on the market-friendly proposals of the Institute for International Finance. Launched at the IMF spring meeting in March this year, they state that creditors and borrowers should be guided in restructurings by the following principles: transparency, cooperation, good faith and fair treatment. “The agreement on the new principles is important,” said IIF chairman and Deutsche Bank CEO Josef Ackermann, launching the report.“Repeatedly in the past decade there have been crises that could have been avoided, jobs destroyed that could have been preserved and debt restructurings that could have been more orderly.” ■

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COUNTRY REPORT UKRAINE

BY LAURENCE NEVILLE

After the Revolution

n the space of just six months, the world’s view of Ukraine has changed beyond recognition. Before November 2004 few people knew much about the country, and those who did saw it as a politically corrupt backwater that was too close to Moscow for comfort. But the Orange Revolution has put an end to such characterization. Now the talk is of eventual membership in the EU and of financial reform. The man at the heart of this transfor-

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mation is Viktor Yushchenko, a former gover nor of the central bank of Ukraine, who received an award from Global Finance in 1997 as one of the six best-performing central bankers in the world—a fact he cited in his official presidential campaign biog raphy. Yushchenko is no stranger to power. In addition to his stint as central bank governor, he was Prime Minister from 1999 to 2000 and was widely credited with laying the foundations of Ukraine’s cur-

rent economic success. However, it is his most recent actions that have inspired the world. Having been denied power in the almost-universally condemned November 2004 presidential election,Yushchenko galvanized the people into action.Thus, more than a decade after the fall of communism, Ukraine was once again protesting for its freedom. In a re-run of the election in December, Yushchenko won and, despite being deliberately poisoned during the campaign,

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With the shockwaves from last year’s election debacle subsiding, Ukraine is poised to embark on a phase of explosive—and potentially traumatic— growth.

took office to global applause. Of course,Yushchenko’s election is not a panacea.According to RZB, the investment banking arm of Raiffeisen Bank, economic growth slowed considerably in late 2004 and early 2005.The country remains vulnerable to a fiscal deficit of 6%7%—not least as a result of last-minute election-related increases in pensions and minimum salaries—unless serious action is taken to stem it. But the problems should also not be

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overstated. In 2004 Ukraine’s GDP grew by 12%, and it is likely to grow by 8% this year, according to RZB. German investment bank WestLB more conservatively estimates growth of 6.5%—still impressive by European standards. Similarly, the government has promised to accelerate its privatization program, which should bring the budget deficit down to 2%. Inflation is expected to fall from 12.3% in 2004 to 9.5% in 2005 and 5.5% in 2006, according to WestLB. On May 11 Standard & Poor’s raised its long-term foreign currency sovereign credit rating on Ukraine to BB- from B+, reflecting improved creditworthiness and an enhanced political and policy environment, according to credit analyst Helena Hessel. She notes that Yushchenko advocates transparency, the rule of law and democratic values, which over time should lead to the implementation of political, institutional and structural reforms that are necessary to transform Ukraine into a country with an open, democratic political system and a marketbased economy. Tomasz Balamut, economist in the treasury department at WestLB, says there are a number of explanations for Ukraine’s growth. “Part of the reason is because the country experienced a deeper recession than most other postCommunist countries, and when the stabilization of the late-1990s arrived, there was further to climb. In addition, Ukraine has also benefited from the strong market for steel, which is the country’s main industry.”

Opportunities and Problems Despite a slowdown, Balamut remains optimistic about prospects for GDP growth and says the broad growth of both the export and domestic consumption markets bodes well for the future.“This is certainly a great place to invest in terms of accessing growth,” he says.“The wages are around $120 a month, making it comparable with China but with the German

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market on the doorstep. Already we are seeing Polish manufacturers moving factories to the Ukraine to take advantage of wage rates. It’s not an easy step for everyone though; you would need to be confident of being able to cope with Sovietstyle bureaucracy,” he adds. Indeed, the slow pace of reform at the grassroots level remains a problem.“The Ukraine has a big challenge in order to make conditions more attractive for investors. It is at the bottom of FDI per capita tables,” says Balamut. “There is a real need for better administration and decision-making procedures in government.” Similarly, while the tax code and legal structure of Ukraine appear attractive to foreign investors, there continue to be problems with implementation and government organization. A further disincentive to investment is the fact that the local currency, the hryvnia, is not fully convertible. Gerhard Lechner, country analyst at RZB, says that although the government has yet to make full convertibility a pledge, it is generally accepted to be a long-term objective. In the meantime, investors must cope with a steadily appreciating currency and the prospect of a change in policy in the future. The currency has appreciated in recent years primarily because ferrous and nonferrous metals account for a huge percentage of Ukraine’s economic product. As a result of the strong demand for metals, the country’s current account surplus has ballooned from around 4% of GDP in 2000 to 9% last year.That has had a predictable effect on the hryvnia currency, which has appreciated from around 5.44 to the dollar in 2000 to 5.33 last year to around 5.20 this year.WestLB is predicting a rate of 5.15 by the end of the year, but some commentators say an official change to a 5.10 rate is possible. If the currency is revalued, there is likely to be a decline in the rate of growth, according to Lechner. “There is a great need to revalue in order to slow inflation, but it

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would affect growth, which in a country as poor as Ukraine is desperately needed,” he says.“It’s a tough trade-off.” Ukraine does have an attractive tax environment for investors, however. The country has recently followed the trend across Central & Eastern Europe in introducing flat taxes for both individuals (13%) and corporates (25%). Balamut says that there is no question that either would change in the future.

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Industry and Privatization While the dominance of the steel industry in Ukraine has contributed to its growth as global demand has soared, WestLB’s Balamut says that future growth could come from areas such as timber production and agriculture. Many other sectors remain blighted by Soviet-style bureaucracy, although there is strong potential in chemicals. Privatization is likely to remain cautious, and efforts will focus instead on re-negotiating deals struck under the previous government. The government plans to raise $1.4 billion through the revision of prior privatizations, which are tainted by the corruption of the previous government. While this policy played well during the presidential election, it is fraught with danger. Not only could the proceeds— which the government requires to lower its deficit—be limited as a result of court actions, but the policy could undermine confidence in investing in the country. “There is certainly a risk with regard to foreign investors,” says Lechner, “but the risk should not be overestimated. For example, there is far more need to be concerned about inflation than re-negotiated privatizations.” A test case currently going through the courts involves the privatization of the giant Kryvorizhstal steel mill in 2004. In April the court gave an initial verdict that the privatization was illegal because the price paid for the assets by Metallurgical Union Corporation, partowned by the son-in-law of former President Leonid Kuchma, who has

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been widely discredited as corrupt, was lower than other bids from international companies.Yushchenko had made the recovery of the mill an election issue in November. At the beginning of May the court reversed its decision in the case, which had been brought by a group of private investors. However, the government is also bringing a lawsuit against the current owners that has yet to be heard and could result in myriad re-negotiations of earlier privatizations.As the lawyers for the Metallurgical Union Corporation note, the case could have implications for more than 3,000 privatizations. Unsurprisingly, Sergiy Vlasenko, one of the lawyers, notes that “particularly after the Orange Revolution, it is very important not to take decisions in haste which could seriously undermine the stability of the economy by weakening foreign investors who already have a presence in Ukraine or by frightening foreign investors who are looking to invest in Ukraine in the coming months.” Whichever way the case eventually goes, the uncertainty could have an impact on investment.

The wild card with regard to Ukraine is the EU. Officially, the country is not a potential candidate for entry, but already there have been numerous calls for the long process of accession to begin. Certainly, many feel the promise of membership could help entrench economic and political reform. Even before the Orange Revolution, the EU was working with Ukraine on its bid to join the World Trade Organization (WTO), and Ukraine has agreed to ensure that new company law, competition rules and environmental and consumer protection are similar to those in the EU. The EU is expected to grant Ukraine market economy status by June. But at the same time there is considerable concern among many Europeans about expanding the EU to the borders of Russia—and the union is still getting to grips with the last wave of enlargement and the process of introducing a constitution to streamline its operation. In addition, Russia itself—long used to getting its way in Ukraine—is resisting attempts to bring Ukraine under the wing of the EU. Despite supporting the fraudulently elected rival to Yushchenko in the November election and being the leader of one of the few countries to accept the validity of the election, President Vladimir Putin has since visited Yushchenko in a bid to shore up the influence of Russia in Ukraine. For investors, EU entry could present a huge opportunity. The potential for profits to be made from convergence as the country’s economy moves into line with Europe are arguably greater than that of any of the 10 countries that joined the union in 2004—not least because the country is so poor at the moment. But as with all potentially great rewards, there is risk attached. While Ukraine, having experienced its Orange Revolution, now looks politically stable, the revolution demonstrates the potential for upset. And the government of Yushchenko will need to make significant organizational and financial advances before any EU talks begin. ■

AWARDS CEREMONY

Stars of Russia, 2005 ours before the start of Global Finance’s award ceremony for the best banks and companies in Russia, TNK-BP was hit with a claim for $1 billion in back taxes. But

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that didn’t keep Kent Potter, the CFO of the Anglo-Russian joint venture, from being on hand to accept his company’s award as the Best Oil and Gas company in Russia. Russia’s top

bankers and company executives joined him in London’s Mayfair for the second annual Stars of Russia Awards presided over by Global Finance publisher Joseph Giarraputo. ■

Dmitry O. Levin, CEO of Russian Standard Bank, receives the award for Best Consumer Finance House

Michel Pehirin, chairman of Raiffeisen Bank, accepts the award for Best Syndicated Loans Arranger

C. Kent Potter, CFO of TNK-BP, collects the award for Best Oil and Gas Company

Andrey Saveliev, chairman of MDM Bank, accepts the Best Domestic Bank award and the Transparency award

Pavel M. Teplukhin, president—CEO, Troika Dialog Asset Management, collects the award for Best Asset Manager

Dmitry A. Usanov, a director of Norilsk Nickel, receives the award for Best Non-Ferrous Metals Company 2 0 0 5

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SECTOR REPORT BUSINESS TECHNOLOGY

BY DENISE BEDELL

Already recognized as a key element of any CRM strategy, speech recognition technology is only set to grow in popularity as prices come down and products become increasingly sophisticated.

Voicing Approval peech recognition software is best known for its presence in the call center space, driving advancements in customer relationship management (CRM). Such software has matured to the point where it is the norm rather than the exception in this realm. But there are a multitude of uses for voice technology—from speaking text messages into a mobile phone to doctors dictating reports and from investors getting stock quotes and making trades over their telephone to using voice-ac-

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tivated identity authentication. The most recognized use of speech recognition technology is within call center applications. Richard Rosinski, a vice president at VoiceGenie, a Toronto-based company that provides the backbone to voice applications for telecom and enterprise firms, says the advantages are many. “Generally when people are interacting with voice recognition technology, they have far shorter phone calls, which leads to savings just in holding time and telecom-

munications charges,” he explains. Another saving is in headcount, adds Bruce Eidsvik, also at VoiceGenie: “An agent costs upwards of $30,000 a year plus benefits, whereas a speech recognition port costs around $3,000 a year.An average call center agent costs around $6 to $7 per call, and if you automate that call, you can bring it down to a dollar or less per call.” As call center technology becomes more standardized and the market matures, interest is growing, Rosinski

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notes:“We have seen really strong pickup in the speech automation business over the past nine months to a year.”Total investment is expected to rise from $90 million in 2004 to $262 million in 2008, according to Datamonitor. Dick Bucci, an associate with consulting firm The Pelorus Group, explains in a report that, as with other IT businesses, the contact center space is being hit by slowdowns in investment spending but adds that few technologies have the same power to improve customer loyalty and satisfaction while reducing operating costs as voice technology. “The replacement cycle for the Y2Kinduced spurt of products purchased in 1998-1999 will provide a welcome bump in market growth,” Bucci says. Driving this growth, he adds, is a wealth of new applications, new markets, a persuasive business case, modest penetration rates and corporate compliance and liability concerns.

Technology Speeds Data Input While the heart of the business is in call center technology, interest in other uses for speech software is exploding. One area that promises greater efficiency is that of automated stock quotes and trades. UK telecom firm BT, for example, offers a speech-driven, collaborative trading system where trades can be entered, contacts dialed, emails sent through mobile phones or voice-enabled PDAs and customer relationship management (CRM) systems updated. The group went live with such a system for the New York Mercantile Exchange in February this year, rolling it out to 740 trading positions across the exchange. John Barbara, director of telecommunications at the New York Mercantile Exchange, said in a statement, “They worked with us in blocks over a series of weekends, avoiding any disruption to our mission-critical trading operations.” Another growth area is document

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dictation. German group Philips Speech Recognition Systems, a subsidiary of global conglomerate Philips, is one of a number of companies offering software to handle document creation for case management systems. Marcel Wassink, CEO of Philips Speech Recognition Systems, says, “Whether it be dictating, brain dumping or what have you, our software offers complete hands-free document creation.” Proponents of the technology note that it can allow customers or company agents to input complex data in a short period of time with great accuracy. The information input is then integrated with enterprise systems—giving greater automation to the entire data management process.

Open Standards There are two major areas that are of cr itical interest both in the speech recognition market itself and for clients and potential clients.The first is the development of more flexible voice user interfaces—the prime subunit in the speech recognition hierarchy, and where speech meets data. Peter Mahoney, vice-president of worldwide marketing for the Speechworks division of Scansoft, explains: “Applications are becoming more flexible, and this is really what clients are

BUSINESS TECHNOLOGY

looking for. Instead of going through a hierarchical menu, as was the case with the original speech-activated systems, these solutions can handle a much more conversational exchange. Users, be they customers or internal stakeholders, just provide the system with as much information as possible about the request, and the solution can pull out the appropriate information and fill in the blanks.” The other big development involves what happens to the information once it is received—how a voice recognition solution can connect to back-end systems within the organization to provide seamless processing of infor mation across the group.This is possible as a result of the development and use of open standards, such as voiceXML, that allow for voice applications to interact with other data applications. In this context, voice software becomes one block in the sequence of information provision, processing and results. It makes it possible for users to get real-time information from internal systems, from web applications, from any part of the digitized information chain. And this information will be the same as that viewed by all others in the chain. The technology is still facing considerable resistance in some areas, particularly in br icks-and-mortar companies Peter Mahoney, Scansoft: “The increased packaging of speech applications drives down the cost”

Marcel Wassink, Philips: “It starts with a few customers and then begins to radiate. At some point one hits the tornado”

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where the payoff may not be immediately obvious. Wassink says, “Many people have tried general packages, and, as they are not tuned to specific usergroups, they have been disappointed.” But, Mahoney says, it is becoming more accessible for all companies. “In the past we have seen smaller companies shy away from implementing speech software,” he says.“Two things are changing that: First, there is the increased packaging of speech applications, which drives down the cost—where in the past only big companies could afford it. Second, firms are delivering increasingly sophisticated packaged applications,” he adds. For example, there are packaged applications in the contact center space for utilities, insurance providers and financial services companies, all of which can be delivered to smaller companies with some ability to be personalized for their needs. Eidsvik agrees: “When a company wants to deploy a solution, they now have a reasonable chance of not being the first in their industry. They can get applications that just need to be customized, which can be deployed much faster and at lower cost than previously.” Another deterrent may be existing solutions. Dan Miller, senior analyst at Opus Research, says some companies are waiting to invest in this space until past product purchases reach the end of their life cycle: “For example, if you

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bought a service point in 2000 that you are depreciating over seven years, it is going to stay there for seven years.” Some resistance may also arise out of organizational issues. Says Miller, “You see resistance at a departmental level because people are loyal to technology they are using here and now.”

The Need to Show ROI The incentives for investing in speech recognition technology are often built, at least in part, around intangibles, such as improving customer service and providing a uniform customer experience across several touch points, says Miller. “As well as showing the easily-quantifiable benefits—reduced headcount, shorter call times and lower telecommunications cost—you need to be able to quantify those intangible concepts, such as the value of there being greater efficiency throughout varied contact points and with internal systems and the value of better systems for service personnel,” he says.“You can make this into an ROI. The value of creating loyal customers and happy employees is clear,” he adds. But the picture is becoming more complex. Investments in speech recognition will increasingly be justified within end-to-end IT infrastructure spend, from data to voice and back again, because savings are seen across a range of modalities with the addition of

Richard Rosinski, VoiceGenie: “Strong pickup in the speech automation business over the past nine months to a year”

Dan Miller, Opus Research: “The value of creating loyal customers and happy employees is clear”

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a voice user interface.You are no longer talking about just replacing a body in a call center, explains Miller. “You are talking about optimizing the entire client interface, eliminating redundant back-end systems and doing a better job of integrating your customer databases and transaction databases and really leveraging the investment that you have made already in your web-based self service,” he says. The case for companies to acquire voice recognition technology is growing. “The sheer amount of applications is phenomenal,” says Wassink. One of the areas he points to for future application is the management of all correspondence—from email to voice to letter. This would save time, increase efficiency of users and save on telecommunications and other costs. Mahoney at Scansoft expects to see a spike in the area of advanced applications for phone carriers, particularly with wireless phones. “Soon we will have the ability to provide multimodal applications through a mobile phone. For example, we could provide automated voice applications along with a graphical display,” he says. “If you, say, call directory assistance, we can show you the number you are looking for, show you a map to the location and show ads for businesses in the area you are searching,” he says. Miller says one area he will be watching is that of voice biometrics and the introduction of conversational authentication. “There is greater awareness, and indeed risk, of identity theft and fraudulent use of financial instruments today. At present, voice is being underused as an identification modality, but I think this will change,” he says. Companies are certainly becoming more accepting of voice recognition. Wassink adds: “There is a lot of interest for this type of technology, but it is like any early technology that one brings into the market. It starts with a few customers and then begins to radiate. At some point one hits the tornado.” ■

REGIONAL REPORT MIDDLE EAST

BY JONATHAN GREGSON

Awash With Liquidity Skyrocketing oil prices have brought a flood of liquidity into the Middle East, providing vast opportunities for fleet-footed investors and financial institutions. he near doubling of crude oil prices over the past 18 months has generated enormous revenues for the oil-rich states of the Middle East. As a rough measure, each additional dollar on the price of oil results in an extra $6 billion of revenues for the Middle Eastern OPEC members, who between them are sitting on more than two-thirds of the world’s proven reserves. Nor is this flow of money into the

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Middle East likely to dry up in the immediate future. A continuing highprice environment is certainly what both the oil futures markets and most independent experts expect. Leo Drollas of the London-based Centre for Global Energy Studies says: “Over the next 18 months oil prices will stay high. I only see them starting to drift downwards after 2006.” Some blame hedge funds and other speculators for this. However, as Walid

Shihabi, head of research at the Dubaibased investment bank SHUAA Capital, points out, “Political tensions between Iran and the US have rendered ample room for speculation.” He also notes that we have been here before. “Reminiscing back to the wake of the 1979 Iran Revolution, when oil prices surged past $80 [in today’s money], fund managers have priced in the possibility of the US waging another war in the Middle East.”

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What has changed since the previous oil price spikes in the 1970s, following the Arab-Israeli war, and the early 1980s after Ayatollah Khomeini’s rise to power is that this time most of the extra oil money is staying in the Middle East region. Previously there was a strong counter-flow of petrodollars back into OECD economies. This time, Shihabi notes,“the same region is witnessing massive growth in financial assets and real estate prices amid a windfall of liquidity on the back of record-high oil prices.” Certainly, local stock markets have experienced a momentous bull run. Over the three years from end-April 2002, during which time oil prices have stayed above $25 a barrel, Dubai’s stock market rose by 768%, Qatar’s by nearly 600%, and Kuwait’s by 326%, while Saudi Arabia posted a more modest 288% gain. The overall index for stock markets in the Gulf Co-operation Council area has nearly trebled, with some of the most spectacular gains in

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Modern stock markets are improving both liquidity and corporate governance

Qatar and elsewhere coming through earlier this year. Real estate prices have rocketed, as massive projects, including what is promised to be the world’s tallest tower

going up in downtown Dubai, get the go-ahead.With such investment opportunities so close to home, why look further abroad? In addition, there is a widespread inclination among the re-

REGIONAL LIQUIDITY MANAGEMENT BECOMES MORE SOPHISTICATED he agencies responsible for investing Middle East governments’ oil wealth are among the largest and most influential players in the global market. The Abu Dhabi Investment Authority, for instance, controls assets estimated at around $500 billion, making this oil-rich emirate the best financially endowed county in the world on a per capita basis.

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In many of the smaller Middle East countries a proportion of this wealth is set aside—in a “fund for future generations”—against the time when oil revenues start drying out. Most of these assets are invested outside the region, in government bonds, real estate and strategic equity stakes. The Kuwait Investment Authority—whose enormous accumulated assets took a serious dent when that country paid its agreed share for its liberation from Saddam Hussein in the first Gulf War, but which has since rebuilt its asset base to the tune of hundreds of billions—manages investments for the future on a graduated basis, with a higher proportion going to their fund for future generations when the oil price rises above set parameters. Saudi Arabia is the exception to this rule, having a larger population and therefore greater calls for government spending on infrastructure and social programs. “The Saudis just spend on projects,” says Leo Drollas of the Centre for Global Energy Studies. “That is partly driven by five-year plans but also by what the Saudi royal family want to do. With big infrastructure projects these often turn out to be white elephants.” The big government investment authorities, which control so much of the oil wealth, are in for the long term and have traditionally pursued fairly conservative investment strategies. That is not to say that they are not extremely

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sophisticated investors, applying the full panoply of financial vehicles to grow their assets and hedging against adverse foreign exchange movements and other possible threats. There are signs that some government investment authorities are now pursuing more active—some would say predatory—investment strategies. The UAE, with its more developed financial infrastructure, is taking the lead here, both in terms of more cross-border joint ventures within the region and through the acquisition of key stakes in global companies. Dubai, for instance, is now one of the largest stakeholders in Daimler-Chrysler. Whereas far more of the oil wealth is now remaining within the region, the balance is invested further afield. “Certainly capital flows into global markets get a boost during oil-boom years,” says Walid Shihabi, head of research at SHUAA Capital. “Nowadays the infrastructure in terms of capital markets, investment banking and fund management capabilities needed to redirect those capital flows is far better developed.” Shihabi points to new laws being introduced across the region that are more conducive to redirect investment to where it can gain a better return, along with “the ongoing liberalization of the financial industry to allow more players, both domestic and international, to tap these markets.” He also sees the opening of new markets such as the Qatar Financial Centre and the Dubai International Financial Exchange (DIFX) this September (see page 30) as introducing more international standards to the region’s capital markets. “Over the long term that should bring more depth to these markets as well,” he notes.

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gion’s private sector investors, especially since 9/11 and the selective freezing of assets by the US and its allies, to keep more of their money within the Middle East. And while there are many plausible explanations for so sharp a rise in asset values—notably, improvements at the geopolitical level combining with more mature and diversified economies to offer the prospect of sustainable growth—there can be no doubting what is the primary driver of the current boom. The entire region is awash with surplus liquidity. And so far only a fraction of the burgeoning oil revenues has entered the local economies.These are government revenues, after all, paid directly by stateowned oil and gas companies into the state coffers. Normally they are held in overseas assets such as treasury bills and other bonds and only repatriated when needed to fund government expenditure programs. It is at this stage, when they are converted into the local currency, that additional liquidity is created. However, the expectation of these capital flows has stimulated bank lending, thereby creating further liquidity. No wonder that this “massive windfall resulting from the hydrocarbons boom,” as Shihabi puts it, has created “what can be described as the Gulf ’s black gold rush.” Those countries that had racked up high debt/GDP ratios during the low oil price environment of the 1990s are now paying down their debt. Saudi Arabia, where public debt rose to above 100% of GDP, paid down $12 billion last year, according to Drollas. Currently, Saudi debt is down to 71% of GDP, and given that the country’s surplus on the fiscal side is set to rise to $56 billion compared to $26 billion last year, further debt reduction is anticipated. But since most of those bonds were held by Saudi commercial banks and two large government pension funds, one of the results of paying down public debt is to inject further liquidity into the private sector.

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Liquid market: Regional investors are finding new ways to manage their assets

Brad Bourland, chief economist at the Saudi American Bank, points out that the sharp reduction in the debt/GDP ratio is not so great as it seems because Saudi Arabia’s GDP has grown so rapidly. He believes the authorities are going for a gradual run-down of debt, which is being achieved simply by not issuing any new bonds.“They’re not going into the market place and retiring debt prematurely. And with money supply currently growing at around 20%, there’s no need to inject more liquidity into the system,” he says.

Caveat Emptor Bourland differentiates between Saudi Arabia, with its relatively large population, diverse economy and requirements for infrastructure and other investments, and the smaller oil-rich Gulf states—Kuwait, Qatar, the United Arab Emirates (UAE)—where there are fewer channels for redirecting the immense incoming capital flows. Shihabi points out that much of the UAE’s stock market gains have been on the back of booming real estate and construction sectors. A lot of money is chasing relatively few real opportuni-

ties. “The cowboys are out in force,” he warns, “and they are trying to use such seemingly legitimate means as capital markets to scoop the largest share of wealth away from investors. Beware the hollow IPO.” Since many of the region’s capital markets are relatively immature and are only just opening up to foreign investors, it is hardly surprising, says Shihabi, that the returns generated from the massive gains witnessed in Gulf markets over the past three years have been captured almost completely within the region, with only a handful of niche emerging markets fund managers involved. The opening of new, more sophisticated international financial exchanges in Dubai and Doha may change that. However, given that the region’s combined stock markets are now trading at an average p/e of 32 times earnings, outside investors may find it hard to identify value. Oil revenues may have brought new opportunities in the Middle East. But it is very much a homegrown affair, and structural barriers to redirecting these immense capital flows more efficiently still remain in place. ■

MARKETS DUBAI

BY ANITA HAWSER

Money Magnet Dubai’s international financial exchange, due to open in September, aims to provide a much-needed arena for drawing in international capital. he states of the Gulf Cooperation Council (GCC) and the United Arab Emirates (UAE) may boast oil-rich economies with all the usual symptoms of prosperity, including booming real estate and construction sectors, but historically companies in the region have had no real venue for raising money on the international capital markets. Aside from the local stock markets, the only form of international financing available to them was through a handful of niche emerg ing market funds that have cashed in on the region’s economic gains, or by issuing depositary receipts on exchanges outside their time zone in London or New York. That is about to change. In a move that some say is long overdue, the region is about to get its own international exchange, based in Dubai and scheduled to open for trading on September 26.The Dubai International Financial Exchange (DIFX) hopes to wave the international flag for the region, promoting corporate g ove r n a n c e standards as well as settlement and clearing practices, which one normally only finds in

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major financial markets such as London,Tokyo and New York.The DIFX’s ambition is to become the main exchange for equities, bonds, Islamic products, funds and derivatives between Western Europe and East Asia. It is targeting potential issuers in the UAE, GCC states and the Middle East as well as in Africa, Turkey, central Asia and India. DIFX’s CEO Steffen Schubert, formerly chief executive of Easdaq in Brussels and managing director of the Bavarian Stock Exchange, believes that the international financial reporting and corporate governance standards supported by the exchange will help it build a liquid market that is attractive to both issuers and investors. “We have had discussions with companies from the GCC countries who are willing to change their corporate structure to match international corporate governance standards,” Schubert says. “They are willing to comply with these rules in order to have the DIFX’s ability to parSchubert: ticipate in the “Particularly inter national in the area markets. Particof corporate ularly in the governance, area of corpocompanies rate goverunderstand nance, compawhat they nies understand need to what they need change” to change.”

The number of issuers seeking listing on the DIFX will be dependent on market conditions, but Schubert says the exchange has a number of IPOs in the pipeline, at least one of which it hopes to go live with on September 26. It is also looking at bond issues as well as dual listings in the form of depositary receipts. While most people consider oil to be the region’s biggest cash cow, Schubert says DIFX is attracting interest from issuers across a range of industry sectors, including travel and entertainment. He believes the exchange will provide family-owned companies that have annual revenues in the region of $100 million an unprecedented opportunity to raise international capital. “There are family-owned companies that have reached a certain size without using the capital markets,” he explains. “Their businesses are international, and they have international customers, and they want to finance further expansion.” DIFX claims it will complement existing local stock exchanges in Dubai, Qatar, Kuwait and the GCC states.“We will not compete with them directly,” Schubert says, adding that local investors were likely to play an important role in the region’s capital markets for some time to come. “Our role is to allow companies an alternative to listing in Europe or the US and to list on a market that is in the same time zone,” Schubert explains. ■

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ENT BANK TM

BEST INVESTMENT BANKS

It’s been a busy year for the world’s investment banks as they have vied with each other to win a greater slice of an ever-growing pie.

BEST INVESTMENT BANK$ rom Google’s Internet auctionstyle initial public offering to the rise of private-equity consortiums, investment bankers have lived in interesting times in the past 12 months. Financial market conditions have worsened in the past two months, and the year ahead promises to be at least as challenging as the last.Worldwide merger-and-acquisition transactions exceeded $1.9 trillion in 2004, the highest in four years, with Goldman Sachs leading all financial advisers. Merger activity continued at an active pace in the first quarter of 2005, highlighted by Procter & Gamble’s $57.5 billion acquisition of Gillette, creating the world’s biggest consumer products company. Meanwhile, global underwriting volume rose to a record $5.7 trillion last year, and IPO volume more than doubled to $135 billion, according to Thomson Financial. Issuance of global

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debt, equity and equity-related securities totaled $1.6 trillion in the first quarter of 2005. While that was a decline of 5.2% from the year-earlier period, it was still the second-best quarterly showing ever for securities underwriting. With companies worldwide seeking to raise huge amounts of capital at a time when major market averages are declining, the selection of a capable investment-banking partner has become critical. Global Finance editors, with input from industry analysts, corporate executives and banking consultants, identified the best investment banks in the world. We considered deals announced or completed in the last three quarters of 2004 or the first quarter of 2005. Award winners were chosen for best equity, debt, M&A and overall in six regions and globally. Country winners were selected in 23 nations. Industry-sector

winners were chosen in 10 sectors. Best equity, debt and M&A deals were also selected, and best legal advisers were named globally and in six regions. Goldman Sachs was singled out as Best Investment Bank globally.The firm tied with Citigroup and Morgan Stanley for the most individual awards; each won six. UBS won five awards, and JPMorgan Chase and Merrill Lynch followed with four awards each. Criteria included market share, customer service and advice, structuring capabilities, distribution network, staff dedicated to investment banking, efforts to overcome difficult market conditions, innovation, pricing and after-market performance of underwritings. The winners are the banks that the best companies choose to get their financings done. ■ —By Gordon Platt, Anita Hawser and Paula L. Green

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GLOBAL AWARDS GLOBAL Best Investment Bank Best Equity Bank Best Debt Bank Best M&A Bank Most Creative Best Up-And-Comer

Goldman Sachs Merrill Lynch Citigroup JPMorgan Chase WR Hambrecht Evercore Partners

Industrial/Chemicals Real Estate Media & Entertainment Health Care Consumer Telecom Technology

Citigroup Wachovia Capital Markets Morgan Stanley Lehman Brothers UBS Bear Stearns Silver Lake Partners

SECTORS Financial Institutions Oil & Gas Power

Greenhill Petrie Parkman Lehman Brothers

PRIVATE EQUITY Global North America Western Europe

Blackstone Group Texas Pacific Group Cinven

REGIONAL AWARDS NORTH AMERICA Best Investment Bank Best Equity Bank Best Debt Bank Best M&A Bank

Goldman Sachs Morgan Stanley Citigroup JPMorgan Chase

CENTRAL & EASTERN EUROPE Best Investment Bank Goldman Sachs Best Equity Bank Morgan Stanley Best Debt Bank RZB Best M&A Bank JPMorgan Chase

WESTERN EUROPE Best Investment Bank Best Equity Bank Best Debt Bank Best M&A Bank

Deutsche Bank UBS Barclays Capital Lazard

LATIN AMERICA Best Investment Bank Best Equity Bank Best Debt Bank Best M&A Bank

Goldman Sachs Morgan Stanley Citigroup JPMorgan Chase

ASIA Best Investment Bank Best Equity Bank Best Debt Bank Best M&A Bank

Nomura Goldman Sachs HSBC Morgan Stanley

MIDDLE EAST/AFRICA Best Investment Bank Best Equity Bank Best Debt Bank Best M&A Bank

HSBC Samba Merrill Lynch Citigroup

COUNTRY AWARDS NORTH AMERICA Canada US

Scotia Capital Banc of America Securities

EUROPE France Germany Italy Netherlands Nordic countries Portugal Russia Spain Switzerland Turkey UK

Rothschild Deutsche Bank Mediobanca ABN AMRO Nordea Millennium bcp Brunswick UBS BSCH UBS Akbank Barclays Capital

LEGAL ADVISERS Global: Sullivan & Cromwell North America: Simpson Thacher & Bartlett Western Europe: Linklaters Asia: Cleary Gottlieb Steen & Hamilton Central & Eastern Europe: Dewey Ballantine Latin America: Machado Meyer Sendacz & Opice Middle East/Africa: Freshfields Bruckhaus Deringer

ASIA Australia China/Hong Kong India Indonesia Japan South Korea Taiwan

Macquarie Bank HSBC Kotak Mahindra Capital Mandiri Sekuritas Nomura Samsung Securities KGI Securities

LATIN AMERICA Argentina Brazil Mexico

MBA Banco de Inversiones Banco Pactual Bank of America Mexico

DEALS OF THE YEAR Best Equity Deal: Google IPO Lead underwriters: Morgan Stanley and Credit Suisse First Boston Best Debt Deal: $1.75 billion Pemex perpetual bonds Joint lead managers: Citigroup, HSBC and Merrill Lynch Best M&A Deal: Procter & Gamble-Gillette Advising acquirer: Merrill Lynch Advising target: UBS and Goldman Sachs

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GLOBAL AWARDS INVESTMENT BANK Goldman Sachs By steering clear of the governance scandals and internal bickering that befell many of its competitors and consistently putting together the biggest corporate mergers and acquisitions worldwide, Goldman Sachs has demonstrated that it deserves to be named best investment bank globally for 2005. Not only did Goldman Sachs top the league tables as the leading financial adviser for announced worldwide M&A deals in the past 12 months, but it also maintained its reputation for service and integrity. The old-line firm, which was founded in 1869 and went public in 1999, provides financial advice and services to the world’s leading companies. It has been the top global M&A bank for each of the past seven years. In its fiscal first quarter ended February 25, 2005, Goldman Sachs earned a record $1.5 billion.The annualized return on average tangible shareholders’ equity was 29.6%. Net revenues in investment banking were $893 million, 17% higher than the first quarter of 2004. As of February 25 its total capital was $121.7 billion, comprising $26.1 billion in shareholders’ equity and $95.6 billion in long-term debt.

EQUITY BANK Merrill Lynch Merrill Lynch was the top-ranked bookrunner for global equity and equity-related issues during the first quarter of 2005, raising $12 billion in proceeds, according to Thomson Financial. Merrill Lynch also served as bookrunner on five of the top 10 initial public offerings worldwide in the first quarter.

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With a presence in 28 countries, the firm’s investment bank has raised $3 trillion in debt and equity for clients worldwide in the past 10 years. Merrill Lynch is also one of the world’s largest managers of financial assets, with $479 billion under management. Merrill Lynch earned $1.2 billion in the first quarter of 2005, which was down 3% from the record $1.25 billion in the first quarter of 2004. Net revenues from global markets and investment banking rose 3% from the year-earlier quarter and were up 13% from the fourth quarter of 2004. The global equity markets division generated its strongest net revenues in the past 15 quarters.

DEBT BANK Citigroup Citigroup was the leading underwriter of global bonds, global highyield debt and global investmentgrade corporate debt in the first quarter of 2005, according to Thomson Financial. Citigroup retained the top position in US investment-grade corporate debt for the 20th consecutive quarter. The company reported record net income of $5.44 billion in the first quarter of 2005, up 3% from the same period a year earlier. Record fixed-income markets revenues, which increased 16%, reflected increased customer activity and favorable interest-rate positioning, according to the bank. In September 2004 Citigroup was joint lead manager of $1.75 billion of perpetual bonds for Petróleos Mexicanos, the biggest bond sale ever by a Latin American company. The bonds, which yield 7.75%, have an option that allows Pemex to buy them back after five years.

There is one black cloud: Citigroup’s European government-bond underwriting business has fallen off since its controversial €11 billion trades last August, which angered dealers and regulators.

M&A BANK JPMorgan Chase The leading financial adviser based on number of worldwide M&A assignments in 2004 was JPMorgan Chase, with 396 deals valued at a total of $511 billion, according to Thomson Financial. JPMorgan also led the way in the number of crossborder global deals in 2004, with 128 transactions completed. Within the US, JPMorgan was the leading investment bank, with $271 billion in M&A advisory assignments during 2004. JPMorgan Chase’s acquisition of Chicago-based Bank One, which became effective last July, accounted for more than 20% of that total. JPMorgan Chase earned $2.3 billion in the first quarter, up from $1.9 billion in the first quarter of 2004. The year-ago figure does not include results from Bank One.The most-recent results include an after-tax charge of $558 million for a settlement involving WorldCom. JPMorgan Chase agreed in March to pay $2 billion to settle claims from investors who lost money in the collapse of the telecommunications company.

MOST CREATIVE WR Hambrecht San Francisco-based WR Hambrecht has developed an innovative auction process for distr ibuting stock in initial public offerings to individuals and institutions in what it says is a more efficient and equitable manner. Under an open-auc-

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tion IPO, investors bid for shares, or submit multi-tiered bids, and all successful bidders pay the same price per share.WR Hambrecht advised Google, the most widely used Internet search engine, on its $1.9 billion IPO in August 2004. Although Google ultimately decided on a hybrid offering in which lead investment banks Morgan Stanley and Credit Suisse First Boston han-

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dled the largest institutional orders, it did use an auction-style approach for its IPO. Everyone who bid $85 a share or higher was able to buy the shares, and the stock posted a firstday gain of 18%.

UP-AND-COMER Evercore Partners Evercore Partners, the private equity partnership founded in 1996 by

WORLD’S BEST INVESTMENT BANKS

Roger Altman, former deputy US treasury secretary, leaped into the ranks of the top financial advisers in 2004.According to Thomson Financial, Evercore Partners was ranked number 15 in global announced M&A transactions last year, up from a 106 ranking in 2003. In January 2005 Evercore Partners advised SBC Communications on its pending $16 billion acquisition of AT&T.

SECTORS FINANCIAL INSTITUTIONS Greenhill Greenhill provided financial advisory services and a fairness opinion to Archipelago Holdings in connection with its April 20, 2005, definitive merger agreement with the New York Stock Exchange. Greenhill prides itself on its independence, which allows it to offer advice that is not colored by conflicts of interest. It offers no research, trading, lending or related services. In January 2005 Greenhill provided a fairness opinion to Connecticut-based MeadWestvaco related to its agreement to sell its paper-producing business to Cerberus Capital Management for $2.3 billion. It also is advising MCI on its acquisition by Verizon Communications. An NYSE-listed firm that went public last year, Greenhill is owned mainly by its managing directors. It recruited three new managing directors in the first quarter who were formerly senior bankers with UBS, Goldman Sachs and Morgan Stanley.

OIL & GAS Petrie Parkman Petrie Parkman rules the oil patch. The Houston-based investmentbanking boutique, which also has offices in Denver and London, has advised on more US oil and gas transactions than any other investment bank. In December 2004 Petrie

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Parkman advised Denver-based Patina Oil & Gas on its acquisition by Noble Energy in a stock-swap transaction with a rank value of $3.2 billion. The firm advises clients on the sale or purchase of oil and gas assets in divestiture transactions. It also advises debtors and creditors in a wide range of industries in corporate restructuring transactions.

POWER Lehman Brothers Lehman Brothers is a repeat winner as best investment bank in the power sector. The firm advised Chicagobased Exelon on its December 2004 agreement to merge with Newark, New Jersey-based Public Service Enterprise Group to create the largest utility in the US. The merger will create a combined company with total assets of $79 billion, serving 7 million electric customers and 2 million gas customers in Illinois, New Jersey and Pennsylvania. Lehman Brothers ranked third in overall US M&A transactions in 2004, behind JPMorgan Chase and Goldman Sachs, according to Thomson Financial.

INDUSTRIAL/CHEMICALS Citigroup Citigroup, the leading lender to the chemical industry, has specialists in a wide range of industries worldwide. Citigroup advised Switzerland-based Holcim in January 2005 on its unso-

licited offer to acquire Aggregate Industries, a UK-based manufacturer of concrete products, for $4.2 billion. In October 2004 Citigroup advised Shell Transport and Trading on its $80 billion agreement to merge with Royal Dutch Petroleum. Citigroup advised Crompton on its agreement in March 2005 to merge with Great Lakes Chemical in a stock-swap transaction valued at $1.8 billion.The merger will create the third-largest US specialty chemicals company.

REAL ESTATE Wachovia Capital Markets Charlotte, North Carolina-based Wachovia Capital Markets was the largest underwriter of public preferred equity for real estate investment trusts in 2004. In February 2005 Wachovia advised an investor group composed of Regency Centers and Macquarie CountryWide Trust of Australia on its $2.7 billion agreement to acquire 101 retail shopping centers from CalPERS/ First Washington, the California Public Employees Retirement System.Wachovia provides significant balance-sheet support for real-estate corporate clients, with $3.7 billion committed to 58 public and private REIT clients.

MEDIA & ENTERTAINMENT Morgan Stanley While Morgan Stanley and its dissident former executives have provided

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Western Wireless in January 2005 and rendered a fairness opinion on the telecom’s $5.9 billion acquisition by Alltel, in a stock-swap transaction that included the assumption of $1.5 billion in liabilities. Little Rock, Arkansas-based Alltel will be the fifth-largest wireless carrier in the US, with 10 million domestic wireless customers. Last November, Bear Stearns advised Verizon Wireless on its $3 billion acquisition of all of the PCS (personal communication system) licenses of bankrupt NextWave Telecom (now NextWave Wireless).

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Silver Lake Partners Menlo, California-based Silver Lake Partners put together a team of seven private equity firms in March 2005 to bid for SunGard Data Systems, which

makes software for financial institutions, in an $11 billion leveraged buyout. The deal was the largest LBO since Kohlberg Kravis Roberts bought RJR Nabisco in 1989. Silver Lake Partners focuses its investment activities on market-leading technology companies and is the leading private equity firm dedicated exclusively to large-scale investments in this sector. In April 2005 the firm agreed to buy Instinet’s institutional brokerage division at the same time that Nasdaq acquired Instinet to gain control of its electronic marketplace, INET. In July 2004 Silver Lake Partners announced a $500 million investment in Parisbased Thomson, its first direct investment in a European company.Thomson provides technology and services for integrated entertainment and media companies.

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Blackstone Group Blackstone Group, a leader in private equity investing for nearly two decades, has increased its focus on Europe in recent years. It opened a London office in 2000 and a Hamburg, Germany, office in 2003. Blackstone Group has invested in more than 75 companies, including some in Latin America and Central & Eastern Europe. In March 2005 Blackstone Group joined with six other private equity firms in an $11 billion leveraged buyout to acquire SunGard Data Systems, a Pennsylvania-based company that makes software for financial institutions. Blackstone’s funds manage more than $14 billion, and the firm has raised $32 billion for alternative-asset investing since 1985. Blackstone was founded by Peter G. Peterson, former US commerce secretary and former chairman and CEO of Lehman Brothers, along with Stephen Schwarzman, former head of M&A at Lehman.

Texas Pacific Group Texas Pacific Group, a Fort Worth, Texas-based private equity partnership with offices in San Francisco and London, manages more than $15 billion in assets and specializes in equity investment in the technology sector and in consumer and luxur y brands in need of a makeover. It joined with Blackstone Group in March 2005 in the $11 billion leveraged buyout of SunGard Data Systems. Early in May 2005 Texas Pacific and Warburg Pincus agreed to purchase Neiman Marcus, the upscale Dallas-based retailer, for about $5.1 billion in cash.Texas Pacific also has investments in other retailers, including J. Crew and Petco, as well as fast-food chain Burger King. Last year, it joined with Sony and Comcast, along with Providence Equity Partners and DLJ Merchant Banking Partners, to buy Metro-GoldwynMayer and its film library.

Cinven With offices in London, Frankfurt and Par is, Cinven is one of the leading private equity investors in Europe. Founded in 1977, its funds are some of the largest dedicated solely to European buyouts. Cinven was early to recognize the potential of the buyout market in Europe, where it says an increasing focus on shareholder value is driving the disposal of non-core assets. Meanwhile, the euro has eliminated currency r isk and accelerated cross-border mergers. In September 2004 funds advised by Cinven and Apax Par tner s Worldwide agreed to acquire VNU World Directories, a leading director y publisher, from VNU, the Netherlands-based infor mation and media company, for €2.1 billion. Last December Cinven acquired an 11% stake in Eutelsat, the Paris-based satellite operator, for €337 million.

will expand its lead as the world’s largest consumer-products company. Based in London, UBS Investment Bank, which was formerly known as UBS Warburg, employs more than 15,000 people in 31 countries. Its Switzerland-based parent, UBS, is Europe’s largest bank. UBS forms close relationships with its clients and aims to become the global leader in investment banking by helping its corporate customers become global leaders in their industries.

TELECOM Bear Stearns As the telecom industry consolidates, Bear Stearns is picking up some hefty advisory fees. It advised Verizon Communications on its recent $8.5 billion acquisition of MCI. It also advised Bellevue, Washington-based

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REGIONAL AWARDS NORTH AMERICA INVESTMENT BANK Goldman Sachs Not only did Goldman Sachs repeat as the leading financial adviser for announced worldwide M&A transactions in 2004, but it also was the leading adviser for US and Canadian completed mergers and acquisitions. The firm’s US total of $270 billion in completed transactions was compiled from 145 deals, and the Canadian total of $15.6 billion came from nine deals, according to Thomson Financial. Goldman Sachs has burnished its image as the premier investment bank by advising on some of the biggest and most complex transactions put together in the past 12 months. In January 2005 it advised Gillette on its $57.5 billion acquisition by Procter & Gamble. In February it advised Federated Department Stores on its $15.4 billion acquisition of May Department Stores. In March Goldman Sachs advised the investor group that definitively agreed to acquire SunGard Data Systems for $11 billion. Each of these transactions was the largest in the US market for that month.

EQUITY BANK Morgan Stanley Morgan Stanley finished in first place for global common stock offerings by US issuers during the first three months of 2005, with $4.3 billion raised from 15 issues, according to Thomson Financial. The public debate about the investment bank’s future structure and leadership does not appear to have diminished its performance in the marketplace, as it held on to its top ranking from a year earlier. Morgan Stanley also ranked first for initial public offerings by US companies, with $1.7 billion in pro-

ceeds from seven issues in the first quarter of 2005. For the full year 2004, Morgan Stanley stood astride the league tables as the number-one investment bank in both categories. It beat out Goldman Sachs for the top position in global common stock issues by US companies, a position Goldman had held for five consecutive years.

DEBT BANK Citigroup Citigroup claimed the number-one spot as leading underwriter in the US investment-grade corporate debt markets in 2004 for the fifth consecutive year, with proceeds of $139 billion from 526 issues giving it a 20.2% market share, according to Thomson Financial. The bank maintained its top ranking in the first quarter of 2005. Citigroup offers a wide range of debt products, including a growing volume of peso-denominated bonds through its Banamex subsidiary in Mexico. In August 2004 Citigroup/Banamex announced the first issuance of peso-denominated investment-grade bonds to finance microfinance activities in Mexico. The proceeds of the bonds, issued on behalf of Financiera Compartamos, a Mexican microfinance institution, will be used to fund thousands of entrepreneurs, mainly women in rural communities.

M&A BANK JPMorgan Chase JPMorgan Chase leaped to the top of the league tables for US announced M&A in 2004, with a rise from the number-eight slot a year earlier, according to Thomson Financial. JPMorgan advised on 137 deals from a broad range of industries, with a total rank value of $270 billion of M&A transactions last

year. The bank advised on Sprint’s $36 billion agreement to buy mobile-phone company Nextel Communications and on Johnson & Johnson’s $24.5 billion bid for Guidant, a manufacturer of medical devices. In February 2005 JPMorgan advised MCI, the US telecom that was the target of a bidding war between Qwest Communications International and Verizon Communications. It also advised the investor group in March that acquired SunGard Data Systems for $11 billion.

WESTERN EUROPE INVESTMENT BANK Deutsche Bank In the first part of this year, the German banking giant has steadily inched its way up the worldwide M&A league tables for deals announced, moving from 14th to 11th spot. Last year it was the highest ranked (seventh) European bank, behind the leading US investment banks, in terms of any European involvement in M&A based on announced deals. One of the more memorable deals it advised on featured in last year’s top 10 announced deals: Shell Transport & Trading’s $80 billion merger with Royal Dutch Petroleum. Other deals it advised on include Gas Network’s August $2.5 billion acquisition of Grid Transco’s gas-distribution assets last August and Texas Pacific’s $1.26 billion acquisition of British Vita in February this year.

EQUITY BANK UBS The Swiss investment bank significantly enhanced its share of EMEA equity-related issuance, moving from fifth spot in Q1 2004 to number one in Q1 this year. Following

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last year’s encouraging performance, which saw UBS substantially increase its involvement in equity issuance, it was bookrunner on 19 equity offerings, worth $7 billion, in the first quarter of this year. It was also number-one European bank in terms of global disclosed fees.

DEBT BANK Barclays Capital Noted for its fixed-income capabilities and benefiting from the AA rating of its parent, the UK investment bank saw a good year in 2004, recording the largest increase in market share (1.3%) among the top 10 banks in the international bond markets, moving from eighth to fourth spot in the league tables. It also increased its market share of euro-denominated bonds and topped the tables for European syndicated loans, with a market share of 9.7%.

M&A BANK Lazard The international investment bank ranked number seven in the world last year for worldwide announced and completed M&A deals. It was an adviser on one of last year’s top 10 deals, Telecom Italia’s acquisition of Telecom Italia Mobile, worth $29 billion. It also advised Amadeus Global Travel on its $5.9 billion takeover by WAM Acquisition and advised SunGard US on its takeover in March this year by a consortium of investors. It also made headlines recently following the announcement of Lazard Ltd’s IPO of 34.18 million shares on the New York Stock Exchange, billed as the largest IPO from an investment bank since Goldman Sachs’ in 1999.

ASIA INVESTMENT BANK Nomura In last year’s investment banking

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awards, Nomura claimed all categories (Best Investment, Equity, Debt and M&A Bank) in the Japanese market. Its performance on the league tables backed this up, finishing first for the second year running in 2004 for equity issuance in the Japanese market. Handling a total of 161 deals last year, including some of the largest deals in the Japanese market (Electric Power Development Co. and Shinsei Bank Ltd), it continued to grab the headlines this year, advising Mitsubishi Tokyo Financial Group on its acquisition of UFJ Holdings to create the world’s largest bank. It ranked first in 2004 for Japanese IPOs, acting as bookrunner on 40 deals, worth $5.2 billion.

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number-two bookrunner in the Asia-Pacific region for syndicated loans.

M&A BANK Morgan Stanley Morgan Stanley is a leading adviser on M&A deals in the region, claiming the number-one spot for both announced and completed deals on the 2004 league tables, with combined deals valued at more than $28 billion, including three of last year’s top 10 deals. In the first quarter of this year it was ranked number two behind Credit Suisse First Boston for announced deals in the Asian region (ex-Japan), worth $6 billion.

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Goldman Sachs With a strong track record in Hong Kong, Goldman Sachs is also making its mark on the mainland. In December last year it won approval to establish a joint-venture investment bank with China’s Gao Hua Securities. Last year it led the allequity league tables for Asia-Pacific (excluding Japan and Australia) with proceeds of $8.2 billion from 23 issues, increasing its market share by almost 6%, from 9.3% in 2003 to 15% in 2004.

Goldman Sachs Last year Goldman Sachs remained the leading financial adviser for worldwide announced M&A, advising on 336 deals. It was also among Mergerstat’s top five European cross-border financial advisers for the first quarter of this year, on the back of deals with an aggregate enterprise value of $44.1 billion. The investment bank boasts a strong track record in emerging markets, including Central & Eastern Europe, and is known for its innovation when it comes to structuring deals. Deals it has advised on in the region include General Motors’ tie-up with Fiat Auto Poland.

DEBT BANK HSBC Experienced at raising funds in local and overseas debt markets, HSBC boasts a strong presence in Hong Kong and China as well as an extensive regional network. Last year it was the number-one bookrunner for Asian currency-denominated bonds, underwr iting 162 issues worth a total of $6.6 billion. It was also bookrunner on Sun Hung Kai Financial Services’ $1.6 billion syndicated loan, the largest in the Hong Kong market last year. It is ranked

EQUITY BANK Morgan Stanley Morgan Stanley led this year’s largest-ever Russian IPO ($1.35 billion) by mobile phone company Sistema in February. Its asset management division has a strong presence in the region, including Russia, the former Soviet Republics and CEE via the Morgan Stanley Eastern Europe Fund. It has also led a number

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of debt issues in the region, including Hungary’s issue of a $1.5 billion 2015 bond and the Czech Republic’s maiden 10-year sovereign issue worth €1.5 billion in June last year. In December last year it also advised Central European Media Enterprises on its acquisition of a controlling stake in CEE’s largest commercial television network,TV Nova.

DEBT BANK RZB Austria’s Raiffeisen Bank (RZB) has an extensive regional network encompassing 16 Central & Eastern European markets and is also rated as best bond house in a number of countries. Last year its CEE operations grew more rapidly (25.9%) than the group as a whole. Raiffeisen Capital Management has invested in fixed-income securities from CEE transition countries since 1996, as well as local currency government bonds in Hungary and Poland.To support the growth of its business in CEE it also recently raised €1.11 billion for a 30% stake in its international arm, Raiffeisen International, in the largest initial public offering (IPO) in Austrian stock market history.

M&A BANK JPMorgan Chase The US investment bank was involved in a number of key deals across the region, including playing the role of adviser in the $2 billion deal between Fiat Auto Poland and General Motors. It is also active in the Russian market, advising ConocoPhillips’s Springtime Holdings on its purchase of a $2 billion stake in Russian oil company LUKoil, and Russian cellular telecom provider Vimpel Communications on its sale of a 25% stake to Alfa Telecom. It has been involved in some historic deals in the region, including the first major post-communist-era banking

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privatization of Bulgarian savings bank DSK in 2003.

LATIN AMERICA INVESTMENT BANK Goldman Sachs Goldman Sachs has brought the expertise and finesse that makes it a top player in investment banking activities around the world to Latin America. This blue-chip financial institution was the leading financial adviser for announced mergers and acquisitions in Latin America in 2004, according to Thomson Financial, and served as adviser on 35 deals with a rank value of $16.75 billion. Those 35 deals gave it a 43.5% market share in the Latin region for the year. Goldman Sachs also captured the lead position in completed M&A transactions in Latin America in 2004 as it moved up from second place in 2003 by dislodging JPMorgan Chase, which slipped to fifth place. This Wall Street powerhouse advised Interbrew, now called InBev, of Belgium on the unwinding of its complex relationship with Mexican brewer FEMSA. In that deal, FEMSA, also know as Fomento Economico Mexicano S.A. de C.V., and one of the largest integrated beverage companies in Latin America, bought the 30% share of FEMSA Cerveza that had been owned by Interbrew for $1.245 billion.

EQUITY BANK Morgan Stanley Morgan Stanley ranked number five in its mergers and acquisitions work in Latin America in 2004 with eight deals totaling $6.9 billion, according to Thomson Financial. Morgan Stanley advised low-fare Brazilian airline GOL Linhas Aéreas Inteligentes on its recent global offering of equities after advising the South American airline on its initial public offering in June of 2004.The

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sale in April of this year was offered to local markets and as American Depositary Receipts on the New York Stock Exchange. The fastgrowing airline says it will use the money to purchase new aircraft from Boeing. Morgan Stanley’s equity specialists are part of a sophisticated mergers and acquisitions department that routinely handles a range of complex domestic and international deals.These deals ranged from corporate restructurings to leveraged buyouts to defenses against unsolicited takeover attempts. For the first four months of this year, the bank announced merger and acquisition deals around the world that pushed it into the number-one spot with deals valued at $261.5 billion, according to Thomson Financial.

DEBT BANK Citigroup Once again, Citigroup has captured the Global Finance award for Best Debt Bank and retained its position as the top-ranking bookrunner for Latin American bonds, syndicated loans and debt exchanges. Citigroup played a part in one of Latin America’s biggest corporate bond sales ever when it advised Petróleos Mexicanos, or Pemex, on its sale of so-called perpetual bonds last September.The deal was the first time a Latin American borrower issued perpetual bonds, and the Mexican oil company received bids of about $5 billion for the $1.75 billion issue. This sophisticated deal was targeted at Asian investors searching for higher yields. They bought about 65% of the bonds. In another significant deal, Citigroup helped the gover nment of Colombia issue $375 million (954 billion pesos) of Colombian peso currency bonds late last year. The transaction was Colombia’s first issuance of pesodenominated global bonds in the

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international capital markets and the second time in which a Latin nation placed domestic-currencydenominated debt abroad.

M&A BANK JPMorgan Chase The 37 Latin American merger and acquisition deals for which JPMorgan Chase acted as adviser in 2004 helped this global investment bank claim the top slot of announced M&A deals in Latin America. The 37 transactions held a rank value of $7.6 billion and gave the bank a market share of 19.8%, according to Thomson Financial. One significant deal in 2004 involved advising Telefonica Movil Chile on its $1.25 billion sale to Spain's Telefonica. JPMorgan Chase investment bank serves thousands of clients—including corporations, financial institutions, governments and institutional investors—in more than 100 countr ies around the world. And its mergers and acquisitions business is a vital component of an investment banking business that ranges from equity and debt capital-raising to market-making in derivative instruments. For the first four months of this year, JPMorgan Chase captured the number-three spot in overall merger and acquisition transactions, with announced deals valued at $186.6 billion, according to Thomson Financial.

MIDDLE EAST/AFRICA INVESTMENT BANK HSBC HSBC is the leading investment bank in the Middle East and has expanded its regional services in Africa. HSBC Financial Services (Middle East) and the bank’s capital markets team, based in London, provide a full range of services to corporate, institutional and retail clients. HSBC Bank Middle East is

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the largest and most widely represented international bank in the region, with offices in Bahrain, Jordan, Lebanon, Oman, Qatar and the UAE. HSBC is also a leader in developing the domestic bond market in Egypt. HSBC Amanah is the global Islamic financial services division of HSBC. It was established in 1998 and is now based in Dubai. In 2003 HSBC opened a corporate and institutional bank in Johannesburg, which now acts as the regional office for all of HSBC’s sub-Saharan African activities.

EQUITY BANK Samba Samba, the former Saudi American Bank, has proved that it can excel without the help of an international bank partner. Citigroup last year sold its 20% stake in Samba to the Public Investment Fund, a Saudi public entity, and recorded an after-tax gain on the sale of $760 million. Samba’s handling of the Etisalat Ettihad IPO, which was oversubscribed by 100 times, demonstrated the bank’s underwriting capabilities as well as the large pool of liquidity available for investment in Saudi Arabia.The telecom IPO for UAE-based Etisalat attracted 4.3 million applicants, nearly a quarter of Saudi Arabia’s population. Samba posted a 74% rise in earnings for 2004 and a significant increase in return on shareholders’ equity from 16.2% to 27.3%.

DEBT BANK Merrill Lynch Merrill Lynch is a repeat winner of best debt bank, as it has continued to manage major deals across the region in a variety of currencies, primarily for sovereign borrowers such as Tunisia and Morocco. In April 2005 Merrill Lynch Bank (Suisse) was awarded a license to operate from the Dubai International Financial Center. Merrill Lynch has been

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present in the Middle East since 1961 and maintains offices in Israel, Lebanon, Bahrain and the UAE. Mer r ill Lynch also is active in African debt markets. It was lead manager of South Africa’s first private-sector bond issue in 2000, and it operates a securities firm in Johannesburg. In October 2004 Merrill Lynch was the winning underwriter of $750 million of 20-year bonds for the state of Israel, which are guaranteed by the US Agency for International Development.

M&A BANK Citigroup Citigroup has the most widespread geographic presence in the Middle East and Africa combined of any international bank, and it owns the CitiIslamic Investment Bank. Although Citigroup sold its 20% stake in Samba, formerly Saudi American Bank, many analysts expect it to return to Saudi Arabia on its own before long. Citigroup advised CelTel International in March 2005 on its acquisition by Kuwait-based Mobile Telecommunications, or MTC, for $3.4 billion. MTC already operates in Kuwait, Jordan, Bahrain, Lebanon and Iraq. The acquisition will give it 13 licenses in sub-Saharan Africa. Meanwhile, Citigroup’s leading position in Africa is being challenged by Barclays, Britain’s third-largest bank, which agreed in May 2005 to pay $5.5 billion to acquire ABSA, South Africa’s biggest retail lender. Citigroup’s investment banking arm has been operating in South Africa for three years. A significant portion of the deal flow in South Afr ica is associated with black economic empowerment, or BEE, transactions an area in which Citigroup is active. The bank’s ability to commit its own balance sheet to support financing for these transactions is giving it a leg up in this area.

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COUNTRY AWARDS NORTH AMERICA CANADA Scotia Capital Scotia Capital, the global corporate and investment banking division of Scotiabank, is a repeat winner. With operations in 50 countries, including a presence in Latin America and the Caribbean, Scotiabank is Canada’s leading international bank. Scotia Capital and Grupo Financiero Scotiabank Inverlat served as financial advisers for one of the largest M&A transactions in Mexico last year, Grupo Comercial Chedraui’s acquisition of 30 retail stores from France’s Carrefour. In April 2005 Scotia Capital was the exclusive financial adviser to Kohlberg Kravis Roberts (KKR) on its acquisition of Masonite International, the largest leveraged buyout in Canadian corporate history. It also underwrote $2.3 billion in credit facilities to finance KKR’s bid for Ontario-based Masonite and was the sole M&A adviser to Newfoundland-based energy company Fortis on its acquisition in May 2004 of Aquila’s electric utilities in Alberta and British Columbia.

2004, with issuance of $1.3 trillion. Banc of America Securities had a market share of more than 20%.The bank was number five in global highyield corporate debt for 2004.

EUROPE FRANCE Rothschild Rothschild boasts specialist expertise across a range of investment disciplines, including M&A, restructuring, private placements, privatization and equity. Last year it ranked number one in European target M&A league tables based on an announced 190 deals, valued at $211.8 billion. It advised on two of last year’s major M&A deals: the $80 billion merger between Royal Dutch Petroleum and Shell Transport & Trading, and Sanofi-Synthelabo’s controversial $66 billion bid for Aventis.The joint venture it founded with ABN AMRO in 1996 continues to bear fruit, with ABN AMRO Rothschild acting as the sole global coordinator and bookrunner for BAE Systems’ secondary offering of SAAB, valued at €187.3 million.

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Banc of America Securities Banc of America Securities, the investment-banking arm of the Charlotte, North Carolina-based bank, wins the US award on the strength of its capital-markets activities, particularly in syndicated lending. At a time when mergers and acquisitions are spurring growth of leveraged lending, Banc of America Securities is a leading participant in US leveraged loans.Acquisition-related proceeds in this market increased by 88% in 2004 to $50 billion, according to Thomson Financial.The US syndicated lending market reached an all-time high in

Deutsche Bank In terms of equity issuance, Deutsche remains one of the highest-placed German banks (number two in equity in Europe according to Thomson Financial), with an overall market share of 8.9% in 2004. In terms of debt issuance, Deutsche is the number-one bookrunner for international bonds denominated in euros and number-two-ranked on league tables for all international bonds. In the European syndicated loan market it was sole bookrunner on Euroclear’s $5.7 billion loan, which is ranked as the third-largest deal so far in 2005.

ITALY Mediobanca Italy’s leading investment bank and one of Italy’s most powerful financial and industr ial corporations, Mediobanca was lead manager alongside Merrill Lynch on last year’s largest equity offering, the $9.5 billion privatization of Italian power and gas provider ENEL. It is ranked in the top 10 in Europe for equity issuance. It also advised Leonardo Finanziaria on its $2.6 billion tender for real estate developer Beni Stabili in September last year. The Italian bank is also making its mark on worldwide M&A, jumping from 36th position in Q1 of 2004 to 10th in Q1 2005, based on deals completed.

NETHERLANDS ABN AMRO Notable deals for the Dutch bank in 2004 included advising Royal Dutch Petroleum on its $80 billion acquisition of Shell Transport & Trading and Nederlandse Gasunie’s transport unit on its acquisition by the Netherlands government for $3.56 billion in November. Based on 2004 league table rankings, ABN AMRO Rothschild increased its number of equity offerings almost threefold, from 15 offers valued at $3.9 billion in 2003 to 43 offers valued at $8.2 billion in 2004. It is also steadily building market share in the euro-denominated international bond market, with its share of the market increasing from 5.6% in 2003 to 6.2% in 2004, moving it from fourth spot to third position.

NORDIC COUNTRIES Nordea With operations in four Nordic countries, Nordea is a leading adviser on equity and M&A deals throughout the region. Nordea’s involvement in the European M&A market grew,

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taking it up 16 places in terms of total deal volume, from 21st position in Q1 2004 to fifth in Q1 this year. Also in the first quarter of this year, the Nordic banking giant was a new top25 entrant in the “any European involvement” announced M&A league tables, coming in at 17th spot with a rank value of $5.2 billion.

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Mexican cement producer Cemex and French hypermarket Carrefour. On the equity origination side, Banco Santander was joint global coordinator for the IPO of Madridbased Cintra, one of the largest private sector transport developers in the world. The year also saw BSCH increase its market share of the mutual fund market to 27.6%.

Millennium bcp The specialist investment banking subsidiary of Portugal’s leading private bank significantly increased its net contribution to the overall business, raising it by more than 102% from €10.7 million in Q1 2004 to €21.7 million in Q1 this year. Private banking operations also saw increased activity in the first quarter, with a 32.7% increase in wealth management business from €11.5 million in the corresponding period for 2004. Both divisions have benefited from the focus on reducing operating costs and shoring up net commission income at Bank Millennium.

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Brunswick UBS Russia’s leading investment bank, which forms part of UBS’s investment banking operations, has a 28% share of the domestic market. Its knowledge of the Russian market, where it has been active since 1994, combined with UBS’s global franchise and expertise has proved a compelling proposition. UBS was global coordinator for last year’s ADR placement on the NYSE by Russian steel giant Mechel.

Akbank Turkey’s most profitable private bank, Akbank continues to increase its share (from 14.5% in 2003 to 15.2% in 2004) of the domestic mutual fund market, where it is ranked number two based on portfolio volume. It attributes its success to superior asset and channel management. Last year Akbank signed $501.5 million worth of project finance loan agreements, constituting an average annual growth rate of 26% per annum since 2000. Assets under management also increased by 13%. In an effort to widen its US and international investor base, Akbank also recently launched a Level-1 ADR facility.

SPAIN BSCH The structured financing and syndicated loan division of Spain’s largest bank recorded a 51% increase in operating revenue last year.The fourth quarter saw it underwrite a number of major syndicated loans for leading

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UBS The Swiss banking giant made its mark on the worldwide announced M&A rankings, moving from 12th spot in Q1 2004 to fifth position in Q1 this year. Notable deals it advised on include Standard Chartered Bank’s acquisition of Korea First Bank for $3.28 billion in January this year. Last year the firm increased its share of equity issuance by almost 100% compared with 2003, and in the first quarter of this year it moved to first place on the EMEA equity league tables, playing a leading role in 19 equity offers worth a total of $7 billion.

UNITED KINGDOM Barclays Capital One of the world’s fastest-growing

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investment banks, Barclays Capital has a strong reputation in the fixedincome markets. In the first quarter of this year it was ranked number three for issuance of euro-denominated bonds and number four for all international bonds and in 2004 recorded the largest increase in market share (1.3%) among the top 10 banks in the international fixed-income market. It is also a significant player in the European LBO market and was involved in some of last year’s largest deals, including the refinancing of Kabel Deutschland.

ASIA AUSTRALIA Macquarie Bank Last year Australia’s leading investment bank consistently finished in the top two for announced M&A deals based on number of deals and rank value and topped the league tables for deals completed, with 46 deals valued at $34.8 billion. In December it advised an investor group on the acquisition of NTL Broadcast UK for $2.4 billion, and it worked on last August’s acquisition of National Grid Transco’s $6 billion gas-distribution assets. In the first part of this year Macquarie was also the leading bookrunner for domestic equity-related activity, notching up $1.8 billion in deals.

CHINA/HONG KONG HSBC HSBC has the largest and longest established presence on the Chinese mainland. It is strong in both Asian cur rency bonds and syndicated loans. Last year it was the leading bookrunner for all Asian currency bonds, underwriting volumes worth $6.6 billion. It was also part of the bookrunning syndicate for Sun Hung Kai Financial Services’ $1.6 billion loan—the single largest borrowing in the Hong Kong market in the first quarter of this year.

ANNUAL SURVEY INDIA Kotak Mahindra Capital India’s leading equity investment bank is a joint venture between Kotak Mahindra Bank and Goldman Sachs. Benefiting from Goldman Sachs’ global reach and expertise and Kotak Mahindra’s local knowledge, the investment bank boasts an extensive distribution network. Last year as well as this year it was bookrunner on a number of key IPOs in the Indian market, including public equity issuances by Allahabad Bank, National Thermal Power and Jet Airways India. In the first quarter last year, net profit in the investment banking division grew by 87%.

INDONESIA Mandiri Sekuritas Mandiri Sekuritas is a subsidiary of Indonesia’s largest state-owned bank, Bank Mandiri. Mandiri Sekuritas rose to prominence in 2004, with a strong showing in both bond and equity markets and a return to the IPO market. It is ranked number one in the government securities interdealer market and is a leading bond underwriter. In the bond markets, Mandiri managed the $79 million offering of Indonesian heavy equipment provider PT Apexindo Pratama Duta and was lead underwriter for the oversubscribed $111 million bonds issued by Bank Jabar.

JAPAN Nomura Ranked number one last year by Thomson Financial for global Japanese equity issuance, with proceeds of $16 billion, Nomura also topped the tables for IPOs, with a market share of 34.2%. Some of last year’s major deals included Electric Power Development’s $3.3 billion equity issuance, which ranked among the top three Japanese IPOs. In M&A, Nomura advised Mitsubishi Tokyo Financial Group on its February acquisition of

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UFJ Holdings for $41.4 billion. It also took the number-one spot from Goldman Sachs in last year’s league tables for global convertible offerings, acting as bookrunner on 22 deals, worth $3.85 billion.

SOUTH KOREA Samsung Securities South Korea’s leading brokerage house and a repeat winner, Samsung Securities is a strong contender in both equity and fixed income. In February last year it acted as adviser on a $2.9 billion deal in the Korean banking sector, which saw the Korea Deposit Insurance Corporation sell its 80.04% stake in Chohung Bank to Shinhan Financial Group, creating the country’s second-largest bank in terms of assets.

TAIWAN KGI Securities KGI Securities is part of a pan-Asian financial services group with more than $2 billion worth of assets under management. In March this year it was expected to for m part of a three-way merger between Grand Cathay Securities and President Securities, but the deal was put on hold after a board member of China Development Financial Holding, operators of Grand Cathay, called for an objective appraisal of the deal.

LATIN AMERICA ARGENTINA MBA Banco de Inversiones As Argentina’s leading investment bank, its experienced team of professionals has sealed some of the country’s most important capital market transactions. Last year, for example, MBA advised Telecom Argentina on its $3.3 billion debt restructuring— one of the largest corporate restructurings in Argentine history. And to keep its edge in an increasingly competitive industry, the Argentine bank

WORLD’S BEST INVESTMENT BANKS

in November entered into a strategic alliance with global investment bank Lazard. The alliance will provide cross-border advisory services to institutions investing in companies located in Argentina and to Argentine corporations investing abroad.

BRAZIL Banco Pactual Banco Pactual has been the sole or joint bookrunner on seven equity offerings in the past year.The $200 million stock issue in May 2004 by Natura Cosmeticos was the first stock offering in Brazil in more than two years.The bank uses its smaller size to its advantage to give clients the flexibility and speed they crave as it caters to the needs of local clients. Last year Banco Pactual led a $180 million IPO for American Latina Logistica, a Brazilian transportation company that manages rail track in Brazil and Argentina. It is also a leading financial adviser on Brazilian M&A transactions and advised Viaoeste, a toll road operator in São Paulo, on its acquisition by fellow concessionaire CCR, or Companhia de Concessoes Rodviarias, in October.

MEXICO Bank of America Mexico A subsidiary of US-based Bank of America, Bank of America Mexico serves its institutional clients in Mexico with a range of investment banking services. Late last year it streamlined its services when it completed the merger process for the Mexico subsidiaries of Bank of America and FleetBoston Financial—a move that was triggered by the April 2004 merger of Bank of America and FleetBoston Financial in the US. The bank’s Mexican investment banking division also should receive a boost by Bank of America’s recent decision to invest $675 million in its capital markets and investment banking operations.

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LEGAL ADVISERS GLOBAL

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Sullivan & Cromwell Sullivan & Cromwell was the top legal adviser on both announced and completed worldwide mergers and acquisitions in the first quarter of 2005, according to Thomson Financial.The law firm also ranked first for M&A deals with any European involvement in the first quarter, moving up from number two a year earlier. Sullivan & Cromwell took the top manager counsel spot for worldwide initial public offerings by US issuers in 2004, with $4.35 billion from 13 issues, according to Thomson Financial.The firm was second last year in the US investment-grade corporate debt market. M&A constitutes a large portion of the firm’s work, and it is continually involved in some of the most significant transactions. Sullivan & Cromwell currently is acting as counsel to Archipelago on its recently announced merger with the New York Stock Exchange.

Linklaters Linklaters is the leading legal adviser for Western Europe, with the number-one position in virtually every league table for its work on mergers and acquisitions in the first quarter of 2005, by both value of deals and number of transactions.The firm also took the top spot on a nationwide basis in the UK, France, Spain and Germany, as well as in the Benelux countries. Linklaters advised Vodafone on its $3.5 billion acquisition of MobiFon in Romania and of Oskar in the Czech Republic.

NORTH AMERICA Simpson Thacher & Bartlett Simpson Thacher & Bartlett was the number-one law firm advising on US announced and completed M&A transactions in the first quarter of 2005. In March 2005 it advised a consortium of private equity firms, and also advised Blackstone Group and Kohlberg Kravis Roberts individually, on their $11 billion acquisition of SunGard Data Systems. It was the leading legal adviser on worldwide equity issuance by US companies in 2004, with $9.5 billion in proceeds from 17 issues, according to Thomson Financial. It was also number one in US equity and equity-related and US high-yield corporate debt markets for issuer legal adviser in 2004.

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ASIA Cleary Gottlieb Steen & Hamilton Cleary Gottlieb Steen & Hamilton has 12 offices in major financial centers worldwide and operates as an integrated global partnership. The firm employs more than 850 lawyers from more than 50 countries. Cleary Gottlieb represented KFB Newbridge Holdings in the $3.3 billion sale of the entire share capital of Korea First Bank to Standard Chartered Bank, the largest-ever investment in South Korea. It represented Newbridge in its acquisition of a controlling interest in Korea First Bank in 2000 and since that time has represented the bank in numerous international securities offerings.

CENTRAL & EASTERN EUROPE Dewey Ballantine Dewey Ballantine is the leading counsel to investment advisers in Central & Eastern Europe. Its Warsaw office, staffed by 50 attorneys, has particular expertise in corporate law, including mergers and acquisitions as well as capital markets. It also maintains an office in Prague in association

with a local firm. Dewey Ballantine’s London office was instrumental in many of the region’s innovative transactions. In December 2004 the firm advised Central European Media Enterprises in its acquisition of TV Nova, the largest direct US investment in the history of the Czech Republic.

LATIN AMERICA Machado Meyer Sendacz & Opice Brazil-based law fir m Machado Meyer Sendacz & Opice was the leading legal adviser on all M&A transactions with any Latin American involvement that were announced in the first quarter of 2005, according to Thomson Financial. The firm was Brazilian counsel to Interbrew on its $11.2 billion merger last year with AmBev, creating the world’s largest brewing group by volume. Machado Meyer Sendacz & Opice also is an active adviser on debt securities issuance by Brazilian companies, as well as on corporate restructurings.

MIDDLE EAST/AFRICA Freshfields Bruckhaus Deringer Freshfields Bruckhaus Deringer is a major international law firm with more than 2,400 lawyers in 27 offices worldwide.A significant portion of its work involves mergers and acquisitions.The firm has specialized expertise in the acquisition of banks and financial institutions. Freshfields Bruckhaus Deringer advised Japan Bank of International Cooperation, Nippon Export and Investment Insurance and HSBC Tokyo on the recent debt financing for a $650 million chemical and fertilizer complex in Sohar, Oman. In January 2005 it advised US-based CSX on the $1.2 billion sale of its international terminals business to Dubai Ports International.

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DEALS OF THE YEAR EQUITY DEAL Google IPO Lead underwriters: Morgan Stanley and Credit Suisse First Boston Google’s auction-style IPO last August raised more than $1.9 billion, among the largest-ever equity issues by a technology company. Anyone who bought at the IPO price of $85 a share is enjoying a very sizable gain. The highly anticipated offering was a shot across the bow to investment bankers, who need to be worried about the potential of the Internet to undermine their traditional way of pricing and distributing stock issues. Lead investment bankers Morgan Stanley and Credit Suisse First Boston cashed in on their over-allotment option to buy 2.94 million Google shares at their IPO price. This helped to make up for the fact that they received a lower-thanusual underwriting fee of 3% on the offering of shares in the popular search engine. The bankers didn’t have to value the company and, therefore, had less work to do than in traditional IPOs.The price of the offering was set by investors, not by the underwriters. This may have helped to weed out those investors looking to buy with the intention of selling almost immediately. The stock rose 18% in its first day of trading and nearly 8% the following day. The offering price was well below what the company initially planned to charge, and founders Larry Page and Sergey Brin cut in half the number of shares they sold. Still, Mountain View, Californiabased Google accomplished most of what it intended with a success-

ful IPO in a soft market for stock offerings. The debate over the auction process hasn’t ended, but it has become more interesting thanks to Google’s g roundbreaking—and hugely successful—IPO.

DEBT DEAL $1.75 Billion Pemex Perpetual Bonds Joint lead managers: Citigroup, HSBC and Merrill Lynch Petróleos Mexicanos, or Pemex, Mexico’s state-owned oil company, raised $1.75 billion in September 2004 through an offering of socalled perpetual bonds.The securities have no set maturity, but they pay regular interest and have an option that will allow Pemex to buy them back after five years.This was the biggest-ever bond sale by a Latin America company, as well as the first issue of perpetual bonds by a borrower in the region. Last June Pemex sold $1.5 billion of floatingrate notes, its previous biggest sale. The underwriters timed the innovative sale of perpetual bonds to take advantage of a bond-market rally to enable Pemex to lock in lower borrowing costs. Pemex received bids of about $5 billion for the bonds, which have a 7.75% coupon. Yield-hungry Asian investors, who were specifically targeted by the underwriters, purchased about 65% of the issue. Pemex had a goal of moving beyond its traditional American and European investor base. Analysts say Pemex is likely to exercise the option to buy back the bonds after five years if it is able to borrow at a lower rate, which could very well be the case if its credit ratings continue to improve.

M&A DEAL Procter & Gamble–Gillette Advising acquirer: Merrill Lynch Advising target: UBS and Goldman Sachs Cincinnati, Ohio-based Procter & Gamble’s deal to acquire fellow consumer-products company Gillette for $57.5 billion fell short of being the largest merger in the past 12 months. That honor went to French pharmaceutical company Sanofi-Synthelabo’s purchase of Aventis at the end of April 2004 for $72.7 billion. But the P&GGillette hookup makes the best sense to a lot of people. Warren Buffett, chairman and CEO of Berkshire Hathaway, Gillette’s largest shareholder, called the transaction “a dream deal.”A.G. Lafley, chair man, president and CEO of Procter & Gamble, said, “This combination of two best-inclass consumer products companies, at a time when they are both operating from a position of strength, is a unique opportunity.” Even those without a vested interest had to admit that not only was the transaction a terrific fit but that it also would create a company with the power to fight for shelf space at a time when gigantic retailers such as Wal-Mart are calling the shots. Some analysts pointed out that Boston-based Gillette’s male-oriented razors and shaving cream and deodorants such as Right Guard were the perfect complement to P&G’s more ladylike brands, such as Olay lotions, Tampax tampons and CoverGirl cosmetics. The combination will enable both companies to distribute their products more cheaply and to remove duplicate costs.

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SEC Likely to Change Rules For Securities Offerings To Attract Foreign Issuers

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ow that the burdens imposed by the Sarbanes-Oxley Act have scared a number of non-US issuers away from the US capital markets, the Securities and Exchange Commission is preparing to reform the securities offering process, hoping to win some of those companies back. The effort is unlikely to bear fruit, lawyers say, except for possibly luring a few large, well-known companies, which will receive special status under the new rules. A new category of well-known seasoned issuers, or WKSIs, will gain new flexibility that will enable them to jump into the markets more quickly with new issues.WKSIs are companies that have filed their SEC-required documents on a timely basis in the past year and have more than $700 million of common stock outstanding. In the case of debt offerings,WKSIs must have

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issued at least $1 billion of registered debt securities in the preceding three years. “The reforms will make it much easier for large, nonUS corporations to do registered securities offerings in the US,” says Richard Baumann, London-based partner at Dorsey & Whitney, who heads the firm’s international capital markets practice. The SEC reforms are likely to be adopted in the coming months, and maybe in the coming weeks, Baumann says, noting that the comment period ended in January 2005.The new rules could radically change the way US-registered securities offerings are marketed and documented,

he says. “Changes to the communications process will make it easier for foreign issuers to handle the publicity restrictions in the US, which are more restrictive than in Europe,” Baumann says. “This will make it easier for corporate executives of issuing companies to talk to the media, for example.” Under the proposals, all existing limitations on communications made during the offering process would be eliminated for seasoned issuers. It is purely coincidental, Baumann says, that the US reforms are coming at the same time that the EU is implementing the Prospectus Directive, which

will introduce a single set of documents, or passport, for raising capital on a regulated market in any EU-member country, effective July 1, 2005. The proposed US regime appears to offer certain advantages compared to the EU market, where companies are required to wait for at least seven days before making a rights offering, Baumann says. There would be no

Richard Baumann, partner, Dorsey & Whitney

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US capital markets as a result of the proposals, according to lawyers at Cleary Gottlieb Steen & Hamilton in New York. They say that while some foreign companies may view the benefits of WKSI status as outweighing the burdens imposed by SarbanesOxley, many will Richard Lark Jr., CFO and investor relations officer, GOL not. In its November 2004 release second international offering was the global coordinator proposing the changes to its of American depositary of the offering. securities registration and Gol, which started as shares (and a simultaneous offering rules, the SEC said a bus company, provides Brazilian offering of the existing regime hinders frequent service on routes preferred shares) in less than legitimate communications between all of Brazil’s a year. that would be helpful to major cities and is The fast-growing airline investors and has led to expanding into neighwill use the proceeds to the practice of marketing boring countries. buy and lease additional securities through road “We still have the bus Boeing 737 Next shows to selected incompany, but flying beats Generation aircraft. stitutional investors and taking the bus,” says GOL offered 5.5 million broker-dealers. Constantino de Oliveira Jr., preferred shares, and In the future, it suggests, Gol’s chief executive, who stockholder BSSF Air road-show presentations rang the opening Holdings, an affiliate of should be done bell on the New York AIG Capital Partners, sold on the Internet, Stock Exchange. 9.2 million shares. Each giving small American depositary Gol’s ultimate goal is investors access to serve all countries in receipt represents two to the same South America, de Oliveira preferred shares. information as says, but the company Morgan Stanley led the larger investors. has no intention of international offering, as becoming an international sole book-running overseas airline. manager, and Merrill Brazilian Air- Lynch, Raymond GOL operates one of the line Issues youngest and most modern James and Santander fleets in the industry. It Investment were joint Shares offers a single-class of lead managers. service and uses only The local offering in Brazil’s only Boeing aircraft. De Oliveira Brazil was led by Banco low-fare airline, says GOL chose the US Santander Brasil and GOL Linhas aircraft maker over Airbus Morgan Stanley, as joint Aéreas because Boeing’s planes fit bookrunners, and Banco Inteligentes, raised Constantino de Oliveira Jr., its operating and route Itaú BBA as co-lead about $180 chief executive, GOL structure and are easy to manager. Morgan Stanley million in its

such delay for WKSIs making rights offerings in the US. “The proposed SEC reforms include something for everybody, but more for the large companies,” Baumann says. “SarbanesOxley is still a big burden for many companies, but the offering reforms ought to tend to lower costs and reduce time to market for many US registered offerings,” he says. While the new rules are designed to modernize and streamline the process of offering securities, as well as to make more information available to investors and increase use of the Internet, the SEC is also keenly interested in steering more transactions to the US public market through registration, lawyers say. The SEC is also hoping to reduce reliance on private placements conducted under Rule 144A, as opposed to registered offerings. It remains to been seen to what extent foreign issuers will return to the

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investors, including some who are allowed to invest in ADRs but not foreignlisted shares.

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Exchange, and the ADRs trade in the US over-thecounter market. The company’s businesses include Sainsbury’s Supermarkets and Sainsbury’s Bank, and it employs 147,500 people.

company’s Nasdaq-listed ADR program. Each ADR represents 15 ordinary shares. China is emerging as a top growth area for ADRs, says Christopher Sturdy, managing director and head of Bank of New York’s depositary receipt division. “This [China Techfaith] newly listed program supports the strong interest and increased activity we are seeing throughout Asia,” Sturdy says. Beijing-based China Techfaith designs mobile phones and wireless communication terminals. Bank of New York also announced a Regulation S program for Concern Galnaftogaz, a Ukrainian distributor of gasoline and oil products to the domestic retail market. Meanwhile, Bank of New York was selected as successor depositary for the J Sainsbury ADR facility. Each Sainsbury ADR represents four ordinary shares. Shares in the UK-based food retailer and financial services provider trade on the London Stock

Malayan Banking Starts Program Malayan Banking, or Maybank, launched an ADR program on May 3, 2005, becoming the 14th Malaysian-based company to issue ADRs. The bank issued 50 million shares, or 1.35% of its total shares, to be traded as ADRs in the US overthe-counter market. Maybank selected Bank of New York as depositary and said it was seeking to broaden its foreign shareholder base and create greater awareness of its brand by US investors. Each ADR represents two ordinary shares, which trade on the Kuala Lumpur Stock Exchange. Bank of New York also was selected by China Techfaith Wireless Communication Technology as depositary for the

Turkcell Makes Bonus Issue JPMorgan Chase announced that Turkcell is offering a bonus issue for holders of its NYSE-listed ADRs.The Turkey-based telecommunications company approved a bonus issue of slightly less than 25.8% of its tradable shares, payable on June 9, 2005. According to JPMorgan, fractional shares resulting from the bonus issue will be sold and the proceeds allocated in cash.Two Turkcell ADRs are equivalent to five tradable shares.The ADR ratio was changed on April 29, 2005, from one ADR to 2,500 ordinary shares, in connection with the re-denomination of the Turkish lira. —Gordon Platt

REGIONAL ADR INDEXES 180

160

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maintain, with quick turnaround times. “With low fares and new planes, GOL is similar to JetBlue Airways of the US from the customer’s perspective,” says Richard Lark Jr., CFO and investor relations officer for the Brazilian airline. GOL sells 80% of its tickets on the Internet. “From an operating viewpoint, GOL is more like Southwest Airlines of the US, with its short-haul routes, and Ryanair [Europe’s largest low-fare airline] in terms of revenue management,” Lark says. GOL began operations in 2001 with six aircraft serving five cities in Brazil. It now serves 29 Brazilian cities and plans to have 40 aircraft by the end of 2005, up from 27 at the end of last year.The airline began flying to Buenos Aires in December 2004 and added flights to Bogota, Colombia, this year. Uruguay and Paraguay will be served later this year. “Our market share in Brazil has risen from zero to 26% in just four years, and we can increase it to the low 30s by the end of 2005,” Lark says. The airline is increasing night flights at fares similar to what it costs to go by bus, he says. Lark says the airline is satisfied with its ADR program, which is run by the Bank of New York. The value of Gol’s shares traded on the New York Stock Exchange ranges between $6 million and $8 million a day. “Liquidity has been good,” Lark says, and the program has helped the company to reach a broader range of institutional

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Dollar Bulls Run Again, As US Economy Heats Up The pieces of the US economic puzzle fell neatly into place last month, creating a picture of strength that enabled the dollar bulls to gain the upper hand. The euro dropped to 1.27 to the dollar, its low for the year, following the “shop ’til you drop” May 12, 2005, US retail sales report, which showed exceptionally large increases in sales of clothing and motor vehicles. Coming on the heels of a surprisingly strong employment number, with a rise of 274,000 in non-farm payrolls in April, the reports showed that the US economy is reaccelerating, and this created demand for dollars, analysts say. The upbeat tone emerged at a time when worries about an economic slowdown had begun to weigh on the financial markets. “If the non-farm payrolls took the ‘soft patch’ argument off the table for the Federal Reserve, the retail sales report buried it six feet under,” says Michael Woolfolk, senior currency strategist at Bank of New York.The Fed is expected to continue raising rates by at least a quarter point at each scheduled meeting this year, he says. If the dollar bulls needed any more convincing, the US trade deficit for March came in better than expected at slightly above $55 billion, instead of the $62 billion consensus forecast. The deficit narrowed from a record $61 billion in 5 2

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February, despite higher oil imports. Much of the improvement can be attributed to a strong seasonal effect and a narrowing of the bilateral trade imbalance with China, Woolfolk says. “For the time being, it appears that the dollar bulls are in control,” he adds. Nevertheless, China remains the proximate cause for the long-term deterioration in the US trade balance, which is not expected to show any lasting improvement until China begins to adopt a moreflexible exchange rate, according to Woolfolk. He says Chinese officials conservatively estimate that the US lifting of import quotas on Chinese textiles will prompt a 15% increase in the US importation of such goods this year. “On this basis alone, it is difficult to imagine how the trade balance with China is expected to improve with the US economy growing at a 3% to 4% annual rate,” Woolfolk says. Concern over the twindeficit problem in the US has been shelved for the time being, he says, and the better-than-expected trade figure suggests that the US first-quarter gross domestic product will be revised upward. Meanwhile, the strong US economic reports kept the dollar firm amid weakening fundamentals in Europe. The British pound fell sharply on May 10, as UK retail sales took their biggest

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Euro (Euro/US$)

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Source: Bank of New York 0.6 M

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Source: Bank of New York 0.4 M

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Source: Bank of New York M

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Source: Deutsche Bank 2.0 M

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US HIGH-YIELD NEW-ISSUANCE VOLUME

Spreads Widen as Investors Flee to US Treasury Bonds

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US companies will be paying more to borrow money in the wake of the widening of credit spreads between corporate and treasury bonds following the downgrading of General Motors and Ford Motor. Coming months sooner than expected, the move by Standard & Poor’s to lower the rating of GM and Ford bonds to below investment grade created some turbulence in the debt markets, as investors fled corporate bonds for the relative safety of US treasury bonds. US government bonds rallied in mid-May, amid worries that hedge funds were sustaining big losses in credit derivatives and collateralized debt obligations, or CDOs, analysts say.These derivatives contracts are popular with hedge-fund managers because they offer leverage and can be purchased for as little as 10% of the value of the underlying securities. In the past five years, there has been massive growth in

the trading of credit derivatives, such as credit-default swaps, says Mark Kiesel, executive vice president at Newport Beach, Californiabased Pacific Investment Management, or Pimco. “Interestingly, hedge funds are the largest users of credit derivatives,” Kiesel says. “Several of the largest Wall Street firms estimate that 50%-60% of their current trading volume in credit default swaps is with hedge funds,” he says. The recent widening in credit spreads was led by hedge funds buying protection in credit derivatives index products, according to Kiesel. In addition, investors are selling high-yield bonds to make room for any potential investment-grade fallen angels that may be coming their way, Kiesel says. S&P’s downgrade of Ford and GM could potentially reduce corporate bond issuance later this year and result in increased issuance of asset-backed securities, says

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Chesapeake Energy Amerigas Partners NewPage Movie Gallery NewPage Whiting Petroleum Ziff-Davis Hawaiian Telcom Communications NewPage Hawaiian Telcom Communications Hawaiian Telcom Communications Triad Acquisition NationsRent Brown Shoe Source: KDP Investment Advisors 5 4

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6.625 7.250 10.000 11.000 7.250 9.750 12.250 12.500 11.125 9.500 8.750

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Source: KDP Investment Advisors

Micah Green, president of the Bond Market Association. “Ford and GM will look for the cheapest and mostliquid ways to borrow money, and that could easily lead to higher assetbacked issuance and lower straight corporate issuance,” Green says. Meanwhile, the Bush administration announced that it is considering bringing back the 30-year treasury bond to help finance growing budget deficits and extend the maturity of the debt. Timothy Bitsberger, assistant treasury secretary for financial markets, says a

TOP US HIGH-YIELD ISSUES IN APRIL 2005 Issuer

Jun

Maturity Date Private/Public Amount ($mil) 1/15/16 5/20/15 5/1/12 5/1/12 5/1/12 5/1/13 5/1/12 5/1/13 5/1/13 5/1/15 5/1/13 5/1/13 5/1/15 5/1/12

144A 144A 144A 144A 144A 144A 144A 144A 144A 144A 144A 144A 144A 144A

600 415 350 325 225 220 205 200 200 150 150 150 150 150

decision on whether to bring back the 30-year bond will be announced on August 3, 2005, when the government will detail its quarterly borrowing plans. Investors such as pension funds and insurance companies have a strong appetite for long-dated securities, says Green of the Bond Market Association. “Reintroduction of 30year treasury bonds would be helpful for the market and market participants, for example, by expanding investment opportunities for employee pension funds,” Green says. In the US high-yield bond market, new issuance fell to $3.25 billion in April from $8.3 billion in March, according to KDP Investment Advisors. Oklahoma City-based Chesapeake Energy issued $600 million of senior notes due in 2016.The company will use the proceeds of the offering to partially fund $686 million of recently announced acquisitions of oil and gas properties in Texas and New Mexico. —Gordon Platt

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Latin American Companies Seeking US Takeovers Companies based in Latin America are seeking to acquire US companies in order to buy into the fastgrowing Hispanic market in the US, where 40.4 million Spanish-speaking people control $700 billion in purchasing power. “The US is the largest Hispanic market outside of Spain,” says Jay Garcia, managing director of New York-based investment bank Samuel A. Ramirez. With revenues of USbased Hispanic companies growing at an average rate of 20% a year, Latin American companies have come to realize that the best way to participate in this market is through corporate acquisitions, instead of just exporting their products, Garcia says. Samuel A. Ramirez, which specializes in middle-market M&A transactions, has been approached by a half-dozen Latin American companies recently that are actively seeking takeover targets in the US, Garcia says. A rash of takeovers in the $300 million to $400 million range is likely in the months ahead, according to Garcia, who expects a flurry of cross-border activity in the banking, media and food sectors. In November 2004 Mexico-based Editorial Televisa purchased a 51% stake in Hispanic Publishing, a Miami-based publisher of Hispanic and Hispanic Trends magazines. “While the dollar-value

of the transaction was modest, the significance of the acquisition was in the fact that Televisa is positioning itself in the US market, where Hispanic media companies are consolidating,” Garcia says. Televisa, Mexico’s leading broadcaster, also owns 11% of Los Angeles-based Univision Communications and supplies more than one third of its television programming. Emilio Azcárraga, chairman and president of Televisa, has moved to the US, where he hopes to create a Hispanic media empire. In April 2005 Televisa agreed to acquire Colombia’s Editora Cinco, which sells magazines for the US Hispanic market. Meanwhile, major US and Spanish banks are making big pushes into the Hispanic market. Last September, Spain’s BBVA purchased Texas-based Laredo National Bancshares for $850 million.Texas is second to California in Hispanic population among US states. Bank of America, which purchased a 24.9% stake in Mexico-based Santander Serfin in 2003, eliminated transfer fees earlier this year for account holders sending money to Mexico. More than half of the Latinos in the US are Mexicans, and they sent $14.5 billion of remittances to Mexico in 2004. The banks want to capture the remittance flow in order to win Hispanic

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customers who are already settled in the US, Garcia says, “They want to do business with those consumers,” he says. Citigroup, which owns Banamex, offers a binational credit card that can be paid off on either side of the US-Mexico border. The card is marketed in California by Commerce Bank, a unit of Banamex. US financial services companies also are continuing to make large purchases in Latin America. GE Consumer Finance agreed in May 2005 to acquire a 49.99% stake in Panama-based BAC International Bank, one of

the largest banks in Central America, for an estimated $500 million. In the food sector, Mexico-based Grupo Bimbo has been acquiring bakeries in US states with large Hispanic populations. Its US operations now comprise 17 plants and account for 18% of its $3.3 billion in annual revenue. Another Mexican company, Gruma, is the largest US tortilla producer, with 13 packaging facilities, five corn-flour plants and 5,000 US employees. Grupo Gigante, Mexico’s thirdlargest supermarket owner and operator, is expanding in California. —Gordon Platt

AMERICAS M&A: TOP DEAL ADVISERS Rank Value % Mkt # of ($million) Rank Share Deals

Adviser Goldman Sachs Morgan Stanley UBS Lehman Brothers Merrill Lynch Industry Totals*

146,065 139,485 107,185 92,237 90,716 369,141*

1 2 3 4 5 -

39.6 37.8 29.0 25.0 24.6

55 48 37 43 35 2,821

EUROPE M&A: TOP DEAL ADVISERS Rank Value % Mkt # of ($million) Rank Share Deals

Adviser Morgan Stanley Goldman Sachs JPMorgan Citigroup Deutsche Bank Industry Totals*

70,672 68,762 63,333 62,210 44,315 223,137*

1 2 3 4 5 -

31.7 30.8 28.4 27.9 19.9

39 31 52 40 27 2,909

ASIA M&A: TOP DEAL ADVISERS Adviser Nomura Morgan Stanley Mitsubishi Tokyo Financial Merrill Lynch JPMorgan Industry Totals* January 1, 2005 – May 1, 2005

Rank Value % Mkt # of ($million) Rank Share Deals 67,943 51,721 51,084 48,986 45,299 138,778*

1 2 3 4 5

49.0 37.3 36.8 35.3 32.6

45 21 26 13 4 2,531

Source: Thomson Financial Securities Data

* Figures may not add up, as more than one bank typically obtains credit for any one transaction.

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CORPORATE FINANCING NEWS MERGERS & ACQUISITIONS

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CORPORATE FINANCING NEWS MERGERS & ACQUISITIONS

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TOP MERGERS AND ACQUISITIONS (APRIL 1, 2005–MAY 1, 2005) AMERICA Date Announced

Target Name (Target Advisers)

4/4/05

Unocal (Morgan Stanley)

US

ChevronTexaco (Lehman Brothers)

4/21/05

Adelphia Communications (UBS) (Allen & Company)

US

Investor group US (Bear Stearns) (Lehman Brothers) (Blackstone Group) (Morgan Stanley)

Group comprised of Time Warner and Comcast definitively agreed to acquire bankrupt cable-TV company, for cash and a 16% stake in Time Warner Cable.

4/25/05

Premcor (Morgan Stanley)

US

Valero Energy (Lehman Brothers) (UBS)

US

Agreed to acquire maker and wholesaler of 7.73 petroleum products, in stock-swap deal; includes assumption of $1.8 billion in liabilities.

4/15/05

Kerr-McGee

US

Kerr-McGee (JPMorgan) (Lehman Brothers)

US

Oil and gas company began Dutch auction self-tender offer for 26.65% of its common stock outstanding.

4.00

4/18/05

Macromedia (Morgan Stanley)

US

Adobe Systems (Goldman Sachs)

US

Definitively agreed to acquire developer of Internet software and e-commerce applications, in stock-swap deal.

3.23

4/20/05

New York Stock Exchange (Lazard) (Goldman Sachs)

US

Archipelago Holdings (Goldman Sachs) (Greenhill)

US

Definitively agreed to merge with NYSE; upon 2.26 completion of reverse takeover, NYSE shareholders were to own 70% of combined company.

4/28/05

EnCana’s deepwater Gulf of Mexico portfolio (Morgan Stanley) (Randall & Dewey)

US

Statoil ASA (Deutsche Bank) (JPMorgan)

Norway

Agreed to acquire deep-water production facilities of US oil and gas company.

2.00

4/21/05

Time Warner Cable (Blackstone Group) (Morgan Stanley)

US

Time Warner Cable (Lehman Brothers)

US

Agreed to repurchase its 17.9% stake from Comcast in exchange for cash and cable systems.

1.86

4/1/05

200 Park Avenue, New York, NY

US

Tishman Speyer Properties

US

Agreed to acquire owner and operator of office building from MetLife.

1.72

4/21/05

Pernod-Ricard’s certain Allied Domecq assets (Morgan Stanley) (JPMorgan Cazenove) (Deutsche Bank)

UK

Fortune Brands US (Credit Suisse First Boston) (Houlihan Lokey Howard & Zukin)

Agreed to acquire certain spirits brands, super-premium California wines and distribution assets, for cash.

5.37

4/19/05

InterGen (Citigroup)

Netherlands Investor group (Deutsche Bank)

US

Group comprised of AIG unit and Ontario Teachers’ Pension Plan agreed to acquire Dutch power company joint venture of Bechtel and Shell Generating.

4.45

4/12/05

Cesky Telecom (Credit Suisse First Boston) (Deutsche Bank) (Ceska Statni Sporitelna)

Czech Republic

Telefónica (Merrill Lynch)

Spain

Planned to acquire a 51.1% interest from Czech government and to launch a mandatory tender offer to acquire remaining shares.

3.54

4/15/05

Eldorado Group

Russia

Dixons Group (Citigroup)

UK

Was granted an option to acquire the remaining 90% it did not already own in Moscow-based retailer and wholesaler of consumer electronics.

1.90

4/8/05

East Surrey Holdings (Hawkpoint Partners)

UK

Kellen Acquisitions (Citigroup)

UK

Company formed by Terra Firma Investments agreed to launch a tender offer for water utility.

1.55

4/4/05

TIM Hellas Telecommunications (Merrill Lynch) (Lehman Brothers)

Greece

Investor group (JPMorgan) (Deutsche Bank) (Citigroup)

US

Group comprised of Apax Partners and Texas Pacific Group agreed to acquire an 81% interest from unit of Telecom Italia Mobile.

1.43

4/8/05

Dometic International (Merrill Lynch)

Sweden

BC Partners (Morgan Stanley)

UK

Agreed to acquire maker of leisure appliances from EQT Partners, in leveraged buyout.

1.42

4/12/05

Turk Dis Ticaret Bankasi (Rothschild) (Is Yatirim Menkul Degerler)

Turkey

Fortis (Citigroup)

Belgium

Agreed to acquire 89.3% interest in bank from 1.27 shareholders and to acquire remaining stake.

4/21/05

Molnlycke Health Care (UBS) (Enskilda)

Sweden

Apax Partners (Deutsche Bank) (Merrill Lynch)

US

Definitively agreed to acquire maker of surgical 1.24 products from Nordic Capital, in leveraged buyout.

4/20/05

Seven-Eleven Japan (GMD Corporate Finance)

Japan

Ito-Yokado (Nomura Securities)

Japan

Agreed to acquire the remaining 49.37% stake 12.48 it did not already own, in a stock-swap transaction.

4/26/05

Mitsubishi Pharma (Nomura Securities) (Mitsubishi Securities)

Japan

Mitsubishi Chemical (Nikko Citigroup) (Mitsubishi Securities)

Japan

Planned to acquire the remaining 41.06% stake it did not already own, in a stockswap transaction.

Country

Acquirer Name (Acquirer Advisers)

Ranked Value ($billion)

Country

Description

US

Agreed to acquire oil and gas company, in a stock-swap transaction; includes assumption of $1.6 billion in liabilities.

18.62

17.61

EUROPE

ASIA

Source: Thomson Financial Securities Data 5 6

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2 0 0 5

1.89