On October 23, shares of Bovespa made their debut on the stock market. The company sold 288.1 million shares at 23 reais each, raising 6.63 billion reais ($3.7 billion). The price was at the high range of between 20 and 23 reais per share. In response to strong demand, the forecast was raised by more than 20% on October 23 from a band of between 15.5 and 18.5 reais. The sale established the market value of Bovespa at $9.179 billion, making it the fifth-largest of the world’s 23 publicly traded stock markets.
Hugo A. Macías Cardona, director of the CIECA research center at the University of Medellín (Colombia), notes, “Although the amount of money raised through the new share offering may appear to be predictable, this move is unprecedented in Latin America. It sends a clear signal that private capital has confidence in this particular operation and in the management of this stock market in general…. Don’t forget that Brazil has claimed its right to lead the countries of the region. Its new strength will enable it to attract capital similar to the way the U.S. dollar attracts global capital to the U.S.”
An Upward Trend in the Market
Bovespa’s share offering received an extremely important boost from the Brazilian stock market, which has risen by more than 40% during the current year, a lot faster than the principal global indices. The Dow Jones and S&P 500 in New York have gained 9% and 6%, respectively, since January. The Euro Stoxx 500 has risen by 7%, the Dax Xetra in Germany by 19%, and the FTSE in London by 9%. Nevertheless, the experts believe that the upward trend in the Brazilian share prices will enter a phase of slower growth.
“It is clear that the market finds itself in a growth phase that normally doesn’t last for too many months,” says Macias. The large size of this market, compared with others in Latin America, he adds, “makes us less sensitive to changes. For example, the Colombian stock market is much more vulnerable to transactions made by a small number of players.” Luis Eduardo Franco Ceballos, South American market analyst at the Bancolombia Group, believes that the Brazilian market might move backwards. He attributes that to “systemic and market risk, principally because of the environment of the U.S. market and the participation of new players in the stock market who have a “global” character. Shares of Argentine companies have recently been traded on this market.”
However, until the Brazilian stock market slows down, a large number of businesspeople are taking advantage of the favorable environment by investing more in it. They want to use its capital market as a source for financing their projects. This year, 56 companies have issued shares on Bovespa, the third-large number in the world after China and South Korea, increasing Bovespa’s total market capitalization to $1.28 trillion, or five times its value in 2000. Next year, the number of new issues could surpass this year’s record number because of continued economic growth. “This will vault Brazil to the top of the list for global investors,” declares Jose Olympio Pereira, head of investment banking in Brazil for Credit Suisse Group.
Bovespa’s share offering was led by Credit Suisse’s investment banking division and by Goldman Sachs. UBS Pactual was the global coordinator. In addition, various banks participated, including Itaú, Deutsche Bank, HSBC, Bradesco, Santander and Banco de Brazil. Bovespa became a for-profit enterprise, ending its operations as a non-profit. Until then, the two largest individual shareholders in Bovespa were Itaú, the Brazilian banking group, and Santander Banespa, a subsidiary of Spain’s Santander group. Both hold ownership shares of about 5.5%.
The São Paulo stock market is the only trading exchange in Brazil and the largest one in Latin America. About 70% of the trading volume of the entire region takes place there, worth about $2.2 billion on an average day. The total market value of the stocks quoted on the exchange is more than $1 trillion.
“The Brazilian stock exchange is the most important in the region in terms of size, its modernization process and its rise in value this year,” says Fabián Hernando Ramírez, head of the financial engineering program at the University of Medellín in Colombia. In addition to these other considerations, he believes the São Paulo market “will set a sustainable standard in Latin America, offering a stable institutional framework and promoting investment in the Brazilian economy. It will encourage transparency and the arrival of new companies in the market as well as the integration of transactional systems.”
Bovespa is the first Latin American market to follow the global trend toward issuing its own shares to investors. The New York Stock Exchange and the Spanish group, Bolsa y Mercados Españoles (EME), are among at least nine companies in the sector that have issued shares over the past three years. These issues have set the stage for an increasing number of corporate takeovers. That competition between corporations takes place day and night. Bovespa’s public share offering should enable those who manage the Brazilian market to take part in the trend toward consolidation in the sector.
The first such deal anywhere in the world took place when the New York Stock Exchange, the world’s largest exchange, announced last June that it was merging with Euronext, which brings together the exchanges of Amsterdam, Brussels, Lisbon and Paris as well as the London derivatives market. Together, they created a $28 trillion company that is enjoying strong results. During the second quarter of 2007, it registered net earnings of $161 million, or 164% more than the New York exchange generated by itself during the same period last year.
That was only the first such deal. Last May, the NASDAQ stock market announced the acquisition of OMX, the operator of Scandinavian and Baltic stock markets. In August, the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT) completed a merger valued at $12 billion, which created the world’s largest derivatives market. At the same time, persistent rumors maintain that Nymex, the New York mercantile exchange, is negotiating a merger in either the United States or in Europe.
What Is the Goal of an Acquisition?
Manuel Romera, director of the finance department at the Instituto de Empresa business school [in Spain], says “the first step that Bovespa needs to take is to consolidate its privatization. After that, it’s a sure thing that some foreign company in the sector will be eyeing it [Bovespa]” because it is the principal market in Latin America. Along the same lines, Fabián Hernando notes that, first of all, “You have to strengthen the national [Brazilian] stock market so that you can later go and look for partnerships and mergers through a process of negotiations.”
For Hugo Macias, who belongs to the Ecolatin network, it’s significant that the Brazilian market will set the standards for global investors who want to enter South American stock markets. “The São Paulo market is strengthening itself much the same way as the ownership of the planet’s most profitable industries is also becoming more concentrated. For years, financial transactions have exceeded the value of transactions made daily in ‘real’ global markets. Increasingly, financial centers send the signals that ‘manage’ the utilization of global savings. This stock exchange [Bovespa] is becoming one of those institutions; it is an important model that will determine the future of financial capital that enters the [Latin American] region.”
It will also send a signal when it is time for capital to leave for other locations, Macias says. All you have to do is go out on the floor of the Bovespa market and you will see how the great global markets have taken positions in Bovespa’s shares. NYSE Euronext has acquired ownership of one percent [of Bovespa]. Sources close to the deal told Reuters that the NYSE Euronext, a joint U.S.-European company, has invested $90 million through that deal, acquiring approximately one percent of Bovespa’s shares. Analysts say this purchase reflects NYSE Euronext’s drive to expand its presence in Latin America.
However, the interest in Brazil doesn’t stop there. CME Group, the world’s largest futures market, agreed on October 23 to purchase 10% of Brazil’s Mercantile and Futures Exchange (BM&F) for a price of about $700 million. CME, headquartered in Chicago, will pay approximately 42 times BM&F’s projected earnings for 2009, according to Diego Perfumo, a former advisor to CME Group who now works at Equity Research Desk in Greenwich, Ct. Experts believe that the high premium paid by CME in this deal helped Bovespa when its shares were issued. BM&F is the largest derivatives market in Latin America, and it, too, has announced plans to issue its own shares.
Goals and Challenges
Regardless of any possible corporate deals, the short- and medium-term challenge for the Brazilian stock market will be “to attract foreign capital and to professionalize,” says Romera. One approach that would attract more investment from Europe and the United States would be to “facilitate entry through such initiatives as lower commissions for buying and selling shares.” Another key goal, he adds, is to “create a market culture.”
According to Fabian Hernando, “The future of Latin American stock markets must be characterized by the leadership of a great diversity of companies and investors…. The market must offer them a wide range of well-structured instruments for satisfying their financial needs.” Hernando adds that this will lead to “greater confidence in the market and, as a result, increased trading volume and appropriate transfers of risk and profitability in those stock markets. That, in turn, will make it possible [for Bovespa] to make significant improvements in its global performance.”