Global Finance (December 2005)

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PROVIDERS 2005

DECEMBER 2005

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Thanks to you, we have been elected again in December 2005. Thanks to our clients, SG Corporate & Investment Banking has once again been awarded Best Equity Derivatives House 2005 for Europe, Best Equity Derivatives House 2005 for the Americas by The Banker and Best European Equity Derivatives Provider by Global Finance SG CIB had already received the Best Equity Derivatives House Award by the Banker last year and by IFR and Risk Magazine in December 2004 and January 2005 Thank you for your loyalty SG CIB, your partner in Euro Capital Markets, Derivatives and Structured Finance www.sgcib.com [email protected]

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DEAR READER

DECEMBER 2005 | VOL.19 NO.11

Great Expectations ity the poor incoming Federal Reserve chairman, Ben Bernanke. As well as having to fill the disproportionately large shoes of his predecessor, Alan Greenspan, Bernanke has to fulfill some disproportionately high expectations. As he sailed through his confirmation hearings, the general impression seemed to be that Bernanke as Fed chairman would be a lot like Greenspan, only better. Much has been made of his determination to ensure the Fed remains flexible and to focus his efforts on controlling inflation. Both are noble goals, but on both counts Bernanke is already hamstrung by the actions of his predecessor. After months of steady monetary tightening, it appears that the US economy is on course for a gentle landing. But partly as a result of Greenspan’s comments, the markets have already discounted some further interest rate rises, and Bernanke has already hinted, perhaps with a view to establishing his inflation-fighting credentials, that he will maintain a tightening bias, at least for a while. He is, in fact, caught in a classic Catch 22 situation. In order to make his mark, he has to do something. Unfortunately, if he does raise rates still further, Bernanke will be held accountable if economic growth in the US runs out of steam next year. His best move, if he is to achieve the economic stability for which he so explicitly yearns, is to do nothing. If he chooses this path, however, he may be accused of dithering. Ironically, the ability to dither—constructively—is a key characteristic of a successful central banker. Strong, decisive action might play well in the media, but it can also lead to volatility in the economy. Established, successful central bankers know this, but there is a tendency among new central bankers to play a little heavily with the levers of economic management. Bernanke, with his determination to keep the Fed on its toes and ready to act, might find himself doing exactly that. Tempting though it may be to make a bold policy move in order to stamp his authority on the Fed, Bernanke’s best strategy will be to sit on his hands. If he can do that, he’ll stand a good chance of living up to those great expectations—and becoming a worthy successor to Alan Greenspan.

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Until next month.

Dan Keeler [email protected]

EDITOR IN CHIEF AND CHAIRMAN: PAOLO PANERAI PUBLISHER AND PRESIDENT: JOSEPH D. GIARRAPUTO ASSOCIATE PUBLISHER: MATTEO GABBA

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CONTENTS

DECEMBER 2005 | VOL.19 NO.11

COVER STORY BY MARK LEHANE

COVER STORY 10 Germany: Beyond The Election Gloom

REGULARS 1

As the dust settles after the German election it is becoming clear that Europe’s largest economy is undergoing a profound transformation.

A letter from the editor.

4 MONEY LAUNDERING BY GORDON PLATT

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reelection.

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criticism of their record profits. £

We recognize the best of the best in our second annual awards.

¥$

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Global businesses are recognizing the benefits of centralizing their treasury and liquidity management.

markets.

MERGERS & ACQUISITIONS BY ANITA HAWSER

29 World’s Best Internet Banks

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HSB C CIT IGR OUP

WELLS FARGO

BANK OF AMERICA

BRADESCO SAMBA

RZB

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41 Foreign Exchange Interest-rate increases are like vitamins for the dollar, which will continue to flex its muscles in the months ahead if the Federal Reserve keeps tightening monetary policy, analysts say.

DBS BANK

Determining the right style of IT management can be complex. Although centralization offers many benefits, it does not offer necessary flexibility.

Emerging Markets Investor Key information for investors in emerging

Rising M&A deal volumes mask some real problems in the crossborder market.

39 Technology: Finding the Right IT Strategy

and Brazil.

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26 Dealbreakers

Awards conference and ceremony in New York City.

Emerging Markets Roundup The latest news from India, Russia, China

TREASURY & CASH MANAGEMENT BY ANITA HAWSER

23 Bringing It All Together

35 Best Internet Banks Conference Report

Milestones Buenos Aires offers creditors a deal to restructure $3.1 billion of debt on which the province defaulted nearly four years ago; and oil company chiefs shrug off persistent

AWARDS: DERIVATIVES PROVIDERS BY MIKE TOPPING

The World’s Best Derivatives Providers

In the second part of a two-part series, we identify the best corporate and consumer Internet banks globally and regionally.

Newsmakers Potential future Fed chairman Ben Bernanke shows his mettle; and Colombian president Alvaro Uribe takes a huge stride toward

FEATURES 14 Hung Out To Dry Regulations and global cooperation have combined to put the squeeze on money launderers.

Dear Reader

AWARDS: BEST INTERNET BANKS BY ADAM ROMBEL

45 Corporate Debt Ford Motor Credit sells $1 billion of debt at higher-than-expected yields; and the US Internal Revenue Service audits American Indian casino financings.

TECHNOLOGY BY DENISE BEDELL

46 Global Equity/DRs Electricité de France’s $8.5 billion initial public offering includes the biggest employee stock ownership plan ever in Europe, with a guarantee on money invested.

47 Mergers & Acquisitions Telecom mergers surge to the highest level in five years, as Telefónica of Spain bids $32 billion for O2.

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UNITED STATES

CANDID FED CHIEF COULD SPOOK MARKET

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en Bernanke could prove to be a fine Federal Reserve Board chairman in the long run, assuming he is confirmed, but his honeymoon threatens to be a stormy period for the financial markets. Analysts say Bernanke’s refreshingly clear speaking style could spook the markets, which have become used to Alan Greenspan’s soporific version of Fedspeak. While Bernanke has been prepared for the job, with a three-year stint as a Fed governor before heading the White House Council of Economic Advisers, he lacks experience on Wall Street. And while no one accuses the former Princeton economist of being looselipped, the markets demand to be spoken to in a certain tone and prefer that some things remain unsaid. Bernanke, whose nomination sailed through the Senate Banking Committee on a voice vote in midNovember, has promised to maintain the same policies and strategies as Greenspan, which could help to produce a smooth leadership transition at the Fed. Nonetheless, baptisms by fire are not unknown. Just ask Greenspan about the stock-market crash of October 19, 1987, that followed within a few months of his taking 4

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the helm. The dollar slipped initially on news of Bernanke’s nomination, based on the assessment of foreign exchange traders that Greenspan’s successor could have dovish tendencies and might be somewhat less willing to raise rates.The bond market had no such worries, however, and seemed to become an instant Bernanke backer. The new Fed chief will be more inclined to be open and clear about monetary policy and to let the markets react as they may, whereas Greenspan carefully shaped market expectations, analysts say. If Bernanke follows clear targets and rules, however, he just might be able to reduce market volatility while saying what he is thinking. —Gordon Platt

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AROUND THE WORLD

COLOMBIA

COLOMBIA’S URIBE GOES FOR SECOND ROUND Colombian president Alvaro Uribe, 53, scored a victory in November when the nation’s Constitutional Court overturned a 1991 ban on reelection for sitting presidents. The move hands Uribe, whose approval rating hovers near 80%, a virtual guaranteed reelection next May. The ruling, coupled with a divided opposition and polls that give Uribe an estimated 56% of votes next Alvaro Uribe year, has consolidated his frontrunner spot. “It’s a big step,” Uribe said during an initial ruling in October, “in a country that has more urgency than hope.” Much of that urgency revolves around Colombia’s 40-year struggle against violence from drug cartels, left-wing guerrillas and right-wing paramilitary forces. Since taking office in 2002, Uribe has taken a tough stance on crime, extraditing more than 300 suspected drug traffickers, mainly to the US. While he has popular support, some are concerned that a second Uribe administration could spark both a heightening of opposition attacks as well as a stepping up of guerrilla violence. Uribe is undaunted and says he needs another four years to get the job done, including solidifying his conservative economic policies, overhauling social security and putting the country back on the radar for foreign investors. So far, foreign direct investment rose 54% during the first half of 2005, to $2.26 billion, after soaring by 69% last year, to $3.05 billion. Net FDI is expected to top $4 billion for fullyear 2005. Much of the FDI flows have gone into the mining, oil and manufacturing sectors. Public debt, however, stands at more than 50% of GDP, raising concerns over debt sustainability in a country that already lost its investment-grade rating. Expectations are that Uribe will push for greater exports and investment flows while privatizing some of the remaining government-owned utilities and banking assets. Meanwhile, the president counts the US among his fans. He is one of the US’ strongest Latin American allies and heads one of the region’s few remaining right-wing administrations. “So far as the country continues improving as it is,” said pollster Jorge Londoño of polling firm Gallup/Invermedia, “it will be very difficult to beat Uribe.” –Antonio Guerrero

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ARGENTINA

BUENOS AIRES OPENS GLOBAL SWAP

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early four years after its default, the Argentine province of Buenos Aires opened a global debt swap in November that analysts predict will prompt bondholders to tender as much as 85% of defaulted debt when the offer expires on December 16.The deal follows the record-setting $100 billion sovereign restructure that was both the largest in history and one of the most contentious. Instead of the federal government’s prolonged battle with creditors, provincial authorities have maintained an ongoing dialogue with bondholders who support the offer.The province is offering a haircut of about 52%, versus the Republic’s 60%.The province’s restructure is

Buenos Buenos Aires: Aires: Offers Offers default default swap swap

considerably smaller at $3.1 billion and involves 16 types of bonds set to mature between 2002 and 2007, at rates as high as 12%. But, like the Republic, provincial authorities warn holdouts that there will be no improved offer once the deal expires. “We are not going to make another offer,” Buenos Aires’ economy minister Gerardo Otero told the press. “There is no Plan B.”The province’s timeline calls for completing the swap in midJanuary. Under the swap, the province offers up to $750 million of 15-year par bonds due in 2020 and denominated in euros or dollars, paying 1%4% annually in a step-up scheme. It also offers up to $500 million of 12-year discount bonds due in 2017 and which pay a fixed rate of 9.25% for dollardenominated paper and 8.5% for euro-denominated bonds. A third option involves 30-year pars in euros or dollars, paying 2%-4% annually. —Antonio Guerrero

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UNITED STATES

OIL COMPANY CEOS DEFEND RECORD PROFITS The Republican leadership of the Senate called the chief executives of the nation’s leading oil companies on the carpet last month to explain why they were making a lot of money at a time when their prices were so high. Lee R. Raymond, chairman and CEO of ExxonMobil, whose $9.9 billion third-quarter profit was an oil-industry record, explained the law of supply and demand. “The Lee R. Raymond price [of oil] is set on the world market by willing buyers and sellers, for what willing sellers are willing to sell it for and willing buyers are willing to pay for it,” he said. “Petroleum company earnings go up and down,” Raymond said. ExxonMobil’s were up 75% from a year earlier in the latest quarter. The company invests large amounts of money in projects to increase fuel supplies when earnings are high as well as when they are low, Raymond said. “In politics, time is measured in increments of two, four and six years,” he said, referring to terms of office for elected officials. “In the energy industry, time is measured in decades, based on the life cycles of our projects.” The oil industry’s profits, measured as a share of revenue, were no greater than those in other industries, he said. The executives blamed the high prices at the pumps on the high price of the raw material used to make gasoline, which is, of course, oil. Less than a week later, the Senate Finance Committee voted to impose a $5 billion tax next year on the nation’s biggest oil companies. The committee must have known that a windfall profits tax that could discourage production, contribute to shortages and create long lines at the pumps would almost certainly be voted down in the House. –Gordon Platt

www.odebrecht.com

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BRAZIL

INVESTMENT GRADE LOOMS FOR BRAZIL

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razil continues to move closer to a coveted investmentgrade rating, albeit slowly. In October Moody’s upgraded the sovereign’s foreign currency rating to Ba3 from B1 with a positive outlook, putting it three notches away from the top rating.The move came after Brazil’s debt fell from 51.8% of GDP in August to 51.4% in September, prompted by a strengthening real that is making it easier for the government to service its foreign currency-denominated obligations. In November Standard & Poor’s revised its outlook on Brazil’s long-term local and foreign currency sovereign ratings to positive from stable. S&P also reaffirmed its BBlong-term foreign, BB longterm local and B short-term foreign and local currency sovereign ratings. “The continued reduction in public and private sector external debt and impressive export performance reinforce the trend decline in Brazil’s external debt burden,” says Lisa Schineller, S&P credit analyst. Net of international reserves and other liquid assets, S&P says Brazil’s external debt is projected at 90% of current account receipts in 2005-2006,

compared to 270% in 2000. Encouraged by positive ratings actions, the sovereign returned to international capital markets for the fourth time this year in November. It reopened its due-2015 issue with a $500 million offering. The sovereign has sold $6.9 billion abroad year-to-date. Local corporates have also stepped-up their bond issuance. Telemar, Brazil’s largest fixedline telecom company, was set to issue $150 million abroad, due in 2011, via Citigroup. CVRD, one of the world’s largest iron ore producers, sold $300 million of 30-year notes due in 2034, yielding 7.65%, in a deal reportedly twice oversubscribed. Banco Mercantil do Brasil upped its 8.75% due-2008 offering via Standard Bank and Finantia by $5 million, to $50 million, due to strong investor appetite. More than 80% of fund managers surveyed by Morningstar say Brazil has the best outlook for economic growth over the next five years. The survey also found that Brazil is already home to 64% of asset managers’ Latin American holdings. Most respondents, however, worry about the potential impact of US interest rates on the region over the period. —Antonio Guerrero

CHINA

HEADING SKYWARD China Construction Bank (CCB) on October 27 became the first of China’s four biggest state-owned banks to launch an initial public offering. Despite mixed reactions from investors, the bank raised US$8 billion on the Hong Kong Stock Exchange, making it the largest IPO globally since 2001 and the largest ever for a Chinese company. In early November the bank increased the size of its offering by an additional 15%, pushing the total value of the share sale to $9.2 billion. In early 2006 the Bank of China (BOC) will likely be the second of China’s four biggest state-owned banks to sell its stock publicly. Sales of another kind continued to break new ground, too. Retail sales of consumer goods in China totaled a record 585 billion yuan ($72.3 billion) in October, an increase of 12.8% over October 2004. Increasing disposable income, low inflation and recent government policies, including various tax reductions and moves to limit real estate development, all contributed to the increased consumer activity. Historically China’s uncertain job market and shaky welfare system have encouraged high savings rates, which in turn means China depends heavily on exports and investment for economic growth. Higher consumption in recent months implies reduced dependence and a strengthening domestic market. Perhaps that is just as well, as the country agreed to limit exports to the US of more than 30 categories of clothing and textiles. The agreement, which will last for three years, came after months of negotiations and only two weeks before US president George W. Bush embarked on a trip to China. Chinese exports of clothing to the US and the EU boomed in the first half of this year after quotas were dropped as part of China’s WTO membership. Both the US and the EU have now negotiated agreements with China to limit the increases in exports over the next two to three years. President Bush is expected to focus on intellectual property rights and currency flexibility during his trip. China’s Agriculture Ministry unveiled an ambitious plan in the country’s battle against bird flu. China’s state-owned media reported on November 15 that China would vaccinate all of the country’s billions of chickens and other poultry against bird flu. The government, according to the report, will pay for the inoculations, but the procedures for the massive project have yet to be disclosed. Eleven bird flu outbreaks have been reported in China in the past few months. —Thomas Clouse

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PUTIN PREPARES FOR SUCCESSION

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ussian president Vladimir Putin reshuffled the government in midNovember, promoting presidential administration head and long-time Putin loyalist Dmitry Medvedev to the position of first deputy prime minister. Sergei Sobyanin, the governor of the oil-rich region of Tyumen, was named to replace him. Defense minister Sergei Ivanov was also given the title of first deputy prime minister. Prime minister Mikhail Fradkov retained his post for the time being. The reshuffle was widely interpreted as the beginning of the process of Putin positioning a successor to assume the mantle of the presidency in 2008, when his constitutionally mandated

second term ends. Questions continued to linger about the Kremlin’s growing role in the economy, as its efforts to assert control showed signs of extending beyond the oil and gas arena to encompass heavy industry and a range of other so-called strategic sectors.The burgeoning economy means that the Russian government has plentiful cash to pursue its corporate empire-building, following on from the recent acquisition by governmentcontrolled Gazprom of the country’s fifth-largest oil company, Sibneft. Elsewhere in the CIS, the ruling elite of Azerbaijan dug in their heels to ensure that parliamentary elections in early November would not

follow the revolutionary lead of Ukraine, Georgia and the Kyrgyz Republic. Protests were quelled, and the government of Ilham Aliyev appeared positioned to retain its grip on power. Meanwhile, as the government of Viktor Yuschenko in Ukraine prepared to celebrate its first anniversary in power, in late October the country’s enormous Kryvorizhstal steel works were sold to Mittal Steel Germany for $4.8 billion—$4 billion more than a group of insiders had paid sixteen months prior.The investment by Mittal increased total foreign investment in Ukraine since 1991 by 50%. On another front, American coffee king Starbucks regained the right to use its brand on

Russian president Vladimir Putin

coffeehouses in Russia following a legal struggle with a trademark squatter who was demanding $600,000 for the logo. As a litmus test of the country’s commitment to addressing intellectual property abuses, the decision was a step in the right direction. —Kim Iskyan

INDIA

SUPPLIERS RAMP UP PRODUCTION TO MEET GROWING STEEL DEMAND The steel market in India is getting hotter by the day. Hard on the heels of POSCO of South Korea and Mittal Steel announcing their respective investments of $12 billion and $9 billion in setting up gigantic integrated steel plants, Indian companies have begun to make their own announcements. JSW Steel, the third-largest integrated steel maker in India, will invest $1.2 billion to expand its steel-making capacity from 2.5 million tons per annum (mtpa) to 3.8 mtpa at its southern Indian location. This will quickly be followed by another round Mittal chairman, of expansion that will push capacity up to Lakshmi N. Mittal 7 mtpa and then 10 mtpa by 2010. The company is also planning to build a new integrated unit in eastern India with a capacity of 10 mtpa, investing another $7.5 billion. The dramatic increase in capacity is likely to be matched by growing demand, according to a recent study of Indian economic growth.

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According to the study carried out by the Business Standard newspaper, the Indian manufacturing sector (the survey looked at 1,227 companies) reported a revenue growth of 14.4% for the quarter ended September 2005. Despite being a very robust growth rate, the report pointed out that it was actually the lowest quarterly rate since June 2003, which saw a growth rate of 12% in manufacturing revenues. The manufacturing sector in India posted a revenue growth of 20% for six consecutive quarters between December 2003 and March 2005, before slowing down a little in June 2005. As corporate India continues its phenomenal growth, India’s quest for energy security is gaining ever-greater momentum. After losing in the bid to acquire PetroKazakh, ONGC, India’s largest upstream oil company, through its joint venture company ONGC Mittal Energy has entered into an arrangement with the Nigerian government to acquire deep-water oilfields producing 650,000 barrels of oil per day (bpd) for a period of 25 years in return for $6 billion worth of investments in infrastructure projects such as a 2,000 MW power plant, railways systems and a 180,000 bpd refinery. —Aaron Chaze

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ETHANOL AND SUGAR GIANT OFFERS SHARES

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ao Paulo, Brazil-based Cosan, the world’s biggest sugar and ethanol producer, made an initial public offering on the Bovespa Stock Exchange last month. Brazilian-produced ethanol is expected to gain increased penetration in global markets as a result of efforts by the World Trade Organization to liberalize trade. Brazil won its case against European Union sugar subsidies at the WTO earlier this year. Meanwhile, there is a trend toward greater consumption of renewable energy, including ethanol. Cosan was expected to raise more than $300 million in the IPO, which began trading after Global Finance went to

press. Morgan Stanley and Credit Suisse First Boston coordinated the offering. Cosan’s 13 mills and sugargrowing operations are located in the centralsouthern region of Brazil, which has some of the best cane-growing land in the world in terms of soil and climate.The company makes use of efficient farming practices on its large-size cane farms, according to the International Finance Corporation, which has invested in a project to support Cosan’s growth strategy. Cosan began operating in 1936 with one sugar mill and has grown mostly by acquiring and consolidating existing mills. —Gordon Platt

COMPANY TO WATCH: HANKOOK TIRE/SOUTH KOREA

RUBBER TO HIT THE ROAD IN HUNGARY

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ankook Tire, South Korea’s largest tiremaker, in November selected Dunaujvaros, Hungary, which is about 40 miles south of Budapest, as the site for its first European factory.The $600 million plant is scheduled to start

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operation in 2007, with the final phase of construction to be completed by 2010. The company made its choice after reviewing possible plant sites in Central Europe, including Poland, Hungary, the Czech Republic, and Slovakia to supply tires to

DR NEWS

DUBAI EXCHANGE LISTS FIRST GDR Investcom, an international mobile-telephone services provider, has become the first company to list its global depositary receipts on the new Dubai International Financial Exchange. Investcom raised about $750 million in its initial public offering, which was also listed on the London Stock Exchange, where it became the largest GDR by a Middle Eastern company. The telecom firm has operations in eight countries in the Middle East, Africa and Europe, and it was recently awarded licenses to build and operate mobile-phone networks in Afghanistan and Guinea. The family of Najib Mikati, former prime minister of Lebanon, holds a controlling interest in Investcom. Mikati’s SWITZERLAND, GERMANY, STATES nephew, Azmi Mikati, is theUNITED CEO. Investcom moved its headquarters from Luxembourg to Dubai ahead of the IPO, which was managed by Citigroup and HSBC. The company selected The Bank of New York as depositary for its dual GDR listing. “We are happy to be working with Investcom on this transaction, particularly as it brings depositary receipts to a new part of the world,” says Christopher Sturdy, managing director and head of The Bank of New York’s DR division. He says the bank will be helping the company to increase its international profile. The Dubai exchange opened on September 26, when Deutsche Bank listed five equity index-tracking certificates, but Investcom is the first company to list shares. The exchange says it aims to provide access to international capital for many family-owned businesses in the Middle East. —GP

European markets. In 2008, Hankook Tire’s production volume will reach 70 million units, making it one of the world’s top five producers. The new plant in Hungary will have 1,500 employees and will produce 10 million highperformance tires annually for passenger cars and light trucks. By building a plant in Europe, Hankook says it hopes to avoid EU political problems regarding imports and the

dangers of exchange-rate fluctuations. Hankook currently produces more than 58 million tires a year from two plants in South Korea and two in China. It exported $317 million worth of tires to Europe last year, accounting for about 37% of its worldwide exports. Its exports to Europe are expected to rise 26% this year to about $400 million. —GP

COVER STORY GERMANY

BY MARK LEHANE

GERMANY: BEYOND As the dust settles after the German election, it is becoming clear that Europe’s largest economy is undergoing a profound transformation. That change will come at a price, though. hen German conservative leader Angela Merkel finally put together a Grand Coalition of left and right in November, it marked a remarkable overturning of the post-war settlement in that country. Much was made of the fact that Merkel was a woman—Germany’s first female chancellor, indeed. More important still is the fact that as someone who grew up in the former East Germany, she has little natural attachment to an economic model that had long since shown signs of its age. “I would like to see Germany put back on its feet again,” was Merkel’s rallying cry. Make no mistake, the German economy is mired in the mud: GDP is expected to rise by a measly 0.8% this year. Next year it will grow by just 1%, according to IFO, the panel of economists that advise the government. That 1% mark is beginning to look like a bad habit: Most estimates put Germany’s trend growth around that level, shameful compared to the 2% level of the rest of the eurozone, let alone the 3% cruising speed of the US economy. Unemployment hovers just over the 5 million mark, a level last seen just before the Weimar Republic gave up the ghost to the Nazis. In some former East German states almost one in five people are out of work—and that despite

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THE PEOPLE WHO ARE MAKING THE NEW GERMANY… eer Steinbruck, finance minister (SPD): This 58-year-old bureaucrat-turned-right-wing Social Democratic politician has arguably the toughest job in Germany: putting the country’s finances back on track. He might—just—be the man for the job. As finance minister and prime minister of Germany’s most populous state, North Rhine Westphalia, he honed a reputation for fiscal rectitude. He also worked effectively with political opponents to cut practical, money-saving deals on state finances. An avid chess player, he’ll need to keep a keen eye on the maneuverings of the labor and economy ministries.

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Frank Muentefering, vice chancellor and labor minister: Freeing up the labor markets is widely regarded as key to unleashing Germany’s economic potential. That agenda is in the hands of a man who earlier this year dubbed hedge funds as “locusts.” His abrupt resignation as SPD chairman almost scuppered the coalition talks. He will be Merkel’s deputy. Expect some fireworks on this beat. Michael Glos, economic minister: For 10 years Glos has run the parliamentary party for the CSU, longtime allies of the CDU. He comes from an archetypal Mittelstand business background in Bavaria. Pro-reform, yes, but not at the expense of anything that cuts into the interests of a Catholic social constituency with strong ties to the land.

… and the people who are pulling the strings behind the scenes… Matthias Platzeck: This 51-year-old biochemist replaced the edgy Muentefering as chairman of the SPD during the coalition talks. A highly regarded premier of the state of Brandenburg, Platzeck will be point man in keeping the moderate and left-wing elements of the party working in tandem. He might work some of that magic in the coalition, too: A former Green turned Social Democrat, he has since worked closely with the CDU in his hometown state. Edmund Stoiber: Don’t forget this veteran conservative. He skulked out of the coalition talks and holds no formal government position, but his leadership of the CSU and his economic track record of “Lederhosen and Laptops” in his home state of Bavaria means he can make trouble from the wings if he chooses.

some $110 billion of handouts to the East since reunification. Those handouts, those dole queues, have savaged public finances. Germany’s fiscal deficit stands at over 3.5% of GDP. For four years in a row now, Germany has burst through the 3% mark established by the treaty underpinning the euro single currency. So, did the installation of a new gov-

ernment led by a self-declared outsider and reformer unleash a tide of optimism that change is on the way? Hardly. “More than ever, I suspect that what Germany does will be too little, too late,” is the opinion of Timothy Garton Ash, the University of Oxford historian who is one of the most astute observers of modern Germany. The make-up of the coalition provides little hope of rad-

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THE ELECTION GLOOM ical enough change in the areas needed to reboot the German economy, he says: labor laws, taxes and welfare contributions. A glance at the make-up of the new coalition suggests he might have a point. Of the three top economic posts, two are occupied by Social Democrats and one by a member of the CSU, a right-wing party with a strong social bent (see box for more details). And the initial program of the coalition doesn’t exactly grab Germany Inc by the scruff of its neck. Minor labor, pension and corporate and income tax reforms have been jostled out of the limelight by a rise in value-added-tax (VAT), a kind of rolling sales tax. Michael Huether, director of the Institute of the German Economy, a think tank, estimates that the VAT rise alone will drain €34 billion from citizens’ pockets and cut 1.5% off the potential rate of

German growth.“This is poison for the German economy,” says Dieter Hundt, president of the country’s employers’ association. That’s because Germans are already keeping their pocketbooks firmly in their, well, pockets. Germans save 11%

of their income, compared to the less than 1% that Americans put aside for a rainy day. True, they’ve long been a thrifty people, but there is a haunting conundrum that lies at the heart of most recent efforts to address Germany’s ills. Because public sector costcutting and private sector restructuring almost always involve short-term pain, the measures end up battering the confidence of the German consumer still further, according to Charles Dumas, an economist at the London-based Lombard Street Research. And they do have something to be frightened about: In Januar y this year, the Hartz IV reforms kicked into life, means-testing social security benefits for the unemployed and making life uncomfortable for longterm dole-takers who turn down job offers. That stick has been allied with a carrot:

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WHAT THE COALITION PLANS TO DO LABOR REFORM

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tentative step toward more flexible working patterns: Employers can extend the probationary period from six to 24 months. During this period workers can be fired without any comeback. But non-wage costs, the highest in the developed world, will only be slightly eased. Mitbestimmung, or worker representation on the board, is unchallenged, as are collective wage settlements. Michael Sommer, chairman of the DGB trade union federation, said the unions would not “accept any, I repeat any, changes to the collective bargaining system.” BALANCING THE BUDGET Here’s where the fireworks have already started. To staunch the flood of red ink flooding Germany’s public sector balance sheet, the coalition wants to increase the VAT sales tax from 16% to 19% and the top rate of income tax to 42%. They are holding back the VAT rises to 2007, when payroll tax cuts may provide a consumption boost, but the move has shocked many conservatives, keen to keep their mantle as a low-tax party. PENSION AND HEALTH-CARE REFORM Citizens will now have to pay a little more toward their own pensions; when they are drawing them, they will have to pay higher health-care costs. The moves are marginal, say economists, but that doesn’t make them any more popular. CONSTITUTIONAL REFORM The one that few people understand within Germany, let alone outside: Germany’s post-war constitution set up an elaborate system of checks and balances between states and the federal government, aiming to stymie any chance of a repeat of the 1930s. But what was once good has now become a burden. By more clearly allocating respective roles and powers, the new administration hopes to make real changes in, for example, Germany’s creaking education system.

Unemployed people can now take jobs that pay them one euro per hour on top of benefits. More than 200,000 people have taken advantage of this. Other still have taken up so-called mini-jobs, paying €400 a month. But these measures have failed to cut into the ranks of the long-term unemployed and have added some $9.8 billion to the social security budget. For too long, the German workforce has been divided into two camps: those with jobs, good conditions and security and those on the outside looking in. German workers are the most expensive in Europe at $34 an hour (the US equivalent is $23.16). Little wonder that faced with the challenge of China and the opportunity of a low-wage, relatively skilled workforce in the new EU members immediately to the east, Ger-

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man firms have become net exporters of jobs. Out: Gerhard Schröder Rarely a day goes by in Ger many without headlines over a planned shuttering of a homemoving production to China, union IG town factory as production facilities are Metall didn’t call its members out. Inshifted abroad. stead it came up with a counterplan, But as always in Germany, the truth is one that saw one plant close down and a little more complex than the head1,000 cut from the payroll. In exchange lines. Frightened by the prospects of TPG and CSFB agreed to increase inunemployment—particularly on the vestment in the remaining facilities. new terms—German workers have beThat’s a pattern repeated all across gun to react, cutting deals to save jobs. Germany, whether it’s carmaker DaimTake Grohe Water Technology, makers ler’s workers taking a pay freeze or of high-quality bathroom fittings.When Siemens’ workers staying on up to 40 new owners Texas Pacific Group and hours a week for the same paycheck the private equity arm of Credit Suisse they got for 35. Add that to low inflaFirst Boston earlier this year unveiled a tion in Germany, and unit labor costs plan to cut 3,200 out of 4,500 jobs by have fallen by some 10% against the EU

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average since 1999. That’s helped Ger many’s bluechip companies take advantage of the tailwind provided by global GDP gains of over 5% to boost exports by over 50% in five years, especially in the kind of capital goods it makes and China wants. Germany Inc sells over $920 billion of goods and services abroad, making it the world’s largest exporter. That has translated into bumper prof-

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its for a string of leading Ger man companies. It hasn’t worked through into the payroll, however. Ever more Anglo-Saxon in attitude, Ger man boards are distributing more of their gains to shareholders. And while union flexibility is slowing the drain of jobs abroad, it is not encouraging managers to create new ones at home. Indeed, Germany’s top 25 companies actually reduced the amount they invested at home by 20% in 2004, compared to a 10% slowdown worldwide in the same period. That’s partly, of course, because they are getting more out of fewer workers. But it’s alIn: Angela Merkel so because it remains expensive to take on staff. Of the average $34 an hour labor costs, a full $15 is absorbed by social costs. The new government has indicated it will go a little way to easing the burden. Workers will have to pay more toward health and pension provision. But it’s probably not enough to bridge the expensive gulf between workers in jobs that carry full benefits and the swelling army of “micro” and “euro” workers. And, again, in the short term those measures are likely to depress domestic consumption still further. At the moment there is one German worker for each retiree; by 2035 each worker

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will have to support two pensioners. Faced with that equation, Germany’s citizens are doing the sensible thing: They are saving for their future. That’s tur ned the Ger man Main Street into a morgue. Here’s one vignette: Mid-November, international clothes store H&M introduced a lowcost diffusion range by hot designer Stella McCartney into their stores across Europe. In London’s Oxford Street, would-be fashionistas fought to get at the dresses, and the range was sold out within two hours. Two days later a colleague of this writer reported seeing racks full of the clothes in H&M’s Hamburg store. (OK, so Stella is Brit, but she is courted across the world, and her dad is Paul, of Beatles fame.) Inter national companies such as H&M can weather poor demand in one area of their operations, but it is the Mittelstand companies that are most feeling the pain that comes with swooning domestic demand. By some counts these small- and medium-size companies provide 80% of jobs in Germany; classical economics tells us that in an advanced economy such as Germany’s they should account for a still higher percentage of new posts. However, it is this sector of the German economy that has found itself most constrained by rules and restrictions, starving entrepreneurs of the time and energy to grow their businesses. Some of that burden is of their own making:The rules that say who can be a plumber, for instance, owe more to the guild system of the Middle Ages than to any modern, regulated economy. But still others are a by-product of Germany’s ever-present urge to overengineer its society. Merkel and her new crew need to get the figures right at a national level to bring the deficit under control. But there is much, much more that can be done at a more micro level to get Germany back to work again. ■

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FOCUS MONEY LAUNDERING

BY GORDON PLATT

Hung Out To Dry New regulations and unprecedented global cooperation have combined to put the squeeze on money launderers. n just a few short years, the global effort to clamp down on money laundering and terrorist financing has yielded dramatic results. Now there are only two countries left on the watch list: Nigeria and Myanmar, and even they are beginning to move toward international standards. The reasons behind this remarkable success story are varied, as are the implications for nations that have cooperated—and those that have not. Nauru, for example, a tiny Pacific-island nation just south of the equator, turned to money laundering for Russian crime syndicates in the mid-1990s when its lucrative phosphate exports ran out. After being threatened by the US Treasury with being cut off from the US financial system, Nauru shut down its 400 shell banks. Nauru got its reward in October when the Financial Action Task Force, or FATF, the global watchdog on money laundering, at its plenary meeting in Paris removed Nauru from its list of non-cooperative countries and territories. Meanwhile, Russia has developed one of the strongest anti-money-laundering units in the world, known as Rosfinmonitoring. For Nauru, however, that was far from the end of the story. Once one of the world’s wealthiest countries per capita, it is now among the poorest— so poor, in fact, that Nauru’s president Ludwig Scotty appealed for urgent assistance at the United Nations General Assembly session in New York in Septem-

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ber. He said that although the country has begun to strengthen governance and combat corruption, it has been left in dire need of financial aid. The Cayman Islands, a Caribbean tax haven, was removed from the list of noncooperative countries in June 2002 after beefing up its anti-money-laundering laws. “When a country is placed on the FATF blacklist, its economy definitely suffers, because firms don’t want to take the risk of dealing with the jurisdiction,” says Samantha Pelosi, director of corporate compliance at Washington, DCLIST OF NON-COOPERATIVE COUNTRIES AND TERRITORIES June 2005 Myanmar Nigeria June 2000 The Bahamas The Cayman Islands The Cook Islands Dominica Israel Lebanon Liechtenstein The Marshall Islands Nauru Niue Panama The Philippines Russia St. Kitts & Nevis St. Vincent & The Grenadines Source: Financial Action Task Force

based Ruesch International. Banks in the Cayman Islands now have more business, she says, than before the country complied with the FATF 40 recommendations, which serve as the international standard.“There is nothing wrong with a jurisdiction having low taxes or no taxes,” Pelosi says, “but offshore tax havens can attract nefarious people who try to take advantage of the system without being detected.” Prior to joining Ruesch International, which specializes in business-tobusiness international payment products, Pelosi was senior counsel at the Financial Crimes Enforcement Network, or FinCEN, which is the US Treasury Department bureau that safeguards the US financial system from money laundering. The USA Patriot Act of 2001 gives FinCEN the authority to determine that a foreign jurisdiction or financial institution is of primary money laundering concern and to take appropriate countermeasures. “After the September 11, 2001, terrorist attacks in the US, countries really made an effort to deny money launderers and terrorists use of their financial systems to conduct criminal activities,” Pelosi says. “Many countries modeled their anti-money-laundering laws on US laws or passed even stronger laws.The financial institutions in these countries made a good-faith effort to be good world citizens,” she says. Before 9/11, a lot of countries didn’t have financial intelligence units like FinCEN, she says.

The Cost of Coming Clean Compliance with the money laundering regulations can be an expensive process.The US anti-money-laundering requirements are complicated and burdensome, and companies that comply spend significant time and money setting up their programs, which can put them at a competitive disadvantage, according to Pelosi.

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The 40 recommendations comprise a complete set of counter-measures covering the criminal-justice system and law enforcement, the financial system and its regulation, and international cooperation.The revised recommendations now apply not only to money laundering but also to terrorist financing.“Since the passage of the Patriot Act, US businesses across the spectrum have faced and still face increasing scrutiny over where their money comes from and where it is going, especially when dealing with large movements of funds through the international payments systems,” says Michael Zeldin, global leader of Deloitte Financial Advisory Services’ anti-money-laundering group in New York, a subsidiary of Deloitte & Touche USA. The US insurance industry is now being pushed into complying with antimoney-laundering requirements, which were announced by FinCEN on October 31. Within six months insurance companies subject to these rules must establish an anti-money-laundering program with written policies, procedures and internal controls and name a compliancy officer who is responsible for ensuring that the program is implemented effectively. The insurers will also be required to file Suspicious Activity Reports on transactions of at least $5,000. The new rules will not apply to group life insurance policies or group annuities. Under a bill awaiting Congressional approval, US banks could receive some regulatory relief from the paperwork burden. If the bill passes, the banks will no longer be required to file Currency

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Transaction Reports for businesses that have been customers for 12 months or more.“The challenge for firms and regulators is in acting in an appropriate manner, with risk-based compliance and assessment,” says Michael Corrigan, partner, governance and regulation, at Deloitte & Touche in London. “One firm may be doing something completely different from another just down the hall,” he says. “Cost is an issue, but there has been a recognition that there was a need for improvement.” There has been significant progress made, as indicated by the shrinking FATF blacklist, Corr igan says. The Cook Islands, Indonesia and the Philippines were removed from the list in February 2005. “The idea was not to put countries on the list and leave them there,” says Vincent Schmoll, principal administrator at the FATF Secretariat, which is housed in the Paris-based Organization for Economic Cooperation and Development.“These countries did significant work to get off of the list,” he says.They had plenty of incentive to do so, too. “Developing countries recognize that a safe and sound banking system can attract investment rather than repel it,” Schmoll says. “A secure financial system is a basic necessity.” The Group of Seven created the FATF in 1989 primarily to counter money laundering related to illegal drug trafficking. The FATF now has 31 country members. The European Commission and the Gulf Cooperation Council are also members. China, which began a campaign against money laundering in

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2003, is an observer.“The FATF is a standard-setter,” Schmoll says. “The same procedures are used by the International Monetary Fund and the World Bank.” UN Security Council Resolution 1617, which was adopted in July, strongly urges all countries to implement the standards embodied in the FATF recommendations on money laundering and terrorist financing, Schmoll says. Meanwhile, the FATF will continue its program of mutual evaluations, whereby members submit to an assessment by their peers of their laws and systems for fighting money laundering. At its recent meeting in Paris, the FATF launched a project, in partnership with the Asia/Pacific Group on Money Laundering, to explore the symbiotic relationship among corruption, money laundering and terrorist financing. “When a country puts our anti-money-laundering standards in place, along with the necessary legal and law-enforcement systems, it can be hindered in implementing the recommendations because of endemic cor ruption,” Schmoll says. He says the FATF is studying whether or not there is an evolving role for the organization in relation to the corruption issue. Meanwhile, 14 Arab countries have endorsed tough new standards to regulate informal “hawala” money transfers, cash couriers and charities. The Middle East and North Africa regional FATF, formed in November 2004, agreed at a meeting in September to launch mutual evaluations in 2006, beginning with Jordan and the United Arab Emirates. ■

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ANNUAL SURVEY WORLD’S BEST DERIVATIVES PROVIDERS

BY MIKE TOPPING

DERIVATIVES As the use of derivatives for risk management and cash management continues to grow dramatically, the opportunities and challenges for providers are multiplying. Global Finance’s second annual awards for the World’s Best Derivatives Providers recognize the banks that have excelled in their service to corporations in each asset class across the three main financial regions of the world. This service is judged in terms of not only competitive pricing and execution capability but also crucial considerations such as customer support, product expertise, research and innovation. The awards were compiled through the canvassing of opinions from treasurers—involved in all three regions at both the national and international levels—and nonmarket participants, such as analysts and consultants, combined with market intelligence garnered by the editorial team. Biggest therefore does not necessarily mean best, though the backing of a major force in the interdealer markets does provide obvious advantages that, if augmented with product innovation and strong service levels, can make for a formidable package. As with last year, efforts to integrate across asset classes emerged as a major theme. With treasurers’ time at a premium, it makes increasing sense for banks to offer a holistic risk management service

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PROVIDERS WORLD’S BEST DERIVATIVES PROVIDERS 2005

NORTH AMERICA Best Commodity Derivatives Provider Best Credit Derivatives Provider Best Equity Derivatives Provider Best FX Derivatives Provider Best Interest Rate Derivatives Provider

Morgan Stanley JPMorgan Citigroup Deutsche Bank Morgan Stanley

EUROPE Best Commodity Derivatives Provider Best Credit Derivatives Provider Best Equity Derivatives Provider Best FX Derivatives Provider Best Interest Rate Derivatives Provider

BarCap JPMorgan SocGen UBS JPMorgan

ASIA Best Commodity Derivatives Provider Best Credit Derivatives Provider Best Equity Derivatives Provider Best FX Derivatives Provider Best Interest Rate Derivatives Provider

Calyon Deutsche Bank BNP Paribas HSBC Deutsche Bank

EXCHANGES Achievement Award Performance Award

rather than artificially channeling the business into product silos. As one banker put it, this combined approach enables his team “to be more innovative and focus on whatever key issues keep treasurers and CFOs awake at night, be it share price, leverage or whatever else.” Another key theme the banks have been seeing over the past 12

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months is the growth in corporate cash holdings, which has in many cases afforded opportunities for the creation of innovative derivatives-based cash management strategies. Additionally, regulatory changes in Europe and the United States have added an extra dimension to the consideration of risk and methods of mitigating it. As ever, long-standing relation-

ships between banks and their corporate customers count for a great deal. However, no franchise is immune to competition. With the growing commoditization of certain types of derivatives on the one hand and the increasing sophistication of corporate treasuries on the other, resting on their laurels is a sure way for derivatives providers to abdicate market leadership. ■

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RUSSIA REMAINS A STEP BEHIND

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manage to hedge currency and rates

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risk offshore, usually via London,

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unresolved legal and regulatory issues mean that onshore use of derivatives by Russian-domiciled corporates is practically non-existent. Tax treatment of hedging is so unfavorable as to make it more expensive than it is worth, and use of cashsettled derivatives is legally classified as gambling and therefore not subject to protection in the courts. New derivatives laws are expected soon, though this has been the case for the past few years, and developments have been subject to numerous delays. What derivatives business there is in Russia is predominantly institutional, though the market is much less developed than in the world’s major financial centers, with notional derivatives values still below the level of trading in the underlying assets. Equity derivatives volumes are growing on the FORTS exchange, which trades futures and options on futures on a small range of single stocks and a stock index. However, the bulk of deals are transacted in the over-the-counter markets, facilitated by investment firms such as Troika Dialog, the first to set up a desk trading Russian equity options. “We provide liquidity and firm prices for Russian and overseas institutions

The size of Morgan Stanley’s footprint and, consequently, risk appetite makes for highly efficient pricing across a broad range of commodity risk management products. This, combined with a high level of expertise and innovation, has been crucial in a year that has seen extraordinary levels of volatility in the underlying markets. “The risks that corporates faced this year were unprecedented, so there were opportunities for us to apply our knowledge and creativity to meeting client objectives for risk management,” explains Charlie Adams, head of North American commodities marketing at Morgan Stanley. The result has been the creation of both risk management products and creative financing solutions involving commodity derivatives. In the past year the bank has been active in using commodity derivatives to assist corporates with takeovers and other major structural changes. “This year we saw some interesting cases where a large risk needed to be hedged in the context of an acquisition or change in corporate structure.Those brought our strengths to the forefront in terms of being able to do sizeable transactions and digest large amounts of risk,” says Adams.

trading in very large sizes,” says Georgy Mirel, director of equity derivatives trading. Troika does a limited amount of work for corporates under the current regime, advising on staff equity option schemes.

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The firm is watching the regulatory

While levels of direct corporate usage of credit derivatives remain relatively low, JPMorgan continues to pioneer the use of credit instruments to assist corporates in their activities. By taking an integrated asset class approach to its product offering, the bank is able to utilize its credit derivatives expertise to create hybrid products that address a number of corporate client needs. These include increasing funding opportunities and flexibility,

situation closely and anticipates picking up significant corporate business when the rules are eventually relaxed. “Once the limitations are less strict, we expect the business to boom, but the institutional business will be the driver for the next year or so,” says Mirel.

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pre-hedging future issuance spread levels and hedging counterparty risk. In North America the bank has done a great deal of work with companies involved in the energy sector over the past year. In a period of high volatility in these markets, the use of credit derivatives has been crucial in maintaining some firms’ trading operations by hedging increased counterparty credit risk. In addition to its innovative approach to product structuring, JPMorgan has maintained its focus on expanding the market through client education in an on-going effort to broaden the base of familiarity with credit derivatives and their uses.

BEST EQUITY DERIVATIVES PROVIDER Citigroup Citigroup maintains the dominance in North American equity derivatives provision to corporates that won it this award last year. However, rather than resting on its laurels, the bank has over the past 12 months aggressively set about bolstering the wider strategic position of its equity derivatives franchise. Having already developed strong positions in corporate and structured retail products sectors, Citigroup has made large strides in the flow side of the business.A key move was the acquisition in December 2004 of the market making and customer order routing businesses of Knight Trading. While this expansion into the flow side of the business enhances the bank’s ability to hedge the risks involved in its corporate transactions, the real strategic benefit is in strengthening the ability of Citigroup’s equity derivatives franchise to weather major structural changes to the market over the next few years. “Whichever way the structure of the markets changes over the next several years, we’re in a much better position to be able to take advantage of that and maintain a strong franchise than we were at the end of 2004,” explains Bret Engelkemier, co-head of US equity derivatives at Citigroup.

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BEST FOREIGN EXCHANGE DERIVATIVES PROVIDER Deutsche Bank Deutsche Bank’s North American foreign exchange team has won praise for the clarity of its service offering and their ability to structure and execute appropriate hedging strategies. The bank’s approach is geared to “providing an operationally smooth product,” says Jason Shell, head of currency sales and trading in North America. According to Shell, that is all about avoiding unnecessary complications and “keeping FX simple when it needs to be simple.”To this end, Deutsche Bank employs platform-neutral technology with a view to making treasury managers’ jobs easier. However, the key focus is appropriateness of service, and Deutsche Bank has the scale and capability to facilitate complex transactions as required.“We provide partnership advice when their FX needs become complex. For example, DB levers its wide global presence to offer clients assistance in investing in new parts of the globe,” says Shell.

BEST INTEREST RATE DERIVATIVES PROVIDER Morgan Stanley One of the world’s fixed-income powerhouses, Morgan Stanley wins this award for the second year running. The bank has been a key player in the interest rate derivatives market since its beginning and built up a solid and well-founded reputation for product innovation and transaction capability. Morgan Stanley backs up the benefits of scale and technical expertise with a keen focus on client relationship management, and it is this that gives the bank the edge over the handful of other serious contenders in this area.What is valued above all in this context is Morgan Stanley’s consistency of presence across all markets, whether they are flourishing or not. Additionally, this year’s bank-wide drive to break

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down its silo approach is in tune with the growing trend toward providing a totalsolution-based service.

EUROPE BEST COMMODITY DERIVATIVES PROVIDER Barclays Capital Expansion, coverage and innovation have put Barclays Capital into the number-one spot for European commodity derivatives provision. Over the past five years the bank has been on a targeted recruitment drive, tripling the size of its commodities team.The result is solid depth of expertise across a broad range of commodities. In addition to energy products, base and precious metals and soft commodities, the bank is at the forefront of the nascent markets in carbon emissions and plastics derivatives and is actively preparing for the advent of steel futures.This forwardlooking approach is also demonstrated by product innovation. The bank introduced the world’s first collateralized commodity obligation (CCO) and has invested in the growth in electronic trading via its BARX platform. Head of commodities Benoit de Vitry says the bank’s aim had been to build “the most diversified, deep and integrated commodities group around.”

BEST CREDIT DERIVATIVES PROVIDER JPMorgan As in North America, the success of JPMorgan’s credit derivatives offering is based on breaking down product boundaries. “Integration across asset

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classes is key to our approach. In this way we are able to offer corporates a more sophisticated service that makes use of credit derivatives to hedge a wide range of r isks,” says Daniel Berman, JPMorgan’s head of European credit product management. During the past year this approach has led to the use of credit der ivatives, and specifically the iTraxx index, to prehedge credit spread risk in advance of new issuance. Also this year JPMorgan has pioneered work with corporate pension funds using credit derivatives to hedge sponsor risk. JPMorgan is actively involved in making listed credit futures a reality, a widely anticipated development expected to bring credit derivatives to an even wider range of users.

BEST EQUITY DERIVATIVES PROVIDER SG CIB SG CIB’s equity derivatives business frequently ranks high in surveys and draws praise from a range of industry experts. The bank’s rise in the space is evidenced in part by its continued expansion in staffing, with numbers across the team as a whole rising 16% from June 2004 to June 2005 to around 600 front-office staff. These figures help illustrate the bank’s expertise and its commitment to corporate business. However, sheer weight of numbers alone is not qualification for an award; it is the service provided to clients that counts. Corporates point to SG CIB’s strength as a structurer and arranger of large, strategic transactions and its expertise in compliance and corporate governance issues. SG CIB has a joint equity capital markets and equity derivatives marketing team combining derivatives trading and engineering capability with strength in equity-linked products. It has also formed an insurance and pensions group that brings together structuring, actuarial and accounting expertise to help pension funds enhance their asset and liability situation.

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BEST FOREIGN EXCHANGE DERIVATIVES PROVIDER UBS U B S d e s e r ve s praise not only for i t s c o m p e t i t ive pricing and execution capabilities in FX derivatives but also for the quality of the decision support it offers to clients. It has a highly regarded research team, innovations in electronic trading and expertise in numerous areas. “Our business is based on a very intense understanding of client needs,” says Fabian Shey, global head of FX distribution. “Those needs continue to evolve, and for us to keep pace with them requires ongoing investment and innovation.” Over the past year UBS has doubled the size of its prime brokerage operation, broadening the focus on hedge funds to encompass corporates and other client groups.A key product focus over the past 12 months has been emerging markets. UBS has been able to offer the same range of non-vanilla and structured products based on emerging market currencies as it does on G-10 currencies.

BEST INTEREST RATE DERIVATIVES PROVIDER JPMorgan With its breadth of coverage and strong pricing capabilities, JPMorgan is highly regarded as a source of liquidity, even in difficult times. However, it is innovation and attention to the needs of corporates that puts it in the top spot for this award. “We’ve seen a big change in corporate use of derivatives because of the accounting changes ushered in by the implementation of IAS,” explains Russell Schofield-Bezer, head of corporate derivatives marketing for Northern Europe. “Using our HEAT [Hedge Effectiveness Analysis Tool] software,

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JPMorgan has been at the forefront of introducing a holistic risk management concept that encompasses earnings volatility as well as cash-flow volatility.” Another major development over the past year has been the merging of the bank’s hybrid desks to provide a cross-asset service to corporates covering interest rates, credit and equity derivatives.

ASIA BEST COMMODITY DERIVATIVES PROVIDER Calyon Calyon was formed as a result of Crédit Agricole’s 2003 acquisition of Crédit Lyonnais, and its antecedents have a lengthy history in the Asia-Pacific region. The commodities division, formerly Crédit Lyonnais Rouse Derivatives, is a well-established franchise that serviced Asia-Pacific clients out of London. Since the creation of Calyon, the bank’s commitment to providing commodity derivatives to the region’s corporates has been cemented with the opening of a Singapore desk. This has enabled Calyon to improve its service to existing commodity derivatives clients in the region and extend relationships with other clients. The key focus over the past year has been energy, with Calyon offering derivatives on crude and refined products.

BEST CREDIT DERIVATIVES PROVIDER Deutsche Bank Deutsche Bank continues to innovate in the credit derivatives arena and wins this award for the second consecutive year. Although corporate usage of credit derivatives is still at an early stage in Asia, a number of transactions demonstrate

WORLD’S BEST DERIVATIVES PROVIDERS

Deutsche Bank’s leading ability to transform risk, repackage it and distribute it into diverse markets.These include a securitization structure on future receivables for a corporate in India, a range of CMCDS [constant maturity credit default swap] structures for several banks in the Philippines and the execution of a high-yield CDO structure sold to retail investors by a large financial institution in Singapore. “In 2005, like previous years, Deutsche Bank has really focused on the intellectual value-add products for its Asian corporate clients and focused on how it could introduce G3 technology and localize this in specific situations,” says David Lynne, head of rates and credit trading, Deutsche Bank Asia.

BEST EQUITY DERIVATIVES PROVIDER BNP Paribas The expertise of French banks in the area of equity derivatives is well known, and BNP Paribas is one of the leaders. In conjunction with its long-standing presence in Asia, this makes for an impressive offering. “We enjoy the full support and benefit from a global business line in terms of important things such as research, quantitative modeling, IT and financial engineers,” says Yann Muzika, head of equities and derivatives in Asia at BNP Paribas. “That way, innovations made in our core European markets can quickly be utilized to benefit clients in all regions. This combined with our large footprint in the region makes for a successful Asia franchise.” As elsewhere, the cash equities and derivatives businesses work closely together.This year’s acquisition of regional equity brokerage Credit Agricole Indosuez Securities further increases BNP Paribas’ ability to distribute corporate issues with the addition of a large number of clients.

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BEST FOREIGN EXCHANGE DERIVATIVES PROVIDER HSBC With its deep roots and long-established relationships in Asia, HSBC has built up a solid foreign exchange derivatives franchise in the region. According to Tarun Kataria, global markets head of sales, Asia-Pacific, the bank’s approach rests on “the three pillars of innovation, appropriateness and client education.” Keenly aware that continued market leadership is not conferred automatically, the bank commits significant energy and resources to innovation and service improvement in order to maintain its position. One key area of investment recently has been technology, with regular system upgrades and product development going hand in hand.“In this business, unless you’re constantly improving risk management capability and therefore product offering, you’re falling behind. Our strategy is to keep investing in technology that enables us to improve our service to customers and stay a year or two ahead of the competition,” says Hossein Zaimi, HSBC head of FX derivatives,Asia.

BEST INTEREST RATE DERIVATIVES PROVIDER Deutsche Bank Against a background of increasing competition in the region, Deutsche Bank stayed in front, partly thanks to its commitment to a large geographic footprint. With trading floors in 13 countries in Asia (ex-Japan) and primary bond dealership status in many of these markets, Deutsche has been embedded in local markets over many years. The bank also has an extensive coverage model in local markets, which has produced strong relationships across broader Asia, as opposed

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to just working out of the traditional hubs of Hong Kong or Singapore. “You really can’t innovate on the local level with local clients if you don’t have a developed footprint in Asia.We see a lot of competitors attempting to cover markets through a hub strategy. Deutsche by contrast has deliberately built out trading and sales operations in 13 Asian markets. It has enabled us to work more closely with local regulatory bodies and cover clients more effectively,” says David Lynne, head of rates and credit trading, Deutsche Bank Asia.

WORLD’S BEST DERIVATIVES PROVIDERS

US. As a result, CBOT has gone from strength to strength. Not only has its own electronic trade volume rocketed, it now hosts electronic trading for three North American grain exchanges. It has expanded its product line and geographic reach, with a trading hub and joint venture exchange planned for Singapore. Third-quarter figures show a 21% revenue increase year-on-year and stock price doubled after launch.

PERFORMANCE AWARD Chicago Mercantile Exchange

EXCHANGES ACHIEVEMENT AWARD Chicago Board of Trade A few years ago, the idea of CBOT winning an award like this would have been unthinkable. Cash-poor and strategically hampered by complex membership politics, CBOT’s half-hearted attempt to embrace the reality of electronic trading had resulted in a largely unfavorable alliance with Eurex, and the exchange looked vulnerable to competition for its benchmark government debt futures. The sharp turnaround evidenced by October’s successful IPO is testament to the work of a dynamic management team led by ex-Cargill chief Bernie Dan, who took over the reins as president and CEO in November 2002. A series of bold moves has transformed the exchange from a beleaguered giant into a competitive powerhouse. The first—to end the deal with Eurex and adopt the Liffe Connect electronic platform—was risky in that it freed Eurex to launch direct competition. The second—severing 78year-old ties with its clearing house and moving clearing to erstwhile rival Chicago Mercantile Exchange—seemed to hand an advantage to Eurex on a plate.As it turned out, both moves provided financial and strategic strength to CBOT and enabled it to fight off what many had seen as the very real threat from Eurex

Across town from CBOT, Chicago Mercantile Exchange (CME) continues to reap the benefits of its own earlier transfor mation. The exchange has ably demonstrated that while an IPO is in one sense the culmination of a major transformation process, it should be, more importantly, the starting point for further success. After becoming, in December 2002, the first publicly quoted US financial exchange, CME has seen a doubling of revenues based on steady volume growth and a ten-fold share price increase. It has also built a cash pile of nearly $900 million. These results are all the more impressive for being achieved not in a competitive vacuum, but against the backdrop of Euronext Liffe’s attempt to rival CME’s benchmark eurodollar contract. CME has not taken its foot off the accelerator and continues to drive its franchise forward.This year saw a raft of new product launches including futures based on ethanol, exchange-traded funds, the eurozone HICP inflation index, S&P Asia 50 index, Nasdaq biotechnology index, as well as incentives for various sections of the trading community. CME continues to push electronic trading, with enhancements to the options trading functionality of its Globex platform added in recent months. CME has also led the way with geographic expansion, being the first western exchange to open an Asian trading hub in Singapore and signing a memorandum of understanding with Shanghai Futures Exchange.

SECTOR REPORT TREASURY & CASH MANAGEMENT

BY ANITA HAWSER

Bringing It All Together Increasingly, global businesses are recognizing the benefits they can gain from centralizing their treasury and liquidity management. Setting up suitable systems to achieve that goal, however, is far from simple. s the world’s biggest companies spread their operations ever farther afield, they are looking for efficient ways to manage multiple cashflow streams in often-diverse currencies. Many already appreciate the benefits of manag ing cash and treasur y functions centrally, but even with the rapid development of technological solutions, they are finding the process is complex—and often costly. For most companies, the desire to do business in multiple markets can come at a price. “Siemens is represented in more than 190 countries, which makes managing liquidity a truly global challenge,” says Peter Murer, head of cash management advisory, Siemens Financial Serv i c e s . Siemens’ Treasur y &

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Financing Services division acts as an inhouse bank responsible for all internal and external payment transactions for Siemens worldwide.“In Europe we have a substantial number of subsidiaries in each country, and each subsidiary has a number of bank accounts,” Murer explains. To add to the complexity, while a number of Western European and US-based companies are eager to expand their geographical footprint to developing countries with high economic g rowth, local laws and regulations can prevent them from freely moving capital from these markets to other international subsidiaries. In China, for example, the lack of convertibility of the Chinese renminbi has restr icted multinational

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corporations’ ability to implement fully centralized treasury and liquidity management solutions in the region. “It is not feasible or practical to have full centralization of FX among different entities in different cities,” says Leong Wai Leng, vice president and chief financial officer of Philips, China. Philips has excess renminbi liquidity in China, which is difficult to mobilize to other parts of the company when needed. “The question I often get from our headquarters is,‘How can we justify the situation where Philips globally has borrowing positions overseas, but yet we have a huge pile of renminbi in China just sitting in bank accounts?’” says Leong. Similarly, in Russia the ruble is not convertible, so Siemens in Munich, Germany, which does substantial volumes of business in the region, has to think outside the box in order to manage their liquidity needs in that market. “Rubles cannot be obtained

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Peter Murer, Siemens

less control over their working capital, which ultimately affects their ability to better manage their liquidity. “Good working capital management is a precondition for good liquidity management,” says Murer. “If you don’t know

“[IN CHINA] IT IS NOT FEASIBLE OR PRACTICAL TO HAVE FULL CENTRALIZATION OF FX AMONG DIFFERENT ENTITIES” “Philips globally has borrowing positions overseas, but yet we have a huge pile of renminbi in China just sitting in bank accounts” —Leong Wai Leng, Philips China outside of Russia, so as we have substantial volume in the local market, we need to look for alternative solutions to manage the liquidity position for that currency,” Murer explains.

Making Capital Work Companies’ inability to adequately manage their liquidity is not just restricted by FX controls. A lack of automation, manual processing and general inefficiencies in the corporate supply chain can mean companies have

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when your customers are going to pay you, how can you determine your liquidity position for the days and weeks ahead?” Yet as John Gibbons, head of relationship management, EMEA, at ABN Amro, explains, there are examples of highly sophisticated European companies with billions in cash balances sitting idle in bank accounts around the world. Consultancy REL estimates that 1,000 of Europe’s largest corporates have $1 trillion in trapped capi-

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tal. The biggest challenge is to get the goods and money to move together. But according to research conducted by ABN Amro in conjunction with BDRC, only 33% of treasurers surveyed were actively engaged in their supply chain, and 66% did not pay any attention to receivables. Lisa Rossi, head of liquidity management, Deutsche Bank Global Transaction Banking, believes treasurers are more empowered to understand their entire supply chain, whereas 10 years ago that probably was not the case.“More recently it has become a requirement to engage the business areas to get a better handle on the whole supply chain,” she says. Another reason for companies to better manage their working capital and liquidity is the tremendous pressure put on companies by shareholders and executive boards to better manage their cash.“Cash is king so cash flow is critical,” says Gibbons.“Companies are waking up and saying if it is about cash flow, we need to figure out how best to mobilize our cash.” Regulations such as Sarbanes-Oxley and Basel II also demand that companies have better visibility into their cash flows. Rossi believes that automated liquidity management solutions are the best way of addressing this need. “Automated liquidity management is a significant improvement over manual processing as it provides an electronic audit trail and improves the information companies are receiving,” she says.

From The Center Aside from enhancing working capital efficiencies, there are a number of ways companies can optimize their ability to better manage liquidity on a global and regional basis.The more international a company, the more likely it is to benefit from centralizing treasury and liquidity management operations.

SECTOR REPORT

Siemens Financial Services centrally manages liquidity positions in AsiaPacific, EMEA and North America via centers in Hong Kong, Munich and New Jersey. Its corporate financing function also uses a single platform globally to manage cash positions. “Bank account statements are imported electronically every day,” Murer explains. “We can determine our cash position at the beginning of the day. The selling and purchasing of currencies is added to that starting balance as well as invoices and commercial inflows and out-flows, which enables us to determine our end-of-day position per currency.” Rossi says companies continue to approach her about implementing centralized liquidity management solutions. “Everyone is looking to optimize liquidity, whether it is in regard to working capital management or optimizing their balance sheet,” she says, “but not everyone is implementing centralized liquidity management right now. There is more emphasis on enhancements to regional liquidity management, which leads to discussions on a global overlay solution. Corporates can then globally leverage what they have instituted regionally.”

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Bank account anywhere in the world. Rossi views global cash concentration as a step toward centralization and says it provides companies with the ability to automatically move funds to wherever they are needed. For example, a company could use their end-of-day cash balances in their Deutsche Bank account in Frankfurt to fund a short position in their New York account. Alter natively, companies can also sweep excess euro liquidity from Asia into Europe or US dollars from Europe into Asia. “In the past, companies had to figure out when and where to wire money to; now it can be done automatically with end-of-day value,” says Rossi. Cash pooling is another tool for automating liquidity management. Zero balancing cash pooling brings credit balances on subsidiary accounts back to zero, and that balance is then swept to a master account. Notional pooling, on the other hand, means no funds are actually transferred. Interest is paid on the net amount of the pool, and the net cash is reported on a company’s balance sheet. As Siemens maintains multiple subsidiaries and bank accounts, it has cash pools in a substantial number of coun-

Automated Solutions Automated liquidity management tools can help companies better manage excess liquidity by centralizing cash balances in multiple currencies. One of these tools is cash concentration, which can be done regionally or globally. Some cash concentration solutions such as that provided by ABN Amro are multi-currency and multibank, which means companies can use it to manage excess liquidity in accounts that are not held with ABN Amro. Deutsche Bank’s Global Cash Concentration product physically sweeps surplus US dollar and euro local cash balances to a designated Deutsche

Lisa Rossi, Deutsche Bank

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tries.With regards to euro, funds from subsidiaries are pooled into a master euro account in Germany. However, the ability to pool currencies is not just confined to the dollar and euro. It can work cross-cur rency as well, which is popular with companies based in Europe and Asia. “Automated centralization of funds is already well developed,” says Gibbons. “It is now a case of enhancing the model by including more currencies and creating more global liquidity management structures.” However, pooling is not something companies should take on without completely reviewing the tax and regulatory requirements. “Pooling is a sound strategy for some companies,” says Rossi, “but there are certain reg ional considerations.” Rossi says some new issues have also emerged around Basel II, which could have an impact on notional pooling. “I am confident banks will offer this from a technology standpoint,” she says, “but there are still regulatory issues to contend with.” On a notional level, Rossi says companies need to ensure they understand the legal and regulatory aspects involved that affect their particular structure. Inter-company borrowing can also raise complexities, depending on the jurisdiction a company is operating in. As Murer explains, “Liquidity management is about resolving legal and tax aspects,” issues that can be challenging in regulated markets such as Russia and China, where the transfer of liquidity between different legal entities is subject to many rules. The situation is further exacerbated in Europe by the lack of harmonization around regulation and taxation, such as the treatment of resident and non-resident accounts.“The ideal is to have one single eurozone, not different laws or a ‘wannabe’ eurozone where each countr y has its own boundaries,” says Murer. ■

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BY ANITA HAWSER

Dealbreakers Sharply increasing M&A deal volumes mask some very real problems in the cross-border M&A market. t first glance 2005 appears to have been a record year for worldwide M&A. In the third quarter the volume of worldwide M&A deals was almost 50% greater than the same period of 2004. According to Thomson Financial, Europe saw a staggering 75% increase in M&A activity in the third quarter, with the US market experiencing a 37% increase in deal volume. Standard & Poor’s anticipates that industry consolidation in Europe and the US will continue to fuel a worldwide surge in M&A throughout 2006. The outlook for cross-border M&A appears just as rosy, with Dealogic reporting that cross-border deals had tripled to $75 billion in the first quarter of this year. Some of the more notable cross-border European M&A deals in 2005 included French drinks maker Pernod Ricard’s bid for UK rival Allied Domecq, UniCredito’s bid for Germany’s HypoVereinsbank, Spanish telecom company Telefónica’s bid for British mobile operator O2, and the largest-ever single cross-border acquisition by a Spanish company, Spanish property firm Metrovacesa’s $10 billion takeover of French real-estate company Gecina. The numbers are remarkable, but there are still questions over whether all really is well in the world of cross-border M&A. Arguably, Europe has not seen some of the megadeals that have characterized the US market in recent months, more notably Proctor & Gamble’s $57 billion takeover of Gillette. Some maintain that those deals are yet

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to come, particularly in the telecom, utilities, banking and energy sectors, where market liberalization and privatization of formerly state-owned companies suggests that European companies are ripe for the picking. But Jeremy Dickens, a senior partner in the London office of legal firm Weil

Gotshal & Manges, says cross-border M&A between European companies and US firms contrasts with the somewhat rosier outlook for worldwide M&A in general. He points to figures published by Bloomberg that indicate that most of the cross-border M&A deals in Europe were led by European

MERGERS & ACQUISITIONS

companies. In the UK, British firms accounted for more than 40% of M&A deals, followed by the French and Germans at 26%, while US firms accounted for a paltry 8%.“If you look at it on a market-by-market basis, there is a high degree of intra-European M&A, but not a lot of M&A with non-European buyers,” says Dickens. However, José Manuel Campa, a re-

search fellow at the Center for Economic Policy Research (CEPR), says that was not always the case. He points out that in the past decade there had been surprisingly more deals between EU and US companies but that in the past year there had been more pronounced activity within Europe than in

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the US, which he attributes to the role played by venture capital funds.

Euro Fails To Trigger Wave Of Deals With the advent of the single currency in Europe, most observers anticipated a surge in cross-border consolidation, particularly in the banking sector, but that has not really materialized. A 2004 study of cross-border M&A among European financial institutions conducted by Allen & Song found that domestic M&A and intra-continent M&A was more prevalent than cross-continent M&A. But in its 2005 Global Banking Industry Outlook, Deloitte sounds an optimistic note, saying that the “traditional reluctance to engage in cross-border mergers in Europe may finally be fading.”According to Deloitte, the value of M&A deals in the European banking sector in the first 10 months of 2004 was $204 billion, double the level achieved in 2002. However, the Deloitte report notes that the obstacles that have hampered cross-border mergers in the past still loom large.“The European financial services industry is still fairly fragmented, with country-specific taxes, regulations and cultures making it difficult to transplant banking services cross-border,” Deloitte writes. These obstacles are further compounded for potential acquirers from outside of Europe. And if the recent scandals in the Italian banking sector are anything to go by, the issue of national pride is still very much alive in European cross-border M&A. Earlier this year it was discovered that the Italian central bank had intervened to try to prevent foreign takeovers of two of its local banks, Banca Antoveneta by Dutch bank ABN Amro, and Banca Nazionale del Lavoro, which Spanish bank BBVA bid for. ABN Amro’s bid has since been approved, but controversy surrounding the deal garnered the attention of the EU commissioner for internal markets and services, Charlie McCreevy, who has threatened to use existing laws to prevent

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such obstacles from re-occurring. Although ABN Amro persisted with its bid, Dickens says a lot of companies cannot afford to be that highly principled, which leads him to conclude that the Dutch bank’s success will not necessarily open the floodgates to more crossborder M&A involving companies from countries such as Italy. While some may be tempted to view the Italian banking fiasco as an isolated incident, recent pronouncements from German and French politicians suggest that “economic patriotism,” to borrow French prime minister Dominique de Villepin’s phrase, is alive and kicking. In August, de Villepin announced that the French government would take a “protectionist” stance toward “strategic” economic sectors to prevent foreign takeovers. His sentiments soon played out on the French economic stage with a rumored bid by US drinks giant Pepsi for French yogurt manufacturer Danone. The French finance minister, who greeted the bid with an emphatic “non,” said the government would do everything in its power to protect the interests of employees. In the summer, Germany’s ruling Social Democratic Party leader Franz Muentefering also made a jibe at outside investors, describing private equity firms as a “ swarm of locusts” that “graze” on underpriced businesses, lay off staff and then resell the firm for a profit. Dickens predicts that these demonstrations of “economic patriotism” will continue to hinder some mega-cross-border deals within Europe, but he says it is less prevalent in mid-market deals involving lower-profile takeover targets.“I wouldn’t be surprised if not in every transaction, but in more key transactions, we start seeing these same sort of issues arise,” he says. Campa of CEPR says “economic patriotism” significantly influences the likelihood of whether cross-border M&A is even attempted.“Firms are reluctant to engage in a cross-border deal if they feel that opposition from the host govern-

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ment may be an issue,” he says. Although “economic patriotism” may be a worldwide phenomenon, Campa says it is more likely to occur in Europe because of the range of industries that are present there. However, earlier this year the US appeared to engage in its own demonstration of “economic protectionism” with the attempted takeover of US oil and gas company Unocal by the China National Offshore Oil Corporation (CNOOC), resulting in Senator Byron Dorgan introducing a bill prohibiting the merger of the two companies. Congress took a leaf out of France’s book, arguing that oil and natural gas resources were “strategic” assets critical to national security. Others, however, saw it differently.“It was China-bashing,” says Dickens, “but I don’t think the US is, broadly speaking, anti-FDI. So many US companies are buyers themselves, so you can’t have it both ways.”

US Adopts More European Approach George Kleinfeld, counsel in Clifford Chance’s Washington practice, says that unlike Europe any official remonstrations surrounding national security interests in the US are based on a rule-of-law approach. He is referring to the Exon-Florio amendment adopted in 1988 in response to an influx of Japanese high-tech investment. The amendment gives the US administration the right to review, where appropriate, foreign acquisitions that could give rise to national security issues.“Traditionally, we have not applied the concept of investment screening or economic chauvinism beyond the boundaries of national security, unlike our friends to the north, the Canadians, as well as the Australians and others in the OECD club,” Kleinfeld says. Yet in the past four years, Kleinfeld says, the ExonFlorio amendment has been more aggressively applied as a result of the terrorist attacks of September 11, 2001, and concern that China’s economic expansion may threaten US interests. In the context of CNOOC’s bid for

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Germany’s ruling Social Democratic Party leader Franz Muentefering (left) compared private equity investors to a “swarm of locusts” George Kleinfeld (right), Clifford Chance, says national security concerns could be used as an excuse to prevent foreign takeovers

Unocal, Kleinfeld says that political opposition was based not only on “economic patriotism” but also reciprocity concerns —if US companies cannot invest in Chinese oil and gas companies, why should it work the other way? This reaction from Congress imposed a risk premium in domestic bidder Chevron’s favor, because the timing and outcome of an Exon-Florio clearance could not be taken for granted. “Closure of the deal with CNOOC was not a sure thing,” Kleinfeld says. “If Unocal had wanted to take the risk, they could have accepted CNOOC’s offer, undergone an ExonFlorio review and sought to mitigate concerns by divesting certain assets.”This is very different from what appears to be happening in European countries such as France and Italy where, he says, foreign takeovers may be influenced by completely “non-transparent” considerations without recourse to an established administrative process. Kleinfeld worked on Chinese company Lenovo’s acquisition of IBM’s PC business, which he says attracted the attention of Congress. He says the transaction was “excruciatingly reviewed” under the applicable regulatory procedures and went forward on that basis. Unlike the CNOOC/Unocal deal, there was no rival domestic bidder and political opposition was restrained. However, he ac-

knowledges that fervent nationalists could in the future use national security as an excuse to prevent foreign takeovers. “The problem is that it is hard to objectively define a national security threat. Politicians who have an economic nationalistic agenda could use national security as an excuse to defend parochial interests,” he points out. So with economic patriotism and national security interests coming to the fore in cross-border M&A, will companies considering taking the plunge think twice? While potential acquirers in such deals need to spend a lot of time and money exploring the political and cultural implications of cross-continent or cross-border M&A, Dickens says if the deal is important to them, they will factor that into the cost of doing business. But the problem is unlikely to go away. Campa anticipates that there will likely be more FDI from Chinese and South Korean companies and that the reaction to these investments will be similar to that in the 1980s when Japanese companies were intent on world domination. “In general, greenfield investment will be perceived to be better than acquisitions of existing companies,” he says. “The biggest problem with economic patriotism will be for cross-border integration of European companies, which is highly needed in certain industries.” ■

ANNUAL SURVEY BEST INTERNET BANKS PART 2

BY ADAM ROMBEL

THE WORLD’S BEST INTERNET BANKS, 2005

HSB C CIT IGR OUP

WELLS FARGO

RZB

BANK OF AMERICA

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mid blaring headlines, customer concern and new regulatory action regarding the security of customers’ financial information on the Internet, banks have faced a challenging time in 2005. Concern about the growth of identity fraud is slowing adoption and usage of online banking, according to the results of a survey commissioned by Entrust, a Texas-based Internet-security firm. The survey, conducted by Atlantabased research firm InfoSurv, quizzed more than 700 online-banking consumers across the United States about their use and views of Web banking. According to the report, 18% of all respondents said they decreased their use of Internet banking or stopped banking online completely in the past 12 months due to concerns regarding the security of their online identity.Thirteen percent of European consumers reported doing the same. A report by Stamford, Connecticut–based research firm Gartner Group in June estimated that 2.5 million people in the US suffered financial losses in “phishing” attacks in 2004. Phishing involves tricking people into providing personal identification information. In response to reports like these, the Federal Financial Institutions Examination Council, a consortium of five US banking regulators, took action in October. It issued guidelines requiring banks to im-

BRADESC O SAMBA

Online security issues have taken center stage over the past year, presenting banks with greater challenges in retaining online customers and attracting new ones.

OVERALL WINNERS

BEST GLOBAL - Citigroup BEST GLOBAL CONSUMER - HSBC BEST GLOBAL CORP./INST. - Citigroup 2 0 0 5

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plement, by the end of 2006, multi-layer authentication systems that go beyond user name and password.This is to ensure those attempting to log onto bank accounts and make transactions are actual customers and not criminals. Global banks have mounted a threepronged defense in response to these problems: boosting the security of their online-banking systems and offerings; convincing corporate and retail customers that they are safe banking online; and investing in enhanced Internetbanking products, services and technology to attract more customers and reduce costs over other banking channels. “The concern around online identity attacks and fraud continues to be high, with increasing numbers staying away from banking via the Internet,” says Kevin Simzer, senior vice president at Entrust. “The urgency of this problem demands immediate action, especially when considering the financial impact

REGIONAL WINNERS NORTH AMERICA Best Corporate/Institutional Internet Bank Wells Fargo Best Consumer Internet Bank Bank of America EUROPE Best Corporate/Institutional Internet Bank RZB Best Consumer Internet Bank Citigroup ASIA/PACIFIC Best Corporate/Institutional Internet Bank DBS Bank Best Consumer Internet Bank HSBC LATIN AMERICA Best Corporate/Institutional 3 4

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WORLD’S BEST INTERNET BANKS SECOND-ROUND WINNERS METHODOLOGY

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ll second-round winners were chosen from among entries evaluated by a world-class judging panel consisting of representatives from Tata Infotech. Global Finance editors were responsible for the final selection of winners. Only banks that entered the competition were considered for awards, and awards are only given in those regions and sub-categories in which there were entries. Winning banks were selected based on the following criteria: strength of strategy for attracting and servicing online customers, success in getting clients to use Internet offerings, growth of online customers, breadth of product offerings, evidence of tangible benefits gained from Internet initiatives, website design and functionality, and the strength of the bank’s security initiatives.

of customers reverting to more expensive channels to conduct their banking transactions.” One bank taking action is Bank of America, which in 2006 plans to introduce a new, multi-step process that combines passwords with customer-selected test questions and a digital system that “fingerprints” the customer’s computer. The Entrust survey found that 94% of respondents expressed a willingness to use additional security measures such as strong authentication when banking

online, especially when conducting higher value transactions. Top banks, such as those honored in the 2005 World’s Best Internet Banks Awards, are also rolling out new, innovative products and services that attract clients by boosting their productivity and convenience. Banks are also continuing to reap cost savings and operating efficiencies from their Internet-banking initiatives—yet another reason why it’s important for banks to put security issues behind them.

Internet Bank Citigroup/Banamex Best Consumer Internet Bank Bradesco Best Corporate/Institutional Internet Bank RZB Best Consumer Internet Bank RZB

Citigroup/Banamex Best Corporate/ Institutional Online Cash Management Samba Best Corporate/Institutional Website Design Wells Fargo Best Corporate/Institutional Integrated Site Bradesco Best Consumer Information Security Initiatives Citigroup Best Consumer Private Banking Citigroup Best Consumer Online Bill Payment & Presentment Bank of America Best Consumer Online Credit Bank of America Best Consumer Website Design Wells Fargo Best Consumer Integrated Site Citigroup/Banamex

MIDDLE EAST/AFRICA Best Corporate/Institutional Internet Bank Samba Best Consumer Internet Bank Samba

GLOBAL SUB-CATEGORY WINNERS NORTH AMERICA Best Corporate/Institutional Information Security Initiatives HSBC Best Corporate/Institutional Online Securities Research

Can you say “World’s Best Internet Bank” 4 times in a row?

CitiDirect® Online Banking

History has a way of repeating itself. Once again, we’ve

been selected by Global Finance as the World’s Best Internet Bank. We’ve also been named Best Corporate/Institutional Internet Bank globally and in 30 countries in Europe, Asia, Latin America, the Middle East /Africa, and Central and Eastern Europe. As rewarding as that is, our ultimate satisfaction comes from consistently providing our clients with creative solutions and flawless execution. Put the award winning, online banking capabilities of Citigroup to work for you.

Global Banking

Global Capital Markets

Global Transaction Services

Please visit us at www.transactionservices.citigroup.com. © 2005 Citigroup Inc. CITIGROUP and the Umbrella Device are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world.

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CANADA: JPMorgan Chase UNITED STATES: Wells Fargo

EUROPE AUSTRIA: RZB FINLAND: Citigroup GREECE: EFG Eurobank Ergasias GERMANY: JPMorgan Chase IRELAND: Citigroup ITALY: Citigroup NETHERLANDS: Citigroup POLAND: Bank BPH PORTUGAL: Millennium bcp SPAIN: Citigroup SWEDEN: SEB Merchant Banking SWITZERLAND: Citigroup TURKEY: Garanti Bank UNITED KINGDOM: JPMorgan Chase

INDIA: ICICI Bank KOREA: Citigroup KYRGYZSTAN: AsiaUniversalBank MALAYSIA: OCBC SINGAPORE: DBS Bank TAIWAN: Chinatrust Commercial Bank THAILAND: Citigroup

CENTRAL/EASTERN EUROPE

ASIA/PACIFIC

BOSNIA/HERZEGOVINA: Raiffeisen Bank dd

CHINA: Citigroup HONG KONG: HSBC

CROATIA: Raiffeisenbank Austria CZECH REPUBLIC: Citigroup HUNGARY: Citigroup ROMANIA: Citigroup RUSSIA: Citigroup SERBIA/M’NEGRO: Raiffeisenbank a.d. SLOVAKIA: Citigroup

LATIN AMERICA ARGENTINA: Banco Rio de la Plata BRAZIL: Bradesco CHILE: Citigroup COLOMBIA: BBVA JAMAICA: Citigroup MEXICO: Banamex PERU: BBVA PUERTO RICO: Citigroup TRINIDAD & TOBAGO: Citigroup VENEZUELA: Banco de Venezuela

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COUNTRY WINNERS – BEST CORP./INST. INTERNET BANKS

THE WO RL D

ANNUAL SURVEY

MIDDLE EAST/AFRICA CAMEROON: Citigroup EGYPT: Citigroup ISRAEL: Citigroup IVORY COAST: Citigroup KENYA: Citigroup KUWAIT: National Bank of Kuwait NIGERIA: Citigroup QATAR: Qatar National Bank SAUDI ARABIA: Samba SENEGAL: Citigroup SOUTH AFRICA: Citigroup TANZANIA: Citigroup UGANDA: Citigroup ZAMBIA: Citigroup

COUNTRY WINNERS – BEST CONSUMER INTERNET BANKS NORTH AMERICA CANADA: TD Bank Financial Group UNITED STATES: Bank of America

EUROPE AUSTRIA: RZB BELGIUM: Citigroup GERMANY: Citigroup GREECE: EFG Eurobank Ergasias ITALY: Citigroup POLAND: Bank Millennium PORTUGAL: Millennium bcp SPAIN: Citigroup TURKEY: Akbank UNITED KINGDOM: Citigroup

ASIA/PACIFIC AUSTRALIA: ANZ Banking Group CHINA: ICBC GUAM: Citigroup HONG KONG: HSBC 3 6

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INDIA: ICICI Bank INDONESIA: Citigroup MALAYSIA: Citigroup PAKISTAN: Citigroup PHILIPPINES: Citigroup SINGAPORE: DBS Bank TAIWAN: Chinatrust Commercial Bank THAILAND: Citigroup

LATIN AMERICA ARGENTINA: Banco Rio de la Plata BRAZIL: Bradesco CHILE: Santander Santiago COLOMBIA: BBVA MEXICO: Banamex PERU: Citigroup PUERTO RICO: Citigroup VENEZUELA: BBVA Banco Provincial

CENTRAL/EASTERN EUROPE BULGARIA: Raiffeisen Bank EAD

CZECH REPUBLIC: Citigroup HUNGARY: Raiffeisen Bank Rt. ROMANIA: Raiffeisen Bank SA RUSSIA: ZAO Raiffeisenbank Austria SLOVAKIA: Tatra Banka SLOVENIA: Raiffeisen Krekova Banka dd UKRAINE: JSCB Raiffeisenbank

MIDDLE EAST/AFRICA BAHRAIN: Citigroup EGYPT: Citigroup JORDAN: Jordan Kuwait Bank KUWAIT: National Bank of Kuwait OMAN: Bank Muscat QATAR: Qatar National Bank SAUDI ARABIA: Samba UNITED ARAB EMIRATES: Dubai Islamic Bank

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BEST INTERNET BANKS PART 2

Best Online Securities Research: Scotia Capital Best Online Cash Management: Citigroup Best Website Design: Wells Fargo Best Integrated Corporate/Institutional Bank Site: Wells Fargo Best Information Security Initiatives: Wells Fargo

EUROPE

Best Information Security Initiatives: Millennium bcp

ASIA/PACIFIC Best Online Cash Management: Citigroup Best Website Design: HSBC Best Integrated Corporate/Institutional Bank Site: HSBC Best Information Security Initiatives: HSBC

LATIN AMERICA

Best Online Securities Research: RZB Best Online Cash Management: JPMorgan Chase Best Website Design: RZB Best Integrated Corporate/Institutional Bank Site: RZB

Best Online Securities Research: Banamex Best Online Cash Management: BBVA Best Website Design: Bradesco Best Integrated Corporate/Institutional Bank Site: Bradesco

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Best Information Security Initiatives: Banco Rio de la Plata

CENTRAL/EASTERN EUROPE Best Online Cash Management: Raiffeisenbank a.d. Best Website Design: Raiffeisenbank a.d. Best Integrated Corporate/Institutional Bank Site: Raiffeisenbank a.d.

MIDDLE EAST/AFRICA Best Online Cash Management: Samba Best Website Design: Riyad Bank Best Integrated Corporate/Institutional Bank Site: Qatar National Bank Best Information Security Initiatives: Samba

REGIONAL SUB-CATEGORY WINNERS – BEST CONSUMER INTERNET BANKS NORTH AMERICA

ASIA/PACIFIC

Best Bill Payment & Presentment: Bank of America Best Online Consumer Credit: Bank of America Best Website Design: Wells Fargo Best Integrated Consumer Bank Site: Wells Fargo Best Information Security Initiatives: Bank of America

EUROPE Best Bill Payment & Presentment: Millennium bcp Best Online Consumer Credit: Millennium bcp Best Website Design: RZB Best Integrated Consumer Bank Site: RZB Best Information Security Initiatives: Millennium bcp

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Best Private Banking: Citigroup Best Bill Payment & Presentment: Citigroup Best Online Consumer Credit: Citigroup Best Website Design: HSBC Best Integrated Consumer Bank Site: ICICI Bank Ltd. Best Information Security Initiatives: Citigroup

LATIN AMERICA Best Private Banking: BBVA Best Bill Payment & Presentment: Banamex Best Online Consumer Credit: Banamex Best Website Design: Banamex Best Integrated Consumer Bank Site: Banamex

2005

NORTH AMERICA

T INTERNET BES BA ’S

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REGIONAL SUB-CATEGORY WINNERS — BEST CORP./INST. BANKS

THE WO RL D

ANNUAL SURVEY

Best Information Security Initiatives: Bradesco

CENTRAL/EASTERN EUROPE Best Website Design: Raiffeisen Bank EAD Best Integrated Consumer Bank Site: Citigroup

MIDDLE EAST/AFRICA Best Bill Payment & Presentment: Jordan Kuwait Bank Best Online Consumer Credit: National Bank of Kuwait Best Website Design: Qatar National Bank Best Integrated Consumer Bank Site: Samba Best Information Security Initiatives: Arab National Bank

CONFERENCE AND AWARDS INTERNET BANKING

Internet Banking Conference and Awards Ceremony

Global Finance brings together leading figures from the Internet banking world to discuss the future of the market. n November 8, 2005, Global Finance presented its inaugural Internet Banking Conference. The event brought the latest online banking developments to the operations and marketing staffs of Internet banks from around the world. The program began with a presentation by Jorge Vargas, co-founder and director of W3 in Buenos Aires. W3 has been the web developer of many of Citigroup’s award-winning sites. Vargas focused on web-credibility and how credibility is affected by usability and accessibility. He

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concluded by offering advice on increasing bank site credibility. Anup Bagchi, general manager and head of retail liabilities at India’s ICICI Bank, followed. He is a member of the core team that founded ICICI in 1994 and has since made it the second-largest bank in India and, according to Global Finance’s May issue Best Emerging Market Banks selections, the best bank in India. Bagchi’s presentation began with a description of the banking environment in India and then provided details of the bank’s Internet banking philosophy. ICICI’s approach has seen its Internet adoptions increase to a significant portion of its customer base. Rex Richardson, general manager of National Bank of Kuwait, the largest bank in Kuwait and Global Finance’s choice as the best bank in the Mid-

dle East & Africa, presented the bank’s multi-channel online strategy that aims to manage a customer’s experience and brand promise delivery. Use of NBK’s site has increased significantly in recent years, growing 50% since 2003. Next up was Natalia Major, head of electronic distr ibution channels at RZB’s Tatra Bank in Slovakia. Her presentation, “Successful Electronic Banking,” opened with a description of Tatra’s rudimentary site from 1998 and finished with today, when Internet banking customers are 36% of the bank’s customer base. Major, who plays a role in the development of all RZB sites in central Europe, showed that even a small bank in an emerging market can offer world-class Internet services. Nancy Todor, director, global payments, Citigroup Global Transaction Services, followed with a description of a major new initiative for the bank’s treasury customers. Citigroup has redefined customers’ needs according to their new version of STP—Simplicity, Transparency and Perfection. The results are a payment flow manager including a set of online tools that give

Awards event cocktail party sponsor

CONFERENCE AND AWARDS

Natalia Major, Tatra Bank

customers real-time information and control of their payment flow, and a payment investigation manager that provides customers with fast and effective case resolution. Danny Peltz, executive vice president of Wells Fargo in the US, then gave a spirited description of how a bank located in the heart of the 1990s dot-com mania reacted to develop a super-site for its CEO customers. It was a time when Peltz and his team had “more money than time” to do the job.The re-

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sult has been a single CEO site with more than 50 services and 28,000 business customers. Wells Fargo’s relentless pursuit of customer feedback has, according to Peltz, allowed the bank to continually upgrade and improve its CEO offering. The Internet banking conference was followed by Global Finance’s Third Annual Best Internet Bank Awards dinner. The program first honored the winners of round one of Global Finance’s Best Internet Bank competition.These win-

Anup Bagchi, ICICI Bank

INTERNET BANKING

Nancy Todor, Citigroup

ners were announced in September’s Global Finance. But the real excitement of the night came with the announcement of the second-round winners— the best regional and global Internet banks. This year’s top global awards were taken by Bank of America for best consumer Internet bank in the world and by Citigroup both for best corporate/institutional bank in the world and for best overall Internet bank in the world. See page 29 for the full report and a list of all of this year’s winners.

Rex Richardson, NBK

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INTERNET BANKING

Best Internet Banks Awards 2005

Citigroup's Internet banking team collects the global best Internet bank award

Tata InfoTech's judging panelist Shripad Vaidya

Michael Donelson, HSBC, with Global Finance’s Chris Giarraputo

Rohit Luthra and Tony Mojabber, SAMBA, with Global Finance’s Joseph Giarraputo

Pearl Geffers, RZB

Sanjay Gupta, Bank of America

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Commercial International Bank Focuses on SMEs Working with IFC to improve services and access to small businesses n response to the growing contribution of small and medium-size Enterprises (SMEs) to the Egyptian economy, Commercial International Bank (CIB), Egypt’s largest and most profitable private bank, is launching a new finance operation aimed at the SME sector. CIB, Egypt’s fifth-largest financial institution in terms of asset size, has identified significant business opportunities within the SME sector despite the inherent risk management challenges this sector represents. Small and medium enterprises comprise much of the local economy and represent a vast and largely untapped market for financial institutions in Egypt and other developing countries. Although often plagued by weak financial reporting and other issues that cause leading local banks to perceive them as high-risk, many commercial banks around the world have managed to overcome these obstacles with proven models of profitable and effective small business lending. In September 2003, the International Finance Corporation (IFC) signed a major advisory service mandate with CIB to assist it in developing retail and small and medium enterprise finance operations.The aim of the project is to help CIB develop and implement relevant organizational structures, information technology systems and products that will enable it to reach its objectives in terms of the growth and quality of its retail and small business operations over the next five years. The project will also take advantage of CIB’s extensive client base and its excellent

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relationships with its customers in order to gain access to their SME suppliers and buyers and therefore maximize profitability. Risk management techniques and risk assessment models have also been introduced for the first time by CIB.The Credit Scoring Models for the consumer and SME Risk Rating Tool are essential components of an IRB (internal ratingbased approach) credit rating system. A new Consumer Credit and SME Credit Policy Guide are also under development in order to ensure compliance with the Basel II regulations. To support its SME lending operations, CIB has also decided to install Temenos T24 to handle its new Credit Management System.This provides a total solution, including hardware, software, implementation service and interfacing.The system will run on the latest IBM servers, will be interfaced to CIB’s existing systems and will handle the bank’s new lending mechanisms for SMEs. CIB’s new SME finance operation will provide it with the opportunity to contribute to the overall growth of the Egyptian economy and to the development of the retail and SME sector and will assist the bank with the diversification of its product portfolio and sources of profit. ■ Contact Information: Amr Rostom Corporate Image Department Tel: (202) 747 2332 Fax: (202) 748 1789 Email: [email protected]

TECHNOLOGY IT CENTRALIZATION

BY DENISE BEDELL

Finding the Right IT Strategy

Determining what style of IT management is right for an organization can be complex. Although centralization offers many benefits, it does not always offer the necessary flexibility. ith the speed of technological development, the desire to drive greater efficiency through business processes, and the need to have compliance with new regulatory regimes, IT strategy increasingly plays a critical role in supporting business process management. The early 2000s saw a trend toward centralized IT management for many corporates.While many mid-size companies continue to move toward centralization, some larger firms have drifted in the opposite direction. Choosing what strategy is best for a particular company depends on the size and type of company and what the goals are within the group. In a recent survey conducted by research group Forrester, more than 900 North American IT and business decision-makers were asked questions about their approach to IT governance. Of those polled, 60% said their company took a centralized approach to IT management, which was down from 66% the previous year. More surprisingly, the number of respondents who described their approach as decentralized was 26%, up from just 13% the previous year. Those who took a combined, or federated, approach accounted for 15% of respondents, down from 23% last year.

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THE DEGREE TO WHICH COMPANIES CENTRALIZE IT

Source: Forrester Research

The large growth in those executives that self-describe as having decentralized IT suggests that the drive over the past few years to centralize business processes, including IT, may be waning. Bobby Cameron, a Forrester analyst and author of the report, notes that centralized IT is still the norm, especially among smaller enterprises. “The 2003 peak in IT centralization was rooted in the cost pressures of the recession that followed the dot-com bubble burst— and in the digestion of IT’s $60 billion

surplus buying spree during the bubble.” The survey found that 75% of firms with 1,000 to 4,999 employees described their IT organizations as centralized, which is about 20% to 25% more than mid- and large-size companies. Findings were also split by sector, with retail and wholesale enterprises being much more likely to centralize IT than other sectors. Of those respondents in the retail and wholesale trade industries, 75% described their IT organizations as cen-

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tralized. This was far more than most other sectors, which tended to run at about 60% centralization. In contrast, the finance and insurance sector showed only 48% of respondents describing their IT strategy as centralized. Says Cameron, “This difference comes from variations across industries in firms’ need for uniformity, tight operating margins and hierarchical governance—such as the finance and insurance industr y’s traditional product-based governance, making that group less likely to have centralized IT.” For many, it is a matter of the strategy and approach of the business as a whole. For those with a decentralized business structure, it may make sense to take a decentralized approach to IT management. For those with very autonomous business units, this may also be the case. In addition, for those firms with a highly acquisitional business strategy, a decentralized approach may

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Robert Cohen, BasWare

need to be able to bring that data together.With no way to capture that data, it poses a problem from a compliance perspective.” “For those public companies looking to achieve compliance under SarbanesOxley and other new regulator y

“THE REASONS FOR MOVING TO A CENTRALIZED IT STRATEGY ARE ECONOMIES OF SCALE, CONTROL AND COMPLIANCE” —Robert Cohen, director of marketing at BasWare be the only approach possible, particularly while new firms go through the process of integration with the rest of the business. “There is a continuum out there from centralized to decentralized IT management,” says Robert Cohen, director of marketing at financial solution provider BasWare. “It does not have to be one extreme or the other, and it is often in a state of flux. The big reasons for moving to a centralized IT strategy are economies of scale, control and compliance,” he says. “Our experience is that people are trying to manage the influx of data across business units and

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changes, then what we are seeing is that there is a tendency to look at standardizing business processes and a tendency to centralize functions where possible,” Cohen notes. Indeed, there is a growing drive to increase efficiency and transparency of processes through better integration of IT platforms.While this would seem to lend itself to the idea of centralized IT management, this is not necessarily so. With a number of firms either now offering or in the process of building overlay systems that can bring together information from various different platforms, and as data standardization in-

IT CENTRALIZATION

creases, the need to consolidate data interfaces will decline. However, that standardization is as yet a long way off. Although there are standardization initiatives in some industries—such as TWIST and RosettaNet in the financial software arena—the idea of global standards for all business process technology is far from a reality. Communication between solutions servicing different areas within an organization is improving, however, as companies increasingly focus on building technology bridges between the various parts of the group in order to drive business process efficiency. One prime example is that of sales force automation software, which integrates data from sales, customer service, and finance and ERP systems in order to improve the client experience and increase sales force efficiency by providing them with much richer client data. When it comes to managing overall IT strategy, the solution may be a combination of centralized IT management for some functions and autonomous IT management for other functions. Indeed, the survey by Forrester found that those with such a federated IT approach tend to have a strategy where both IT and business units are involved in IT decision-making. According to the survey, 66% of respondents from federated IT organizations felt that business and IT worked together to craft the IT department’s strategy. But, noted the survey, only 52% of respondents from centralized IT departments and 46% from decentralized IT described a similar collaborative relationship. Be it standardization, centralization or decentralization of IT processes, what is right for any given company will depend on the business model of that company. Notes Cohen: “The important thing is that companies look to implement best-of-breed practices. Whether that involves centralization or standardization will depend on the organization.” ■

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Dollar Will Remain Buoyant As Long as the Federal Reserve Keeps Raising Rates, Analysts Say

approach of his predecessor by raising rates another quarter point, Chandler says. Meanwhile, the European Central Bank recognizes the fragility of the eurozone’s economic recovery and will be reluctant to raise rates by more than a quarter point to 2.25% late this year or early in 2006, he says. The ECB left its target rate at 2% on November 3, and the bank’s president, Jean-Claude Trichet, said the level, which has been unchanged for more than two years, was still appropriate. “The ECB doesn’t need to be in a hurry,” Chandler says. “And any tightening that the market anticipates from the ECB over the next several months is being offset by the market’s discounting an extension of the Fed’s tightening cycle.” Sandy Wong

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nterest-rate rises are like vitamins for the dollar, which jumped to its highest level in two years in November and which will continue to flex its muscles in the months ahead, currency analysts say. Although European policymakers are moving closer to hiking rates on the Continent, the United States is expected to maintain a wide advantage in rate differentials for months to come. And the same holds true for US rates compared with those in Japan, analysts say. “Judging by the trading level of federal funds futures, US short-term interest rates are expected to climb to 4.75% by the end of the first quarter of 2006,” says Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. Virtually nobody was surprised when the Federal Reserve raised interest rates another quarter of a percentage point to 4% on November 1, for the 12th straight rise since June 2004. “Price pressures are evident in the US economy, and the Fed will likely raise rates by a quarter point at their December 13 meeting,” Chandler says. Another quarter-point increase is likely, he says, at the Fed’s two-day meeting on January 30-31, 2006, the last Federal Open Market Committee meeting to be led by chairman Alan Greenspan. When Ben Bernanke succeeds Greenspan as Fed chairman and heads his first FOMC meeting on March 28, 2006, the new Fed chief likely will want to establish his anti-inflation credentials and to continue the gradualist

Yen Keeps Sliding The dollar has shown big gains against the Japanese yen, reaching a 26-month high near ¥118 in early November, mainly as a result of interest-rate considerations, analysts say.The Bank of Japan has kept rates near zero since 2001 and will move cautiously in raising rates next year, analysts say. Given the lingering deflationary forces in Japan, the weaker yen may be quietly welcomed by officials and may help boost already-strong corporate earnings, according to Chandler. “Thus, contrary to conventional wisdom, which had expected a rising Nikkei stock average to be good for 2 0 0 5

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the yen, a weaker yen may actually be supportive SHORT-TERM US & EUROZONE RATES of Japanese share prices in the current (JANUARY 1, 2004-NOVEMBER 1, 2005) environment,” he says. Michael Woolfolk, senior currency strategist at 4.0 the Bank of New York, says strong US economic Federal Reserve's Intended Federal Funds Rate growth, rising rates and contained inflation are all 3.5 lining up in favor of continued strength in the European Central Bank's Refinancing Minimum Bid Rate dollar.The personal consumption expenditures, or 3.0 PCE, core index, Greenspan’s favored quarterly 2.5 measure of inflation, actually eased to 1.3% in the third quarter from 1.7% in the second quarter. 2.0 “This should provide some comfort to ongoing concerns over rising inflationary risks outside of 1.5 energy prices,”Woolfolk says. Meanwhile, the third-quarter US gross domestic product report, 1.0 which showed an increase of 3.8% at an annualized 0 rate, was everything it was advertised to be and 1/1/04 8/10/04 11/10/04 2/2/05 5/3/05 8/9/05 11/1/05 more, he says. “While the Fed has adopted a more hawkish 6/30/04 9/21/04 12/14/04 3/22/05 6/30/05 9/20/05 stance since Hurricane Katrina, the nomination of Source: Federal Reserve Board, ECB Ben Bernanke has curbed some of the enthusiasm for the dollar based upon the market’s assessment of he said. A money-financed tax cut is essentially equivalent him as being more dovish than Greenspan,”Woolfolk says. to dropping money from a helicopter, he noted. “What the deflation story showed is that Bernanke pays Helicopter Drop lots of attention to the price level and inflation measures Bernanke is best known in the financial markets for his anti- generally,” Gilmore says. “And, as an advocate of inflationdeflation campaign at the Fed, according to David Gilmore, targeting, I think it is a safe assumption that he would be as economist and partner at Essex, Connecticut-based Foreign reactive to inflation approaching the top end of the Fed’s Exchange Analytics. “Bernanke was worried that near-zero threshold as the bottom end.” inflation and stagnant economic activity could prompt a In theory, a more rules-based monetary policy with more Japan-like bout of US deflation,” Gilmore says. transparency should result in reduced asset-price volatility, In a November 2002 speech to the National Economists according to Gilmore. “I also think that Bernanke could step Club in Washington, DC, Bernanke outlined just what the into his first FOMC meeting in late March with a need to Fed could do if deflation were to occur. A broad-based tax hike, simply to show markets that he has symmetry in cut accompanied by a program of open-market purchases handling upside as well as downside risks to prices,” he says. to alleviate any tendency for interest rates to rise would “And if the wheels stay on the economy and restraint is embraced by Bernanke, then we can look for a 5%-5.5% almost certainly be an effective stimulant to consumption, federal funds rate in relatively short order in 2006,” he adds. YIELDS ON 10-YEAR GOVERNMENT BONDS NOVEMBER 8, 2005

Deficits Detract

6% 5.53%

5% 4%

4.61%

4.45%

3%

4.14%

3.48%

2% 1.56%

1% 0%

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Japan

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France Australia

The dollar may well press higher based on interest-rate considerations, Gilmore says, but the higher it goes, the harder it will fall, due to structural problems related to the US budget and trade deficits, he says. “I think it is inevitable that the wheels will come off,” he asserts. Many currency analysts at the major banks continue to forecast a weaker dollar over the medium to longer term, and they warn that the US eventually will need to address the steady deterioration in the current account deficit. Interest rates are the main influence on the market at the moment, says Chandler of Brown Brothers Harriman.“When the Fed is tightening policy, cyclical factors such as economicgrowth differentials and interest-rate differentials offset worries

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about the current account,” he says.“Interest rates do a better job of explaining both the dollar’s decline from 2001 through 2004 and its strength this year than does the current account,” he notes. For now, the dollar will remain strong, as generally good US economic data and comments from Fed officials, including Greenspan, reinforce expectations of additional tightening in monetary policy going forward, says Robert Lynch, head of Group of 10 foreign exchange strategy, the Americas, at HSBC Bank in New York. But a key message to take away from the ECB’s November press conference is that the central bank could move on rates at any time, he says.The perceived risk for an ECB tightening will again be a factor in the market as the December ECB policy meeting approaches, he adds. The ECB confirmed in early November that if the eurozone growth outlook continues to improve, policy would have to become less accommodative in coming months, says José Luis Alzola, European economist at Citigroup in London. “But contrary to some market fears, the ECB stopped short of indicating that an interest rate hike was imminent,” he says. If the European recovery continues to gather steam, the ECB likely will begin a gradual tightening cycle sometime around next March, Alzola says. As long as underlying

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inflation and price expectations are contained, the ECB would be willing to let the recovery strengthen before moving to raise rates, according to Alzola.

Repatriation Flows The dollar is unlikely to get much of a boost from the repatriation of as much as $400 billion of earnings by US multinational companies this year at a special reduced tax rate under the Homeland Investment Act, analysts say. There could be some increased dollar buying ahead of the year-end closing of the window for US corporations that want to repatriate funds under the program. However, the impact of the inflows will be minor in the foreign exchange market, which trades $1.2 trillion daily, says Stephen Kuhl, vice president of foreign exchange solutions and strategy at Travelex, which facilitates international fund transfers for multinational corporations and handles 50% of currency-exchange note volumes at international airports worldwide. “It’s just a drop in the bucket,” he says. The amount of non-dollar holdings that will be repatriated isn’t that great, he adds. “Most of these earnings already are sitting in dollar-denominated accounts offshore and don’t need to be converted into dollars,” he explains. Meanwhile, a potential further revaluation of the Chinese

CURRENCY FORECASTS 1.0

0.7

Euro (Euro/US$)

0.9

UK (Pound/US$)

0.6

0.8 0.5

0.7 0.6

140

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Source: Bank of New York

Forecast

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2005

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1.6

Japan (Yen/US$)

120

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J

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M A

2004

M J

J

A

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N

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A

2005

M

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J

A

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A

S

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2006

Switzerland (Franc/US$)

1.4

100

1.2

80 60

0.4

1.0

Forecast

Source: Bank of New York N

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M J

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2005

N

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2006

Everything you need to know about Foreign Exchange Services fits on a business card. We Should Talk.

0.8

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Source: Deutsche Bank N

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2004

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M A

M J

J

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N

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2005

F

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2006

Robert Ryan New York (212) 804-2260

Kazuma Yamashita Tokyo 81-3-3595-0343

James McAuliffe London 44-207-570-6680

Joe Fong Hong Kong 852-2-840-9880

www.bankofny.com

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yuan is one factor that could work against the dollar’s continued rise in the months ahead, analysts say. China’s economy is flexible enough to withstand a more freely traded currency, according to Zhou Xiaochuan, governor of the People’s Bank of China. China recently announced that it would loosen capital controls on multinational companies by allowing them to lend foreign exchange to their overseas subsidiaries. No timetable was announced for the change, however.

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Canada (C$/US$)

1.4

1.2

1.0

Forecast

Source: Bank of New York N

D

J

F

M A

M J

2004

China Is Cautious China will move very cautiously in allowing the yuan to appreciate, says Marc Chandler of Brown Brothers Harriman. “There is an old saying in China: ‘To cross a river, step on the stones,’” he says. China is not fully using its existing trading band of plus or minus 0.3% in the yuan against the dollar, so there is no immediate need to widen the band, he asserts. It is possible, however, that China will widen the permitted trading range slightly to about 0.5% sometime in the first half of next year, Chandler says.The Bank of Japan also will be cautious in ending its policy of quantitative ease, under which it has been flooding the banking system with reserves, he says. The Japanese central bank has made it clear that the end of quantitative ease will not imply an immediate increase in interest rates, Chandler says. First, it will begin slowly reducing its target for bank reserves. Only later will it set an interest-rate target greater than zero, and then it will move very gradually in raising short-term rates. Japan’s monetary-base growth rate has accelerated rapidly in recent months, which could be negative for the yen, according to currency analysts at Barclays Capital. Japan’s adjusted monetary base increased by 10.1% in October from the level of three months earlier, the highest growth since July 2003, according to the Japanese central bank.This could mean that the circulation of money in the banking system has increased due to the end of the bankingsector crisis and that an increase of bank lending is driving monetary growth higher, the Barclays analysts say.The more money that is printed, the weaker the yen is likely to become, they say. Elsewhere in Asia, Indonesia’s central bank raised its benchmark interest rate by 125 basis points to 12.25% on November 1, following a much sharper-than-expected increase in inflation. Indonesia’s consumer price inflation jumped to 17.9% in October when the government more than doubled fuel prices by ending subsidies that kept the country’s energy prices well below world levels. Analysts say the central bank had little choice but to act, for if it had failed to raise interest rates, the rupiah would have fallen further, putting even more upward pressure on inflation. —Gordon Platt 4 8

D EC E M B E R

2 0 0 5

J

A

S

O

N

D

J

F

M

A

2005

14

M

J

J

A

S

O

A

S

O

A

S

O

A

S

O

A

S

O

A

S

O

A

S

O

2006

Mexico (Peso/US$)

12

10

8

Forecast

Source: Bank of New York N

D

J

F

M A

M J

2004

J

A

S

O

N

D

J

F

M

A

2005

3.5

M

J

J

2006

Brazil (Real/US$)

3.0 2.5 2.0 1.5

1.6

Forecast

Source: Deutsche Bank N

D

J

F

M A

M J

2004

J

A

S

O

N

D

J

F

M

A

2005

M

J

J

2006

Australia (A$/US$)

1.4

1.2

1.0

Forecast

Source: Bank of New York N

D

J

F

M A

2004

M J

J

A

S

O

N

D

J

F

M

A

2005

10

M

J

J

2006

China (Yuan/US$)

9 8 7 6

Forecast

Source: Deutsche Bank N

D

J

F

M A

2004

M J

J

A

S

O

N

D

J

F

M

A

2005

1400

M

J

J

2006

South Korea (Won/US$)

1200 1000 800 600

Forecast

Source: Deutsche Bank N

D

J

F

M A

2004

M J

J

A

S

O

N

D

J

F

M

A

2005

1.8

M

J

J

2006

Turkey (Million Lira/US$)

1.6 1.4 1.2 1.0

Forecast

Source: Deutsche Bank N

D

2004

J

F

M A

M J

J

2005

A

S

O

N

D

J

F

M

A

M

J

2006

J

L O B A L

GF

F

I N A N C E

US HIGH-YIELD NEW-ISSUANCE VOLUME

Ford Motor Credit Sells $1 Billion Notes

18 2004

16

the secondary market in recent weeks, after the world’s largest automaker announced a significant cost-cutting agreement with the United Auto Workers union that will help lower its health-care costs. Ford is expected to announce a similar agreement with the union eventually. According to GM’s chief financial officer, John Devine, the tentative agreement will lower the automaker’s retiree health-care expenses by about 25%, or $15 billion, over seven years. GM also plans to eliminate 25,000 manufacturing jobs and close several plants by 2008. It also announced that it would sell a controlling interest in GMAC. GM and Ford are two of the largest issuers of corporate debt, with a total of about $475 billion outstanding, including the bonds of their financing units. Both of the leading US automakers reported big losses for the third quarter, and Ford said it would announce significant US plant

2005

14

($ billion)

Ford Motor Credit, the finance arm of number-two US automaker Ford Motor, sold $1 billion of debt in a two-part offering in late October that produced higher-than-expected yields. Ford Motor Credit offered yields of 4.375 percentage points more than comparable-maturity US treasury securities for its $500 million of five-year notes. The 5.5-year notes of General Motors Acceptance Corporation, or GMAC, the financing unit of General Motors, were yielding only about 2.6 percentage points more than treasury securities in secondary market trading on the same day. Ford Credit also sold $500 million of two-year floating-rate notes with an interest rate of 3.0 percentage points more than the three-month London interbank offered rate. Deutsche Bank Securities, Barclays Capital and ABNLaSalle were joint lead managers on the debt sale. GM’s bonds have performed better than Ford’s in

20

12 10 8 6 4 2 0

Jan

Feb

Mar

Apr

May

Offer Date Coupon %

Ford Motor Ford Motor

10/26/05 10/26/05

8.625

Seminole Tribe of Florida Colorado Interstate Gas NOVA Chemicals

10/6/05 10/27/05 10/26/05

5.798 6.800

Seminole Tribe of Florida Affinion Group E*Trade Financial

10/6/05 10/3/05 10/28/05

6.535 10.125 7.375

Senior Notes Floating-Rate Notes Notes Senior Notes Floating-Rate Notes Notes Senior Notes Senior Notes

10/18/05

8.500

Senior Notes

Targa Resources Source: KDP Investment Advisors

Issue Type

Jul Aug

Sep

Oct

Nov

Dec

Source: KDP Investment Advisors

closings and layoffs in January. Besides high health-care costs, US automakers have been hurt by rising costs of raw materials, excess capacity and intensifying competition from Asian carmakers. William Clay Ford Jr., chairman and CEO of Ford Motor, says the restructuring plan he will announce in January will apply to salaried workers as well as hourly workers represented by the union. “This is not a sacrifice that we will ask only the UAW and its members to share,” he said in a conference call after Ford reported a third-quarter loss of $284 million.

TOP US HIGH-YIELD ISSUES IN OCTOBER 2005 Issuer

Jun

Maturity Date Private/Public Amount ($mil)

11/10/10 11/2/07

Public Public

500 500

10/1/13 11/15/15 11/15/13

144A 144A 144A

450 400 400

10/1/20 10/15/13 9/15/13

144A 144A 144A

280 270 250

11/1/13

144A

250

Tribal Bonds The Seminole Tribe of Florida offered $730 million of gaming division bonds in a two-part private placement with institutional investors. The tribe, which has 3,100 enrolled members, derives more than 90% of its revenue from gaming. The tribe offered $450 million of eight-year notes and $280 million of 15-year notes.The proceeds will be used mainly to refinance two hotel-casino complexes built with tax-exempt bonds, an arrangement that has been criticized by the US Internal Revenue Service. The Seminole tribe owns and operates six casino gaming facilities across Florida, the largest of which are the Tampa and Hollywood Hard Rock properties. The tribe is trying to negotiate a buy-out of its financial obligations to Power Plant Entertainment, its former financial adviser. Meanwhile, the IRS is auditing other Indian casino financings across the country. —Gordon Platt 2 0 0 5

D EC E M B E R

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CORPORATE FINANCING NEWS CORPORATE DEBT

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L O B A L

GF

Electricité de France Offers Record ESOP The biggest leveraged ESOP, or employee stockownership plan, that Europe has ever seen was part of Electricité de France’s $8.5 billion initial public offering in November, the largest IPO in the world for the past five years. Workers at EDF waged a campaign of protests against the partial privatization of the electric utility, which sold a 15% stake to raise money to compete in Europe’s power and gas markets, as well as to increase electricity production within France. Some of these same workers are smiling all the way to the bank as a result of the generous terms of the ESOP, which was designed to create a culture of share ownership by making the stock affordable to even low-income employees. “The company wants the employees to be very happy. They want something new,”

says Martine Giffon, director, corporate equity structures, SG CIB in Paris.Workers were allocated 15% of the issue, or 36.4 million shares. SG CIB won the mandate as sole structuring bank of EDF’s leveraged international ESOP in a hard-fought competition with Europe’s leading investment banks. Employees of the utility were allowed to buy shares at 10% of the offering price, and they also received a guarantee that they would not lose any of their investment, according to Giffon.“It was easy to sell this plan to the unions because of the guarantee,” she says. The only requirement for the employees who purchased shares was that they agreed not to sell the stock for five years.The five-year lock-up period was necessary in order for SG CIB to structure the deal through a forward swap agreement and

F

I N A N C E

call options sold to the employees, Giffon says. SG CIB is providing the financing to fund the plan through a pre-paid swap. “It was somewhat risky to hedge such a large issue involving a single stock which was not yet listed,” according to Giffon. The employee-owners will receive a multiple of the average of the stock’s positive performance. “We will look at the stock price each week, with one fixing a week for five years, or 260 fixings,” Giffon says. “If the price is below the original price at the fixing, we will take out the option.” Trading in the shares on the Euronext exchange was scheduled to begin on November 21, which was after Global Finance went to press. Credit Agricole’s Calyon investment banking unit, Morgan Stanley, BNP Paribas and ABN Amro Rothschild managed the sale. An overallotment of more than 30.9 million additional shares was made available to the banks managing the issue, which

REGIONAL ADR INDEXES 180 Latin America

160

Europe

Asia

140 120 100

Source: The Bank of New York 5 0

D EC E M B E R

2 0 0 5

Oct 14, 2005

Oct 28, 2005 Oct 31, 2005

Sep 30, 2005

Sep 2, 2005

Sep 16, 2005

Aug 5, 2005

Aug 19, 2005

Jul 22, 2005

Jul 8, 2005

Jun 10, 2005

Jun 24, 2005

May 27, 2005

Apr 29, 2005

May 13, 2005

Apr 1, 2005

Apr 15, 2005

Mar 4, 2005

Mar 18, 2005

Feb 4, 2005

Feb 18, 2005

Jan 7, 2005

Jan 21, 2005

Dec 10, 2004

Dec 24, 2004

Nov 26, 2004

Oct 31, 2004

80 Nov 12, 2004

CORPORATE FINANCING NEWS GLOBAL EQUITY/DR S

G

Martine Giffon, director, corporate equity structures, SG CIB

was France’s largest-ever IPO. Unions have staged strikes and protests against the stock sale, saying it could lead to job reductions and energyprice increases. In late October Prime Minister Dominique de Villepin canceled the proposed partial sale of nuclear-energy group Areva, which had been scheduled for next year.The conservative government had hoped to raise cash from an extensive privatization program to pay down some of its heavy debt burden. EDF generates 85% of the electricity used in France and is the world’s largest generator of nuclear power. The communist-backed Confederation Général du Travail, which represents half of EDF’s workers in France, has fought hard to block the sale. In June 2004, EDF employees disconnected the electricity supply to three suburban Paris train stations for four hours to protest the government’s plan for privatization, stranding 500,000 passengers. The government scaled back the share offering to 15% from 30% following the workers’ protests. —Gordon Platt

L O B A L

GF

Telecom Mergers Surge As Telefónica Buys O2 Global mergers and acquisitions in the telecommunications sector reached $303 billion in the first 10 months of 2005, the highest since 2000, according to Dealogic. Cross-border M&A volume more than doubled in the first 10 months to $109 billion and accounted for about 36% of all activity in the telecom sector so far this year. The proposed acquisition of O2 of Britain by Telefónica of Spain for nearly $32 billion, announced on October 31, is the biggest telecom deal of the year to date. O2 is the mobile-telephone service provider spun off from BT, formerly British Telecom, in 2001. Telefónica’s bid was the largest overseas M&A deal ever launched by a Spanish company. Banco Santander Central Hispano’s acquisition of Britain’s Abbey National last year was about half the size. The acquisition will help Telefónica to expand, not only into the UK and Ireland but also into Germany, where O2 is the fastest-growing mobilephone company. “We are entering into the two largest markets in Europe with critical mass,” says Cesar Alierta, chairman of Telefónica. He says the deal will give the Spanish company geographical balance, with its expansion in Europe following its foray into Latin America. Earlier this year,

Telefónica acquired a majority holding in Cesky Telekom of the Czech Republic for about $3.3 billion. The Spanish telecom has about 145 million subscribers worldwide, while O2 and its subsidiaries provide service to about 25 million customers. If the O2 deal proceeds as planned, Telefónica could push T-Mobile of Germany out of second place among mobilephone companies with international operations, according to a report by Martin Gutberlet, principal analyst at Gartner Deutschland in Munich. Vodafone of the UK is the largest in terms of subscribers.Vodafone announced on October 31 that it has agreed to sell its 100% interest in Vodafone Sweden to Telenor, a panNordic telecom services provider, for about $1.2 billion. Telenor is the largest telecom company in Norway and has significant international operations. The Telefónica offer for O2, which was made at a 22% premium, puts greater pressure on Vodafone and T-Mobile to achieve growth outside their current markets, Gutberlet says. Expect more mobile operators to be acquired during the next two years, he says. Telefónica’s previous push into Germany, through a joint venture named Quam, ended in failure, Gutberlet says.

F

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Morgan Stanley leads the advisory rankings in telecom M&A deals in the first 10 months of 2005, with transactions valued at $90.4 billion from 43 deals, according to Dealogic. JPMorgan is second with $79.9 billion from 35 deals, and Merrill Lynch is a very close third, with $79.2 billion from 25 deals. In the October 31 transaction, Goldman Sachs and Citigroup advised Telefónica, and JPMorgan Cazenove and Merrill Lynch advised O2. “O2 and Telefónica have no overlapping territory, so they will be able to offer our customers better roaming and better services

around the world,” says O2 chief executive Peter Erskine. The O2 board recommended that shareholders accept the Telefónica offer. The companies expect the deal to be completed by February 2006. The Spanish telecom is unlikely to make any additional acquisitions in the near term and is expected to shelve its previously contemplated offer for Tunisia-based Tunisie Telecom. Telefónica says its strategic goal is to provide its shareholders with both growth and cash returns. —Gordon Platt

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

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

291,045 252,630 194,836 186,707 173,595 894,823*

1 2 3 4 5 -

32.5 28.2 21.8 20.9 19.4

166 121 110 100 119 7,725

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

Adviser Goldman Sachs JPMorgan Citigroup Deutsche Bank UBS Industry Totals*

273,969 256,955 230,938 204,487 176,947 787,664*

1 2 3 4 5 -

34.8 32.6 29.3 26.0 22.5

116 136 96 89 105 8,004

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

Rank Value % Mkt # of ($million) Rank Share Deals 82,488 65,537 64,637 53,585 52,666 271,365*

1 2 3 4 5 -

30.4 24.2 23.8 19.8 19.4

102 58 32 102 26 6,869

Source: Thomson Financial Securities Data

* Figures may not add up, as more than one bank typically obtains credit for any one transaction. 2 0 0 5

D EC E M B E R

5 1

CORPORATE FINANCING NEWS MERGERS & ACQUISITIONS

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CORPORATE FINANCING NEWS MERGERS & ACQUISITIONS

G

L O B A L

GF

F

I N A N C E

TOP MERGERS AND ACQUISITIONS (OCTOBER 1, 2005–NOVEMBER 1, 2005) AMERICAS Date Announced

Target Name (Target Advisers)

10/7/05

Innovene (Goldman Sachs) (Morgan Stanley)

US

10/2/05

Texas Genco Holdings (Goldman Sachs) (Lehman Brothers)

10/10/05

Country

Acquirer Name (Acquirer Advisers)

Ranked Value ($billion)

Country

Description

INEOS Group (Merrill Lynch)

UK

Planned to acquire maker of commodity and specialty chemicals from BP, for cash.

9.00

US

NRG Energy (Morgan Stanley)

US

Unit of Excel Energy definitively agreed to acquire electric utility; includes the assumption of $2.5 billion in liabilities.

8.30

Jefferson-Pilot (Morgan Stanley) (Lazard)

US

Lincoln National (Goldman Sachs) (Lehman Brothers)

US

Definitively agreed to merge with insurance holding company, in a stockswap transaction.

7.67

10/13/05

Vintage Petroleum (Credit Suisse First Boston) (Lehman Brothers)

US

Occidental Petroleum (Goldman Sachs) (Petrie Parkman)

US

Agreed to acquire oil and gas exploration and production company, in a stockswap transaction.

3.96

10/24/05

Independence Community Bank, Brooklyn, New York (Merrill Lynch) (Lehman Brothers)

US

Sovereign Bancorp, Philadelphia, Pennsylvania (Citigroup) (Bear Stearns) (JPMorgan)

US

Definitively agreed to acquire savings and loan holding company.

3.66

10/3/05

Prentiss Properties Trust (Lazard)

US

Brandywine Realty Trust (JPMorgan)

US

Agreed to acquire real-estate investment trust, for cash and stock.

3.50

10/13/05

HCA

US

HCA (Merrill Lynch) (JPMorgan)

US

Owner and operator of hospitals planned to launch a Dutch auction self-tender for 11.6% of its outstanding stock.

2.50

10/24/05

Sovereign Bancorp, Philadelphia, Pennsylvania (Citigroup) (Bear Stearns) (JPMorgan)

US

Santander Central Hispano (Morgan Stanley)

Spain

Agreed to acquire an estimated 20% stake in savings and loan, for cash.

2.43

10/31/05

O2 (JPMorgan Cazenove) (Merrill Lynch)

UK

Telefonica (Goldman Sachs) (Citigroup)

Spain

Agreed to launch a tender offer to acquire provider of telecom services.

31.66

10/3/05

Telewest Global (Deutsche Bank) (Rothschild)

UK

NTL (Goldman Sachs) (Evercore Partners)

UK

Definitively agreed to merge with provider of telecom services.

9.00

10/24/05

JSC Kryviy Rih Mining & Smelting Plant

Ukraine

Mittal Steel (UBS Investment Bank)

Netherlands

Agreed to acquire a 93% interest in steel manufacturer, in privatization.

4.99

10/7/05

Coral Eurobet (Lehman Brothers)

UK

Gala Group (UBS Investment Bank) (Merrill Lynch) (Global Leisure Partners)

UK

Acquired provider of gaming and betting services, in a leveraged buyout.

3.88

10/13/05

Drax Group (Deutsche Bank)

UK

Investor group (Lehman Brothers) (UBS Investment Bank)

UK

Planned to acquire the holding company for Drax Power, Europe’s largest coalfired power plant.

3.65

10/19/05

Drax Group UK (Deutsche Bank) (Dresdner Kleinwort Wasserstein)

Investor group (Citigroup) (Morgan Stanley)

UK

Group comprised of International Power of the UK and Mitsui of Japan planned to acquire Drax Group.

3.53

10/7/05

Boots Healthcare International (Goldman Sachs)

UK

Reckitt Benckiser (Merrill Lynch)

UK

Agreed to acquire pharmaceutical manufacturer from Boots Group.

3.43

10/4/05

Eregli Demir Celik Fabrikalari (Raiffeisen Investment)

Turkey

Oyak

Turkey

Planned to raise its interest to 52.36% by 2.96 acquiring a 49.93% stake in manufacturer of flat-rolled steel sheet from the Turkish government.

10/24/05

Kobenhavns Lufthavns (Merrill Lynch) (JPMorgan)

Denmark

Macquarie Airports (Macquarie Bank)

Australia

Planned to launch a tender offer to acquire the remaining 85.3% it did not already own in airport operator.

2.85

10/20/05

Paladin Resources (JPMorgan Cazenove) (Merrill Lynch)

UK

Talisman Energy Resources (Goldman Sachs)

UK

Unit of Talisman Energy of Canada agreed to launch a tender offer to acquire oil and gas company.

2.36

10/28/05

Tomen (Nomura Securities) (Nikko Citigroup)

Japan

Toyota Tsusho (Merrill Lynch)

Japan

Agreed to merge with wholesale trading company to form a new entity.

4.65

10/13/05

PoweredCom (Nikko Citigroup) (Morgan Stanley)

Japan

KDDI (Mizuho Securities)

Japan

Agreed to merge with provider of Internet data communication services.

2.23

10/14/05

First Credit

Japan

Sumitomo Trust & Banking (UBS Investment Bank)

Japan

Definitively agreed to acquire mortgage bank from subsidiaries of Lone Star Fund.

EUROPE

ASIA

Source: Thomson Financial Securities Data 5 2

D EC E M B E R

2 0 0 5

1.14

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