2012 fincom session 2

8/3/2019 2012 FinCom Session 2

1/54

Reporting and financialcommunicationSkema - MSc Finance - 2012

p!r convaincre vos pa"enairemessage dentreprise


2/54

Skema 2012 - Reporting & Financial Communication - Session 2

p!r convaincre vos pa"enaire

Agenda

Regulatory framework

1. General organisation of the Stock Exchange

2. Market players

3. Regulatory environment : European Directives & AMF

4. Valuation models and key consequences for the corporation

2


3/54

General organisationof the Stock Exchange

3


4/54



General organisation

Financial Market Authority (AMF)

Marketinfrastructure

trading

clearing

centralcustody

Issuers /Companies

IPO

Share issue

Bond issue

Public offersetc.

Financialintermediaries

Brokers

Banks

Custodians

Assetmanagement

Mutual funds

Hedge funds

Private Equity

Press & News agencies, Media & journalists, Internet,Financial Analysts, Rating agencies 4

Cash flow

Newsflow

Client /Institutional

investorInsurance

Mutual funds

Pension funds

Sovereign funds

Independentfinancialadvisors

Client /retail investor


5/54



The Stock Exchange is a company

5

NYSE Euronext is a Limited Companypublicly traded

Regulated activity: its business fallsunder European and domesticregulations

NYSE Euronext provides its customerswith a secured transactions system

\ Allowing to buy and sell a wide range of

selected products: equity, debt, bonds,trackers, warrants

\ Fixing prices based on the order book

\ Guaranteeing safe transactions

Selected clients

\ Only approved intermediaries (brokers)are allowed to enter transaction ordersinside the mega IT system

\ Every other players (private andprofessional investors) shall go throughthose providers

Selected products

\ Only approved products can be traded

on the system

Transactions fees

\ Higher traded volumes mean higherturnover, no matter the way market goes


6/54



A competitive company

NYSE Euronext is competing withother financial markets:

\ Europe : London, Frankfort, Madrid,Milan

\ USA : Nasdaq

\ Worldwide : Tokyo, Hong-Kong, Shanghai,Rio, New Delhi

In theory

\ Investors go for the lowest transactioncosts

\ Companies go for the highestconcentration of investors

\ High trading volume allow economy ofscale and cost cutting

Actually:

\ Investors go for the highest growth

prospects\ Companies get listed:

where there business is located

where there is cash available

6

For the past 10 years,Stock Exchange companies tend toconcentrate worldwide


7/54Skema 2012 - Reporting & Financial Communication - Session 2


A transforming company

7

Bourse de Paris

+

Brussels StockExchange

+

Amsterdam Stock

Exchange

=

2000 2002

+

Lisbonne Stock Exchange

+

+

+

+

+

2007 2011

?

= = =




Euronext ParisMarket structure

8




Euronext ParisIndexes

9

CAC Allshares

(500 companies)

Total Euronext list

(about 900 shares)

SBF 250

CAC 40

SBF 120

CAC Small&Mid190

Key figures

Highest market cap :Total 95 billon

Lowest market cap :

95%




Trading system

10

Trader

OrdersCollected


11/54

Market players

11




Brokers / traders

Brokers

\ approved by Euronext to executetransactions

\ Fees on trading on behalf of investors

\ May trade for their own interest

They participate to marketefficiency

\ Counterpart provided

\ Anonymous trade guaranteed

\ Liquidity improved

\ Information provided

4 main activities

Traders: ongoing trading on markets

Sales: direct contact with investors tokeep them informed and suggest ideas

Research: financial analysis, forecast,valuation and recommendation

Corporate: in charge of marketoperations (IPO, share issuance)

Marketing / Corporate access : organisemeetings between investors and issuers

12




Institutional investors

Professional asset managers

\ International leaders in assetmanagement

\ Independent specialised asset managers

\ Portfolio managers for private investors

They work on behalf of:

\ OPCVM funds of funds

\ Insurance companies, pension funds,mutual funds

\ Private investors

Mutual funds (SICAV & FCP)

Manage the money of third parties

Collected via banks, insurance,independent financial advisors

Or via corporations (employees savingplans)

Banks, insurance

Can also invest their own equity

Private Equity

Pension funds

Manage the money of third parties

Mainly foreign investors

Average holding period: 1 year

13


14/54




Employees shareholders

More and more employeesare shareholders

\ Directly: totally free

\ Via FCPE (company saving plans):5-year lock-up

\ Capital increase dedicated to employees

\ Public-to-private operations

\ Stock-options, free shares

For employees share plan is often seenas part of the compensation package

\ Highly sensitive to price changes, which may

impact the social context within the company\ Risk that employees would sell heir share at the

end of the lock-up period

Company saving plansare widely SRI oriented.

2 million employees shareholders

80% of CAC40 companies

representing 3% of the CAC 40

Employees interest may sometimesbe in conflict with shareholdersinterest

Employees know little about theStock Exchange

15




Media

Press agencies:Reuters, Bloomberg, Dow Jones,AFP

\ Very wide audience

\ Main aim: inform quickly

\ Flash news from agencies may be the firstto hit the market, before the official PR

Daily press, finance and economy:Echos, Tribune, Figaro, FinancialTimes...

\ Audience: investors & analysts, economicenvironment (banks, providers, clients)

\ Main aim : information put intoperspective

with previous disclosure

with other sector information

Wealth press:Investir, Le Revenu

\ Audience : private investors

\ Main aim: provide investmentrecommendation

\ Ongoing contacts with financial analysts

Websites:Boursorama, boursier.com,Cerclefinance

\ Audience : private and insitututionalinvestors

\ Main aim: attract their audience

\ Mainly aggregated content

Other media: TV, radio, local press,business press

16




Rating agencies

Dedicated to bond market

\ analyse companies that have issued debt

\ evaluate the solvency riskfor each company and for each kind ofbonds.

\ the rating is key for financing cost

They are dedicated to investors butpaid by issuing companies

\ Avoidable conflict of interest

\ Now put into light with the subprimes, andnow with State debt crisis.

Always disapproved, they are stillkey for many investors

3 main agencies

Fitch

Moodys

Standard & Poors

Notation system

Investment grade : AAA - BBB-

Speculative grade : BB+ - D

Institutional investors can only buyinvestment grade products

17




Extra-financial rating agencies

They are dedicated to SociallyResponsible Investment (SRI)

\ Company analysis based onenvironmental and social criteria, andgovernance

\ Methodology and valuation models are

not standard

\ Data collection is made from publicdocumentation

They provide a rating that issometimes used by analysts and

investors

Their impact on share price andvaluation is difficult to measure

\ No real financial theory on this subject

\ Some investors have decided to eliminatelow rated companies

Many local and global agencies

No standard methodology

New requests as for the informationprovided

Making new set of reportingnecessary within corporations

18


19/54



A widely diverse audience

The publicly traded company has to communicate with very heterogeneousaudiences, according to:

\ Their investment style and time scale

\ Their centre of interest and their level of understanding

\ Cultural patterns

With a guarantee of equal treatment for all

\ timing : communicate to all the same time

\ dissemination means

\ and quality of information

While securing its own interests

19


20/54

Regulatory environment :

European Directives & AMF

20


21/54



Regulation

Every financial markets operate within a regulatory and legal framework

\ Framework may be more or less stringent

\ If more stringent, listing and transaction costs grow heavier for every market participant

\ If less stringent, investors may face higher risk in areas such as minority shareholdersprotection, information transparency, market abuse

Every major financial markets worldwide are under the supervision of nationalindependent authorities dedicated to:

\ Define the regulatory framework of transactions

\ Agree and supervise every market participant:companies, brokers and investors

\ Monitor market operations and transactions

\ Investigate and sanction if necessary

21


22/54



European Regulation integration process

European integration speeds up the market consolidation

\ The adoption of the single currency has fostered cross-border consolidation of the financialindustry

\ With the Economic Union, pan-European industrial groups have emerged\ Many financial affairs have been reported in the recent years, which led to ever tighter

regulatory and legal constraints imposed on every participant

The European Commission is committed to create a unified European capitalmarket

\ Many dedicated Directives: Market Abuse, Transparency, Mifid, IFRS, Prospectus, StatutoryAudit, Investment Services

\ Launch of a new pan-European Authority: ESMA

With the aim to ensure standardised transparency practise and marketefficiency throughout the EU

22


23/54



New European organisation set up in 2009

23


24/54



Regulation framework

24

Domestic lawCode of Commerce : applies to every companyPublic offering status : specific obligationsAd hoc Laws and Acts : Grenelle, TEPA, NRE

Domestic Authority

Regulation power : General Regulation of the AMFAgreement of investors, brokers, intermediates, listed companies, productsSupervision of markets, transactions, informationPowers of sanction

European Law

Directives & Regulations : Market Abuse, Transparency, Mifid, IFRS, Prospectus,Statutory Audit

Adoption of IFRSApplies to all EU countries, after being transposed into national law

International practisesAccounting standard convergenceCo-ordination between regulatory authorities : IOSCO (OICV)Political Co-ordination : G8, G20


25/54

AMF ID



25

Established in 2003(Loi de Scurit Financire)

\ Merger of the Commission des oprations

de bourse (COB), the Conseil desmarchs financiers (CMF) and the Conseilde discipline de la gestion financire(CDGF).

Objective:

\ To strengthen market supervision after the

bursting of the internet bubble\ And to give it greater visibility.

Main functions :

\ to safeguard investments in financialinstruments and in all other savings andinvestment vehicles;

\ to ensure that investors receive materialinformation;

\ to maintain orderly financial markets.

Organisation

\ AMF is an independent public body with legal

personality and financial autonomy.

\ AMF is led by an independent college of qualified

personalities and includes a Sanction Committee

\ AMF is financed by fees due by listed companies

and asset management

\ Approx. 400 staff


26/54



AMF mission statement

26

RegulationRegulations approved

by the Ministry ofFinance

Instructions andrecommendations

Advisory opinions

AgreementEvery kind of Public Offer:

sale, bid, exchange,repurchase

Ensures that all the requiredinformation is available

(Prospectus/InformationNotice)

Gives no opinion on thequality nor the opportunityof operations approved


27/54




27

Supervision

Potential stock market

offences (insider trading,price manipulation, breachof duty to discloseshareholding interests)

Information disclosed bylisted companies: schedule,content, misleading

information

broad investigative powers

Sanction

Injunctions

Administrative penalties(


28/54




28

Communication

Annual report to the

President of the Republicand to Parliament.

Monthly bulletin

Documentary base

Education materials

Ombudsman (mdiateur)

Co-operation

the Parliament

the Government

the Legal Authorities

professional associations

foreign counterparts


29/54


30/54



Categories of Regulated Information anddisclosure deadlines

30

Annual financial report (Registration Document) 4 months

Half-yearly financial report 2 months

Quarterly financial reporting 45 days

Corporate governance and internal control procedures report 4 months

Statutory auditors compensation 4 months

Total number of voting rights / shares making up the share capital 1 month

Share buyback programme 1 month

Weekly statements on share buybacks 7 days

Press release related to the AGM 35 days before

Press release related to the prospectus in case of an issue of afinancial instrument

asap

Permanent information / privileged information asap


31/54



Examples of primary information providers

31
http://www.hugingroup.com/ir_distributionservices.aspx?lang=en-UShttp://www.hugingroup.com/ir_distributionservices.aspx?lang=en-UShttp://www.lesechoscomfi.com/http://www.lesechoscomfi.com/http://www.lesechoscomfi.com/http://www.latribunewire.com/http://www.latribunewire.com/http://www.businesswire.com/portal/site/home/http://www.businesswire.com/portal/site/home/http://www.actusnews.com/http://www.actusnews.com/


32/54


33/54


34/54


35/54


36/54
http://www.cggveritas.com/


37/54
http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/http://www.cggveritas.com/


38/54

Content

Annual ReportFY + 4 months

Annual accounts (parent company & consolidated)

Board meeting report

Persons responsible for the document

Auditors reports

Chairmans report on Internal Control procedures

NRE law information (social & environment information)



38

Transparency Directive


39/54



39

Content

H1 reportH1 + 2 months

Digest consolidated accounts

H1 Board meeting report

- H1 main events and impacts on accounts

- Main risks and uncertainties for H2

- Transactions between related parties

Persons responsible for the document

Auditors report



40/54



40

Content

Quarterlyinformation

Q1, Q3 + 45days

Main events during the period and impact on the financial

situation of the issuer.

General comments (could be only qualitative) on theconsolidated financial situation of the issuer.

Turnover breakdown by IFRS business segment and byquarter + cumulative approach


No obligation to release full quarterly accounts


41/54

Aim of the Prospectus Directive:

\ to provide investors with information necessaryto enable them to make an informedinvestment decision

\ to facilitate cross-border operations thanks toa single passport

What is a Prospectus ?

\ In the case of a Public Offer of Securities on aRegulated Market, a specific set of informationis required

Information about the issuer

Information about the operation

\ The Prospectus is valid only when approved bythe competent supervisory authority of thecorresponding EU country.

Prospectus Content

\ Prospectus = Registration Doc. + Note on thefinancial instruments to be issued + summary

\ Agreement process: draft prospectus issubmitted for approval by AMF (check amongothers if the needed documentation isincluded). operation cannot start before it

gest the agreement number

\ Dissemination process : should be madeavailable free of charge to anybody asking forit (press, web site, hard copy, AMF, )

Single Passport

\ Once a Prospectus have been certified by

one supervisory authority, it is regarded asvalid in all EU countries

\ Companies can then issue securities in foreigncountries (ex. a listed company in Franceissuing bonds in the UK)



41

Prospectus DirectiveFrom July 2005 for listed companies on a regulated market


42/54

1. Persons responsible for the referencedocument

2. Statutory auditors

3. Selected financial information

4. Risk factors

5. Information about the issuer

6. Business overview

7. Organisational structure

8. Property, plant and equipment

9. Operating and financial review

10. Capital resources

11. Research and development, patents andlicences

12. Trend information

13. Profit forecasts or estimates

14. Administrative, management and supervisorybodies and senior management

15. Remuneration and benefits

16. Board practices

17. Employees

18. Major shareholders

19. Related party transactions

20. Financial info. concerning the assets andliabilities, financial position and P&L of theissuer

21. Additional information22. Material contracts

23. Third party information and statements byexperts and declarations of any interest

24. Documents on display

25. Information on holdings



42

Prospectus DirectiveRegistration Document : table of contents : appendix 1 of EC regulation 809/2004


43/54

Market Abuse DirectiveFrom April 2004 for listed companies on a regulated market



43

Aim of the Market Abuse Directive:

\ to improve the rules relating to market integrity throughout the EU.

\ to restore confidence on the financial market, after the burst of the Internet bubble.

\ to preserve the competitiveness of European stock exchanges

Consequence : Implementation of an European legal framework to uniformthe concepts, the definition and the obligation

\ Inside information

\ Market manipulation


44/54

Market Abuse DirectiveFrom April 2004 for listed companies on a regulated market



44

Market manipulation :

\ (a) transactions or orders to trade:

which give false or misleading signals

about demand, offer or price of anasset

which secure the price of an assetat an abnormal or artificial level,

\ (b) fictitious transactions or orders, or anyother form of deception or contrivance;

\ (c) dissemination of information through

the media, including the Internet, whichgives false or misleading signals,including rumours and false or misleadingnews

Inside information :

\ information of a precise nature which hasnot been made public, relating, directly orindirectly, to one or more issuers of

financial instruments

\ and which, if it were made public, wouldbe likely to have a significant effect onthe prices of those financial instruments orrelated derivative.

f i i


45/54



Examples of market manipulation

Secure a dominant position over the supply of or demandin order to fix, directly or indirectly, purchase or sale prices

the buying or selling of financial instruments at the close of the marketwith the effect of misleading investors acting on the basis of closing prices,

taking advantage of occasional or regular access to the traditional or electronic mediaby voicing an opinion about a financial instrument (or indirectly about its issuer)while having previously taken positions on that financial instrumentand profiting subsequently from the impact of the opinions voiced on the price of thatinstrument, without having simultaneously disclosed that conflict of interest to the publicin a proper and effective way.

45

k t b i ti


46/54

Market Abuse DirectiveManagement of inside information



46

inside information (released through the regulated information process)

\ Whenever an issuer has precise information at its disposal concerning itself, that would havea material impact on the share price if it were known by the market, the disclosure of thatinformation to the public is necessary as soon as possible.

\ An issuer may under his own responsibility delay the public disclosure of inside information,such as not to prejudice his legitimate interests provided that such omission would not be

likely to mislead the public and provided that the issuer is able to ensure the confidentiality ofthat information.

The issuer is required to establish and keep updated an inside information list

\ All persons having access to inside information.

\ It could be composed of employees (finance department, development, executivecommittee, ) and external stakeholders (auditors, lawyers, .).

\ It has to be sent to the AMF upon request


47/54

E ti t t ti


48/54



48

Executive management transactionsGeneral Regulations of the AMF - from 2005

Regulation is set up to prevent insiders trading and market manipulation

Executive management and board members are always insiders

They are submitted to specific disclosure rules

\ Transactions shall be declared to the issuing company and to the AMF

(7 trading days notice after the execution of the transactions)\ A summary of those transactions shall be included in the Management Report part of the

annual report

A wide range of persons is subject to this regulation

\ Board, Executive Committee, executive managers

\ Their family members: parents & children or other members living in their house\ Any company or legal entity related to them (holding, trust)

A ti h i


49/54



Anti-rumour mechanismGeneral Regulations of the AMF - from October 2006

In the case that the market in an issuers securities shows significant unusualvariations in price or volume

AMF is entitled to to request that any entity in respect of which there isreasonable cause to think that it is preparing a takeover bid make adeclaration of intent

\ If the concerned entity denies to prepare such operation (or fails to answer),that entity may not launch an offer on the company concerned before 6 months

\ If the entity declares its intention of making a takeover bid,it must release a PR detailing the characteristics of the bid within the time set by the AMF.

\ Failing this, the entity is deemed to have no intention of making a takeover bid.

The publication of the PR marks the beginning of the pre-offer period.

49


50/54

Valuation modelsand key consequences

for the corporation

50

Wh t d i t d b t?


51/54



What do investors wonder about?

What does the company?business, sector, size, position on market,geographic footprint

Who controls the company ?identity, financial soundness,shareholders intentions, topmanagement, auditors

Is the company profitable ?profitability level and ratio, debt

position, dividend policy

What are the companys prospects ?macro-economic projections, marketgrowth, competitive advantage...

How is the company stock marketevolving ?who are the buyers/sellers, whichfrequency, which way, how much is itvalued by the market

51

Growth Profitability Gearing Dividend Cash Capex Prospects Price

Wh t i th i t t i


52/54



What is their constant aim:estimate the fair value of any asset class

3 major valuation methods

\ Historical value of assets + sum-of-the-parts

\ Relative value models determine value based on the observationof market prices of similar assets

\ Absolute value models that determine the present valueof an asset's expected future cash flows (DCF method)

Every method rely on a wide range of information and hypothesis

\ Reliability and integrity of financial information

\ Good understanding of activities and strategic issues

\ Growth prospects / competitive environment

\ Business plan

By nature, management is better informed than investors=> information asymmetry

52

Case st d


53/54



Case study

Zodiac

Beneteau

53

Conclusion


54/54


Conclusion

Financial communication aims to address investors concerns

\ What is the fair value of the company?

\ Is there a gap between the fair valkue and the stock price?

While preserving specific interest:

\ of the company: confidentiality, financing costs

\ of the majority shareholders: valuation and control

\ of the staff members: employees share plans, impeachment process

And making sure they comply with the legal and regulatory framework