Re: Global Equity Markets: The Case of Royal Dutch and Shell
Structure: The Royal Dutch/Shell Group is different because it appears that it is functioning as a single company instead of two separate companies. Yet, they are functioning as two separate companies. The Shell Company in the Netherlands, the Shell Company in the UK and the Shell Petroleum Company in the USA all appear to be maintaining their own identities in their respective countries. The Royal Dutch and Shell Company share equally in the Shell Company in the Netherlands, The Shell Company in the UK and the Shell Company in the U.S. They are not separate companies since they are linked by corporate charter. There is a ...view middle of the document...
It also allows companies to avoid some of the legal approval process by the SEC. Investors may shy away from buy foreign stocks but an ADR makes the process simple. ADRs are equivalent certificates traded in the U.S. and issued in exchange for the shares of foreign entity kept at a depository bank Companies that issue ADRs make their stock available to the U.S. market and investors and eliminate some of the barriers to acquiring foreign capital.
Price Differential: The price differential of Royal Dutch/Shell according to Exhibit 8 is Europe 13.80% and New York 11.71%. Shell trades at a significant discount to Royal Dutch and Europe offers a small discount .01% to New York. One reason for the price differential may be the taxes in the different countries. Exhibit 3 shows that Royal Dutch is owned mostly in the U.S. and in the Netherlands while Shell is owned mostly in the UK. The 60/40 split between Royal Dutch and Shell may be because of tax laws. The case mentioned that “pension funds sometimes faced tax asymmetries from with respect to the two stocks.” It went on to say that in the Netherlands pension funds were exempt from withholding taxes on Royal Dutch but not on Shell.
Another reason may be the differences in currency for the respective countries which would result in a difference in dividends. According to the case Exhibit 10 shows the difference between Royal Dutch and Shell ADR returns from New York. “The return differential was regressed on three indices and two exchange rates.” The table show the beta based on local currency.
Arbitrage Opportunities: Based on the price differentials I believe that there are arbitrage opportunities. One arbitrage transaction is to sell your stock in Royal Dutch and buy shares of Shell stock. The investor would then sell his/her shares of Shell stock and buy Royal Dutch. Another arbitrage transaction would be to short Royal Dutch stock. The investor would then buy Shell and eventually sell Shell and buy back Royal Dutch. Another arbitrage opportunity would be to enter into the swap agreement that was mentioned in the case in which you would exchange the total return on one instrument for the total return on another, plus or minus a fee, where the total return on an instrument is its price appreciation or loss during the holding period, plus interest or dividend income paid on the instrument during the holding period. The third option would be to enter into a swap with the Wall Street firm.
Net Payoffs: The case stated that the one way commission is 5cents per share. New York has a two way commission of 10 cents giving us a 25 cent commission. Shell...