In what also represents the largest ever international equity offering from Taiwan, United Microelectronics Corp (UMC) raised $1.3 billion this Monday on the pricing of its debut ADR. Behind fellow foundry manufacturer Taiwan Semiconductor Manufacturing Company (TSMC), the company becomes the second from the Island Republic to obtain an NYSE listing and does so after pulling back from issuing earlier this summer when market conditions were also poor.
Although the company managed to maintain a stable share price in the immediate run-up to pricing, the overall market remained under pressure, leading bookrunner Morgan Stanley Dean Witter to adopt a cautious approach to syndicating a book that closed two to three times covered.
Of a total order book just shy of 150 accounts, officials report that about six key investors placed orders above the $200 mark, with tier one and tier two investors accounting for about 70% overall. In geographical terms, there was a rough split of 60% US, 20% Asia and 20% Europe.
"Because the backdrop was so volatile, we were very, very careful to limit the amount of paper that went to hedge funds, with the result that less than 10% overall went to this type of account," comments one banker.
One of the most interesting ratios was that roughly 20% to 30% of orders comprised switches against TSMC, whose ADR premium to underlying shares dropped to 32.3% on the day of pricing from 47% only three days earlier. It has since jumped back to the 44.99% level again.
UMC itself achieved a 15% premium to an underlying share price of NT$78, the exact mid point of a 10% to 20% indicative range. Some 90 million ADS units were sold, on a one-for-five basis at an issue price of $14.35. There is also a very small two million unit greenshoe.
Alongside the lead, joint lead was Credit Suisse First Boston, with ABN AMRO, DLJ, ING Barings and Lehman Brothers as co-leads.
Some syndicate members argue that a 15% premium was little too greedy and that the company suffered for it in immediate secondary market trading. The ADRs opened below issue price at $13.45, dropping to a low of 12.9375, before recovering to a trading price of $14.9375 in New York on Thursday.
Others, however, point out that although the ADR's dropped, the underlying share price performed even more badly, sliding 4.5% on Tuesday and leading the premium between the two to widen out to 26.45% at one point.
Lead officials also say that although volatility caused some funds to place limit orders on the amount of paper they were willing to accept, there was little price sensitivity within the indicative range. Christopher Legallet, CIO of Newport Pacific Management in San Francisco concurs. The company has $3.2 billion under management and participated in the transaction.
He comments, "I don't think that we would have paid more than a 15% premium and we would have preferred 10% given the underlying weakness, but 15% was reasonable enough. We are long term growth investors and we believe that the semiconductor cycle will be good for some time to come."
In Asia, by contrast, analysts and some fund managers continue to query why UMC and TSMC should trade at any kind of premium at all. Vaughn Chang of Jupiter Asset Management in Hong Kong declined to buy scrip.
He says, "UMC is a core holding for us, but only in the domestic market. We had no desire to participate in the ADR, although brokers tried to pitch us the premium expansion story. I agree that UMC's premium to its local shares may strengthen by several percentage points and TSMC may decline slightly over time. But we're not really interested in playing that game. We do like the fundamental strategy and business outlook of both companies, however."
Legallet responds that US fund managers often prefer to deal through an ADR because it is more convenient. "Taiwan's capital markets are still relatively closed," he explains. "A lot of funds just don't think it's worth the effort getting a quota and investing in the market directly. But this will change as Taiwan opens up further."
Over time, analysts also generally agree that any premium differential between TSMC and UMC will even out, with both settling around the 30% level. In the interim period, most also agree that a 10% to 20% differential between the two is probably correct, although some favour UMC over TSMC.
As Abraham Leu at Prudential Bache in Taiwan puts it, "My point of view is that investors should concentrate more on earnings growth where UMC is a clear leader, rather than overall market share, where TSMC still dominates."
By the end of the year, UMC projects that it will operate seven 8" wafer Fabs, with total wafer capacity reaching 2.4 million against TSMC's projected 3.4 million. On a ratio of market capitalisation/annual wafer capacity UMC is trading at a 12% discount to TSMC, where Leu thinks it should be flat.
Against the Philadelphia Semiconductor Index against which most investors measure value, both companies have underperformed. Where the index is currently up 72% year-on-year, TSMC's underlying share price is only up 12% over the equivalent period and its ADR 9%. UMC is said to have done slightly better at 20%.
Some analysts argue, however, that most valuations in Taiwan are currently pretty meaningless give the indiscriminate selling pressure of local investors. "The best thing that has come out of this transaction is that should the Taiwanese equity market still be in the gutter this time next year, then at least UMC now has a real market to raise funds in," says one.
