Novo is a Danish multinational firm that produces industrial enzymes and pharmaceuticals (mostly insulin). In 1977, Novo's management decided to "internationalize" its capital structure and sources of funds. This decision was based on the observation that the Danish securities market was both illiquid and segmented from other capital mar-kets. In particular the lack of availability and high cost of equity capital in Denmark resulted in Novo having a higher cost of capital than its main multinational competi-tors, such as Eli Lilly (U.S.) Miles Laboratories (U.S.-a subsidiary of Bayer Germany) and Gist Brocades (The Netherlands). Apart from the cost of capital, Novo's projected growth opportunities signaled the eventual nccd to raise new long-term capital beyond what could be raised in the illiquid Danish market. Since Novo is a technology leader in its spe-cialties, planned capital investments in plant, equipment, and research could not be postponed until internal financing from cash flow became available. Novo's competitors would preempt any markets not served by Novo. Even if an equity issue of the size required could have been raised in Denmark. The required rate of return would have been unacceptably high. For example, Novo's price/ earnings ratio was typically around 5; that of its foreign competitors were well over 10. Yet Novo's business and financial risk appeared to be about equal to that of its com-petitors. A price/earnings ratio of 5 appeared appropriate for Novo only within a domestic Danish context when com-pared with other domestic firms of comparable business and financial risk. If Denmark's securities markets were integrated with world markets, one would expect foreign investors to rush in and buy "undervalued" Danish securities. In that case firms like Novo would enjoy an international cost of capi-tal comparable to that of its foreign competitors. Strangely enough, no Danish governmental restrictions existed that would have prevented foreign investors from holding Dan-ish securities. Therefore, one must look for investor perception as the main cause of market segmentation in Denmark at that time. At least six characteristics of the Danish equity market were responsible for market segmentation: I) asymmetric information base of Danish and foreign investors. 2) taxa-tion. 3) Alternative sets of feasible portfolios. 4) Financial risk, 5) foreign exchange risk and 6) political risk...................
Read the above Novo Industri N/s case study and address the following
1. What were the impacts on novo as a result of operating in a segmented market?
2. What were the primary causes of the market segmentation?
3. Ultimately, what actions did novo take to escape its segmented market?