Monday October 22, 2012

Speculators hinder mergers and acquisitions

Raison D'etre - Risen Jayaseelan

We need to ‘outplay’ them in favour of longer-term shareholders

SPECULATIVE investors play a role in injecting life into markets. They are risk takers that dig deep into the corporate world looking for even the slightest opportunities to make a quick buck on the bets they take.

They thrive on being the first to get hold of market-sensitive information. And often times, they and those who feed them information are the bane of the actual businessmen looking to embark on mergers and acquisitions (M&As).

This is a simple illustration of when that happens: when the owner of a company (company A) has finally identified a takeover target (company B) after much study of the latter, a possible deal is poised to take place.

Theoretically at least, with company A taking over company B, greater value is supposed to be created, with the end result being that the shareholders of both companies gaining from this possible merger.

But in many instances, information is leaked into the market, resulting in a spike in the target company's share price.

That, in turn, may likely impact the deal as the valuation numbers have now changed. The buyer then has to re-do the numbers.

Can the buyer now still afford to pay a premium to market for the shares of the target company? Some buyers have walked away ending that possible deal.

It is possible that the target company's share price, over time, then retreats to its pricing levels before the M&A talk.

It is likely in that scenario that the early speculators may have made a quick buck but the later ones would have suffered a loss. But it can be argued, that the true losers in that deal were the longer-term shareholders of both company A and company B.

They have missed the opportunity of owning a piece of a stronger and higher valued merged entity. All thanks to leaked information and opportunistic speculative investors.

This, of course, isn't anything new. Markets have for a long time worked like this and the Malaysian market certainly isn't the only one affected by this.

But here's an admittedly brash idea to “outplay” the speculators, in favour of the longer-term shareholders of companies do away with a particular disclosure rule pertaining to M&As.

Malaysia's Takeovers Code stipulates that a potential offeror, who says that he is not intending to launch a takeover of a particular company, cannot launch any takeover of the said company within six months of such a declaration.

If this rule did not exist, and if news of company A taking over company B had leaked into the market causing company B's share price to spike, then a simple way to rid the presence of speculators in the picture is for company A to come out to say that no, it's not interested.

Company B's price should then fall back to the pre-M&A level. And soon after, company A, unknown to the market, could re-launch its takeover bid at the more realistic valuations.

Similarly, company B's board or owners should be allowed to blatantly deny that it is interested in any sale but surreptitiously still continue working on the deal, only to announce it when the market is most unaware.

I am fully aware that such a proposition flies in the face of the full disclosure concept that our market has been moving towards. And regulators and market watchdogs may find it appalling that this proposition not only enables corporations to “hoodwink” the market, it also encourages them to do so!

But the point remains that real businessman are often times stymied from embarking on M&As because of leaked information and speculative buying of target company shares. More thought and effort needs to go into preventing this from happening.

Business news editor Risen Jayaseelan knows of at least three entrepreneurs-cum-owners of listed companies who have in recent months been negatively impacted by rising share prices of their own companies or their M&A targets.

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