Business

Saturday August 18, 2012

The E&O price surge – and collapse

A QUESTION OF BUSINESS
P. GUNASEGARAM


There can be no excuse for market manipulation and every instance needs to be investigated and the culprits brought to book

THE recent limit-up in the shares of Eastern and Oriental (E&O) on the back of rumours that Sime Darby will be required to make a general offer (GO) is just one illustration of how share prices can be manipulated.

That incident shows why regulatory authorities must stand at watch always to ensure the integrity of markets and be prepared to take action whenever there is indication that things are not quite right.

The situation arose, when Sime Darby, in a controversial deal a year ago, paid RM766mil cash for a 30% fully diluted stake in E&O. It paid RM2.30 a share, which was a massive 60% premium to the market price at that time, raising eyebrows.

Sime Darby had purchased its stake from three shareholders E&O managing director Datuk Terry Tham; Tan Sri Wan Azmi Wan Hamzah, a close associate of former finance minister Tun Daim Zainuddin and formerly involved in failed property company Land and General; and Singapore-listed GK Goh Holdings.

Minority shareholders of E&O, predictably, were up in arms because they did not receive such a good offer for their own shares. Some of them lobbied strongly for the Securities Commission or SC to rule that Sime Darby should make a GO for the shares.

The situation became more complicated because the E&O chairman, Datuk Azizan Abdul Rahman, the husband of the SC chairman then, Tan Sri Zarinah Anwar. Azizan was reported to have increased his stake in E&O ahead of the Sime Darby purchase but it was not established that he had prior knowledge of the deal.

Such a tale, and true at that, resulted in much controversy and the public gaped open mouthed as it unfolded. In the end the SC, in a decision in which Zarinah did not participate, ruled that Sime Darby need not make a general offer because control of E&O had not changed hands.

That was not surprising because the trigger for a GO under the Takeover Code is 33%. Also, Sime Darby did not make any move to change management.

Further, there have been many cases of companies acquiring just short of a 33% stake in a listed company without making a GO even when there were significant changes in directorships and eventually management. Any other ruling would have meant that the SC was acting inconsistently.

The SC ruling disappointed minority shareholders who could not look forward to their windfall, including those who had accumulated shares in anticipation of a GO. It also meant that Zarinah's husband too would not have got any gains, something overlooked by those who like to point out that he had E&O shares.

That could have become the end of matter, notwithstanding the question of whether Sime Darby paid too much for the shares and whether it could have bought it by other means, but a minority shareholder decided to sue the SC over the issue.

The Singapore Straits Times reported in December that Michael Chow Keat Chye was seeking to overturn the waiver from the GO granted to Sime Darby by the SC.

“If obtaining control of the company (E&O) was not the basis, motive or reason for Sime Darby's acquisition, then it would have acquired the company's shares over a period of time in the open market at a considerably lower price,” the newspaper quoted Chow as saying in his pleadings to the High Court.

One would have thought that everyone would have waited for the court ruling but that was not to be. News website The Malaysian Insider reported eight days ago that the SC would make an about turn and order Sime Darby to make a GO.

It quoted a government source as having said that the decision was made after a review by the leadership under new SC chairman Datuk Ranjit Singh. The E&O share price galloped, hitting limit up at RM1.92, up 30%, on Friday Aug 10.

The SC promptly not only denied the report but said that it was starting an investigation into trading of the shares. Market observers called for an investigation into possible market manipulation of E&O shares. On Monday, E&O shares fell back, giving up its gains, losing over RM400mil in market value.

Here's what is very interesting. On that fateful Friday, 447 million E&O shares, yes 447 million I checked twice, were traded compared to just 29 million shares the previous day. And they amounted to some 40% of the paid-up capital of the company!

In just that one day, fortunes of up to about RM190mil (447x0.42) could have been made or lost, given the share price increase of 42 sen and the subsequent fall.

It may not be as good as if Sime Darby had made a GO at RM2.30 but quite a number of minority shareholders could have made quite a killing, especially if they knew that the story about the SC reversing its story was untrue.

Most certainly this sorry state of affairs needs to be investigated thoroughly and the question of how such a story could have been carried has to be answered. Those who profited illegally from such trades should be brought to book.

Nothing less than the integrity of our markets is at stake here. For too long, market manipulation and insider trading have been excused on the grounds that it makes the market, that it provides excitement and that it provides opportunities to make money for both traders and brokers.

But really, that's not the purpose of the market. The purpose is to provide a place where investors and others can seek a fair value for the assets they buy and sell through a fair, transparent and straightforward process that provides equal information and opportunity to all.

The economic aim for all that is to provide investors with a place to raise capital efficiently so that business can flourish.

It is lamentable that this basic aim of capital markets seems to be lost and it has become a place for wheelers, dealers and plain crooks to make money in less than honourable, and even illegal, ways. What a shame! And will it ever change?

■ P Gunasegaram believes that the dog should wag its tail always. And capital markets should serve the economy.

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