Monday, 30 March 2015

Weekly roundup

Regarding Cliq: The Edge wrote an article "Potential adjustment to price of Cliq’s QA". Some snippets and comments:

Ahmad Ziyad said that if a disparity between the oil price and the purchase price still exits in March, the assets’ price tag may be adjusted by 5% of the current amount, or no less than US$218.5 million.

Five percent adjustment is not that much, the impact of the lower oil price on the price should be much higher, in my opinion.

When asked why Phystech was willing to sell its assets, Ahmad Ziyad said: “They think that all this while they have not realised the full potential of the field.”

That is not what I hoped to read, better something like: "there is enormous potential, but the company has not enough funds to explore, so Cliq will purchase new shares in the new SPV with which new exploration wells will be drilled, old machinery will be replaced by new, efficient ones".

I have been very critical of SPACs from the start, I am afraid I have not yet seen any reason to change my mind in this matter.

MSWG wrote in their newsletter of March 27, 2015:

That is indeed good news. However, I like to note that Amin is a large shareholder of Integrax. For small shareholder (in the absence of large shareholders fighting to get a better deal) there should also be enough venues to participate in shareholders activism. In some countries I have noted class action suits, taken up by an organisation similar to MSWG, with large amounts of minority investors chipping in. That scenario still appears far away in the Malaysian context.

Kinibiz wrote: "At SP Setia, a conflicted ex-chief judge", a snippet:

Can the chairman of a public-listed company rightly hold shares in another public-listed company — a direct rival at that?

Common sense says no. In fact the law also says this should not be. But this scenario is exactly what has unfolded with regards to SP Setia chairman Zaki Azmi.

Zaki, a former chief justice, holds 19.12 million shares in Eco World Development Group as of Jan 22, according to the latter’s latest annual report. On that date this corresponded to 3.77% of Eco World’s outstanding shares base, making him the third largest shareholder, and was worth RM37.2 million at Friday’s closing price of RM1.95 per share.

And it was not just Zaki. Eco World’s latest annual report also reveals that SP Setia’s two foremost management executive — acting CEO Khor Chap Jen and acting COO Wong Tuck Wai — holding 2.29 million and 1.53 million shares respectively as of Jan 22 this year. The shareholdings come to 0.45% and 0.3% respectively of the outstanding shares base at that point.

This raises pressing questions of conflict. Foremost is why Zaki and company are apparently turning their backs on the obligation for company directors to actively avoid positions of conflicting interests under Section 132 of the Companies Act, which stipulates that directors must use “reasonable diligence” in the discharge of his duties.

Worse, this rubs salt onto SP Setia’s festering wounds after a massive talent drain to Eco World, which is now counting a legion of former SP Setia men — all the way up to the top — as among its directors, top executives and most of its workforce.

It is indeed rather strange and worrisome, the investments in Eco World of the persons mentioned above are substantial. Will that have an impact in their acting in the best interest of SP Setia?

Sunday, 29 March 2015

Singapore in mourning

Singapore today bade farewell to its founding father in a most impressive way.

Even the gods were crying, rain pouring down during Mr Lee's last trip through the city.

Rest in peace, Mr Lee.

Saturday, 28 March 2015

To Cliq or not to Cliq? (2)

Regarding my previous posting about this matter, it seems I wasn't the only person who had questions regarding Cliq's announcement.

Bursa queried the company with 8 highly relevant questions, which Cliq answered, some in a convincing way, some less so.

5. Justification in using the URALS oil prices forecast in the economic modelling, given that the price of oil has dropped substantially in the recent months

The oil price estimates included in the economic modelling was based on URALS oil price and the typical spread of Brent oil price to URALS oil price is about USD2 per barrel. In the middle of  January 2015, there has been a reduction in Brent oil price to around USD47 per barrel and the Brent oil price has since recovered to around USD56 to USD59 per barrel in March 2015.

As a result from the current low global oil prices, AGR believes that the demand for energy resources from the industries will increase, and hence, in the opinion of AGR, this is expected to further spur oil prices for the next 5 to 6 years. In addition, political instability in the Middle East may also result in a reduction in global oil supply and this is expected to further support the recovery of global oil prices.

The price of Brent Oil over the last six months:

It shows quite a difference, the current price (USD 56.41) is about 20% lower than the one used in the first announcement (USD 70.90). Since there are fixed expenses the gross margin must therefore be much lower.

AGR believes that the oil price will rise in the next 5 to 6 years. That might happen, but still, the base price is 20% lower, which should have quite a large impact on the near future projections, and thus the DCF valuation.

7. The financial information as required under Paragraph 19(d)(ii) and (iii) of Part A and Paragraph 1 of Part H, Appendix 10A of the Main Market Listing Requirements of Bursa Securities 

The financial information set out in Section 3 of the Announcement is for information purpose only and may not reflect the future financial performance of the SPV as the BTA entails the transfer of the Vendor’s assets (excluding liabilities, payables, cash and receivables) including Subsoil Use Contract, contractual obligations and certain existing employees to the SPV. As such, the SPV does not assume any prior liabilities arising from the Proposed Acquisition. In addition, the SPV has yet to be incorporated as at to date.

The disclosure of financial information of Karazhanbas Northern Field based on the financial statements of Phystech pursuant to Paragraph 19(d)(ii) and (iii) of Part A and Paragraph 1 of Part H, Appendix 10A of the Main Market Listing Requirements of Bursa Securities (i.e. profit before tax, profit after tax and minority interest, shareholders’ funds and total borrowings) may not be applicable in view that the Company is only acquiring the asset of Phystech.

That might be strictly speaking correct, but is still disappointing. The assets are generating financial numbers in the Profit & Loss and are valued in the Balance Sheet, and one would thus be interested in the full picture, not in some "selected financial information".

For instance:
  • How much tax is the company currently paying?
  • What is the current depreciation?
  • At what value are the assets in the books?
  • For how much money have they been acquired, and when?
  • What is the current paid-up capital of the company?
  • How much cash does it have?

Some of these will help in evaluating the assets to be acquired in the SPV, others are meant to form an opinion about the company that CLIQ will work together with (for instance its ability to keep its side of the bargain).

As mentioned before, a proper snapshot (past and current, balance sheet, profit & loss, description) of a company should not take more than a single page.

8. Financial information of Karazhanbas Northern Field based on the latest unaudited accounts for 2014

The financial information of Karazhanbas Northern Field based on the latest unaudited financial statements of Phystech for the FYE 31 December 2014 is not available at this juncture as the management of Phystech is in the midst of finalising the same.

That is disappointing, negotiations started in December 2014, that should give the company ample time to have the books ready by now.

Please note that The Edge wrote that "In 2013, Phystech recognised earnings before interest, taxation, depreciation and amortisation (Ebitda) of US$22.61 million.".

That is incorrect, it is unfortunately only RM 22.61 million.

Friday, 27 March 2015

Malaysia scores dismal on "open government"

The World Justice Project published its Open Government Index 2015. In the overall score, Malaysia ended on a dismal 88th place out of 102 countries.

Malaysia scored well on "Publicized Laws and Government Data", but badly on "Right to Information", "Civic Participation" and "Complaint Mechanisms".

This kind of research always has a subjective element in it, but overall (from own experience) I would agree with the above findings: excellent laws, but what is the use of it when enforcement and transparency are so lacking.

I guess most people have similar experiences with a complaint to a government agency that ended in a drawer somewhere and never came out of it. The reason why many people don't even bother anymore to file a complaint.

More information can be found here.

Wednesday, 25 March 2015

To Cliq or not to Cliq?

Cliq Energy has finally announced its qualifying acquisition, an investment in an oil and gas company based in Kazakhstan.

Regular readers know I am not "exactly" a fan of DCF valuations. Unfortunately, it has been used in this case:

The price of oil that is used in the DCF model is the prevailing price in December 2014.

However, the price of oil has since drastically fallen:

I certainly hope that a new DCF will be calculated, based on the recent price of oil. It will give a much lower outcome, is my estimate. Hopefully the details of the DCF will be published, although I doubt that.

Cliq had a long time to come up with its proposal, so we can expect lots of financial numbers.

Unfortunately, it is very disappointing:

Some comments:
  • Not a single balance sheet number of Phystech;
  • Some profit & loss numbers, however no PBT or PAT but the dreaded EBITDA (whenever they are presented, the earnings are much lower than the EBITDA number, we have to wait and see if that is also the case here);
  • EBITDA for 2013 only RM 23 Million, does not really look exciting;
  • Numbers are only up to December 2013 (15 months old), even tiny ACE-listed companies have already announced their (unaudited) December 2014 numbers a month ago, why can't Phystech give their unaudited numbers?

I have seen excellent formats provided by research houses where lots and lots of relevant data regarding a company is packed in one single page. Although the announcement of Cliq counts 26 full pages, relevant numbers are very scarce, lots of important (financial) information is left out.

We must hope that the official brochure to Cliq's shareholders will be of a much higher quality.

Tuesday, 24 March 2015

Tanjung Offshore: more twists and turns

Tanjung Offshore's storyline seems to have more twists and turns than a whole season of Game of Thrones.

Even Transparency International Malaysia (TI-M) entered the fray, according to this news article.

Although Tanjung Offshore is a very interesting case to follow from a corporate governance point of view, TI-M might just want to focus on the big ticket items like 1MDB, which might be literally one thousand times bigger than Tanjung Offshore: the issues in the former company seems to run in the billions, the issues in the latter company in the millions.

Yesterday Tanjung Offshore made fourteen announcements in one go:

The Malaysian Insider wrote about the issues, some snippets:

According to a filing with Bursa Malaysia today, the withdrawal notice from the three parties – Tan Sri Tan Kean Soon, Datuk Dr Nik Norzrul Thani N. Hassan Thani and Datin Norhafizah Mohd Nordin – was received after the uplifting of suspension of three officers – Tan, Muhammad Sabri Ab Ghani and Harzani Azmi with immediate effect.

Interestingly, the board of directors has also redesignated Tan as its new executive director, replacing Muhammad Sabri who has resigned from the board today. Tan was previously a non-executive director.

Apart from Muhammad Sabri, who resigned for "personal reasons", George William Warren Jr has also resigned as independent non-executive director “to explore other opportunities elsewhere".

In a press statement, Tanjung said the board welcomed Datuk Mohd Hafarizam Harun as its chairman, after appointing him an independent non-executive director today. Three others were also appointed as independent non-executive directors, namely Nik Norzrul Thani, Datuk Maheran Mohd Salleh and Tan Sam Eng.

Meanwhile the Audit Committee, in consultation with Bursa, had on March 20, 2015, appointed Ferrier Hodgson MH Sdn Bhd as a special auditor to review matters highlighted by the Independent Committee (IC).

To recap, Tan had initially planned to remove Warren and two other directors – Datuk Ab Wahab Ibrahim (non-executive director) and Shahrizal Hisham Abdul Halim (independent non-executive director) – in the proposed EGM. Warren, Wahab Ibrahim and Shahrizal Hisham were the members in an IC established by Tanjung’s board of directors on Jan 8 this year.

The reasons given for the resignations ("To explore other opportunities else where." and "Personal reason.") are disappointing given what happened in the past, I had expected some more zest.

I guess that we have to wait for the outcome of the investigations by the special auditor and by the authorities.

Sunday, 22 March 2015

Liew Kee Sin: there is a conflict of interest

For the first time it seems that Liew Kee Sin has admitted that there is a clear conflict of interest in his business dealings.

In an article (page 18) in The Sun:

Liew was of course very much involved in property developer SP Setia, where troubles started about 3.5 years ago when PNB made an offer.

While still at SP Setia Liew was getting involved in another property developer, Eco World.

Later on Liew resigned from SP Setia, but still stayed on as chairman for the Battersea Project Holding in London.

And now Liew is involved in Eco World International Co. Ltd, which will also develop three large scale projects in London.

Liew allegedly said “There is conflict but I declare (to the authorities) and I’m transparent about it,” The Sun reported Liew as saying. “It is up to the shareholders (to decide).”

Not sure which shareholders he was specifically referring to, since he is involved in so many companies.

First and foremost this appears to be an issue that has to be handled by the boards of directors of all companies where Liew is involved.

The question is of course, how does Liew deal with all the inherent conflict of interest situations. For instance:
  • If he receives a juicy project proposal, to which company will he refer this deal?
  • If a very credible person in the industry reaches out to him for a job, which of his companies will he recommend?
  • What will he do is he receives confidential information in a board meeting, which might also apply to any of the other companies he is connected?

All not exactly far fetched scenario's.

Every director has a fiduciary duty to act in the best interest of his company, how can one juggle this duty for so many companies (engaged in the same industry) at the same time?

One publication that has consistently been critical about this conflict of interest is Kinibiz. It's latest article (behind pay wall) in this matter can be found here. A previous 5-part series of articles can be found here, with the most important questions being asked here.

I am afraid I very much agree with the critical comments brought up in those articles.

Unfortunately, in the Malaysian context, this conflict of interest is not exactly unique, it occurs quite often. The many Related Party Transactions (and probably many more transactions that are related but not indicated as such, which is even worse) are a testament to that.

It has always been quite puzzling for me why founders in Malaysia not just focus their efforts on one single company, but seem to be involved in many companies, with large overlaps in business dealings.

Sunday, 15 March 2015

"Flash Boys", a year after

I wrote before about "Flash Boys".

Michael Lewis wrote a follow-up on his book, one year after it's publication. One snippet:

His [the president of BATS, one of the exchanges] defining moment came when Katsuyama asked him a simple question: Did BATS sell a faster picture of the stock market to high-frequency traders while using a slower picture to price the trades of investors? That is, did it allow high-frequency traders, who knew current market prices, to trade unfairly against investors at old prices? The BATS president said it didn’t, which surprised me. On the other hand, he didn’t look happy to have been asked. Two days later it was clear why: it wasn’t true. The New York attorney general had called the BATS exchange to let them know it was a problem when its president went on TV and got it wrong about this very important aspect of its business. BATS issued a correction and, four months later, parted ways with its president.

My own opinion: I don't think that HFT (High Frequency Trading) is a real problem for long term investors. It might be though for short term traders who turn over their holdings very often.

HFT does not add anything to the economy, it merely transfers some wealth from some (the huge majority of the investors) to some others (the HFT players). Exchanges will profit from the higher turnover in the short term. Not sure if they profit in the longer term though, some investors might not like HFT and either abandon the exchange or lower their turnover.

Exchanges have an important role in growing the economy of a country. They should be non-profit organisations, focused on regulation an orderly market, fair to all participants. HFT clearly doesn't belong in that picture.

Exchanges could make HFT impossible or at least very difficult by certain implementations, like delaying orders and/or prices, increasing their commissions, randomly matching orders in a batch, making sure that HFT traders do not have more information then other market players, etc. I am sure that clever people in the industry can come up with some effective methods.

HFT traders could then focus on something more meaningful, like coming up with a cure for cancer, building new technology, etc.

Unfortunately, most exchanges are privatised and therefore are looking to maximize their profits, often with the focus on the short term.

Saturday, 14 March 2015

Fairfax: "tech bubble will end very badly"

Fairfax Financials posted their year report, in it the Chairman's letter to the shareholders.

Some people call V. Prem Watsa the "Canadian Warren Buffett".

People who are heavily invested in the tech-sector might want to take note of the below excerpts, and especially the last line:

Friday, 13 March 2015

Markets also need negative viewpoints (2)

Quite good article by Reuters about companies being targeted by short sellers or negative reports, in particularly about Noble Group.

Not in the sensational "Short sellers cause havoc, causing huge losses to orphans and widows" kind of style that I (unfortunately) noticed several times in newspaper articles, but much more balanced.

"Noble's concession gives clout to maverick researchers"

Some snippets:

"Almost all of the investment research or opinions disseminated to the market fail to properly scrutinize listed companies. In fact, they are usually nothing more than a dressed up regurgitation of management drivel," Soren Aandahl, director of research at short-seller Glaucus Research, told Reuters.

Sell-side analysts - who recommend stocks to clients - often face a conflict of interest given the banks many work for seek advisory fees from the firms they analyze, Aandahl said.

Activist short-sellers such as Glaucus and company-watchers like Iceberg Research have stepped in to assume the role of corporate antagonists. Short-sellers sell borrowed shares, buy them back at lower prices and pocket the difference. To push a company's share price down, they bring to light, for instance, what they perceive as misleading accounting.

Tanjung Offshore filing a 100M lawsuit

I posted a few times about Tanjung Offshore. It seems the saga is continuing, according to this article in The Star: "Tanjung Offshore sues director and 6 others for RM100m".

A snippet:

Tanjung Offshore Bhd is suing its director Tan Sri Tan Kean Soon and six others for alleged defamation arising from remarks he made in articles published in the media on Feb 9.
The company said it was seeking damages of RM100mil.

The suit was filed on Feb 24, 2015 and it served on the seven defendants’ respective solicitors on Thursday. The defendants are Datuk Dr Nik Norzrul Thani N. Hassan Thani, Datin Norhafizah Mohd Nordin, Datuk Rosman Hassan, Datuk Norazman Hamidun and Datuk Maheran Mohd Salleh and Tan Sam Eng.

The suit was filed by Tanjung and its three independent non-executive directors, George William Warren Jr, Datuk Ab Wahab Ibrahim and Shahrizal Hisham Abdul Halim.

Remarkable is that this is all done by independent (in other words not owning a big chunk of the shares) non-executive (not involved in the daily running of the company) directors. In Malaysia these kind of directors are normally not known for this kind of actions, in the contrary.

I am sure that the authorities are looking into this case, they have their work cut out for them.

Thursday, 12 March 2015

Bank Negara makes it difficult for 1MDB?

Article from The Star: "PM: 1MDB moved RM4bil from Cayman Islands to Singapore".

One snippet:

“The remaining US$1.103bil in 1MDB’s investment funds managed by Cayman (Islands) Monetary Authority has been redeemed and is kept in US currency at BSI Bank Ltd Singapore (BSI Singapore),” he said in a written reply to the Dewan Rakyat in response to a question raised by Petaling Jaya North MP Tony Pua.

“The decision to use a bank in Singapore is to facilitate transactions as Bank Negara Malaysia (BNM) regulations require approval by the bank for each transaction exceeding RM50mil,” wrote Najib, who is also the Prime Minister.

That is a rather interesting statement from the Prime Minister of Malaysia, who is also the Minister of Finance.

"To facilitate" means "to make easier", in other words, Bank Negara Malaysia makes things more difficult by requiring approval.

Should other Malaysian companies follow suit, that is leave their money outside Malaysia, is that the lesson we learn from this?

Monday, 9 March 2015

XOX: from bad to worse ..... (2)

I wrote before about XOX's proposals, one snippet:

"In other words, current shareholders (who might include loyal shareholders who bought shares of XOX at its IPO price of RM 0.80), who inject further money to subscribe to the rights issue, and who inject even more money to exercise their warrants, will in total only receive 36% of the enlarged shares in the maximum scenario.

And almost all of the dilution due to the restricted issue and SIS will be done at a price that is only a small fraction of the RM 0.80 that shareholders paid at the IPO.

Is this the way the company wants to reward its loyal shareholders?"

The official circular is out. It is a rather long document (108 pages), but what I completely miss is a proper discussion about the huge dilution that normal shareholders will endure if the proposal is approved. In my opinion, it should have been included in the following paragraph:

I find it dubious to mention enhancing of shareholders value without discussing the dilution that they will face.

If one follows all the numbers that are given in the document, then one should be able to work out the dilution. But why is this not transparently presented, accompanied by a proper discussion about the reasoning behind it all?

I have no problem with the rights issue (in which all shareholders can participate), but very much with the huge Restricted Issue (Private Placement) and the massive SIS (Share Issue Scheme).

The Directors will participate in the SIS, and are thus very much conflicted in this exercise (at least that is admitted in the brochure).

I hope that MSWG will be present at the EGM and will grill the Board of Directors about the huge dilution for the minority shareholders.

Bursa Malaysia and the Securities Commission should revisit the rules regarding Private Placements and ESOS/SIS schemes, and limit them to a decent maximum (like 5% or 10% of the outstanding shares of a company).

Thursday, 5 March 2015

1MDB's "attacks" politically motivated, who cares?

I wrote before about 1MDB and its new CEO Arul Kanda. A few snippets:

"Another thing that will serve the fund and its communication team well is to rid itself of the notion that all its critics have a political agenda.

That's undeservedly self righteous for a fund that has ratcheted up over RM40 Billion in debt, rolled over a RM2 billion debt three times over a year, switched auditors and bosses twice and is in the red to the tune of RM665 million in 2014."

I fully agree with this.

Definitely not a good start by the new CEO of 1MDB, the remark about political motives.

Sarawak Report has reported recently many new articles about 1MDB and related matters. At this moment of time we don't know if the allegations are true and if the huge amount of emails, documents etc. are indeed genuine (Sarawak Report claims to have thousands of supporting documents).

A reaction from 1MDB was very much needed and according to an article in The Star Arul Kanda stated:

"It is clear that the attacks being directed at 1MDB are politically motivated. These are deliberately coordinated attempts to undermine the company by spreading unsubstantiated allegations and speculation, which in turn could potentially harm the economy."

Again Arul Kanda seems to stress a possible political motive about the allegations. But honestly, who cares? 

There are two matters at hand:
  • Are the documents/emails etc. as specifically shown on Sarawak Reports website genuine?
  • Are the conclusions drawn from these documents correct? 

Arul Kanda should start by making a clear statement regarding the first matter, then at least we (interested observers) know were we stand. If they are not genuine, we don't have to bother with the conclusions. If they are genuine, then we can proceed with the second matter at hand.

This blog focusses more on corporate governance issues regarding listed companies, and one company in particular is mentioned in the articles, UBG Bank, here and here. There are several allegations in these articles regarding the deals in which UBG Bank was involved and its subsequent privatisation.

The authorities (SC and/or BM) should investigate these matters and check if all warranties and representations (made by all parties involved during that time) were indeed correct.

"1MDB welcomes the Prime Minister's request for the Auditor General to verify 1MDB's accounts, which have been audited by Deloitte, one of the world’s leading firms."

The verification by the Auditor General is of course welcomed, I hope that all findings will be published in a transparent way, for all to see, if possible backed by evidence.

The last part in the above sentence ("one of the world’s leading firms") is unfortunately not adding much value to the statement. Too many fraudulent companies all over the world (Malaysia is no exception) were audited by the "big four" (besides of course many being audited by other auditors, the "lesser" ones). Anyone still remembers Arthur Andersen? Much more information regarding this subject can be found here.

Wednesday, 4 March 2015

DCF: Hall of Shame (1)

Interesting article from Professor Aswath Damodaran:

"DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!"

He defines "the consistency test" for DCF:
  • Unit consistency
  • Input consistency
  • Narrative consistency
And continues:

"Many of the DCFs that I see passed around in acquisition valuations, appraisal and accounting  don’t pass these consistency tests. In fact, at the risk of being labelled a DCF snob, I have taken to classifying these  defective DCFs into seven groups:"

Followed by the seven DCF groups and their description. The following picture gives some insights:

From the above we can see that there are many pitfalls in making a correct DCF. That is a serious problem with DCF.

But I think there is an even larger problem: dishonesty from the side of the DCF modeller. In the Malaysian context (and may be even in the global context), that is in my opinion a huge problem.

I will detail my reasons for this in a subsequent posting.

Tuesday, 3 March 2015

Timing of Earnings Announcements

Interesting article, although the outcome of the research is not exactly shocking:

This study examines the value relevance of the timing of earnings announcement dates relative to prior expectations. It shows that when firms advance their earnings announcements at least four days prior to expectations, the earnings surprises in those quarters tend to be positive and the abnormal returns from two days after the earnings release date was announced through one day after earnings are actually announced are positive and significant. The converse is true for firms that delay their earnings announcement at least four days relative to prior expectations. The study also shows that firms which delay their earnings release date at least four days after previously setting the date earlier are characterized by both negative earnings surprises and abnormal returns from the delay announcements through one day after the actual earnings announcement date. These results can be used by investors to earn abnormal returns, by security analysts in revising their forecasts, and by option traders when earnings announcement dates cross option expiration dates.

My guess is that the same holds in the Malaysian environment, companies with good results want the news quickly out, while companies with bad results will wait until the last day of the month.

Companies that further delay their results beyond what is allowed: a big red flag, often horrific news is waiting.

And the title of "champion in delaying" will go to Golden Plus:

Four audited financial statements, four annual reports and fifteen quarterly financial reports, all delayed. Not a bad score!

Monday, 2 March 2015

Delistings: trust issues

Good article in The Financial Times: "Management Buyouts: Trust issues".

Management Buyouts are sometimes called delisting exercises in the Malaysian context.

In a typical company, investors wonder if the chief executive is competent. A tougher question emerges when the chief owns a big chunk of the shares: is the boss trustworthy? This week the founder of electronic music festival company SFX Entertainment, Robert Sillerman, offered to buy out the 60 per cent of the company he does not own, for $4.75 per share. The shares traded at $12 at the end of 2013. Still, the offer may well succeed - the bosses of Dole Food and Dell both won approval for their recent buyouts.

The dilemma with management buyouts is this: the boss has the inside perspective on the value of the company. Knowing where the bodies are buried puts them in a position to exploit the ignorance of Joe Public. Aggrieved shareholders of Dole Food claimed that its chief executive, who owned a 40 per cent stake, took advantage of a lull in the share price. In the case of Dell, the recent strong rally in the shares of HP - a very similar business - suggests Mr Dell timed his purchase well.

Shareholders have some protection against exploitation. Independent directors can negotiate on the behalf of public shareholders. Deals can require a majority of unaffiliated shareholders to vote in favour. Management buyouts often face a higher standard of review in deals in case of a legal challenge. Increasingly, shareholders demand "appraisal rights", where a judge decides if the deal price was fair.

Still, companies with big insider shareholders do not necessarily underperform in aggregate. A 2012 study by ISS found single-class "controlled" companies (where control is defined as ownership of 30 per cent of the shares) outperformed non-controlled companies as well as dual class controlled companies. The theory behind investing in companies where the chief executive has a big stake is that management and shareholders have the same interests. That is not always how it works in practice.

The above mentioned protection against exploitation in the Malaysian context:
  • Independent directors are not known for standing up against the boss: they are chosen by the boss and their fees are paid by him. Also, independent directors could simply be the golf buddies or former classmates of the boss. There are some exceptions, but they are rare, and (often) not published. Enforcement against independent directors for failing their fiduciary duty in this matter is almost non-existent, I can't recall a single case.
  • Legal challenges are very rare, they can be costly, taking a long time to conclude, not a good prospect for minority shareholders who will anyhow have a problem to band together like in a class action suit.
  • Appraisal rights: they depend on an independent valuation. Unfortunately, I have seen too many "independent" valuations that were extremely favourable for the boss. Enforcement agencies (SC and BM) often do not like to question these valuations, is my experience, even when they appear to be highly unfair. Some independent valuers have been punished, but very rarely so.
In other words, unless there are some vocal fund managers who own at decent stake of the company, it is usually a very unequal fight. Bosses are of course very aware of this. 

The perils of Private Placements

This blog has warned many times about the perils of Private Placements (PPs).

Rita Benoy Bushon, CEO of MSWG, wrote an excellent article about this matter in Focus Malaysia:

In short:
  • Why the need for PPs?
  • Why not consider a rights issue in which all parties can participate?
  • No transparency regarding the placees of PPs.
  • The discount widens if the share price rises (and the PP can be aborted if the share price decreases).
  • The urge for a limit on the size of a PP, say 10% of the shareholding through regulatory approval.

I like to add that minority shareholders in unlisted companies are often protected through the "right of first refusal", any new shares have to be offered first to the existing shareholders, who can take it up pro rata to their shareholding.

Sunday, 1 March 2015

Berkshire Hathaway: 50 years of Value Investing

Berkshire Hathaway, the conglomerate managed by Warren Buffett and Charlie Munger, published its much anticipated 2014 year report. It is the 50th since Buffett took control of the company. A true monument of value investing.

At the end of the day, the only thing that counts is the long term returns, and they are extremely impressive:

Berkshire Hathaway always uses "marked to market" for listed securities despite their limitations, Maybulk and Noble might want to take note:

It is the hallmark of the great manager to admit mistakes, Buffett does not try to hide the mistake he made regarding Tesco, about which I wrote here and here.

The last three sentences are a proof of the amazing stock picking abilities of Buffett and Munger.

Reviews about the year report can be found at Fortune, Forbes and The New York Times.