Sunday, 28 April 2013

Of Bimbos, Black Swans and Ex-Dates

Kok Chee Keong wrote two interesting articles about coirporate buzzwords on the website of Skrine:

"A Blast from the Past: Of Poison Pills and Pac-Man Defences"

"Of Bimbos, Black Swans, Ex-Dates, Etc"

C.K. Kok writes:
The impetus for this article came about when a young colleague in our Firm enquired, "What is a poison pill?"
The question brought my thoughts back to the mid-1970s and the 1980s – not to the pulsating rhythms and flashing strobe-lights of the disco-era but rather, to the cut and thrust action of the golden age of hostile take-overs.
The take-over of Electric Storage Battery Co. by International Nickel Company in 1974 ushered in one and a half-decades of hostile take-overs. During this period, new tactics to prosecute and defend hostile take-overs were introduced and refined and phrases like "poison pills", "Pac-Man Defence", "risk arbitrage", "greenmail" and "leveraged buy-outs" became part of the English language.

A "Sleeping Beauty" is a company which is an attractive target but has yet to become the subject of a take-over bid. Typically such a company would have undervalued assets or large reserves of cash.

A company may also become an attractive proposition for a take-over when its management is unable to realise the company's full potential or its share price lags behind in the stock market.

When a take-over bid is made for a Sleeping Beauty, it would be described in take-over parlance as being 'in play'.

A recent example of a company which came into play was Yahoo!. Yahoo!'s stock price had lagged in a bull market and it had for several years, lost market share to Google in search traffic and on-line advertising revenue. These factors, plus Microsoft's need to boost MSN's user base and advertising revenues in its battle with Google for control of the internet made Yahoo! the ideal candidate for a take-over.

An offer was extended by Microsoft, but resisted by the Yahoo! board. Despite several months of posturing by both sides, the highly anticipated hostile take-over failed to materialise and the Redmond-based software giant withdrew its offer.

A company may also come into play as a result of the break-up of the controlling block of its shares. This may arise due to disputes between the shareholders, particularly in family-controlled companies, or when shareholders no longer share the same vision of the company's future or where one or more of the controlling shareholders decide to dispose of their stake in the company.

An example of a break-up of a controlling block of shares which led to the take-over of a company is that of Southern Bank Berhad. The bank had, for a long time, been jointly-controlled by two groups of shareholders, one led by Tan Sri Dato' Tan Teong Hean and the other, by DYMM Sultan Sharafuddin Idris Shah and Dato' Syed Mohd Yusof. When the CIMB Group made an unsolicited take-over offer for the bank, the latter group decided to sell their shares, leaving Tan Sri Dato' Tan's group with insufficient support to stave-off CIMB's bid.

When a company becomes the subject of a take-over bid, it is not unusual for arbitrage traders to acquire significant blocks of shares in the target company with a view of profiting from an increase in the price of the target company's shares, especially if competing bids are received for the target company's shares.

Arbitrage traders may also attempt to profiteer from a take-over bid by short-selling the predator's shares if they expect its share price to fall due to unfavourable market response, or acquiring significant blocks of such shares if they expect the price to be driven up by a favourable market response to the take-over bid.

The afore-mentioned practices by arbitrage traders is known as risk arbitrage and differs from the traditional arbitrage practice where arbitrageurs profit from trading in shares by taking advantage of differences in the price of a company's shares on the different stock-markets on which it is listed.

One of the prominent risk arbitrage traders was Ivan Boesky who reportedly amassed a fortune of about US$200 million by arbitraging on hostile take-overs. Boesky ultimately fell from grace upon his conviction for insider trading and was barred for life from working in the securities business.

In the golden age of hostile take-overs, it was not uncommon for corporate raiders, such as Carl Icahn, T Boone Pickens and James Goldsmith, to acquire significant stakes in a company to create a threat that a hostile take-over was imminent. To neutralise this threat, the target company would buy-back the shares of the raider at a substantial premium against an undertaking by the latter to refrain from acquiring further shares in the target company for a specified period. This practice by corporate raiders came to be known as "greenmail."

An illustration as to how profitable greenmailing can be, James Goldsmith and his cohorts made a profit of about US$90 million in their raid of The Goodyear Tire & Rubber Company which bought-back their 11.5% stake in the company at a substantial premium to eliminate the threat of a hostile bid.

A corporate raider who acquires a company and disposes of all or some of the latter's assets is known as an "asset stripper".

The ideal target for asset stripping is a company whose break-up value exceeds its combined value. In an extreme situation, a raider may acquire a target company with the view of liquidating the entire company to make a profit from the disposal of the various businesses carried on by the target company.

Asset stripping is also a means by which a raider reduces its cost of acquiring the target company.

Ron Perelman's Pantry Pride which acquired Revlon for its cosmetics business in a hostile take-over in 1985, sold Revlon's prescription drugs division for US$690 million to reduce its cost of acquisition.

A white knight is an individual or company whose help is sought by a target company to fight-off a hostile take-over bid by making a competing bid which is welcomed by the target company.

One of the most endearing first generation computer games was the Pac-Man. It involved an adorable yellow character, the Pac-Man, being chased by ghost-like characters. The objective of the game is for the Pac-Man to gobble up power pills located at various parts of the screen which transform him from being the hunted to the hunter.

The Pac-Man Defence, which takes its name from the afore-mentioned game, is a defence strategy whereby the target company defends itself against the predator by launching a take-over offer against the predator.

In 1982, Bendix Corporation made a hostile bid for Martin Marietta, an arms manufacturer. To counter the unwelcomed bid, Martin Marietta, together with United Technologies, made counter-tenders to acquire Bendix and to split its assets. With the tables turned on it, Bendix rescued itself from the clutches of Martin Marietta and United Technologies by getting Allied Chemical to acquire it.

The Bendix case is interesting as the target company, Martin Marietta, aided by United Technologies, successfully deployed the Pac-Man Defence to fend-off a hostile bid and the predator, Bendix, had to resort to a White Knight to save itself from the target company's counter-bid.

The Gray Investor Group (GIG), a syndicate led by renown corporate raider, T Boone Pickens, acquired 22 million shares in Gulf Oil. GIG then made an offer to acquire 50% of the issued shares of Gulf. Gulf sought white knights to fend-off GIG's hostile bid.

A bidding war ensued between three white knights, with Standard Oil of California (Socal) (now known as Chevron) emerging triumphant and Gulf losing its status as an independent company.

Perhaps the biggest winner of the Gulf War was GIG which made a profit of US$750 million from the raid, with Pickens' Mesa Petroleum netting almost two-thirds of that amount.

The Gulf War illustrates that apart from forcing the target company to buy-back its shares at a premium, greenmailers can also profit by forcing the target into the hands of a white knight.

A "shark repellent" describes any measure adopted by a company to discourage unwelcomed take-over bids. They include amending the company's by-laws to specify a high threshold for shareholders to approve a merger and to introduce classified boards, that is, an arrangement for directors to retire at different times.

The above-mentioned measures are ineffective for public companies under Malaysian law. A shareholder does not require the approval of a company's shareholders in general meeting to dispose of his shares. Directors of a public company may be removed by simple majority vote of the shareholders without cause before the expiry of their term of office.

The poison pill, a form of "shark repellent", was conceived by one of the foremost take-over defence lawyers, Marty Lipton of Wachtell, Lipton, Rosen, Katz & Kern as a means to deter hostile take-over offers.

There are principally two types of poison pills. One is a 'flip-over' provision which gives the shareholders of a target company the right to acquire shares in the acquiror after the completion of the merger of the two companies.

The other is a 'flip-in' provision which gives the shareholders of a target company (other than the acquiror) the right to acquire shares in the target company at a discount or by way of a dividend. The 'flip-in' pill, which may be activated irrespective of whether the acquiror and the target company are merged, dilutes the shareholding of the predator in the target company and makes it more costly to acquire control of the target.

After several cases where the American courts declined to issue a definitive ruling on the validity of poison pills, the Delaware Supreme Court in Moran v Household International Inc, 500 A.2d 1346 (Del. 1985) upheld the validity of the poison pill.

A "scorched-earth defence" is a military strategy adopted by a retreating army to destroy crops, land and trees to reduce supplies available to the advancing enemy. The scorched earth policy was successfully deployed by the Russians to frustrate Napoleon's invasion in 1812 and Hitler's army in 1942.

In corporate parlance, a "scorched earth defence" is an anti-take-over strategy whereby a company adopts various measures to make itself less attractive as a target for a hostile take-over.

The measures which can be adopted by a company include disposing of its prized assets, reducing its cash reserves by making huge dividend payouts, implementing share buy-backs or acquiring other assets and increasing its level of borrowings significantly.

As scorched earth defences may be detrimental to financial well-being of the company itself, such defences should not be resorted to except in the most desperate circumstances.

A "leveraged buy-out", also called an "LBO", is a method of acquiring a company which is funded by a high proportion of borrowings. Although this method of financing is not restricted to hostile take-overs, it gained popularity during this period.

Common practices associated with an LBO are the pledging of the target company's assets as collateral for the acquiror's borrowings and the use of its cash-flow to fund the principal and interest payments on the debt. Both these practices are prohibited under Malaysian law.

With the growing popularity of LBOs, corporate raiders filled their war-chests to undertake hostile bids by borrowing in the capital markets through the use of "junk bonds".

In essence, "junk bonds" are high-yield bonds that have low credit ratings, i.e. bonds that pay a high rate of interest but have greater risk of default.

Drexel Burnham Lambert, spearheaded by Michael Milken, was the largest purveyor of junk bonds during the golden age of hostile take-overs. Both Drexel and Milken were subsequently disgraced by their involvement in securities fraud. Drexel declared bankruptcy and Milken was fined a whopping US$200 million and sentenced to a term of imprisonment of up to 10 years (of which he served only 22 months before being released).

According to the Shorter Oxford English Dictionary (5th Edition), a "bimbo" is an attractive but unintelligent woman.

In the world of finance, the acronym "BIMBO" stands for "Buy In Management Buy Out" where existing shareholders of a company are bought-out by a consortium comprising outside investors who "buy in" and existing management who undertake a "management buy out".

To this day, the finance wizards at Harvard, Wharton and INSEAD and top-notch investment bankers on Wall Street have yet to find an appropriate use for the expression, "bimbo", which according to the above-referred dictionary, describes an attractive but unintelligent man. Perhaps the jocks of the NFL and the EPL can provide an 'assist' here, duh?

Black Swan is the name of the movie in which Natalie Portman won the Academy Award for Best Actress in 2010 for her brilliant portrayal of the psychological meltdown of a prima ballerina (the principal ballerina in a ballet company).

In corporate-speak, a "Black Swan" describes a rare event of extreme impact which lies outside the realm of predictability. The appearance of a "Black Swan" usually wreaks havoc in the financial markets. The term was coined by Professor Nassim Nicholas Taleb, a professor at Oxford University and the Polytechnic Institute of New York University, in his book "The Black Swan".

In military parlance, "blitzkrieg" means "lightning war" in German. This strategy was deployed with great success at the outbreak of World War II when Germany, relying on heavy bombardment by its aeroplanes, artillery and tanks, conquered most of Western Europe with ease and in quick time.

A "blitzkrieg tender offer" is similar to the military strategy insofar as its objective is to secure success quickly. It differs radically from its military counterpart in that unlike the latter which creates "shock and awe", a "blitzkrieg tender offer" is a take-over offer which is so attractive that it receives minimal or no objections from the shareholders of the target company.

The reclusive Malaysian billionaire, T. Ananda Krishnan, has deployed this tactic with great success in his privatisation of Maxis Communications Berhad, ASTRO All Asia Networks plc and Tanjung plc by offering substantial premiums of 20%, 23.6% and 21.9% respectively over the last-traded price of the shares of those companies before the issue of the respective take-over notices. Each offer attracted more than 90% acceptances, thereby enabling the offeror to acquire the remaining shares of each company using the compulsory acquisition provisions under the relevant securities law.

In the world of mergers and acquisitions, a "break-up fee" is a fee which a purchaser pays to a target company or the seller if the purchaser withdraws from the transaction. Although less common in practice, this term can also apply to a fee that is payable by a seller or the target company to a purchaser if seller or the target company withdraws from the sale. Such payment is to compensate the relevant party for time and resources spent on the transaction and for loss of opportunity.

The payment of break-up fees is a common practice in international transactions. On 21 March 2011, Bloomberg reported that AT&T agreed to pay T-Mobile USA a break-up fee of US$3 billion if it does not proceed with the acquisition of the latter. It was also reported in that AOL and Pfizer had each agreed to pay break-up fees in excess of US$4 billion in their purchase of Time-Warner and Wyeth. The AOL-Time-Warner and the Pfizer-Wyeth transactions, valued at US$160 billion and US$68 billion, were completed in 1980 and 2009 respectively.

Although break-up fees are presently not a common practice in the Malaysian merger and acquisition scene, the practice may find its way to our shores in due time.

On 6 March 2011, reported that Ms Tan, a waitress, demanded S$30,000 from her former boyfriend, Mr Du, as a break-up fee when he ended their 6-year relationship. Ms Tan alleged that Mr Du had signed an agreement with her and a certain Mr Ng, her other boyfriend (yes, life gets complicated in a triangular relationship) to pay her that sum and a further sum of S$15,000 to Mr Ng.

The online news portal further reported that Ms Ng has since obtained legal advice that the agreement was not legally binding. A case of life imitating art?

The expression "dawn raid" derives its origin from the military strategy, "pre-dawn raid", where attacks are launched before daybreak when the enemy's level of battle-readiness is lower.

In a hostile take-over, a dawn raid occurs when a corporate raider acquires large blocks of securities in the target company as soon as trading commences on the stock market.

One of the most famous "dawn raids" occurred on 8 September 1981 when Permodalan Nasional Berhad (PNB), then led by Tan Sri Khalid Ibrahim (now Mentri Besar of Selangor) acquired approximately 26% of the ordinary share capital of The Guthrie Corporation Limited on the London Stock Exchange within 2 hours of trading to increase its holding in that company to 51%. PNB eventually acquired the remaining shares in Guthrie.

In the trading of securities, an "ex-date" refers to a date on and after which a security is traded without the entitlement to a right, distribution or dividend which has been announced. On Bursa Malaysia, the ex-date usually falls 3 market days before the entitlement date.

In the larger scheme of life, the prefix "ex" connotes a relationship which once existed, but no longer. For example, an ex-spouse refers to a person's former husband or wife, and an ex-girlfriend is a person's former girlfriend. By extending the same logic, an "ex-date" would be someone whom a person once dated but no longer does.

In horse-racing, "front running" describes a horse whose style is to race from the front of the pack as soon as the race starts.

In corporate parlance, front running is the practice where a market intermediary, such as a broker, acquires a particular security before his company recommends the same security to its clients.

On 1 April 2011, The Australian reported that Oswyn de Silva, a Malaysian fund manager with Macquarie Bank in Sydney, was sentenced to 2½ years imprisonment for this form of insider trading. De Silva had purchased certain stocks using insider knowledge that a Macquarie Group company would be purchasing these stocks to align its investments with its investment model and subsequently sold them to the Macquarie Group company for a profit.

A "go-shop period" is not a time when one allows his wife to go on an unbridled shopping spree during the Grand Prix Sale, Mid-Year Sale, Year-End Sale, Hari Raya Sale, Chinese New Year Sale, Deepavali Sale, Christmas Sale or a host of other sales that seem to be perpetually on-going in Malaysia.

In mergers and acquisitions, a "go-shop period" is a time period during which a company that is being sold is permitted to seek out competing offers even though it has agreed on the principal terms of the sale with a prospective buyer. This period enables the directors of the target company to fulfil their fiduciary duty to obtain the best possible price for the sale.

In November 2010, Del Monte Foods Company entered into a merger agreement with a group of investors led by Kohlberg Kravis and Roberts & Co, L.P. which gave Del Monte the right to solicit alternative bids from third parties for a period of 45 days. The "go-shop period" ended on 8 January 2011 without the company finding any alternative bidders. The merger was completed on 8 March 2011.

The deadly game of Russian Roulette probably came to attention of the public in the 1978 multiple Academy Award (including Best Picture) winning movie "Deer Hunter" where the American POWs were forced by their Vietcong captors to play a deadly game where they took turns to spin the cylindrical ammunition chamber of a revolver which contained one bullet before placing the gun against their temples and pulling the trigger. Extreme sports at its ultimate!

In legal terms, a "Russian Roulette" is a form of dead-lock breaking mechanism in a shareholders' agreement whereby a party, A, offers to purchase all the shares of the other party, B, and alternatively, at the election of B, to sell all of A's shares to B, in each case, at the price set by A. B must elect, within a specified time period, to buy A's shares or sell its shares to A. If B fails to respond by the expiry of the specified period, B is deemed to have agreed to sell its shares to A.

The expression "sidecar" refers to a motorcycle sidecar. The pillion in the sidecar entrusts his safety to the skills of the rider of the motorcycle.

A sidecar investment strategy is one where an investor allows another investor to control the manner in which the former's funds are to be invested. In other words, the first investor relies on the investment expertise of the other.

On 25 March 2011, StarBiz reported that a number of French investors in LuxAlpha Sicav-American Selection Fund sued Swiss bank, UBS, in Paris for failing to disclose in the prospectus that the fund's assets were to be invested through Bernard Maddoff's firm.

While it remains to be seen whether the suit will be successful, it appears that UBS had adopted a sidecar investment strategy by entrusting Lux-Alpha Fund's assets in the care of the now disgraced former NASDAQ Chairman and Ponzi-scheme operator extraordinaire.

In everyday life, tailgating is an incident that you encounter when a Proton Satria or Perodua Kancil with its HID-lights blazing on high-beam races right up to the rear bumper of your BMW as you cruise along on the PLUS Highway at a leisurely speed of 180 kmh.

In corporate-speak, tailgating is the practice where a market intermediary buys or sells a security for its own account immediately after carrying out the same transaction on behalf of its client. Unlike front running, tailgating may not be illegal unless the intermediary is in possession of insider information or is a tippee (one who knowingly receive a tip from an insider) when he executes the trade for his own account.

A "Texas Shoot-Out" is not a B-Grade direct-to-video remake of the "Gunfight at the O.K. Corral". It is another form of dead-lock breaking mechanism in a shareholders' agreement.

In a "Texas Shoot-Out", a party, A, offers to purchase all the shares of the other party, B, at a price set by A. B must, within a specified period, indicate whether he will accepts A's offer or that he will purchase all of A's shares at a higher price. If B indicates that he wishes to purchase A's shares, a sealed bidding process will ensue and the shares will be sold to the party who sets the highest price.

Dead-lock resolution clauses like a "Texas Shoot-Out" and "Russian Roulette" are usually provisions of last resort when the parties wish to end their relationship as shareholders in a joint-venture company.

Sunday, 21 April 2013

Late MCA leader accused of stealing A$20m from Aussie firm (2)

I wrote before about Zheng He Global Capital, the Australian listed company named after the famous Chinese explorer:

I doubt if Zheng He would be happy with his name being used given the rather unfortunate events that happened in the company.

The Sydney Morning Herald followed up on this case with several articles, written by "Insider", Ian McIlwraith. Below the texts in full, here some interesting snippets:
  • "The deal appears to have been a little more complex than that, though, because the money was moved into Zheng He accounts near the end of each month, and out again at the beginning of the following month - meaning Zheng He's bank statements each month showed that the money was there, but in reality it was being used by Lin's companies". This kind of tactics is rumoured to happen more often in China, with certain banks supporting this kind of dodgy tactics.
  • Robert Payne only lasted two days as director, as described in the second article, aptly titled "Short Stay"
  • "That is a shame, because if it is delisted, shareholders may never hear about how the hunt for the money is going". And that is exactly what happened, the company is delisted, and I doubt if the ASIC (Australian Securities and Investments Commission) is able to do anything at all about what occurred.
Highly unsatisfactory and unjust for the investors of Zheng He Global Capital, who lost their investments, and not exactly good PR for Malaysia.

Disappearing, reappearing loans test ASIC's reach (May 30, 2012)

Australia's relations with Malaysia may be tested again if the corporate watchdog pursues claims that a former Malaysian government minister, Dato Tan Tian Hong, took more than $20 million from an ASX-listed company to repay a personal debt.

The now suspended, China-based credit guarantee company Zheng He Global Capital told shareholders this week that Tan, who died last year, used his position as executive chairman to organise secret 136.79 million yuan ($21 million) loans to 10 companies associated with fellow Zheng He director, Rong Cheng Wei.

Zheng He's acting chairman, Andrew Smith, who has spent this year trying to unravel what happened, believes the loans were designed to use the public company's cash to repay $US18.8 million borrowed by Tan from Wei in April 2010 to facilitate Zheng He's public float.

Tan might be out of reach, but Smith has sent letters of demand to his deceased estate in Malaysia.

Fascinatingly, about the same time as Smith's lawyers were drawing up those demands, Tan's widow, Catherine, used her family's 55.3 per cent shareholding in Zheng He to demand the appointment of four new directors to the board.

With no hope of beating that board challenge, Smith yesterday afternoon bowed to the inevitable and convened a board meeting, agreeing to the new appointments.

It will be interesting to see whether they decide to continue legal action against the Tans. Insider suspects investors in Zheng He can kiss that money, and probably their investments, goodbye.

Smith, though, may have bought them some insurance. Insider hears he met representatives of the Australian Securities and Investments Commission yesterday and provided them with a detailed file on all the events.

ASIC's difficulty is going to be that while Zheng He is in Australia, the business that made the loans is in China, the accused ''thief'' is now dead, and the other former director said to be involved in the suspect loans, Wei, is also in China. Insider understands neither Tan nor Wei have assets in Australia, apart from Zheng He shares.

The political thorn for ASIC's chairman, Greg Medcraft, will be that Tan was a respected leader of the Malaysian Chinese Association political party, and served as a deputy finance minister and deputy minister in the Prime Minister's office under former Malaysian strongman Dr Mahathir Mohamad. Mahathir and his wife attended the funeral.

The Zheng He loans story does not, however, end there. Rong Cheng Wei's companies, according to Smith, defaulted on all the loans - leaving Zheng He indebted to the banks last August.

Smith said that in a recent meeting with Wei ''he confirmed that, as a consequence of the defaults under the finance arrangements, the … loans had now been repaid in full''.

In Zheng He's prospectus, Wei was not only credited with playing a role in the financing of Zhouning county's public welfare system, he was awarded ''the Excellent Entrepreneur award from Zhouning county's police force from 2003 to 2006''.

Tan's widow signed an agreement last August taking responsibility for the loan defaults, according to Smith, and the deposit around that same time of 140 million yuan into Zheng He bank accounts, by two China-based companies associated with a Lin Liang, were assumed to be the product of that agreement.

In February this year, a routine audit found the cash was no longer in the company's bank accounts, having been withdrawn on the authorisation of Lin (who had been appointed chairman of Zheng He's China subsidiary).

Smith's investigation in recent weeks discovered that Lin believed his companies had only ever been lending the money to Zheng He, and had taken it back.

The deal appears to have been a little more complex than that, though, because the money was moved into Zheng He accounts near the end of each month, and out again at the beginning of the following month - meaning Zheng He's bank statements each month showed that the money was there, but in reality it was being used by Lin's companies.

Short Stay (June 8, 2012)

Robert Payne, who joined the board of the floundering Zheng He Global Capital on May 29, looks like setting a record for the briefest appearance on the board of a listed company.

Zheng He told the market late yesterday that Payne has quit - and his resignation is backdated to June 1, which means that he lasted a mere 48 hours on the board of a company that once had aspirations to be a financier to China but is now looking collapse in the face.

Insider is not wholly surprised that Payne has departed. The last time Zheng He was mentioned here was when the Malaysia-based major shareholder decided to nominate him and three others to the company's board, giving them voting control.

Their nominations had come hot on the heels of Zheng He's executive chairman, Andrew Smith, launching legal action against entities associated with that same shareholder after spending some months trying to find out why $20 million had disappeared from the company's bank accounts.
Smith fell on his directorial sword on May 30, after the new directors rolled across the boardroom border - as did two other former directors.

He had already fired himself as an executive the day before, although his termination was not due to take effect until last Friday.

Insider also hears that not long before he did leave, Smith had delivered a fat file to the corporate walloper on the results of his investigations, showing where he thought the $20 million had gone.

The question now is whether the Australian Securities and Investments Commission wants to chase an investigation through Australia, China and Malaysia.

Small and suspended from ASX but law is the law (August 3, 2012)

ZHENG He Global Capital might be a tiny company, and it has been suspended from ASX trading for nearly six months - but that does not excuse it from complying with the Corporations Act.

Yet, from what Insider can work out, it is now a fortnight since it became a two director company, and neither of those live in Australia.

For those of you who do not sleep with a copy of the legislation, Insider can tell you that Australia's company law says very clearly that a public company must have a minimum of three directors - and at least two of them must be Australian residents.

Zheng He fails on both hurdles, judging by its most recent announcements to the ASX - although with $20 million of shareholders' funds having inexplicably evaporated from the company's bank accounts in China, that may be the least of the sins committed against investors.

Local investors only know about the missing money, and its circuitous path through Chinese businessmen and the family bank accounts of Zheng He's deceased former chairman, Dato Tan Tian Hong - who was also a deputy finance minister of Malaysia - because of the efforts of former chairman Andrew Smith.

Smith tracked down how and where the $20 million went, although Zheng He's empty coffers and the fact that any litigation would require going to court in both Malaysia and China limited his efforts. He was planning to send a legal letter of demand to the Tan family when the former chairman's widow, Catherine, used her family's 55.3 per cent shareholding in Zheng He to thrust four new directors onto the board.

Rather than spend money holding an extraordinary meeting to defend their position, the existing board fell on their directorial swords, and Tan's four nominees took control.

Based on the filings of those four with the Australian Securities and Investments Commission on their appointment, Insider can only conclude that Zheng He has been in breach of the law since May 30 because only one of the men, Melbourne-based Robert Payne, lived in Australia.

Payne resigned within 48 hours, which makes Insider wonder whether Payne realised that consenting to being a director of Zheng He may not have been the smartest thing he had done.

Of the three remaining directors, two lived in Malaysia and the other in China. On July 20, one of the Malaysian directors quit, leaving two people. No explanations were given for either departure, and there was no indication that the company acknowledged it was in breach of the law and had plans to remedy the situation.

Insider finds it difficult to believe that ASIC is not aware of Zheng He's status, because the word was that former chairman Smith made a complaint to the corporate regulator before he left.

Not only that, the new board of Zheng He has said nothing about its plans for a company that has no employees, no business - but does have a theoretical $20 million claim against interests associated with its major shareholder.

Old favourites appear once more in ASX hall of shame (August 24, 2012)

Finally, one of Insider's favourite listed companies, Zheng He Global Capital, is also facing delisting for not paying fees. As noted earlier this month, Zheng He has had only two directors, neither of them Australian residents, since July - which would seem to put it in breach of a whole lot more than not paying listing fees. Maybe those two are too busy trying to recover the $20 million that shareholders thought was the company's assets, but turned out to be claimed, and banked, by the Malaysian-based family that is Zheng He's largest shareholder.

That is a shame, because if it is delisted, shareholders may never hear about how the hunt for the money is going.

Saturday, 20 April 2013

5 Great Presentations

Five presentations from the "Wine Country Conference":

  • James Chanos: "China, The Edifice Complex", many (well documented) warnings regarding China's growth from the famous short seller;

  • Mike "Mish" Shedlock: "Brief lessons in History", "history suggests waiting for better opportunities is the prudent thing to do.

Wednesday, 17 April 2013

Chinese local debt posing a large risk?

Article from Yves Smith on her blog.

"We have someone well-placed in China telling the world that its local debt is a train wreck waiting to happen, a classic Minksy Ponzi unit, but the timing of the unravelling is uncertain. And the source is an authority and not the sort one would expect to make remarks like that casually.

The Financial Times tells us the alert comes from Zhang Ke, vice chairman of the Chinese accounting association, who said his accounting firm, ShineWing, had virtually stopped signing the financial statements for bond sales by local governments. He described the debt as “out of control” with the potential to cause a bigger-than-housing-crisis level bust. But since the obligations can still be rolled, who knows when the dubious debt will fall under its own weight."

And it continues:

Local government debts soared after 2008, when Beijing loosened borrowing constraints to soften the impact of the global financial crisis. Provinces, cities, counties and villages across China are now estimated to owe between Rmb10tn and Rmb20tn ($1.6tn and $3.2tn), equivalent to 20-40 per cent of the size of the economy.

Last week, Fitch cut China’s sovereign credit rating, in the first such move by an international agency since 1999. On Tuesday, Moody’s cut its outlook for China’s rating from positive to stable.

Local governments are prohibited from directly raising debt, so they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicles’ names to fund infrastructure projects.

Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013.

Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”

Monday, 15 April 2013

SPAC's: Boon or Bane? (2)

I wrote before about SPAC's (Special Purpose Acquisition Companies).

I received two comments:

The first, anonymous, person commented that the Securities Commission had provided lots of safeguards in the process (money with a trustee, earning interest, investments have to be approved, if no investments in 3 years money will be returned, etc.).

I agree with those points, but that was not the reason why I wrote the posting. It had to do with the managers having their cake and eating it, and higher (industry) risks down the road, both the energy and mining business are pretty difficult businesses.

The second person, "Shadow" wrote:

"Alternatively investors can invest directly into a number of junior resources companies usually found in ASX or Toronto. The risk profile and business model of such companies are very similar to SPAC with 2 major distinctions - 1) the underlying assets are known; 2) investors do not need to cede a big premium of 15%-20% of the shareholdings to management.

For investment into resources company, the devil is in the details when it comes to assessing a company's outlook. In the case of SPAC, there is nothing to assess but the management's credibility. Personally, i wont know how to assess the management of any of these companies. This is definitely a case of buyers beware!"

I agree with these observations,  SPAC's can indeed be compared to "juniors", which are notoriously volatile. Some of them have taken of spectacularly, but most haven't, in the contrary. They are definitely not investments for widows and orphans.

Why are the called "juniors"?Take for example the SPAC's listed on Bursa, their size is around RM 600 Million. A company like Royal Dutch Shell has a market cap of about 1,000 times larger, RM 600 Billion!

Being so small has distinct disadvantages (it will lose in any bidding war, if it has exceptional employees then they might be hired away, RDS has its own distribution channels, etc.) but also some advantages (it can go for business that is simply too small scale for the big players).

Today in The Malaysian Insider a critical article about SPAC's: "Blank cheque IPOs bring hope and caution to Malaysia" written by Reuters. Some snippets:
  • Malaysia’s bull market is seeing a type of initial public offering, still fairly new to Asia, that takes a special kind of company public: one with no profits, revenues or assets.
  • “If the historical experience in the US is any indication, it should provide a warning sign that these investments may not turn out to be particularly good ones,” said Stefan Lewellen, a SPAC expert who authored a study on US SPACs at Yale University.
  • In the United States, there is a long line of examples where such companies failed to make an acquisition and were forced to delist. Even those that did make a deal, on the whole, have not historically performed well.
  • Lewellen’s research showed that US SPACs with completed acquisitions between 2003 and 2008 posted negative returns in excess of 36.5 per cent a year.
  • “SPACs were popular in the US and now are sort of dead,” said an equity capital markets banker in Hong Kong, who was not authorised to speak publicly on the matter. “I’m very sceptical on SPACs. It’s risky, it’s illiquid. It’s a very difficult product to become mainstream.”
  • After a spurt of listings and a surge in prices in 2010, SPAC issuance in South Korea ground to a halt as prices crashed and companies delisted. Daewoo Securities Green Korea SPAC and Mirae Asset No. 1 SPAC, the first two listed, were among companies that surfed on the retail investor frenzy and nearly doubled in price within weeks of their IPOs.
  • "Those kinds of stock bubbles were caused by ... financial illiteracy of individual investors,” said Kab Lae Kim, head of corporate policy at the Korea Capital Market Institute in Seoul and author of a report on SPACs.
  • “In that sense SPACs have lost market confidence.”
Caveat Emptor or Buyer Beware!

Sunday, 14 April 2013

Malaysia listed "red" chips all in the red

The Edge Malaysia published a list of the China-based companies listed on Bursa Malaysia. I will only mention one number per company, the price change of the current price versus its IPO price:

XiDelang Holdings                       -52%
K-Star Sports                           -83%
XingQuan International Sports Holdings  -48%
Maxwell International Holdings          -43%
Multi Sports Holdings                   -68%
HB Global                               -66%
China Automobile Parts Holdings         -45%
China Ouhua Winery Holdings             -83%
China Stationary                        -59%

Average                                 -61%

A simply horrendous result, given that Bursa Malaysia's composite index is trading near it's all time high. An average loss of 61% means that the shares need to increase its prices by 156% to reach its IPO level, and even then investors would have had their opportunity cost.

  • Why did Bursa Malaysia pursue its plan to list China-based companies? They must have noticed the poor results of China-based companies listed on the Singapore stock exchange.
  • Why would any major shareholder of a Chinese company want to list its company at Bursa Malaysia, except possibly for the wrong reasons? I simply can't imagine a founder of a fundamentally sound China-based company wanting to list its company on Bursa, after seeing the above table.

Saturday, 13 April 2013

EPF/Petronas, "not fair but reasonable", MBf

[1] P Gunasegaram wrote an article on KiniBiz about EPF accepting Petronas' revised offer for MISC shares under the title: "Shame on you EPF!".

I can't agree more on the article, I strongly recommend to read the full article.

The new offer from Petronas was an improvement of less than 4%, a much too low offer. Why did the EPF so hastily accept this offer that is still way below the fair valuations and below the rights issue a few years ago?

Keeping MISC listed would ensure a healthy dose of transparency, something that Petronas itself also could do with.

It looks like a typical case of "face" where both parties can claim some credit:
  • EPF claims that they are actively fighting for the shareholders (I have very strong doubts about this claim), they booked a victory since the price has increased;
  • Petronas can claim that they only raised the price by a small margin, in other words the first offer was also "pretty decent".

[2] Errol Oh wrote in The Star: "Mixed feelings over mixed advice".

"A lot of people are befuddled by the on-going streak of independent advisers (IAs) describing general offers and proposed deals as “not fair but reasonable” and yet recommending that shareholders accept the offers or vote for the deals."

I do like to add that there are two improvements compared to the old situation:
  • The majority of the delisting offers is deemed to be "not fair but reasonable", while in the past it was almost always "fair but reasonable". At least now the minority shareholder know they are (hugely) disadvantaged.
  • The quality of the independent advices has improved recently. There are still some bad examples, but these are more rare. In the past the quality was so low, that I recommended to simply do away with the independent advices, they were a waste of money and time and even worked against minority investors.
For instance, "Where Is Ze Moola" wrote about the horrific delisting of IOI Properties at RM 2.60 in 2009 while a rights issue not too long time before was done at RM 6.25. The "independent" advice from OSK Investment Bank was "fair and reasonable" and recommended the shareholders to accept the offer. This kind of advice would typically cost around RM 500,000. I don't think it was worth the paper it was written on.

"Early this week, a wire report had stated that IOI Corp was planning an initial public offering (IPO) of its property arm in the fourth quarter of 2013, speculating the total value of the listing to be in the region of RM10bil.

This would be a huge improvement in size, considering that it was only in 2009 that IOI Corp had bought back its then-listed property arm IOI Properties Bhd for a mere RM310mil in cash and shares, valuing the unit at about RM1.3bil."

In only 4 years time the value of IOI Properties would have increased by a factor 8? Do the previous minority investors of IOI Property still believe that the offer price of RM 2.60 was indeed "fair and reasonable"?

Another really bad case was the delisting and relisting of Bumi Armada, about which I have written before.

[3] Gurmeet Kaur wrote about the offer for MBF: "Happy ending for MBf minority shareholders":

"The group of minority shareholders who had, for some time now, been holding out for a higher price in the buyout of MBf Holdings Bhd have decided to throw in the towel and accept major shareholder Tan Sri Dr Ninian Mogan Lourdenadin's latest revised offer of RM1.775 per share."

I would not exactly call that a happy ending, RM 1.775 is still way below the estimated Net Assets per share between RM 2.45 and RM 3.20. Holding unlisted shares is simply not an option for most investors, and thus they were pressured to throw in the towel. Still kudos for the minority investors, they did put up a decent fight, but the odds were hugely stacked against them.

It is about time the authorities are looking into this situation: delistings at unfair (low) prices, possibly followed by relisting at inflated prices. They should make the playing field between majority and minority investors a more even one, it is long overdue.

Stating "these corporate exercises were business decisions" will simply not do.

Thursday, 11 April 2013

David Webb on BFM radio

Two days ago David Webb was interviewed on BFM radio, the link can be found here.

I strongly recommend to listen to the whole interview, but here are some pointers:
  • Left his banking career in Hong Kong in 1998 when the markets were bombed down, lots of value; also wanted to give back to society by starting the website
  • There is a clear conflict of interest when an exchange is listed between the commercial and regulatory departments, in Hong Kong's case the HKEX (Bursa); the other regulator is SFC (SC), from time to time these parties collide; the regulatory function should be taken out of the commercial entity HKEX
  • There should be consolidation of the many regulatory bodies into one, dealing with customers/consumers
  • In many ways Malaysia is well regulated compared to Hong Kong
  • HKEX, the majority of the directors chosen by government
  • When Webb was director, information was withheld, so Webb resigned as director
  • HK still has no quarterly reporting, one of the rare Asian countries
  • There is too much influence by the tycoons, also regarding rules for insider dealing
  • IPO's: there is no class action system, court cases are only worth it if somebody has a large investment
  • Independent directors, if approved by controlling shareholders then they are not independent, merely rubberstamps; they should be chosen by the non-controlling shareholders
  • There is a clear conflict of interest when a government is investing in companies
  • The government should not be involved with private ownership
  • 1 share = 1 vote, poll voting and publishing of the results should be the norm
  • Family controlled companies: minority investors' money is wanted but companies don't want to be accountable to them
  • RPT's: there should be an adequate explanation regarding the reason, why not from other sources, why no tender, why exactly from the controlling shareholder
  • Webb is investing in under-valued (under-researched) small caps in HK with a Corporate Governance filter
  • Manages his own funds for over 18 years, has hugely outperformance the HK index, enjoys not having to be accountable to others
  • Holding period more than 5 years on average

Tuesday, 9 April 2013

"Not fair but reasonable", OTC, delisting, Bursa

Where is Ze Moola blogged many times about the "not fair but reasonable" issue, for instance here, here, here and here.

Malaysia-Finance wrote this article about it.

I am happy to say that the mainstream media also paid attention to it, The Sun here (an interview with MSWG's CEO Rita Benoy Bushon) and Business Times here.

These are all excellent articles. Just to add, some observations:
  • The "not fair but reasonable" description is a clear improvement over the past ten years, when almost all deals were deemed to be "fair and reasonable", pity it had to take so long time before this change came through;
  • Still, "not fair and (thus) not reasonable, reject the offer" would make much more sense; the "not fair but reasonable" judgement is (unfortunately) always followed by the advice to accept the offer;
  • If a privatisation offer is deemed to be not fair, then the directors should explain why they could not come with an offer that is deemed to be fair, what they have done to unlock the value of the assets, if they actively have tried to get an outside offer, etc.;
  • Companies are IPO-ed at a clear premium to their net assets, but many are privatised at a clear discount to their net assets, that doesn't seem right;
  • Quite a few companies that were privatised were later relisted again, all at a much higher price, in other words minority investors lost out, in some cases big time;
  • Most of these recent independent reports are regarding privatisations, I hope the advisers have the courage to judge Related Party Transactions also to be "not fair", because many are (unfortunately) not fair;
Regarding the delisting issue, Rita Bushon mentioned:

"Perhaps another suggestion is to have an over-the-counter platform for those minorities who wish to still remain in the delisted entity until and unless a compulsory acquisition is triggered," said Bushon.

"This would motivate majority shareholders to offer a better price at the outset and the minority would be more fairly dealt with. (But) this suggestion needs to be studied more in detail with the implications."

A letter to the editor of today's (Singapore) Business Times from Dennis Distant mentions the same:

"SGX needs to look at circuit breakers, OTC

When SGX extends its activities to new fields, it rightly deserves credit and receives it.

However, in its strategy to adopt the features of leading world bourses like NYSE and Nasdaq, it seems to have ignored features like "circuit breakers" and, more importantly, facilities to assist shareholders of companies which get delisted, leaving them with useless paper certificates although in theory they can still sell the shares if they can find a buyer somewhere.

NYSE offers the OTC (over the counter) facility and, though of less help but still an option, the "Pink sheet" for shares in companies not listed on major exchanges.

With the increased instances of delisting since SGX began inviting China-based companies to list here as what became known as the now infamous 'S-chips', it behoves SGX to help out the many victims created when these counters and others were eventually moved off the SGX boards.

Can SGX comment on the absence of circuit breakers, OTC and PINK Sheets from the list of services? Getting delisted is the end of the road but being moved to OTC can lead to a new lease of life as is currently the case in the US with American Airlines and Eastman Kodak."

Regarding the delisting and relisting issue: questions were asked on Bursa's AGM (from The Edge Malaysia):

At the AGM, a shareholder also asked what Bursa's role was following an  increasing trend of listed companies being taken private, wiping billions off the exchange. And after several years, these companies got relisted.

"When [privatisation and relisting of the same companies] happens, I think someone is making money but not us shareholders," remarked the shareholder.

To that question, Tajuddin responded:

"Bursa has engaged with its stakeholders on this. The conclusion was that these corporate exercises were business decisions .

I find that a very unsatisfactory answer, I think Bursa Malaysia should analyse this important matter and come with a much more equitable solution. That is, if it is really serious about trying to get retail investors back to Bursa.

Claire Barnes wrote:

"Efficient capital allocation is so important that stock exchanges should be run in the public interest. In practice, ownership by member brokers often worked quite well. Running stock exchanges for profit sets up huge conflicts of interest. I have noted some of these in the past. Others are clearly explained in this article on Bursa CEO pay and lack of retail investors. Stock exchanges are too important to be listed companies!"

The good news about this all: the attention to these (and other) issues shows increasing maturity in the Malaysian market.

RIP Margaret Thatcher (1925 - 2013)

In the above video clip her warnings against the European Parliament and the Euro: "No, No, No".

Sunday, 7 April 2013

Difference between Bankers and Pirates

Love the cartoon.

Please also look at this posting:

"After the savings and loans scandal of the 1980's, some 3,500 bankers ended up criminally prosecuted and behind bars. This time around, no one on Wall Street has done jail time.

Or this posting:

For the American economy – and for many other developed economies – the elephant in the room is the amount of money paid to bankers over the last five years. For banks that have filings with the US Securities and Exchange Commission, the sum stands at an astounding $2.2 trillion.

Wednesday, 3 April 2013

Xian Leng, why is still no action taken?

In 2011 investors in Xian Leng were rudely surprised by news of large financial irregularities. I have posted several times about this company.

Key findings were reported by PriceWaterhouseCoopers Advisory Services, the major findings were reported here.

We are now almost two years further and still no action has been taken. KiniBiz wrote about the company recently. Some snippets:
  • Chin Seak Huat ceased to be a substantial shareholder in beleaguered ornamental fish breeder Xian Leng Holdings Bhd, after selling 1.45 million shares or two percent equity interest in the company.
  • It noteworthy that Chin was instrumental in the special audit on Xian Leng by PricewaterhouseCoopers Advisory Services (PwC) last year, which implicated Chua Bah Bee @ Chua Chong Seng— the brother of MCA president Chua Soi Lek— in the siphoning out of RM85.7 million, set aside to build ponds at Xian Leng.   
  • Xian Leng after all has turned out to be a political minefield with many parties uneasy with the findings of PwC.
  • While many investigations have commenced, no action has yet to be taken.
  • Whether the authorities take any action is taken at Xian Leng remains to be seen, with most of them evasive when questioned.
Hopefully we can soon witness some much needed, tough and transparent actions by the authorities.

The following video is from 2007, when all still looked good.

On 2:47 one can hear Chua Chong Seng saying:
"Sound fundamental of the company .... we are the cautious, prudent, fundamental company .....".
The fraud had started already and the Company would book six straight years of losses. 

Tuesday, 2 April 2013


In my article “SC Chairman (under fire) retires as expected” made on 10th March 2012, it has been brought to my attention by the Securities Commission Malaysia that, as a matter of fact, Tan Sri Zarinah Anwar’s decision to retire as the Chairman of the Securities Commission Malaysia was by her own accord and is in no relation to the alleged issues arising from the acquisition of the shares in Eastern & Oriental Berhad (“E&O) by her husband, Datuk Azizan Abdul Rahman prior to Sime Darby Bhd’s acquisition of a 30% stake in E&O Berhad.

Furthermore, it has also been pointed out to me that at all material times, Tan Sri Zarinah Anwar has acted according to the ethical guidelines of the Securities Commission Malaysia and conducted herself fairly throughout the acquisition of the 30% stake in E&O Berhad by Sime Darby Berhad.

As such, the inaccuracies are much regretted and therefore I hereby retract the said article from my blog. Lastly, I apologise for any inconvenience caused arising from the inaccurate statements made.

Frontken shares sold at 8 times the market price

Article in The Edge Malaysia highlighting that a block of 28 million shares in Frontken was transacted at 47.6 sen off-market, while the market price was 6 sen. In other words about 8 times the current price, very steep and unusual.

Most likely the shares are held by OCBC Capital Investment, and the transaction has to do with the court case where OCBC won its appeal, as reported here.

On another note, this announcement mentions several financial irregularities of around RM 9 million involving one of Frontken's subsidiaries. Bad news for the investors who have already been suffering for a long time.

Monday, 1 April 2013

Household incomes continue to soar?

I read with amazement the following article from Bernama:

"Household Income Continues to Soar on Economic Transformation".

"The current average monthly household income of Malaysians at about RM5,000 compared to RM4,025 in 2009"

This simple statement begs a few remarks:

[1] 2008/2009 was the worst global recession of the last 50 years, to take 2009 as the starting point for a comparison is rather tricky; at the very least it should have been noted that 2009 was an exceptional year, to put things in the right perspective.

[2] The average monthly household income does not mean much for the average person on the street. Malaysia has one of the worst GINI scores in the world, this index measures the degree of inequality in the distribution of family income in a country. A much better measure would have been to divide the population in brackets and to show how much for instance the people earning the lowest 20% wages have benefitted.

[3] An increase in income is only "real" if accompanied by low inflation. The Department of Statistics claims that the inflation is indeed very low (between 1% and 2% the last year), see for instance this graph. I don't believe those low numbers at all, when I left Malaysia in 2010 almost all prices that I could come up with had roughly doubled in the last say 10 years, not exactly an indication of low inflation (I have to admit that I compared prices in KL, in the rural areas it might have been different).

Interestingly, the Bernama article seems to agree that the official number is wrong:
  • "However, he said the government should place greater emphasis and take measures to reduce inflation rates in the two states, which were escalating due to indiscriminate hikes in prices of goods by certain parties."
  • "Universiti Sains Malaysia, School of Social Sciences, associate professor of criminology Dr P. Sundramoorthy said, all the government initiatives and various financial support were timely and relevant to ease the burden of the rising cost of living."
But if the real inflation rate is indeed much higher than the reported one (and I think everybody will agree with that), then the real GDP growth (which is the GDP growth corrected for inflation) is much lower than reported.

I wrote before about Malaysia's economic growth, and made some critical comments.

I like quite a few aspects from the Economic Transformation Program and in general I am positive about their achievements, but some of the claims they make are really too much. By giving a more balanced picture their credibility would increase.