Thursday, June 02, 2011

Why I Don't Like Private Placements At All.

That the stock market is risky is such an understatement. The reality is there isn't a 100% guarantee that one would make a return from their investment in the stock market.

Stock market crashes happens and some happen with many claiming that they weren't warned nor were they prepared for the crash.

And then emergencies in one owns life could happen. Yes, an unforeseeable incident might happen, one that might require one to fork out much more money than they were ever prepared for. And if one does not have other options to access money and the only viable option left is their 'retirement fund' which are represented by stock investment. And since in an unforeseeable incident, one always feels it's bad luck and when bad luck happens everything seems so unfortunate. Like when one if forced to withdraw from their 'retirement fund' or their stock investments, many a times, one would forced to sell at a loss. Yes, when things go wrong, they really go wrong. Yes, it's possible that the deemed 'long term' share investor could be forced out of an investment at a loss due to personal unforseeable incident.

Which is why investors in the stock market should always be given a chance or opportunity to be ADEQUATELY compensated.

Key words here is GIVEN a chance and ADEQUATELY. Now I understand that there's no divine right for any investors to claim that they must make money.

However, if the stock represents a good business and the stock is justified by the investing reasoning made (like not over paying for the investment), then at least the investor, the minority shareholder should be given a chance to be adequately compensated for taking the risk to be a long term shareholder/investor of the business.

To have the company attempting every which way to make a fool of the investor and their hard earned money is simply sinful in my flawed opinion.

Seriously, listed companies MUST stop treating the minority shareholders as OPM or other people's money. Show them the respect. They are the co-shareholders of your business. And the last I know, shareholders are shareholders are shareholders. They are your business partner. Treat them with respect.

And if you understand what I have written so far, then you should understand why I absolutely hate private placements.

It stinks to high hell!

And that's being polite.

Private placement discriminates the existing minority shareholders and it short changes the minority shareholders big time.

Last night I posted The Insanity Of Asia Media's Private Placement. It's a private placement which involves the creation of some 79.800 million shares or an extra 35% new shares.

Disclaimer first: DO NOT GET ME WRONG HERE BECAUSE I AM NOT SPEAKING FOR THE SAKE OF AMEDIA BUT I AM WRITING BECAUSE I SEE PRIVATE PLACEMENT HAPPENING WAY TOO OFTEN! IN MY FLAWED OPINION IT'S A FUND RAISING ACTIVITY WHICH UTTERLY DISCRIMINATES THE MINORITY SHAREHOLDERS.

Let me highlight the Amedia example again as mentioned in the posting The Insanity Of Asia Media's Private Placement.

Asia Media has a share base of 228 million shares.
A private placement of 35% would see some 79.8 million shares being created.

Which means Asia Media would end up with a share base of 307.8 million shares.

Not sure of the implications?

It's rather simple.

Assume for a moment that Asia Media 'could' earn some 10 million for the fiscal year.

Based on 228 million shares, this would mean an eps of 4.3 sen.

And if you think this stock deserves a fair value PE of 10x, then the fair value price should see the stock valued at 43 sen.

So far, ok?

Now consider this new share base of 307.8 million shares. Now an earnings of 10 million would equate to an eps of only 3.2 sen. And using the same 10x PE multiple, the stock fair value would shrink to just 32 sen!!!!

See how the value shrunk?

See how the value had shrunk from 43 sen to 23 sen? 32 sen?

Remember EPS means earnings per share. Previously before the private placement, the current minority shareholder is getting an eps of 4.3 sen. Now due to the private placement, the current minority shareholder sees their eps shrunk to just 3.2 sen.

They have just lost the 1.1 sen.

In Amedia case, I have stated that this placement SHOULD have been done before AMedia is granted listing!

Hello Bursa?

Where's the so called Quality Control?

Where's the previous objective of trying to improve the quality of the listing?

How could you let a company list in January 2011 and only to announce on 1st June that it wants to list an additional 79.800 million new shares? How could it let Amedia increase its sharebase by 35% just like that?

Won't the existing shareholders feel as if they have been mighty screwed big time??

And if a company wants to do a private placement because they want to raise funds, why discriminate the existing shareholders? Why can't they do a RIGHTS issue? In the case of the rights issue, EVERY single shareholder is given an EQUAL opportunity to participate fairly.

By doing a placement, it means exclusivity. It's exactly like privileged placement.

Which is so wrong.

And yes, let me say this again. Right or wrong, I am STRONGLY against private placements of new shares.

12 comments:

solomon said...

The public did not have visibility to who take up the share. Only the company and the regulator know.

Mun Wai said...

Moo,

I wonder how are they going to deploy the proceeds from the proposed private placement.

As working capital? Capex? My mind starts to run wild (as usual!) :P

I can't help but to think that they have "plans" to burn money at a greater scale. Moo,correct? wrong?

AMEDIA had RM17.398 mil cash @ 31/3/2011. Why the need to raise funds, again? Fund raising or "fun" raising :D

Scale of the RPTs ?

ronnie said...

This below is the call of EAH @ 0.51 made by dali-san last month>

http://malaysiafinance.blogspot.com/2011/04/watch-this-stock-closely.html

May I know, should I cut loss or hold on EAH ? it is now @ 0.38cts which is > 30% down from my cost .

can anynone answer for dali in case he refuse to give me the answer ?

how about u moolah ? can tell or u wanna to cover yr buddy dali-san ?

Moolah said...

Solomon: That's another solid point.

Like i said 'priviliged placements'!

Moolah said...

Mun Wai: For AMedia's case, yes, at this moment, they have the cash and they could easily borrow money, if they wanted too.

Why raise money thru private placement?

And since in this example, it was to meet the min Bumi stake requirements, why didn't AMedie addressed this issue before it got listed?

Why list and then only do this massive private placement? This is insanity!

And why did Bursa allow the listing to go thru in the first place?

Moolah said...

Mun Wai: OMG! See http://whereiszemoola.blogspot.com/2011/06/ta-researchs-commentary-on-amedias.html

K H said...

"See how the value had shrunk from 43 sen to 23 sen?"

You might want to change 23 sen to 32 sen....

I think basically in Malaysia, every entity can be bribed to look the other way including those that were supposedly there as watchdog for public interest....

Moolah said...

K H: Thanks for pointing out the typo! :)

Mun Wai said...

Moo,
The following came across my mind. Check the logic please. Many thanks!

Company with weak business model and unsustainable earnings should not be listed in the first place. Need funds to expand? Seek conventional means of financing via bank borrowings. In this instance, at least the Director / Management would strive to run the business well so as to generate a return in excess of the cost of funds and the ultimate redemption of loan + profit for the shareholders. Else, they have to be wound up.

Conversely, once it become a listed entity, public funds are at risk. I wonder Is it the true intention to raise funds for expansion of business thru the capital market or to raise funds for one’s own pocket?

Why would the Exchange allows the perceived exploitation of the listing status by promoters of some weak companies at the expense of the investing public (to contribute to the Exchange's P/L as it is not a non-profit organisation?)

Wouldn’t this induce weak corporate governance as the worst case scenario would be for the company to be delisted. Where is the incentive to run the company well if the Directors are crooks ? It just encourage more instances of moral hazard. Yes? No?

Moolah said...

The problem is the mindset. Many are brought with the thinking that the public funds are nothing but OPM (other people's money) and as a listed entity, they have the right to take advantage.

And they just don't care. As a long as they draw the big fat salary, it doesn't matter to them if the company do well or bust.

I am sure you can name a couple of BIG name listed companies who have been losing money for the past decade.

Mun Wai said...

It's sickening to see one instance after another in the local market where so much value has been destructed. And it is even more sickening to see the culprits eacape punishment, living their lavish live freely.

Where are the so-called capital market regulatory bodies? Are they doing their job decently? Are they even awake?

E said...

I dont like private placement too but I just want to bring up one point which has not been mentioned so far.

Rights issue wont do as the private placement is to increase bumiputra holding. In a rights issue exercise, all existing shareholders can choose to subscribe and the company may end up having the same bumiputra portion.

See link: http://announcements.bursamalaysia.com/EDMS/edmswebh.nsf/all/482576120041BDAA482578A200322B15/$File/AMEDIA-Announcement.PDF

I didnt bother to check the bumiputra holding at IPO. I thought every IPO needs to fulfill the min 30% bumiputra equity requirement anyway.

This means about 20% bumiputra shareholders have since sold their stakes?