Wednesday, August 01, 2012

Commentary On Ambang Sehati's Potential Offer for BRDB

Star Biz has an interesting perspective on Ambang Sehati's offer on  BRDB:

Do refer also to yesterday posting: Ambang Sehati To Make A GO for Bandar Raya?

  • Wednesday August 1, 2012
    Can there be a time when too much disclosure is bad for the market? Raison D'etre - Risen Jayaseelan

    CAN there ever be a time when too much disclosure is bad for the market? One instance where that question crops up every now and then relates to companies that disclose “indicative” takeover prices.

    Bandar Raya Developments Bhd's (BRDB) announcement on Monday that its substantial shareholder Ambang Sehati Sdn Bhd was finalising a takeover of the former, comes to mind.

    The announcement said that Ambang Sehati had informed BRDB that it (Ambang Sehati) was finalising the financing and approvals necessary to make a general offer for the shares of BRDB.

    BRDB went on to say that Ambang Sehati had informed that its indicative offer price for the planned takeover was at RM2.90 per BDRB share.

    Needless to say that has got a bunch of speculators jumping on the stock, moving it up by 16 sen to close at RM2.69 yesterday.
    Here's the complication what happens if Ambang Sehati does not go ahead with the general offer? That is always a possibility, considering that Ambang Sehati merely said that it was finalising funding and approvals for the deal.

    Can punters then argue that BRDB had misled the market by providing that indicative pricing? Would it have been better for BRDB to omit the indicative offer price in its announcement?

    Clearly, BRDB's announcement was in the spirit of full disclosure. The board had decided to disclose that information after it received it, which is the way things are supposed to work in our full disclosure-based regime.

    (What is also noteworthy is that Ambang Sehati's latest move of planning a general offer for the shares in BRDB is a significant improvement from what it had earlier planned to do, which was to buy the assets directly.)

    The issue with indicative price disclosures had reared its ugly head before in the case of an attempted takeover of KNM Group Bhd in 2010. The buyers had made a conditional offer to buy the assets and liabilities of the company at an indicative price of RM3.5bil, which worked out to be 90 sen per KNM share.

    Naturally believing that there was some kind of “floor pricing” in place, some investors bought into the stock. The takeover deal fell through after the due diligence and the punters lost their shirts.

    Conspiracy theorists are apt to go further and claim that disclosing indicative prices of potential takeovers is an attempt to mislead the market or to create a false market for the shares.

    Perhaps one way to address the problem is to prohibit companies from disclosing these so-called “indicative offer prices” until the offer is actually made.

    That, however, is against the concept of full disclosure.

    If there are parties related to the potential buyer who are taking advantage of the indicative offer pricing in place by selling their shares, then that's a different matter for the authorities to investigate.

    To merely ban the disclosure of indicative offer pricing information isn't the way to deal with that. It will lead to unnecessary complications. And where would we draw the line? Should the company even be disallowed from disclosing the planned method of takeover, considering different methods of takeovers appeal to different investors?

    BRDB's board therefore has done what was necessary.

    Punters betting that the general offer for BRDB's shares by Ambang Sehati would be made at RM2.90 or more, must accept the risk that the takeover may not materialise for whatever reason. Better for the buyer to beware than for information flow to be hindered.

    News editor Risen Jayaseelan reckons that general offers are always the “cleanest” and fairest ways for listed companies to be bought out.