More on Privatisation of VADS

More on Privatisation of VADS

OSK wrote the following the following in their report.

• Farewell To A Gem
  
  TM has proposed to privatise VADS at RM7.60 per share, matching our target price for the stock, which values the company at 12x FY09 EPS. We view the takeover as a beneficial exit option for minority shareholders as it addresses the stock’s illiquidity. We believe TM had taken cognisance of this in arriving at the offer price, with due consideration for VADS’ solid balance sheet. Hence, we are of the opinion that the minorities should acquiesce to the offer. Fully valued at RM7.60.
  
  Offer price at our target of RM7.60. TM has proposed to undertake the privatisation of VADS at RM7.60 per share implemented via selective capital repayment. The deal values VADS at 12x FY09 EPS, or a market capitalisation of RM1bn, matching our target price for the stock. The offer, which carries a 12% and 18.4% premium over the stock’s last traded and the 5-day volume weighted average price respectively, has adequately factored in the company’s enviable cash flow/balance sheet and dividend prospects.
  
  Solid fundamentals. VADS has not disappointed given its successive y-o-y growth in revenue and earnings, charting CAGRs of 28.6% and 39.3% respectively since listing in 2002. Its earnings are highly visible, thanks to strong recurring revenue from the managed network services (MNS) segment. The focus on the business process outsourcing (BPO) space unlocks a strong revenue stream and is expected to spearhead earnings growth going forward. We project EPS growth at a healthy 25% on average p.a. going into FY10.
  
  One more bites the dust. We were one of the first to commence coverage on VADS in 2005 and had consistently picked the stock as our top pick in the small cap ICT sector for 3 consecutive years. Its privatisation will undoubtedly remove a jewel whose track record is difficult to emulate. The scarcity value attached to the stock is reflected in the takeover price, which we deem fair. We advise minorities to accept the offer as it is a good exit strategy to unlock the value of a stock that has been plagued by liquidity constraints and is trading at an unwarranted discount to its global BPO peers.

This is where it is sooooooooooooooo wrong.

Acquiesce to the offer?

According to my pal Wikiseng, to acquiesce is to knowingly standing by without raising any objection to infringement of his rights...

So if I am not flawed again, is OSK telling VADS minority shareholders just to accept the offer, in regardless?

Forget about the fact that company has solid fundamentals?

Forget about the fact the stock had managed to register stellar CAGR growth of 28.6% and 39.3% since listing?

Forget about the fact the offer price is priced only at 12x FY09 EPS?

Forget about asking if the offer price is justifiable or not?

Just acquiesce to the offer.

Sad isn't it?

Don't you think you are not fully compensated?

So how?

Better consider what happens here before you invest in any listed subsidiary.

So long farewell, it's time to say goodbye....

Privatisation of VADS

Life is never fair and when nothing is done history will repeat itself.

Blogged on Dec 16th 2005, Privatisation Issues

• The issue of privatisation and the subsequent delisting of a listed subsidiary.
  
  Generally there are two ways companies can be delisted from a stock exchange in.
  
  The first case is the enforced, compulsory delisting of a company, in which the stock exchange forces the delisting of the stock because the listed company has failed to comply with the stock exchange listed requirements. And these are usually based on commercial reasons in which the listed companies simply cannot operate in a profitable manner.
  
  The second manner a company can be delisted from a stock is where the company voluntary informs the exchange that they no longer want to be listed. And a variation of this case, is the delisting of a listed subsidiary is made by its holding company, in which the minority shareholder of the listed company is forced to choose between the offered compensation price or risk being involved in a private company, which would ultimately offers no transparency rights.
  
  I have no problem at all with the first case. These are them bankrupt cases. Them 'koyak' companies. 'Chap-lap' companies which are losing money like crazy.
  
  The second one, the privatisation and the subsequent delisting of the listed subsidiary, this one I really don't like at all.
  
  It's just totally unfair to the minority shareholder and it makes a total mockery of the whole stock exchange.
  
  Listed Companies should not be given the approval so easily to privatise their listed subsidiary company in which the general investing public is forced or threatened with the issue of delisting. And as mentioned earlier once the company is delisted this offers the investor no transparency rights at all. So when a listed company is able to list and delist their subsidiary companies as per their wimps and fancy this would make a total mockery of the stock exchange.
  
  And what about the general offer price for the minority shareholders stake in that listed company? Would the minority shareholders get an offer that is fair or would the minority shareholder be placed in a disadvantage position? Would the premium offered over the existing share price to adequately compensate the minority investors?
  
  If no, this ultimately means that the minority investors would never be given a chance to being adequately compensated for the permanent withdrawal of a good investment opportunity.
  
  And if this is the case, then this would contradict the government's plan to woo more investors into Bursa Malaysia cause investing would have indeed turned very unattractive, a game which is very biased against the investing public.

Where did it start?

My first encounter was on Bumi Armada and its detalied in full here.

1. http://whereiszemoola.blogspot.com/2006/09/pirates-which-siezed-armada.html
2. http://whereiszemoola.blogspot.com/2006/09/more-on-privatisation-issue.html

We then have MetroJaya.

1. http://whereiszemoola.blogspot.com/2006/11/muis-purchase-of-metrojaya_02.html
2. http://whereiszemoola.blogspot.com/2006/11/muis-purchase-of-metrojaya-ii.html

The unbelievable privatisation of Johor Port.

1. http://whereiszemoola.blogspot.com/2005/12/privatisation-issues_16.html

Oh how about a stock like Powertek?

Let me ask yet again.

How could I safely know that I would ever be fully compensated for taking the investment risk in investing in a company listed subsidiary when the holding company can list and delist as per wimps and fancy?

Recently, IJM wants to privatise their listed subsidiary. Receipt of Notice of Voluntary General Offer from IJM Corporation Berhad

Today we see another privatisation case where Telekom Malaysia wants to delist its listed subsdiary VADS via privatisation exercise.

• KUALA LUMPUR (Dow Jones)--Telekom Malaysia Bhd. (4863.KU) is proposing to buy the remaining shares in Vads Bhd. (7150.KU) that it doesn't currently own for MYR7.60 per share in a move to take the company private, Vads said Monday.
  
  In a filing with the stock exchange, Vads said the proposed buyout will involve a selective capital reduction and repayment exercise.
  
  Telekom currently owns 83.4 million shares or 63.3% of Vads.
  
  Vads shares, which were suspended Monday pending the announcement, closed Friday at MYR6.80.
  

It just does not end.

For sure the minority shareholders are not happy with the less than generous offer by these holding company.

Yup another sad day where the minority shareholders do not get a fair compensation for taking the investment risk in investing in these listed subsidiaries.

What can an investor do next time?

How about being a tiny bit wiser and AVOID investing in these subsidiaries? What's the point of it all when the investor has not chance of getting a fair investing compensation?

No Risk No Gain But Risking Too Much To Gain Too Little Makes No Sense Either!

Peter Bernstein has published a wonderful piece of article on New York Times a couple of weeks ago, What Happens if We’re Wrong?. It was featured by Chris Puplava, FinancialSense's market commentator, on his wonderful market wrap today, Don't Forget Newton's First Law!

• What Happens if We’re Wrong?
  
  “The key word is ‘consequences.’ I learned this lesson many years ago from studying Blaise Pascal, a French mathematical genius in the 17th century who spelled out the laws of probability more clearly than anyone before him. This was a thunderclap of an insight that, for the first time, gave humanity a systematic way of thinking about the future.
  
  Pascal was both a gambler and a religious zealot. One day he asked himself how he would handle a bet on whether ‘God is or God is not.’ Reason could not answer. But, he said, we can choose between acting as though God is or acting as though God is not.
  
  Suppose we bet that God is, and we lead a life of virtue and abstinence, and then the day of reckoning comes and we discover that there is no God. Well, life was still tolerable even if less fun than we might have liked. Here, the consequences of being wrong would be acceptable to most people.
  
  Suppose, however, we bet that God is not, and lead a life of lust and sin, and then it turns out that God is. Now being wrong has put us into big trouble.”
  
  “RISK management, then, should be a process of dealing with the consequences of being wrong. Sometimes, these consequences are minimal — encountering rain after leaving home without an umbrella, for example. But betting the ranch on the assumption that home prices can only go up should tell you the consequences would be much more than minimal if home prices started to fall.”

The key assumption here is ONLY.

And Bernstein then continues by explaining the issue of risk management.

• In this assumption, the word “only” is ridiculous. There are no “onlys” in the future. More things can happen than will happen.
  
  Under those conditions, risk management should concentrate either on limiting the size of the bet or on finding ways to hedge the bet so you are not wiped out if you take the wrong side — if home prices do start to go down, or even stop rising. Risk management is fundamentally different from managing volatility, which is how many investors view it. Volatility is often a symptom of risk but is not a risk in and of itself. Volatility obscures the future but does not necessarily determine the future.
  
  Effective risk management starts with the recognition that any forecast can be wrong, then weighs the consequences of being wrong. Only then can we decide whether to make a bet, whether to hedge that bet and how to execute the hedge if needed. ( Do read rest of Bernstien article here )

A couple of months ago, I wrote Understanding My Investment Risks.

• Investing in any stock(s) is risky.
  
  There is no investment which carries absolutely zero risk.
  
  Which is why before I make any investment decisions, I always, always weigh out all the pros and cons.
  
  Investment should never be about investing based on yardsticks and numbers. As mentioned before a low PE stock does not the stock a good stock. It simply means that the stock is traded cheaply in comparison to its earnings.
  
  Do you see that it is so common that most tend to equate a LOW PE stock as a great investment? And the whole bias-ness is based on the fact that it's a lowly traded PER stock.
  
  Which I feel it's so badly twisted.
  
  One should invest in a GOOD QUALITY stock that a cheap price. However, it does not mean that all cheap stocks are GOOD QUALITY stocks. Some stocks are cheap because of the risk within the stock. You cannot use the cheapness in the traded stock price to justify that the stock is good!
  
  Too confusing?
  
  Flip it the other way around.
  
  How about them high PE stocks? Does a high PE stock make the stock a lousy stock? Does it? I don't think so. It only means that it's an expensive stock and from an investing perspective it only means that our chances of being rewarded in such an investment is rather slim. ( Dali had also written recently on PER and here is his take, PER – simple but limited )
  
  Anyway, back to the pros and cons of the stock.
  
  And because I tend to consider all the concerns and risks within a stock, folks tend to consider myself a critical cynic.
  
  But my reasoning is simple, if we don't know and we don't consider all the risks and concerns within a stock, how can we fully justify the risk in our investments?
  
  Should the fact that the stock trades at a low PE over weighs all risks?
  
  Well, if that's the mindset, then I have one great example, Megan Media. It showed clearly the risk when one gets fixated on the investment yardsticks and ignores all the risk.
  
  Understanding the business model and the economics of the business is so very important, yes?
  
  What's the driving factor that's driving the current earnings? Could this driving factor be sustainable? Is it cyclical? These are issues that need to be considered, yes?
  
  And about management issue?
  
  If ever you doubt the management or the owners of the business, how could one invest in the company?
  
  Take HaiO case. Back in 2003, it declared to the press it was cash rich and debt free but when one digs further, one discovers that the cash free is derived from a recent rights issue!
  
  So in this given example, won't you doubt this management?
  
  In real life, say you meet this crazy bugger and he asks you to be his business partner in a barnyard business. But this bugger is sort of a whacko because he tends to go bonkers and whacky in the afternoons. Too much smokes I guess. So in such a situation, surely you have your doubts, right? And common sense should suggest to you to forgo this barnyard business opportunity.
  
  Perhaps my example is not the best but shouldn't one have the same type of mindset as an investor? When one have doubts about the management of a company, why should one invest in the company then? Aren't we ignoring our investment risk?
  
  Of course when we get to adversely focused on the risk, one can miss some winners.
  
  Firstly, missing out on a winner is no crime but losing money because one ignores the risk is a crime for me.
  
  For example, take the stock VADS. It was a stock market winner but I chose to ignore it because I simply could not comprehend the risk involved in investing in the stock. VADS is a stock in which its majority shareholder is also the main and only customer for the business. Such a model simply did not make sense to me. Hence, from an investing perspective, I had chosen to give it a pass.
  
  Remember missing out on a winner is never ever a crime.
  
  But some form of greed is always within every one of us and greed can play tricks on our mind. Sometimes we only focus too much on the pros of a stock investment. One only sees the opportunity within the stock and dismisses all possible risks.

And again for now I would like to remind myself to NOT fall in the trap of being too bias towards the concerns and risks of any given stock and the current market too!

Yes no risk no gain but risking too much to gain too little makes no sense either!