Breakdancing in The Stock Market: Taking Companies public, private and then public again!

Now , besides Walla, Bruno, One Malaysian, Donplaypuks who as we all know offer us penetrating and rapier sharp glosses over many of my articles, I have a recent equally formidable participant who provides us with many illuminating opinions. His/her name is Sumpitan emas.  I welcome this person to offer opinions, debates and criticisms on the many topics that I have raised. I am keenly aware that the opinions I offer in those articles are deficient in many aspects but nevertheless put out in the open, expressing my willingness to reason and debate and inviting much persuasive thinking not necessarily in agreement to my own on many of the issues.

In my most recent article, I raised a disturbing point on the passivity and inertia of the government through KLSE and other regulatory bodies in dealing with the unfettered movements in and out of the stock market of players such as Ananda Krishnan. Coincidently I must give credit to my friend The Oracle of Syed Putera for alerting me on this issue. The matter was picked up by Sumpitan Emas and he has commented on the said issue. I have the pleasure and privilege to reproduce his thoughts here, verbatim.

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I wish I could respond to every topic you have covered here, but suffice for now; I will deal with the part about Ananda having three bites after three dippings. Brilliant capitalist entrepreneur or plain investment opportunist, or, both, operating within an investment regime with poor oversight by the very institutions specially formed for such functions. Or is the supervisory function lacking because the grey areas on investment rules and regulations have never been adequately addressed? Where is the KLSE? Where is the Securities Commission Malaysia?

 Though dated, this article from Fortune, 11 Nov 1985 edition, written by Benjamin J. Stein puts in focus who exactly benefits when a listed company is taken private and who loses. Though written for the U.S. the legal points raised are, in my opinion, relevant and worthy of discussion, and perhaps action to prevent further unfettered ‘freedom of movement’ — MIMOMIMO – MovingInMovingOutMovingInMovingOut. What I feel are the key points raised by Attorney Benjamin J. Stein are given below:

The great genius of the system of public corporations is the ability to raise vast sums for economic development. Its great curse from bubbles to watered stock to Ponzi schemes has been the temptation it offers managers and other insiders to abuse the trust of stockholders and steal from them in a seemingly endless variety of ways.

 A particular troublesome form of insider abuse has developed in the past decade without anything approaching full public discussion of its ethics or legality. Known as insider leveraged buyouts, management buyouts, and going private, deals of this type totaled billions of dollars and involved major investment banks and law firms. On their face, independent of the specifics of each deal they seem to me to raise the most basic questions of whether stockholders are getting the legal and ethical protection they need and by law should have.

 Seen up close.., they work like this: a group of insiders — officers and directors — works with an investment banker and a law firm to carefully analyse the assets of the company. If the insiders perceive a large difference between the going stock price and what they can get by breaking up the company, liquidating it, or redeploying the assets, they cook up an offer to buy back the company from the stockholders and “take it private.” Their offer is more than the stock market price. But it is — by definition — substantially below what the insiders believe the value of the company will be once they have it as a private fief.

 The insiders send a prospectus offering cash or a combination of cash and notes for the outstanding shares. The prospectus usually cites the burden of regulation on a public company and the market’s lack of appreciation for the company and includes a pious assertion by an investment bank (hired by the insiders) to the effect that the price offered the shareholders is fair and adequate.

As far as I have been able to tell, no insiders have ever put these words, or words to this effect, in a prospectus: “Notice — we the management and our pals in the investment community believe we can put up a small amount of our own money, take all the cash out of your company, borrow the rest, and rapidly make many times the amount we put in. It is altogether likely our return on investment will be exponentially greater than yours. That, dear stockholders, is the only reason we would do such a deal.”

Managers and directors are, by law and custom, fiduciaries for the stockholders. Fiduciary care, as a matter of unvarying law from the Middle Ages to the present, requires that the fiduciary place the interests of the stockholders ahead of, prior to, and superior to his own interests at all times and in all cases………

Query (as we used to say in law school): How can an insider conceivably be exercising his fiduciary care to a stockholder if he plans buy that stockholder out at a low price and then resell or hold the stockholder’s former assets at a higher price? If the insider knows a way to realign corporate assets to realise more value, is he not legally and ethically bound to do that for the benefit of his cestuis, his wards, the stockholders? How can he justify buying from the stockholders something cheap he knows is worth more, often far more, than he paid for it? Returns to insiders in some leveraged buyouts have been 40 to 1 and better, while stockholders got a few percent on their money. How can fiduciaries do that? ………

Query: When insiders do a leveraged buyout, are they not inevitably acting on insider information? Won’t they always, in every case, know the true value of this real estate or that invention or this pending contract or that competitor’s problems far better than the stockholders to whom they make their leveraged-buyout offer? If that is so, as it inevitably is, are not the insiders just as inevitably acting for profit on insider information? Why is this allowed?........

Query: Why are insiders not required to disclose — under Rule ….or under Rule…. —, the going-private rule, which also requires full disclosure — the very basic fact that they plan to make far more out of the corporation’s assets than they are paying stockholders for them?.........

 To lump all of this into one mound of legal and ethical sorrow: How, under fiduciary standards, insider trading restrictions, and full-disclosure requirements, can insiders get away with transactions that unavoidably call for the insiders to treat themselves vastly better than their ward-stockholders, on inside information, without full disclosure?........

 Investment bankers are required to certify in all going-private deals that the purchase price is fair. But the same investment banker or a closely connected firm may already be at work reselling the corporate assets and may know that the stockholder is receiving far less than the insider will get. How then can the “outsiders’ price” possibly be fair? How for that matter, can the investment bankers possibly represent the stockholders as a large, anonymous mob while their very large fees are paid by the insiders, whose interests by definition are substantially divergent from the stockholders? Aren’t they also fiduciaries?........

Something is wrong on Wall Street. ]]

 Something was wrong in Wall Street in 1985, but nothing was done to fix it. By October 2008, many things really went wrong in Wall Street. Should we fix KLSE now to stop Mr Ananda and many like him from doing the jig? He was widely reported to have presented a top-of-the-line jet-ski to the Sultan of Brunei Darussalam many years ago. Whatever for? But further access to the palace was effectively neutralised by vested and intimate interests from within Shell International. The moral is – ambition propelled by huge amounts of money cannot replace long-term relationship established through years of abiding friendship.

 Some money, some ambition, some guts, some cheeks. We have them all in Malaysia.

Where is the yacht built in Turkey moored now, anyone?