Posted by: donmihaihai | June 8, 2010

What a flip! Can you flip?

Joyce Hooi of Business Times attended General Magnetics (GM) first AGM as an unlisted firm and watched much outpouring of outrage by its shareholders, penned a commentary call “General Magnetics: A lesson not learnt”. Despite some brilliant quotes, this article show one thing, which is the writer can’t flip. Bite at a certain point of view and let words flow. The idea is pretty simple — Why get into this stock? Do you know it in the first place? You have lot of time(years) to run away then why are you still stuck into it?

Surprisingly, I have just discovered that someone did a wonderful flip! Wrote: “General Magnetics: A lesson yet to be learned?” That someone is Mr. Edgar Wong, a professional. Something to consider before writing further. Here is one non professional talking about stuffs written by two professionals. If done right, I might get frame but this is not a good position to be in. Mr. Edgar Wong’s point is simple as well, minority shareholders are not stupid, and they went in because they had made a choice. That choice was GM was trading at way below liquidation valuation and it can be a very profitable trade(investment). The only problem is liquidation is not in sight even after delisting which was why they were outrage during AGM.

GM trading at below liquidation value was an open secret and there were many investors acting on it and some buying right after the confirmation of delisting. So this flip is not that surprisingly to those who on the other side of the table. It is his example that I like the best. Let me steal it.

Learning point – Are you holding on to shares of companies, that in recent years, have been making significant losses year after year (eg. Creative)? If so, are you doing anything about it?

Let do some flipping.

Well, the number of outstanding share is fixed and at any point of time, each is hold by an investor(someone). Selling can only be done when there is a buyer. A listed company shareholder keeps changing according to buying and selling from peoples leaving and newly excited owners. Just when SGX is looking for ways to make it faster and faster for trader to trade, Joyce Hooi is suggesting that time has stop for many years, perhaps 20 years, every investor is in for long term and there was no trading of shares or maybe just those who refuse to sell no matter what and when stock price fall below their purchase price. The other side of the coin is shareholders are excited new owners.

Someone might says, “Isn’t it entirely possible that it is a combination of two?” Likely and there are chances that there are more excited new owners getting stuck than shareholders that got stuck for years. Somehow taking a balance approach point of view might not be as interesting as an article compare to a one side article.

Substantial shareholders say, “Excuse me, anyone care about us? And in situation like this, no matter what, someone will get stuck! How you get stuck doesn’t matter to us.”

How you get stuck!

Except due to emotional reasons, it is hard to believe investors are stupid, unable to see and sell a gone case investment like GM, presume bought in situation where everything was bright and sunny. Spending more time talking about this type will get boring.

It is the second type that is interesting. A control type went in with eyes wide opened that is interesting due to the gap between trading price and liquidation valuation. In situation like this, generally investor profit by a few ways.

1) Company is profitable and as time goes by, gap is closed.

2) Some company/investor come in and bid for the company.

3) Self-liquidation willingly

4) Force liquidation by minority shareholders(must have at least some control, how big is required, I don’t know)

For GM, it is pretty clear cut that 1 was out. The chances of 2 happening is higher after delisting but can be very messy and no one likes messy stuff. For 3, it is actually very simple, if the substantial shareholder/management willing to do it, it will happen long ago. And that leave 4, which I believe many are betting on 4. I use bet rather than invest because for it to happened, my understanding is minority shareholders must at least have some kind of control, i.e at least a certain percentage of total shares so that they can force the substantial shareholders/management/director to act and vote. This is just the first step.

The key is control. If someone goes into this situation and able to has control, then he is less likely to be betting. But if someone goes into this situation without control, hoping that there will be other investors doing the same thing without knowing the actual situation, it is well…. betting.

Flip it over, does it sound like trading? Betting on the movement of stock price. Up or down, liquidation or not. Going by probability, there is a 50% chances but is 50% or even 80% good enough when can likely to loss everything if it doesn’t happened?

– ‘The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.’

– ‘Life is unfair as we can still live happily without flipping.’ donmihaihai

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Responses

  1. One other data point to consider is that controlling shareholder Ho went in to buy GM during the last few days prior to delisting. His last transaction was at 8c, a tad above the cash value (> 6c). This serves as a good indication of the lower (indecent) bound that the majority might offer.

    When I “bet” on GM then, I had wrongly put my faith on our world class regulator enforcing an exit offer (or liquidation), which is clearly stipulated in the listing rules. I calculated my odds based on a worst case exit offer of 8c. Never did I expect SGX to absolve GM from this obligation.

    The most important lesson I’ve learn from this episode is to discount our regulator.

  2. I was thinking that if there is no single controlling shareholder, the game can be played differently. Listing rules no longer apply. e.g. no need to make GO for crossing 30%. One can work like the olden days of approaching shareholders one by one, buying from them, and garner enough shares to control the company. If there were 2 shareholders with 30%, the 2 shareholders could easily come together and decide the fate of company. Or knowing the motivation behind the 2 shareholders, minority can also ride on them.

    The 5th option might be to try listing on other exchanges…and let the music play.

  3. bluechipstamp.

    Don’t need to take what I write about “betting” on GM seriously. I think it was betting but I was an outsider and still is.

    And let say I am fortunate and unfortunate enough to be in a position that failed minority shareholders. Now the rule say I or my group must do good to minority shareholders by giving them something back. What should I do? I would say, “F#$K it, unless I am a saint and rich if not why should I do it?” “Now I have no money, what you want to do with me?” “Who is going to do good to me?” “They made their choice and a wrong one! Kick me out if they can before not asking me to clean up the mess after everything is done”

    Cif5000,

    For GM, has anyone ride on the few biggest shareholders? Are minority shareholders building up?

    I love your idea(not option five) if I have the ability to do it if not I would rather ride on a company than ride on peoples that I hardly know.

  4. For GM, No. The control is in the hands of one person. So, there is nothing the rest can do, esp it is now a private company.

    I checked the definition given by SGX and found that a Controlling Shareholder is
    “a person who:-

    (a) holds directly or indirectly 15% or more of the total number of issued shares excluding treasury shares in the company. The Exchange may determine that a person who satisfies this paragraph is not a controlling shareholder; or

    (b) in fact exercises control over a company”

    It is difficult to understand how one can control the company with 15%. At most he can influence. For private companies, it is clear that 50% is required. So if I were to bet in future, I will check that either this one person is one with integrity or that no one is above that controlling threshold.

    I reread your title and find the word flip ideal. Just like flipping properties, relying on the next “richer” person to pay you a higher price…

  5. Thanks cif5000, I realised it after your comment.


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