Thursday, December 06, 2007

Ooops!!! Big Wok!!!

Seng: "In most corporate exercises, where there is a choice between a share-swap or cash option, the automatic default option — if a shareholder fails to choose or reply — is usually the share-swap one. ". I note with interest that the recent LIONDIV/Parkson restructuring gave shareholders 1.3 ACB shares as default, instead of automatically cashing out shareholders. It's true it's not directly comparable since LIONDIV still exist, whereas previous coy dissappear, but that should be no reason to not give shares isn't it? Perhaps someone can explain to me why it must be automatic cashing out, as I still don't understand. It's true SD is much more complex restructuring, involving 9 companies, but that means having 9 different multiples - one for each company potentially, maybe not (cf 1.3 x for ACB), but why automatic cashing out? I am puzzled....

Dali - My additional point is that Synergy Drive was a unique proposition, and that the GAP btw the px fixing for cashing out till the actual conclusion of the exercise was very substantial. SD directors and the lawyers should be AWARE that the mkt px has moved substantially prior to the suspension of Sime Darby - to me that is a material change of underlying factors. The mgmt and lawyers should be aware that there has been a MATERIAL CHANGE, and should warrant some form of redress. If the pre suspension px of SD was 7.00 or even 7.50, one can argue that the default/elect options would be deem as FAIR. Owing to the material change, one can easily predict the dire consequences ahead, and should have acted to minimise the impact to the detriment of shareholders.

In developed mkts, the board will appoint an independent advisor for minority shareholders, and I am sure the independent advisor would have suggested AGAINST the default for cash option esp when the presuspension px is almost double the cash option. I hope the SC and Bursa will implement new guidelines for future transactions.

Final point, if the affected shareholders really wanted the cash option, they could have sold anytime during the week leading up to the suspension and got nearly double the 6.46! What does that tell... that they are still holding the old Sime Darby shares for the 6.46??? Who in the world would do that? Yes, the blame largely lies with the affected shareholders, but some blame must accrue to the way the deal was structured, and failing to "act" when there has been such a material change in the crucial terms and conditions.


Yes, Sime Darby is the world's largest plantation company now. However there has been a GRAVE INJUSTICE inadvertently committed by the company & its related advisors / registrar. Let's listen in to a conversation between an auntie and her remisier a few days back:

Aunty: Ah May ah..., my Sime Darby now trading again aah??
Remisier: Yes, it touched RM12.00 just now.
Aunty: Waaah ... so good one... lucky I hold for 3 years never sell ... thats why la... people should stick to blue chips, cannot lose one... Can you sell my 3,000 Sime Darby now ... I think I will use the money to visit my old friends in Australia..
Remisier: OK, .... let me check your account.... eh, Aunty you have no Sime Darby in your CDS account, only left 2 lots of Mems Technology...
Aunty: WHAAATTTT.... (and faints..)

Now repeat that conversation a few hundred times over across all brokerages in the country. You think the Hinduraf and Yellow Power protest marches were aggressive... wait till these affected investors bang on Sime Darby's doors.

The Problem - The circular and announcement by SD clearly stated that if you do not elect, you automatically by default will receive 6.46 in cash. We all know the pre-suspension price of SD, nearly double that cash amount. Those who ignored or did nothing automatically got cash instead of new Synergy Drive shares.

The Legality Side - Lawyers will advise that you should not allow default clause to receive shares, but to allow default clauses to receive cash is OK. I can understand where they are coming from - and legal thinking along those lines, can we enforce that those who did not turn up to vote in the upcoming elections will automatically be an extra Vote for BN? IT IS SO OBVIOUS that the deal favours to take up the new shares by a very wide margin. It is also probable that there will be some who will fail to follow up on these type of "exercises" maybe through their ignorance or genuine mistakes. That being the case, I don't think it is legally or morally wrong to put in the clause that in default they will receive shares. What is the law and legal system there to do - to ensure justice and fairness, both not evident here.

The Sufferers - Its not just the aunties and uncles, many foreign investors are affected as well. Custodians also got whacked by their clients. Clients who manage 1,000 companies in their portfolio may have missed the circular as well.

Remisiers/Dealers - Good ones would have inform their clients and reminded them what to do. If they didn't, well, you should change your remisier.

Actual Gainers & Losers - Well if you got a cheque for your old Sime Darby shares, that's your losses. The gainers are the new shareholders in Sime Darby, as the company need not fork out as many new shares vis-a-vis the cash portion. The dilution effect is less. But to SD's bottomline, its all negligible, but the losses to the real shareholders are very real indeed.

Sime Darby - While the PR dept can trumpet all they like that they made the proper announcements and laid out the rules. There are no rules governing equitable performance by the management or doing the right thing. These are not strangers, they ARE your long suffering shareholders who stood by the company through thick and thin - and this is what they get? Is this managing with shareholders' interests as the top priority? Can do better right??? Can do so much better!!!

Level Of Care - SD, their lawyers, the merchant bankers and the registrar cannot and should not hide behind prepared text and legality to excuse themselves from the debacle. Only an IDIOT would have selected to receive cash. Yes, some of the fault can be ascribed to the shareholders who did not follow up on their part. But, as I have mentioned above, SD's management, the lawyers and registrar all had a role in this as well.

Solution - Give them all shares in the new SD, take back their cheques. If you need to hold an AGM to do this, do it. Then, being the biggest plantation company in the world may actually mean something the next time you say that you have the shareholders' interests at heart.


H said...

Well said! We need more people like you to voice out so that companies can make improvement. I am not a shareholder but I can feel how shitty it must have been for those who got the cash.

Your articles are so insightful and interesting -- I follow them daily :) Thanks!

zentrader said...

Sifu Dali,

I salute you for telling the truth and Sifu Dali deserved the title of 2007 Malaysia BEST Financial Blog.

Hope in 2008 you will do the same good work for all investors like us.

Please can do some writeup what will be HOT theme next year? TQ

Old said...


This a great piece of reporting! Your blog together with Moolah's must be a "MUST READ" blogs for all serious KLSE stock investors!

You are absolutely spot on about having SHAREHOLDER'S BEST INTEREST at heart.

This action alone speaks volume and very loudly about SIME's Directors focus. The root cause must surely be the low cash payout based on the Default option. This is not an accident, but is carefully crafted, designed and approved by SIME's Board of Directors. I'm sad to say in this instance, they clearly DON'T have shareholder's best interest at heart with such an arrangement. To the Aunties, this would be seen as legally sanctified DAYLIGHT ROBBERY. There is no other word for it. I dread the day when our laws and legal interpretations are used by a privilege few to STEAL from those less informed like Aunty.

If there are long-term investors planning to stay invested with SIME without monitoring their stocks, then, they deserved to know this sad episode so that it must not be allowed to be repeated!

Old Observer.

mat said...

I believe that in the Synergy Drive merger case, the fault should not be put to the Directors of the previous 9 companies or the Directors of the new Sime. It is the work of the advisors (CIMB). The Directors hands were tied.

Dont believe me....??? check those 'in the know'

deborah said...

This 'unpleasant' situation benefits the substantial/controlling sharedholders. Question is, is this an honest mistake or well orchestrated with an end in mind??

I also note some cases where companies buy back own shares despite the share price not moving up a notch. To enhance shareholders value or to boost share price, they cld opt to raise their dividend payout or go for capital repayment. But oh no, that wld not do. The end result of such buyback only serves to raise the substantial shareholders' effective int in the company without them spending a sen.

As for mat's comments that the decision was out of the directors hands but cimb. I like to respond on 2 counts, 1) directors have the fiduciary duty to ALL sharesholders, so not playing an active contribution in the matter is not excusable. If this is the case, then Shareholders shld vote not to approve their fees at the coming AGM! and 2) merchnat bankers and advisors... sometimes when bad decision or strategies are executed, its not always their fault entirely... they are being plain incomepetent or fail to see the issue at hand. Maybe too many jobs going to cimb and as a result, they are stretching themselves way too much?????

As for independent advisors... even if one is appointed, I wonder how effectively it can be. I have heard of cases where mgt appoints weaker firms or ppl who wld do their bidding as independent advisors. BOttom line is, investors must be vigilant and if they don hve the know how or the time nor interest, they shld just buy unit trusts or amanah saham. Leave the shares to the brave ones.

shiryo said...

I had odd lot (below 100) shares in the old Sime Darby and opted for cash. I might have opted for Synergy shares if I could sell odd lots (if there is a way, please tell me).
Odd lot shareholders in Sime who wanted cash would not have complained (like your Aunty). In fact they would be grateful Sime gave them the automatic cash option. Think about it.

Incidentally the company I do internet trading through did not credit my account with the cash that was supposed to be due from Synergy, meaning I still hold post-merger Sime shares. It’s a small amount so I am not complaining

deborah said...

another question is, what is the Bursa or SC's role in all this since the cicculars and details of the scheme are submited to them in the vetting and approval process?

shiryo said...

Deborah, you said:
As for mat's comments that the decision was out of the directors hands but cimb. I like to respond on 2 counts, 1) directors have the fiduciary duty to ALL sharesholders, so not playing an active contribution in the matter is not excusable

Directorships in GLCs are mainly political or crony appointments. Don’t expect too much from such people. Sime tried banking but failed miserably; the directors just can’t think laterally or out of the box. There are a few quality directors but the rest……….well, you get the drift.

zewt said...

this sounds like a typical malaysian style of doing things... legalised con-man perhaps?

someone somewhere out there made millions... while men on the street suffers. hmmm... the whole situation sounds just too familiar.

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