Brian Gaynor: Low-ball offers won't draw investors back

Bernard Whimp's share offers were sent to investors at a time when many stock brokers and financial advisers are on holiday. Photo / Natalie Slade

An editorial in last week's Weekend Herald, under the heading "Nothing wrong with cheeky share offer", clearly shows there is a huge difference between the views expressed in this opinion piece and most sharemarket participants.

The editorial, which was in response to seven low-price share offers by Bernard Whimp, contained the following comments:

* "[Whimp's offer] has generated more criticism than it deserves."

* "In any market there are people who, because of their circumstances, appreciate the opportunity to dispose of something quickly and conveniently and are willing to accept a lower price as the trade-off."

* "Some critics have complained that the market price of the shares is not included in the offer. But people surely have a responsibility to be familiar with the value of their investments. Protection of shareholders can only go so far. It should not involve over-the-top regulation that effectively wraps them in cotton wool."

On December 27, Whimp sent low-price offers to shareholders in seven large listed companies: Contact Energy, Fisher & Paykel Appliances, Fletcher Building, Guinness Peat Group, Nuplex, TrustPower and Vector. The offer prices were all more than 27 per cent below their sharemarket price at the time.

The bids, which closed yesterday at 6pm, were clearly pitched to catch a number of investors off guard and to encourage them to accept the offers.

December 27 to January 7 is a prime period to target investors because many stockbrokers and financial advisers are on holiday, the Securities Commission doesn't reopen until January 10, media coverage of investment issues is sparse while target companies have little opportunity to prepare and mail out responses during the Christmas/New Year period.

The other issue is that the total value of the offer was highlighted in a box at the top of the letter while there was no information on the market price of the shares or the equivalent total sharemarket value of the shares under offer. It is not illegal to offer to buy securities below their value, although these offers must not be misleading or deceptive. The term "misleading or deceptive" is difficult to interpret but Whimp's offers appear to be legal.

However, in Australia the rules are tighter, including:

* Offers must contain a written statement setting out the market value of the shares on the day the offer is made.

* Shareholders must be given at least one month to accept the offer.

* A failure to disclose the market price attracts a fine of $22,000 or two years' jail for each breach by an individual.

Offers in Australia clearly show how the bid price compares with the sharemarket price and the total value of the offer compared with the total market value of these shares.

These rules enable Australian investors to be far better informed than New Zealand shareholders and means that low-price offers for Australian companies are much less likely to be "misleading or deceptive" because of the threat of a two-year jail sentence.

The Weekend Herald editorial's first mistake was to suggest that some investors would "appreciate the opportunity to dispose of something quickly and conveniently" under Whimp's offer.

Whimp, who was banned as a company director for four years from October 2006, made his offers through unregistered entities that we have no information on.

Vendors would not pay brokerage and a cheque would be posted to them "within 21 days of a receipt [by the Whimp entity] that the transfer of your shares [to his entity] had been registered". Based on this information it is unlikely that accepting shareholders would be paid until early February.

By contrast investors could have sold these shares through the market and received their money within three working days. This transaction would be enacted by a stock exchange participant, which is monitored by the NZX, and the payment protected by the new clearing house system.

Thus an investor with 10,000 GPG shares could have sold them to Whimp at the offer price of 49c and received payment of $4900 in early February. It is highly unlikely that they would be secured creditors if something went wrong with Whimp's offering entity.

By contrast an investor could have sold these 10,000 shares through the market at 73c on Thursday and received $7227 next Tuesday, after deducting an estimated 1 per cent brokerage fee.

How is the receipt of $4900 from an unreliable and unsecure source on February 1 more convenient and quicker that the receipt of $7227 through a secure process on January 11?

The editorial's second, and most important, mistake was to devalue the importance of disclosure and transparency and put the onus of responsibility on investors rather than bidders and public issuers.

The performance of financial markets and their participating institutions is highly dependent on transparency, full disclosure and investor confidence.

There is little confidence in New Zealand's capital markets, partly because of poor disclosure. The situation has been highlighted again by the finance company debacle. This is ironic because we have a light-handed disclosure regulatory regime rather than a reliance on heavy-handed black letter law. In other words, investors are supposed to have sufficient detailed information to enable them to make sensible and astute investment decisions.

Full transparency is an important benefit to financial markets. A study by the Australian Financial Centre Forum looked at the level of participation in Asia-Pacific sharemarkets, as measured by liquidity ratios (the volume of share transactions compared with the number of shares on issue).

The study found that the NZX ranked near the bottom, 12th out of 15 exchanges, with the Shenzhen Stock Exchange at the top and Korea Exchange in second place. The Korean stock exchange has an extremely high participation rate because it is considered to be the world's most transparent sharemarket.

It has achieved this status because of increased disclosure, particularly the requirement to have buy and sell quotes - with broker identifications attached - made available to all market participants on a real time basis. This encourages uninformed investors to replicate trades because they can usually connect transactions through specific brokers with leading buyers and sellers.

We are a long, long way short of this yet the Weekend Herald's editorial supports the continuation of our failed Spartan approach instead of adopting the more enlightened Athenian method.

The editorial's assessment is based on the view that all investors are sophisticated and well-informed and that they only make mistakes because they are lazy.

This column totally disagrees with this assessment on the basis that New Zealand investors are less sophisticated than in other countries, mainly because industry leaders have made little attempt to educate and help them.

In addition, many investors have limited capital markets' experience because residential housing has been a safer, more rewarding and tax effective investment in recent years.

How do we attract more investors to our capital markets if our disclosure levels are based on the assumption that investors are astute and well-informed from day one? What hope is there for the unfortunate widow who has to look after her deceased husband's share portfolio if we continue to adopt Sparta's survival-of-the-fittest approach?

This column agrees with the Weekend Herald's editorial that we don't need "over-the-top regulation that effectively wraps them [investors] in cotton wool".

However, we do need far, far more transparency to encourage investors back to our capital markets.

As far as unsolicited offers are concerned the disclosure of the current sharemarket price should be mandatory along with a minimum acceptance period of one month.

Surely this is not asking too much.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.