By G. Sharmila
Candy and snacks maker Cocoaland Holdings Bhd said on July 21 in a reply to a Bursa Malaysia query that Hong Kong-listed First Pacific Co Ltd withdrew its plan to buy its business as its product range did not meet the latter’s overall regional food expansion plans. So why did Cocoaland get investors’ hopes up by announcing the non-binding offer price?
Before Tiger goes into details of why investors are the ones who ultimately suffer when corporate deals bite the dust, a bit of history on the Cocoaland-First Pacific deal is necessary.
On June 2, First Pacific announced its decision to buy the entire business of Cocoaland at a price of RM2.70 per Cocoaland share for a total offer price of RM463.32 million. First Pacific had said that the buyout was subject to a due diligence exercise. In other words, the offer was merely a non-binding offer between the two parties.
At the time the offer was made, Cocoaland’s share price was RM2.04, according to data from Bloomberg. On June 3, the share price shot up to RM2.46 and hovered around the RM2.40 to RM2.50 levels until July 16.
On July 20, Cocoaland announced that the proposed non-binding offer had been aborted, leading the share price to fall from RM2.40 on July 16 to RM2.03 on July 20. This was followed by a query letter from Bursa, to which Cocoaland replied on July 21. In addition to its product range not meeting First Pacific’s regional food expansion plans, Cocoaland said that the former’s detailed review showed that the strategic benefits to the latter’s overall regional food expansion plans was significantly less than First Pacific has initially envisaged.
Tiger is not about to buy the reasons given for the failed takeover. How could a huge company like First Pacific not know about whether Cocoaland’s product range is a good fit for its expansion plans before making an offer to take over the company? And shouldn’t the due diligence have been done before the takeover price was decided on and announced? Something does not seem right, but then First Pacific has a right to change its mind.
Tiger’s gripe with this matter, however, is not so much that the buyout ended up being aborted, but that the takeover price had been announced in the first place although it wasn’t yet a done deal. Cocoaland was likely being transparent about the takeover, but Tiger thinks making available the takeover price would have got investors’ hopes up and many would have rushed in to buy the stock and cash out when the takeover was done.
When the share price fell on July 20, doubtless many investors would have cursed Cocoaland and blamed it for the failed takeover. While the regulator (namely Bursa) requires companies to be transparent when it comes to disclosing takeover prices, perhaps this ruling should be amended so that companies disclose all details of the takeover except for the price involved so investors do not get their hopes up.
The other thing that keeping mum on price details will do is prevent insider trading and/or share price manipulation by the target company. Indeed, while the regulator keeps an eye on share price spikes before, during and after such deals are announced, it can’t do this for every company. Even the regulator can miss something, hence price details should not be made public in the first place.
One could argue (especially if one were a minority shareholder who got burnt because of the failed takeover) that negotiations should not be made public at all and that details should only be announced once a deal is finalised. There is merit to this argument, as not only will it prevent investors from getting burnt, but it will also maintain the integrity of both companies involved in the negotiations. (That’s just another way of saying that if the deal fails, neither company will end up appearing foolish in the eyes of the investor.)
Tiger thinks the regulator should seriously consider amending the rules for takeovers and mergers so that the details of negotiations are kept private by the companies involved, especially when it involves numbers that could drive up a company’s share price or, conversely, cause it to tank. Without knowledge of prospective deal prices, the avenue of speculation lessens.
However, Tiger does acknowledge the counter-argument that details of deals, even if they are non-binding, should be disclosed in the interest of all parties involved, including minority shareholders.
The reality is that it is difficult to keeps things under wraps in Malaysia and even if they were kept secret, insiders can still profit from already knowing the prices involved. So keeping mum arbitrarily may not be the best move after all – perhaps the regulators can find a middle path that works.
As for investors, they should refrain from rushing to buy (or sell) when a deal has not been finalised, if only from avoiding getting burned, should the deal end up like what happened to First Pacific and Cocoaland. They have been warned: if they insist on rushing in anyway, they are responsible for their own mess. It is a free market, after all.
GRRRRR!!!
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