In my blog yesterday I wrote about the inexplicably high offer that Temasek had made to buy out Olam, a Singaporean commodities firm hemorrhaging cash and burdened by debt repayments falling due. As this offer was inexplicably generous and the timing irrational I feared that at least US$2.1 billion that belongs to the citizens of Singapore was being squandered recklessly and that Temasek was trying to mask its real performance by increasing the proportion of private companies in its portfolio.
At the end of yesterday’s blog I also said that in the period before the deal was announced, I feared Olam and Temasek had breached the Singapore Takeover Code which is regulated byt the Singapore Securities Industry Council. The Takeover Code is designed to protect shareholders in the run up to an announcement and. Our Singaporean code is mirrored on the UK version.
Yesterday I said “ (the code) places very clear obligations on both the offeror and offeree companies to keep any offer discussions secret. In the event of an unusual movement in the share price of the offeree company or an increase in turnover they are required to make an immediate announcement as to the possibility of an offer.”
I believed there had been a breach of the Code because I saw “unusual movement” in Olam’s market price that to me looked like absolute evidence of failure to protect the secrecy of the deal process. Temasek had then failed to make the immediate announcement required in the event of share price movement. Failure to make that announcement was therefore a breach of the takeover code.
Temasek made the official announcement of an offer to buy all the remaining shares in highly leveraged and cashflow negative Olam on March 14th. However in the month preceding that offer being made, Olam’s shares rose by 35%, with no good news announcement to explain that rise and no similar rise being seen in its peers or the market itself. The Straits Times Index only rose by 2.3 % in that period, for example. Once the official offer announcement was made the preceding 35% rise in Olam’s price looked like evidence that the cat had got out of the bag early.
I am not the only person who noted this. In a March 16th article Bloomberg Business Week quoted Mr. Sachin Shah, a special situations and merger arbitrage strategist at New York based Albert Fried and Co, on his concerns that “there’s been leakage in the deal process”. In fact you wouldn’t need to be an expert in M&A activity as I am or an analyst specializing in this area like Mr. Shah, to have serious concerns over “deal leakage”. Any reasonable observer would reach the same conclusion.
I seem to have hit a nerve with my article because today SGX has published an astoundingly defensive statement that not only fails to rebut my concern that a breach had occurred but even seems to give evidence to support it.
Naturally, I stand by yesterday’s blog when I stated that the movement in Olam’s share price was “unusual” by the definition of the takeover code and the failure to make an earlier announcement had been a breach.
Here is what SGX said in reply:
“Market commentaries noted that in the six weeks from 3 Feb 2014, Olam’s share price increased 34.8%, higher than those of its peers such as Wilmar International which rose 11.2% and Noble Group which rose 12.6% over the same period. During the period, the Straits Times Index rose 2.3%. Such comparisons should be conducted with care as the financials and outlook of individual companies may differ even if they are within the same industry. While we do not prescribe a view of value or pricing of stocks, we note that of the 13 analysts who issued reports on Olam in February 2014, seven raised their target price by an average of 10.4% with the highest increase being 21.4%. The 13 analysts had target prices of $1.50 to $2.00 for Olam. In the case of Wilmar, eight analysts raised their target price by an average of 2.6% with the highest increase being 4.8%. For Noble, one analyst raised the target price in February. Trading in these three stocks were within the price ranges set out in the research reports, suggesting they were trading within the general market view of these stocks with Olam shares reflecting a more positive market view.”
The so called clarification by SGX fails to answer the question as to why Olam rose so much more than its peers pre-announcement. A 34.8% rise was three times more than the average of 10.4% by which analysts raised their price target for the stock.
SGX quotes the rise for peers Noble and Wilmar but the statistics for Noble and Wimar only back up my assertion that Olam’s rise was unusual. The rises for those two companies were much smaller and completely in line with the general movement in the MSCI agricultural commodities index over the same period. In any case the large movement in Olam would have the effect of pulling up its peers due to technical activity driven by index rebalancing and quantitative trading.
Nothing that SGX has said above allays my suspicions that there had been “leakage” and that failure by Temasek to respond with an immediate announcement broke the Takeover Code.
Not only do I believe that the Code had been breached but the stock exchange also needs to conduct a convincing investigation of possible insider trading. If evidence of insider trading is found then we must prosecute those responsible.
Who are SGX , anyway and are they sufficiently independent to comment? SGX is itself not independent since SEL, a Temasek holding company, controls 23% of SGX (and a further percentage could be held by nominees). The chairman of SGX, Chew Choon Seng, is also the chairman of the Tourist Promotion Board and the former CEO of SIA.It thus has a clear conflict of interest and cannot investigate itself on suspicions of insider trading or violations of the Code by either or both parties.
What about the Securities Industry Council responsible for the Takeover Code? Similarly the composition of the Securities Industry Council needs to be proven to be independent. What we do know is that Lee Kuan Yew’s son and our Prime Minister’s brother sits on the board of SGX and Lee Kuan Yew’s daughter–in–law and the Prime Minister’s wife, heads Temasek. At least 7 members of the Securities Industry Council are connected with the Government or Government Linked Companies.
We thus need an independent body to investigate this as any statement by SGX concerning Temasek is open to criticisms of being partisan. The investigation will need to come from outside Singapore as an investigation of accusations of possible misconduct by a Government-owned company is likely to face difficulties in finding individuals who do not have a conflict of interest given Temasek and the PAP government’s pervasive control over the economy and given that members of the same family are in key positions at Temasek, in the government and at SGX.
Meanwhile I repeat my offer to assist any MP, NCMP or NMP who wishes to raise this issue in Parliament.
Kenneth Jeyaretnam
*The author blogs at http://sonofadud.com