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Jury is still out on why SGX stock prices move before M&A deals are made public
Kenneth Lim
08 October 2014
The market has been able to anticipate some of the year’s biggest deals, although the quality of that anticipation is spotty, according to an analysis by The Business Times.
Besides possible leakage of deal information, the stronger-than-expected price movements could also be due to a brisk year for mergers and acquisitions (M&A), which has in turn primed investors to speculate on the next target, market observers said.
The analysis looked at the 20 largest announced M&A deals that targeted Singapore listed companies from January to August 2014, and how the shares of the target companies moved before and after the first key announcement related to the deal, whether it was on the actual deal itself or simply a holding announcement alluding to a potential deal.
To reduce the impact of non-deal factors, the excess movement of each company’s share price over its typical volatility and the Straits Times Index was calculated, suggesting how much the stock had changed above expectations.
Of the 11 deals in the analysis that involved takeovers, in which investors would usually expect bidders to offer a premium, eight of the target companies showed excess returns of more than 5 per cent during the two weeks before the key announcements. Every target company had positive excess returns during that time.
Over the six weeks prior to the key disclosures, five of those 11 targets saw share price changes that exceeded 5 per cent above expectations. All but two had positive excess returns.
But not all early movers made the right bets. Considering all 20 M&A deals, even potentially dilutive share placements to strategic investors, 17 target stocks rose more than expected over a two-week period before the announcements. The more-than-expected gainers totalled 16 when looking at a six-week period.
Most of the stocks that went the wrong way were targets in deals where it was not always clear what the impact of the deal would be, such as a reverse takeover or stock placement in which price performance could hinge on market perception of the acquirer.
Among the takeover targets that saw early movements in the correct direction, commodities trader Olam International posted the largest excess returns in the six weeks before its key announcement. Its stock climbed 32.4 per cent above the index and expected volatility before it announced a general offer from Singapore government-owned investment company Temasek Holdings.
The margins of error and the myriad drivers of stock movement, however, should be noted. Not all unusual price movements precede deals, and not all pre-deal price changes are due to inside information.
“We cannot necessarily conclude that in all cases of prior reaction, it is because of insider trading, which is illegal,” Professor Mak Yuen Teen of the National University of Singapore said. “However, I would say that there is fairly strong evidence of insider trading given some of the large adjusted returns and the ‘surprise’ element to some of the transactions.”
Market observers in general were not surprised to see the share price movements.
One reason is that 2014 has been particularly active for M&A.
Singapore-related M&A volume in the first nine months of 2014 stood at US$61.7 billion, more than the US$41.8 billion for all of 2013, according to Thomson Reuters.
“Today what you’re seeing is the interest rate environment is low, companies are cashed out, companies outside are buying Singapore companies,” said CIMB head of research Kenneth Ng. “Especially in a sector where there’s been a history... one can put two and two together and guess who’s next.”
The possibility of leaked information cannot be ruled out.
One dealmaker, who declined to be named because of regular work on deals, said it can be hard to keep big deals under wraps given how many people are involved.
Lawyer Stefanie Yuen Thio, co-managing director of TSMP Law Corp, said the onus is on companies to make sure insiders are aware of the rules. Listed companies involved in a transaction must also monitor their stocks for unusual activity during negotiations. The basket of obligations is hefty, but experienced professionals in general should have a system in place.
“We handle a lot of extremely confidential takeover deals so we do have a standard operating procedure that kicks in,” Ms Yuen Thio said.
Richard Teng, chief regulatory officer at Singapore Exchange (SGX), said the market operator and regulator takes a serious view of market misconduct and will “spare no resources to investigate” incidents.
In the first nine months of 2014, SGX referred 44 cases to the Monetary Authority of Singapore for further investigation, of which 20 involved alleged insider trading, he noted.
SGX this year also started an “early notification” system requiring companies to inform the exchange about deals being negotiated, and to furnish a list of people privy to the discussions, all in confidence. SGX is seeking to codify the practice in the listing rules.
“We have received about 40 notifications to-date that allowed us to conduct earlier surveillance,” Mr Teng said. “These requirements have also brought about a positive change in the behaviour of issuers. We noticed that they are now more mindful of their obligations to make timely disclosure of material information and there is a trend of earlier disclosure compared to previously.”
For investors, the challenge is in figuring out when unusual stock price movements are actually meaningful.
“One understands that the possibility of a deal can give the possibility of extra gains,” CIMB’s Mr Ng said. “But from an analyst’s perspective, our job will be both trying to combine the fundamental and operating part of the business with the likelihood of the deal happening.”