Latest SGX ‘hollowing out’ is different - and troubling
Whichever way you lean, one thing is for certain - the
present hollowing out of the market, while reminiscent of previous episodes, is
sufficiently different to be very troubling.
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Comments
R Sivanithy
13 May 2016
“A BIG problem the Singapore market faces is the hollowing-out effect created by the failure of the market to operate as an efficient pricing mechanism. Because stocks persistently trade at undervalued levels, there is an incentive for major shareholders or corporate predators to step in, pay off shareholders, and take the company private.”
“This phenomenon has been gaining momentum in the past 18 months, and although it leads to short-term bursts of interest because of the takeover speculation generated, it leaves the market worse off in the long run.”
This may come as a surprise to some readers but although the above assessment could well apply in today’s market given the increasing number of privatisations over the past year, it was actually made in a column published in BT on Nov 12, 2001, more than 14 years ago.
From this, one might conclude that every time the market undergoes a downturn it creates opportunities for major shareholders and corporate predators to buy up undervalued companies, sometimes to the detriment of minorities.
In 2001, for example, stock markets were reeling from the bursting of the dotcom bubble and so there was a spate of buyouts that prompted the earlier observation; this was followed in 2003 by another round of privatisations/delistings in the wake of the Sars epidemic.
If so, then it might be tempting to surrender to the view that the current round of takeovers/privatisations which over the past year have included such illustrious names as NOL, Tigerair and OSIM International and this week included CM Pacific and possibly Eu Yan Sang, is simply part of a natural market cycle, an inevitability that although not ideal is one that cannot be avoided.
To some extent this is true. However, there are differences between the past and present takeover/delistings that are serious enough to be of concern.
First, although many good quality companies departed the local exchange over the past two decades, there was simultaneously a reasonably steady inflow of fresh names, promising replacements that helped fill the hollows left by the departures. Minorities therefore had interesting and attractive alternatives to consider which helped cushion the blow of the market losing good quality names.
Absence of new listings
This is not the case today. The absence of a suitable number of new listings - let alone those of suitable investment grade - has been highlighted many times in the press over the past 18 months and is undoubtedly a problem that the authorities here are acutely aware of, though it has to be pointed out that this is not confined only to Singapore since markets from Hong Kong to New York are also struggling to attract new listings.
A second difference is that whilst many delistings in the 1990s and early 2000s were motivated by a desire by external parties to grow and acquire Asian presence and expertise as quickly as possible, privatisations/ delistings of the past decade were largely motivated by frustration and disillusionment at being persistently undervalued and having to suffer poor liquidity.
Instead of the entry of powerful external parties willing to pay hefty premiums for control, this time it’s more likely to be incumbent shareholders who see no more virtue or value in remaining listed who are the buyers, paying depressed prices to walk away from the public eye, albeit at prices that are slightly elevated from the prevailing market.
One implication of this shift is that the prestige attached to being a listed company does not appear to exist today. In the past, being a public listed company was widely seen as being an achievement to be proud of and, in order to acquire that status, buyers were prepared to pay top dollar. Today, a public listing is more likely to be viewed as an onerous liability whose costs outweigh its benefits.
For an open Singapore market that will always be hostage to external factors, are there any localised solutions to address the current, troubling hollowing out? This is the $64,000 question for which there are no easy answers.
A suggestion made in the past is that more companies would be willing to list and more investors would be willing to participate if they were convinced that the playing field was truly level. If so, then it would be up to the authorities to tighten the rules, ensure strict enforcement and crack down hard when breaches are detected.
The counter to this is that over-regulation may stifle the speculative energies necessary in any market and with conditions as weak as they are now, a step in that direction which would add to compliance costs thus further detracting from the attractiveness of a public listing is the last thing local stocks need.
Whichever way you lean, one thing is for certain - the present hollowing out of the market, while reminiscent of previous episodes, is sufficiently different to be very troubling.