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I have often wondered about the signalling power of placements, especially when they involve the entry of a big-name investor (BNI).
Suppose for example, that a stock trades at S$1 per share and the company triumphantly announces a placement to a BNI to enable the latter to buy into the company. For argument's sake, suppose the entry price is reported as say 90 cents per share, not too uncommon since a discount is the norm under such circumstances. (You could also argue that a discount is essential since the BNI's name is then associated with the company which then enjoys the prestige of having BNI on board).
In the market's mind, 90 cents then becomes a very strong support, the logic being that if a party as knowledgable and smart as BNI has bought at that price, the stock is unlikely to fall below.
Moreover, since BNI isn't likely to be happy with only a small profit on its investment, there is then usually a rush to pile into the stock so as to participate in the assumed upside (of course, before BNI bails out).
My question is this - does anyone independently check if 90 cents was actually paid? If BNI isn't likely to be satisfied with a small return on its investment, then it's also possible that it would build in some buffer to protect its downside. What if the actual price paid is really 80 cents and not 90 cents? If it was, then BNI is placed in an almost pefect win-win situation - the market thinks it entered at 90 cents and so will chase the stock up but in the highly unlikely event that the stock does fall below 90 cents, BNI is hedged to the tune of 10 cents.
Can a situation like that described ever arise? I'm not sure - but it's possible that if there is a majority shareholder who sells part of his or her stake to facilitate BNI's entry, then all we have is that shareholder's word that 90 cents was really paid since these deals are typically described as being between " a willing buyer and willing seller''.
And what if a covert agreement was reached between that shareholder and BNI that if the latter takes a stake and lends its name to the deal that a discount on the reported discount could be granted?
Note that there is an element of risk involved since placements are generally not welcomed by the market as they dilute earnings, asset value per share and so on. So these sorts of deals have to be carefully timed - the BNI must be seen as being a savvy operator, market conditions have to be conducive with investors hungry for something to trade on, and of course, there has to be plenty of interest in shares to begin with. But even given the imponderables and variables, does this sort of thing happen? I wonder.