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China stocks delisting/privatising - the US experience
There is a fascinating article by a law firm that deals with China companies listing in the US, then privatising/delisting a few years later much richer than when they started - in some cases only to relist in China. Since the local market has seen a fair number of similar exits over the past 18 months (described in a recent blog post on the "hollowing out'' of the local market) I thought it worthwhile to feature this study as it's highly topical. Those interested can find it here.
The writers highlight that of 38 Chinese management buyouts since the start of 2015 until April this year totalling US$44.4b in value, the premium paid to shareholders was less than 3/4 of the average paid in all US buyouts. "This has created shareholder discontent and disenchantment. The lower premiums offered were not due to a lack of financial wherewithal. Indeed,Chinese issuers subject to management buyout offers had increased on average their cash values six-fold since before listing in the US'' said the writers.
Just as interesting is that "many are small-cap stocks that opt to 'go private' and 'delist' due to Wall St indifference after the IPO'' and low trading volume. "While buyout offers are typically good news, many managements are squeezing out US investors that force sales at low prices far below fair or intrinsic value, curtailing investor value and in some cases imposing permanent capital losses...even more disturbing: many of these companies seek to squeeze out investors below their IPO prices. After 32 of these companies who sold IPOs collected a combined US$6.3b in IPO funds ostensibly from long-term US investors, 19 are now seeking to go private at prices below their IPO price. For these, their buyout price is on average 54% below their IPO price''.
From a neutral viewpoint, this is an outrage. You list at a certain price, raise lots of cash, then because the market fails to correctly price your shares, you buy everyone out and take the company private, often at a price below your original sale price. The article then calls for better checks and balances to protect US investors from losing out from this practice and I leave it to readers to study the suggestions made.
In the meantime, I think the pertinent points for local readers are as follows. First, there are stocks in the US that suffer from low liquidity and poor interest resulting in under-valuation. Second, this undervaluation creates an incentive for managements to step in with a offers to take the companies private and delist them. Third, offer prices for some of these exercises may be pitched at a premium to current market prices but they are viewed as being unfair because they don't compare well with other privatisations. Fourth, minority shareholders end up feeling cheated.