Extraordinary Popular Delusions

Last year the Atlas Copco delisting made us great returns!!

After receiving the postal ballot approval from shareholders, the company voluntarily increased the delisting offer to Rs 2250/- (approx 58% higher than the SEBI discovered floor price!!). Even after this announcement, the stock was available below Rs 2100 for a few days, probably reflecting the market’s fear of sufficient shares not being tendered during the reverse book building (RBB) process (For an understanding of the delisting process click here). Our thesis (read Representative Bias) was that the amount required to delist was ‘chicken feed’ for the globally mighty and rich promoters, hungry to capture the ‘India story’ all for themselves. We had also been reading and listening from analysts how the delisting regulations presented an opportunity to squeeze out a tough bargain from these promoters apparently stuck between a rock and a hard place (read bias created by recency/vividity). Also, our ‘khabar’ J was that the requisite quantity would come in. Excited (read endowment bias) with the ‘edge’ we had on the market, we concluded that it made sense to buy and tender.

The RBB itself was like a classis cricket match going down to the wire. On the last day the stock made an intra-day move of ~30% giving us a quick graduation in the concept of Return per unit of stress. As we had predicted, the requisite quantity came in, but at a substantially higher cut off price of Rs 2750/- Also, as expected the promoters accepted the price and delisted.

Uncork the bubbly!! We had made a neat pack. What’s more important, we had been right!! RIGHT ??

Well, heck NO!! As our thoughts took shape on the subject we realized that nothing could be further from the truth..

Do you Smoke??

The journey to our current line of thinking began soon after. To start with, we were intrigued that in spite of the promoters of Atlas Copco having accepted the discovered price of Rs. 2750/-, healthy volumes were being traded on the exchanges at a small discount.

Why did the market price not ramp up to 2750/-? What was in it for the buyers and the sellers? What was the risk in the trade?

We got our answer in Clause 21 (1) of the regulations, reproduced as under:

“Where, pursuant to acceptance of equity shares tendered in terms of these regulations, the equity shares are delisted, any remaining public shareholder holding such equity shares may tender his shares to the promoter upto a period of at least one year from the date of delisting and, in such a case, the promoter shall accept the shares tendered at the same final price at which the earlier acceptance of shares was made”

So essentially, the sellers were those who had not tendered any shares in the RBB. Unlike regular open offers, residual shareholders had the option of tendering their shares for one year at the same price ie 2750/- The discount was thus on account of the time risk to completion of delisting formalities and launch of continuing offer. A near bond in the form of equity!!

A check on time taken in previous delistings revealed that money should be in your account mostly within 2-3 months from that point on. The discount still provided approx 15% annualized returns based on conservative time taken estimates. (In subsequent delistings, we have sometimes seen 20-25% annualized returns on the table) We had discovered a Cigarbutt!!! We were ready to smoke J

To do or not to do?

Our experience of the entire process in Atlas Copco led us to introspect the next time a delisting opportunity came along. The question we asked ourselves is:

What advantage do I get by tendering in the Reverse Book Building process? Or put simply…Do I tender??

So lets look at the possible outcomes and judge our response accordingly

1. If the company accepts the delisting price, it is bound by law to offer exit at the same price to all investors, including those who have not tendered for 1 year after delisting. So there is no advantage in tendering.

2. If the company rejects the delisting or sufficient shares are not tendered, tendered shares would be returned in 10-15 days by which time it is likely that the price would have corrected substantially. Those who retained optionality by not tendering can choose to sell in the market without delay and thus are favorably placed against those who tender...Not tendering wins hands down

So essentially it is heads I lose, tails I don’t win. No prizes for guessing the correct answer to our question..DO NOT tender in any circumstance!!

Having come this far, we now ask ourselves the next obvious question.

In a world of rational investors why should anybody tender and thus expose oneself to only downside risk, with no compensating advantage in exchange? And therefore, how is any company expected to succeed at getting the minimum shares for a successful delisting under the current regulations??

Well, given that quite some delistings have happened in the past, obviously Homo Economicus or the rational man, does not exist. Traditional economists please take note. Choosing to tender is a good example of man  accepting risk for no visible reward. And be under no misconception, by investors we do not mean only ‘retail’. Institutional investors are widely known to participate (we refrain from using the word ‘punt’ for the so called smart institutional investor J ) and TENDER in the RBB process. The behavioural scientists were right after all in disbelieving the existence of the rational man!!

However, what is most intriguing is that the premise of the delisting regulations thus seems to rest on the irrationality of the human race. Seems like behavioural science has a fan in SEBI !!

Sleeping with the enemy

While there is a large body of advise on strategies investors should adopt in playing this game (MNCs, low capital intensity, high on innovation, high moats, large global parentage with deep pockets etc.) we thought it opportune to first ‘sleep’ with the lonely enemy for a change i.e. chip in with some free unwanted advise for promoters considering delisting.

1. Why act with a gun on your head

June 2013 is a mirage. It is the deadline to regularize minimum shareholding and not the final opportunity to delist. Companies desirous of delisting would be better off initially bringing down their stake and subsequently launching an offer after the required regulatory cool off period at more favorable prices. No harm in remaining listed for 2-3 more years after being listed for 2-3 decades. Play on your own terms.

2. Why overspend just because you have deep pockets

An oft repeated argument is that large MNCs will be willing to pay an obnoxious premium since they have deep pockets. However, it is not necessary for a rich man to splurge irrationally. If the price is right, one should be prepared to buy. Similarly, if the price is right, one should be prepared to sell. Since delusional investors are giving an opportunity, why not unlock some gains for the time being. Who knows, the same gains might be sufficient for a subsequent delisting offer.

3. Go ahead and try if you still want to, you have nothing to lose!!

When it is heads I lose, tails I don’t win for the investor, it means it is heads I win, tails I don’t lose for you since you are on the other side of the trade. In spite of flawed regulations, if you still want to attempt delisting, go ahead and try. There is little to lose!! Its loaded in your favor. You can call it off if you want to at any stage and nobody will force you to accept the delisting price if you don’t want to.

Investors think that they have a gun on your head, but sadly they seem not to have loaded it…The bullets are with you!!

We feel no compulsion to dance just because the music is playing!! Luck is manufactured not only by fishing in a pond full of fish but also by choosing not to open your tiffin box under a tree full of crows. The delisting theme to us is nothing but a bubble waiting to be pricked. We are happier waiting for a last drag on cigarbutts thrown away by the dancers…

Best of manufactured luck!!