Welcome to Corporate Governance 101. Day 1.Class 1. The first lesson is: Treat all shareholders the same. No exceptions, no divisions, no classifications, no omissions.
This elementary lesson seems to have been forgotten in recent deals to have come out of Asia. In many recent equity and equity linked deals, companies have been structuring their transactions so that different classes of shareholder receive different treatment.
In Korea, the division between local and foreign shareholders is keenly felt. Recently there was the debacle of the Korea Development Bank's sale of its remaining 6.84% stake in Posco. This ADR offering to foreign institutional investors was signed, sealed and ready to go on June 20th at a price of $22.125. But the deal was pulled at the last minute because it was being sold at a discount to the previous day's local share price. The deal was finally sold on September 28th at a price of $18.9375 to institutions and $17.80 to Posco itself. Never mind, said KDB, the price paid by the foreigners was a premium to the local price. The logic behind this was that it was alright to leave over $100 million on the table as long as foreign investors were paying more for their shares than local retail investors.
Word reaches me that the forthcoming Korea Tobacco & Ginseng deal is going to be a very inventive affair. The government originally planned a $740 million global depository share offering in November last year, but the deal was pulled due to poor investor response. This time around because the local share price is roughly 40% below its IPO price, the company has to find a way to sell its stock at least at a 40% premium to where it trades today. The government has said it will do a deal if an investment bank can find a way to sell the shares at a premium to the IPO price.
According to market sources, the only way to do this is to offer a convertible structure with a vast coupon - some have even said as high as 8% - which will price in the requisite conversion premium. Never mind that such a structure, if it was able to be sold in the first place, would destroy shareholder equity and be a hugely expensive exercise in futile corporate finance, purely designed to assuage some misguided political principals.
This trend is not just a Korean phenomenon. In Hong Kong, we are seeing the wholesale adoption of the discriminatory practices that were pioneered in the British privatization process. In both the Tracker Fund IPO and the recent MTR Corporation IPO, retail investors have been given huge incentives to buy into the stock which materially benefit them more than the institutions that hold the stock.
Retail investors get to buy the stock cheaper than institutional investors at the IPO price and if they hold the stock for two years they get given more shares. For free. I am certain that the average institutional investor is much more loyal to a stock they own than the average retail investor would be. I am also sure that institutions would love to be rewarded for that loyalty by the gift of free shares. But political necessity has entered the trading floor. And in the absence of the ballot box, Hong Kong's politicos need to bribe the populace with semi-guaranteed investment products at the expense of institutional investors.
This slamming of institutions by issuers and their investment bankers is certainly a swing of the pendulum. The usual IPO practice in Asia has been to shovel cheap shares into the institutional old boy's club who then flip the stock out to retail punters in the first few days of trading. For this they usually can make a turn of 10%-20% on the price they originally paid. Other dubious practices of old - such as unpriced allocations to "special investors" in Indonesia - have also thankfully gone by the wayside.
Preferential allocation of stock - once underhand and under reported - is now being officially sanctioned, but this time in reverse. Either way round it is pernicious and to my mind the pendulum has swing too far in favour of the local retail investor. Any differentiation of share ownership - either by price paid for the shares, voting rights, access to the company or disclosure of information - is wrong. Wherever they come from and whatever they do, shareholders are shareholders are shareholders. Politics has no place on the exchange floor.
