Introduction
Mergers and acquisition activity is often said to be the life blood of the stock market. Much of the largest prices changes seen on regulated exchanges occur as a direct result of the announcement of a bid or more likely the rumour of an impending bid. Stocks which are trading at low price earnings or price book ratios relative to their peers may be vulnerable to a takeover attempt from a suitor looking for a cheap source of revenue generation or assets respectively. At the other end of the scale companies on the cutting edge of research and development may command huge multiples of revenue or earnings (or may have never even have turned a profit), as established firms seek to find a fit of up and coming technology with their existing business.
It is not difficult to see why mergers and acquisitions should have a dramatic increase in share prices. Consider the case of a firm trading at $4-5. If a bid is subsequently announced at $7 dollars, assuming the stock is still trading in the $4-5 dollar range an opportunity for arbitrage arises – as long as the deal goes ahead a profit can be made by buying the stock in the market and tendering the shares in the offer. Given most takeovers are usually made at a premium to current share prices even the rumour of a potential takeover may be enough to induce speculative buying. Locally we had one such case when a rumour of a takeover by ANSA McAl (a Trinidadian Conglomerate) sent the shares of Bank’s DIH Ltd (DIH) price soaring over 54% in one trading session. Of course a deal may not go through at all in which case the premium paid by the market may quickly evaporate. Similarly, a deal involving shares of the offeror (the company making the takeover bid) rather than cash runs the risk that the offeror’s shares fall in value. A branch of hedge fund activity has sprung into being to take advantage of the price differences which may remain because the profits to be made upon the announcement of a takeover are not certain.
Given the potential for such rapid price swings it is easy to see why strict insider dealing legislation is required – there is enormous potential for insiders to profit handsomely by buying before the news gets out. The film Wall Street depicts enormous profits being made by those amongst the first in the know. With advances in computing power regulators are generally now in a much better position to spot suspicious trading activity, indeed a computer algorithm can be used to automatically flag suspicious trades in the period prior to the announcement of a takeover for further investigation.
Guyana
There has been little merger and acquisition in Guyana. It could be argued that the mutual strategic interest between DIH and Banks Holdings Ltd of Barbados should be classed as merger activity, since each issued a significant number of shares to the other.
A glance at the market capitalisation of our stocks reveals widespread differences. The market capitalisation reflects the total value placed on the firm based on the most recent transactions on the local stock exchange, and it is calculated by taking the share price and multiplying by the number of shares in issue. It can be thought of as the price that would be required to purchase all the shares in the company. Five companies are trading at around G$1B, however in all cases they are majority owned and so would be expected to command a premium to the market price to obtain control. Nevertheless, many of these firms have significant assets and their low market capitalisations could make them a natural target.
Two of the largest three companies are commercial banks. RBL (Guyana) Ltd’s market capitalisation dwarfs every other stock on the exchange at G$16B. The next two largest firms are DIH and Demerara Bank Limited (DBL). The other three firms with significant capitalisations are Demerara Distillers Ltd (DDL), Demerara Tobacco Ltd (DTC) and Guyana Bank for Trade and Industry (BTI). Again many of these companies have either controlling interest or significant shareholdings thus a takeover prospect in many cases would involve convincing the majority shareholder the price is right. However, as the case of Barbados Shipping & Trading Limited (BS&T) shows a high enough bid can entice significant shareholders to part with their holdings.
Barbados Shipping & Trading Limited
A proposed merger between Neal & Massy of Trinidad and BS&T earlier this year was called off in August when ANSA McAl tendered a full blown takeover bid: Neal & Massy then responded with a counter-bid of their own later that month. Since that time both companies jockeyed for position with counter offers trying to trump the other’s bid. Shortly before the ANSA offer was due to close, Neal & Massy made the announcement they would be selling their stake in BS&T to ANSA McAl. On October 16 ANSA McAl withdrew their bid, prompting the Directors of BS&T to issue a notice advising “the Director’s of BS&T take particular issue with the reason tendered by AMCL whereby it presumed the undertaking of material financial obligations on the part of BS&T in respect of the possible acquisition of a business.”
Two days after Ansa McAl’s withdrawal Neal & Massy varied their bid, prompting the Barbados Securities Commission to suspend trading in BS&T’s shares and move to the courts seeking to determine if there were any breaches of the laws. It has subsequently come to light that Neal & Massy purchased 3.5 million shares in BS&T at Bds$9.04, higher than its offer at the time of Bds$8.05. A major institutional shareholder in BS&T, Sagicor has joined in the suit. Arguments are being made that the higher price should have been offered to all shareholders.
However, trading in BS&T continued on the Trinidad and Tobago Stock exchange where BS&T is cross listed. In an interview with the Midweek Nation of Barbados chief executive officer of Neal & Massy, Bernard Dulal-Whiteway, stated “We could have purchased at any price [in Trinidad] and we are not committed to offering that price to anyone else . . . . We sought advice from our attorneys and the SEC in Trinidad and got clearance from them.”
Despite all the talk of a regional stock exchange it appears that far from making securities trading transparent by cross listing it has raised the potential for confusion due to differences in regulations. Guyana is somewhat insulated at present in that none of its companies are cross listed throughout the region, however Trinidad Cement Limited (TCL) is cross listed here (though no shares have traded locally) and four other exchanges to boot. Imagine a hostile takeover, involving purchases of stock on all five exchanges. The BS&T matter would look tame by comparison.
Trading in BS&T resumed with effect from November 21. It may be some time before the civil matter before Madame Justice Elneth Kentish, which has seen the involvement of 14 lawyers representing ANSA McAL, the Securities Commission, the Trinidad & Tobago Stock Exchange, Sagicor Life, the Barbados Stock Exchange, BS&T and Neal & Massy, is resolved. The outcome will have far reaching implications for the development of the regional market, hopefully the regulators will see the need to avoid a similar situation in future and harmonise trading and takeover regulations across the region.
