Corporate Actions

Explained

Ooi Kok Hwa

August 2017
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Disclaimer

The information in this workshop is for general information purposes only and is provided on an “as is” basis without
any representations or warranties of any kind. The information does not constitute legal, financial, trading or
investment advice and it does not make any recommendation or endorsement regarding any and all products
mentioned. All participants of the presentation and persons reading the information in these presentation slides are
advised to seek independent advice and/or consult relevant laws, regulations and rules prior to relying on or taking
any action based on the information presented. All examples and views expressed are entirely the presenter’s own.

Bursa Malaysia Berhad, the Bursa Malaysia group of companies (the Company) and the presenter do not accept any
liability for: the information provided during the presentation and in the presentation slides (including but not limited
to any liability pertaining to the accuracy, completeness or currency of the information); and for any investment or
trading decisions made on the basis of this information.
Agenda
On completion of this course, participants will be able:

• To extract the key elements in an IPO

• To analyze the impact and rationale behind the
merger and acquisition (M&A) activities
• To examine the effects of various types of corporate
proposals like: rights issue, bonus issues, share
buyback, spin-off and RTO.
Session 1
IPO
Why do companies want to get listed on the Stock Exchange?

• To raise capital
• To provide a market for their shares
• For brand building and market positioning
• Flexibility
• Socio-economic agenda
 Types of Offering

• Offer for sale vs Issue of new shares (Public issues)

• By Tender
• By Subscription
• By Private placements
 Offer for Sale

• The shares are offered by promoters and major

shareholders, also known as vendors

• Usually at a fixed price stated in the

prospectus, sufficient to maintain the minimum
public spread required for the listing
 Issue of New Shares

• The shares offered for sale are new shares

issued and offered directly to the public

• The mechanism for pricing is the same as that

in an Offer for Sale of vendor shares
 Key Difference
• Offer for Sale
– Sale proceeds from an Offer for Sale goes directly to the
vendors, usually the major shareholders and owners

• Issue of New Shares

– Sales proceeds, together with the premium received, goes
directly to the company to fund the operations of the
listed company
 By Tender
• Investors are invited to tender with the minimum
price set as the low end of the price range

• Book building. When all offers are in, the

institutions handling the issue will set a strike
price

• All investors who bid at the strike price or at a

higher price get some or all of the shares they
applied for at the strike price. Those who bid the
lower price will be unsuccessful
 By Subscription
• These shares are offered at a fixed price
• The issue may be cancelled if undersubscribed
• Usually such issues are heavily oversubscribed
• Successful bidders may be selected through a
process of random and open balloting by the
issuing house
• More common practice sees these bids being pro-
rated
 Private Placement

• Issuance of new ordinary shares to designated

investors to raise funds
 Key Information

• Directors, shareholders, management team

• Advisors, auditors and valuers
• Key statistics relating to the issue
• Proforma financial statements
• Illustrative financial projections and assumptions
• Key risk factors associated with investing in the
company
• Environment analysis of the competition and the
industry
• Significant legal, tax or contingent matters
 The Directors and Management Team
• Vision and strategic thinking
• Experience
• Family members and succession planning
• Organization structure
• Track record
• Check the track record of the finance director
• Shareholding structure and moratorium terms
• Remuneration
 The Advisors
• Usually quality listings are linked with top
investment banks, brokers and accounting
firms
• Reputation counts
• Check track record of the advisor
 The Environment Analysis

• Industry analysis
➢ Growth prospects
➢ Risks
• Comparable companies
➢ Competition
➢ Similar size

• Vertical scope and supply chain analysis

• Stakeholders – customers, suppliers
 The Internal Analysis

• Overview of the operations

➢ Red flags
➢ Most of the staff are new and there’s
lack of breadth at the top
management level
➢ Decision making largely driven and
made by the entrepreneur owner
• Value chain analysis
 Sustainable Competitive Advantage

• Possession of intellectual property, technology,

patents, trademarks or licence
• Possesses strong and recognizable brands
• Dominant in a particular geographical region
• Dominant share in a particular market or niche
area
• Possesses exceptional distribution network and
capability
• A clear edge in marketing, sales, or research and
development
The Financial Analysis

• Ratio analysis
• Trend analysis
• Segmental analysis
• Cash flow analysis
• Notes to the accounts
 Valuing Companies with Earnings

• Price-to-earnings ratio (PER)

• Price-to-book ratio (PB)
• Dividend yield (DY)
• Price-to-earnings-growth ratio (PEG)
 Case Study 1

LOTTE CHEMICAL TITAN HOLDING BERHAD

 Guidelines for Discussion

• Objective: You are given a brief write-up on the

Lotte Chemical Titan Holding Berhad’s IPO. You are
required to give your view on this IPO whether to
accept or to reject. Your discussion will be based on
the following information:
• Corporate Information
• Competitive Strengths
• Financial Information
• Dividend Policy
• Details on IPO
• Risk factors
• Utilisation of Proceeds
Session 2
 Bonus Issue

• Free shares to shareholders

• Dividends in the form of shares
• Capitalizing on reserves
• E.g. 1 for 2 bonus issue means 1 bonus share for
every 2 existing shares held
 Bonus Issue

• Providing a way to adjust share price lower

• To increase liquidity of shares
• Practically, no “actual” value creation for
shareholders.
• Share price will adjust according to the ratio of
bonus issue on the ex-date
 Rights Issue

• Raise cash through new issues of shares to

existing shareholders
• For the purpose of business expansion
• For the purpose of recapitalization
• E.g. 1 for 2 rights issue means 1 rights share for
every 2 existing shares held
• Either renounceable or non-renounceable
 Rights Issue

• Price of rights shares is normally offered at below

market price
• No dilution in shareholdings, if the shareholder
subscribes to his/her own rights
• Share price will adjust according to the ratio of
rights issue on the ex-date
• Dilutive in earnings, unless cash raised can generate
strong earnings immediately
 Private Placement

• Issuance of new ordinary shares to designated

investors to raise funds
• Dilutive effect on shareholdings
• Dilutive in earnings, unless cash raised can generate
strong earnings immediately
 Shares Buyback

• Advantages:

- Sell shares which are purchased earlier at

higher price
- Alternative to cash dividends
- Shares purchased and kept as treasury shares
can be distributed as bonus shares
 Shares Buyback

• Advantages:

- Support share price / valuation of the company

- Increase earnings per share
- Sending out a statement that the company is
undervalued
- Eliminate small shareholdings
 Shares Buyback

• Disadvantages:

– Opportunity cost in other profitable investments

– Lower cash reserves for declaring cash dividends
– Repeated share repurchases may imply
management’s inability to locate profitable
investment opportunities
 Convertible Bonds
• Convertible bonds are a hybrid of debt and equity.
They may be seen as a debt instrument attached
with an equity warrant, and are also known as
interest rate securities

• Convertible bonds pay the investor a fixed interest

based on a coupon rate, either annually or semi-
annually. They have a face value, and have fixed
period to maturity
 Motivation Behind a Convertible Bond Issue

• Convertible bonds are usually issued at an early stage of

an economic upturn, where investors prefer steady fixed
income, but would also like to enjoy a an equity “kicker”
in the event the market picks up
• These convertible bonds have an equity warrant attached
which allows for conversion into ordinary shares
• If the market turns up, and the share price does
extremely well above the strike price, then the investor
can exercise his option to convert into equity to take
advantage of the market price
• If market turns down, the investor still can rely on his
fixed income for returns
 Warrants

• Warrants are equity linked securities issued by a listed

company which give the holder of the warrant an option to
purchase common shares in that company for a fixed price
on or before the exercise date

• Listed companies enjoy bundling warrants together with

another debt or equity securities issue. The warrant is
used as a sweetener that provides for greater leverage or
gearing for investors who have a higher risk appetite

• Warrants can also be issued independently which are also

known as naked warrants
 Motivation for an Investor
• If the share price rises well above the exercise price before
expiry, it will be “in-the-money” and will be to the
investor’s benefit to exercise the option to purchase the
shares. If the share price remains below the exercise price,
and remains “out-of-the money”, the warrants will expire
worthless
• Warrants have no right to dividends and no voting rights, so
their value is tied entirely to the relationship between their
exercise price and the share price of the company
A step-up mechanism may be structured into the warrant, for
example, the strike price increases each year
 Shares Split

• Divide existing shares into more shares

• E.g. 2 for 1 split means each share is split into two
new shares
• To increase market liquidity
• To lower the share price
• May increase volatility of share price
• No “actual” value creation for shareholders
 Shares Consolidation

• Consolidate existing shares into less shares

• E.g. 10 into 1 consolidation means every 10 shares
is consolidated into 1 share
• Easier to manage share price through shares
buyback program
• To increase the share price
• May reduce volatility of share price
• No “actual” value creation for shareholders
 Case Study 2

Bonus & Rights Issue

Bonus and Rights Issue

• A company’s share price is RM4. If it is going to give bonus 1

for 2 (1 share for each 2 existing) and rights 2 for 5 (2 share
for each 5 existing) and the rights will be sold RM1.50 each,
what is the theoretical price per share for the following 3
scenarios after bonus and rights issues, given that:
A. Rights issue come after the bonus issue
B. Bonus issue come after the Rights issue
C. Bonus issue is not entitled to the rights issue
 Case Study 3

Shares Buyback
 XXX Bhd’s Shares Buyback
• XXX Bhd with market-cap of RM50m is currently trading at
RM0.50. The company is expected to record RM5m net profit
this year. On the balance sheet, it has RM50m worth of total
assets, of which RM10m is cash. Management plans to buy
back 10m shares at RM0.50 over the few trading days.

1. Calculate the EPS, ROA and PER before and after the shares
buyback.

2. How the shares buyback exercise has improved value of

shareholders ?
Session 3
Common motivations behind M&A activity

• Achieving synergies
• More rapid growth
• Increasing market power
• Gaining access to unique capabilities
• Diversification

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 Common motivations behind M&A activity (con’t)

• Achieving international business goals

• Taking advantage of market inefficiencies
• Working around disadvantageous government
policies
• Use technology in new markets
• Product differentiation
• Provide support to existing multinational clients

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 Rationale for Divestments
• The subsidiary may be underperforming
• Not well positioned within its industry due to losing
competitive position or may require excessive investment
• Change in the parent’s strategic focus
• Disproportionate amount of managerial resources, with
loss of control and ineffective management
• The parent too widely diversified

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 Rationale for Divestments (con’t)
• The parent may be experiencing financial distress
• The parent may have no desire to keep it or may need to
raise money because it was acquired as part of an acquired
company
• The divested part may be valued higher by the stock market
• Used as a defense against a hostile takeover

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Pre-offer takeover defense mechanisms

• Pre-offer defense mechanisms to avoid a hostile

takeover include:
➢ Flip-in pill
➢ poison puts
➢ staggered board elections
➢ restricted voting rights
➢ golden parachutes

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Characteristics of M&A deals that create value

• The buyer is strong (high growth in earnings and

share prices)
• The transaction premiums are relatively low
• The number of bidders is low
• The initial market reaction is favorable

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 Merger & Acquisition (M&A)

• Mode of considerations : cash

• Advantages of using cash compared to shares:-

- Quicker to complete
- May cheaper than shares as costs associated with
new shares issue are avoided
- No dilution in shareholdings for the acquiring
company
- Generate greater return from unused cash pile
 Merger & Acquisition (M&A)

• Mode of considerations : shares

• Advantages of using shares compared to cash:-

- If acquiring company’s share price is strong and its
shares are highly demanded in the market
- If acquiring company has no enough cash
 Merger & Acquisition (M&A)

• Advantages of using shares compared to bonds:

- If acquiring company’s share price is strong and its

shares are highly demanded in the market
- If acquiring company is already highly geared
- Does not need to worry about quarterly coupon
payment and redemption upon maturity
 Merger & Acquisition (M&A)

• Mode of considerations : Convertible bonds

• Advantages of using convertible bonds:-

- Current share price is undervalued
- Coupon rate is normally lower than straight loans /
bonds
- To finance M&A with long gestation period
- Mandatory convertible can be used as deferred
equity
 Merger & Acquisition (M&A)
• Factors to be considered in evaluating M&A:-
- Dilution in EPS
- Cost to the acquirer in raising finance
- Gearing
- Valuation of acquiree
- Profit guarantee
 Case Study 4

Merger & Acquisition

 Case Study 4

• Company A is considering acquiring Company B. Mr. Z,

the vice president of finance at Company A, has been
assigned the task of estimating a fair acquisition price
for Company B. Mr. Z is aware of several approaches that
could be used for this purpose. He plans to estimate the
acquisition price based on each of these approaches,
and has collected or estimated the necessary financial
data.
• Company B has 10 million shares of common stock
outstanding and no debt. Mr. Z has estimated that the
post-merger free cash flow Company B, in millions of
Ringgit, would be 15, 17, 20 and 23 at the end of the
following four years.

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 Case Study 4 (cont’)
• After Year 4, Mr. Z projects the free cash flow to grow at a
constant rate of 6.5% a year. He determines that the
appropriate rate for discounting these estimated cash flow
is 11%.
• Mr. Z has determined that 3 companies – Company C, D and
E – are comparable to Company B. He has also identified 3
recent takeover transactions – Company F, G and H – that
are similar to the takeover of Company B under
considerations. He believes that price-to-earnings, price-
to-sales, and price-to-book value per share of these
companies could be used to estimate the value of
Company B.

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 Case Study 4 (cont’)
The relevant data for the three comparable companies and for Company B are as
follows:-

Valuation variables Company Company Company Company

C D E B

Current stock price (RM) 44.00 23.00 51.00 31.00

Earnings/Share (RM) 3.01 1.68 2.52 1.98

Sales/Share (RM) 20.16 14.22 18.15 17.23

Book value/share (RM) 15.16 7.18 11.15 10.02

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 Case Study 4 (cont’)
The relevant data for the three recently acquired companies are given below:-

Valuation Variables Company Company Company

F G H
Stock price pre-takeover 24.90 43.20 29.00
(RM)
Acquisition stock price 28.00 52.00 34.50
(RM)
Earnings/Share (RM) 1.40 2.10 2.35
Sales/Share (RM) 10.58 20.41 15.93
Book value/Share (RM) 8.29 10.14 9.17

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Answer to Case Study 4: Using Free Cash Flow

The value of Company B

= total present value (PV) of free cash flows (FCF)
during the first 4 years + PV of the terminal value at
the end of the fourth year using the constant growth
model

Total PV of free cash flows during the first 4 years

= 15/1.11 + 17/1.112 + 20/1.113 + 23/1.114 = RM57.09
million

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Answer to Case Study 4: Using Free Cash Flow

Based on the constant growth model, the terminal

value of Company B at the end of the fourth year
= FCF at the end of fifth year/(r – g)
+ (23 x 1.065)/(0.11 – 0.065) = RM544.33 million
Present value of the terminal value = 544.33/1.114=
RM358.57 million

Estimated value of Company B

=RM57.09m+RM358.57m=RM415.66m
Estimated stock price = 415.66m/10m = RM41.57

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Answer to Case Study 4: Using Comparable company analysis

Calculate the relative valuation ratios for the three comparable

companies and their means

Relative Valuation Ratio Company Company Company Mean

C D E

P/E 14.62 13.69 20.24 16.18

P/S 2.18 1.62 2.81 2.2
P/BV 2.90 3.20 4.57 3.56

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Answer to Case Study 4: Using Comparable company analysis

Apply the means to the valuation variables for Company B to get the estimated stock
price for Company B based on the comparable companies

Valuation Variables Company B Mean Multiple for Estimated

comparables Stock Price
Current stock price 31.00
Earnings/share 1.98 16.18 32.04
Sales/price 17.23 2.20 37.91
Book value/share 10.02 3.56 35.67

The mean estimated stock price = (32.04+ 37.91+35.67)/3 = RM35.21

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Answer to Case Study 4: Using Comparable company analysis

• The takeover premiums on three recent

comparable takeovers are:
Company F: (28.00 – 24.90)/24.90 = 12.45%

Company G: (52.00 – 43.20)/43.20 = 20.37%

Company H: (34.50 – 29.00)/29.00 = 18.97%

Mean takeover premium = 17.26%

Using the comparable company approach, considering the mean takeover premium =
17.26%, the estimated fair acquisition price for Company B = 35.21 * (1+0.1726) =
RM41.29

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Answer to Case Study 4: Using Comparable transaction analysis

Calculate the relative valuation ratios for the three comparable

companies and their means

Relative Valuation Ratio Company Company Company Mean

F G H

P/E 20.00 24.76 14.68 19.81

P/S 2.65 2.55 2.17 2.46
P/BV 3.38 5.13 3.76 4.09

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Answer to Case Study 4: Using Comparable transaction analysis

Apply the means to the valuation variables for Company B to get the estimated stock
price for Company B based on the comparable transactions.

Valuation Variables Company B Mean Multiple for Estimated

comparables Acquisition Price
Current stock price 31.00
Earnings/share 1.98 19.81 39.22
Sales/price 17.23 2.46 42.39
Book value/share 10.02 4.09 40.98

The mean estimated acquisition stock price = (39.22+42.39+40.98)/3

= RM40.86

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Session 4
 Spin-off
• Creation of an independent company through the
sale or distribution of new shares of an
existing business/division of a parent company
• Spun-off companies have the same shareholders as
the parent company, management is normally
different
 Spin-off
• Rationales:

- A preventive tactic against hostile take-over so as

to make the acquisition less attractive
- To realize the actual value of spun-off entity or
parent company
 Spin-off

• Rationales:

- To avoid conflict of interest with parent company

- To enhance transparency
- To focus on own unique business
 Spin Off Structure
• Stage 1

Shareholders

Parent Company
(Listed)
Issue shares for Inject
consideration Assets
100%
Newco
 Spin Off Structure

• Stage 2
Shareholders

Parent company distributes new shares to shareholders

Parent Company
(Listed)

Newco
 Spin Off Structure

• Stage 3
Shareholders

Parent Company Newco

(listed) IPO Spin Off
 Reverse Take-Over (RTO)
• A type of merger used by private companies to
become publicly traded without resorting to an IPO
• It occurs when a public-listed company acquires
other assets via the issuance of ordinary shares of
the listed company, resulting in a change in control
of the listed company arising from the introduction
of new dominant shareholder / shareholders
• Faster way to get listed on stock exchange
 Privatization

• Delisting a listed company

• Mainly because:

- Listed company has been consistently undervalued

by the investors
- To carry out aggressive expansion plans without
interference by other shareholders
 Privatization

• Mainly because:

- Consistently low trading volume in the company’s

shares

• Low interest rate environment would encourage

privatization by private equity
Thank You
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