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Has the Stock Market Kidnapped Its Corporations?


Has the Stock Market Kidnapped Its Corporations?


Capital decreases, dividend distribution, spin-offs, mergers and acquisitions... listed companies are using a huge bag of new tricks in the capital market. But why?



Has the Stock Market Kidnapped Its Corporations?

By Maxine S. C. Yang
From CommonWealth Magazine (vol. 366 )

The wafer-market leaders UMC and TSMC, important stock-market indicators a decade ago, have taken center stage again. UMC announced a 30 percent capital decrease at the end of January – the greatest decrease in Taiwanese stock market history – and refunded NT$3 per share for a total capital refund of NT$57.39 billion.

At the beginning of February, TSMC distributed to its shareholders cash dividends of NT$3 per share – a total NT$77.5 billion.

The next day, institutional investors began speculating that the four listed Formosa Plastic Group companies might distribute combined cash dividends of nearly NT$150 billion.

And they are not alone. Other corporations that might join their ranks include financial holding companies such as the Grand Formosa Hotel, Sunplus Technology Co., LiteOn Technology Corp., Realtek Semiconductor, E.Sun Bank, Fubon Commercial Bank, Chinatrust Financial Holding Co., Megabank, Bank SinoPac, and Fuhwa Bank.

Not counting those already engaged in capital decreases and the distribution of cash dividends, there are still many companies very active in the capital market.

Taipei Fubon Commercial Bank director Jesse Ding observes that business capital manipulations are gaining agility.

Some companies are selling off their subsidiary investments. For example, First Financial Holding Co. is selling off Mingtai Fire and Marine Insurance Co., and Uni-President is shedding Cathay Bank and Allianz_president Life Insurance.

Others are busy with merger and acquisitions. ASE has been scooped up by international private equity fund Carlyle, while Hon Hai has acquired Premier Image.

Yet others are splitting into different companies, as Sunplus has sundered itself into three.

Share prices, as well as stock market reactions and demands, are the reasons behind this.

Listed companies must publish their financial figures each quarter, and shareholders are ever pressing for better returns for each penny and each deal.

Therefore, capital decreases, spin-offs, mergers and acquisitions, and downsizing have also been assigned different meanings.

Capital Decrease—the New Aphrodisiac for Share Prices

According to Taiwan Stock Exchange Corporation (TSEC) chairman Gordon Chen’s analysis, in the past capital decreases were undertaken only by badly managed companies in the red, with share values of under NT$10. A decrease in stock quantity makes the earnings per share (EPS) look better.

Should a functionally operating company effect a capital decrease, its future would also be branded unfavorable, because a subsequent capital increase must inevitably wait; a capital decrease means a lull in investments in expansion in the short term, says Deloitte accountant Clark Chen.

But now, “capital decrease has become an aphrodisiac for share prices,” one analyst points out. After a massive capital decrease, the relisted Grand Formosa Hotel stock has become the king of stocks among conventional industries, with a NT$300+ value per share.

Mergers are not only a case of “I buy you, you destroy me,” Goldman Sachs Taiwan managing director Chia-Lin Chang points out. The key is to utilize company resources to their greatest advantage.

Taiwanese industry has entered into a new paradigm. It required a great influx of capital during the previous period of expansion – over the past 10 years, TSMC’s capital has increased from NT$40 billion to over NT$200 billion.

The future, however, holds limited room for growth. Without excellent investment opportunities and the chance to expand into China, enormous capital or idle funds will only make earnings per share worth less.

As there is limited room for expansion in the industry, the new industry battleground has shifted from income statements to balance sheets.

In the past, income statements told of industry achievements and share prices, such as attempts to increase revenue and business scale, or in lowering costs or increasing other investment benefits.

Desperation Inspires Innovation

But now, each item on the balance sheet can be used to create capital or decrease operating costs. “Multifarious tactics imply desperation,” says Chi Mei Optoelectronics CFO Eddie Chen. Different times require different investment tools.

For example, investments in other companies can also be used to raise capital at a lower rate than bank loans. UMC and BenQ have both issued exchangeable bonds on their investments in AU Optronics.

Even future accounts receivable can now be used to raise capital through bonds.

Last year, Chi Mei distributed securities on its accounts receivable projected for the next five years, effectively raising NT$80+ billion without having to collect from downstream businesses, and at a far cheaper rate than syndicated bank loans.

More than just financial games, these activities have many positive results.

Joseph Chou, a partner in Global Capital Market Group of Price Waterhouse Coopers, believes that this goes to show a greater concern for shareholder interests on the part of industry: “This is natural. A company’s capital belong to its shareholders.”

Businesses are taking this opportunity to inspect their own tactics. Uni-President, a conventional business that has crossed over into the financial industry, sold its subsidiary bank in 2003, and its life insurance business recently, in order to use the capital recovered to strengthen the expansion of its core food and logistics operations. Moreover, a capital decrease can be a preparatory move for the future.

Chinatrust Asset Management, a subsidiary of Chinatrust Financial Holding, affected a NT$12 billion capital decrease at the end of 2006. Chinatrust CFO Miaochiu Hsu tells us that in the future, Chinatrust affiliated banks will only have to expand their operations to acquire more capital.

How will the government deal with the hubbub of financial activity from listed companies?

Both Hu Sheng-cheng of the Financial Supervisory Commission and TSEC chairman Chen have emphasized their regard for industry reform, provided it is accompanied by data transparency revealing the necessary details – but the government must and will step in should reorganizational activities impact shareholder interests or involve insider trading. 

Translated from the Chinese by Ellen Wieman