Olam should act smartly, rationally

As the two sides keep up the fire on each other, the collateral damage continues to mount, with no end in sight to the skirmishes.

No, it's not the Middle East we are talking about, but last week's sniping between homegrown, listed wholesaler of agricultural products Olam International and US short-selling firm Muddy Waters.

Shareholders of Olam continue to have sleepless nights as the mud-slinging, counter-accusations and threats are ratcheted up.

Olam plunged 21 per cent in over-the-counter trading in New York last Monday, after Muddy Water's Carson Block dumped the stock, alleging that the company was booking profits on transactions before booking in the deals.

In a damning assessment to the market, he told the Ira Sohn Investment Conference in London that Olam was "heavily" indebted and overly aggressive in how it reports what it calls "biological gains" on investments; Mr Block essentially charged that the company was on the verge of collapse.

Olam quickly suspended the stock on the Singapore Exchange the next day, and aggressively defended itself against what it said were unsubstantiated and malicious attacks.

Its CEO Sunny Verghese said he was "dismayed at the nature and lack of substance" of Mr Block's comments, and vowed that the group would stoutly defend its reputation for transparency and good governance.

By Thursday evening, Olam had initiated legal action against both Muddy Waters and Mr Block for "aggravated and exemplary damages, for libel, slander and malicious falsehood".

Things will only get worse before they get any better.

This is not the first time Mr Block or Muddy Waters has bet against companies which they allege have dodgy businesses or business practices.

In June last year, Muddy Waters shorted the stock of Canada-based Sino-Forest Corp, accusing it of fraud.

Its strategy is simple: find a plausible fault, short-sell the stock and spill it to the market that the company is a cheat on the brink of collapse.

Devastating effect

In the case of Sino-Forest, the effect was devastating.

Its stock plunged almost 80 per cent, the company filed for bankruptcy protection in March, and regulators went after several executives for devising a "complex fraudulent scheme" to inflate assets and revenue.

Other companies targeted by Muddy Waters include New Oriental Education & Technology Group Inc and Focus Media Holding Ltd, but, with the exception of Sino-Forest, all others have largely survived the maelstrom.

Olam can too, if it acts smartly and rationally.

There is little point in taking expensive legal action or issuing more rebuttals to Muddy Waters.

Mr Block is a sophisticated investor who has done his homework.

He would not have cried wolf if there had been no faint sound of howling somewhere.

What Olam should really do is engage a highly reputed international consultant - or a number of such people - to do an independent audit of its books, its business and its accounting practices.

Ideally, these should be auditors based in one of the other financial capitals of the world - New York, London or Hong Kong.

Olam should open all its books so the consultant or consultants can pore over them with a fine tooth-comb, and then publicise the findings globally.

If Olam's claims in self-defence are right, the audit will find nothing more or nothing less than what the market already knows - that it is a reputable global commodities player engaged in a complex and somewhat highly geared business, but with ready access to funds, and a system of valuing its assets which may or may not be agreeable to everyone - but no deliberate dodginess or fraudulent practices.

Olam already seems to have local analysts on its side.

CIMB, after examining Muddy Waters' allegations, said it "found them not totally unjustified, though not new to the market".

"High gearing is common among supply-chain managers. But we exclude readily marketable inventories, which are cash-like in nature, to determine its adjusted net gearing. Criticism over the recognition of biological-asset gains is nothing new."

Maybank-Kim Eng noted that Olam's business is complex, stretching across 65 countries and 16 products; it also said Muddy Waters' claims were not really new, and unsubstantiated.

Global endorsement

SCB Credit Research said Olam's disclosure levels remains far better than some of its peers', and OSK-DMG pointed out that, in the absence of Muddy Waters' full report, "the recent share price decline has made Olam more attractive as a long-term investment".

That said, these are mostly Singapore-based analysts - not that this makes them any less good or credible. But as the world's fifth-largest, publicly traded global wholesaler of agricultural products by revenue, Olam needs global endorsement as well.

It is why Mr Verghese should put his money where his mouth is and engage independent offshore auditors to scrutinise his books and operations.

If Olam's nose comes up clean, it would be a sure-fire way of shutting-up doomsayers and restoring confidence among shareholders.