Short-sellers - boon or bane?

PHOTO: Short-sellers - boon or bane?

IN JUST two days last week, Olam International surged 10 per cent, as it pressed ahead successfully with a US$750 million (S$916 million) cash call to fend off short-sellers attacking its stock.

To get the message across that it was firmly behind the agricultural commodities trader, Temasek Holdings, Olam's second biggest shareholder, announced during the week that it had raised its stake from 16.3 per cent to 18 per cent in a series of deals.

It has been a successful counter-offensive, along the lines of a similar strategy outlined earlier in this column describing how banking giant HSBC Holdings fended off short-sellers with a US$17.7 billion rights issue during the global financial crisis four years ago.

Like HSBC before it, Olam's bond-cum-warrant issue forces big investors who lent out their shares to recall them to subscribe to the rights issue, or miss out on any gains that they may enjoy from the bonds or the so-called "free" warrants issued by the company.

And as the shares are recalled by the lenders, short-sellers are caught short, as Temasek squeezes the liquidity of Olam shares still further with its own market purchases.

Some say that it is a fitting punishment for the short-sellers, whose only objective is to panic investors into believing that there may be something amiss at a company, and causing its share price to plunge. They then walk away with a fat profit, even before their allegations can be proved.

But others note that Temasek's intervention dramatically alters the dynamics of the debate, driving it well beyond the issues raised about Olam's business viability by prominent US short-seller Carson Block and his research outfit, Muddy Waters.

As the Financial Times observed, it could be Singapore's way of betting that the argument would shift to one over which side has the greater firepower - the Republic, with an eye to deterring more attacks of this kind, or the shorts.

For the rest of us, it is a rude awakening to the fact that the barbaric attacks we have only read about in the newspapers - the assaults by the shorts that slayed giant firms such as US investment bank Lehman Brothers, and humbled mighty nations like Spain and Italy - are finally making their unwelcome appearance here.

Some market pundits such as former Morgan Stanley investment banker Michael Dee argue that trying to eliminate the shorts is not the answer. This, they say, only protects companies that have done a poor job of protecting their shareholders.

So the theory that this is just corporate vandalism does not hold water and is a distraction, he argued. "Olam is not a target which one takes on lightly. These are people who put their money out there with a view that the company is overvalued."

Then there is the argument that short-sellers perform a valuable service to investors, as they expose deeply flawed governance practices in publicly listed firms.

Mr Dee said: "When single analysts took on Enron and Lehman, they were pilloried by the companies, but in the end, they were right. Muddy Waters' boss Carson Block did not magically create these concerns. He merely capitalised on a well- researched bet on Olam's business model sustainability."

But one may also ask: Is it ethical for outfits like Muddy Waters to fund their research by taking positions in the target's stock ahead of publication?

The big worry is that this will incentivise them to exaggerate negative findings to maximise the adverse reaction.

As the publication of the research may drive the share price down, the short-seller may use the post-announcement slump in the target's price to close its position and make a huge profit.

Then there is the persistent question of whether Muddy Waters is merely acting as a front for hedge funds acting in concert to attack Olam's shares.

Until regulations are devised that can transcend national borders to regulate companies producing research geared towards benefiting their own positions, the best check on them is reputational.

Not all of the Chinese companies that Muddy Waters has accused of fraud have collapsed.

In fact, one - Focus Media - is being taken private by its chief executive Jason Jiang at a price higher than the level it had been trading at, prior to coming under attack last November.

It raises an intriguing question: Are the shorts just as likely to get it wrong in their relentless pursuit for profit? Backers of Olam would believe it to be so.