Two months ago I wrote about an opportunity on a possible privatisation offer: https://timetocompound.wordpress.com/2017/01/14/jiangnan-group-1366-hk/
At the time, I judged that the company was likely to be genuine and that the new major shareholder was genuinely looking to privatise the company probably due to its perceived low share price at the time.
If the privatisation did not go through, I did not expect the price to drop by much and we would be holding a company with an average business at a cheap price. However, I also noted that such a wide spread indicated that the market did not think that an offer was even remotely likely to materialise.
Yesterday, the company announced that due to the major shareholder’s inability to secure financing for the deal, they have decided to not go through with the offer. According to the stock exchange rules, they are not allowed to make another offer in the next 6 months.
Although it is not possible to ascertain ex-ante odds solely based on the outcome, I think that in all likelihood, the market had it right and I had overestimated the odds of an offer materialising (though I have no doubt that the company and the offeror’s intentions were genuine). China stepping up their controls against capital flight may have been one of the key reasons why it is difficult for companies now to secure financing for overseas deals.
After the announcement, Jiangnan’s share price did not drop by much (as expected), and I significantly cut down my stake at a price of around 1 HKD, for a loss of about 6-7%. The reason for this is because I had a medium sized stake betting on a certain event. When the event did not materialise, my returns going forward will depend on how the business performs. Given that I do not know much about the business, I will either eliminate the position completely or maintain a small position as part of diversified basket of stocks that are trading cheaply on a statistical basis. The fact that Jiangnan did not declare an interim dividend when it has always done so in the past is also a negative sign.
When facing a situation where you are getting a price which implies that either the market is very wrong or you are very wrong, I think it is important to go with your view after double checking your facts and thesis. As Benjamin Graham said, the market is there to serve you, not to guide you. Sometimes the market really gives you a really good deal and that is how you outperform the market. For the times that you were wrong, do a post mortem and make adjusments to your thought process for future decisions based on where you went wrong.
C is for Compounding 