Forum Archive Index - May 2002

["Lindley Smith" <lindleysmith@bigfoot.com>]

I gave up half way through, but I think I know what you were saying!

But it was about that time where I started to think that it isn't so much
which way is right or wrong, but which way do the TAs do it. If all/most TAs
work straight from the raw prices, then 'adjusting' the prices won't help.

A minor quibble along the lines of 'is my pint half full or half empty', do
the original owners now own a smaller part of the company, or part of a
lager company. (Yes I did mispell that, it's a hot sunny friday arvo in
London (honest) and I'm getting thirsty).

----- Original Message -----
From: <tennyson@caverock.net.nz>
To: <sharechat@sharechat.co.nz>
Sent: Saturday, May 18, 2002 12:40 AM
Subject: Re: Re: [sharechat] AUO Chart/Phaedrus


> Hi Gerry,
>
> Apologies in advance for this long post which should have been posted
> a week or so ago.   My brain needed the time to mull it all over!
>
> >
> >
> >I can add that in this case there were no "rights" but it was a
> >placement @ 45 cents. The acute pre recording date price was 64
> >cents and the ex issue price was 56 cents.
> >
> >
>
> That being the case, the scenario is a little different to my cash
> issue example then.  Where there is a share placement there is no
> debt liability to the existing shareholders.  However, because the
> business (the pie) remains fundamentally unchanged, the existing
> shareholders will end up with a smaller share of what was the
> original pie.  I'll walk you through how I see the 'twin chart
> approach' to this problem.
>
> Before the share placement was announced there were 82.7m AUO shares
> on the market.  According to Gerry the closing price on the day
> before the announcement was 64c.   The announced share placement was
> for first 12.4million shares then 37.6million shares (being a total
> 50m shares) at a price of 45c.  I think we can assume that despite
> the second tranche requiring shareholder approval, the market
> regarded the approval of all shares to be issued as a 'fait
> accompli'.
>
> So we can work out the theoretical ex issue price as follows:
>
> (82.7m*64)+(50m*45)/(82.7m+50m)= 56.8c, or near enough to 56c
>
> Right, at least Gerry, if no-one else, is with me so far!
>
> Now, as I see it, the day the share placement was announced (26th
> February 2002) we effectively had two charts until the last of the
> new shares were allotted (23rd April 2002).
>
> Of course as 'on market investors' we only see one chart.   The
> second chart is only of interest to those lucky enough to be
> offered shares in the placement.  This first chart is the one that
> Phaedrus has been plotting for us.  But Phaedrus's chart represents
> (from 26th February) only 62 % ( 82.7m/(82.7m+50m)= 62% ) of the AUO
> share capital.   Running parallel to this is the second chart, the
> chart of the new shares issued at 45c.  We shall assume that none of
> these new shares were dumped on the market for a quick profit in the
> up two months between when they might have been placed and when
> everything became one class of share again on 23rd April.
>
> Now if we wanted to study the market sentiment as regards AUO on a
> monthly timescale, I would do it in three stages.
>
> Stage 1: Before the placement was made (before 26th February)
> Stage 2: When the market was aware of the share placement coming, but
> before the shares had all been placed (between 26th February and 23rd
> April)
> Stage 3: After all the shares have been issued (from 23rd
> April)
>
> As I write this we are in 'stage 3', looking backwards.  So we'll
> start preparing our adjusted chart by looking at where we are now,
> then move further back into the past.
>
> ------------
>
> During stage 3, we simply take the closing price of the shares as
> our data point (as normal).
>
> -------------
>
> Now what happens to the historical data points we have archived from
> Stage 2?  At the start of stage 2 the market price for AUO shares
> fell.  If the new shares had been issued at 64c then there would have
> been no drop in the price of the existing shares on the market.  But:
>
> 1/because the new shares were going to be issued at a discount to the
> market price,
> 2/ *and* the new shares were to rank equally with the existing
> shares,
>
> Then, this meant the average value of existing shares was
> diluted.  This is why we saw the fall in share price for the existing
> shares.  Stage 2 is easy to deal with.  Because all of the
> information regarding the share placement is available in the market,
> the market has adjusted the share price quoted on the market for us,
> to compensate.  All we need to do is take the end of day closing
> price as our data point (as normal).
>
> ------------
>
> Lastly let's look at stage 1.  No speed reading.  From here on in.
> you are going to have to concentrate!
>
> Looking backwards from where we are today, the reason for the share
> price fall on Phaedrus's Chart 1 was because the share capital, which
> used to represent the whole company, no longer represents the whole
> company.  What happened was that the existing shareholders had their
> large pie reduced to a smaller one.  How?   Although the number of
> shares existing shareholders had did not change, the proportion of
> the underlying business that those shares represented went down.
>
> Specifically if we look at the figures:
>
> Existing AUO shares: 82.7m
> New Placement AUO shares:  50m
>
> which means summing the two:
>
> Total AUO shares after placement: 132.7m
>
> This means that we need to scale back the share price closing levels
> in stage 1 to allow for the fact that these shares only represent:
>
> 82.7/132.7= 62% of the company.
>
> If the new shares were to be issued at market price on the day
> of the placement announcement (64c), then we would need to multiply
> the closing value of the shares by 62% (that is 0.62)  to allow for
> the new shares being issued, and that would be that.
>
> However, because the new shares are being issued at 45c (a
> substantial discount) there is a one off transfer of wealth which
> occurs from the existing shareholders to the placement shareholders
> at the time the placement is announced.   We can work out what this
> wealth transfer is by using the 56.8c (theoretical ex issue price)
> per share calculated earlier.
>
> Wealth transfer from existing shareholders
> = 64 - 56.8 = 7.2c per existing share.
>
> Where does this wealth go?  It goes to the shareholders given shares
> in the placement.  But each of the placement shares has a wealth
> transfer of more than 8c to it, because there are less placement
> shares than original shares.
>
> Wealth transfer to placement shareholders
> = 7.2c x (82.7/50) = 11.9c per share
>
> It is pertinant to remember here that 'before the placement was
> announced', the existing shares traded at 64c.  Also note the new
> shares were placed at 45c.
>
> Pause here to reflect that:
>
> 64-7.2= 57c and 45+11.9= 57c
>
> This shows that, after the share placement, the theoretical price for
> the existing shares is the same as the theoretical price for the new
> shares.  This provides a check that our working is correct because
> the new shares rank equally with the old, and so should have the same
> value.
>
>
>
> --------
>
>
>
> SUMMARY
>
> We have two charts and because we are now in the present looking
> backwards we choose to adjust these historic charts retrospectively.
> This takes into account the fact that the new capital we have in the
> business now didn't exist at that time.  Now, how do we prepare both
> charts?
>
> CHART 1 (Existing Shares)
>
> From the date that the new share placement is announced, plot the end
> of day closing figures as you find them (stages 2 and 3).   Before
> that time (stage 1), multiply each of the closing prices by 0.62,
> because these shares only represent 62% of the company as it is
> today.  The other 38% of the company as it is today is represented
> in stage 1 by the capital from the rights issue.  During the rights
> issue each new share was issued at 45c.  So 0.38 x 45c = 17c.
> Bringing it all together, the way you compile your 'chart 1' is to
> take into account the new capital of the company as follows:
>
> Stage 1:   [(End of Day Closing Price) x 0.62 ] + 17
> Stage 2:    (End of Day Closing Price)
> Stage 3:    (End of Day Closing Price)
>
> Example (Stage 1):   Closing price on February 26th (date the
> placement is announced) is 64c
>
> So the value you put into your chart for that day is:
>
> (64 x 0.62) + 17 = 57c
>
> Observe that this figure is equal to the theoretical ex issue share
> price of 57c I calculated earlier.   This is not a co-incidence.
>
> If you go though and scale all your 'stage 1' chart figures, using
> the stage 1 formula I have given you, then you will find that the one
> off step drop in the graph between the day before the placement is
> announced and the day afterward, is eliminated.  This one off drop
> represented the transfer in wealth from existing shareholders to
> placement shareholders.  This drop was real (ask any shareholder who
> held those shares at the time)!   So doesn't this prove that the
> scaled adjustment of share  prices I have just postulated is a load
> of bollocks?
>
> Well, no it doesn't (as I see things).   The secret to
> understanding this apparent paradox is to think about what happens
> if you buy AUO shares on the market today.   If you buy today, are
> you buying the new shares or the old shares?  It doesn't matter
> because as soon as the new shares were paid up there was no
> difference between the new and the old shares.  Effectively when
> you are buying shares today you are buying a  *mixture* of the new
> and old shares.   On 26th Febuary the existing shares spike down in
> value was exactly matched by the placement shares spike up in
> value.  Today, you are choosing to look backwards on the share
> placement event.   From your present point of view (because you
> are buying a mixture of old and new shares) those spikes in share
> value never happened!
>
> If you plot things as I have suggested, you will eliminate that spike
> in the value of the shares which is mucking up your medium term trend
> lines, and was causing you all that grief Gerry!
>
> CHART 2 (Placement Shares)
>
> This chart only has two stages, as in stage 1 (out of three) before
> the placement was announced, these shares did not exist.  In stage
> 2 (where this chart begins), the chart starts out at 45c (the price
> of the placement), but then it immediately jumps up by 12c to 57c
> (this is the one off transfer of wealth from existing shareholders).
>  Because these shares are untradeable until 22nd April, the graph
> then 'flatlines' at 57c all the way to the start of stage 3,
> whereupon the shares start trading.  The points on the chart in stage
> 3 are then the end of day market prices of the shares as traded on
> the open market (same as Chart 1).
>
>
> >
> >
> > This event would show up quite differenly on my manually prepared
> > Chart -see my previous posts- than those produced at present.
> >
> >
>
>
> Hopefully my 'Chart 1' as described in the summary, should pretty
> much tie in with your manually prepared chart Gerry.
>
>
>
> >
> >
> > It does show fundamental investors need to read Charts together with
> > the supplied data. Not to do so may lead to wrong conclusions and
> > cost money: you could have been put off by a Chart of  what could be
> > a splendid investment.
> >
> >
>
>
> Agreed.  But you *can* adjust the raw chart to give a representative
> picture looking backwards.   When there is a share placement you
> can follow the methods that I have described.
>
> SNOOPY
>
>
>
> ---------------------------------
> Message sent by Snoopy
> e-mail  tennyson@caverock.net.nz
> on Pegasus Mail version 2.55
> ----------------------------------
> "Sometimes to see the wood from the trees,
> you have to cut down all the trees."
>
>
>
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