Taking Stock / Waiting for You II

Answers to questions from readers about `Waiting for you' from June 4, 2003.

1. Why did you use the first names of the shareholders, not their full names?

Simple - the article's thrust was to describe developments on the market, not the affairs of this or that businessman. There are dozens, maybe hundreds, of stock market sharks with a penchant for raising expensive money from the public every few years. Once it's the Recanatis, another time it's the Dankners - as we show later on, it doesn't really matter.

2. Why was the article so cynical?

Cynical? The reader is evidently unfamiliar with the world of public issues in general, and investment bankers in particular. That is where you'll find the pure essence of cynicism, perfect indifference to the greater good of the investors, and a tendency to squeeze the public to the last drop. With all due respect to our capacity for cynicism, it pales into insignificance alongside the level evinced in Tel Aviv public offerings.

3. Why do we ignore the substantial contribution public offerings made to advancing the capital market, the economy in general and economic growth?

No, we aren't ignoring it. We have always believed that the capital market, not the government or the bankers, are the ones who should serve as sources to the market.

The problem is that in Tel Aviv's capital market, the public - mainly the institutional investors that manage its money - tend to buy securities at the worst time, at the highest price.

History shows that it is always better to buy corporate stocks and bonds on the secondary market, because when they're offered for sale on the primary market, they tend to be terribly expensive.

4. Are there public offerings from which the public benefited?

Of course, there are always exceptions to the rule. Investors did well from many public offerings. A handful of companies that went public during the last boom on the market have turned into big, profitable concerns.

But if you list the 10 or 20 companies in Tel Aviv that generated the most value for investors over the last decade, you'll find that most hardly raised capital on the local market. Some never went there at all. As for the few that went public and did well, there was almost always an opportunity to get their equity on the secondary market at a lower price, because they went public at a high price, or at bad timing.

But the companies that keep issuing weird and wonderful securities, or that pounce first with prospectuses or non-negotiable bond issues the second the market twitches, tend to be the ones that generate the least value for investors.

5. So why do the institutional investors that manage our money buy securities at offerings?

A good question. We wonder. There are several possibilities. First - the offerings roll in when the market is feeling perky, and optimistic. Second - ahead of their offerings, companies expend much effort on persuasion, marketing and even groveling to the institutionals. Marketing and obsequiousness work. Third - in offerings, stocks are usually prettily packaged with options and ribbons and sparklers that distract from efforts to estimate the quality of the stock, and obscure the big picture.

6. Why has all this come up now?

Because the leading indices of the Tel Aviv Stock Exchange gained 30 percent within two months and, if our senses do not deceive us, companies and major shareholders by the hundreds are burning the midnight oil to write prospectuses and raise more and more capital from the public.

In fact, they are already hitting the market. Shares are being released, onto the floor or through off-floor transactions, after the surge on the market. We are certain that the buyers are, often enough, people managing our money.

What especially worries us about this latest flurry is this - companies are more leveraged than ever before. We fear there are companies, banks and underwriters controlled by the banks who are trying to persuade institutionals to buy stock and bonds of enormously leveraged companies. Today, we must be more vigilant than ever before to make sure the banks don't connect pipelines between their mutual funds and credit outlets.

Why do we not trust other people to manage our money?

Because we've been keeping track of these people, who manage other people's money, for the last 15 years. All too often they seem to be taking the short-term view, not the long-term one. All too often, they seem to be watching out for their employer's interest, and their own, and to forget ours by the wayside. We would be delighted to be mistaken about this, and to learn that this time around, they are showing a sense of responsibility and professionalism.