Forum Archive Index - June 2003

[Dean Phibbs <fibz@xtra.co.nz>]

Hi all

Heres a good one for a Friday.  I didn't see anything about this in the archives
so I'll assume that it has not been discussed in the forum, my appoligies
if it has.

Anyway are investors rational or not.  I'll present the facts and leave you
to decide...

Richina Pacific recently conduted a 1for1 rights issue to raise US$10.4 million,
current investors in the company could elect to pay for their entitlement
in US$ or NZ$ and the rates were set by the company so that you could pay
either US$0.145 or NZ$0.28 per share.  If we ignore for the moment whether
you consider RCH a good investment or not and focus on the rights issue,
some interesting facts emerge.  The exchange rate in the week leading up
to the close of the rights issue was around  NZ$0.58  - which meant that
if you subscibed for your rights in NZ$ you paid  28 cents NZ per share,
but if you paid for your rights in US$ you only paid 25 cents NZ (US$0.145
x 1/0.58). This meant that if you paid in $NZ you paid a 12% premium for
your shares as opposed to if you paid for them in US$,all very straight forward,
but wait it gets better.....

Apparently 74% of investors took up their rights to the US$10.4m capital
raising which was good for the company in one respect. Out of that percentage
$1,730,000 was received in NZ$ which by a rough calculation means that 9%
of subscibers by paying for their shares in NZ$ burnt approximately $200,000
of their own money for no good reason other than the fact that they did not
think through the transaction logically or couldn't be bothered with the
hassle and cost of a bank draft!  I guess that if all of them were tiny shareholders
then the cost benefit analysis of this may have been locical but I doubt
it.

This raises some interesting points -

Are investors really rational?
Was the company at fault by not advising its owners to pay in NZ$?
(In effect this resulted in a transfer payment from the unwary (the investor)
to the wary (the company).)
If this type of transaction is typical then it leaves us some hope that markets
are not truly efficient and that an investor that does his homework has a
reasonable prospect of making a buck.

Food for thought..

Dean