QIC Inside Investor Relations - Volume 50: How Changes in Shareholding Structure Affect Equity Value
Many entrepreneurs who have achieved a certain scalability in business will look forward to an IPO, leveraging resources from the capital market to support the company's long-term expansion and development. In reality, when a major shareholder considers selling part of his/her holdings, or when equity is diluted due to fundraising, or when a share transfer is executed due to issues like second-generation inheritance, these transactions influence the major shareholdings of the listed company.
Changes in major shareholding structures will attract the attention of external investors
Once such an event occurs, external investors will begin paying attention to the causes behind the change in the core holdings. Investors will have certain speculations: Is it because the major shareholder is too occupied to focus on business? Has diluted shareholding resulted in a board representation problem? Is the second generation able to successfully inherit the business and continue its achievements? Such conjectures make investors uneasy. When companies encounter such problems, we often observe the IR or spokesperson of the company giving evasive and passive responses, such as: "We are not familiar with the personal investments of our shareholders and cannot respond on behalf of them." But if a major shareholder or insider offers no timely explanation and fails to dispel public speculations on these changes through the company's spokesperson, external investors often decide against opening a new position or reduce holdings in current positions to avoid risks.
Focus on communication with shareholders to avoid being coveted by activist shareholders
There are many successful first-generation entrepreneurs in Taiwan. After many years of operation, they face problems with succession. In recent years, in addition to family shareholder fights, there have been many companies with low major shareholdings that have attracted the attention of external investors looking to make profit in the short term. If a significant shareholding is obtained by such investors, there is a huge uncertainty in the medium and long-term allocation of company resources, resulting in positive, but short-lived stock price performance.
In the past three years, frozen cross-strait relations, the outbreak of the pandemic, as well as rapid changes in the global environment have led to the growing scale of hot money in Taiwan. Many companies with huge assets but scattered shareholdings have naturally become prey to these external investors, and these cases have become increasingly prevalent. If the original major shareholder does not pay attention to the opinions of other institutional investors or communicate with other shareholders, it will be difficult for external institutional investors to actively express their support for the original major shareholder. A hostile investor can easily strengthen her influence by waging a proxy fight through controlling dissident shareholders.
Many founding families have been recognized by the market in terms of business operation and corporate culture. In time, however, quite a few have gradually neglected communication with shareholders, focusing their dialogue solely on business development and financial statements and failing to discuss changes in shareholding structures. We believe that unless the founding family members are completely withdrawn from the business, listed Taiwanese companies should pay special attention to the impact of the founding family’s shareholding changes and provide timely communication with markets before external shareholders have doubts. These actions must be taken to prevent external investors from exploiting gaps in the shareholder structure.
The QIC team is comprised of experienced industry professionals that have worked in major sell-side and buy-side companies. We leverage our knowledge in the industries and the relationships with investors and assist companies and investors in achieving effective two-way communication to enhance shareholder value. QIC also supports our clients with many years of experience in corporate access services. We plan, schedule, and execute tailor-made roadshows and targeted investor events for high-quality corporate clients. If you are interested in learning more about our services, you are welcome to contact us.
Contact: yvonnehuang@qtumic.com