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Were the Chartered Semiconductors Manufacturing Rights offering a Successful Transaction? Could the Process Have Been Managed Better?

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(Chartered Semiconductor Manufacturing Ltd.)





Were the Chartered Semiconductors Manufacturing rights offering a successful transaction? Could the process have been managed better?

The rights offering involved 3 players largely - CSM, the Shareholders of CSM and Meryl Lynch. From the perspective of CSM, as the rights issue was underwritten, they managed to raise the funding that they required. Meryl Lynch realized a net gain in the transaction because it bought the underwritten shares at S$1 each and was able to offload the shares quickly at 1.12 when the price appreciated. The real losers in this transaction were the existing shareholders who suffered a huge capital loss in the transaction. The price of shares fell from S$2.1 to as low as S$0.89 before climbing back to S$1.12, but the shareholders and analysts had lost confidence in the management due to the chain of events that led to the spiraling down of the prices. The management on their part had intended to issue shares through rights to protect the interests of its existing shareholders, but due to bad communication and timing, it was the shareholders who suffered. In public offerings like rights issues, the timing is very important. The position of the company at the time of the offering suggested that it had a good amount of cash and it did not really need to raise money for further expansion of FAB-7. But the rights issue at a significant discount suggested that the company was probably cash strapped and feared difficult financial circumstances in the near future. Moreover, the management announced that the revenue prospects in the next quarter will not be able to meet projects and a loss, similar to the previous quarter is expected. This further heightened speculative fear in the market about the financial future of CSM and led to spiraling of share prices. In this process the management tried to douse the fire, but the only credible move that would have met the market expectations was if they called off the rights issue and waited for a few months before deciding which method to use to raise capital.

The problem in the process lay with communication and timing, and of course, with the method of raising capital. Another issue faced during rights issues are information leaks. The usual impact was a reduction in the share price of the issuer and a consequent impairment of the rights issue price, thus reducing further the overnight market risk assumed by the lead underwriter. Communication from the management



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