Why I Don't Like Private Placements At All.

That the stock market is risky is such an understatement. The reality is there isn't a 100% guarantee that one would make a return from their investment in the stock market.

Stock market crashes happens and some happen with many claiming that they weren't warned nor were they prepared for the crash.

And then emergencies in one owns life could happen. Yes, an unforeseeable incident might happen, one that might require one to fork out much more money than they were ever prepared for. And if one does not have other options to access money and the only viable option left is their 'retirement fund' which are represented by stock investment. And since in an unforeseeable incident, one always feels it's bad luck and when bad luck happens everything seems so unfortunate. Like when one if forced to withdraw from their 'retirement fund' or their stock investments, many a times, one would forced to sell at a loss. Yes, when things go wrong, they really go wrong. Yes, it's possible that the deemed 'long term' share investor could be forced out of an investment at a loss due to personal unforseeable incident.

Which is why investors in the stock market should always be given a chance or opportunity to be ADEQUATELY compensated.

Key words here is GIVEN a chance and ADEQUATELY. Now I understand that there's no divine right for any investors to claim that they must make money.

However, if the stock represents a good business and the stock is justified by the investing reasoning made (like not over paying for the investment), then at least the investor, the minority shareholder should be given a chance to be adequately compensated for taking the risk to be a long term shareholder/investor of the business.

To have the company attempting every which way to make a fool of the investor and their hard earned money is simply sinful in my flawed opinion.

Seriously, listed companies MUST stop treating the minority shareholders as OPM or other people's money. Show them the respect. They are the co-shareholders of your business. And the last I know, shareholders are shareholders are shareholders. They are your business partner. Treat them with respect.

And if you understand what I have written so far, then you should understand why I absolutely hate private placements.

It stinks to high hell!

And that's being polite.

Private placement discriminates the existing minority shareholders and it short changes the minority shareholders big time.

Last night I posted The Insanity Of Asia Media's Private Placement. It's a private placement which involves the creation of some 79.800 million shares or an extra 35% new shares.

Disclaimer first: DO NOT GET ME WRONG HERE BECAUSE I AM NOT SPEAKING FOR THE SAKE OF AMEDIA BUT I AM WRITING BECAUSE I SEE PRIVATE PLACEMENT HAPPENING WAY TOO OFTEN! IN MY FLAWED OPINION IT'S A FUND RAISING ACTIVITY WHICH UTTERLY DISCRIMINATES THE MINORITY SHAREHOLDERS.

Let me highlight the Amedia example again as mentioned in the posting The Insanity Of Asia Media's Private Placement.

Asia Media has a share base of 228 million shares.
A private placement of 35% would see some 79.8 million shares being created.

Which means Asia Media would end up with a share base of 307.8 million shares.

Not sure of the implications?

It's rather simple.

Assume for a moment that Asia Media 'could' earn some 10 million for the fiscal year.

Based on 228 million shares, this would mean an eps of 4.3 sen.

And if you think this stock deserves a fair value PE of 10x, then the fair value price should see the stock valued at 43 sen.

So far, ok?

Now consider this new share base of 307.8 million shares. Now an earnings of 10 million would equate to an eps of only 3.2 sen. And using the same 10x PE multiple, the stock fair value would shrink to just 32 sen!!!!

See how the value shrunk?

See how the value had shrunk from 43 sen to 23 sen? 32 sen?

Remember EPS means earnings per share. Previously before the private placement, the current minority shareholder is getting an eps of 4.3 sen. Now due to the private placement, the current minority shareholder sees their eps shrunk to just 3.2 sen.

They have just lost the 1.1 sen.

In Amedia case, I have stated that this placement SHOULD have been done before AMedia is granted listing!

Hello Bursa?

Where's the so called Quality Control?

Where's the previous objective of trying to improve the quality of the listing?

How could you let a company list in January 2011 and only to announce on 1st June that it wants to list an additional 79.800 million new shares? How could it let Amedia increase its sharebase by 35% just like that?

Won't the existing shareholders feel as if they have been mighty screwed big time??

And if a company wants to do a private placement because they want to raise funds, why discriminate the existing shareholders? Why can't they do a RIGHTS issue? In the case of the rights issue, EVERY single shareholder is given an EQUAL opportunity to participate fairly.

By doing a placement, it means exclusivity. It's exactly like privileged placement.

Which is so wrong.

And yes, let me say this again. Right or wrong, I am STRONGLY against private placements of new shares.