Ridiculous Offers Shouldn't be Banned

The first release came from the Securities Commission. It told debenture holders in Dorchester Finance, which is in moratorium, to be wary of an unsolicited offer to buy their investments for 5c in the dollar. The would-be buyer has previously made similar offers for Strategic Finance and St Laurence Finance debentures.

The second release came from AMP, warning shareholders not to accept an unsolicited offer to buy their AMP shares at A$2.29, which is about NZ$2.75 – way below half the market price.

The names of the companies making the offers are similar: Stock & Share Trading Co for Dorchester, and Share Buyers Pty Ltd for AMP.

But the circumstances are not.

It’s easy to tell that the AMP offer is terrible. The shares are listed on the New Zealand and Australian Stock Exchanges, and a recent local price was $6.50 – information easily found in a newspaper or stock exchange website.

However, the very fact that Share Buyers is making the AMP offer means it expects some shareholders to accept.

This may be because, when AMP demutualised and listed on the stock exchanges in June 1998, it distributed free shares to its former members. About 70,000 New Zealanders now own AMP shares, says external relations manager Veronica Ruddenklau. They probably include many who are not particularly savvy investors. Here’s hoping, though, that none of them is naïve enough to be sucked in by the offer.

The Dorchester Finance situation is not as clear cut. As the Securities Commission puts it, “When a finance company is in moratorium it is very difficult to accurately assess the value of the company's debentures. The debentures are not trading on any organised market, so there is no market price against which investors can assess the offer.”

However, investors do have a clue or two. Dorchester Finance investors have approved a capital reconstruction plan, and the Commission suggests investors consider the value the directors of Dorchester Finance’s parent company “have attributed to the securities to be issued under that plan.”

According to the Dorchester website, directors estimate the return to debenture holders at 33c in the dollar, and possibly more.

There are no guarantees, though. And some debenture holders might need money fast, or they might just want to get the whole nightmare over and done with.

If that’s you, don’t move fast. The Securities Commission urges you to “seek professional advice before making any decision,” and I quite agree. Stock and Share Trading must be confident they will end up with considerably more than 5c in the dollar on every debenture they buy.

Their gain will be your loss.

Should such offers as these two be allowed to happen?

“Under securities legislation it is not illegal to offer to buy securities below their face value,” says the Commission. And I wouldn’t like to see that changed.

There could be situations in which the value of an investment is unknown and a would-be buyer makes a realistic offer that some investors - who prefer the bird in the hand - will be wise to accept.

What about protecting investors who don’t realise just how bad many of these offers are? I think we can take protection too far. If an investor doesn’t know what their investments are worth and isn’t prepared to seek expert advice before selling, they should accept any losses they suffer – or stick with bank term deposits.