KIPCO announced earlier this week that they are selling 39.2% of Gulf Insurance Company to Fairfax Financial Holdings for KD 0.900 per share, or a total of KD 59.89 million. The price of the stock before the proposed acquisition was announced was at KD 0.570. Now the stock is trading at KD 0.620, a 45% discount to the offering price. Why hasn’t the stock price surged to match the acquisition price? Simply, our stock market doesn’t protect minority holders, and allows majority owners to sell their stake at a huge premium without benefiting other shareholders. This issue isn’t unique and occurs everytime an acquisition is announced on the Kuwait Stock Exchange.
To better understand the issue, I offer cases around the world:
- In the US, IBM announced on Monday the acquisition of Netezza, a data warehouse company, for $27.00 per share. The stock was trading at $24.60, and closed the at $28.48 the day the announcement was made, surpassing the acquisition price after gaining 15%. In this case every shareholder benefits.
- In India, Vedenta (a Britsh metals company) offered to buy a 60% stake of Cairn India (an oil company) from its parent company. The price of the stock up to almost match the offering price as soon as the announcement was made even though Vedenta is not acquiring the whole company. Also, to please regulators, Vedenta offered to buy at most 20% from minority shareholders and the remainder will be bought from the parent company.
I hope that the recently created Capital Market Authority puts a stop to this disparity.
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