The recent announcement by Travellers International Hotel Group, Inc. (PSE: RWM), the operator of entertainment-gaming complex Resorts World Manila that it would voluntarily delist from the Philippine Stock Exchange surely raised a few eyebrows. Most of us have come to think of delisting as something bad, something done by, or more commonly TO, companies that are in trouble. Indeed, probably the two most common reasons for a company listed on the PSE to be delisted are: 1) business is so bad that there remains little public interest in its stock, and its public float (i.e. proportion of shares held by the public) has gone under the minimum level required by the Exchange; and 2) the company has somehow found itself "unwelcome" by the Exchange, usually due to the actions of its officers and/or majority owners.
However, there are various legitimate reasons why even healthy and robust companies may choose to delist. Below I will enumerate three of these reasons. I emphasize that these are general reasons that may or may not apply specifically to RWM. It is up to the reader to ultimately decide on RWM's reasons and motivations.
But first, some basics: what does it mean when a company delists or is delisted from an Exchange? Simply put, the company is removed from the roster of stocks that are traded on that Exchange. Ownership tends to be reduced to a much smaller number of parties because the general public will no longer have easy access to the company's shares. Additionally, without the liquidity, infrastructure, and attendant safeguards provided by an organized exchange, the general public will also have much less interest in ownership in the company. But wait, before that happens, what happens to all the existing owners whose stakes were gained by buying shares in the stock exchange? The company is required to conduct what is called a tender offer to buy back their shares at a fair price. While an investor may choose not to participate in said offer and to hold on to his shares and remain an owner, this is usually not too desirable, especially for the smaller investor, because as the company comes to be dominated by a few majority owners, the small investor will have no easy way to get information, will have practically no voice in management decisions, and will have no easy way to liquidate his shareholdings if he wakes up one day and decides that is what he wishes to do. The net effect of all these is that in short, once a company delists, it will usually become primarily a privately-held corporation (i.e. collectively owned by a few) instead of a publicly-held one (i.e. collectively owned by many). As with most things in life, there are advantages and disadvantages to being a privately-held company instead of a publicly-held one. The main disadvantage is that if and when the company needs to raise capital, it must now rely on a much smaller pool of investor-owners. As money is always important, this is a significant disadvantage to the privately-held company. Still, conditions do exist wherein being a privately-held company may be deemed desirable by the majority owners, and below we will take a look at a few of them -
1. Business is Extremely Good, but not Necessarily Growing
Let's say your business is going great, but you do not think you will have much room to expand - perhaps you operate in a mature market where the lucrative market segments are no longer growing; or perhaps the government has become less friendly to your industry; or perhaps the environment has become increasingly challenging. You will now find yourself in a position wherein you are awash in yesterday's and today's profits, but do not see opportunities to put those profits to work for tomorrow. What do you do then? One thing you could do is to eliminate some owners, return their capital to them, since these are not needed anymore, as you have more than enough retained earnings to serve as capital. This may, to some, sound heartless. You invited these investors in when you needed them (by listing your company at the Exchange in the first place) then cut them loose when they, or more accurately, their capital, became expendable. Unfortunately however, this is how capitalism is meant to work, and I mean that in the best way possible. Capital should always be seeking out its most efficient use, so when you no longer have a good use for capital, you should liberate it.
2. You Feel the Stock Market is Undervaluing your Stock
The price of a company's shares in the stock market - its market price - is the end result of thousands of trades, so effectively, it reflects how the investing public values the shares; which is to say that if more people felt that the shares ought to be trading at a higher price, then they would be more willing to buy and less willing to sell, thus driving the price higher; and vice versa. In short, the price at which a stock trades is a clear reflection of how both buyers and sellers value it. In fact, a trade only results if both sides can come to a agreement as to what that value is. Sometimes, a small group of owners, usually the majority owners who have the best view of the company's prospects, may feel the company's shares have been trading for a prolonged period at a price they deem to be too low relative to the company's true value. The fact that the stock has been trading at that level for a prolonged period tells them that the investing public, "the market at large", deems that price to be correct. But they themselves deem it too low. Rather than trying to convince thousands, perhaps even millions, of market participants - arguably an impossible task - what this small group of owners may choose to do is to buy up all the stock and take the company private. Put another way, it is as if they saying "ok fine, if this low price is what you believe our stock to be worth, then by golly we will buy everything and prove you wrong. We'd be buying a great company at a discount." In a way, it's the same act of returning capital and reducing owners but with a different twist - this time, in a very real sense, the remaining owners reduce owners because they feel that these owners do not fully appreciate the value of what they have been given the opportunity to own. (People might not necessarily think of these transactions in exactly those slightly melodramatic terms, but if you think about it, that is exactly what their actions mean at the end of the day.)
These "buy-outs", as what they effectively are, become even all the more feasible when interest rates are low, because then the group doing the buying out can even go out and borrow cash if they do not have enough equity themselves to do a buy-out. While debt is a more dangerous form of capital because one cannot delay interest payments in the same way that one can delay dividends, if the stock price is low enough and therefore attractive enough, then at some point replacing equity with debt becomes tenable.
As a small side note, in the late 80s and early 90s, with the US stock market depressed, the Leveraged Buy-Out came into vogue. Stock prices of some good companies were deemed too low that financial entrepreneurs were encouraged to borrow money and buy enough stock in the open market to gain control of good and valuable companies. As equity was replaced by debt, companies were forced to cut costs, become more efficient, and in the end become even more valuable. This is actually what Gordon Gekko meant when he uttered his cult-favorite line "Greed is Good." I feel that the line has been over-simplified through the years. He was actually espousing a more complex view that what starts out as greed, ultimately serves to provide the incentive for efficiency and the increase of economic value.
But I digress, as I often do..
3. Your Business Operates in an Environment which Requires Quick Decisions and Quick Actions
One of the primary reasons a company goes public is to raise capital from a large pool of investors - the "public". Having a large number of "owners", has both pros and cons. One of the disadvantages is that the company might not be able to move quickly, as major changes would require concurrence and approval from the same large number of "owners". At some point, a company might feel that the challenges in its business environment require that it be able to move more quickly, and perhaps with more discretion, than would be practicable while having many "owners" to report to, and in cases such as these a company might willfully choose to go private.
So, as far RWM specifically, or any stock that is going through voluntary delisting for that matter, what should a PSE investor who owns the stock do? Actually, there aren't that many options - the most practical thing to do is to participate in the tender offer and get cash in return for your shares. If you have so much confidence in the future of Resorts World Manila that you would like to go on owning shares of stock in the company, then by all means hold on to your shares. The delisting does not render the shares worthless, you would still have a valid claim over a piece, however big or small, over the company. What the delisting does extinguish is your ability to quickly sell your stake if you decide to. Like a true owner, you would be in it for the long haul. If Resorts World Manila makes so much money and pays out big dividends, then good for you. But keep in mind that if Resorts World Manila decides to use those profits to expand in a direction you don't like, there's not much you would be able to do about it, and no easy way to liquidate your stake. Your financial fortunes from this particular investment will be inextricably linked to the company, as a true owner's would.
