Time for tide to turn on shells

By Geoff Senescall

Between the lines


In the heady days before the 1987 sharemarket crash it was said you could float a brick and people would buy it.

Today, in far less buoyant conditions, it appears you need even less. Just look at the share price performances of shell companies - listed vehicles which have a register of shareholders but little or no assets.

Shells such as Strathmore, Spectrum Resources and Wilson Neill have all been trading at prices well above their intrinsic value.

Meanwhile, finding little favour are companies with tangible businesses such as Fernz. Even Sir Ron Brierley's Guinness Peat Group - which just reported a $330 million profit and $600 million of cash in the bank - trades at a discount to its asset backing.

But in this age of lotto and casinos it seems investors prefer two in the bush rather than one in the hand. A whisper that a shell company is going to transform itself into a vehicle with .com in its name sets off a speculative stampede.

Add the high-profile Auckland entrepreneur Eric Watson to the mix and the price goes berserk.

Certainly shell companies, with a ready shareholders list to tap for capital, make perfect vehicles for fledgling technology companies. By taking over the shell company, they gain a cheap and easy "backdoor" listing on the market. It sure beats the cost and complexity of flotation which involves stock exchange scrutiny to see if companies meet its listing rules.

But while the spoils of speculation can be great, so are the risks. A rumour will bounce off every brokers wall in the country before it hits the street. People at the end of the information chain can end up paying a high entry price.

Take Strathmore. Eric Watson and Advantage paid 18c a share (for their respective 10 per cent and 20 per cent holdings) to get a seat at the Strathmore table. That is less than one-fifth the 99c some investors paid last Friday ahead of Strathmore's announcement new controlling shareholders were plunging it into high technology investments.

Having taken a blind punt on Strathmore, investors now face a hefty rights issue to raise money for the new owners to invest. Just because it is technology does not mean it will succeed. With no proven track record, investors are taking a gamble.

There is nothing wrong with this if everyone is playing with the same deck. If they do not, then it shakes the very foundations of our market.

Here the stock exchange has a crucial role to monitor trading behaviour to ensure a level playing field. It can't delay in learning how to bring discipline to the market. After all, its getting into the game itself with its plans for a market in start up companies, volatile enterprises in ambition far exceeds assets.