When Rights Go Wrong - Chartered Semiconductor Manufacturing Ltd.

Singapore-based Chartered Semiconductor Manufacturing, one of the world's leading silicon producers, was growing increasingly concerned that it was starting to lag technologically behind its main rivals. In September 2002, CSM announced a major rights offering to existing shareholders, many of whom were alarmed by this unexpected turn of events. As the de Picciotto Chaired Professor of Alternative Investments Pierre Hillion explains, the markets needed more than a little convincing. The case offers compelling insight into how publicly listed companies often cope with being forced into "damage control" mode, and how easy it is to undo years of reputation-building with a few clumsy missteps.

by Pierre Hillion
Last Updated: 23 Jul 2013

Singapore-based Chartered Semiconductor Manufacturing (CSM), one of the world's leading silicon producers, grew increasingly concerned that it was starting to lag technologically behind its main rivals. Worse, many of its competitors were announcing plans to boost production. In September 2002, CSM announced an eight-for-ten rights offering to existing shareholders, involving the new issuing of roughly 1,100 million new ordinary shares.

Founded in 1987 by the Singapore government (which remains its biggest shareholder), CSM had seen its operating profits suffer during a major market downturn in the late 90s. In its 2002 prospectus prior to the new offering, CSM stated that its prime goals were growth positioning and shoring up its currently still-strong financial position.

But as the de Picciotto Chaired Professor of Alternative Investments Pierre Hillion explains, the markets needed more than a little convincing. Many investors were very vocal when complaining that CSM had offered earlier assurances that it had no immediate need of more substantial liquidity. Its Singapore-listed shares tumbled on the strength of various rumours in the weeks prior to its official issuing announcement.

Very soon, media attention and continuing investor criticism led the Singaporean regulatory authorities to launch a formal investigation. This mainly concerned itself with whether or not peak sell-off volumes just prior to the formal announcement may have involved insider trading.

The case offers compelling insight into how publicly listed companies cope with being forced into "damage control" mode, and how nimble-footed and demonstrably resilient a firm must be to avoid intensifying such a crisis. Although the explanations it offered for its unexpected issuing decisions were largely credible to most observers, considerable damage was done very quickly to CSM's once unsullied reputation.

Investment banks grew more doubtful in their ratings. And market commentators blamed CSM's mounting misfortunes on poor timing, clumsy handling of expectations, cavalier disclosure methods, and a generally unattractive bottom line.

In October, CSM's underwriters, Merrill Lynch, agreed to become the firm's second-largest shareholder. Rival investment banks were quick to express their feelings that Merrill Lynch had mis-stepped badly in a very public deal. The most common negative sentiment expressed centered around the investment bank's decision to proceed with the original rights offering, rather than underwriting a private placement which would obviously have exposed the firm to far less immediate and intensive scrutiny.

The case presents the reader with an intriguing example of how such transactions demand a degree of deftness and alacrity, especially in an industry like semiconductor making which has historically been highly cyclical and prone to sudden major downturns.

It would probably be quite unjust to say that CSM had done anything genuinely unethical, and the firm had long enjoyed an excellent reputation. But, as the author asks, could the shares offering have been handled better, and if so, how? Was the offering mistimed? If so, couldn't that really only be sufficiently appreciated in retrospect? Moreover, was the September 2002 rights issue over-priced, under-priced, or well valued? How could one best determine this objectively?

The study also examines the rights offering process in general. The reader is asked to critique the underlying rationale for the process as a whole, and personally determine the strengths and weaknesses of the general process.

INSEAD 2005

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