{"id":4111,"date":"2021-01-13T16:19:14","date_gmt":"2021-01-13T16:19:14","guid":{"rendered":"https:\/\/thefinanceghost.com\/?p=4111"},"modified":"2021-01-13T16:19:14","modified_gmt":"2021-01-13T16:19:14","slug":"investing-with-caution","status":"publish","type":"post","link":"https:\/\/thefinanceghost.com\/index.php\/2021\/01\/13\/investing-with-caution\/","title":{"rendered":"Investing with caution"},"content":{"rendered":"

Y<\/span>ou\u2019ve probably seen companies release \u201ccautionary announcements\u201d over SENS, the Stock Exchange News Service of the JSE. This system ensures that everyone gets information at the same time.<\/p>\n

The news goes out \u201con the wires\u201d and the market reacts accordingly.<\/p>\n

Today, Alaris Holdings Limited released a cautionary announcement, which is a good opportunity to unpack why such announcements exist and what they mean.<\/p>\n

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This is what the announcement says:<\/p>\n

CAUTIONARY ANNOUNCEMENT<\/em><\/p>\n

Shareholders are hereby advised that the Company has entered into negotiations to acquire a business operating in the United Kingdom, which, if successfully concluded, may have a material effect on the price of the Company\u2019s securities.<\/em><\/p>\n

Accordingly, shareholders are advised to exercise caution when dealing in the Company\u2019s securities until a full announcement is made.<\/em><\/p>\n

It doesn\u2019t say much, but it does let investors know that there\u2019s a UK deal on the cards and that the eventual transaction could have a significant impact on the share price.<\/p>\n

So, what is a cautionary announcement?<\/strong><\/h4>\n

A cautionary announcement, commonly just called a cautionary, is the first public step in the dance for a corporate transaction. It\u2019s designed to avoid a situation where some investors know about a potential deal and others don\u2019t.<\/p>\n

It\u2019s key to the integrity of a market like the JSE that we don\u2019t have \u201cinformation asymmetry\u201d i.e. different levels of information among different investors. It all sounds good in theory but doesn\u2019t always work in practice.<\/p>\n

Every now and then, you see a share price move substantially for no good reason \u2013 no announcement, no major statistical release, nothing. The surveillance people at the JSE investigate these events to see whether any information has leaked that has been taken advantage of by people in the know.<\/p>\n

This is called \u201cinsider trading\u201d which is a term you\u2019ve probably heard before. It\u2019s rare, but it does happen. It\u2019s a criminal offence and deservedly so, although so is walking on the beach these days.<\/p>\n

The way to avoid information asymmetry is for companies to protect their confidential information properly. Listed companies need to have strict policies in place to do so. The existence of an Investor Relations department and policies for restricted access to internal information are ways to make sure that information is shared with the market correctly.<\/p>\n

A company would release a cautionary announcement in one of these circumstances:<\/p>\n

    \n
  • High-level terms of a deal have been agreed to and parties are moving forward with more detailed negotiations, or<\/li>\n
  • Information has leaked and the existence of a potential transaction is no longer confidential.<\/li>\n<\/ul>\n

    As another quick nugget of information, releasing a cautionary announcement immediately puts a company into a \u201cclosed period\u201d, which means directors aren\u2019t allowed to trade in the shares for that period.<\/p>\n

    A cautionary announcement must either be renewed every 30 days or withdrawn. It would be withdrawn where the deal has fallen over or where a detailed terms announcement is being made because the deal is going ahead.<\/p>\n

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    It\u2019s possible to be too cautious<\/strong><\/h4>\n

    The JSE gets grumpy when companies release cautionary announcements too easily or with no useful details. It\u2019s obviously totally unhelpful to the market to release what is known as a \u201cbland cautionary\u201d that is devoid of any details.<\/p>\n

    The Alaris Holdings announcement gives some indication that there is a deal on the table to acquire a business in the UK. Investors have some idea that the international strategy is being executed and that the UK is the country of choice. It has enough details for now.<\/p>\n

    A cautionary with no details, or released prematurely, causes more harm than good. It creates market speculation and confusion in the market.<\/p>\n

    What about analysts who do research? Isn\u2019t that information asymmetry?<\/strong><\/h4>\n

    Yes this is definitely asymmetry, but in an allowable form, provided the research is conducted within the rules.<\/p>\n

    \u201cMosaic theory\u201d is the process through which analysts use various sources of public information to join the dots and arrive at conclusions. For example, analysts may do research into the relationship between Stats SA industry data and the actual performance of a company, building a model that predicts performance based on Stats SA releases which are more frequent than financial results announcements by the company in question.<\/p>\n

    Sure, they might do more detailed research than that (e.g. discussions with private companies in the industry) to arrive at sensible estimates, but they still aren\u2019t operating with \u201cprice sensitive information\u201d \u2013 you\u2019ll have to forgive me for the jargon, but you need to understand this stuff.<\/p>\n

    Price sensitive information is specific or precise and will have a material impact on the share price. It\u2019s not \u201cwe are considering an acquisition strategy\u201d but rather \u201cwe are buying company XYZ next month for R100m, a bargain!\u201d<\/p>\n

    Most information about a company isn\u2019t price sensitive in isolation.<\/p>\n

    This is tricky<\/strong><\/h4>\n

    Yes, but as Chris Martin of Coldplay once opined when asked about public market regulation:<\/p>\n

    \u201cNobody said it was easy. No one ever said it would be so hard.\u201d<\/em><\/p>\n

    Ok, perhaps that song wasn\u2019t about investing, but it could\u2019ve been.<\/p>\n

    [the_ad id=”3234″]<\/p>\n","protected":false},"excerpt":{"rendered":"

    You\u2019ve probably seen companies release \u201ccautionary announcements\u201d over SENS, the Stock Exchange News Service of the JSE. This system ensures that everyone gets information at the same time. The news goes out \u201con the wires\u201d and the market reacts accordingly. Today, Alaris Holdings Limited released a cautionary announcement, which is a good opportunity to unpack why such announcements exist and …<\/p>\n","protected":false},"author":1,"featured_media":4112,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[26],"tags":[769,771,238,37,773,775],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/4111"}],"collection":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/comments?post=4111"}],"version-history":[{"count":0,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/4111\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/media?parent=4111"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/categories?post=4111"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/tags?post=4111"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}