Did the listing suspension of CMC undermine shareholder interest?

CMC Holdings showroom on Lusaka Road in Nairobi’s Industrial Area. Photo/FILE 

By Robert Bunyi

What is a market? A market is commonly understood to be a physical place or medium, such as an electronic exchange, where buyers and sellers congregate to trade.

This understanding is generally correct although the emphasis is on the trade rather than the congregation of buyers and sellers. To illustrate, imagine a market day in any of our towns where buyers and sellers congregate but no sale actually happens that day. If this was to occur then a market didn’t, exist rather a market place was in existence

Applying this thinking to the stock market, the market place is the stock exchange and the market is when a buyer and a seller of a share actually conclude a trade.

The Nairobi Securities Exchange (NSE) today has 50 companies that have listed their ordinary shares and if on a single trading day a trade occurred in each share, then that day would have had 50 distinct markets for ordinary shares.

In the case of CMC Holdings the situation is rather unusual in that the shares were suspended on 16 September 2011, which is 745 days or well over 2 years running without an opportunity to trade! That is a very long time for a market not to exist when there are willing buyers and sellers.

The reason we establish stock exchanges is to ensure a safe, smooth and orderly mechanism exists within which to trade in securities. Various rules and regulations as well as governing laws are put in place to deliver the framework that allows various actors to participate in this financial sub-sector.

The exchange will disseminate at the end of each business day the transactions concluded in each security. Each company will also release any information on its operations that is deemed necessary for investors to consider in arriving at what investment action to take with regard to a particular company.

The ruling price for a share will then reflect the aggregate view of the participants in the stock exchange. So if over a period of time the share price of a company maintains an upward trajectory then it is generally accepted that the market views a company favourably.

The key element here is that the company will at all times and in a continuous fashion release material information to the public and leave the investing public to draw its own conclusions as to appropriate price for its shares.

This process is particularly useful to those investors who are not very sophisticated as they will follow the market trusting that the more savvy investors will determine and drive the share price to an appropriate level.

Company management will also learn what investors think of their performance by reviewing movement in share price. This signalling effect from changes in share price is also used by other companies who are looking to acquire listed businesses.

The Al Futtaim takeover offer of CMC Holdings is priced at Sh13.00 which is 4 per cent lower than the last trading price of Sh13.50. For the ordinary investor the long-running suspension of CMC, robbed her of the opportunity to continuously asses and re-price the company’s shares.

The need for the initial suspension was clear but the maintenance of the suspension was unnecessary as long as the company continued to release relevant information.

This market price feedback would probably have given management crucial indicators of the options that exist within the exchange to plot a new path for the company.

Thanks to Al Futtaim we now know there is value in CMC but in a sense it is one sided as they are the only buyers in sight