Un-Chartered Waters
What was behind Chartered Semiconductor's disasterous rights offering last month?
By Tom Leander

Rarely does a major company make such a flamboyant mistake, and get penalized by the market so heavily. But the question of why US$463 million-a-year Chartered Semiconductor, based in Singapore, launched its rights offering after telling the market it needed no cash has still to be satisfactorily answered.

Chartered Semiconductor's rights offering on September 2, which effectively halved the company's market cap, has been attributed to management's mishandling of market expectation.

As late as August 28, analysts say, Chartered's management was insisting that it had no immediate need of cash. Then, virtually overnight, it reversed tracks and launched a S$633 million (US$365 million) rights offering at S$1 per share, a steep discount of 52 percent to the then-market price of S$2.10. The discount ensured that majority holder Temasek, which, through its ownership of Singapore Technologies, owns 60.5 percent of the company, would snatch up the offer. This left minority shareholders with very little choice: either accept the terms of the offering or face having their shares heavily diluted.

The effect on the listed price has been disastrous. Chartered has dropped to S$1.05 from S$2.10 before the offering. "It's a problem of mismanagement of expectations," says Warren Lau, semiconductor analyst for HSBC Securities in Taipei, "especially for the minority shareholders." He adds: "Management actually told the market it didn't need any funds. And it changed over a weekend."

Following the offering, the Securities Investors Association of Singapore (SIAS), under the aegis of the Singapore Stock Exchange, launched an investigation into the deal. The focus of the investigation was on whether management had consulted Chartered's majority stakeholder on the pricing of the deal, while letting the holders of the publicly listed 30 percent be taken unawares. David Gerald, president of the SIAS, said after meeting with Chartered's CEO Chia Song Hwee: "We're satisfied that they were sincere about meeting small investors' concerns." But the investigation is still ongoing.

To make matters worse, Chartered announced on September 17 that it was going to miss its fourth-quarter sales targets and would have to revise earnings downward. Following management's about-face on the rights offering, investors took the news as confirmation of Chartered's cavalier style of disclosure..

Rumor Mill

It strains credulity that management was taken by surprise by the offering’s effect on the share price. Chartered has been fairly savvy in the timing of its financings in the past, and the company has a wealth of experience to draw on. In July, long-time CFO Chia Song Hwee ascended to Chartered’s top job to become the third CEO for the company to emerge this year (the former CEO, Barry Waite, was replaced by interim CEO Jim Norling in April). Chia declined to be interviewed for this story.

No one would accuse Chia of lacking experience in bringing Chartered to market. He was CFO during Chartered’s IPO, raising US$548 million in October 1999 in a combined deal on Nasdaq and the Singapore Stock Exchange. He led a successful secondary offering for US$567 million in May 2000. At the time, Chia won accolades – including a special commendation for capital raising from CFO Asia’s Achievements in Best Practices awards – for forthright dealing with investors.

And there was ample evidence that the market disapproved of raising more cash to fund Chartered’s growth plans. Chartered announced its intention to develop its 12-inch capacity last year, saying that it wanted to get its new Fab Seven running in 12 to 18 months. The reasoning behind the plan: Chartered’s major business making 8-inch wafers has been losing ground for some time in China, Korea and Malaysia. Launching into the 12-inch market would make it more competitive against high-end players such as Taiwan Semiconductor (TSMC) and United Microelectronics (UMC). Or it would make Chartered a possible acquisition target for either of those companies.

But the plan has come under heavy criticism by analysts. For one, TSMC and UMC are four quarters ahead in their development of 12-inch fabs. “Full scale launch into 12-inch technology will only spread R&D efforts even thinner without producing tangible results,” says Lau. As for acquisitions, it made sense to beautify Chartered by developing 12-inch capability when TSMC and UMC were prohibited by Taiwanese regulation from building foundries in China. A purchase of Chartered could have offered either of the companies a back door to transferring their manufacturing operations to China. But Taiwan has now waived the prohibition, allowing the companies to pursue this strategy directly.

Still, the company was determined to forge ahead, and it was obvious they would need more cash. The company had devoted only US$200 million to building the fab as of August. Analyst estimates for its completion ranged between US$3 billion and US$3.25 billion. Rumors began to mount that Chartered would need to come to market with a bond or rights offering. This had a chilling effect on the share price, depressing it 18 percent in the week before the offering.

After the deal, analysts pinned the decline in the stock price on the steepness of the discount. But the sharp fall of the stock on pre-offering rumors suggests that the market’s grim view of Chartered’s business plan was the real reason. A 52 percent discount on a rights offering is steep, but not unusual. The Business Times in Singapore tracked 13 rights offerings over the past two years, and found that they averaged a discount of 50 percent. More likely, Chartered’s investors were worried over Chartered’s 12-inch strategy, voting against management’s bull-headedness for raising cash for a bad plan.

There’s no reason that Chia should have misread these signs before he made his headlong decision last month. Yet in explaining his motives in public statements, Chia insisted that the rights offering provided the best option. “We believe in the current weak and volatile market environment,” Chia said in a press conference on September 8, “a rights offering presents the best option for a successful capital raising, providing relative certainty of proceeds and preventing dilution of existing shareholders who would subscribe.”

Chia has denied strongly that management has plans to take the company private, but seasoned Singapore Inc. watchers have been entertaining this idea for some time. Without the option to sell the company because the stock price has long been too low, the theory goes, the next best means of recouping would be to buy it, recapitalize and rebuild, and then sell it after a restructuring. But a rights offering would be a far-fetched way to accomplish this strategy. For one, the offering would enlarge the number of shares that Temasek would have to buy – at a premium – from existing shareholders. Unless management was sure beforehand that the share price would sink well below the offered discount, the strategy would be pointless.

In the end, the answer may have been a simple, but quite serious misreading of the market’s impatience with Chartered’s future. “The decline in the stock price,” says David Webb, the Hong Kong-based corporate governance campaigner, “indicates the degree to which shareholders have lost faith in a controlled economy’s ability to manage a company.”

Which suggests that no matter how capable Chia and Chartered’s reshuffled management may or may not be, they face an uphill battle when they want to raise money again.

Tom Leander is Editor-in-Chief of CFO Asia based in Hong Kong.