General Magnetics: lessons not learnt
By JOYCE HOOI
04 June 2010
At General Magnetics’ first AGM as an unlisted firm last week, one would have thought that one had blundered into the Enron building by accident, so large was the outpouring of outrage by shareholders.
General Magnetics, which was listed 20 years ago as a cassette tape maker, survived the death of the Walkman age, struggled through the Discman decade as a recordable CD and DVD maker and finally succumbed to the iPod era, because next to Steve Jobs, everyone’s a loser.
It made losses for much of the last decade and was put on the watchlist in 2008 before being delisted in April this year.
In some ways, General Magnetics had some things in common with Enron, but not in the way that any of its angry shareholders would have imagined.
Malcolm Gladwell’s latest book – What The Dog Saw – points out that Enron, for one thing, had not been undone by the release of information that it had previously concealed from the public.
Rather, the thread that had led to the dissolution of the tapestry had been public information – in its financial reports, Enron had stated that it had used mark-to-market accounting.
Careful reading of this led a Wall Street Journal reporter to conclude that this accounting principle meant that a lot of the profit Enron had made was unrealised, and as more journalists and investors realised this (the implications, not the profit), its stock was shorted and by December 2001, Enron filed for bankruptcy.
The parallel is nowhere near as exciting for General Magnetics, but the main principle applies – all the facts that investors had needed to sell their stock had been in plain sight for years and years.
In fact, a close reading of the financial statements had not even been necessary.
After the turn of the millennium, the company began consistently making losses in the millions.
Whether it had been the fault of a shrinking industry is irrelevant. It’s all too easy with the benefit of hindsight to say that recordable DVDs like the ones General Magnetics makes are now as valuable as Frisbees.
But for argument’s sake, in 2002, the year when DVD recording was supposed to have taken off, General Magnetics made a net loss of $5.1 million.
Much of the figures mentioned were not made available on hindsight. They had been made public every year, for 20 years.
And so when several shareholders lamented that they had held the stock for 20 years, it might have invoked some kind of sympathy, but it also meant that they had 20 years to change their mind about the firm.
Others had hung on, presumably because the stock had traded so far below net tangible asset value in its dying days.
But to have harboured hope that the company would sell its assets and distribute them as an exit offer would have meant betting on its liquidation – which is the strangest thing to hope for in a company you are investing in.
Now that the SGX cannot enforce an exit offer for General Magnetics, making one is not compulsory, as its managing director Oh Loon Lian pointed out.
‘Actually, the delisting of General Magnetics should be pretty straightforward as it has a perpetually loss-making business and lots of assets. It does not take a genius to know that the best course of action is to liquidate the company and distribute the cash,’ a shareholder had told BT.
Now that the company is no longer governed by SGX listing rules, however, there is a lot of danger in confusing what a genius does with what the firm will ultimately do.
On a related note, the state of things merely clarifies that there is little use for a watchlist. The people who should ‘watch’ a stock the most are the people who own it. The information that a stock has had a three-year losing streak is hardly Pentagon material.
Currently, minority shareholders are faced with the choice of taking an exit offer when one surfaces, or going along with General Magnetics’ plans to get into ‘high-tech fertiliser’.
While most of the analysis has thus far been made on hindsight, this question is a forward-looking one: If this had been an IPO, and the company in question wanted to enter a field it has no experience in, with details that are sketchy at best, in an industry you know nothing about, how much stock would you buy?
If the answer remains murky, this quote from Warren Buffett should hopefully clarify – ‘The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.’