If you want to know one of the reasons the number of companies going public is falling then look at the hoax bid to buy Twitter. The social media company’s shares spiked by 8.5 per cent this week after a bogus news story was disseminated, ironically through Twitter, about a possible takeover. The hoaxer mimicked the Bloomberg news website, posting a story that the company was taking advice from banks about a $31 billion bid. By holding a stake in the firm before news spread, the hoaxer would have been able to watch the share price rise as speculators piled in and then sell at the top of the market before investors realised the truth, making a very comfortable return. (The $31 billion ‘bid’, which translates to more than $49 a share, pushed Twitter up from $36.84 to $38.56).
Fraudulently manipulating share prices is nothing new. As recently as May, the cosmetics company Avon saw its shares surge by 20 per cent in one day when a similar hoax claimed ‘PTG Capital Partners’ had bid $8 billion for the company. Investors soon discovered the company didn’t exist. In 2011, the aviation giant American Airlines was subject to a bid of $3 billion by a fake firm called Sterling Global Holdings.
Target companies can benefit from the hoaxes. Twitter’s share price closed up 2.6 per cent after the takeover story was comprehensively rubbished. But not all hoaxes are to their benefit. In 2000 technology company, Emulex, saw its shares plunge 59 per cent in 16 minutes after a fake press release claimed the company was lowering its reported results, sacking its chief executive, and being investigated by the US Securities and Exchange Commission (SEC).
The SEC, the body charged with protecting investors, has tried to improve the integrity of the Edgar Database, through which company bids are logged, and successfully charged some hoaxers. The sender of the Emulex press release later received a 44-month prison sentence and the SEC recently filed a lawsuit against a Bulgarian man, Nedko Nedev, for the Avon scam.
But it is up to investors to take a calmer approach to breaking news, to check sources before reacting, though the gains to be made by target company shareholders are so huge that this might prove impossible.
As for the companies, it is little wonder that the US has seen ‘take private’ deals rise from $14 billion in 2012 to $80 billion in 2013, while the number of Initial Public Offerings has fallen dramatically. Big IPOs, the kind that get investors’ mouths watering, are even more infrequent. Facebook owner Mark Zuckerberg waited years before taking the company public and only capitulated after ensuring his control could be guaranteed. The life expectancy of US listed firms has plummeted from 65 years in the 1920s to less than ten in the 1990s. The volatility of investors, along with a barrage of criticism of the effects shareholder pressures have on companies’ long term prospects, are all ultimately damaging the integrity of stock markets and companies’ appetite to list.
