Les actualités et publications
01/03/2024 Gouvernance

Price, value and trust

Hubert Mathet, head of the Governance working group of the SFAF's Extra-Financial Analysis commission, reviews the reasons for late adjustments to the share prices of Wirecard, Casino and Orpéa.

In July 2023, the Business Science Institute published an interesting article analyzing the forces at play in activist short-seller campaigns(1).
According to the authors, it's not a matter of the short seller having precisely analyzed and highlighted a company's weaknesses in order to be right about its future estimated value - sometimes after a substantial delay.
Quite often, on the contrary, the conditions that enable this self-prophecy to come true combine as follows: "the dimensions of the triptych ʺfinancial structuring - choice of strategic/industrial bases - operation of financial and regulatory institutionsʺ do not appear independent and decoupled, but rather entangled and in complex interaction". In short, a chain of circumstances that become favorable comes to "help" the original "short" analysis in its realization.
The three examples commented on below (two of which are mentioned in the above-mentioned article) show that it sometimes takes an additional subjective ingredient for the price to adjust to the anticipated value, after sometimes very long periods and many twists and turns.
Let's start with the simplest case, Wirecard, which is the story of a real fraud that was supposed to end at 0 value. It took no less than 5 years between the first alert launched by the Financial Times and the Zatarra report (2015) to finally lead to the collapse of the value after the auditors found a €2 billion cash hole in the group's coffers. In the meantime, the share price will have passed through an all-time high (August 2018) and a sell-side financial analyst - a rare occurrence - will have published, a year before the June 2020 bankruptcy, a target value of 0, with no noticeable effect on the share price at that time.

With Casino, Muddy Waters took on a Parisian heavyweight in 2015, for which nothing - in the minds of investors at the time - predisposed it to becoming a penny stock. Interestingly, the target price calculated by Muddy Waters was €6.91 per share for Casino and €0 for its parent company Rallye. The "prophecy" went far beyond the projection of the time, most certainly as the article points out, for governance and management reasons. Management now finds itself overwhelmed by the need to deal with a financial emergency that is becoming more pressing by the day, as time goes by and some or all of the ingredients of the charge report come to the surface.

As for Orpéa, the discredit cast on the group's modus operandi by the book "Les Fossoyeurs" and, incidentally, on its financial leverage has most likely shaken "confidence" in the model and dissuaded lenders from "rolling over" debt as had been the habit over the past twenty years with companies holding real estate assets. Once again, it is interesting to note that the share price did not finally adjust until October 2023, even though the technical ingredients for massive dilution to save the group from bankruptcy had been on the table since the June 2022 conciliation and the November 2022 plan proposed by management.

There are therefore forces far more powerful than fundamental analysis and its target price calculations, which enable shares whose values eventually tend towards zero to be held at abnormal prices, sometimes for a very long time. This is called confidence, or its opposite, loss of confidence, a subjective feeling which, by definition, cannot be quantified.
Let's just remember that, in this dynamic which causes a share price to tend towards 0 when professionals have abandoned a value that has become too "legal", the residual quotation becomes the result of interventions by individual shareholders who, by definition, have little or no control over the subject.
To illustrate this question of the "impalpable", it is interesting to note that, during the subprime crisis, the lowest point for convertible bond listings was at the end of October 2008, around a month and a half after the collapse of Lehmann Brothers, while the lowest point for equity markets was at the beginning of March 2009, four months later. Once again, there is no rational explanation for this decorrelation, other than a loss of confidence on the part of equity market players, while bond market players had understood that the world was not going to end.
In all three cases, strong measures were taken (financial restructuring, management buybacks, determined communication, regulatory intervention in Germany for Wirecard, etc.) to restore confidence. It's true, irrationality dictates, that everything doesn't always go downhill, as indicated above for Wirecard's share price.
If traditional financial models can't introduce this "loss of trust" eventuality into the calculation of a risk premium, for example, then we must resolutely turn to governance analysis to better appreciate the complexity (sic) of an organization and the intangible elements - human, to be precise - that make up its long-term value.

It's all a matter of nuance when analyzing the human factor that makes up boards of directors and management teams. The difficulty for the investor is that this is a long, even very long, process, based on experience in the field and nourished by exchanges with numerous players both inside and outside the company. What's more, it leaves no room for any kind of weighting according to perceived or anticipated risk: one either invests or resolutely stays away from a stock according to one's perception of the human factor that determines governance. It's certainly an unwieldy alternative for benchmarked asset managers.

Beyond the wish expressed by the article's authors for a better structuring of boards of directors to deal with these attacks by short-sellers, it is also necessary for investors to equip themselves with internal and external means to challenge the governance of companies, whose fragility may have been misperceived by market players. An initiative by the SFAF, such as the creation in Paris of a platform for shareholder dialogue similar to the Investor Forum in London, is a step in this direction.

(1) "Vers le capitalisme de Corrida : Casino, jurisprudence stratégique et organisationnelle à méditer", by Jean-Philippe Denis (Université Paris-Saclay), Alain Charles Martinet (Université de Lyon) and Franck Tannery (Ausar Energy, Université de Lyon).