Amid the stunning scenario experienced by the economic participants today, your nomination represents an important event. We are not talking about your economic view. Neither about the school you graduated from. Nor about your familiarity with the issues of the financial system. For the first time in years, we have a specialist in microeconomics in the Brazilian government. And that’s about it we would like to talk.
We do not need to spill ink over or waste your valuable time reporting the current situation of the Brazilian capital market. You know it as few others do. You know the role it plays for the economic development, financing of our companies, creation of jobs and broader transparency and formalization of several sectors of our economy. We do not need to remind you that the capital market plays a social role, that is, to channel private savings to finance the production sector.
But that has not been happening. In 2014, Amec recorded 15 ‘going private transactions’ or similar operations (tender offers, equity increases, unregistering from listed segments, restructuring operations, etc.). There was only one IPO. There was also an important follow-on operation that brings back bad memories. Not to mention the several share buybacks and “strategic purchases,” many times overpriced and that represent the shrinking of outstanding shares. The phantom of the so-called “virtual delisting” – when controlling shareholders acquire virtually all of the company’s outstanding shares – is once again hovering around us.
We started 2015 with the announcement of two offers to delist. One of the corporations, Souza Cruz, is willing to put an end to the 69-year period as a publicly-held company in Brazil.
Mr. Minister: there is something very wrong with the capital market. It’s not a problem of economic perspectives or political risks. We do not need to appeal to Chicago’s scholars to say that, in a healthy market, these perspectives adjust in the prices of assets and affect all participants – buyers and sellers. Accordingly, they should not be a decisive factor for the lack of IPOs and the stampede of companies wanting to leave BMF Bovespa. Markets clear.
We have been experiencing an institutional problem. The market is not working properly. And it is a microeconomic problem – not a macroeconomic one. Amec has been thoroughly debating this issue since its founding and would like to offer four fronts for the understanding – and maybe reversion – of the deterioration of our market: (1) wearing off of values; (2) disrespect for the rights of minority shareholders; (3) difficulties in enforcing the existing protections; and (4) perception of problematic public policies.
The values we are talking about have to do with the integrity of the ‘capital market’ institution. A place of confidence and transparency where investors can safely invest their savings based on the risks they are willing to incur. A deal is a deal. These values, however, have been vanishing in recent years. Pragmatism has been replacing vision. Making the ‘next’ deal feasible is more important than preserving the system’s pillars. Conflicts of interest are routinely left aside – ‘for further analyses’ – while investors are crumbled into dust as part of shady operations. Principles of alignment of interest, such as the one-share, one-vote principle – a crucial pillar of Novo Mercado – are considered an “over-refinement” of naive people. If in the past we used to have a problem with the preferred stock of two thirds of the capital, now we have the SUPER PREFERRED STOCK, which price is 70 times higher than that of voting shares and allows the once inconceivable leverage of controlling shareholders. All this with the sometimes enthusiastic consent of those who should be our market’s gatekeepers. Mr. Minister, do you see how market participants having been acting? It’s necessary to reflect on the incentives they have.
Yet the disrespect for minority shareholders is clear. When an investor buys 1% of a company, it’s natural that he/she wants to have 1% of its cash flow. This is the basic premise when calculating a discounted cash flow divided by the number of shares. Although it is a tautological premise, it’s a fiction in Brazil. Evidence A: the high premiums paid to the holders of “strategic” blocks of shares in publicly-held companies. Ok, it’s a legal operation. But, as already discussed in previous Amec articles, if someone is willing to pay a premium for a block of shares, he/she certainly expects to be compensated for that. If a company is valued 100 and someone buys 10 percent of it for 20, the remaining 90 percent must value 80. There’s no magic; there’s no money-making machine. The value comes from the same source, that is, the company. And minority shareholders are left not only with the depreciated value but, more than that, with the uncertainty of how much this value is actually worth, once that depends on how aggressive will be the strategies used to channel the value to the “strategic” blocks.
The constant premiums paid for the most diverse reasons show a sick environment. In the 90’s, the capital market managed to reduce this lack of symmetry in the perception of the value through the adoption of tools like tag along rights and Novo Mercado. Unfortunately, these tools became outdated and, today, they are the shadow of what they have represented in the past. It’s of utmost importance to establish a new set of microeconomic reforms to ensure that minority shareholders are treated with equity – or at least with dignity.
This will only happen when we have an effective enforcement structure. Despite the huge efforts of its employees, CVM – the Brazilian Securities and Exchange Commission – has not been able to meet the market participants’ (maybe inflated) expectations. The entity’s chairman has already mentioned the need of more power and harsher punishments. But nothing will change until the essence definitely prevails over the form. Scholarly jurists make use of highly complex rules and procedures to make the most basic shareholders’ rights set forth in Law 6,404 unfeasible –tag along rights being an evident case in point.. The same happens with the self-regulatory structure, which many times is focused on the formal details whereas tons of abuses negatively affecting investors are accepted. Not to mention the insider trading, which continues to be considered a cancer in the Brazilian market by foreign investors, a cancer we have not been able to effectively extirpate.
Finally, the market feels abandoned. Many times it feels it has been forgotten, other times, mistreated as a “collateral damage” in some policies established by the Federal Government. The market does not need to be the focus of public policies – this would make no sense. But analyzing and assessing the consequences these policies can bring to it would be a great development. A first step would be to seek a harmonious way to guide and communicate these policies. The second one – to staunch the dramatic destruction of the value of government-controlled companies.
Mr. Minister, no doubt that putting public accounts in order is one of the toughest challenges you have to deal with in macroeconomic terms. Certainly, if the capital market is being reborn, it can strongly help reach these challenges.
And we are not talking about subsidizing the market – but help it survive.