How’s this for an idea: the fall in flash memory pioneer M-Systems' stock (Nasdaq: FLSH) offers a buying opportunity, since it has fallen primarily as a result of causes unrelated to economic value. M-Systems has fallen because of the options affair, which has no connection whatsoever to the stock’s current value. In fact, the asset was too “expensive” and it has now returned to economic value. As is the way of the capital market, the initial reaction was an overreaction, so the stock is more a buy than a sell.
We have read that the accountants are to blame, that M-Systems president Dov Moran didn’t see the announcement before it was published, or that in fact it’s the underwriters of the upcoming share issue who were at fault here. Rubbish! Read how it happened and then decide for yourselves who’s to blame.
The fuss began on Wednesday May 31, when many people were surprised at the vast quantities of stock that were changing hands, and attributed it to big buyers who were entering the stock at $33 a share. The next day, on June 1, M-Systems released an announcement whose wording, I have to admit, came as quite a surprise to me, so lacking was it in finesse. While everyone was waiting for a date and a price for the secondary issue, what came out instead was a brief notice that said the company had decided to examine its options policy and that the issue would therefore be postponed. Whoever wrote that announcement obviously doesn’t have a clue about capital market PR.
The announcement about the options was bad enough to raise a storm on its own. To make matters worse, the writer had to go and add the item about the postponement of the share issue that had been so widely publicized just two or days earlier. What were they thinking when they wrote this? After 30 companies announced options policy reviews only to see their stocks get slaughtered in the aftermath, an announcement appears that looks like it was written by short sellers. But the amazement is one thing, and the explanation of what happened is another. And here we’ve run across the tough competition between investment houses over who will get their explanation of events out first.
First off the blocks was CIBC, which on seeing the announcement immediately sent a sensational message to its customers telling them that the options inquiry could lead to the resignation of the company’s management. CIBC warned, “"The brevity of the news release, its ill timing and spontaneity force us to assume the worst. [M-Systems] chairman, president and CEO Dov Moran could be forced out.”
True, Moran hates it when he gets all the praise, but what can you do when the public equate him with M-Systems?
In the wake of the announcements by M-Systems and CIBC, I’m astonished that the share fell so little. It seems to me that CIBC’s analysts only read M-Systems announcement in full after releasing a preliminary announcement. Any other interpretation would be insulting to CIBC and would bring its intelligence into question.
CIBC revised its take on the matter within hours. “Upon further digging, we believe management's brevity does not point to a worst-case scenario, but is rather a reflection on their integrity," it wrote.
M-Systems’s entire press release was three lines long, so what “further digging” is CIBC referring to? The apology was accompanied by a brief comment about "an overly austere/defensive" approach by the company's accountants. You have no idea how right CIBC’s analysts were in their second announcement. It’s just a pity that it’s the same investment bank that released the first announcement.
Is it worth exploiting the fall in M-Systems’s stock to buy it? I think so, but there’s no rush; the worries will persist.