I have been targeting the JAN 16 $8/$20 verticals. I like a lot of time and a low strike in this case. Also, when I sold the $20's they were trading over $1, so my net price for the $8's was a relative bargain for almost a year and a half time frame.
I think Lin is honest about not selling the company. Unfortunately, the entire MW episode has done substantial damage to the share price. The best defense to a take-over is a high share price which removes bids from marginal players such as Bison. If the 20-F is clean, the share price should ultimately recover. One caveat is that NQ is now exposed to low valuation offers. I'm assuming a lot of folks are now invested sub $10 purchase price. A $15 offer might look attractive to these folks. NQ's lack of management ownership, makes it exposed to a firm offer with serious capital behind the offer.
While I like your time frame better than mine, I suspect it will take a longer while for share price to recover, hence my JAN 16 calls. I invested in a lot of special situations, but the length and breadth of this short attack exceeds any attack I've seen prior to NQ. That is why I think recovery takes some time and NQ might ultimately get taken out at a price below objective fair value.
Bison has not been a player in Chinese privitizations or acquisitions. The party I listed below Abax, which has Morgan Stanley money behind it, has been active in this sector. My take is that Bison saw a bargain opportunity and is taking a shot. If NQ came back with a reasonable counter offer, I suspect Bison could raise the funds to close. However, I don't expect NQ to counter, or if they do, it will be at a throw away number much higher than Bison's proposed number. The vast majority of undervalued Chinese based U.S. listed companies went private via management buyout with management owning a significant % of shares pre-offer. Bison is not the only one that can recognize a good deal when it sees one.
NQ's case for a MBO is a bit more complicated. One they need to completed the 20-F. Two they need to follow through on their pledge for management purchase of shares and increase management stake in the company. Most capital sources like to see management with significant skin in the game before launching a MBO. Currently, that is not the case with NQ. For what its worth, my advice to NQ is to complete #1 and #2 above, wait a year and go through another audit cycle, and then think about strategic alternatives hopefully at a much high valuation.
The Bison proposal is not a billion dollar deal so I'm not sure why you would ask about billion dollar deal disclosure. More on point, below is an excerpt from the original non-binding proposal letter disclosed by FSIN. As you may recall, this was another MW target, Chinese based that successfully went private after the MW "research report". This was immediately disclosed by FSIN. As regards the 6-K, I expect to see one filed in the near future. As regards the disclosure itself, I'm sure NQ ran this by DLA Piper before issuing the press release. I know some lawyers at Piper, and I can assure you a first year lawyer is not handling the NQ account.
ABAX GLOBAL CAPITAL (HONG KONG) LIMITED
November 3, 2010
The Board of Directors
Fushi Copperweld, Inc.
TYG Center Tower B, Suite 2601
Dongsanhuan Bei Lu, Bing 2
Beijing, 100027, China
Mr. Li Fu (“Mr. Fu”) and Abax Global Capital (Hong Kong) Limited, on behalf of funds managed by it and its nominee entities and its and their affiliates (collectively “Abax”) are pleased to submit this preliminary non-binding proposal to acquire Fushi Copperweld, Inc. (the “Company”) in a going-private transaction (the “Acquisition”).
While there is no absolute duty to disclose M&A negotiations, if the target deems it a material event requiring 10b-5 disclosure it must disclose. Materiality is generally judged on the probability of its occurrence and the significance of that occurrence to NQ. In view of everything that has happened to NQ in the last nine months, and the high scrutiny of their corporate governance, NQ likely decided to error on the conservative side and disclose the Bison offer. Even though non-binding, likely subject to DD and successful completion of an acquisition agreement, I can't fault NQ for disclosing this offer. Also, if NQ does not disclose, insiders would be prohibited from trading any shares of the company. If the Bison deal came to pass, and it was discovered that insiders were buying at $7, I would not want to be one of those insiders.
For example, TWGP, another takeover target I follow, received an unsolicited offer from an Eastern European insurance company while it already had a firm pending offer from ACP Re. The offer looked pretty off the wall, but it was more than the ACP Re offer, so they disclosed the offer. Nothing ever came of this offer. However, TWGP, like NQ, is pretty "lawyered up" at this point, and most M&A law firms will tell you when in doubt disclose. The liability of the D&O's and counsel is potentially too great.
You can decide my relevance based on my posts. However, I did participate in all three of the China buyouts mentioned above, two of which were MW targets. They all pretty much follow the same pattern. Hit piece, short attack, special audit and eventually a MBO or third party acquisition. I will say MW has done a better job sustaining this attack, but eventually the party is over when cash comes to the table. I added some more calls today. Still high I.V. and a nice price on the calls for those looking to take the other side of that trade.
I suspect the warrants are being compared to the JAN 16 $40 option price for KMI which is currently trading around $1.75. Obviously you are getting 16 months additional time with the warrants over the option, hence the $2.81 price for the warrants. Also, you have the warrant buyback which does not occur with the options. I first received options from the E.P. acquisition and then decided to buy a lot more warrants after doing the warrant vs. option analysis. In general, I think KMI is still under-priced and with the project backlog time is KMI's ally. Also the short attacks appear to be on the wane and although the interest rate threat still exists, the Fed does not seem to be in any hurry to raise rates. Therefore, paying about a $1 more for the additional time provided by the warrants made sense.
Since NQ is a foreign issuer that reports in the U.S. form 6-K is used in lieu of for 8-K which is for all U.S. reporting companies. Form 6-K should be sufficient.
FF: I remember that case. Although a serious issue, it was less serious than the allegations rumored about NQ. As I understand the rumor, PWC China allegedly was leaking information to shorts to influence trading of NQ. If that were true, that would be beyond just insider trading, and I would argue it merits PWC's China suspension from SEC practice. Of course, this is all rumor to date.
FF: I would view the chances of a PWC/MW connection as remote. Independence and client confidentiality are foundations of accounting firms, and drilled into employees from day one. PWC has internal and peer review of its work product to detect any slippage in these ethical mandates. If these rumors were true it would be a significant scandal not just for PWC China but the entire PWC, and create the possibility of civil, criminal and regulatory sanctions against the individual(s) and the firm. Which is why internal vigilance is pretty strong at accounting firms, especially those with a SEC practice.
There is always the possibility of a rogue employee(s) within PWC China that disregarded legal and ethical constraints and either leaked information or traded on confidential information. Therefore, I can't say the possibility is zero.
I have not read the article because I typically don't read much S/A information. However, I presume Giles means PWC can limit access to its work papers. PWC owns the work papers and does not have a duty or obligation to share the work papers with Marcum. With the client's consent they can choose to do so. It would not surprise me if PWC declines to share its work papers in view of the controversial nature of the NQ saga and the potential for legal liability somewhere down the road if NQ imploded.
Marcum should be able to do the 2013 audit with or without PWC cooperation on work papers. NQ and Marcum likely went over this scenario before Marcum was retained. Their retention tells me they indicated to NQ they have the resources to timely complete the audit with or without PWC cooperation. I still don't see a likely scenario in which the 2011 and 2012 audits will need to be redone. I also still think it is PWC's self interest to cooperate with Marcum, have a healthy and solvent NQ and ultimately have a Marcum audit report as the most recent audit of NQ. However, PWC legal is likely involved in this decision, and they may error on the side of caution as mentioned above.
Q10. You have identified PWC's problem. " PwC has already signed off on 20f for 2011 and 2012 which is technically out there with an unqualified audit opinion for the investing public to rely on." If PWC decides to state that no one should rely on their prior audit opinions, they are essentially indicting their own work product as sole auditor of NQ until last week. Of course, they would likely dress this up and sight recent events for their change of opinion, but material misstatements of financial information typically do not occur overnight. Unless PWC has evidence of serious financial misstatement by NQ, in which case they should have resigned a long time ago, not cooperating with the new audit firm increases the liability hazard to PWC. If I were PWC, I would let the transition go forward unimpeded by PWC. The sooner Marcum completes their audit, the easier it is for PWC to be one step removed from NQ.
As regards use of prior audited financial statements, the necessity of re-audit only exists if PWC intends to withdraw its opinion for those audit years. As indicated above, I do not see that as a likely decision by PWC.
Thanks. As regards question 1, the audit standards do allow review of the predecessors work, and use of that work as audit evidence in expressing an opinion on the financial statements. This should shorten the process somewhat. However, the successor auditor is solely responsible for this opinion and therefore will do independent work beyond PWC's work. A greater impact on speed of the audit may be the resources devoted by the new auditor to the engagement. I guarantee that NQ asked each auditor candidate what resources it could bring to bear immediately to the engagement. MBP likely answered we are prepared to bring full firm resources to the audit, otherwise I doubt they would have been retained. In view of both of the above, I would not ascribe any taint to an audit that is completed quickly.
As regards #2 SEC Regulation S-K Item 304 contains a detailed listing of disclosures NQ must make in an 8-K regarding change of auditor. To date no 8-K has been filed but it will need to be filed this week. The 8-K must be provided to PWC and they may state their agreement or disagreement with the filing and it must be included in the 8-K. The SEC/NYSE will review this 8-K. If PWC either agrees with NQ's statement or makes no comment, I doubt you will see any move to delist. Typically auditor dismissal is treated with less suspicion then auditor resignation. However, if PWC disagrees with NQ's statement in a material matter, then I would expect some further inquiry from both entities. More should be known this week.
As regards your points:
1. The only thing we know after Friday's events is that PWC was not going to issue an audit report anytime soon and it might issue its report after the 20-F extension had expired. No one knows what audit opinion PWC would issue after this work was completed.
2. Ms. Han resigned from two boards and two audit committee chairmanships within a few days of one another. Although I was skeptical when she first announced her resignation from NQ for personal reasons, the resignations from two boards and two chairmanships within days is indicative of a personal issue.
3. No pun intended, but NQ is establishing an appropriate "Chinese Wall" between parties working on the fraud investigation and parties working on the annual audit. If S&S or DT were retained on the external audit matter, the next allegation would be these parties compromised their original opinion on the fraud matter to secure additional business from NQ, and now NQ is repaying them via work on the annual audit.
The quality of the financial press continues to deteriorate. The quote below is from Reuters. Apparently no one at Reuters read the press release which goes into detail about the reasons behind NQ's decision to replace PWC, or they read the release and preferred to slant the story. Immediately after they post a quote from CB. Disgraceful
"NQ did not give a reason on Friday for the dismissal of PwC Zhong Tian, but said it had hired Marcum Bernstein Pinchuk LLP as its new auditor. PwC's refusal to issue an audit opinion results from the fact (that) NQ is a fraud," Muddy Waters founder Carson Block told Reuters in an email. "By not issuing any opinion, PwC effected a backdoor resignation that attempts to save face for its client."
JF: I just posted, but kudos to your earlier theory that PWC wanted to be fired. That is certainly my read based on the press release. As I said in my other post, I think PWC's decision was short sighted and NQ had no choice but to replace PWC in view of PWC's terms of engagement. MBP is no bucket shop. They do a lot of SEC work and a lot of work in China. I would be concerned if NQ hired a two partner firm out of California (this actually was the case in some early China fraud situations). However, this does not look like opinion shopping.
Now that I know they what PWC was requesting and the open time frame of PWC's audit work, interpretation one appears to be the case. If DT had not performed their work and issued their opinion, I would say NQ is opinion shopping. However, PWC's date request are unreasonable, and even if third parties could be convinced to supply this data, PWC indicated they then might ask for more data. This definitely brought the November deadling into play. Presumably PWC wanted out at any costs. However, they did not substantially reduce their liability risk, the last audit opinion is still PWC's unqualified opinion, they lost NQ as a client and this will not go unnoticed by other Chinese companies.
NQ's PR has been a problem from the beginning of this fiasco. First they went with the silent approach (facts will do the talking), then the random blog approach and now the new PR initiative. They should adopt one strategy and stick with that strategy.
The silence may have something to do with the new audit committee head getting up to speed on the issues. He will have to be involved in any decisions regarding PWC. They also need Chen up to speed because both the audit committee and the board will be involved in any PWC's decision. So I'm not reading too much into the silence, because, at this point, they probably don't have much to say.
I rather they take their time and reach the proper decision (i.e. giving PWC what they want, within reason, and as you state not making a major bone head decision like firing PWC).
The China/SEC issue is a problem for China U.S. listed firms, and it does bring additional scrutiny to these firms. However, PWC needs to balance scrutiny versus commercial sensibility in China. Several local Chinese firms now make the top ten largest firms list in China including Ruihua at #3. NQ was the first Chinese internet company to list on the NYSE, and a true success story in China. If PWC decides to resign, it better have a very good reason for resignation, especially after DT's report. If you look at the NQ board, they cover a broad spectrum of Chinese business. Most new business still comes through referral.Previously, it was automatic for a Big Four to get the audit of listed companies. However, as Chinese based firms grow, the perceived market stigma of using a Chinese based firm is fading. PWC must balance political issues, liability issues and commercial issues in deciding how to manage the NQ situation. The leverage does not all reside in PWC's favor. If the perception in China is that PWC walked from NQ on other than very solid grounds, Ruihua and others will be knocking on PWC client's door.
Date : 2014-05-22
The Chinese Institute of Certified Public Accountants released Circular Kuaixie  No. 27 - “Notice of the 2014 Top 100 Accounting Firms in China” on 19th May 2014. The top 10 accounting firms are PWC China, Deloitte China, Ruihua CPAs, BDO China, Ernst & Young, KPMG China, Pan-China CPAs, Dahua CPAs, ShineWing CPAs and Daxin CPAs.
Ruihua Certified Public Accountants ranks No.3 nationwide and No.1 among local firms.
Speaking for myself, I visit the board to gauge other theories on NQ, both negative and positive, and compare these theories to my thoughts on NQ. Many of my posts are in response to questions which I try to answer (i.e. if you take ideas from the board, you should give some back). I actually think this is what Yahoo had in mind for the board at its inception.
You are correct, no one knows for sure exactly what is occurring at NQ, if you do and are trading you should be in prison, but that is true of all stocks. Obviously, NQ is higher risk than most stocks, but also much higher potential reward. If is rare to see vertical spreads at 10/1, 11/1 and 12/1 return on any stock. I don't come to the board for comfort, I'm actively investing and try to cover all bases before pulling the trigger.