'All in' on McMillan Shakespeare

My colleague Robert Gottliebsen raised an interesting issue this morning in his commentary on the lifting of the suspension of trading in the shares of the nation’s biggest salary packaging company, McMillan Shakespeare today.

Gottliebsen, who quite correctly predicted chaos in the market for the company’s shares when they resumed trading after a week’s suspension – the group’s market capitalisation was nearly halved as $528 million was wiped off its value – argued that the suspension should have been maintained until after the election. McMillan Shakespeare directors apparently sought that outcome from the ASX.

McMillan Shakespeare shares were smashed, of course, because of the Rudd government’s announcement that it would change the law relating to the treatment of fringe benefits tax on motor vehicles, abolishing a near three decades old statutory formula for calculating the amount of FBT payable on employer-provided vehicles.

Without going into the merits of the change (except to say that people who regard the treatment as encouraging "rorting" obviously don’t understand the meaning of "statutory") it is obvious that if the foreshadowed changes are enacted they will have a devastating impact on salary packagers like McMillan Shakespeare.

Directors of the group gave quite a detailed description of the contributions the affected streams of business make to its revenue and earnings – they represent more than 30 per cent of current revenues and a large share of earnings – while making it clear that the changes would, if implemented, impact future earnings.

Should the ASX have acceded to the directors’ request and maintained the suspension indefinitely?

Depending on when the election is actually held that could mean investors would be unable to buy or sell shares for between about five weeks and up to four months, or perhaps even more if it took some time for a re-elected Labor government to introduce the legislation and get it through both houses of parliament.

The ASX takes the view – it is in its guidance notes – that trading halts and voluntary suspensions should be as brief as practicable and only maintained when either there is a significant risk that trading might occur in a market that isn’t "reasonably" informed or where it is needed to correct or prevent a false or disorderly market.

The market is as informed as it could be in the circumstances. It knows how material the group remuneration services revenue derived from salary-packaged novated leases is and it knows that if Labor wins the election and enacts its changes to the law McMillan Shakespeare will be materially and adversely affected. Today’s share price plunge provides an indication of the extent of the anticipated impact.

It is true that the market won’t know until after the election whether Labor will be in government and in a position to get the legislation passed in both houses. It does know that if the Coalition wins it has promised not to proceed with the changes so there is effectively a binary outcome for McMillan Shakespeare shareholders.

In other words, the big "unknowns" are, in fact known. If the Coalition wins, so does McMillan Shakespeare. If Labor wins, the company loses.

The fact that we don’t actually know the outcome of the election yet is not a reason for maintaining the suspension.

Markets are riddles with uncertainties and never completely informed, other than with hindsight. Every share trade capitalises uncertainty – both buyer and seller are making bets, educated or otherwise, on their view of the future.

Denying investors the ability to trade in circumstances where they have a reasonably solid understanding of the potential outcomes and their implications for the value of their investments is to compromise one of the fundamental reasons for the existence of securities markets, allowing investors liquidity for their judgements.

Gottliebsen likened the ASX decision to providing an "election betting ring" rather than a "sound marketplace" and it is hard to argue with the former although it doesn’t necessarily follow that the marketplace isn’t sound.

The market is as informed as it can be and it knows exactly what it doesn’t know. If only that were always the case.