business acquisition, page-7

For interest an extract from an article by Will Kraa from "Compare Shares" in which he discusses RCH. I post it only for interest as apart from a quick trade which was profitable I am leaving them alone ATM....Cheers hope it helps the discussion.

"At 3 cents the market capitilisation is over $15,000,000. The people who are paying this sort of money for it obviously know something I don’t know. There seems to be no other explanation. The day the price started shooting up was after the ASX had asked the company why they should not be suspended and gave them 3 months to fix things. The company had cash in the bank of some $400,000 and no other assets. No business, nothing. The ASX does not like that, since listing is not for those who simply operate a savings account.

The company responded by saying that it was actually looking for a business and had some ideas in mind. It was about to give shareholders the right to buy options at $0.001 (exercisable at $0.01 within 18 months) at the rate of one option for every share held. This would raise about $500,000 of which over $100,000 would be spent in raising this money. Now in view of what I wrote about at the beginning, you might ask if this one was only for the “sophisticated” investors but in fact the company did supply a prospectus. Maybe the sophisticated ones were not interested and probably it is not so hard to write a prospectus for a company that has no business. The main thing that has to be done is warn investors that there is no busines, there may never be a business, you may not be able sell the options, if it is possible to buy a business it may fail and if it is possible to buy a business there will have to be further capital raising (which may not be possible) and that will seriously dilute the value of the options, etc.

In its prospectus the company fairly warned potential investors of all the possible risks and that in the end it might all come to nothing. The directors did what they are expected to do and no doubt are making every effort to create value for the shareholders. What I don’t understand is why people want to invest in this so badly as to raise the price to such an extent. As an example I noticed one bid for 1,000,000 shares at 3.1 cents, which amount to $31,000, to buy a very small portion (less than 0.2%) of about $800,000 plus the vague hope that there might be a functioning business someday.


If the options were exercised at 1 cent one day, that by itself would seriously dilute the value of the shares bought at over 3 cents and the capital raising necessary to buy a serious business would require vastly more shares to be issued so that the original shares would finish up being an insignificant portion of the business. This seems to me the ultimate in pure speculation."