Harvard Case - A Tale of Two "Orientals": Lessons from Short Selling Attacks
"A Tale of Two "Orientals": Lessons from Short Selling Attacks" Harvard business case study is written by Hong Zhang, Anne Yang, Xiaojia Guo. It deals with the challenges in the field of Economics. The case study is 21 page(s) long and it was first published on : Feb 27, 2017
At Fern Fort University, we recommend a multi-pronged approach for Oriental Holdings to address the short-selling attacks and restore investor confidence. This includes strengthening corporate governance, enhancing transparency, and proactively engaging with stakeholders.
2. Background
This case study revolves around Oriental Holdings, a Malaysian conglomerate with diverse business interests, including plantation, property, and automotive. The company faced a series of short-selling attacks, which significantly impacted its share price and reputation. These attacks alleged financial irregularities and questioned the company's transparency and corporate governance practices.
The main protagonists are:
- Oriental Holdings: A family-owned conglomerate facing a crisis of confidence.
- Short sellers: Investors who profit by betting against a company's stock price.
- Investors: Individuals and institutions who hold shares in Oriental Holdings.
- Regulators: Malaysian authorities responsible for overseeing the financial markets.
3. Analysis of the Case Study
Strategic Framework: The case study can be analyzed using a SWOT analysis framework, considering Oriental Holdings' internal strengths and weaknesses, as well as external opportunities and threats.
Strengths:
- Diversified portfolio: Oriental Holdings operates in various sectors, providing some resilience to economic downturns.
- Strong brand reputation: The company has a long history and a well-established brand in Malaysia.
- Family ownership: This provides a sense of stability and long-term vision for the company.
Weaknesses:
- Lack of transparency: The company's financial reporting and corporate governance practices were perceived as opaque.
- Limited communication: Oriental Holdings did not effectively engage with investors and address their concerns.
- Vulnerability to short-selling: The company's structure and lack of transparency made it susceptible to attacks.
Opportunities:
- Emerging markets growth: Southeast Asia presents significant growth potential for businesses like Oriental Holdings.
- Technological advancements: The company can leverage technology to improve efficiency and transparency.
- Investor relations: Building stronger relationships with investors can help rebuild confidence.
Threats:
- Short-selling attacks: These can further erode investor confidence and impact the company's share price.
- Regulatory scrutiny: Authorities may investigate the company's practices, leading to potential penalties.
- Economic downturn: A global recession could negatively impact Oriental Holdings' businesses.
Financial Framework: The case study also highlights the importance of financial stability and transparency. Short-selling attacks often exploit perceived weaknesses in a company's financial reporting and governance.
4. Recommendations
Strengthen Corporate Governance:
- Independent Board: Appoint a majority of independent directors to the board to ensure greater oversight and accountability.
- Financial Transparency: Implement rigorous financial reporting standards and disclose all relevant information to investors.
- Internal Controls: Establish robust internal controls to prevent financial irregularities and ensure compliance with regulations.
Enhance Transparency and Communication:
- Investor Relations: Establish a dedicated investor relations department to proactively engage with investors, address concerns, and provide regular updates.
- Public Relations: Develop a comprehensive communication strategy to manage public perception and counter negative narratives.
- Social Responsibility: Demonstrate commitment to corporate social responsibility initiatives to enhance the company's image.
Proactively Engage with Stakeholders:
- Short Seller Dialogue: Engage with short sellers to understand their concerns and address them directly.
- Regulatory Cooperation: Collaborate with regulators to ensure compliance and transparency.
- Investor Education: Educate investors about the company's business model, financial performance, and long-term strategy.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations align with Oriental Holdings' core competencies in diversified business operations and its mission to create long-term value for shareholders.
- External Customers and Internal Clients: The recommendations address the concerns of external investors and internal stakeholders, including employees and management.
- Competitors: The recommendations help Oriental Holdings differentiate itself from competitors by demonstrating stronger corporate governance and transparency.
- Attractiveness: The recommendations are expected to improve investor confidence, enhance the company's share price, and attract new investments.
6. Conclusion
Oriental Holdings needs to take decisive action to address the short-selling attacks and restore investor confidence. By strengthening corporate governance, enhancing transparency, and proactively engaging with stakeholders, the company can regain its reputation and achieve sustainable growth.
7. Discussion
Alternatives:
- Ignoring the attacks: This could lead to further erosion of investor confidence and a decline in the company's share price.
- Legal action against short sellers: This could be expensive and time-consuming, and may not be effective in restoring investor confidence.
Risks:
- Implementation challenges: Implementing the recommendations may require significant resources and time.
- Negative market reaction: The market may not immediately respond positively to the changes.
- Regulatory scrutiny: The company may face increased regulatory scrutiny as a result of the attacks.
Key Assumptions:
- Management commitment: The company's management must be committed to implementing the recommendations.
- Investor confidence: Investors will respond positively to the changes and regain confidence in the company.
- Regulatory support: Regulators will support the company's efforts to improve transparency and governance.
8. Next Steps
- Develop a detailed implementation plan: This should include specific timelines, responsibilities, and performance metrics.
- Communicate the changes to stakeholders: This should be done transparently and proactively to build trust and confidence.
- Monitor progress and make adjustments: The company should continuously monitor the impact of the changes and make adjustments as needed.
By taking these steps, Oriental Holdings can navigate the challenges of short-selling attacks and emerge as a stronger and more transparent company.
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Case Description
The case focuses on the main issues faced by two US-listed Chinese companies - Orient Paper (NYSE MKT: ONP) and New Oriental Education and Technology Group (NYSE: EDU) - when they were attacked by Muddy Waters, LLC. Interestingly, the seemingly similar responses of the two "Orientals" resulted in widely disparate outcomes, offering lessons to emerging market firms eager to embrace the global capital markets. The case aims to help students understand the mechanism of short selling in the context of "bear" attacks, and expose the problems that attract short sellers' attention, as well as the actions companies can take to deal with them. It also explains the normative role that short selling plays in the market: to discipline corporate behaviour and improve market efficiency.
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