SOME INTERESTING NEW TERMS

The following new definitions feature in the 2008 edition of Nick Renton's popular Dictionary of Stock Exchange and Investment Terms.

independent director (listed companies): a non-executive director elected by shareholders to a company's board of directors who is not affiliated with the company directly or indirectly.

This includes affiliation as an employee or personal services contractor or auditor or adviser or consultant (or as an employee or partner of such entities), or by virtue of any family relationship, or otherwise.

It covers affiliation with the company or its related parties or their executive officers, or their major customers or suppliers or charitable beneficiaries, in any other capacities than as director and shareholder. However, the provision of goods or services to directors on the same commercial terms as are available to members of the public or to employees can be disregarded.

A past affiliation should be regarded as relevant for a further period of, say, three to five years after it ceases.

An independent director should be a person who makes judgements on the merits of a case, in good faith, in the best interests of the company, and not as the result of any outside influence. There should be no known relationships or circumstances which could affect, or might appear to affect, that director's judgement.

An independent director should not rely solely on the company's management to provide information to enable the monitoring and evaluation of that management.

An independent director's remuneration from the company (apart from dividends) should not constitute a significant portion of that person's annual income. See also share qualification.

Preferably such an independent director should not also be an employee of another company where any of the company's executives serve on that company's board of directors.

share qualification (for directors): the minimum number of shares (or their market value) that a person must own in order to be eligible for appointment to a company's board of directors.

If the directors own reasonable parcels of shares in the company then there is a greater chance that their interests will parallel those of other shareholders than if they do not. Correspondingly, small parcels demonstrate a lack of faith in the company.

However, the absence of large holdings by well-qualified but not necessarily wealthy individual directors should not automatically be held against them. At the other extreme, a very substantial holding by a super-rich director would not necessarily signify all that much, as even the total loss of the entire investment in the company would probably make little difference to that person's standard of living.

pump and dump: a stock market scam, designed to catch greedy investors who are foolish enough to think that unsolicited e-mails from complete strangers in another country contain genuine stock tips. The idea is that the recipients will buy a stock based on messages which pump its virtues. The price will then surge, at which stage the promoters of the ruse dump their own holdings in the company concerned. After that the price collapses. The warning signs are clear enough - it should be obvious that if the originators of the e-mails concerned really had special insights then they would have been much better off exploiting these themselves in total secrecy than offering them free of charge to all and sundry.

stapled securities: two or more legally different instruments which under their terms of issue are coupled together for certain purposes. In particular, they cannot be transferred separately either on the stock exchange or off-market. These structures are usually adopted because they are tax-effective both for the organisations concerned and for their investors.

Examples of such stapled securities include ordinary shares and units in an associated unit trust; ordinary shares and unsecured notes; ordinary shares and convertible preference shares; ordinary shares and options; unpaid preference shares and unsecured notes. A "parcel" consisting of one share and one or more units or notes or options is traded on the stock exchange as though it were a single security. It has a single ASX code.

It is also effectively treated as a single asset for capital gains tax purposes, although conceptually the components are regarded as separate assets. However, for ordinary income tax purposes the dividends on the share components are generally treated as dividends in the financial year in which they are received, while any trust distributions (as in the case of trusts generally) are treated as trust distributions in the financial year to which they relate.

private equity: an investment of risk capital, usually by a large group and with the substantial use of borrowed funds, in assets in which the equity of a company after its acquisition by its new owners is not tradeable on a stock exchange. In those circumstances the board of the company can take a three-to-five year view when running the business, instead of having to focus on the next quarterly or half-yearly earnings report.

The new investors generally restructure the business thus acquired and after a few years receive their return through initial public offerings and/or trade sales and/or management buyouts of various parts of the business.

On disposal the parts are often significantly more valuable than the previous whole. The profit realised rewards the investors for the risks undertaken, the lack of liquidity during the holding period, the management skills provided and the use of leverage.

Often the mechanism used is a conventional takeover bid for a listed target company, with the bidding syndicate borrowing around 80 per cent of the required cash consideration on a short term basis from bridging finance lenders. After the acquisition and change of control the target company borrows heavily from outside financiers (no doubt at a lower interest rate for a longer term and on the security of its own assets), and then immediately onlends the cash to its new owner (the successful bidder), who then uses this money to repay its own short term debt.

If anything goes wrong after that then the losers would include employees, customers, trade creditors, lenders to the target company and the members of the bidding syndicate (both as shareholders and as borrowers).

trimmed mean: one of two measures of inflation used by the Reserve Bank of Australia in preference to using the Consumer Price Index (CPI), the other being the weighted median. The trimmed mean is calculated as the weighted mean of the central 70 per cent of the seasonally adjusted quarterly price changes of all CPI components arranged in order of magnitude, thus disregarding the extremes at both ends. Annual rates are then based on compounded quarterly calculations.

weighted median: one of two measures of inflation used by the Reserve Bank of Australia in preference to using the Consumer Price Index (CPI), the other being the trimmed mean. The weighted median is calculated by taking the middle value of the seasonally adjusted quarterly price changes of all CPI components arranged in order of magnitude. Annual rates are then based on compounded quarterly calculations. The word "weighted" refers to the components rather than literally to the median.

The following simplified example illustrates the technique:

Weight %   Price Movement     Product    Product

 15             5.00            0.75
 34             4.00            1.36       1.36
  2             3.50            0.07       0.07
 11             3.00            0.33       0.33
 12             2.50            0.30       0.30
 11             2.00            0.22       0.22
 15             2.00            0.30

100                             3.33       2.28
                                           2.28/0.7=3.26

CPI                             3.33
Unweighted Median               3.00
Weighted Median                 3.50
Trimmed Mean based on 70%       3.26

public private partnership (PPP): an arrangement under which an infrastructure project benefiting the community is funded and operated by a partnership involving a government and one or more private sector companies, often under a long term contract at the expiry of which the entire assets vest in the government free of debt. The theory is that a private sector organisation can manage such a project more efficiently than a government agency. Usually the intention is also for a smaller call on taxpayer funds and for the bulk of the business risks to be borne by private sector investors.

merger of equals (MOE): a euphemism for a takeover offer not involving a premium. Typically such transactions: