Two weeks ago, Liz noted the SEC’s announcement that it is suing ISS in
federal court to compel compliance with an outstanding administrative
subpoena. The...
4 days ago
Friends Provident Shareholders to be sold out?
By sheer coincidence (or foresight?) your author bought a few FP shares during the darkest days of the credit crunch. It looked like a nice bet at a time when the banks were shaky and there was no light at the end of the tunnel (yet). So when talk about a 'rapprochement' between the FP board and management and Resolution started again during the past few days my blood started to boil about this sell-out by the shareholder representatives. By looking at the FP chart any idiot (only a strong word will do here!) could see that the share is building a bottom formation and that the shares are still in seriously cheap territory. Of course, news flow is still poor - but otherwise the shares would be flying. So why sell now to a predator? If management is not up to the task it could be changed (again). And the unnamed institutions (and fellow-travellers in the media) that push management and the board to talk to Resolution, are they blind or do they really want to sell out at the bottom (or for a short-term flip if they were lucky and bold enough to buy during one of the downwared spikes in the winter months)? Maybe the Institutional Shareholders are really not the right forum to oversee corporate governance and should be limited to play in the secondary markets.
On whose side is the Takeover Panel?
The Panel has gained an excellent reputation as the ultimate arbiter in many a contested takeover battle in the UK Stock Market and many countries are in dire need of a comparable institution.
But while no one can question the qualifications or motives of those professionals who work for the panel - who probably take a sizeable pay-cut in doing so - we would like to remind readers that the panel is not necessarily the best forum to defend the interests of the shareholders of the involved companies.
In our opinion, the Takeover Panel is too concerned with organising a smooth bid procedure but does not see the wood for the trees. As a consequence, the selling shareholders do not get fair treatment due to a defect in the mechanics of public takeover bids.
A simple look at the good old Supply and Demand Graph that will be familiar to all of those who have done an economics degree will demonstrate that any cut-off (bid-price) that may appeal to a majority of holders short-changes those investors who would only have planned to sell at a price that is higher than the agreed price.
By disenfranchising the shareowners at the upper end of the Supply Curve (e.g. the last 10 or 5% of the holders) the sellers lose what is comparable to a 'consumer surplus' in economic theory. The buyer would have to pay substantially more on the totality of the outstanding shares if he would have to pay the price needed to buy the last 5 or 10% to all the sellers.
The politicians in the UK (as well as in some other countries) have followed the advice (of dealmakers?) and made it easier to 'squeeze out' minorities and introducing 'schemes of arrangement' that penalise shareholders that hold out for a higher price before agreeing to sell out.
All this contributes to explains why the 'Venture' Capital Industry (as much a misnomer as 'Private' Equity) can easily pick off shareholders in public companies and produce good returns. The surprising fact is that the returns of the Venture Capitalists are not much better in spite of this tactical advantage (amazingly, many studies even claim that the risk-adjusted performance lags the broad indices).
But while no one can question the qualifications or motives of those professionals who work for the panel - who probably take a sizeable pay-cut in doing so - we would like to remind readers that the panel is not necessarily the best forum to defend the interests of the shareholders of the involved companies.
In our opinion, the Takeover Panel is too concerned with organising a smooth bid procedure but does not see the wood for the trees. As a consequence, the selling shareholders do not get fair treatment due to a defect in the mechanics of public takeover bids.
A simple look at the good old Supply and Demand Graph that will be familiar to all of those who have done an economics degree will demonstrate that any cut-off (bid-price) that may appeal to a majority of holders short-changes those investors who would only have planned to sell at a price that is higher than the agreed price.
By disenfranchising the shareowners at the upper end of the Supply Curve (e.g. the last 10 or 5% of the holders) the sellers lose what is comparable to a 'consumer surplus' in economic theory. The buyer would have to pay substantially more on the totality of the outstanding shares if he would have to pay the price needed to buy the last 5 or 10% to all the sellers.
The politicians in the UK (as well as in some other countries) have followed the advice (of dealmakers?) and made it easier to 'squeeze out' minorities and introducing 'schemes of arrangement' that penalise shareholders that hold out for a higher price before agreeing to sell out.
All this contributes to explains why the 'Venture' Capital Industry (as much a misnomer as 'Private' Equity) can easily pick off shareholders in public companies and produce good returns. The surprising fact is that the returns of the Venture Capitalists are not much better in spite of this tactical advantage (amazingly, many studies even claim that the risk-adjusted performance lags the broad indices).
Why only now Mr. Pessina?
We read with interest that an 'energetic' Stefano Pessina now 'puts spring in step at Boots'.
The question we would like to ask is why is it only after buying out the public shareholders of Boots that the man in charge of the business is able to manage the company the way he thinks is right. In the article he even admits that Alliance Boots is still being run 'as if it were a UK-quoted company'. We just cannot believe that it is beyond the capability of any skilled top manager worth his salt to manage a listed company properly.
We suspect that MBO's and LBO's are mainly a way to divert the profits of a company to a changed set of owners. If the incumbent management is a beneficiary of a buy-out we urge shareholders - or their agents (the institutional fund managers) to be extra vigilant and refuse to ratify a sell-out. It will always be much cheaper to install new management if the existing management is unable or unwilling to put in the effort to make the business perform well.
The question we would like to ask is why is it only after buying out the public shareholders of Boots that the man in charge of the business is able to manage the company the way he thinks is right. In the article he even admits that Alliance Boots is still being run 'as if it were a UK-quoted company'. We just cannot believe that it is beyond the capability of any skilled top manager worth his salt to manage a listed company properly.
We suspect that MBO's and LBO's are mainly a way to divert the profits of a company to a changed set of owners. If the incumbent management is a beneficiary of a buy-out we urge shareholders - or their agents (the institutional fund managers) to be extra vigilant and refuse to ratify a sell-out. It will always be much cheaper to install new management if the existing management is unable or unwilling to put in the effort to make the business perform well.
Mitchells & Butlers - who looks after the small investor?
It is management dogma at most business schools - and certainly with investment 'bankers' - that corporate activists are a good thing. However, the current activity around Mitchells & Butlers (M&B) raises a few points of principle.
First, newspapers report that a group of investors controlling about 40 per cent of M&B's shares are preparing to 'move on the board' (sic). They are 'understood to be acting separately but collectively' . Now it would be interesting to find out what that is supposed to mean. How can you act collectively and separately at the same time?
The same newspaper report also refers to a 'series of letters and telephone calls' in which the shareholders have 'warned the management' and demanded that management take a specific action with respect to its property portfolio. Some of these shareholders might also be interested in entering into transactions with respect to this portfolio.
This situation illustrates a basic problem with the practice of shareholder activism as a solution to the problem of corporate governance: Any communication among investors creates the danger of conflict of interests. Dialogue with management or other investors gives an investor insights into the business outlook of the business and an advantage vis-à-vis ordinary shareholders that are not privy to this information.
Only full disclosure of all communications between management of investors can guarantee a level-playing field for all investors. In addition, a 'quiet period' after any direct communication might also be useful. A few days after any direct contact (and dissemination of relevant minutes of the information exchanged) should be enough given that most investors have easy access to bulletin boards, corporate websites and newswires.
It would also be helpful if all significant proposals are discussed in an open forum that is open to all shareholders and where all proposals are put forward. It is high time that the owners of a business do not only read in the newspaper when major decisions affecting their investment are taken. The good old Annual General Meeting (possibly supplanted by some sort of electronic alternative) would be the most appropriate forum.
First, newspapers report that a group of investors controlling about 40 per cent of M&B's shares are preparing to 'move on the board' (sic). They are 'understood to be acting separately but collectively' . Now it would be interesting to find out what that is supposed to mean. How can you act collectively and separately at the same time?
The same newspaper report also refers to a 'series of letters and telephone calls' in which the shareholders have 'warned the management' and demanded that management take a specific action with respect to its property portfolio. Some of these shareholders might also be interested in entering into transactions with respect to this portfolio.
This situation illustrates a basic problem with the practice of shareholder activism as a solution to the problem of corporate governance: Any communication among investors creates the danger of conflict of interests. Dialogue with management or other investors gives an investor insights into the business outlook of the business and an advantage vis-à-vis ordinary shareholders that are not privy to this information.
Only full disclosure of all communications between management of investors can guarantee a level-playing field for all investors. In addition, a 'quiet period' after any direct communication might also be useful. A few days after any direct contact (and dissemination of relevant minutes of the information exchanged) should be enough given that most investors have easy access to bulletin boards, corporate websites and newswires.
It would also be helpful if all significant proposals are discussed in an open forum that is open to all shareholders and where all proposals are put forward. It is high time that the owners of a business do not only read in the newspaper when major decisions affecting their investment are taken. The good old Annual General Meeting (possibly supplanted by some sort of electronic alternative) would be the most appropriate forum.
Proposal to simplify and control excessive compensation
We have consistently argued that all non-individual bonus and incentive schemes (as well as pensions schemes for that matter) should be made available to all employees on a pro-rata basis related to base salary. Bonus packages (including all cash and stock elements as well as a long-term incentive schemes) should not be just tailored for the benefit of a small group of top executives.
Discretionary Bonuses should continue to be based on individual performance. For example, the CEO could decide the bonus of any head of division who in turn could determine the bonus due to his staff and so on all the way down the organisational ladder.
To avoid a ratcheting up of the bonus levels, however, there will have to be strong checks on the CEO's overall compensation. This would give CEO's a strong motive to keep a keen eye on compensation levels. We think the best way to avoid excessive payments would be to (1) link CEO pay in the main to the level of bonus due to all staff (firm wide bonus), (2) to ban any long-term contractual payments after the initial contract term (set when the CEO is hired) has expired and (3) to put all additional bonus payments or perks to a shareholder vote BEFORE they are being allocated.
Bonus payments for CEO's are in any case a dubious innovation of the last management culture of the past 10 - 20 years. One would assume that a good salary package should be enough to do a good job, esp as the overall success of an organisation is due to the efforts of all the employees. Some top companies such as BP or Nestle have been around for decades and the incumbent CEO is building on the contributions of all previous employees.
Retaining his position and a not inconsiderable salary plus all the perks associated with his office should be enough reward for the CEO (as should simple pride in a job well done). The alternative is also simple - if the performance is not sufficient it will be loss of office. It is for that reason that any organisation should have a strong culture of management development so that at any point in time there are good candidates for promotion among the senior managers. This is not only a Macchiavellian requirement but simple common sense as a CEO could be victim of an accident or medical condition at any time or decide to jump ship to another position.
Discretionary Bonuses should continue to be based on individual performance. For example, the CEO could decide the bonus of any head of division who in turn could determine the bonus due to his staff and so on all the way down the organisational ladder.
To avoid a ratcheting up of the bonus levels, however, there will have to be strong checks on the CEO's overall compensation. This would give CEO's a strong motive to keep a keen eye on compensation levels. We think the best way to avoid excessive payments would be to (1) link CEO pay in the main to the level of bonus due to all staff (firm wide bonus), (2) to ban any long-term contractual payments after the initial contract term (set when the CEO is hired) has expired and (3) to put all additional bonus payments or perks to a shareholder vote BEFORE they are being allocated.
Bonus payments for CEO's are in any case a dubious innovation of the last management culture of the past 10 - 20 years. One would assume that a good salary package should be enough to do a good job, esp as the overall success of an organisation is due to the efforts of all the employees. Some top companies such as BP or Nestle have been around for decades and the incumbent CEO is building on the contributions of all previous employees.
Retaining his position and a not inconsiderable salary plus all the perks associated with his office should be enough reward for the CEO (as should simple pride in a job well done). The alternative is also simple - if the performance is not sufficient it will be loss of office. It is for that reason that any organisation should have a strong culture of management development so that at any point in time there are good candidates for promotion among the senior managers. This is not only a Macchiavellian requirement but simple common sense as a CEO could be victim of an accident or medical condition at any time or decide to jump ship to another position.
Stork hoists the white flag
As the management will stay in place after the proposed takeover by Candover Investments, one has to ask why the buyout should be necessary in the first place.
Will the shareholders get full value and is it not a conflict of interest when existing management is involved in buyout or merger discussions?
The campaign by 'activist' shareholders Centaurus and Paulson has not succeeded in the stated aim of breaking up the company to 'realise shareholder value'. But it has driven management into the arms of a white knight and resulted in a sizeable short-term profit to the two funds.
It is questionable that these two funds - which together controlled 33% of the outstanding shares - should be allowed to have such a large role in the future of a company. While the company has been built up over a long period and should plan with a time horizon of years funds such as Centaurus or Paulson can be in and out of the stock at the push of a button and have no responsibility to employees, customers or the other shareholders.
Will the shareholders get full value and is it not a conflict of interest when existing management is involved in buyout or merger discussions?
The campaign by 'activist' shareholders Centaurus and Paulson has not succeeded in the stated aim of breaking up the company to 'realise shareholder value'. But it has driven management into the arms of a white knight and resulted in a sizeable short-term profit to the two funds.
It is questionable that these two funds - which together controlled 33% of the outstanding shares - should be allowed to have such a large role in the future of a company. While the company has been built up over a long period and should plan with a time horizon of years funds such as Centaurus or Paulson can be in and out of the stock at the push of a button and have no responsibility to employees, customers or the other shareholders.
Tax regime should be neutral
Politicians never stop tinkering with the tax code. Has this ever been designated a form of obsessive behaviour by the medical community?
A case in point are the latest proposals for the taxation of investment income and capital gains in Germany.
We do not want to go into technical details but suffice it to say that the proposals are the result of a non-participatory form of democracy that is prevalent in Western Europe.
So-called political elites and technocrats representing the lobbies with an interest in the matter have produced legislation that will be far from neutral in its effects on business and the way the citizen invests his money.
As matters stand, investment in pooled vehicles of various kinds will be at an advantage and investors that hold shares in individual companies and want to manage their portfolio will be penalised.
This is contrary to the interests of wider share ownership and shareholder democracy.
A case in point are the latest proposals for the taxation of investment income and capital gains in Germany.
We do not want to go into technical details but suffice it to say that the proposals are the result of a non-participatory form of democracy that is prevalent in Western Europe.
So-called political elites and technocrats representing the lobbies with an interest in the matter have produced legislation that will be far from neutral in its effects on business and the way the citizen invests his money.
As matters stand, investment in pooled vehicles of various kinds will be at an advantage and investors that hold shares in individual companies and want to manage their portfolio will be penalised.
This is contrary to the interests of wider share ownership and shareholder democracy.
Boots - another fire sale?
Press comment today argues that 'there seems to be little choose but to accept £10.40' (the level of the likely bid for Alliance Boots).
If this is accurately reflecting prevailing sentiment in investment community there is little hope for the future of public share ownership. The existing mechanism for transferring ownership of a company as a whole is seriously defective if it allows insiders to bid for assets they should manage as fiduciaries or if outsiders get preferential access to information (when a company agrees to open its books to a prospective bidder). Investors that buy shares not just for a quick punt but in view of holding them for the long term or until a certain value point is reached are also unceremoniously squeezed out in a voting process that is biased in favour of auctioning off the ongoing concern to any bidder who gets a relatively narrow majority of shares.
Management should not be in the business of selling the business. It is mandated to manage a business and the stock market should decide who controls the selection of management or whether or not a company is being sold.
As we have repeatedly argued, the process of how public shareholder-owned companies are being sold short-changes the public holders of its shares. If a bidder wants to pay £10.40 for each Boots share and the majority accepts, the holders that would only have sold at higher prices are in effect forcibly separated from the asset. If the bidder is forced to buy all shares at the highest price necessary to obtain a quorum of say 95% it would mean that the takeover could only be effected at a much higher price.
As the business of takeover regulation in the UK is dominated by producer interests (stockbrokers and investment bankers) it is incumbent on public shareholders to organise a more forceful lobby to prevent the transfer of value to the promoters of buy-outs.
If this is accurately reflecting prevailing sentiment in investment community there is little hope for the future of public share ownership. The existing mechanism for transferring ownership of a company as a whole is seriously defective if it allows insiders to bid for assets they should manage as fiduciaries or if outsiders get preferential access to information (when a company agrees to open its books to a prospective bidder). Investors that buy shares not just for a quick punt but in view of holding them for the long term or until a certain value point is reached are also unceremoniously squeezed out in a voting process that is biased in favour of auctioning off the ongoing concern to any bidder who gets a relatively narrow majority of shares.
Management should not be in the business of selling the business. It is mandated to manage a business and the stock market should decide who controls the selection of management or whether or not a company is being sold.
As we have repeatedly argued, the process of how public shareholder-owned companies are being sold short-changes the public holders of its shares. If a bidder wants to pay £10.40 for each Boots share and the majority accepts, the holders that would only have sold at higher prices are in effect forcibly separated from the asset. If the bidder is forced to buy all shares at the highest price necessary to obtain a quorum of say 95% it would mean that the takeover could only be effected at a much higher price.
As the business of takeover regulation in the UK is dominated by producer interests (stockbrokers and investment bankers) it is incumbent on public shareholders to organise a more forceful lobby to prevent the transfer of value to the promoters of buy-outs.
Spain lowers threshold
The news that Spain will lower the threshold above which buyers will have to make a mandatory bid for the remainder of the shares from 50 to 30 percent is welcome. But it leaves open the general question of what is so magical about the 30 percent limit that it has become enshrined in the takeover regulations of several countries.
It also leads to the question of who is setting these limits and how their impact is being monitored. Closely related is the question of the way the mandatory bid has to be made after the threshold gets triggered. So far, legislators, market insiders from the producer side (banks, securities firms and investment managers) dominate the discussion and there is little regard for the voice of the ultimate owners of the businesses.
It also leads to the question of who is setting these limits and how their impact is being monitored. Closely related is the question of the way the mandatory bid has to be made after the threshold gets triggered. So far, legislators, market insiders from the producer side (banks, securities firms and investment managers) dominate the discussion and there is little regard for the voice of the ultimate owners of the businesses.
Boots Deputy Chairman involved in bid for Company
It is time that the public shareholders create robust defences against conflicts of interest that exist when all or part of top management and board members are involved in bids for the company or assets that are being sold off.
These insiders have a substantial advantage over the public shareholders when assessing the intrinsic value of a company's asset and it sounds more than hypocritical when they argue that they want to make a bid because the market undervalues the shares of the company. Let them buy shares in their private investment account but do not allow them to make bids within a cooling off period of one, preferably two years after leaving the company.
These insiders have a substantial advantage over the public shareholders when assessing the intrinsic value of a company's asset and it sounds more than hypocritical when they argue that they want to make a bid because the market undervalues the shares of the company. Let them buy shares in their private investment account but do not allow them to make bids within a cooling off period of one, preferably two years after leaving the company.