Report Card: Boards Face the Takeover Test

The doyen of modern investment theory, Benjamin Graham, observed that fictitious spirit populates the stockmarket he termed “Mr Market”. Mr Market was interested in buying and/or selling shares of nearly every listed entity on daily basis. Very often Mr Market was irrational in the way he priced his buy bids or sell offers with these in part reflecting his current mood as opposed to any real consideration or understanding of company values.
Despite the so-called “efficient market theory” which suggests that companies’ shares are constantly priced at their fundamental or ‘intrinsic’ value, history demonstrates example after example of how wrong this concept is. If, for instance, the theory held water how did investors such as Sir Ron Brierley, Warren Buffet, Jim Rogers and Peter Lynch, to name few, consistently get richer through investing in fundamentally undervalued companies?
Of more concern to the director of public listed company is whether their company’s share price reflects its fundamental value. Good corporate governance should protect and maintain shareholder rights and interests while also promoting shareholder value creation. In the medium to longer term effective value creation initiatives should be recognised by the market. In the short term, or until such time as initiatives translate to better relationship between share price and share value, shareholders are vulnerable.
A quick perusal of the financial pages of the Australasian press over the last six months highlights how this vulnerability can be brought into sharp focus. The principal means of highlighting any potential undervaluation of company by the market is when it is the subject of takeover offer. This can have significant implications for all shareholders and company directors.
Although not all takeovers are hostile, all are made on the underlying premise that the target company is of greater value to the bidder than its market value. Traditionally there is some form of recognition of this factor in the bid price through the so called “acquisition premium” or “control premium”. As rough rule of thumb these premiums historically range between 20 and 40 percent above the normal pre bid share price of the target company.
The New Zealand and Australian stock exchanges have highly prescriptive rules as to how listed companies and their directors should handle takeover offers. Both countries also have specific statutes and codes governing process and procedures in takeovers. Interestingly the requirements of both countries statutes and their stock exchanges are procedural and contain very little requirement to maximise as opposed to establish company’s value relative to the takeover offer. The take-over situation can test how committed the board of directors is to maximising shareholder value. The key is not how it undertakes processing the takeover offer but how it positions the company and its shareholders to benefit from the situation created by the offer.
Recent responses from boards of publicly listed companies in Australasia demonstrate how important board actions are in maximising shareholder value. Although the investment bankers and other advisers play role in assisting boards in takeover situations it is the directors’ recommendation that guides most investors and has the most impact.
Below is Badger’s scorecard of small but interesting sample of five recent take-over offers and how each company’s board responded. There are many additional examples that could have been included but with Montana and Goodman Fielder we can illustrate the two extremes of shareholder value maximisation or marginalisation.
In highly acrimonious situation Montana’s board gave vintage display of how to maximise shareholder value which produced truly champagne result for all shareholders – including the original bidder Lion Nathan.
At the other end of the scale is the board of Goodman Fielder, which has put its shareholders through the mill, with continued poor earnings and an endless stream of restructuring producing little positive results. To compound all of this Goodman Fielder’s board refused to entertain takeover approach at level rumoured to be 25 percent above the then prevailing share price. Shareholders were not even consulted by the board despite the fact that they owned the company. The share price has remained static since.

Badger’s Scorecard

Target companyBoard responseImpact to shareholders Badger rating
out of 10
Montana Group• Strong corporate governance with deputy
chairman replacing chairman who was conflicted.
• Vigorous defence of original offer, solicitation
of higher competing offer.
• Extensive use of available NZSE and statutory
remedies.
Normandy GoldRejection of initial bid and solicitation of
(ASX)higher offer. Outcome yet to be decided but
controversial “break up fee” payable by
company to higher bidder may inhibit neg-
otiating flexibility and final value realised.

Frucor Beverages• Strong corporate governance practices
displayed by independent directors despite
partial acceptance by Frucor’s major share-
holder.
• Rejection of original offer. Board actively
soliciting counter offers.
• Constant communication with all share-
holders to ensure fully informed market.
Contact Energy• Bidder already had control and sought full
control.
• Independent directors made token gesture
to marginally increase offer.
• Shareholders are telling the directors some-
thing through the lack of offer acceptances.
Goodman Fielder• Approach by significant and credible bidder
wanting to make offer at substantial premium.
• Board decided unilaterally that the offer
should not be put to shareholders despite
company’s floundering share price and record
of value destruction.

• Significantly higher offer made available to 10.0
all shareholders from competing acquirer.
• Shareholder value maximised for all share-
holders.
• Even original bidder Lion Nathan eventually
benefited from directors’ actions.

• Higher bid and value than the initial offer 8.5
seems assured. Potential third bidder rumoured
which could deliver even further upside.
• Negatives are “break up fee” and litigation
undertaken by original bidder as result of
board actions.

• Result yet to be determined but independent 8.5
directors hanging in and doing the hard yards
for minorities. Currently negotiating with
possible counter bidder.
• This could be replay of Montana.

Yet to be decided but the American major 4.0
shareholder and bidder might be realising that
New Zealand investors have principles and are
getting tired of being taken advantage of.

• Shareholders continue to wait delivery on 0.0
promises of value creation and restructuring
benefits.
• To add insult to injury the company is now
seeking to buy back its own shares from share-
holders at discount of around 25 percent of the
rumoured offer price.

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