Sent: 13-12-2011 11:47:02
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Company Directors Undermining Superannuation Investment Decisions
Although at opposite ends of the industrial spectrum, brand manager Foster's Group and coal miner Coal and Allied Industries have much in common, including directors who urged their shareholders to call it quits during the year.
Within a couple of days of one another this month, Foster's Group and Coal and Allied Industries obtained court approvals allowing directors to sell the companies.
The Foster's price received by shareholders will be around 25% above the price it traded for during most of the two years to early 2011. The buyers of Coal and Allied, the Hunter Valley coal miner, were less generous. The bid price is 4% below the price at which the stock traded in January 2011 and just 12% above the weighted average price over the first six months of the year.
For many, the most important point in the discussion surrounding the takeovers was how assets were being lost to overseas owners. Rio Tinto and Mitsubishi are buying the coal assets while Anglo-South African brewer, SABMiller, is buying the beer assets.
Being able to keep assets in Australian hands is emotionally preferable but frequently not economically practical. As a capital importing country, Australia must continually sell assets to attract the capital necessary to build businesses and fulfil its consumption objectives.
There is another reason we should be upset about Foster's and Coal and Allied being sold. The self managed super investor looking for quality companies keeps getting the rug pulled from under him and the directors of these two companies have done it again.
There was nothing in either case which required the companies to be sold. Coal and Allied was already 85% owned by the largest shareholders. They had operational control. Foster's was capable of generating free cash flow so was not in need of outside funding.
David Crawford, one of Australia's most experienced public company directors, defended the decision of his colleagues to recommend that shareholders sell their shares. He contrasted "the state of the current financial markets where you are being provided with certainty as to the dollars you will be receiving as opposed to the uncertainty of continuing to trade in these uncertain times".
Coal and Allied directors were telling shareholders to sell their shares "to crystallize their value".
Financial advisers are regularly told they need to understand the investment objectives of their clients before they can make specific recommendations. What makes these directors so sure their shareholders need to crystallise the value of their shares? Why should the conditions which dominated the end of November 2011 dictate how one views the choice of selling or staying?
Perhaps current conditions are of greater importance than any other but perhaps a view about the world in 2015 is a more appropriate guidepost for a superannuation investor?
To be able to justify their recommendations, Foster's directors needed to show that an investment in Foster's was likely to be inferior to both holding cash and any comparable equity investment.
The directors have not shown the slightest sign of having done that analysis. In several thousand more words they have essentially said they are incapable of getting the business to run as profitably as they think it should be run, no matter how hard they try. They are also saying there is another group of managers capable of doing the job better so "sell the business to them".
Coal and Allied directors are not even going this far. Rio Tinto already manages the business. The Coal and Allied directors are saying that everyone should sell at a price at which the largest shareholder, who knows the business better than anyone else, is an enthusiastic buyer. That seems more like a reason to stay than go.
In encouraging investors to cash up their portfolios (after a token show of determination to get a better price), directors are undermining Australia's superannuation system. By recommending bids based on short term market conditions, directors are preventing superannuation investors from taking the longer term perspective they are supposed to have.
Many directors seem more at ease buying and selling assets than working them harder to extract the value for the benefit of longer term investors.
Investors in Foster's and Coal and Allied had a choice. If they had wanted to hold cash, they could have done so. Directors are manipulating shareholders into thinking that they should sell. The whole process is directed to this end. It could be done differently.
Directors should say to shareholders: "We have a bid. An expert has said it is in the middle of his valuation range. Depending on market conditions the share price could move higher but there is also downside risk. That means it is open to you to buy or sell depending on your personal circumstances and we are not going to make the case either way."
Of course, this would not suit the strategy of the bidders who have direct access to the directors of the target company.
Ironically, Coal and Allied is a good example of how directors can get it wrong. Minority shareholders kept the company listed for many years by refusing to sell. Since 2000, the Coal and Allied share price had risen sixfold before the bid was launched. The Foster's share price rose a more modest 30% but the share price index for the industrial companies in the ASX 100 is still within a handful of points of where it was in 2000.
Of course, 2000 was hardly the most benign of times. We had just suffered the shock of the Asian and Russian financial crises. The Enron and WorldCom collapses were unfolding. The internet bubble was about to burst. Within 12 months the US would be lurching into recession and Osama bin Laden was plotting an attack on the United States.
That sounds like a time when the safety of cash would have made sense but Foster's and Coal and Allied shareholders were unambiguously better off hanging on to their stock.
Directors are saying that this time will be different. They could be right. Luckily, they can make a call on the market and deliver specific stock recommendations not only without any repercussions but without any sensible investment analysis.
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