Another half yearly reporting season has been and gone, and the ASX continues to plumb new lows as investors panic blindly in the face of uniformly poor economic news. In this environment, if you are a CEO of well run listed company you must surely be thinking "Well, is staying listed really worth it?".
Where taking a company private is a viable option, the answer right now is an emphatic "no". Managers have a great opportunity to buy back their businesses at bargain basement prices, and even disregarding this obvious attraction for a moment, what possible utility is there for a company to remain listed, anyway? The one big benefit of being listed, namely getting efficient access to capital markets, is not there at the moment except at ridiculous discounts to true value. On the other hand, all the disadvantages associated with being listed are manifesting themselves in a big way. These include panic selling, over-emphasis on short term targets vs long-term value creation and worst, overzealous scrutiny and second-guessing of management from everyone from fund managers to regulatory authorities.
It's true that a number of ASX-listed companies have been poorly run, are unlikely to survive the current recession and may deserve the criticism being hurled at them by the finance industry. However, on any rational measure, many other well-run companies have been unfairly and in some cases, irresponsibly singled out for criticism and must be seriously contemplating taking their stock off the market. After all, times like these bring out the worst instincts of the investment community and demonstrate why they are often unworthy and unhelpful investors.
At the forefront of the problem is the attitude taken by a lot of fund managers and equities analysts. Because they have a degree in finance and worked in an investment bank for a couple of years, they often have the arrogance to think they are better qualified than the board and management to run a business, when clearly they are not. Some companies have the fortitude and good sense to ignore the ill-informed advice of these armchair experts and focus on an appropriate business strategy. Others, unfortunately, let them influence decision making, often to disastrous effect.
Industry examples of this are legion. Analysts have been quick in the past to castigate boards for having "lazy" balance sheets then equally quick to change tack and criticise when investments they fully encouraged turn sour and a company runs short of cash. They will attack boards incessantly for excessive executive remuneration while conveniently disregarding their own six-figure bonuses - bonuses they derived on the back of the good share price performance driven by the efforts of the executives they don't want to reward. Finally, they tend to maintain a blinkered and destructive focus on the performance of the next quarter or next half, and will punish companies who don't meet their short-term expectations, even where the reason for doing so is driven by the need to successfully execute a long-term strategy.
The press don't help the situation, either. Whenever a company proposes a transaction that might be in the company's interest but may at the same time require some sacrifice from shareholders to get it done, the media response is always histrionic. Company directors are painted as being crooks and charlatans for promoting the deal, while at the same time the press print verbatim the comments of analysts and fund managers clamouring for a better deal. The press conveniently overlook the fact that in a lot of cases, the directors they are savaging are also shareholders and in many cases, were responsible for building the business up from scratch. They have just as much if not more interest in both seeing the company succeed and shareholders get the best deal.
Unfortunately, due to these blinkered attitudes, a couple of major privatisations have already been shot down by fund managers, to the severe detriment of all investors. I have spoken at some length in this column about the failed bid to privatise Qantas, and why shareholders should clearly have regarded the $5.45 offered as a very good price. The fact that Qantas shares have taken a battering down to $1.40 on Friday again reinforces this.
Another sorry example occurred in early 2007 when the Queensland-based travel agency Flight Centre put forward a proposal for its privatisation at a price of $17. The founders of the company stated in the proposal documents that both Flight Centre and the industry it operated in had some challenges to face in the coming months and years, and that those challenges would best be met if the company were able to operate as a private company away from the glare of the Australian Stock Exchange.
Well, boy, weren't they right. But in spite of the board's all too accurate prophesy, one of the large fund managers, Lazard Asset Management killed off the proposal, claiming it was too low and questioning the board's assessment of the company's prospects.
On Friday, Flight Centre's shares closed at $3.74, roughly 75% below the bid price. On this basis alone, Lazard and the other fund managers who voted the deal down should be taken out and shot. Instead, the media spotlight has been not on Lazard but on Flight Centre and the reduction in its profits that it so accurately predicted. The board of Flight Centre must be absolutely furious, and rightly so.
So, corporate Australia, the ball is in your court. Stay listed, and you can continue to suffer a tanking share price and idiotic scrutiny from the industry louses well into 2010. Alternatively, team up with some sophisticated and "sticky" capital and buy back the farm. In the process you might just have the happy effect of eradicating a whole useless element of the industry.
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