19/12/2006 - 22:00

Questions need to be asked

19/12/2006 - 22:00


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It's quiz time and today’s questions is: How much financial detail should be available to shareholders in a company?

It's quiz time and today’s questions is: How much financial detail should be available to shareholders in a company?

If you’re struggling to find the correct answer, here’s a clue; it’s a word beginning with ‘every’, and ending with ‘thing’. And the reason’s simple – shareholders are the owners of a business, and the management team works for them – news that might come as a shock to some directors.

Alright, if the first question was a bit tricky, try the second. How much financial detail in a company should be provided to people who might (or might not) own a few shares, but who want to make a takeover bid? Should the potential bidder get (a) more information than an existing shareholder, (b) less, or (c) exactly the same?

By now the average reader will have picked up the drift in these end-of-year observations from Briefcase, because what’s been happening at Coles Myer, Qantas, and a few other big-name companies targeted by investment banks and private equity funds is an outrageous abuse of share-ownership principles.

In fact, it’s more than outrageous, it’s a disgrace, which appears to have the blessing of government and its agencies, such as the Australian Securities & Investments Commission (ASIC), which is turning a blind eye to the fact that a form of financial discrimination has been allowed to develop.

Qantas is this week’s hot topic, but an investigation into what’s been happening should start with Coles Myer, where the board might be in trouble on two fronts.

First, it appears to have had reasonably detailed discussions with a possible buy-out syndicate led by the original barbarians at the gate, Kohlberg Kravis Roberts (KKR). It seems to have rejected a bid, without revealing to shareholders precisely what information was given to KKR, and why the terms of a bid were not passed on to the shareholders (and don’t forget, whenever you see the word shareholder it means owner).

The biggest shareholder in Coles Myer, Solomon Lew, certainly shares the view held by Briefcase that, when it comes to a question of ownership of a company, the only people able to make decisions are the owners, not managers, or directors. If KKR wanted to make an offer, then it must be referred to the owners, which is why Mr Lew has launched a legal challenge to discover who said what to whom, and when.

Coles Myer, through a paid employee, said that Mr Lew’s allegations would be strenuously defended. This raises another fascinating point, because when the case goes to court, it will be the management of a company spending shareholders’ funds to resist an attempt by a shareholder to find out what’s going on inside his company.

The Qantas situation is a variation of this theme of shareholder rights. In this case, it seems that the management and board of Qantas made detailed information available to a bank/fund syndicate, and a price was agreed for the sale of the business.

On this score, Briefcase has no complaints. There is nothing wrong with selling a business at a high price. That’s the way the system works.

But the question left hanging is exactly what information was made available to the buyers, and was all of that information also made available to the existing owners of the business?

Perhaps the best price was negotiated. That’s not the issue. The issue is whether everyone was treated equally, and Briefcase strongly suspects not.


Defenders of the system will argue that the average shareholder lacks the time, or the wit, to absorb, let alone understand, the intimate financial workings of a company in which he might only own a few hundred shares.

To make everything available, they say, would clog the system, and make day-to-day management impossible and, apart from that, average investors need protecting from themselves.

If you think that’s going too far, consider what happens when a company goes into fund-raising mode and the investing world is divided into so-called ‘professionals’ and ‘the rest’.

The professionals, we are told, require less protecting and less detailed explanations. That’s alright up to a point. But, what it really means is that they get priority treatment in fund raising, and in the flow of information from a company.

This process of financial discrimination, which has the force of law behind it, has now spilled over into the question of ownership of a company, where potential bidders are escorted into ‘data rooms’ to be shown the most confidential details of a business in order to arrive at a price. The target company possibly even agrees to a ‘break fee’ should the deal not proceed, or a rival bid be lodged.

While all this is happening, the real owners of the business are in mushroom land where it’s nice and dark, and the ground is packed with manure.

Space prohibits a digression into the matter of break fees. The real point is that the division of shareholders into those in the know and those not in the know has gone too far.

Even the arguments that only a few ordinary shareholders would want the same level of detail as a bidder, or that its not feasible to make it available fails, the internet test where it is possible to post instantaneously on the company’s website everything provided to a bidder.


As a final observation for the year, it is worth looking at the sudden re-emergence of Orbital Corporation as a plaything of speculators. During the past two months the stock has doubled in price from around 10 cents to 21 cents in heavy turnover. Last week, about 10 million shares were exchanged.

Two questions arise from this doubling in value of a business that has seen much better days. First, what’s driving the share price, and secondly does it really mean much?

The drive, from what Briefcase can see, is the injection of around $9 million in fresh capital and a decision to focus on the engine requirements of scooters and motor bikes in Asia.

As to what it means, the answer is, not a lot, as can be seen from two graphs that track the life and times of Orbital.

The first graph, over a two-year period, shows how the share price has suddenly doubled – yippee!

The second graph shows the real effect of this doubling when looked at over a 25-year period, including a marvellous day in October 1986, when an Orbital share would have cost you $24, a price which puts today’s 21 cents into perspective, or provides material for a third quiz question: Is Orbital’s share price up 110 per cent (graph one), or down by 99.12 per cent?


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