Dialogue: Takeover code for those who miss the bus

Do not cry for small shareholders in Montana, sidelined in Lion Nathan's takeover this week. They did not lose any money, they lost an opportunity to make some money, which is not quite the same thing.

In fact, they did not even lose the opportunity if they were wide awake and their brokers were quick off the mark. On Thursday of last week, when the takeover bids had been posted but the bidders were not yet allowed to buy, the Montana share price rocketed to $4.65, the level of Lion's bid, on heavy trading.

Smart Montana shareholders were selling at or near the takeover price that day and on Monday, when the battle was over, they could buy back in at $3.62, roughly the price of the stock before the bidding began.

Those who had done nothing were no worse off, though they might have been asking questions of their brokers and analysts this week.

So might those who bought Montana shares last Thursday at close to Lion's price, plainly expecting the price to be driven higher on a bidding war between Lion and the British company Allied Domecq.

Those people gambled on a price already at the top of its range, and lost. They would have lost even if Lion had not gone off market overnight to sew up acceptances from institutions that morning in London and Allied had hours to respond to Lion's bid. It simply reaffirmed its offer of $3.40.

So brokers and analysts had some explaining to do. In those circumstances it is always easier to blame the referee or insist the market is unfair to small shareholders than to admit you simply missed the bus.

Don't believe it. Small shareholders can do very well out of even partial takeovers, as many of Montana's did, without the work, expense and risk that a major investor faces in preparing a takeover bid.

And there is no sound reason to add to those takeover costs by regulating to force a company bidding for control to buy more than it needs so that all shareholders can get to sell to it.

Try as I might, I cannot see the case for treating all shareholders equally. There is all the difference in the world between a portfolio investor and an investor who sets out to control a company. Their commitments to the business bear no comparison.

The portfolio investor puts capital in the company and performs an important service to the country as well as to his portfolio, by voting with his cash on the company's performance.

But he normally has no wish to help to run the business. He does not sit on its board, study its resources and its needs as closely as a director does, or try to solve its problems.

Furthermore, the small investor can buy into the company any time at the market price; an investor seeking a controlling stake is likely to drive up the price and pay a premium for the parcel that brings control.

And the small investor can get out at the market price a great deal more readily than those with a controlling stake, whose slightest hint of exit is likely to lower the stock.

Why, then, should an investor making the greater commitment to a company have to offer the same price to all shareholders and buy more than he needs? Beats me, but that is what will happen from July 1 if this Government is determined to impose the takeover code that has become the holy grail for the aggrieved in Lion's acquisition of Montana this week.

Had the code been in force, Lion would not have been able to raise its stake in Montana as it did, approaching selected institutions to sew up a near 50 per cent stake before the market opened. And a more rigid regulatory panel envisaged by the code might not have granted the waiver that allowed Lion to enter the market the same day as Allied Domecq.

The code due in July is not new. It originated in a now dusty and dog-eared scheme proposed by the Securities Commission as long ago as 1983 and one version or another has been kicked about periodically for nearly 20 years.

Since Muldoon, successive governments have seized it with enthusiasm, picked it over, invited business and academic views and thought better of it.

Volumes were published by advocates and critics of a takeovers code, seminars held, reports commissioned. Each time, the idea was found wanting on arguments of "fairness" to all shareholders, since all shareholders are better off in the long run when takeovers are inhibited in their ability to see that maximum value is obtained from all assets.

And when it came to "efficiency" there was no contest. Assets should be controlled by investors who can make the best use of them. The rules would have discouraged company takeovers, protecting slack managements, making it less likely that the maximum value would be derived from resources under their control and the country as a whole would be poorer for that.

The advocates have been left with two arguments: that "New Zealand is alone" in lacking a code such as they propose, and that international confidence in our sharemarket suffers as a consequence.

Sharemarket rules vary widely in the world but even if we were "alone," there would be no sense in placing needless, costly restrictions on the economy simply because others do.

And the sharemarket's performance suffers for reasons deeper than the lack of rigid takeover rules. Like most regulations, a code would protect the weaker, slower, dimmer bulbs in business. That is not in the interests of the economy, nor of investors large or small.