KEY POINTS:
The latest round of takeover offers clearly demonstrates that a major difference in approach has developed between shareholders and directors.
Shareholders want to invest in companies with clear growth strategies that will deliver long-term value, whereas New Zealand directors seem to be more interested in short- term considerations as they are quick to recommend bids that offer a premium to the current market price.
This difference of opinion, which was evident in the controversial Waste Management takeover last year, has become more pronounced over the past few months.
The bid for MediaWorks, formerly known as CanWest MediaWorks, closed on Monday with Sydney private equity manager Ironbridge Capital reaching 82.55 per cent.
As Ironbridge started with the 69.99 per cent stake it acquired from CanWest Ireland, it received acceptance in respect of only 42 per cent of the outstanding shares.
MediaWorks owns TV3, C4 and half the country's radio stations.
The independent directors recommended the $2.33 a share offer even though it was at the lower end of Grant Samuel's $2.26 to $2.59 valuation. The accept recommendation was based on a number of issues, including:
* The offer represented a 36 per cent premium to the volume weighted average share price over the previous 12 months.
* There was unlikely to be a competing offer.
* The independent directors believed Ironbridge would not raise its offer price.
* Ironbridge might gear up MediaWorks and reduce the dividend payout if the company remains listed.
The most disappointing aspect of the MediaWorks acquisition, and most other bids, is that the independent directors do not lay out any alternative long-term growth strategy for the target company.
This gives the impression that New Zealand directors don't have long-term goals and are mainly concerned with short-term share price movements.
The other notable feature of recent offers is the role of senior executives and employees in the process. The seven senior executives listed in the MediaWorks Target Company Statement owned 133,071 ordinary shares and the company had 7,828,000 employee share options. These ordinary shares and options represented 3.4 per cent of fully diluted capital.
Under the terms of the takeover, senior executives and other staff would benefit as follows:
* Full payment on their ordinary shares and options. The profit on the options will exceed $4 million.
* Five senior executives will own 5.05 per cent of HT Media, the new controlling owner of MediaWorks, and other employees will own up to an extra 3.6 per cent.
* Chief executive Brent Impey will receive a bonus payment estimated at $3 million.
* Four other senior executives will receive a payment equivalent to nine months' salary plus short-term incentives.
* A pool of $200,000 is to be available for MediaWorks' employees involved in the takeover process.
The problem with these payments is that directors are far closer to executives and staff than they are to shareholders. Human nature suggests it will be difficult for independent directors to recommend a "don't sell" to shareholders when this could adversely affect windfall profits available to executives and staff.
Brook Asset Management is now in the driver's seat as far as the listing of MediaWorks is concerned, as it owns approximately half of the 17.45 per cent stake held by minority shareholders.
This is a high-risk holding, but Brook also held out on the Metlifecare and Tranz Rail (Toll NZ) bids, an approach that has proved to be highly profitable.
Ironbridge will find it extremely difficult to gain full control of MediaWorks, particularly at a low price, without Brook's full agreement.
It will be interesting to see if Ironbridge's private equity approach delivers superior investment returns for Brook and the other holdout minority shareholders.
The board of Software of Excellence (SoE) has recommended the $2.70 a share offer from Henry Schein in New York, even though it is at the bottom end of the $2.70 to $2.91 a share valuation range. The recommendation is based on several factors, including that it represents a 27 per cent premium to the pre-announcement price, that the share is likely to fall if the offer is unsuccessful and there is unlikely to be a competing bid.
The independent directors' analysis reinforces the view that New Zealand directors are much more comfortable having a dollar in the hand than accepting the challenge of growing a business.
The directors believe the best expansion opportunities for SoE are in Europe but this "brings with it considerable risks" and "it will take a lengthy period of time to execute".
They wrote that the decision regarding the Henry Schein offer is "a fine judgment call" but concluded that the bid is likely to create greater value for shareholders than a European growth strategy.
This "take the money and run option" is adopted by most New Zealand boards when faced with a takeover offer.
It is one reason NZX-listed companies are growing much more slowly than entities listed on other stock exchanges.
In addition, Co-Investor Capital Partners - which owns 16.8 per cent of SoE's ordinary shares, has a director on the SoE board and has agreed to accept the Henry Schein offer - will receive a special fee of $350,000 from the target company on the offer.
This fee, and similar fees paid by other target companies, indicates that New Zealand directors are more willing to pay advisers to assist the completion of a takeover rather than the rejection of a bid.
The controversial takeover offer for Tourism Holdings also reflects the short-term approach by directors compared with the long-term attitude of shareholders.
Tourism Holdings' independent directors have recommended the $2.80 a share offer even though it is near the bottom end of the $2.67 to $3.07 valuation range.
Their recommendation is based on just two considerations: the offer is within the valuation span and there is no competing bid.
Under the takeover agreement the bidder, MFS Living and Leisure, will be paid a $3.5 million break fee "when a director of Tourism Holdings does not recommend the offer or changes his recommendation".
Two senior Tourism Holdings' executives will be paid a bonus of up to $800,000 as part of the takeover.
Once again these fees indicate New Zealand directors are overly willing to facilitate successful offers. As well, interests associated with director David Cushing were the first to accept the MFS bid.
Parties associated with directors were also the first to accept the MediaWorks, Open Country Cheese, Pod and Software of Excellence offers.
The Tourism Holdings' board acquiescence is particularly surprising given that new chief executive Trevor Hall has developed a radically different growth strategy, which has been endorsed by directors. Does the board still have confidence in Hall and, if so, why is it not prepared to give him the opportunity to implement his new strategy?
The short-term attitude of New Zealand directors has resulted in a large number of our listed companies being sold far too cheaply.
The investing public desperately needs a new breed of company directors with vision, ambition, long-term horizons and a willingness to take risks.
This is particularly important as KiwiSaver will introduce an enormous number of new investors to the NZX who must take a long-term view as their funds are locked in until they reach 65 years of age.
Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.
* bgaynor@milfordasset.com
