By ROD ORAM
Damian Archbold has taken a title as grand as his ambitions for Global-e Investments: "Founder President of the Company for Life."
He wants to sell $US1 billion ($2.01 billion) of prize draw bonds to investors in New Zealand and abroad to develop Auckland-based Global-e into a worldwide e-commerce company.
Given that Global-e wants to borrow the billion for 20 years, five key questions arise for potential investors:
* How safe is the money?
* What will bondholders reap?
* Who owns Global-e?
* Who runs it?
* What corporate governance mechanisms will be used?
There are two aspects to safety: the way the money is raised and the way it is then handled. Global-e is issuing bearer bonds, a type of security which has fallen out of favour in New Zealand because of its inconvenience.
The bonds are still popular, however, in countries such as Switzerland where investors want anonymity.
A bearer bond is unregistered, so the issuer has no direct way to contact investors. Instead they rely on newspaper advertisements or, in the case of Global-e, its web site. Whoever has physical possession of the bond has the right to repayment and prizes.
Outright theft is rare, but the longer the life of the bond, the greater the tendency for investors or their heirs to forget to apply for repayment or prizes.
To solve that problem, investors can house their bond certificates with Global-e's trustee, Tower Trust, which will also notify them if they win a bond prize. The trust deed makes provision for Global-e to issue registered bonds later if it decides to.
Jean de Skowronski, a bearer bond specialist at Credit Suisse in Zurich, said that to overcome the inconvenience of bearer bonds, the Swiss had issued no printed bearer bonds for the past three or four years.
Instead, an electronic process had been added to the banking system for tracking bearer bonds held in customer accounts. This gave investors high security while retaining their anonymity.
The potential for counterfeit bonds is slim but present, given that Global-e is offering a stream of bond draw prizes over the next 20 years. As a security measure, Global-e will use an uncommon type of paper for the bond certificates. It says it has also "determined a method of eliminating the risk of counterfeit bonds and identifying genuine ones."
Global-e says it chose bearer bonds over registered bonds "to provide liquidity to bondholders." But short of advertising in, say, a newspaper, the holders will have no mechanism for selling. If there is a demand for a secondary market, Global-e says it will look at, for example, matching buyers and sellers on its web site.
Once Global-e has sold bonds, the money flows into three pots. The first, receiving 32.5c in every dollar, is a bond repayment fund in New York to be run by Ryan Labs, a small Wall Street fund manager. Ron Ryan, its head, is a shareholder and director of Global-e.
Global-e's bond prospectus says the repayment fund will be invested in US Treasury stock and similar US Government agency securities.
To safeguard investors, Global-e appointed Tower Trust as trustee for the repayment fund. Tower spent a year negotiating its role, said Jim Minto, its managing director.
Tower Trust, working through a US custodian, will retain title to the securities bought for the fund. Global-e has also agreed to some financial covenants.
"We hold the pot of gold. We have bulletproofed the repayment," Mr Minto said.
However, the investment return is small. Global-e's bonds pay no interest and will offer capital gains of barely 1 per cent a year for 20 years.
The second pot of money is the prize fund, which will receive some 40c of every dollar raised. Again, this is managed by Ryan but Tower's role is less prominent. It has a charge over the assets but not title.
The prospectus says Global-e will pay out each year prizes equal to 3.86 per cent of the bond proceeds. But it also has the right to change the prizes at any time and it can apply to Tower to spend the money for purposes other than prizes.
When it comes to changing the trust deed itself a quorum of only 20 per cent by value of the bonds is required. Given there is no bond registry, it might be hard to make a quorum. If so, a second meeting can be called with a quorum of only two bondholders with no minimum value.
The third pot of money goes to Global-e itself. Up to 27.5c in every dollar raised will be invested in the company. If $US1 billion is raised, Global-e will have up to $US275 million to put to use.
How well Global-e uses this money is critical to bondholders. Each bond carries an option to buy 300 shares in the company at 5c a share. Thus the big potential reward to bondholders is not repayment or prizes but the options.
In essence, bondholders are taking the same sort of punt as venture capitalists but without the control mechanisms or reward.
Global-e was set up as a New Zealand firm by Mr Archbold in December 1997. His only previous experience as a chief executive was for two years in the mid-1990s at Senova, a short-lived Arizona company.
As the accompanying chart (see E1) shows, bondholders will potentially put up $US275 million of capital for Global-e for a maximum 10 per cent stake in the company and no board representation.
Meanwhile, Global-e's equity investors, 30 individuals - mostly Americans - and one corporate, have so far put in only $US5.5 million and hold three of the four board seats.
The corporate investor with 78 per cent of Global-e's equity is MMC Management Holdings, a New Zealand firm. MMC is in turn owned by a group of US individuals, mostly from Arizona. One of the only two New Zealand shareholders is Simon Fawkes, who resigned from Trade NZ last year. He was in charge of Trade NZ's efforts to facilitate Global-e's set-up in New Zealand.
The corporate governance mechanisms of Global-e are weak even by the poor standards of New Zealand. It has only four directors and they are all insiders. None of them has experience in e-commerce.
Mr Archbold says fellow director Raymond Elliott has "40 years' experience in information technology," pointing to his role as Coopers & Lybrand's head of computerised auditing in the US. But that is a world away from e-commerce and Mr Elliott retired from Coopers on January 1, 1993.
Similarly, Global-e has a financial advisory team but CVs of its members are light on e-commerce experience. Below the board is a management team with New Zealand financial services experience but little e-commerce background.
A further sign of weak corporate governance was the appointment of Mr Archbold as "Founder President of the Company for Life" from April 1, 1998. He can be removed as a director by a vote of his fellow directors but the only explicit ground for dismissal specified in the company's constitution is an absence of six months or more from board meetings.
As an issuer of public securities, Global-e is required by law to publish audited accounts. It plans to lodge those with the Companies Office and Tower Trust but unless it publishes them on its web site, bondholders will have to make some effort to keep track of their investment.
There is no market yet in Global-e's shares, so before bondholders exercise their options, the company will provide an independent valuation of itself to Tower Trust for distribution to bondholders. The valuation will be based on company accounts to March 2002.
Valuation will be hard, as it is for any internet company, because the sector is long on intangibles and forecasts and short on actual corporate performance. Moreover, New Zealand corporate law requires less financial disclosure than US or British laws.
The company says investors will be able to trade its shares on, for example, a matched bargain basis on its website and in any private market a broker might make.
For all its complexity, Global-e comes down to a simple proposition. Bondholders will get a modest return on their investment. Any big return will come from the "free capital" of up to $US275 million, supplied by bondholders, which the promoters will use to build Global-e to their gain.
Evaluation comes down to a tried and true adage used by fund managers, the three Ps: people, product and performance. On that basis, Global-e and its promoters should be judged.
Running Global-e
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