Cross Border Group

A pretend blog post to make the CorpComms category show up

This is a pretend post to make the CorpComms category show up.

Stuff here etc.  La la la.

All about the equity

I defy anyone to open the financial pages of a newspaper, or watch any business-type news broadcast, and not read or hear the words ‘private equity.’ It is without doubt the hottest topic around right now. It’s not really difficult to understand why, and everyone has a theory on the reasons public companies are falling over themselves to go private.

January, however, saw a very interesting perspective from someone who knows more about it than most of the people. Jim Clark, founder of Netscape and until recently chairman of Shutterfly, quit the role because he feels the SEC and Sarbanes-Oxley have, in effect, nullified his effectiveness as a board member.

With the candor and humor for which he is well known, Clark, a 30 percent owner of Shutterfly, wrote a letter to the CEO and other board members (see page 9) explaining how, under current rules, he feels his hands are tied and that all he’s able to take on are ‘liability and constraints.’ The loss of Clark, a successful and innovative businessman, is significant for a company like Shutterfly, and there’s no doubt it will struggle to find someone of his caliber and experience as a replacement.

It’s not difficult to see why Clark is frustrated. He’s spent a lifetime building businesses and is now ideally placed to help guide other firms, but he is restricted from doing so if he has an ownership stake. Others in his position choose to take complete control and buy their companies out. At least then they can be effective board members.

For some reason, there seems to be the idea that owners make bad managers. This is odd considering the number of activist investors who love nothing more than protesting, ‘We are owners of the business and we deserve a board seat.’ Surely a person who owns a significant number of shares will be working in the best interests of shareholders, considering he or she is one? Don’t be too surprised if you see some private equity interest in Shutterfly at some stage in the not-so-distant future.

A similar story, though from a different perspective, is playing out at Cablevision. The Dolan family, with slightly more than 70 percent of voting shares, has made another attempt to take the company private. The board rejected the offer, which tipped the scales at $8.9 billion but was deemed ‘inadequate.’ The rejection was hailed as a victory for the concept of the public company by some leading newspapers, but we should be careful about reading too much into it. The board didn’t say it’s against going private, and though the Dolans say they won’t up the offer, it wouldn’t be the first time they change their minds.

As long as the current governance thinking marginalizes owners as board members, we can expect to see a lot more companies disappearing from stock market trading screens.

Brendan Sheehan
Corporate Secretary

Private enemy number one

Private equity houses are copping a lot of flack. From buccaneering asset strippers to locusts, they’ve heard it all. When are they are not being charged with colluding in auctions to keep down prices, they are criticised for seeking ‘nothing more than the most rapid return possible to the stock market.’

The latter was the conclusion of yet another stinging attack on private equity in an article published in yesterday’s FT. Management and media alike were accused of looking at private equity through rose-tinted spectacles. It was claimed that companies were swayed by the allure of escaping quarterly reporting or worrying what analysts or press may have got hold of. A slightly tenuous argument inasmuch as since January this year quarterly reporting forms an integral part of the EVCA (European Venture Capital Association) guidelines.

As increased transparency is becoming a major issue in the private as well as the public sector, I would say that the gap between quoted and unquoted firms is closing and it is increasingly difficult to shield companies from information ‘the press may have got hold of’.

I would also beg to differ that private equity owners delist only to relist as quickly as possible and that staying public is the best option. Admittedly, in the case of Debenhams, its flotation on LSE just two years after its take-private in late 2003, provided considerable returns for the CVC-led private equity syndicate. The fact it was relisted without any significant growth fuelled concerns over the utility of the UK retail group ever having been taken private, if only to line private equity pockets.

And I’m not about to deny the spectacular growth of M&S, which has never been the subject of a take-private. Yet who says Stuart Rose would not have been able to implement those same changes, inclusive of the ‘carbon neutral’ plan, in conjunction with a private equity team? 

It would only be too simple to look at these two examples and say private is bad and leads to rapid relisting and that pubic is good. Critics should realise that private equity IPOs following take-privates are fairly rare and not without their complications. Most deal executives favour trade sales or selling to another private equity player.

And why not focus on private equity success stories rather than pinpointing the few inevitable downturns? Or doesn’t that make interesting news? It seems a pity to overlook private equity success stories rather than pinpointing the few inevitable failures. When Alchemy Partners delisted software company Sanderson Group from the LSE in 1999, it was an over-diversified conglomerate comprising 25 different boards. The private equity house successfully consolidated the group into three separate firms – Talgentra, Sanderson and Civica, which were developed via acquisition and organic growth. Civica was floated on AIM in 2004, representing the first IT group to list in the UK for nearly two years. In 2006 Alchemy fully exited its shares in the company, which had increased its profits threefold during private equity tenure.

Qantas chairwoman Margaret Jackson’s recent interview with the FT demonstrates how increasing corporate governance demands and the short-term outlook of equity investors helped convince the Australian airline of the merits of its impending public-to-private. It would certainly be a tall order for management not to warm to the prospect of having just one, private equity shareholder to answer to, rather than some 30 unknown stakeholders.

Excuses, excuses

What do you do when your growth figures aren't quite as impressive as you were hoping? Well, you could tell a flagrant untruth… but legislative obligations can make that quite difficult. What about employing the use of some distractive techniques? Something like, 'There's a fire in the building! Oh, and profits are down 15 percent-don't say we didn't tell you'… Or maybe, you can try to excuse your poor performance like one company did on Thursday. The old 'my dog ate my homework/my little brother made my essay into a paper aeroplane' lines never really washed with my teachers, do companies think analysts will be any more gullible? Perhaps they do, if the case of Alliance Boots is anything to go by.

The group told analysts they should add 0.7 percentage points back to its UK retail sales growth for the third quarter on the grounds that the group had 'lost' a Saturday and gained a Sunday in the period compared with 2005. The like-for-like growth figures once adjusted for the 'missing' Saturday were nearly 2 percent higher than the paltry 1.5 percent the company actually reported. What happened to this Saturday? Did it disappear into thin air? Surely the fact they were a Saturday down on this quarter means that they gained a day in one of their quarters? I wonder if they ever attributed their previously strong growth to enlightened management, magnificent marketing and an 'extra' Saturday?

Clare Harrison
European correspondent
IR magazine