Déjà vu..?

Here is an interesting snippet from AIM's (Apollo Investment Management) 1st Quarter 2006 report.

• The most irritating of the three duds was until recently a small-company gem, with ROE and EPS growth both over 20%, supplying services to the offshore oil and gas sector... déjà vu? remember the Pirates?... and once again we were mugged by Malaysians. This was an unpleasant surprise, since the company, Total Automation, was Singapore-based, excellently run by its founder-managers, and they were reporting no interference from their Malaysian shareholders - until the latter decided to sell the whole business to Wartsila of Finland. They did so on a PE of 11 for the year just ended, and on our estimates 8-9 for the current year, a strangely low valuation. The disposal announcement made no mention of distributing the cash proceeds: it said the board would ponder other businesses in which to invest. All executive directors resigned immediately, with no apparent thought of fiduciary duty to minorities. As startled investors who had bought the shares for its niche engineering business studied the diverse interests and dismal track record of listed companies in the controlling Melewar group, Total Automation shares slid to a discount of 25-30% to the expected cash. Seven weeks after the initial disposal announcement, having cancelled the routine analysts' briefing after the results and been parsimonious with access meanwhile, the company did announce an intention to distribute 75% of the proceeds, which may be sufficient to reduce protest - most investors will just curse and move on - but remains unfair, since the share price remains well below the level at which we believe it would have been trading if continuing with its existing business (7 times EPS for '06?), and the implied value attributed to the 25% balance implies no confidence in the directors. The pattern of trading and disclosure has been no credit to Singapore (nor of course to the Melewar group), and we were surprised to be told that minority shareholders would have no effective say. For the controlling shareholders to vote on the sale is fair enough, since unconnected, but we would have thought the decision should require a 75% majority, and/or that there should be a requirement for an immediate unconnected-shareholder vote on distribution of proceeds.

Well, I have blogged on Melewar before. (see Melewar and Melewar: Part II ).

Remember the blog posting Philip Fisher: Management Integrity.

Let me repeat here again.

• On the issue of integrity, this is a simple no-brainer. Does it make sense to go into a business-partnership with someone you do not trust? It is hard to imagine why anyone would want to go into a business partnership with someone who would most likely cheat us the minute we turn our back.
  
  According to Fisher, the management of a company is always for closer to its assets than its shareholders. And without even breaking any laws, there are number of ways that the management can benefit themselves and their families at the expense of the minority shareholders, for example employing their relatives, buy-and-selling of properties between relatives at above market rates or the issuing common stock options.
  
  It's not only the dislike for dealing with unscrupulous people but Fisher believes that companies managed by people of dubious integrity will definitely meet with failure. (Don't you agree?) For those in control would attempt to make money at the expense of the minority shareholders for these minority means nothing to them but mere other people's money who are there for them to abuse!

ps...

How does one value a company one cannot trust?