With very few exceptions, most privatisation-cum-delisting offers are met with outrage from minorities who feel that the “lowball’’ offers that are typically made severely undervalue their shares.
This reaction is perfectly understandable – sellers will always want as high a price as possible, while buyers will always pitch their offers as low as possible.
Regulators are understandably reluctant to intervene, partly because the rules surrounding such deals have already been fine-tuned to ensure that offers are “fair and reasonable’’ and mainly because an independent financial adviser (IFA) has to be appointed to provide advice to minorities on fairness and reasonableness.
Providing another line of defence for minorities are the target company’s independent directors. In theory, at least, they can accept or reject the IFA’s advice and communicate their opinion to shareholders.
Yet another safeguard is the Securities Investors Association (Singapore), or Sias, which, given its mandate to look after minority interests, regularly takes up the cudgels on behalf of small shareholders and has successfully fought for better prices in some privatisations.
Sias has also thrown down the gauntlet to IFAs by challenging their valuation methodologies while calling upon minorities to reject those offers, even for some that were deemed “fair and reasonable’’ by the IFAs.
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To justify its position, Sias would present alternative and equally plausible valuations, thus demonstrating that when it comes to pricing assets, more than one method is possible because professional judgment plays a big role.
How do we reduce outrage among minorities and ensure true fairness and reasonableness?
Since it is always the case that valuation methodologies can be challenged, the crux of the issue is whether IFAs, who are appointed and paid by target companies which in turn are usually controlled by offerors, are truly independent – and seen to be so.
Independence, it must be emphasised, has to be in all aspects of substance, form and – perhaps most importantly – perception. This is especially so in the case of takeovers, where a majority owner is pitched against minorities and where a range of valuation methodologies are possible.
To be sure, the leeway granted to IFAs has led to bizarre and confusing outcomes – shareholders have been advised to accept offers that are “not fair but reasonable’’ while prices at large discounts to asset value for asset-rich companies have been deemed “fair and reasonable’’.
There have also been cases where listing was at a significant premium to asset value, but delisting a few years later was pitched at a sizeable discount to asset value – and yet this was ruled as being “fair and reasonable’’.
Although IFAs can be assumed to be thoroughly professional when discharging their duties, given that they receive their fees from parties that may have a vested interest in a favourable delisting outcome, and given that judgment can always be questioned, is it any surprise that opinions are routinely challenged and offer prices criticised as being “lowball’’?
The answer lies in ensuring true IFA independence – difficult though this may be.
In an ideal world, the IFA would be appointed by an external party – possibly regulators or even Sias – and should not receive payment from target companies. Instead, there should be a special fund from which fees are drawn.
Quite understandably, both arrangements are difficult to put in practice. But just because solutions are hard does not mean the issue should be ignored.
After all, unequivocal IFA independence would surely boost confidence in the market, which could lead to more interest and improved liquidity. This, in turn, could produce better valuations – which might then reduce the number of companies going private in the first place.
