Massive windfalls have indeed been doled out to the institutional shareholders of almost half of the top 200 companies in the last act of a scripted and predictable pattern of debt fuelled overpriced acquisitions, followed by rising interest rates, tightening credit conditions and inevitable asset writedowns. Its our very own cash for clunkers scheme!

The next act however is one that shareholders should watch carefully, lest they fall into the trap of paying too high a price themselves.

Giving a company more money irrespective of whether it is through a rights issue, a placement or most other forms of capital raising is akin to putting more money in a bank account; the end result should be more earnings. And so a company that is the recipient of a billion dollars should – if it is going to beat a bank account – deliver an increase in its earnings of at least 5 percent. If the risks associated with businesses and the stock market as well as the dilution that occurs from issuing additional shares are taken into account the increase should be greater still.

Failure to increase earnings means shareholders have gone backwards.

Of course at next year’s beauty pageant (earnings reporting season), companies that boast about record earnings or otherwise substantial increases, should be reminded by reporters, journalists, shareholders and analysts of the vast sums of additional funds they were given. They should also be told that earnings can increase substantially with little more than a bank account, a generous benefactor and a rocking chair.

By Roger Montgomery, 1 September 2009

by rogermontgomeryinsights Posted in Market Valuation.

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According to Richard Puntillo, in theory, publicly traded corporations have shareholders as their kings, boards of directors as the sword-wielding knights who protect the shareholders and managers as the vassals who carry out orders. In practice, in the past decade, managers have become kings who lavish gold upon themselves, boards of directors have become fawning courtiers who take coin in return for an uncritical yes-man function and shareholders have become peasants whose property may be seized at management’s whim.

When a listed company announces an acquisition, commerciality is often cited as the reason for failure to disclose the purchase price.  But with Australia’s corporate graveyard littered with the write downs of overpriced acquisitions past (think Fosters, Paperlinx,AMP, Lend Lease, RIO and Valad) it is about time that companies treated their shareholders like kings.

By Roger Montgomery, 1 September 2009

by rogermontgomeryinsights Posted in Insightful Insights.

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