What’s the big Idea?
Matthew was so disappointed about the April takeover offer for a company he owned, that he wrote a letter to his rep – the CEO
More of us should be doing likewise, remembering the words of Richard Puntillo; “in theory, publicly traded corporations have shareholders as their kings, boards of directors as thesword–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.”
Has a company you owned shares in been taken over and left you disappointed rather than elated? Its simplistic and a sign of immaturity as an investor to celebrate a takeover when the price paid does not justify the prize. Its far too easy for investors to do the ‘Wall Street walk’ when a bid is received. Matthew’s actions serve as a reminder that their are issues beyond the immediate return that must also be considered.
Hi Roger and team,
I sent the following letter to the CEO of a company today that I am a shareholder in called IDEAS International. They are a small company but very successful and operate in an area that is experiencing huge growth. They are little known, very thinly traded and not appropriate for most investors. Perfect for me!
IDEAS International was formed in 1981 and listed on the ASX in 2001. The IDEAS business is essentially one of analysing computer resource usage. This is important for companies who operate servers because this information allows these companies to increase efficiency and get value for money from their IT purchases. In a commodity like business (i.e. cloud servers) companies that can assist you to squeeze out another 1% in efficiency or when buying $20m of hardware to buy the correct servers for the job, paying a small fee to a company like IDEAS is a no-brainer. They provide independent advice based on real-world scenarios. They collect this information from the other part of their business which is in providing independent monitoring and analysis services to the same companies. Cloud computing is a huge growth area at the moment and it will get bigger. IDEAS is only just making a dent in this business and the demand for their services will grow as the cloud computing business is increasingly commoditised.
On wednesday they went in to a trading halt pending the release of information regarding a control transaction. Today they released a takeover bid by a large international IT outfit called Gartner with the full support of the board. No premium to current prices has been offered, the takeover is at $1.40, the same as the trading price for the last month. The quality of this company is high, it is cheap and Gartner are getting away with robbery.
The below letter doesn’t fit the theme of the recent “Guest Posts” but I thought you might consider it anyway. I won’t be at all concerned if you don’t think it is appropriate.
Kind Regards,
Matthew Rackham
**********
IDEAS InternationalASX Code: IDE“Takeover Disappointment”
Dear Mr Bowhill,
I read with interest the takeover proposal by Gartner for IDEAS released to the ASX this morning.
I am a private investor and I will be up front and say that I am very disappointed to hear that you are recommending the proposal.
IDEAS is a fantastic business. There are very few businesses as good as IDEAS in Australia, let alone on the ASX. Not only is this a fantastic business but by what I have read it seems to be run very well by management. Overlay this on the growth in the server space which IDEAS is in and my impression is this company has many exciting years of growth ahead of it.
In comparison Gartner looks to me to be a lousy business. Significant debt, slim profit margins and poor return on assets are the lot of Gartner’s management and shareholders.
But maybe these could be forgiven if the sale price rewarded current shareholders equally to future shareholders. Sadly however, it does not. If something close to recent performance continues I expect IDEAS to be worth in excess of $3 per share and maybe up to $4.20 in four years time. If the AUD drops this figure will be higher. Looking at your financial statements IDEAS will have the capacity to pay much larger dividends in the very near future as well. Net of cash Gartner are buying our company for $13.1 million and with earnings of $1.9 million and cash flow of $2.8 million – Gartner are making a steal. I expect Gartner will get their purchase outlay back within 4 years, and much earlier when they leverage their much larger distribution network.
I have to ask the question: Why if Gartner are so keen to use the resources of IDEAS do the management of IDEAS not license Gartner as a reseller/agent/partner ? This would ensure the value of IDEAS stays with the shareholders of IDEAS, allow IDEAS management to achieve their aspirations of making IDEAS a globally significant business and Gartner can continue on as, albeit slightly less so than before, a lousy performing business. In this scenario everyone gets the value they are entitled to.
Longstanding shareholders of IDEAS may feel that the performance of IDEAS share price has not been all that great for many years and this is a chance to “cash out” at a good price. What I would say to them is that (1) this is not the time to “cash out” given IDEAS is on the cusp of a large ramp up in use of it’s services – if they have waited this long surely they can hold on a few more years to realise the benefits of their patience and (2) higher share prices in normal circumstances result in greater liquidity in the shares so if they want to cash out they will be able to in a few years anyway. New shareholders from the GFC period have nothing to lose either way (good luck to them!).
I am very frustrated by this opportunistic offer for our company,
Kind Regards,
Matthew Rackham
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
joe
:
dear Roger
The person I spoke to was management and i will not give his name because i have held forge shares since they came on the market and when the share price falls i ring him,and have been doing that since 2007. I asked him compared to other engineering companies forge seems to be under valued .First he said those other companies are over valued and we are going at full throttle and for the next 3 years at least we will continue to grow and if there is a downturn in the market we have the cash to make positive additions and we are debt free
Roger Montgomery
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OK Joe,
Just be sure he’s not giving you information that is otherwise unavailable! Best leave it at that thanks.
joe
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Dear Roger,
About 2 months ago I asked you and fellow bloggers about a company called logicams (lcm) and i had a mixed result from half who replied
Today they announced an estimated net profit for current year of 11million dollars .I think this company could be under intrinsic value .what do you think
Also I spoke to a person from forge group and asked him if there was a slowing down of projects and he laughed this year is going to be good and beyound
Roger Montgomery
:
Thanks Joe,
Did you speak to management or a line worker? I expect the order books will remain very very full. It won’t slow down until the customers start delaying and deferring projects and that won’t happen until the iron price fall – which it may not. Value investors tend to be very early on these things, its just that on this occasion the prices plummeted right after we sold. And don’t forget, sometimes the pendulum can swing too far too early the other way.
Nigel
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Hi Roger, about 3 days ago, I posted a reply, but it did not appear, a glitch in the system, or did you moderate it, not sure if I did something wrong.
Keep up the good work, Cheers Nigel
Roger Montgomery
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Not sure. Feel free to post again Nigel.
Nigel
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Hi Joe,
I was one who did respond, positively, and went out and bought some.
It appeared that 2 past contracts were money losers, fixed contracts if I recall. Management reviewed the cause and adopted a policy to avoid a repeat. I believe their underlying business is sound, high entry barriers, no debt, high quality customers, high reinvestment of earnings, I’m grateful for you drawing my attention. Cheers Nigel
Matthew Smith
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Andrew I like your point and your letter was well written.
Would you be as concerned if you were on the other side of this trade?
I doubt you would…and that would be completely justified as everyone loves a bargain.
I would suggest utilizing your knowledge and experience of apathetic shareholders, managers/directors, forced sellers and absent buyers as in this case to your investment advantage in the future.
All the best, Matt
Roger Montgomery
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A nice compliment Matthew.
Chris
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In response to the various comments expressing surprise that the board agreed with such a low offer – I wonder how many of them have got cushy positions waiting for them with the new owner?
Roger Montgomery
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On more than a few occasions takeovers have the effect of the board losing their positions and so there’s often a disincentive to accept a bid.
Chris
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True … but I’m wondering about this case; and the cushy position doesn’t have to be on the board :)
Richard C
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RCU is another example of a current low ball offer. Offer at $0.46 when min value is closer to $0.80 for the assets. Fortunately There is a significant holder that will at least put up a fight. CUS taken over without much of a fight either. In this climate there are more than few companies trading less than the cash it holds in the bank.
Roger Montgomery
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Skaffold’s Table View should be able to produce a list of those companies.
David Maynard
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I can only agree with the author of this article.Having found this gem through Scaffold and done my research i believe it to be a leader in a field which will expand rapidly in coming years and more importantly been in the business for many years with a great reputation giving it a huge head start to competitors.It is VERY disappointing to see the company sell at a price well below its value.
Roger Montgomery
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I hear you David.
Sammy
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Hi Matthew
I bought IDE earlier this year and was initially excited to hear that the company had gone into a trading halt pending the announcement of a takeover offer, only to find myself really disappointed by the offer price.
Like you, I had the company valued far higher than the $1.40 offer price regardless of the fact that the company’s shares are thinly traded. Indeed, only a week prior to the trading halt, IDE was trading at $1.50.
I was even more disappointed to read of the board’s apparent enthusiasm for the takeover offer price.
The Gardner offer is conditional on at least 90% of the current IDE shareholders accepting the offer. The last announcement indicates that they are already at about 85% acceptance with a couple of weeks to go before the offers expires, so clearly the takeover looks inevitable. At 90% acceptance, Gardner will have the right to forcefully acquire the outstanding shares on issue at the same $1.40 offer price.
Should the takeover be successful, Gardner’s intention is to take IDE off the ASX. Indeed, the bidder’s statement has implied that if they achieve greater than 50.1% acceptance of the offer, they may waver the aforementioned minimum 90% condition and take IDE off the ASX anyway.
This would obviously make it more difficult to sell the shares in the future if one was to hang onto them by rejecting the offer.
It seems like a case of “Resistance is futile!”
Sammy
Roger Montgomery
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This is where a larger insto with both a mind for intrinsic value and a blocking stake would have assisted greatly – but too thinly traded.
Phil Crossan
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Thank you very much for the thought, Roger.
Chris
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I think it IS noteworthy of discussion and Richard’s piece above was so true.
It is the same principle as if someone went to the bank and offered to pay out your mortgage on your house or an investment property, but that they got the title to the property, since the bank are the ‘greater shareholder’ in your financial dealing so they can call the shots. Can you imagine the outrage among ‘mum and dad’ property owners ? It would be political suicide as well if anyone allowed it to happen.
However, shares are fair game ? Is it because shares are seen as the ‘plaything’ of the rich and famous, or the big end of town ? (and a property is more emotional, when you call it a ‘home’).
All for a short term gain because the management maybe put it in the ‘too hard basket’ to grow the company. What on earth are they running the company for then ?!
Sadly, the number of retail shareholders is probably so small as to not exercise any great sway over the company, even if they pooled proxies or it came to the attention of a certain shareholder rights group.
Roger Montgomery
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That is indeed a very interesting comparison. The bank does indeed have title…
Phil Crossan
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Hi Matthew,
Well done and thank you for taking action on this. I like many small shareholders took no action believing that the directors and institutions would outvote us anyway.
The $1.40 per share price is justified based on it being higher than four volume weighted averages and nothing to do with the per share value of the business as a going concern.
And the other three non quantitative reasons given are all to do with liquidity of shares, where the share price might go, and whether another takeover offer might happen and again, nothing to do with the value of the business either.
I, like you was happy to wear the liquidity risk as the prospect for this company was great, in my opinion.
Roger Montgomery
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I think it would be very useful if buyers were forced to disclose the valuation they had come up with before purchasing. WOuld make some buyers look very greedy and others (fosters/Southcorp) silly.
Andrew
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Good for you Matthew, investors should not be taking things like this lying down. I have been paying attention to IDE for a good year or so after it popped up in a general scan and i looked back over all the reports dating back to 2001/2002.
The price was around $0.80-$0.90 and i wished i had the money to put in an order for them. I have since seen it slowly but surely go upwards. Oh well these things happen and i don’t really fret over missed opportunites as more will come in the future.
As for takeovers in general Roger. I was surprised more people dind’t jump on board the Qantas takeover, i would have thought this to be the equivalent of Monopolys “get out of jail free” card.
Michael Leslie
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Sorry, I purchased IDEAS International at five cents more than the offer price not that is really relevant to the point being made.
Michael Leslie
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Thank you Matthew for taking this action and to Roger for publishing this letter.
I also own IDE because it is the sort of company I seek. I am a very new shareholder having only acquired a small holding on 10 April (last month) at $1.45 a share. This is five cents less than the offer by Gartner. I had spent considerable time searching for this company then researching the company itself and was intending to add to my holding. You can imagine my dismay when the Gartner offer was accepted by the IDE Directors. I was particularly excited by its work with Cloud and the huge future of the company. It was a great find for me. Thanks to Skaffold much of the work in research was done. I did hesitate about the small margin of safety but considering everything else about the company I was even willing to pay a small premium.
My fear is that IDE under Gartner will deteriorate and the expertise will be lost. IDE is indeed a great little business which has certainly been stollen from me and the other owners. Even the Directors themselves have lost. When I heard the news of the takeover offer AND the enthusiastic acceptance of the directors I was extremely upset. I did make a wild statement on this blog but it was not published (just as well!)
Well, I suppose the search continues for something else as good as Ideas. Has anyone else got some Ideas?