What’s the deal with Infomedia?

What’s the deal with Infomedia?

Infomedia (ASX: IFM) has been going through a difficult period recently. At the time of releasing its full year results in August, it also announced the resignation of CEO Andrew Pattinson, effective immediately, and the retirement of long-serving NED Myer Herszberg. The company found itself in the awkward position of having a somewhat disappointing set of numbers to present, and no CEO to present them.

Unsurprisingly, the market took this badly, and IFM shares quickly traded down. After that initial reaction, things stabilised briefly while the board outlined its process for selecting a replacement CEO, but then things started to get worse.

Unhappy with developments at IFM, the company’s co-founder, Richard Graham, and former CFO, Jonathan Pollard, offered themselves as candidates for the IFM board. Due to the timing of previous board appointments, 3 of the existing directors, including the chair, retired from the board at this year’s AGM, and have offered themselves for re-election, so shareholders will vote on 5 separate board candidates.

There are many possible outcomes from the AGM, but in simple terms we can consider the vote a contest between two opposing camps – the co-founder/former CFO (Old Guard), and the current board (Incumbents). It appears that neither side is happy to work with the other, so effectively shareholders need to make a choice between those two alternatives. Key points of disagreement between the sides include:

• The decision to replace the CEO (Incumbents thought change was needed; Old Guard may seek to reinstate the previous CEO);

• Increases to the cost base of the business through the appointment of consultants and increases to remuneration structures and headcount (Incumbents think the business needs to invest; Old Guard think leaner is better); and

• What sort of “culture” best fits the needs of the business (Incumbents think cultural change is needed; Old Guard disagree).

The uncertainty has not gone down well with investors, and IFM shares have fallen further in the wake of these developments. In light of all this, there are two questions worth considering for investors in IFM:

• Do I want to be an owner of IFM at all given the uncertainty?; and

• If so, how should I think about the choice put before shareholders at this year’s AGM?

From our point of view, the first of these is the easier of the two. Setting aside the current drama, IFM is a good business with an excellent product, a sticky customer base, and interesting long-term growth prospects. While the current uncertainty will pass, these features are likely to endure. The share price may not recover quickly, but for investors with a long-term view, the current turmoil shows all the signs of being an opportunity.

The second question is trickier. Running a company is a complex business, and from the outside it can be difficult to reliably gauge the quality of the board and management, or to usefully opine on strategic and operational matters.

In relation to the case presented by the competing board camps, both appear plausible. We have seen plenty of examples where a poorly-aligned board has acted against the best interests of shareholders, through some combination of laziness, ego, incompetence and greed. We have also seen plenty of examples of companies that outgrew their founders, and in doing so needed to adopt a more professional board, management and culture.

Having spoken with all the interested parties, we find it hard to judge with any confidence which of the two camps might have the strongest case to oversee the future development of IFM.

Oddly enough, this makes for an easy voting decision. Turfing out a sitting board of directors is a serious matter, and requires that a compelling case for change be put forward.

It hasn’t.

The Montgomery Fund and the Montgomery [Private] Fund hold positions in Infomedia.

Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To invest with Montgomery domestically and globally, find out more.

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Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

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.