Unsheathing the long knives
The reconstitution of Comparex`s board is perhaps symptomatic of the turbulence in the telecommunications, media and technology (TMT) industry as it undergoes severe restructuring in order to stave off shareholder value destruction. The recent actions of fund managers Allan Gray, Investec Asset Management and Sanlam Asset in replacing five non-executive directors clearly indicate an end to shareholder patience with lack-lustre company management.Comparex`s new board should soon be putting the final touches to a revised strategy it hopes will satisfy shareholder demands. One can expect its members to be a bit nervous after having experienced the “night of the long knives”, in which five of their number were replaced by individuals more aligned with shareholders` interests.The overhaul of the Comparex board is a shot across the bows of all directors that might hold shareholders in contempt. It is a clear demonstration that if shareholder value is seen to be in jeopardy nowadays, knives will be unsheathed for the surgical removal of the threats to it.Initially, it came as a surprise to the IT industry and the financial markets when the three asset management companies, representing ownership of about 38 percent of Comparex`s shares, called for the ousting of the non-executive directors.Allan Gray`s CEO, Simon Marais, says he became very concerned about Comparex`s strategy when the group insisted on pouring more money into its loss-making European operations.“We approached the board about our concerns. We felt the strategy was just too risky and would destroy shareholder value. They then told us to get lost,” Marais says.Instead of taking up the Comparex board`s suggestion, Marais and Allan Gray`s chief investment officer Steven Mildenhall promptly recommended the non-executive directors do so instead.The three fund managers insist they didn`t work in concert, but clearly they were all concerned enough to simultaneously call for the replacement of Comparex non-executive chairman Russell Chambers and four others. This has since happened and Comparex has been forced to rework its strategy.Meanwhile, five highly peeved former non-executive directors are awaiting the outcome of a Securities Regulation Panel investigation into whether their forced resignations mean Allan Gray, Sanlam and Investec must now be legally compelled to make an offer to buy out minorities.The five later described the three fund managers as “the concert party” in a statement on 20 June, after which they gagged themselves. Comparex`s executive directors and management have decided to do the same until the new strategy is announced. (Consequently, they refused to talk to Brainstorm for this article.)The fund managers consider the move to request the Securities Regulation Panel investigation little more than a smokescreen for the former directors to hide their own failings.“There is no way we want to take over Comparex or run the company. We are fund managers and we have a duty to look after our clients` investments. In fact, the shares do not belong to us, but rather to our clients,” Marais says.He goes on to say neither Allan Gray, nor Investec, nor Sanlam, have increased their holdings in Comparex. “All we wanted is for them to start following a strategy more in line with shareholders` expectations and less risky than dumping cash into their European operations.”Piet Viljoen of Investec Asset Management concurs. “When it costs you R150 million to generate no profits, as is happening to Comparex`s European operations, there is a problem, and action has to be taken.”Viljoen, who has spearheaded Investec`s recent burst of activism, insists that institutions need to take a bigger interest in their investments than they have in the past.“It is not the role of the shareholders to prescribe to management on a daily basis, but we can get involved in the auditing committees and help develop the overall strategy. The objective is to align the long-term needs of the shareholders with the short-term needs of the company. Again, we don`t want to run an IT company,” he says.In a more conciliatory vein, Viljoen concedes that shareholders have to make a distinction between bad management decisions and poor market situations – and this is where independent, non-executive directors can play a bigger role. “I would like to see more independent directors on Comparex`s board. It will be good for corporate governance,” he says.Furthermore, Viljoen sees the reconstitution of the Comparex board as a situation of last resort. “The board, management and shareholders should be involved in a dialogue and only once that breaks down will we find such action taking place,” he says.But why has Comparex been singled out for special shareholder attention?On the face of it, the group has not been doing too badly. True, its share price has fallen, but so has the global TMT industry, resulting in the group being caught up in the wave of pessimism that has gripped the sector.What makes Comparex stand out is that it is cash flush to the tune of R3.4 billion, according to the financial statement issued for the six months ended 31 November. Whereas most TMT companies are suffering from cash shortages and are finding it very difficult to raise more capital, Comparex is, relatively speaking, extremely well off.In fact, it is so well off that the shareholders have become worried about just how it will use that R3.4 billion, which was, at the time of shareholders` action, equivalent to the market capitalisation and the total net asset value.Use it or lose it, seems to be the attitude of Investec`s Viljoen, who says: “If they cannot do anything constructive with the money then they must give it back to the shareholders.”But giving back the money is not something the Comparex management seems too willing to do.One Comparex director says since 2000 the company has investigated about 200 companies, with an eye to acquire. There were “serious discussions” with eight but, in the end, it was decided not to buy any of them.Justifying the inactivity, the executive says: “Ultimately our decisions not to buy were correct, because no-one else bought them either.”Attacking this logic, Marais says that seeming to be doing deals is not the correct way to run a business. “Don`t look to buy someone else if you are not running your current business properly at the moment.”He says people who are willing to sell probably know their business a lot better than you do.“This has been a big problem with the TMT industry internationally. They think that by doing deals they are running their business and this is not so. For instance, Dimension Data probably overpaid by a factor of five for Comparex`s European networking operations, just in order to fulfil their ambition of becoming a global player,” Marais says.Since Comparex sold its European networking operations to Dimension Data three years ago, the group has battled to come up with sound alternative strategy. Analysts have questioned its focus on e-commerce technologies, especially data storage, where they feel the company has made big mistakes.In Comparex`s the last interim results, its European operations reported a seven-fold decline in profits to just R7 million. Even the group called this disappointing, and went on to say: “Revenue from the group`s operating margins increased marginally. While the European operations reported a decline in revenues expressed in local currencies, the group is considered to have gained overall market share, particularly in its services and storage business groupings.”That market share gain has come at a cost – that of profitability – and this means destruction of shareholder value, according to the fund managers.Marais defines shareholder value as the current value of all the cash flows a company will generate over its life span. “When one buys a share in a company, one has a claim on all its future profits.”Viljoen has an even more blunt definition of shareholder value. “The return on capital in excess of the cost of the capital.” So, naturally, he is annoyed that Comparex spent R150 million on its European operations for a profit of R7 million.During the 1999/2000 financial year, cash generated by Comparex`s operations declined by 22 percent to R659 million and then fell a further 35 percent in the 2000/2001 financial year to R430 million. Headline earnings, which exclude once-off exceptional items such as the sale of Dimension Data shares, slumped 35 percent to R331 million in 1999/2000 and then by a further 15 percent to R282 million in the following financial year.Without benefits from the fall in the rand exchange rate during 2001, Comparex might have been in an even worse situation. The major contributions to the group`s increase in headline earnings were foreign exchange gains of R216 million and a R68 million reduction in depreciation charged, says the interim results statement.Furthermore, Comparex`s offerings, particularly in the data storage arena, are considered by analysts to be too narrow for a market that demands choice. It has decided to align itself exclusively with EMC and has thereby alienated a large section of the market.So, what can Comparex`s new strategy be expected to deliver?Considering the state of the IT industry at the moment, the options may be severely limited. Also, the fund managers have indicated they are not too keen on any acquisitions and are dead against any further cash being spent on the European operations.The fund managers have large pension portfolios to take care of. They would want cash to either invest in the money or bond markets that are offering better returns than the equity market could possibly dream of at the moment. Those markets are also considered to be safe havens during this time of global equity turmoil.Marais says: “The money we manage ultimately belongs to someone who is going to retire and this is a life and death matter for him. Our mandate is to minimise risk and the current Comparex strategy does not do that.”Speculating on Comparex`s future strategy is difficult, even for the group itself. It has battened down the hatches and refuses to talk ahead of a formal announcement.Marais and his fellow activists also decline to comment on the stategy options.However, they could see the group scaling down its European operations further. Last year 120 staff were retrenched in Germany at a cost of R46 million, but there is probably still scope for more lay-offs in Eastern European operations that are seeing the same type of emerging market turmoil with which South Africa is familiar.Then Comparex could placate the shareholders by paying out a portion of its cash pile to them. There is nothing like cold hard cash to keep investors happy and off management`s back for a while.The group will also have to improve its local sales operations and try to recapture a significant part of the data storage market. Its unbundling plans, to list Comparex Africa separately, may also pay some short-term dividends that will please the fund managers.And if Comparex fails to come up with a strategy that is to the shareholders` liking?“Then we will enter into a dialogue with the board again,” Viljoen says.“Then we will have to reconstitute the board again,” Marais says. He adds that shareholders will have to follow their responsibilities through the board. “The reconstruction of a board is a fairly rare event in SA. Look how very seldom it happens, and for asset managers it is a hassle. But if there is a danger of clients` investments being destroyed, then we have to act.”The message for management and directors is clear – shareholders are restless and they are no longer just rattling sabre.
30 July 2002
The reconstitution of Comparex`s board is perhaps symptomatic of the turbulence in the telecommunications, media and technology (TMT) industry as it undergoes severe restructuring in order to stave off shareholder value destruction. The recent actions of fund managers Allan Gray, Investec Asset Management and Sanlam Asset in replacing five non-executive directors clearly indicate an end to shareholder patience with lack-lustre company management.
The overhaul of the Comparex board is a shot across the bows of all directors that might hold shareholders in contempt. It is a clear demonstration that if shareholder value is seen to be in jeopardy nowadays, knives will be unsheathed for the surgical removal of the threats to it.
ITWeb Premium
Get 3 months of unlimited access
No credit card. No obligation.