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Is increasing corporate activity a sign of things to come?

At Belvedere, we manage portfolios which for the most part are relatively conservative, and invested across a range of companies that have a favourable outlook.  From time to time specific trends occur in the market which can present opportunities for shorter term gains, albeit with risk.  What has been increasing is the number of attempted takeovers leading to significant gain for current investors.

In most cases, the share price will start to move up on higher volumes of trading before the actual bid.  There can be a rumour, as happened with Healthscope Hospitals; that smoke lead to fire and an offer being made the following week.  It doesn’t always happen so, investors need to be comfortable holding the shares in what could be a problematic company.  That is the risk/reward game.

Healthscope

Healthscope (HSO) – Daily Trading Chart

Very few people have commented upon this increase in takeover offers, most likely as it has not been concentrated in the one sector. The common thread is that the takeover offers are coming for companies that have been completely out of favour and trading at or near multi-year lows.

Consider the takeover offer for Santos, who’s share price had fallen from $12 to under $3 before the offer. That offer for almost $7 has since been knocked back as insufficient!

Healthscope Hospitals suffered a series of profit downgrades and like Santos was carrying high debt levels. The general market had virtually given up on the current management and the stock, when two consortia recognising the value in the hard assets made premium bids.

A cleverly named company, Here There and Everywhere (HT1) has an outdoor advertising and radio division which through a number of management mis-steps saw their share price smashed, only to lead to two competing companies making bids for their outdoor advertising division.  This has caused a 30 per cent jump in the HT1 share price.

And most recently the owner of Sukin, BWX fell from $8 to $4.50 at which point management made a Management Buy-Out bid at $6.60.  It is a solid company on an international growth path which was punished for a slight miss on a recent profit announcement.

The examples differ across industries, however each of the targets were very out of favour with the market which meant that they were so undervalued that they became targets.  At Belvedere, we expect  this to continue.  There has never been more funding for Private Equity firms and we are now seeing international firms compete with local Private Equity firms.  Finance is still very available (and cheap) for such transactions enabling Private Equity to leverage the takeover with a five-year timetable to fix whatever was the issue that had created the low share price.

We have been fortunate enough to have picked some of these opportunities, and are now very focused on identifying the next targets.  Identifying take-over targets is a riskier strategy and requires significant in-depth analysis, as the reason the share prices are down are generally due to high debt levels, management failures, and or industry headwinds.  However, when we allocate a small proportion of a balanced, diversified investment portfolio to potential takeover targets, the upside (if captured) can produce an outperforming portfolio.

Contact the author David Manchee -:

davidmbelvederesharescomau 1 Comment

I was part of it, until I couldn’t stand it any longer.

The Banking Royal Commission shining a spotlight on financial advisers is no surprise to many.  It is long overdue.  My wife will attest that I have been on my high horse about this for decades. Worse still, previous enquiries failed to address the core conflict of interest. The issues are systemic.

The reason I say this I was part of it, until I couldn’t stand it any longer.

I started my career 30 years ago in banking and bank-owned financial service companies, culminating in being appointed, at different times the Managing Director of two large household name firms.  At these firms I was responsible for 250 financial advisers and 500 support staff including Margin Lending and Compliance.  These firms’ business models were typical in that they serviced retail and sophisticated clients. Despite the trappings of corporate life, I struggled with the culture and so moved on 18 years ago.  I have been a principal of an independent financial services business ever since, operating with complete transparency with all clients.  To do otherwise would compromise my values, which I am quite simply not prepared to do.

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Author – David Manchee

The industry has evolved under the guise of “’compliance’ into a vertical integration of institutionally owned advisers selling institutionally owned administration platforms, administering institutionally owned fund managers.  Of course, each charge their own fees, but that’s all in the fine print.

What could possibly go wrong? It turns out a great deal.

Advisers do not require any relevant education or experience. They simply act under a bank owned licence, and although the licence is bank owned it is not guaranteed by the bank.  We’ve all heard and seen the advertisements with the laundry list of T&Cs. Further, the vast majority of advisers have nothing invested in shares or the funds they “advise” clients invest in.

The licensee (i.e the bank adviser) does not have to have Professional Indemnity Insurance.  Yet I do as an independent.

The banks lobbied to the Federal Government that each licensee should have an approved list of investments so as to protect the end customers, recorded on an administrative platform.  These are owned by the same bank.  Of course, the administrative platform charges annual and transaction fees on top of the investment fees.

The approved lists issued to the licenced adviser and the associated administrative platform are of course dominated by funds that are in turn owned by the same bank, creating another revenue stream for the bank.

Why do I believe the issues are systemic? Apart from the arguments above, there are these additional frictions:

 

Adviser Fees

Advisers charge a fee ranging from $2000-$10,000 for their initial recommendation (called a statement of advice by ASIC).  This fee is for what any other profession would call a quote for future services.  It is a disgrace.

They then charge ongoing fees, annual review fees despite no investment changes, nor the adviser doing any investment transactions or administration.

The Rogue Adviser

Having managed large teams of advisers across Australia, the reality is that however good your compliance is, there will be a few advisers in the mix who operate outside the law, a number who skate on very thin ice and a reasonable percentage who are negligent and without empathy.  Not to accept this reality is denying the sun will come up.  Twenty years ago, we had the IT systems to track daily an individual adviser’s business and could investigate irregularities. It is then up to the firm the action taken to eradicate these people and send a strong message that such behaviour is not acceptable.  In my case, I sacked a number of advisers, who turned up elsewhere; years later some were jailed for subsequent behaviour.  At the time, I was chastised for losing a good producer!

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AMP boss resigns following revelations of poor conduct

Administrative Platforms

The banks’ administrative platforms were built to administer unlisted funds, many of which the bank owned.  The platform provider also acts as a gatekeeper deciding which investment products can be administered on the platform and at what cost.

 

Funds Management

Fund management is a very expensive business to set up and scale is critical. For instance, each fund also pays trustee companies and custodians, which of course another division of the banks can supply.  With the knowledge that a new fund will be approved and included on the platforms, it de-risks the launch if it is owned by the bank. This results in poor performing bank funds being left on the approved list for years precluding better performing or cheaper alternatives.

Despite the David Murray led enquiry some years ago heading towards the same conclusion, the bank lobbyists convinced the Government not to disband the vertical integration model, but instead to increase regulation and further ingrain the ‘approved product lists’. Of course, this has led to an even greater market share for the banks.  A win-win for the banks.  Too bad for the investors.

The banks and AMP’s business strategy is vertical integration with ingrained and hidden fees.  Either their Boards have to admit they did not know their business model or they are complicit.

On the weekend, I noted a suggestion by Alan Kohler that all fees should be invoiced to the client, rather than hidden and automatically deducted.  His rational was that this way each client would know exactly what they are paying at the start and every month thereafter.  (i.e. transparent invoices would destroy hidden fees.)

This is the basis of the investment management firms I started independently 18 years ago and still practice today.  It is fair, and it is the right thing to do.  Belvedere Share Managers will never be big, but I can walk down any street and keep my head high.  I welcome a conversation with anyone about their investments, and hey the good news is I don’t charge any fees to have a chat!