I don't mean to beat the proverbial dead horse ... well, OK, those who are regular readers of this column know better. Writing
tends to parallel my own meanderings through the investing process. And as so often happens, good ideas tend to cluster: When one finds an idea in a downtrodden group, there tend to be similar candidates lurking nearby. The point being, once I attach myself to an issue, I do two or three columns on that topic before moving on.
? Corporate governance issues, and we'll bring up four more companies to illustrate our
ongoing points about the conflicts and fiduciary responsibilities among management, the board and shareholders.
The first one actually comes from a
Herb Greenberg column on
Policy Management Systems
, where a decent-sized shareholder of Policy Management Systems swears up and down a double-yellow line that
has made a bid for the company -- and claims that PMS management turned it down without bringing it to the attention of shareholders or even seriously considering it on its own merits.
I have looked at PMS a number of times, and think it
make a very nice fit with CSC (all you need is one to pay for your
subscription!). But like most of the rest of you, I have no idea as to whether Herb's source is right or not, particularly since CSC just announced another like-sized deal.
So question No. 1 is: When does management and the board have an obligation to shareholders to disclose that a bona-fide bid for the company was made? In the spirit of full disclosure, let me admit to my own bias here: Both management, and the board
, in fact, have an obligation to share with their fellow shareholders.
We now move on to
Burns International Services
Borg Warner Security
, the largest armed-guard company in the U.S. Making a long story short, a merchant banking fund of
owns 25% of the stock via a prior LBO, and was prepared to offer it to the public via a secondary offering. With the prospectus printed and the road show scheduled, management and the board received an unsolicited bid for the company, which the company disclosed via press release.
Look Out Below!
As a brief look at the chart might suggest, the deal didn't go through. In fact, they put out a one-page kibosh on the whole thing with little in the way of details, ducked a conference call with management to address the issues and then -- voila -- announced a month later that earnings stink, putting the stock down nearly 50% from its pre-bid price.
So my second question is: OK, management did the right thing and announced there was a bid. But what offer wasn't material enough (we hear it was in the mid-20s) to present to shareholders as a viable alternative to flat earnings, a tremendously competitive industry environment and the lack of a coherent plan from management? And why shouldn't the shareholders get a crack at making that particular decision?
Material is an interesting word right now. The
Securities and Exchange Commission
has cut back on a company's leeway as to what constitutes "materiality" as far as income and balance sheet figures go. The old "less than 5%" rule seems to have gone by the wayside. But this begs an even bigger issue: Why a bid for 50% over a stock's current market price can constitute an issue of
-materiality. If there is any place in the world for above-board discussions of corporate governance, then it should start right here:
We, the shareholders, having put up our hard-earned dollars, deserve the right to choose between a real bid for our company today and the present value of our assessment of management's ability to create shareholder value over the longer run.
For those cynics out there, there have been plenty of instances where a bid today is worth far less than a continuation of long-term trends, as previously documented in columns expressing my unhappiness with Mr. Buffett's
decisions to buy out
We next turn to a very recent situation involving
. This is another instance of my continuing theme that the insurance industry is like the regional banking industry 15 years ago: too much capital and too little management, the result being consolidation. Guarantee was an obvious target with decent niche businesses that could be much better exploited by a larger organization.
Voila. We now have
stepping up to the plate this week and bidding $32 per share. So why am I not happy? Because the price is a modest insult to shareholders, particularly because there is both a collar and cap. In other words, Jefferson-Pilot can pay all cash if their stock goes up too much, depriving Guarantee Life shareholders of any upside -- not a distant possibility considering the accretion to Jefferson from the deal amounts to nearly 15 to 20 cents.
Prominent in the press release is the notation that the chairman and CEO of Guarantee is staying. Which makes my third question: If the board is truly interested in maximizing shareholder value and has determined that a sale of the company was the best way to accomplish this task, was there at least a behind-the-scenes attempt to conduct a mini-auction of the company to attain the highest possible price? Or was a questionable deal done that "guaranteed" the top job?
The last example involves the Herculean effort being undertaken by the investment firm of
Harris Associates LP
, the largest shareholder in
Dun & Bradstreet
. A few weeks ago, after Dun & Bradstreet announced a downward revision in earnings and growth rates, Harris wrote a letter to management which was outlined in the 13D filing with the SEC, essentially calling for the sale of the company. These sentiments were echoed by a number of other institutional shareholders. (We are hereby joining their movement.)
After a Dun & Bradstreet board meeting on Sept. 15 that signaled no real changes, Harris -- in a very juicy letter to management also outlined in a new 13D filing -- urged the company to call a special shareholder's meeting to vote on putting the company up for sale and on redeeming the poison pill.
Now, Dun & Bradstreet and management issues go way back before the current CEO, and it can be said that the current CEO,
, inherited a battleship that is proving difficult to move forward. Nonetheless, my question No. 4 is: If a majority of shareholders loses confidence in management's ability to achieve appropriate returns on their investment (this stock is worth closer to 50 than 25, IMHO), should they have the right to call for the sale of the company? Or at the least, call for a new management team?
Conceptually, they do, but this is a long, slow and expensive process, given the complexity of corporate by-laws that are specifically designed to make it, in many instances, a long, slow and expensive process. A case in point: It took
tens of thousands of dollars, months and three votes to go the other away and get the required 80% shareholder approval to
their poison pill! In the Harris Associates-DNB case, the DNB board can just say no, forcing Harris and others to ante up for the lawyers, proxy-solicitation firms and newspaper ads. I'd like to think that the board won't take that course, but then again, call me the bright-eyed optimist.
We do not have nearly enough space to go through all the legal precedents in these areas, nor all the current examples of controversy in corporate governance -- nor, frankly, am I legally qualified to go into that much detail. But these are crucial issues for any shareholder, and those who would rather fight a righteous fight on our behalf -- as opposed to cashing in and walking away -- deserve our support.
Jeffrey Bronchick is chief investment officer at Reed Conner & Birdwell, a Los Angeles-based money management firm with $1.2 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Value Fund. At time of publication, RCB was long Dun & Bradstreet, Guarantee Life and Berkshire Hathaway, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at