Corporate control
Little serious effort has been made over the years to track the shareholder rolls of Asian listed equities. Emerging stock market mechanics are not always smooth enough to monitor positions with accuracy, and family-controlled corporations are not always as transparent as Western counterparts. Still, the day may come soon when shareholder analysis will become an indispensable IR tool, supporting proxy plays and defending M&A candidates in a maturing capital market.
So believes Toby Heale, the founder of Hong Kong-based Investor Information. Heale is intent on building a new business before the likes of DF King and Technimetrics stiffen the competition in Asia. With a paper-cluttered office nestled among the antique shops of Lyndhurst Terrace, he keeps an eye on stockholder rolls in Hong Kong, Singapore and Malaysia. Only in these countries, registrars and a Companies Act allow for the identification of the beneficial owners behind nominee names.
Heale is an old-hand when it comes to the securities business. He first became a member of the London Stock Exchange in 1964 with a gilt bond dealer called Francis & Prade. When Francis & Prade dropped out of the business in 1972, Heale made the leap to James Capel, running the Southeast Asia equity desk from London by 1986. 'I considered the closing of Capel's London emerging markets desk in 1989 akin to Decca refusing to take on the Beatles,' recalls Heale. After moving to Hong Kong, he turned from stockbroker to PR man with the Rowland Company in 1992, before creating Investor Information in May 1993.
'You can pinpoint stock owners with a high degree of certainty in some markets,' notes Heale. 'Yet the mechanics in the prime market of Hong Kong make it hard to conduct shareholder identification operations with discretion.' The Hong Kong Companies Act stipulates that anyone using the registrar to identify shareholders must send information to the Commission of Banking and the Securities Futures Commission (SFC). In addition, the information must be sent to the stock exchange, which is required to publish all findings.
'I can require the nominees to identify beneficial owners in Hong Kong, with the client's permission, but I have to publish that information for everyone to see,' comments a frustrated Heale. 'If you are a vulnerable company trying to defend yourself from a takeover, by following this scheme it is possible to make yourself even more vulnerable. This extraordinary disclosure rule should be removed from the law. It is a disaster.' All the more so in that Hong Kong holds the greatest short-term potential for shareholder analysis in Southeast Asia.
That is the reason Investor Information has developed other ways of identifying shareholders. Heale notes that while the US business is concentrated around 13-F filings, and the UK revolves around the registrar's office, Hong Kong is a little of both. With a client base that includes blue chip Hong Kong companies and mainland Chinese corporations, Heale supplements his service by covering some 550 Asian-focused funds and trawling through the annual reports of over 2,500 mutual funds. To further identification, Heale uses 13-F reports, information from US depository trust companies and close relationships with fund managers.
In the past, Heale admits that there has not been a perceived need for share tracking in Asia. Now, he sees the IR business changing gear, and the interest in stockwatch gathering steam. The level of activism has created horror stories that listed companies cannot ignore, and disclosure practices are being scrutinised by regulators more than ever before. At the same time, there is a growing understanding of corporate governance, while minority interests are receiving more attention.
There is little doubt that as the IR market grows, American stockwatch agencies will look to open full-scale operations. 'The fact that we come from a different angle than the big American watchers works in our favour,' adds Heale. In the meantime, he is more concerned about avoiding conflict of interest than dealing with new competition. 'We stay away from proxy fights, no matter how violent they are. There's a border in this business, and we never cross it. We're met at the border by IR and PR companies. We don't turn customers into victims.'
One conflict that has been hard to avoid is with the IR companies. Though Heale does not profess to offer IR services, and has no plans to add that kind of service to his mix, he has not won the favour of many IR agencies. Some have complained that his methodology may not be the best, but Heale is neither shaken nor stirred: 'We do a tough job in a difficult market,' he declares. 'Maybe we do it too well. Our information may not show the strategies and results of certain players in the best light.' 02/96 The Bob and Reto Story Successful soap operas run and run. So, it seems, do unsuccessful takeover bids. Janet Dignan tells the story so far of the long-running battle between Moore Corporation and Wallace Computer
As this proxy drama opens, on the evening of Sunday July 30, 1995, the camera pans to a telephone in the home of Bob Cronin, chief executive of the fast-growing, innovative computer forms company, Wallace Computer Services, of Hillside, Illinois. The phone rings but Cronin is out, so the call is answered by a machine. The caller, Reto Braun, is the CEO of Moore Corporation, a much larger computer forms company based in Toronto. The message Braun leaves explains that Moore intends to make a bid for Cronin's company.
Later the same night a messenger pushes a letter under Cronin's front door, in which Moore's offer of $56 per share for Wallace is spelt out. Braun notes that this is 40 per cent above Wallace's latest 30-day average closing price and declares: 'Together we could redefine the industry.' Cronin thinks not. His reaction - that same night - is to retain Goldman Sachs & Co as a financial adviser. Meanwhile, Moore has already moved swiftly ahead on its press relations: the next morning, readers of the Wall Street Journal wake up to find that the company has already briefed at least one journalist - Larry Greenberg - who announces the bid in that Monday morning's paper.
That may have been the opening act of the drama, but the story goes back to at least the previous February, now nearly a year ago, when Braun - who had joined Moore in 1993, charged with turning the stumbling giant around - wrote to Cronin to express his view that, 'Moore and Wallace might make an excellent fit.' When Cronin failed to bite Braun assured him that he would only be interested in a friendly deal.
Six weeks later the pair met at a New York conference, where Braun suggested they get together to discuss other matters. They duly fixed a lunch date for some four months later - busy people, these CEOs - but the two have not in fact met since then.
Nevertheless, their relationship has become one of the hallmarks of this protracted drama; and the hostility between the two companies' leaders has undoubtedly helped to prolong the battle and accentuate its bitterness. The two have made frequent claims and counterclaims about each other, both inside and outside the law courts, with Cronin refusing point blank to meet and discuss terms with Braun throughout the half-year tussle, despite Braun's persistent public demands for him to negotiate.
On the contrary, Wallace's defence team has stuck rigorously to its Just Say No strategy. Cronin's hostility to an offer that he deemed 'clearly inadequate', and from a company whose sales per employee in 1994 were $121,000 against his own $171,000, is understandable enough. After all, his company, by the common consent of most analysts, is the best in its sector. And any scrutiny of the two companies' recent track records - taking market share, growth, earnings or almost any other measure - leaves little room for doubt about their relative progress. In the five years from 1990 to 1994, for instance, Moore's cumulative net earnings were $250.2 mn on revenues of $12.4 bn. Wallace's earnings were about 20 per cent lower, at $203.2 mn - but they came from revenues of just $2.6 bn.
One analyst, Marty McDevitt, managing director of Cleary, Gull, Reiland & McDevitt of Milwaukee for whom he follows the forms industry, characterised Moore's bid as 'The biggest trying to buy the best.' He also said of Wallace: '{It's}been the best-run company in this industry for years.' Not surprising, then, that it should have attracted the interest of its much bigger rival.
In the circumstances, the fact that he has succeeded in making his company the envy of the computer forms industry must seem scant consolation for the embattled Cronin. But it has provided him with the key platform for his defence, which throughout has centred on the company's impressive record by comparison to Moore's own. Moore may have perked up since Braun took charge two years ago, but its market share has been on the slide and the company would surely benefit from an injection of Wallace's innovative capacity and vigour.
After the initial announcement by Moore of its unsolicited tender offer back in July, for $56 a share or $1.3 bn, things developed pretty slowly at first, as both camps gathered their teams of advisers (see boxes) and set about fine-tuning their strategies.
From the start, Wallace took up its business-as-usual, Just Say No stance, insisting that the company was not for sale. And Moore seemed equally determined not to raise its offer, despite market opinion that it would have to (reflected in Wallace's stock trading above the offer price) and despite the minimal interest generated by the opening bid among Wallace shareholders.
Braun's refusal to be more flexible on price may have hindered a speedier resolution of this drawn-out tale, but commentators believe he was under pressure from his own board to get Wallace 'on the cheap', as one analyst put it, against his own judgement.
In any event, the slanging match between Braun and Cronin got under way from early on, as each wrote letters to shareholders and issued press releases about the shortcomings of the other. In early September the Wallace board approved certain improvements to its benefits plans, which would only come into effect if there were a change of control at the company. At the same time it redefined what constituted change of control: previously, if 25 per cent of incumbent directors left the board that would amount to a change; now it would only require a majority of directors to go.
A few days later Cronin wrote to his shareholders urging them not to tender their shares and talking up his company's successful implementation of its business strategy. He insisted that the tender offer failed to reflect Wallace's true value and concluded his letter with the words: 'The board believes that this hostile tender offer is not the best way to maximise shareholder value.'
The next day, September 12 - just a week before the expiry date of Moore's offer - Braun extended his bid to November 8, the tentative date for Wallace's annual meeting; and he launched a proxy fight to get rid of Wallace's poison pill provision. This had been introduced at the company in March 1990, and gave it the right to flood the market with new, discounted shares if Moore were to acquire a certain number - making the acquisition prohibitively expensive.
Moore now began soliciting proxies from Wallace shareholders for resolutions at the annual meeting to reduce the board from eight members to five and to elect three of its own nominees to the board - thereby gaining a majority which could rescind the poison pill. Braun duly fired off a letter to his target's shareholders, in which he insisted that the $56-a-share bid was fair. Moore's financial advisers, Lazard Frres, were said to have recommended that the company raise its price; but if so, that advice was rejected.
'Nothing stands between you and our offer except Wallace's board,' Braun's letter declared. 'Our offer is full, fair, compelling and reflects Wallace's current performance and future potential.' And he warned them: 'If we withdraw our offer, we believe Wallace's stock price will plummet towards its pre-offer level of the low 40s.'
Braun also noted Cronin's refusal to negotiate and accused him of using the courts as a delaying tactic and of enriching pay packets for Wallace's top executives. 'We believe these actions are intended to entrench the Wallace board at the expense of shareholders - and will ultimately act to diminish rather than enhance shareholder value,' Braun said. And he exhorted Wallace's shareholders to press their board to 'avoid an unnecessary and costly proxy contest.'
Braun's announcement that it was ready for a floor fight at Wallace's meeting failed to produce much reaction from Cronin's side, but his warning about the likely plummeting of the stock price prompted Wallace to sue Moore for intimidating its shareholders and making 'false and misleading statements'. This was just one of a number of suits and countersuits between the two companies during the course of their battle.
Meanwhile, the main plot was continuing centre stage, with Braun now indicating that he might raise his price after all - 'if it makes sense'. The bidder had earlier announced that only 1.6 per cent of Wallace shares had been tendered, but Braun said this merely reflected uncertainty surrounding the poison pill litigation. Now, he said, Wallace had better start talking if it wanted to avoid a nasty proxy war for corporate control: 'We hope it won't come to that,' he said, describing a fight as a 'wasteful exercise.'
It did eventually come to that, of course, but not before Moore had finally upped its bid, which it did on October 12, to $60 a share. The bidder also brought the offer's expiry date forward from November 8 to November 3; and Braun turned up the pressure on Wallace shareholders by stating that if a significant percentage of them failed to tender their shares he would terminate the offer. In a letter to Wallace shareholders outlining the new terms - including the revised price tag of $1.39 bn - Moore again noted the Wallace board's persistent refusal to negotiate and described the recently announced postponement of its annual meeting - from November 8 to December 8 - as 'consistent with this intransigence.'
Wallace's stock price went up by 2 1/8 to 58 3/4 in reaction to the new terms, but its board asked shareholders to do nothing until it had reviewed the offer, which it undertook to do within five business days. To nobody's great surprise, Wallace duly came out with its recommendations to shareholders to reject the new terms, at the same time accusing Moore of attempting to panic shareholders into tendering their stock.
Unusually, Wallace also titillated stockholders by saying that it expected earnings for the current quarter - the end of which was by then just two weeks away - and for 1996 as a whole, to be well above analysts' estimates. The company's share price edged up to $59 on this announcement, and proceeded to hover around the high 50s until the expiry date.
As the new early November deadline approached, the outcome remained difficult to call. Wallace's original shareholders had proved loyal at $56. But the price was now up and, more crucially, as the bid had proceeded, so Wallace's ownership profile had been changing, with much of the stock moving out of the hands of long-term institutional holders and into those of arbitrageurs. Analysts at the time were estimating that around 45 per cent of the stock could be in arbs' hands: interested in a quick profit rather than the long term, they were less likely to respond to Cronin's talk about Wallace's business strategy and future growth prospects.
Even so, predictions of the amount of stock likely to be tendered by November 3 - with most commentators plumping for around half - were way out. In the event, 73.54 per cent of Wallace's shares - or 16.7 mn - were tendered. That was 'significant' enough for Moore's board, which now said it would proceed with the takeover and extend the offer to December 11.
Significant it may have been, but the battle for control was far from over. With the poison pill provision still in place, Moore could not formally accept the tendered shares; its only option was to go to the annual meeting on December 8 to try to force a showdown. Reto Braun again exhorted his target's board to sit down and negotiate in order to conclude an agreement 'to effectuate the wishes of the Wallace shareholders'. He noted that they clearly now deemed Moore's offer adequate, and called for Wallace 'to accept {their} mandate and move from obstruction to construction', as he put it. 'Continued refusal to meet and conclude this transaction will only result in further waste of Wallace assets on needless litigation and proxy battles,' he said.
However 'needless', Moore now switched up a gear in its solicitation of proxies, naming its three nominees for Wallace directorships. Its goal was to elect a slate that would vote not to trigger the poison pill but to approve the merger instead.
Meanwhile both parties continued to pursue their causes via the courts, seeking competing injunctions: Moore's aimed at blocking Wallace's use of the poison pill; Wallace's aimed at blocking Moore's bid on anti-trust grounds. In due course - and just days before the meeting - rulings were given on both of these, with neither company being granted its desired injunction.
Wallace was cock-a-hoop that it was able to retain its poison pill, interpreting the ruling by Judge Schwartz in the Delaware court as a vindication of its Just Say No policy and as a vote of confidence in the company's business strategy. And there was more good news for the defendant the very next day, when a judgement was issued from another quarter: Institutional Shareholder Services Inc (ISS), the proxy advisory firm based in Bethesda, Maryland.
ISS advised its clients to vote against the $60-per-share bid on the grounds that it was inadequate and not in the best long-term interest of shareholders. It noted Wallace's 'stellar financial performance and its clearly defined long-term strategic plan.'
However, some shareholders - those more interested in a quick return than the strategic development of a highly successful and innovative company - were growing increasingly frustrated with Cronin's refusal to sit down and strike a deal. Their worst fear was that Moore would grow equally frustrated and walk away from the bid, leaving the Wallace share price - at this point almost twice its pre-bid level but still below the offer price - to look after itself.
But for now Moore was still fighting hard, with Braun writing to Wallace shareholders thanking them for the 75 per cent of shares already tendered and stating: 'We need your support to get the 80 per cent vote necessary to remove the board and rescind the poison pill so that we will be able to purchase your shares.' Failing that, but assuming a clear majority, Moore could at least make Wallace's life awkward by getting its three nominees voted onto the Wallace board.
For its part, Wallace was still steadfastly refusing to talk. Instead the defence team mounted its own retaliatory proxy campaign, which saw Cronin and chairman Dimitriou visiting shareholders to solicit their support. The company's line was that future prospects had yet to be reflected in the share price; and that shareholder interests would be best served by continued independence - although Goldman Sachs was at the time said to be trawling North America, Europe and Japan for a white knight.
That search failed; as did Moore's attempt to gain control of Wallace. At the meeting in December it succeeded, as expected, in getting three director seats, but fell well short - at around 60 per cent - of the 80 per cent needed to remove the entire board. But Braun still had no thoughts of raising his offer: 'I've already done that,' he said. 'I could bid against myself forever.' And he added: 'I'd love to know what is adequate. Is it $60.10? Or $62?'
Braun may have been exasperated, but at least he still had his job. Over at Wallace, his adversary Bob Cronin had lost his board seat to one of the Moore nominees. Now it was up to Dimitriou to do all the talking for Wallace and he declared, as firmly as Cronin ever had: 'The company is not for sale.'
Nor is it any longer under offer: the week before Christmas Moore confirmed that it was letting its bid lapse, leading to a $2.12 drop in Wallace's stock price, to $54.62. The Wallace board was undeterred and moved quickly in the new year to reinstate Cronin at its first meeting of 1996, by voting to increase the board's size from eight to nine.
And that, you might think, would be that. But it is surely not the end of this story. Hilda Mackow, vice president for communications at Moore and the person responsible for the company's investor relations, echoes Braun's own words when she says: 'We're not going away.' Indeed, Braun is on record saying that Moore is 'still hungry for Wallace'; and he has talked of the new directors bringing 'an objective perspective' to the Wallace board. In their new role, those directors are now obliged to fulfil their fiduciary duty to Wallace shareholders, of course, and Mackow confirms that Moore now has 'no communication' with them. But Moore still wants a friendly deal, however far-fetched might seem its stated hope of 'working directly with the new Wallace board'.
But if that doesn't work, Moore may op to rebid, probably in March or April and presumably at a higher price. Between now and then, Wallace will pursue an active IR programme, to ensure it keeps its long-term holders fully informed of its business plan, its growth rates and the reason for their sustainability. It will also keep hoping that members of the arb community don't lose heart in the interim, and decide to dump their stock.
Any good soap opera concludes each episode with a string of unanswered, nailbiting questions; and the tale of Cronin and Braun is no exception to that rule.
How will Wallace's new board of directors get along? Will the three Moore nominees make any headway with the four outside directors? In short, will Moore manage to achieve from within what it has for so long failed to achieve from without? Or will Braun yet walk away from the deal, discouraged with the whole idea?
But perhaps the real cliffhanger is whether shareholders, particularly those who came in for the takeover ride, will be willing to wait - until next week, or next month, or next year - for the final episode.
Or whether they will switch off and sell out instead.
On the Receiving End
For Brad Samson, pointman at Wallace Computer during the bid and the company's head of IR and PR, the takeover battle was a new experience. He joined Wallace three years ago from Hill & Knowlton, since when he has brought Wallace's IR programme up to speed, 'introducing quarterly conference calls, for instance, doing more road shows and presentations, and generally implementing more aggressive shareholder contact.'
Before the bid Wallace had no outside PR or IR adviser, but the Chicago office of H&K, his former employer, was an obvious first port of call to help through the crisis. 'Co-ordinating all the people involved isn't easy,' notes Samson. 'But our whole defence team - the corporate people, the PR firm, the investment bankers, the proxy firm, the lawyers - worked very well together.'
For Samson, the Just Say No defence proved a difficult one to communicate at times. 'It meant I was often unable to answer questions, which is frustrating for an IR person used to trying to provide full information.' Similarly, during the company's regular quarterly conference call in November, the Wallace representatives had to struggle to keep the conversation off the subject of the bid. 'The arbs who jump onto deals like this try to force the dialogue for their own purposes,' notes Samson. 'You have to make sure you prevent that.'
Throughout the battle Samson was faced with having to correct 'misunderstandings' among both the press and the financial community. 'I had to deal with a lot of misinformation, much of it generated by the Street,' he reports, citing the time just before the annual meeting when Wallace's stock price took a jump for no obvious reason. 'People were calling me and saying it was because we had had a meeting with Moore. But there had been no such meeting. I have no idea where that came from.'
Of course, the ability to create and spread rumours is one of the defining characteristics of human beings, so this sort of thing has to be expected. But Samson was surprised by the difficulty some of the business and financial press seemed to have in getting to grips with the concepts involved. 'I think other IR people would be just as surprised by the fact that some journalists are less sophisticated than they would expect. In several cases, I talked them through whatever the issue was, and they eventually understood, but it's something people should be aware of.'