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Opinion: When is a takeover not a takeover?

By Graeme Hunt for NZPA

Friday 19th May 2006

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When is a company takeover not a takeover? When it's an amalgamation under the Companies Act.

It was this issue, among others, that antagonised shareholders in Waste Management NZ Ltd, one of the best performing companies on the NZSX.

This week they approved overwhelmingly Waste Management's "amalgamation" with Australia's Transpacific Industries Group but with severe reservations.

Each shareholder will get $8.642 a share plus a 54c special dividend - a significant premium on the market price of the shares - so money was not the real issue. It came down what Waste Management chairman Jim Syme described as "emotion".

If any company could be loved by its shareholders, Waste Management was that company. It started 75 years ago as A W Bryant, a builders' and shipowners' supplier and carrying company. Since its New Zealand listing in 1985, it has performed consistently and splendidly, producing 20% year-on-year profit growth.

That 20% became the company benchmark and it achieved this not through property development, merchant banking or software invention. It followed the northern English adage "where there's muck there's brass", making plenty from the efficient collection and disposal of rubbish.

In the December 2005 year it earned a tax-paid trading profit of $30.7 million, 24% higher than that in 2004. This year, Waste Management is predicting a more modest gain - a 10% profit lift to about $33.8m, or about half its benchmark.

Most companies would be crowing at that forecast growth but Waste Management, already facing increasing competition in Australia, was worried about its medium-term prospects.

It was probably for this reason the directors endorsed unanimously Transpacific's cash offer before having it independently appraised by Grant Samuel.

In the event, Grant Samuel described the offer as fair, but by that stage the directors, so popular for so many years with the shareholders, were being labelled undemocratic and self-serving.

The most trenchant critic was the largest shareholder, Fisher Funds Management, whose chief investment officer, Warren Couillault, while supporting the offer, attacked it as a "takeover in disguise". Few of the hundreds of shareholders listening to him at the annual meeting in Auckland disagreed.

The Reed New Zealand Dictionary describes "amalgamate" as "to combine". That is technically true in the case of Waste Management and Transpacific - the new operation is a combine - but what is missing is the sharing of governance.

The Waste Management directors will all lose their jobs though the staff, who have helped make the company as strong as it is, are unlikely to be casualties.

Under the Companies Act an amalgamation is simply a scheme of arrangement to allow two businesses to merge. It requires 75% approval rather than the 90% under the Takeovers Code. The 75% threshold predates the Takeovers Code. Therefore, shareholders holding 25% or more of the votes cast could have killed the Waste Management deal.

That they did not reflects the reality of a New Zealand company facing a tough Australian competitor. Given the generous nature of the cash offer, the directors opted for an "all-or-nothing" outcome rather than being "frozen" (as Syme described it) with Transpacific at, say, 55-60%.

The directors, said Syme, had a duty to act in the shareholders' interest.

Would Waste Management shareholders really have wanted to be minorities locked into an Australian-controlled company with a majority Australian board? Unlikely, and they knew it.

But emotion ruled the annual meeting as it did the debate in the weeks up to the shareholders' vote. When pressed, shareholders said what hurt them most was saying goodbye to a company that had served them well and having no influence, let alone shares, in the new owner.

Worse still, Transpacific was Australian - yet another "ugly Australian" gobbling up a great New Zealand company - and that also hurt.

It will hurt the ever-shrinking New Zealand sharemarket even more. Yet New Zealand investors tend only to see the negative.

The energetic Graeme Hart has returned food company Goodman Fielder and forester Carter Holt Harvey to New Zealand hands and revamped a range of other food and food-processing companies into a powerful New Zealand combine. Despite Hart's lack of popularity, he has helped reverse a trend by repatriating former New Zealand assets.

He has done this in the face of several hurdles including a high cost of capital in New Zealand - far higher than in Australia and the United States - high company tax and a public suspicious of business.

The shareholders who so chastised the Waste Management directors this week are unlikely to look to Hart as the new Kiwi corporate messiah. They don't want New Zealand companies to go to Australia but they hardly welcome businessmen who bring them back.

To this end, the Takeovers Panel shares their concerns and would like to extend its influence over amalgamations, presumably bringing all takeovers under the one regime.

The trouble with that approach is that takeovers do not conveniently fit into the panel's prescribed format. It is not the panel's job to tell companies how they should reorganise themselves, no more than it is the role of fund managers like Fisher Funds. If amalgamations work better for companies, provided shareholders of the same class are treated the same - an underlying principle of company law since the first joint-stock companies started in New Zealand in the 1860s - then companies should have a free hand to act as they please.

As Waste Management director Jon Cimino told NZPA this week: "We don't make the law. We work within the law."

The fear to many is that if the regulators get their way, New Zealand could end up with the world's most perfect takeovers regime. Its downside will be that there will be few, if any, takeovers to police because companies will cease going public or simply sell out to Australia.

Lower company taxes and greater government encouragement to Kiwi entrepreneurs to make their fortunes at home - hardly features of Finance Minister Michael Cullen's budget delivered this week - probably count for more than all the hectoring of New Zealand directors who say yes to attractive offers from Australians.

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