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The O'Brien Column: Taking minority shareholdings is not always the best answer

By Peter V O'Brien

Friday 9th June 2000

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Minor listed companies rushing into technology has thrown up the minority shareholding warning signal associated with all investment fads.

Acquisition of minority holdings in other companies dominated the announcements this year from groups trying to cash in on the worldwide surge in technology stocks.

There is nothing intrinsically wrong with a company taking a small position in another or other companies but it can be overdone.

A company with a string of minority holdings gets no cashflow from the investments, apart from dividends that may be paid, but still has to service the holdings.

The investing company has to rely on cashflow from other sources if the cost of equity or borrowings is more than the dividend income.

Capital growth of the investment asset, often referred to as "adding to shareholder value," is a standard justification for minority holdings. There may also be a strategy of increasing the holding until the investment is large enough to bring the target company into the investor's books as a subsidiary.

The investment can provide a capital windfall if the company in which it is made lists on a stock exchange or if it is flicked on to another investor.

A balance between subsidiaries and/or operational, cashflow-generating businesses and minority shareholding investments is the issue in the high technology area as in any sector.

There are signs the balance could be getting off-centre in some companies, particularly if the acquisition of minorities continues at the same rate since the start of the year, without the infusion of cashflow in similar proportions.

The minority position phenomenon can be contrasted with acquisition announcements from groups with a longer history in the technology sector. Auckland-based e-commerce company Advantage Group, for example, announced three acquisitions this year, apart from a joint venture.

The company said in March it was buying software development company Aldridge Punter, a group that provided specialised enterprise applications on various systems to clients including some of the country's major business organisations.

The second move was in April when Advantage increased its holding in Advantage Portable Technologies from 50% to 80% and acquired 50% of Melbourne-based Leopard Systems, a supplier of Symbol wireless and internet mobile data-management technologies to the Australian market.

Advantage bought the business of enterprise solutions provider Campbell Pope and Associates in May, paying $4.3 million for all the shares.

It is worth noting the ironic comment of Advantage chief executive Greg Cross in the company's report for the six months ended December: "Advantage is a rarity among e-commerce companies; we're profitable. We're a new-economy company and ours is a growth story but we're delivering the type of profits that you'd expect from a more traditional company. In other words, we're a real business with real operations, real people and real customers."

Mr Cross seemed to be having a swipe at the bandwagon operators but he had a valid point. The contrast between companies that bought the whole, or 50% or more, of other companies and those acquiring minority holdings can be seen in the activities of IT Capital (ITC) and Strathmore Group this year.

Transactions in January and February resulted in IT Capital having a 19% holding in Virtual Spectator, an internet sports channel established to cover yachting and with plans to expand into digital transmissions of other major sports.

ITC said in May it had bought 34.6% of Deep Video Imaging, described as a "revolutionary screen-based technology company," whose "display technology enables next generation multimedia for liquid crystal display computers and for kiosks."

Late in May the company said it acquired 25% of Queensland-based e-commerce dev-
eloper Golden-Orb Technologies.

Strathmore Group seemed to outdo other listed technology companies in acquisitions this year. They included:

* 9.11% of Haht Asia Inc, which sells and services Haht Software applications in East and South Asia, the Pacific and South Africa;

* An investment arrangement to acquire up to 33.3% of Global Online Promotions, an internet e-commerce company that provides online solutions to the retail sector;

* 10% of business-to-business e-commerce software company Genie Systems and an option to subscribe for another 6%;

* 30% of San Francisco-based web software developer Inspar Inc;

* 10% of Double Impact Inc, described as "one of the most sophisticated technology venture catalysts in the world";

* 16.67% of Soft Tech America, a business-to-business e-commerce software company operating in the construction industry.

Strathmore probably has some grand plan for these holdings and others acquired in the past. A clue was seen in the company's interim report for the six months ended January 31. Executive chairman Phil Norman said:

"The value in these investments grows through our ability to assist management to focus on growth enablers and to leverage our international networks in order for them to achieve accelerated growth in global markets.

"We must continue to leverage Strathmore's existing investment and management capabilities to grow sustainable capital appreciation from our investee companies for all our shareholders."

The question is whether the large number of minority holdings, apart from operational subsidiaries, will achieve that object.

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