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Outlaw Bride Raid: Shotgun Weddings will Backfire

This week in Alrroya, the United Arab Emirates (UAE) business and financial daily, I discuss the often incoherent communications that have followed what are effectively government seizures and unsolicited equity investments in public companies. While the infusions may have been necessary to stave off wider systemic panic, the arm-twisting methods used to achieve them have left a sour taste among legacy shareholders. In the mean time, governments have gone ahead to act as matchmakers for new buyers and strategic shareholders, without the consent of these pre-crisis shareholders. In the article, I argue that the governments' reliance on its prerogatives instead of consensus creates a 'boomerang risk' for these new jocks on the block buyers.

The global economic meltdown has thrown up once-in-a-lifetime opportunities for companies with fortress balance sheets. They are being encouraged, often with the tacit support of governments, to go after competitors, suppliers, adjacent sector concerns or strategic industries long regarded as part of the national patrimony. Suddenly, governments which, not too long ago, wore their anti-trust credentials as a badge of honour now look upon these transactions with benevolence. In some cases, they go as far as to insist that it may be the only way out. Sell out or die is the new mantra.

Dumbfounded at the reversal of fortune, shareholders are being railroaded to sign the dotted line. Plans for the nuptials are on course, at least, for the time being. Nothing is off limits. Everything has a price. As Jamie Dimon, the chief executive officer of JP Morgan Chase gleefully admitted at the time of buying Bear Stearns, the defunct bulge bracket firm, ‘buying a house is not the same as buying a house on fire’. The crown jewels are going for a song.

What most buyers fail to realise is that the short-term political expediency of doing these deals may not equal long-term economic consistency in allowing a few entities gain untrammelled control over non-negligible swathes of the economy. After the meltdown cools, many will forget the clear and present danger of bankruptcy they supposedly faced. Popular discontent will surge. When that time comes, the politicians will not skip a beat in allying themselves with the underdogs.

These raise a pertinent question. In the haste to close deals, how well are governments communicating their compelling logic to legacy shareholders? With a Smith & Wesson Magnum revolver held to their heads, most company boards will choose self-preservation and submit to a threatening regulator’s demands. However, resentment in the shareholder base will linger much longer.

In his very readable account of the global credit crisis, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis – and Themselves, the author, Andrew Ross Sorkin, reconstructs a testy exchange between Hank Paulson, the former US Treasury Secretary, and his aides over the planned takeover of Fannie Mae and Freddie Mac, the mortgage companies.

Asked what he would do if the boards resisted the government’s effective hostile takeover, Paulson replied: ‘You don’t believe me, but I know boards, and they are going to acquiesce. When we get talking with them, they’ll acquiesce.’ Sadly, such display of arrogance and disregard for subtlety and consensus is not an isolated case.

In what will go down in history as some of the most bungled PR fiascos, governments have largely mismanaged public opinion for their involvement in the affairs of public companies.

Several cases abound: the UK Shareholder Association’s resistance to the Labour government’s takeover of Northern Rock, the bitter distaste of General Motors’ shareholders towards the Obama adminstration’s intervention in the auto giant’s affairs, and the pitched court battles launched by minority shareholders of banks taken over by the Central Bank of Nigeria.

Universally, the mood is the same: a strong sense of unfair treatment, wide held belief that due process was not followed, and a general perception that the companies whose losses are usually now backstopped by the government, are exiting pre-packaged pseudo-bankruptcies to emerge fair brides for vulture investors.

It has not helped the case of governments that due to the political horse-trading required to approve these deals, they are forced to backtrack on earlier statements, which can only send confusing signals.

One moment, a government spokesperson will comment on the need for a robust market support programme that protects shareholders, and the next day, he will stress the government’s total rejection of anything that reeks of financial rescue for shareholders. Try to square that.

The takeover of eight distressed banks by the Central Bank of Nigeria is a classic case of bungled process. The Central Bank governor has contradicted himself so many times the public has lost count. The regulator’s announcement that foreign banks are its preferred buyers for these banks has only crystallised fears that the seizures are not in the interest of legacy shareholders but part of a premeditated script.

When rumours surfaced two weeks ago week that Standard Bank of South Africa had concluded talks to purchase seventy-five percent of seized Intercontinental Bank, one of Nigeria’s biggest lenders, it sparked an outburst of public anger at what is widely seen as an opaque transaction. The bank CEO’s denial that it had not concluded any deal with an acquirer was quickly dismissed as rearguard fire-fighting.

With so many retained advisers on these takeover plans, it is bewildering that more attention is not being paid to perception management and shareholder engagement. This cannot help matters.

Ostensibly, riding hell for leather to sign deals with buyers may be the necessary thing to do to save these companies and the economy-wide tsunami that would erupt from their collapse. But necessity is not sagacity. Without the freewill consent of legacy shareholders, it will not be a marriage but forced intercourse.

Doing the right thing at the right time in the wrong way is as disastrous as doing the wrong thing at the wrong time in the right way.

The original article may be read here on the Alrroya website.

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