This week on Street Talking in NEXT, I explain that while preemption rights are jealously guarded by shareholders, there are times when it may make sense for Boards to seek equity capital elsewhere and on very difference terms too.
I may have my dates mixed up, but I think Cadbury started it with their ‘It’s Your Right. Take It or Trade It’ campaign for the confectionery giant’s September 2009 Rights Issue. Then in January 2010, Oando, the integrated energy company, militantly urged shareholders to ‘Stand Up For Your Rights!’ More recently, Unity Bank has championed for its shareholders to ‘Insist on Your Rights!’ At this rate we may not be far off from the ‘Fight for Your Rights!’ clarion call. For Sunny Nwosu, the prominent retail investor crusader and national coordinator of the Independent Shareholders’ Association of Nigeria (ISAN), the rights issue is an article of faith. Never mind that in reality rights issues are always at risk of slipping into the consolation prizes category before the ‘real cash’ is raised from new investors.
Still, given that these preemption rights are now accorded the status of civil rights, it is good to recall that that there might be times when the goal is more than just raising capital, though it is ostensibly framed as such. I will argue that there are cases where the value of the signaling effect of the source of new capital and its expedience makes it the best deal for existing shareholders in spite of themselves.
Permit me to underline my extreme care in putting forth this point of view. There are extenuating circumstances when a new shareholder may actually deliver more to a company beyond the exact figure of capital participation being taken up. In these circumstances, public company attitudes to new shareholder blood are heavily influenced by factors that have more to do with strategic considerations post capital-raising than just a shot in the arm of fresh capital, strictly speaking. At this point I would like to make one clarification. ‘New’ should not be exclusively interpreted to mean that the incoming capital is from a party who has never been a shareholder in the company before. The ‘new’ shareholder may actually be an old shareholder in the company. Their ‘newness’ is defined by the company’s willingness to offer them a unique attractive rate of participation in its ownership which is not extended to other shareholders.
Two obvious examples of the oxygen that some new owners bring were the decision by Goldman Sachs to raise US$5 billion from Warren Buffett’s Berkshire Hathaway vehicle in September 2008 and a month later, Barclays’ choice to raise £5.8 billion from Abu Dhabi and Qatari investors rather than tap the UK government or their own shareholders at the peak of the global financial crisis.
On the conclusion of the Goldman-Buffett deal, a visibly relieved Lloyd Blankfein, the chief executive, announced that ‘we are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. . . which is a strong validation of our client franchise and future prospects.’ In his own statement, Buffett said that the bank ‘has a proven and deep management team, and the intellectual and financial capital to continue its track record of outperformance.’
Good housekeeping seals of approval do not come better than an investment from the Sage of Omaha. Any wonder that the partners of 85, Broad walked away from a planned US$2.5 billion investment on much better terms by a less gleaming Sumitomo Mitsui Financial Group, the Japanese bank.
One month later, Barclays, the British bank, announced its plans to raise capital from Middle East investors over its own shareholders’ protests.
The Association of British Insurers (ABI) promptly issued a rare ‘red alert’ and called it a matter of ‘grave concern’ that the bank would go over the heads of its shareholders to source capital on materially different terms from new investors. George Dallas, the head of corporate governance at F&C Asset Management called it a ‘clear and egregious breach of their rights.’ Roger Lawson of the UK Shareholders’ Association, the British version of Sir Sunny of ISAN, said he ‘deplored the lack of participation by all shareholders.’
In the midst of this anger, John Varley, Barclays’ CEO, pointed out that the Bank absolutely ‘did not have the luxury of time’ required for all approvals via that route of capital raising. Marcus Agius, the bank’s chairman, was blunter: ‘a rights issue would have subjected our shareholders to an excessive period of uncertainty.’ That would have been much worse. Crucially, what was left unsaid was that an investment from the Gulf funds would open doors for business in the fast growing region which was covetable in itself. Two birds, one stone.
Do not quote me wrongly or out of context. Rights issues have their assured place in capital raising plans. But they should not be an end in themselves. Sometimes, it pays for shareholders to trust a board’s judgment. Forcing boards to do what they know they should not and indulging shareholders by accepting what may not be in their best interest is irresponsible. These two wrongs will never make a right.
The original article can be read here on the NEXT website.
One cannot help noticing how Niyi Meka Olowola, Oando's Head of Corp Comms, is nodding in approval. Maybe Goldman Sachs can learn lessons.04:47:49 PM January 25, 2012from HootSuite
It's at times like these companies praise heaven for media-savvy CEOs.Among Nigerian business leaders,Wale Tinubu, is easily among the best.04:46:01 PM January 25, 2012from HootSuite
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