Remuneration consultants

Michael West in the SMH gets stuck into them. And rightly so! More on this later.

Valuing mining companies can be tricky

Just ask shareholders in Ginadlbie Metals and Sundance Resources. An independent expert was unable to value the resources held by Sundance in Cameroon (see Oz article here). This is an example why I typically discourage students from choosing resource companies for the major assignment!

Not fair or reasonable, but the only one you'll get...

More on the Wesfarmers takeover of Coles; the "independent expert report" (see prior discussion here) is in; the offer is apparently not fair, nor reasonable. However, with no realistic prospect of a better offer, the recommendation is for Coles shareholders to accept. Grant Samuel says that the Coles Group is worth $16.21-$18.23 a share (at time of posting this, CGJ is trading at $14.57 (up 6c for the day)). As Matthew Stevens says:

Let's be blunt here: the $930 million gap between the price Wesfarmers will pay and the Grant Samuel valuation is effectively the price Coles shareholders have to surrender to replace the company's crippled management.

The fact is, the board has been forced to accept an offer that undervalues Coles by at least $930 million because it has absolutely no other alternative.

We'll have a look at how they arrived at that valuation when the document proper is released to the market - hopefully in time for class 11 this semester (when we're discussing takeovers).

Independent experts

Independent experts reports are often described as neither independent nor expert. A lot of these reports are required by law, and often seem to be a 'cover your a*** document for managers. The valuation methods used in them are often questionable (in terms of valuation methodology, valuation range etc). Paul Kerin makes similar points:

FAIRNESS opinions are primarily arse-coverers for boards. While they can help shareholders, competition helps more. Target boards should focus on maximising competition for their shareholders' shares and forget about fairness opinions -- unless legally required or sufficient competition can't be mustered.

Following a takeover bid, the target's board often commissions a "fairness opinion" from an "independent expert". The expert estimates a valuation range for the target, compares it to the bid and offers one of three opinions. "Fair and reasonable": the bid at least meets the lower valuation bound. "Not fair but reasonable": while the bid is under the lower bound, other factors lead the expert to believe that shareholders should accept. Otherwise, bids are deemed "not fair and reasonable". Half of Australian opinions are fair and reasonable; one-fifth are not fair and reasonable.

Kerin references some research that came out of Martin Bugeja's PhD thesis at Sydney University. Martin has a paper "The 'Independence' of Expert Opinions in Corporate Takeovers: Agreeing With Directors' Recommendations" published in the Journal of Business Finance & Accounting [Volume 32 Issue 9-10 Page 1861-1885, November 2005 if you're looking for it]. His abstract:

The impact of nonaudit services on auditor independence has been the recent focus of regulators worldwide. Using expert reports provided in Australian takeovers, this study investigates a context where the audit independence issue is reversed. As approximately a quarter of expert reports are prepared by the target firm's auditor, concerns have been expressed over the independence of the opinion provided. This paper finds that, relative to other experts, there is no difference in the rate at which experts with other business dealings with the target, including the target's auditor, provide an opinion that agrees with that of directors. However, the capital market reaction around the release of the report indicates that reports produced by auditors are viewed as nonindependent.

Martin finds that 50% of bids increase after a "not fair and reasonable" opinion, but only 14% of bids are increased if there is a "fair and reasonable" opinion issued. That doesn't surprise me.