Everybody knows
“The more corrupt the state, the more numerous the laws” - Tacitus
What is the point of regulation? What is the point of the FCA and the LSE? The FCA guidebook is a huge, sprawling, incomprehensible labyrinth. The LSE listing rules not much better. Throw in ESG requirements, imported EU rules and you need a city lawyer at £1,000 an hour to guide you through the regulatory multiverse.
But still, it must serve a purpose, surely?
Well, in the last 48 hours, 3 news stories make you wonder.
Keywords Studios – Director buying just before FIFTH offer for the company disclosed
On Sunday 19 May, news broke in the UK press that the listed gaming software company Keywords Studios (KWS) had received a takeover proposal at £25.50, a 73% premium to the closing price of the shares the previous Friday.
Most strikingly, this was the fifth such offer that KWS had received. The previous 4 had been rebuffed, without the market being informed.
On 8 May, one of the directors of KWS had bought £55,000 worth of shares in the market at £11.89 each. What fortuitous timing, you might think. If I had known that there had been 4 bids already, I might have been tempted to buy shares too.
XP Power – Directors buy and fundraise at £11.50 the day after an £18.50 offer was rejected
Today, 21 May, news broke of another UK listed company, XP Power (XPP) receiving an unsolicited approach. This news came directly from the bidder, frustrated that it had made 3 all cash bids for the company, each of which had been rejected by XPP without discussion. The most recent offer was at a 68% premium to XPP’s previous share price.
Here’s where it gets interesting. The bidder states that its first bid was made on 24 October 2023 at £17 per share and its second on 5th November 2023 at £18.50 per share.
On 6 November, when the share price was languishing, the board launched a public offer to raise funds at £11.50 per share.
In the offering documentation, the board said:
“Since the trading update of 2 October 2023, a small number of parties have expressed indicative, non binding interest in acquiring the Company at prices which the Board considers fundamentally undervalue the Company and its long-term prospects. Having considered each of these unsolicited expressions of interest, with its advisers, the Board does not believe that any of them are at a value which merits further engagement with any of those parties and has had no hesitation in unequivocally rejecting them”.
All six board members bought shares in that fundraise.
If we look at a list of the directors and their shareholdings following the raise last November, it is striking that none of them own more than 12,600 shares. When the shares were £11, that is around £135,000. A decent sum, to be sure. But almost certainly much less than their salaries.
However, I am not the only one concerned at a company raising funds by issuing shares at £11.50 at a time when there was a bid on the table at £18.50.
Following a series of badly received announcements, the share price of XPP has lost around 80% of its value over the last 2 years. For directors anchored to a share price of £60, it must be difficult to accept seeing a price of £11, but that does not mean it is undervalued. It might instead reflect that the market doesn’t think the board are competent.
Importantly, directors are well paid. It is much easier to be patient while your investment languishes if you are being paid handsomely and getting significant nil cost options in the meantime.
This highlights how many directors have different motivations to shareholders. This is especially so as a result of the slow withdrawal of institutional money from the UK market. Most private investors would regard receiving a 50% premium to the current share price as a good result. Many shareholders will have sold out since November, unaware that there was a persistent buyer willing to pay a significant premium. After all, a 50% premium isn’t exactly derisory, is it? And as Graham Neary’s comments on Stockopedia today make clear, the offer is at over 20 times 2025 forecast EPS, a value many would regard as generous.
Which gets me to the crux of it: are the board and their advisors best placed to judge what the fair value of the company is? How can anybody be confident that their judgment is not skewed by their wish to preserve their jobs? How can it be right that shareholders were asked to buy shares at £11.50 when an offer was on the table to sell shares for £18.50 and the details of this were not communicated to shareholders?
wefox – “Discredited” director allegedly using scare tactics to bag a £20m bonus
On Thursday 16 May, Sky News broke a story that the European insurer wefox (an unlisted company) had sent a memo to investors saying that it was on the brink of insolvency if it couldn’t secure immediate funding.
This prompted one of its owners Chrysalis Investments (CHRY) - which (full disclosure) I own shares in – to publish a Friday RNS confirming that this had been known for some time, and that it had provided some funding.
On Sunday, the Mail on Sunday covered the story in more colour:
From This is Money, 19 May 2024
The story alleges that the CEO of wefox, Mark Hartigan, had sent out the “scare” letter to investors to pressure them into agreeing a sale of the company that would net him £20m personally. This was a tactic he had, according to the paper, used at a previous company, LV Insurance, which he tried to sell to Bain:
Hartigan and former LV chairman Alan Cook left with their reputations in tatters after spending more than £30 million of policyholders' money on the doomed Bain deal. Hartigan was branded 'shameless' by Labour MP Gareth Thomas, chairman of Parliament's all-party group on mutuals, having 'taken members for fools at every chance he had”
These are three different stories. None of them was broken by the company most affected: 2 were leaked to the media, the other made by the bidding company.
Nobody is suggesting anybody has done anything wrong. This is just the system, the way it is. I’m sure tens of thousands in legal fees were spent in ensuring that every box that needed to be ticked was ticked.
I am equally sure all three companies have statements about how important ESG is to them. I am positive that everyone who makes a career out of advising institutions on ESG will confirm that all 3 companies are ESG compliant.
Investors may be left wondering what is the point of the G in ESG if directors are allowed to act in this way, with a “heads we win, tails you lose” approach. Perhaps if we engaged a £1,000 an hour lawyer, he would be able to correct our ignorance, and explain why this is not corruption, but compliance.
Or we could just rely on the wisdom of Leonard Cohen:
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That's how it goes
Everybody knows
I can't understand why they didn't announce in November that they had received an indicative bid at £18.50 but rejected it. Then they could have likely raised funds at £16/17 rather than £11.50. It just doesn't seem right to reject a bid and then raise money the next day at a huge discount to that bid. If the company's shares were worth more than £18.50, why were they happy to create more and sell them at £11.50?
Brilliant commentary.