Small companies going private
Posted on January 6, 2009 by Richard Beddard
Filed Under Companies, Investing |
On not falling in love with powerful women
I was dismayed by words attributed to Lorna Moran in the Financial Times yesterday. Not what she said, which was already apparent to many of the former shareholders in Northern Recruitment, the company she founded. Being reminded of events last month was enough to dismay me, and perhaps, the fact that she, and the FT, should inadvertently rub our noses in it.
Ms Moran, who owned most of Northern Recruitment, took advantage of a terrifying drop in Northern Recruitment’s share price to make on offer for the rest of the company. In effect, she was squeezing out smaller shareholders who were faced with two choices; accept her offer or own a stake in a company she would take private with no guarantee of ever realising it.
Ms Moran MBE is an astute businesswoman, more astute as a businesswoman than I am as an investor it turns out. “For me there was no downside,” she says in the article. I had come to the same view, buying shares in the company in the expectation of recovery. It was profitable, had no debt, cash on the balance sheet and, I thought, it would withstand a recession and come out of it stronger.
Value investors acknowledge that buying shares in companies means suffering pain in the short-term. Rarely do share prices turn around and head upwards the day after you buy them. The payoff is, over two to five years, say, you should do very nicely. I won’t, as Ms Moran forced me to sell at a loss and of course, gets all of the upside (or most of it, there may be minority shareholders).
Lessons for me:
- Be wary of buying stakes in smaller companies where a majority shareholder has control.
- Be doubly wary if the company is aggressively buying back shares as Northern Recruitment was last year. Of course, it might make sense if the shares are cheap, but it also increases the control of major shareholders and reduces the number of smaller ones they need to squeeze out.
And a lesson for Ms Moran:
Not really a lesson, I just wanted the last word. Part of Ms Moran’s justification for taking Northern Recruitment private was because, she says: “There is no market for small-cap businesses and no interest out there.”
If you look at the ridiculously low valuation investors were putting on Northern Recruitment, you’d have to agree. Taking the company private was a no-brainer. I just wish I’d realised before she did.
However, the fact that NRG delisted so easily hardly boosts confidence in listed smaller companies. If, as the FT argues, more are to follow, we’re going to have to be very careful.
OK, it’s another lesson for me.
Comments
One Response to “Small companies going private”
Leave a Reply
[...] closer to being able to squeeze out minority investors (should they want to). Before Lorna Moran took Northern Recruitment private, the company was buying back shares – not that I am scarred by that experience or [...]