Independent Experts, the specialists who adjudicate on
whether takeover offers are “fair and reasonable”, must have thick skins. Expert assessments of hostile offers
invariably attract criticism from the bidder, and financial journalists are
also quick to sink the boot in – Michael West in The Australian routinely
refers to them as “dependent experts” due to the frequency with which the
expert’s valuation mirrors the perspective of the board that commissioned the
report.

However, even more hurtful than this public criticism would
be the humiliation of having the market totally disregard your valuation – a
situation recently faced by Deloitte Corporate Finance in its valuation of
industrial automation systems company Citect.

On 19 October 2005
Citect announced that it had agreed a transaction under which Schneider
Electric would acquire the company for $1.55 per share. Within a few weeks the Deloitte Independent
Expert’s Report was released – arriving at a valuation range of $1.39 to
$1.76. The methodology used by Deloitte
involved an assessment of the maintainable earnings of Citect, with a
capitalisation multiple then applied to those earnings.

After a counter-offer emerged, a battle for control unfolded
which ultimately saw control pass at $2.20 per share – 25% above the top end of
the “expert’s” valuation range.
Discussions with people close to the transaction suggest that Deloitte
fell well short when assessing the maintainable earnings that an acquirer of
Citect could expect to generate once a focused management strategy was
employed.

Shareholders in other companies that are the subject of
“friendly” offers would do well to keep the Citect experience in mind when
considering the merits of an offer – while there is rarely much press comment
on the merits of these transactions (particularly for smaller companies) it is
possible for a Board to unknowingly recommend a transaction that does not
represent full value, and equally possible for the Independent Expert’s view to
be imperfect.

This week Member Insight has reviewed Tribeca, a provider of
professional education services, in light of a friendly acquisition proposal
received from Kaplan (a US-based education company). While it is early days for the Tribeca deal,
the potential for it to emerge as Citect Mark II appears strong. Crikey readers interested in reading our
review of Tribeca should email [email protected].

Peter Fray

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