The first real corporate action since Helen Coonan’s atrocious cross-media laws passed has occurred this morning, with Fairfax and Rural Press announcing that they will merge to create “Australasia’s largest integrated metropolitan, regional and rural print and digital media business”.

The market is not overly enamored with the deal, with Fairfax shares dropping 13 cents this morning to $5.08. Rural Press shares leapt almost 16% to $13.55 – almost exactly the bid price.

The deal looks to be a boon for Rural Press shareholders, who have seen their investment increase by more than 300% since 1998 under the watchful eye of John B Fairfax. Since listing in 1989, Rural Press has increased its market capitalisation from $200 million to $2.3 billion. Those with good memories will recall Rural Press was the consolation prize that John B and Tim Fairfax received after Warwick Fairfax bought out family interests when he took Fairfax private in 1987 (with the help of “Last Resort” Laurie Connell).

The decision by Fairfax to merge with Rural Press is more perplexing. Industry sources claim that Fairfax would be worth around $5.00 per share if it were to be split up, but closer to $3.75 per share if it were to continue as a going concern. The decision to merge with Rural Press and create a newspaper business with a market capitalisation of more than $7 billion would therefore not appear to be in the best interests of Fairfax shareholders.

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It seems that Fairfax is using a variation of the old Pac-Man defence mixed with a poison pill – that is, take over another company to make you look less attractive to potential acquirers (the real Pac-Man defence is where the target starts buying shares in the predator).

Using a takeover defence against a potential takeover is great for current management who get to keep their jobs (and probably earn a bit more on the grounds that they are managing a bigger company), but not so great for shareholders. The Pac-Man defence was coined by investment banking legend Bruce Wasserstein after US-aerospace company Martin Marietta successfully fended off a hostile takeover from Bendix in 1982 by acquiring Bendix shares.

Unfortunately for Fairfax shareholders, they have no say in the merger proceedings, even though arguably the deal is radically changing the scale of Fairfax’s business (and removing any takeover premium from Fairfax’s share price). The Fairfax-Rural Press merger is being conducted by way of scheme of arrangement – that means that it only needs to be approved by Rural Press shareholders and the Supreme Court of NSW. Importantly, it doesn’t need to be approved by Fairfax shareholders.

Allowing a deal of this size to proceed without Fairfax shareholder approval arguably makes a mockery of the ASX Listing Rules, which merely require a company to “provide full details to the ASX” if it “proposes to make a significant change, either directly or indirectly, to the scale of its activities.” Shareholder approval is only required if the company is seeking to dispose of its main undertaking.

There is an argument to be made that Fairfax CEO David Kirk and Chairman Ron Walker have been appointed to run the company and should be able to undertake whatever corporate moves they feel necessary. However, Fairfax shareholders would rightfully be aggrieved that their company is undertaking an earning dilutive takeover of a fully priced, efficiently run business with little synergistic benefits while at the same time removing a takeover premium from their own share price.