News Corp commentators lecturing Fairfax on governance issues would not normally be taken very seriously, but the duelling positions of Terry McCrann and John Durie on the situation with Fairfax executive Antony Catalano makes for interesting reading.
Catalano is CEO of Fairfax’s booming Domain property business and is being quite open about having spoken to private equity suitor TPG.
Durie, who is paid almost $500,000 a year to write for The Australian, reckons Catalano should be stood down as a result, and Fairfax is breaking all the corporate governance rules.
McCrann loves nothing more than to laud it over rival columnists and point out their mistakes, and he gave Durie the full treatment today, declaring that Catalano is the most important asset at Fairfax and talking to TPG was nothing more than sensible due diligence on their part.
The bigger issue here is the question of who can talk to who in a change-of-control situation, and who gets access to what information?
Now that the Fairfax board has agreed to open their books to both TPG and rival US private equity firm Hellman & Friedman, Catalano and other senior Fairfax executives arguably should be available to talk to both firms, which should get access to the same information.
However, there is nothing stopping either firm offering Catalano a retention arrangement to run the business under their ownership and Catalano is perfectly free to withhold his future services to either firm, subject to his existing contract.
In this context, there’s a strong argument that Catalano’s full existing contract is a material issue, which should be disclosed to the ASX.
As a top 20 shareholder in Fairfax, Catalano has an incentive to maximise any takeover price but given his key man status if he was proposing to take the money and run, the takeover price would be lower.
Even worse, if there were a risk Catalano would defect to rival REA Group or even set up a new start-up in the property advertising space, Fairfax shares would tank because Catalano has a clear record of doing that before, with great success.
While McCrann over-hyped his language today about the importance of Catalano — no single executive is worth hundreds of millions courtesy of their networks and tactical expertise — he does have a track record of leaving Fairfax and taking big chunks of value with him by setting up in competition. There’s no other equivalent executive in the Australian public company space at the moment, although the loss of a super star fund manager can cause large falls in a share price.
Another issue for the private equity firms to consider is whether any of the existing Fairfax directors retain a role going forward. Social issues — i.e. who gets the top jobs — are often a vital determinant in takeover completion. Oftentimes, a board won’t recommend a bid to shareholders unless some of them keep their job.
Many bidders overpay in takeovers, and that is often the premium you pay for the right to sack the whole board after they’ve endorsed your offer.
Give the chairman and CEO of your target a job and sometimes the price will come down.
There are many examples of takeovers where all the target directors and the CEO were let go, including with many private equity bids. Wesfarmers buying Coles, Rio Tinto buying North, Toll’s purchase of Patrick, and PBL’s purchase of Crown are just some that spring to mind.
However, as the following list demonstrates, it is also quite common for some of the directors to retain a gig with the acquiring company.
Ten examples of takeovers where some directors kept their jobs
Axa Asia Pacific Holdings: When the French parent and AMP carved up the ASX-listed business in 2001, CEO Andy Penn lost his job. He’s now a successful Telstra CEO and arguably should have been retained by AMP. The only Axa directors to join the AMP board were chairman Rick Allert and Patty Akopiantz.
Bank of Melbourne: Westpac bought the business in 1995 and CEO Chris Stewart joined the Westpac board.
CRA: The dual-listed company merger with RTZ in 1995 saw all of the directors of both companies initially retain their jobs but the CRA and Australian influence steadily waned over the years.
Promina: Suncorp paid an excessive $8 billion in 2007 and three Promina directors made the trip up north: Leo Tutt, Ewoud Kulk and Geoffrey Ricketts. CEO Mike Wilkins lost his job and ended doing well as CEO of rival Insurance Australia Group.
Rural Press: Taken over by Fairfax in 2007 in an all-share offer, which led two directors, John B Fairfax and his son Nicholas Fairfax, to join the Fairfax Media board. Rural Press CEO Brian McCarthy came across as deputy CEO, before later assuming the top job.
SFE Corp: Entitled to just two seats on the ASX board after the merger but investors then insisted that SFE CEO Robert Elstone run the combined business so Tony D’Aloisio was punted from ASX with a $7 million payout. SFE chair Rick Holliday-Smith and fellow director Peter Warne got the nod whilst the remaining SFE directors lost their jobs.
Smorgon Steel: Merged with Onesteel in 2007 and only two directors, Graham Smorgon and Laurie Cox, joined the expanded OneSteel board.
St George Bank: An agreed merger with Westpac in 2008. Chairman Paul Curtis joined Westpac as deputy chair and Graeme Reaney took the second spot offered. This left Richard England, Paul Isherwood, Peter Hawkins, Linda Nicholls, Terry Davis and Rick Holliday-Smith out of a job.
Star City Casino: When Tabcorp bought the business in 1999, only chairman Dick Warburton migrated across to the Tabcorp board.
Zinifex: whilst the combination with Oxiana Resources to create Oz Minerals was billed as a “merger of equals”, it was nominally Oxiana, which did the buying. All the directors kept their job but Zinifex’s Andrew Michelmore beat Owen Hegarty for the CEO’s post and the quid pro quo was that Oxiana’s Barry Cusask became chair of the enlarged company, which almost collapsed a few months later.