Forum Archive Index - January 2000

[Phil Eriksen <phil@acepay.co.nz>]

> People are probably excessively worried about gearing in the aftermath of
> 1987 in NZ; if they have made good strategic profitable investments then
> the increased gearing to 66% (which doesn't seem dangerous to me) will
> increase their profits more than statically sitting on a 30% gearing going
> nowhere. In any case large overseas bankers wouldn't have lent the money if
> they didn't think it was a good idea and there would have been noises about
> breaching covenants and insufficient interest cover and forced sale of
> assets if there was a problem.

I fail to see the logic in many of the comments i've seen, heard and
read regarding Nufarm.  Sure, they borrow money to acquire companies. 
However, they have a track record of acquiring businesses at a lower p/e
than their own, and then integrating them adequately.  I am baffled when
people who wouldn't buy a stock like Nufarm, which had taken on debt to
acquire profitable companies, but will then turn around and buy the
average tech stock.  Many of these companies have no debt, granted, but
they are continually issuing shares to pay for their acquisitions.  I
doubt some investors in these companies even realise that (a) if stock
is issued to pay for an acquisition, the pie gets bigger, but your piece
gets smaller (b) when a company issues shares to acquire a company, it
may announce the transaction as a "buy", but it is really a sale
(sometimes at a discounted price). Your directors are selling a
percentage in your company, for a 100% interest in another company.  

All up, if a company has the cashflow to service debt, has a track
record of profit growth, and is not over-extending itself, i'd much
rather see a company pay cash than issue shares, and if that cash is
borrowed, so be it.

 
> P.S. Good on ya Phil, keep it going, treat yourself to a decent meal.
> Wasn't it great to see David Zwartz score that beauty over Contact, small
> shareholders have been dreaming of that sort of coup for 10 years.
> As for seeing an Australian Nuf executive caught with a sheep in Oz it
> would serve the ratbag right for delisting from NZ.

I have mixed feelings about what happened with Contact actually.  Sure,
David Zwartz scored big brownie points over the Directors, and i'm sure
the crowd clapped and cheered.  However, the Directors will bump up
their fees next year, probably to an even higher level than they were
proposing.  That's not much of a victory, for anyone.  In my eyes,
"coup" is a word I associate with military takeovers and the suchlike. 
If you have shares in a company where it almost feels like its
shareholders vs directors, the directors are ignoring their employers
(you), the shareholders feel the need to score a "coup", surely the
*real* answer is jump to a ship where the captains and the passengers
are both sailing to the same destination?

At the end of the day, if you are a minority shareholder, you cannot
out-vote any proposal the company makes.  A win on a technicality is
still a win against the directors, but shucks, thats not what the games
about.  It's about investing in the companies that can grow their
business (note : business, not "grow their share price, for a while"). 
If you feel the Directors are not on your side, I favour shutting up and
voting in the only way that could actually make a difference to your
wealth - with your feet.

Cheers,
Phil

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