Embracing the interloper sometimes best way

WAVING the white flag and accepting that shareholders would be better served by soliciting a takeover offer is not easy for some boards and management teams to do.

WAVING the white flag and accepting that shareholders would be better served by soliciting a takeover offer is not easy for some boards and management teams to do.

But for small and emerging companies, the current calendar year looks like crunch time and several have already elected to take the cash and depart the ASX.

One of the key issues smaller companies have had to face up to is the failure of trading volumes to recover following the global financial crisis. While the value of trade in ASX's top 20 stocks remained more or less flat since peaking in 2008, the value of trade in the rest of the market has retreated to 2006 levels.

For companies not ranked in the top 100, the dollar value of trade in 2011 was still close to 50 per cent lower than that achieved in 2007. Companies with a great spread of institutional and retail shareholders have navigated their way without any major impact. But companies faced with illiquidity because of block shareholdings or a lack of institutional interest have had to ask whether they should remain listed or consider the three major alternatives: becoming an acquisition target of larger peers, merging with similar-size peers or pursuing a management buyout and delisting.

Formerly sleepy mining equipment maker Ludowici was jolted into life in January with a board-supported takeover offer followed by a hostile tussle between two suitors. Shareholders are now 21 per cent better off than they were at Christmas, based on the current market price. The winning bidder, Danish group FLSmidth, must now wait until July, with shareholder votes and court hearings required, to implement the $325 million takeover.

ATM network operator Customers has struggled with investor sentiment for the past few years as earnings struggled to live up to the hype generated after its profitability surged when regulatory change allowed it to more than double its transaction fees. But its shares are up 38 per cent over the past months after its board received a $173 million cash takeover offer from Canada's DirectCash and recommended it to shareholders. This takeover is also scheduled to be implemented in July.

In both the Ludowici and Customers cases, the acquirer is a larger offshore player with an existing business it aims to expand.

FLSmidth's strategy is to become a market leader in all major minerals processing segments and it has highlighted coal, copper and iron ore as three priorities. Ludowici's products offering allowed FLSmidth to complete its coal offering and improve its copper and iron ore offerings, as well as expanding its exposure to the Australian minerals sector, from which Ludowici generates about two thirds of its sales.

DirectCash already had an existing Australian business focused on pre-paid cash cards and a deep understanding of the ATM industry, representing its core operation in Canada. DirectCash saw a chance to take a leading position in the Australian market, a market it considered to have greater scope for growth than its home market.

It is likely that over the rest of the calendar year we will see more interest from offshore businesses with access to cash. They are likely to seek out smaller businesses to enhance growth prospects in a soft macroeconomic climate globally. Australia's position relative to Asia and its exposure to both hard and soft commodities, and its legal and political systems, makes it a desirable destination.

But selling to an international player is not going to be the answer for everyone.

Packaging business National Can Industries elected to take one of the alternative paths in late March, with the controlling shareholders looking to take it private in a deal valuing the business at $123 million. The Tyrrell family had always retained a strong position, with a 50 per cent stake in the business but were counterbalanced by the presence of Raphael Geminder's investment vehicle Bennamon, which had 20 per cent. The result of the decision is a 76 per cent return to shareholders over the past month, based on market prices.

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