Interesting to look back and review the historical account:
Read it, then re-read it and view things today through the prism of the
Chairman of the Board also being a Senior advisor to KKR, one of the worlds largest private equity funds, the original
.
Did Qantas chief bale out on real job?
ONE of the top Qantas executives, John Borghetti, has come out with an extraordinary and highly troubling statement.
After an American Chamber of Commerce in Australia lunch on Tuesday, executive general manager Borghetti was quoted as saying Qantas CEO Geoff Dixon had been forced to "abandon" his day job while working on the failed takeover bid for the airline.
"Senior management ... (including) Geoff, Peter (Gregg, Qantas CFO), me ... a lot of time was taken up with this thing.
"It went about six months. You couldn't get your job done. You had to sort of abandon it."
Other executives, Borghetti added, "carried the company through" the period.
Now is this the Geoff Dixon who was paid a multi-million dollar salary to run Qantas? Or was this the Dixon who was part of the takeover team trying to buy Qantas at what became clear was a bargain basement price?
Either way there seems to be a difficulty, if what Borghetti was asserting is correct. And it demonstrates the very serious issues raised by these buyouts in which top management participate.
At a very simple level, a shareholder is entitled to presume that executives who are paid big salaries actually "do" their "day jobs".
Now obviously in multi-billion dollar highly complex takeovers, executives -- and especially the CEO and CFO -- are going to be drawn into supplying information, and having discussions with, the bidders.
As they are acting in the best interests of shareholders, that in a sense becomes their "day job". Borghetti's comment would be unremarkable. In an arms' length takeover.
But in this context who are Dixon and Gregg "working for"? In a perfect world, they could work for both. The shareholders and the bidders.
We do not live in a perfect world. Indeed the board of Qantas recognised the (obvious) conflict of interest; and established protocols so that Dixon and Gregg took no part in discussing the bid as directors.
Rather than solve the problem it exacerbated it; and showed all too clearly the unacceptable face of these management-involved buyouts.
First, surely the protocols should have gone deeper. That Dixon and Gregg could not help the bidder in the bidding process; in a real sense, help themselves.
That not only were they handsomely paid to "do their day job" -- run Qantas; but in the context of the takeover that is exactly all they should have done to avoid any conflict.
But secondly and worse, the board "inviting them out" of their two responsibilities as directors and the company's top executives, actually deprived shareholders of their most important resource in the takeover context.
Yes, governance "says" that's how you resolve the conflict. But who knows most about the company's real-time performance and the dynamics of its value going forward?
If it's not first the CEO and then the CFO, I don't know who. Yet their lips were apparently sealed. At least so far as guiding shareholders was concerned.
This makes even more critical an accounting for Qantas's utter failure to keep shareholders informed of the company's dramatically improved operating performance through the takeover period.
As discussed last week, chairman Margaret Jackson only grudgingly disclosed in mid-March that 2006-07 profit was likely to be slightly better than the 30-40 per cent increase foreshadowed at the beginning of February with the release of the interim results.
The mid-March update said it would be "towards the upper end of the range". That is actually a very marginal uplift. From "30 to 40 per cent", to "towards the 40 per cent".
In fact the actual increase came in over 60 per cent, a very, very significant uplift. And at no stage, through the offer's close in early May and indeed through the end of the financial year, did Qantas revise its guidance.
Let's throw two other matters into the pot that arise in the Qantas context but have relevance to LBOs (leveraged buyouts) and takeovers generally.
It is suggested that Qantas's advisers, global investment bank UBS and then-boutique investment bank Carnegie Wylie, were to share a $96 million success fee.
For what? A price for Qantas that turned out to be far too low? Or for forcing the bidders to pay an extra 10c per Qantas share in the negotiating phase?
If the latter, getting an extra $200 million for Qantas shareholders got them $96 million. You'd have to say, an extraordinarily generous fee.
I can't assert for certain that sum was correct. But some success fee would have been payable. They always are and $96 million in an $11 billion takeover would not have been out of the ballpark.
It would have been if it was the extra $200 million that got it.
So was the potential fee disclosed in the Qantas target statement? No, they never are. Indeed, there is no reference to any fee being paid to UBS and/or Carnegie Wylie.
Now of course both would have been paid by the bidder -- APA, Airline Partners Australia. The success fee as well as the higher bid price.
And perhaps paid more than happily, if the second suggestion is true. That their working as-is valuation of Qantas was $7 a share as against the $5.45 (actually) offered.
Now I have no doubt that Jackson and her fellow directors thought they were acting in the best interests of shareholders. She was consumed by the fear the share price would plummet if the takeover went away. It of course did, go away, and it didn't, plummet.
Although she might ponder whether the company's previously low share price might have in part been due to Dixon's ceaseless talking down of the airline's supposedly precarious financial position, as an IR bargaining tactic, used especially so successfully in starting Jetstar.
Now Dixon and Gregg are honourable men. As Jackson noted in a special statement in late February, Dixon announced he would gift the entire (up to) $60 million incentive payment to him by the bidding group to a charitable trust.
Springing to his defence is understandable. Less so is that she could find the time to defend her CEO, but not to keep shareholders informed on the company's surging profitability.
Further, if we make the reasonable assumption that Dixon's charitable gift would attract a tax deduction, he might have got $28million back from taxpayers.
Bottom line is one word: transparency. LBOs are part of market practice. We might wish it otherwise. Existing governance structures are inadequate.
Why weren't Dixon and Gregg confined to their "day jobs"? Helping the bidder on behalf of helping shareholders should have been unacceptable.
And why didn't Qantas institutionally bend over backwards to keep shareholders informed on its improving profitability -- something presumably known to senior executives.
More broadly, this whole murky business of "success fees" raises a similar issue. Whom exactly are advisers working for? Again, the starting point is to disclose them and their terms.
Did Qantas chief bale out on real job?, September 01,
2007