jakethemuss
9th May 2008, 23:38
Cash and crash: how the flying kangaroo sale failed
Author: Ian Verrender
Publication: Sydney Morning Herald (44,Sat 10 May 2008)
Edition: First
Section: Business
Opinion
THEY hugged, they kissed, they smiled for the cameras.
It was a wonderful day for Qantas, Australia's national carrier, as it prepared to fly off into the bold new world of private equity ownership, and the board and management - especially the management - couldn't have been happier
For those of us observing from the sidelines, it all seemed a little odd. Aren't the board and management supposed to fight for the company, to extract the maximum possible from the bidder? After all, aren't they the employees, hired to work on behalf of the shareholders, the owners of the company?
Normally, yes. But this wasn't normal. Qantas management was being dealt into the future spoils. And the board seemed more than happy to let them go along for the ride. It all ended in tears a year ago this week, when Macquarie Bank failed to secure the minimum number of shares by the deadline.
Margaret Jackson, the chairman, quit the board, her reputation shredded, while chief executive Geoff Dixon and his management team went back to work and pretended that nothing had happened.
Jackson had made a series of blunders during the takeover. Rather than stand up for the owners - as she was employed to do - she became ever more shrill in her condemnation of those who were refusing to sell, with a final outburst that labelled those holding out as "mental".
In the past few months, as the anniversary of the collapse has drawn ever closer, the wounds have been reopened.
Jackson got it right, her supporters have claimed. The Qantas share price is now well below the takeover bid price, so shareholders would have been better off selling. Tut, tut. tut.
Wrong, wrong, wrong.
It's a convenient argument for the Margaret Jackson cheer-squad but one with more holes than a sponge.
To begin with, when the bid collapsed, Qantas's share price went through the roof. In fact, it traded well above the offer price for more than six months. And it has taken a global sharemarket meltdown, the worst credit squeeze in history and fuel prices surging way above $US120 a barrel, to bring it down.
Qantas shares now trade around $3.50, well below the $5.45 offer price from the consortium. But after the bid collapsed last May, the share price immediately tracked higher, peaking at $6.06 a fortnight before Christmas. So if shareholders had accepted the offer, they would have denied themselves the opportunity to earn another 50c profit per share.
But there are more serious issues. I'm not sure if anyone has noticed, but Allco Finance, the major partner in the bidding consortium, has all but collapsed.
Even before its high-stakes Qantas gamble, Allco was overloaded with debt and was a disaster waiting to happen. It was bidding $11.5 billion for Qantas: money it didn't have. Allco and its partners were going to borrow the cash and then dump a vast portion of that debt into the flying kangaroo.
Just take a second to think about what has happened in recent months.
There has been a global credit crisis the likes of which hasn't been seen before. Debt is a dirty word and private equity groups have disappeared from the radar. Most are desperately trying to figure out how to survive in a world where banks aren't begging them to take their money.
Allco's collapse would have been more severe if it had pulled off the Qantas deal because of the extra billions it planned to borrow. And the national carrier either would have gone down with it or been severely crippled.
Airlines have a curious place in the national psyche of most countries, especially smaller nations like Australia - and particularly when those airlines are flag-carriers.
There is no way the nation would have stood by and let Qantas collapse. The Government would have been forced to step in with a rescue package, just as the New Zealand Government rescued Air New Zealand a decade ago when Ansett collapsed. As ever, it would have been taxpayers who would have been forced to foot the bill.
The aborted Qantas takeover represented a low point in corporate governance in Australia and the behaviour of boards and management.
The private equity takeover frenzy was nothing but a con. It was a slicker version of the 1980s entrepreneurs boom - which flourished in a similarly easy credit environment - with a twist.
It was slicker because the private equity players, unlike the '80s entrepreneurs, made sure the huge debt they raised didn't bounce back to them. It was all loaded into the companies they were buying.
And the twist was that they made sure they succeeded with low-ball offers for companies by roping in the senior executives, dangling the prospect of huge riches before them.
In the case of Qantas, Geoff Dixon and his senior executives were hopelessly compromised. Qantas's management was involved in a hostile bid for their own company and the board backed them all the way, right to the bitter end.
It's interesting that since the bid collapsed, management has come up with a range of strategies, such as hiving off the frequent-flyer scheme, which will deliver huge profits to Qantas shareholders in the future.
Margaret Jackson should count herself lucky the bid failed.
She may still be smarting from the stinging rebuke she received last May. But better that than be pilloried as the chairman that sent Qantas to the undertaker.
Copyright © Fairfax
Author: Ian Verrender
Publication: Sydney Morning Herald (44,Sat 10 May 2008)
Edition: First
Section: Business
Opinion
THEY hugged, they kissed, they smiled for the cameras.
It was a wonderful day for Qantas, Australia's national carrier, as it prepared to fly off into the bold new world of private equity ownership, and the board and management - especially the management - couldn't have been happier
For those of us observing from the sidelines, it all seemed a little odd. Aren't the board and management supposed to fight for the company, to extract the maximum possible from the bidder? After all, aren't they the employees, hired to work on behalf of the shareholders, the owners of the company?
Normally, yes. But this wasn't normal. Qantas management was being dealt into the future spoils. And the board seemed more than happy to let them go along for the ride. It all ended in tears a year ago this week, when Macquarie Bank failed to secure the minimum number of shares by the deadline.
Margaret Jackson, the chairman, quit the board, her reputation shredded, while chief executive Geoff Dixon and his management team went back to work and pretended that nothing had happened.
Jackson had made a series of blunders during the takeover. Rather than stand up for the owners - as she was employed to do - she became ever more shrill in her condemnation of those who were refusing to sell, with a final outburst that labelled those holding out as "mental".
In the past few months, as the anniversary of the collapse has drawn ever closer, the wounds have been reopened.
Jackson got it right, her supporters have claimed. The Qantas share price is now well below the takeover bid price, so shareholders would have been better off selling. Tut, tut. tut.
Wrong, wrong, wrong.
It's a convenient argument for the Margaret Jackson cheer-squad but one with more holes than a sponge.
To begin with, when the bid collapsed, Qantas's share price went through the roof. In fact, it traded well above the offer price for more than six months. And it has taken a global sharemarket meltdown, the worst credit squeeze in history and fuel prices surging way above $US120 a barrel, to bring it down.
Qantas shares now trade around $3.50, well below the $5.45 offer price from the consortium. But after the bid collapsed last May, the share price immediately tracked higher, peaking at $6.06 a fortnight before Christmas. So if shareholders had accepted the offer, they would have denied themselves the opportunity to earn another 50c profit per share.
But there are more serious issues. I'm not sure if anyone has noticed, but Allco Finance, the major partner in the bidding consortium, has all but collapsed.
Even before its high-stakes Qantas gamble, Allco was overloaded with debt and was a disaster waiting to happen. It was bidding $11.5 billion for Qantas: money it didn't have. Allco and its partners were going to borrow the cash and then dump a vast portion of that debt into the flying kangaroo.
Just take a second to think about what has happened in recent months.
There has been a global credit crisis the likes of which hasn't been seen before. Debt is a dirty word and private equity groups have disappeared from the radar. Most are desperately trying to figure out how to survive in a world where banks aren't begging them to take their money.
Allco's collapse would have been more severe if it had pulled off the Qantas deal because of the extra billions it planned to borrow. And the national carrier either would have gone down with it or been severely crippled.
Airlines have a curious place in the national psyche of most countries, especially smaller nations like Australia - and particularly when those airlines are flag-carriers.
There is no way the nation would have stood by and let Qantas collapse. The Government would have been forced to step in with a rescue package, just as the New Zealand Government rescued Air New Zealand a decade ago when Ansett collapsed. As ever, it would have been taxpayers who would have been forced to foot the bill.
The aborted Qantas takeover represented a low point in corporate governance in Australia and the behaviour of boards and management.
The private equity takeover frenzy was nothing but a con. It was a slicker version of the 1980s entrepreneurs boom - which flourished in a similarly easy credit environment - with a twist.
It was slicker because the private equity players, unlike the '80s entrepreneurs, made sure the huge debt they raised didn't bounce back to them. It was all loaded into the companies they were buying.
And the twist was that they made sure they succeeded with low-ball offers for companies by roping in the senior executives, dangling the prospect of huge riches before them.
In the case of Qantas, Geoff Dixon and his senior executives were hopelessly compromised. Qantas's management was involved in a hostile bid for their own company and the board backed them all the way, right to the bitter end.
It's interesting that since the bid collapsed, management has come up with a range of strategies, such as hiving off the frequent-flyer scheme, which will deliver huge profits to Qantas shareholders in the future.
Margaret Jackson should count herself lucky the bid failed.
She may still be smarting from the stinging rebuke she received last May. But better that than be pilloried as the chairman that sent Qantas to the undertaker.
Copyright © Fairfax