This article originally appeared in the NZ Herald.
The Shareholders’ Association earned a big bouquet this week for initiating a campaign to dump Rakon director Darren Robinson at next month’s annual meeting.
Robinson is also the technology company’s sales and marketing manager and a member of the founding Robinson family.
Shareholders’ Association chairman John Hawkins wrote that shareholders were “fed up with the Robinson family who own approximately 23 per cent of the shares having a dominant board role. The resignation of two independent directors after relatively short tenures is a pretty clear indication to us that there are serious issues at the top.
“We find it very difficult to understand how the executive in charge of sales could be properly held to account when he sits as a director, as well as being the brother of the managing director and a son of a third director.”
A Rakon shakeup is long overdue as the company’s governance has more in common with the docile companies of four and five decades ago, rather than a dynamic 2010s technology enterprise.
The Robinsons have three of the six board seats, even though they own only 23 per cent of the company, and shareholder value has been destroyed under the stewardship of the two Robinson executive directors.
Family members should either step aside or make a full takeover offer for the company. A successful takeover would allow the Robinsons to run the company as they wish and continue to pay themselves excessive salaries.
Rakon was incorporated in August 1990 and Warren Robinson, his wife Marjorie and their two sons Brent and Darren were appointed directors a year later.
The four Robinsons were the only directors until November 2005, when Bryan Mogridge, Bruce Irvine and Peter Maire joined the board and Marjorie Robinson resigned. Mogridge and Irvine were directors of the controversial Pyne Gould Corporation.
Rakon registered its IPO prospectus on April 13, 2006. The offer included the sale of 35 million shares by the Robinson family to the public at $1.60 each and the sale of 6.25 million new shares at the same price. Thus, the company raised only $10 million of new funds.
The family realised $56m from the sale of shares to the public through the IPO and a further $12m from the sale of shares to Peter Maire and another party.
Maire purchased 16.5 million shares from the Robinsons at 60.5c each compared with the IPO price of $1.60.
All told, the family realised $68m from the sale of shares and retained an additional 44.3 million shares worth $70.9m at the $1.60 IPO price.
Thus, the Robinson family had realised and unrealised value from its Rakon shareholding of $138.9m at the IPO price. This represented a $125.8m gain on the $13.1m of equity they invested in the company between 1991 and 2006.
Rakon listed on the NZX on May 16, 2006 with a hiss and a roar. The shares closed that day at $2.36 – a 47.5 per cent premium over its $1.60 issue price.
By early 2007 the company’s share price had soared above $4 and on February 13 Rakon announced it had raised $60m through the placement of shares to New Zealand and offshore institutions at $4.05 a share.
Two months later the company raised an additional $22m from the public through a Share Purchase Plan (SPP), also at $4.05 a share.
Thus, individuals and fund managers had purchased $148m worth of shares through the IPO, February 2007 placement and SPP.
Rakon’s share price hit an all-time high of $5.80 on May 25, 2007 – 10 days after the company announced its result for the March 2007 year. The result was ahead of the prospectus forecast in terms of revenue and profitability.
The March 2008 year net profit after tax was $10.9m, compared with $10.7m for the previous year, but that did not satisfy investors because Rakon had achieved growth stock status.
Chief executive Brent Robinson remained confident during the Global Financial Crisis, even though it was clear the company was not going to meet its growth expectations. Its share price fell steadily, while the remuneration of the two Robinson executive directors went in the opposite direction.
The company’s share price went under $1 for the first time in early 2009 but bounced back to just over $1.50 by mid-year. It fell below $1 again in mid-2011 and has continued to slide since. Recent share trading volumes indicate that investors have lost interest in the stock.
One of its major problems was a disastrous investment in China which resulted in a loss of $63.8m when it sold its 80 per cent stake in Rakon Crystal (Chengdu) in October 2013. Rakon called this a “successful sale”.
Meanwhile, the Robinsons continued to to be paid extremely well.
The company’s sales fell from $131.4m in the March 2015 year to $112.7m in the latest year yet Darren Robinson, who is the sales and marketing manager, had a remuneration increase from $600,390 to $734,605.
Managing director Brent Robinson’s remuneration leapt from $732,484 to $907,892 over the same period even though the company went from a net profit after tax of $3.2m for the March 2015 year to a loss of $1.7m for the latest period.
These are extraordinary remuneration figures for executives of a company with a sharemarket value of only $40m and a very poor record under their stewardship.
Executives of similar sized companies, in terms of sharemarket value, receive much lower remuneration. For example:
- The chief executive of Serko, which has a sharemarket value of $49m, is paid $280,000.
- The figures for Fliway Group are $43m and $123,000.
- Smartpay’s market value is $39m and the CEO’s remuneration A$444,000 ( $472,000).
- Moa’s figures are $38m and $250,000.
The next highest paid executives in these four companies also receive substantially less than Darren Robinson, Rakon’s sales and marketing manager.
The Shareholders’ Association is particularly concerned about the Robinsons’ remuneration. Chairman John Hawkins said: “The final straw was the decision to increase the pay of Brent and Darren Robinson by about 23 per cent last year. At its 2012 AGM, the company promised to freeze director and executive director pay until EBITDA of $25m had been achieved, something that has not happened (EBITDA was below $10m for the March 2016 year).”
Hawkins went on to say: “In our view, a freeze is a freeze and Rakon’s latest plunge back into a loss showed that there was no reason for a thaw.”
The main issue with Rakon is not its poor performance, it is the way it has dealt with it.
The board seems reluctant to embrace change, even though it is absolutely clear that Rakon needs major changes at the top.
The three Robinsons have been on the board for 25 years and the independent directors for 11 years each. The Robinsons need to step aside and let someone else run the company. If they believe that they are the best people to govern the company then they should make a takeover offer using some of the $68m they realised from the 2006 IPO process. They should be able to make an offer of around 40c a share and, if successful, the Robinsons can run the company however they wish and pay themselves whatever they want.
The Shareholders’ Association will be writing to all of the 5000-plus Rakon shareholders seeking their proxy support for the September 16 meeting. This may be shareholders’ last chance to slow and check Rakon’s steady demise and inject some energy and commercial management expertise into the company.
Disclosure of interest: Milford Funds Ltd holds Rakon shares on behalf of clients.
Disclaimer: This article originally appeared in the NZ Herald and is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so should not be viewed as investment or financial advice. If you require financial advice we recommend that you speak to an Authorised Financial Adviser.