The latest NZX data on takeovers and Initial Public Offerings (IPOs) clearly demonstrates that New Zealand needs more business people with the determination and stamina to build successful long-term companies.
There is a great deal of talk about our capacity to make almost anything out of a piece of number eight fencing wire, but the inability to create large and successful companies has negative implications for wealth creation, in terms of ownership and employee remuneration, and the domestic economy.
As the accompanying table shows, the NZX has had only 12 IPOs since the end of 2004 compared with 17 completed takeovers. These figures do not include a near successful offer for Metlifecare and unfinished bids for CanWest MediaWorks and Tourism Holdings.
The NZX is out of line with most of the world’s stock exchanges in terms of the takeover-to-IPO ratio. Since the beginning of 2005 there have been 5166 new listings on the world’s main exchanges compared with only 3117 delistings, whereas the NZX has been the opposite way round.
In monetary terms the figures are even more dramatic. The total market value of the 17 NZX companies acquired since January 2005 is $12,296 million compared with just $3026 million for the 12 IPO companies. This data suggests that only a limited number of New Zealand business people want to list and grow their companies.
The statistics also indicate that New Zealanders do not see NZX companies as long-term investments as they are quick to accept takeover offers.
A number of other figures confirm these observations:
* The NZX had 0.45 per cent of the world’s listed companies at the end of 2004 yet only 0.29 per cent of the new IPOs in 2005 and 2006. By comparison the ASX had 4.28 per cent of world listings in December 2004 and an amazing 473 new IPOs, or 9.16 per cent of the world total, in the following two years.
* The total amount of capital raised through IPOs in New Zealand in 2005 and 2006 represented only 0.11 per cent of the world total, whereas the ASX accounted for 5.57 per cent.
* The average capital raised per IPO throughout the world in 2005 and 2006 was US$107.5 million ($143 million). The average in New Zealand was US$40.5 million and in Australia US$65.4 million.
There are a number of reasons New Zealand business people are reluctant to list, maintain ownership and build great organisations. These include a lack of confidence and ambition, an aversion to risk, the stranglehold of the Australian-owned banks over the economy, a shortage of risk capital and last, but not least, some dreadful macroeconomic policies including this week’s interest rate hike by Reserve Bank Governor Alan Bollard.
Business and investment people have far more confidence and ambition in most other countries, particularly across the Tasman. The Australian business and investment community is extremely confident, determined to grow and maintain ownership of its assets.
This is reflected by recent rejections of takeover bids for Qantas and APN News & Media and the country’s trading bank ownership rules.
Australian business leaders are confident that they can create shareholder value and are determined to be the main beneficiaries of this value creation.
Contrast this with the recent statement by Tourism Holdings chairman Keith Smith that the takeover offer from MFS Living & Leisure “is the most value-creating option available to shareholders”.
A confident and visionary board would not have made this statement, particularly as Tourism Holdings operates in a fast growing sector.
In the 1970s and 1980s most New Zealand companies hired investment banks when they received takeover offers and adopted vigorous defensive policies. This is still the norm overseas but New Zealand boards are increasingly dominated by professional practitioners who are more concerned with process and risk avoidance.
It is a long time since a New Zealand target company has mailed their shareholders with a document containing a huge NO on the front cover and placed newspaper advertisements advising investors not to accept a bid.
The domestic business and investment community is relatively risk-averse for a number of reasons, including the aftermath of the 1987 sharemarket crash and unsuccessful foreign investments by Telecom, Air New Zealand, The Warehouse, Eric Watson’s PRG Group and others.
The recent decision by ING Property Trust to abandon its Japanese investment plans after shareholder objections is another example of this risk aversion.
This is unfortunate because a large number of companies including Fletcher Building, Michael Hill International, Fisher & Paykel Appliances and Pumpkin Patch have been successful overseas.
The negative impact of the Australian-owned banks should not be underestimated and the sale of ASB Bank, Bank of New Zealand and a minority stake in Banking Group (New Zealand) ranks as our second worst business decision over the past few decades.
The worst, by a long shot, was Robert Muldoon’s termination of the previous Labour Government’s superannuation scheme after he was elected Prime Minister in 1975.
The Australian-owned banks have two clear objectives in New Zealand; they want to minimise their equity investment and maximise their earnings. To achieve these objectives they lend aggressively against residential mortgages, which enables them to have less capital invested in this country under the Basel 1 international agreement. As a result the major Australian banks have more than half their New Zealand assets in residential mortgages compared with a third in Australia.
This means that it is extremely difficult for small New Zealand businesses to obtain bank loans and, if they do, it is usually secured against the owners’ residential property. As a consequence most small businesses are risk-averse as the owners may lose their homes if something goes wrong.
These onerous banking requirements, and the country’s shortage of risk capital, means that most businesses adopt a low-risk strategy from day one. Unfortunately most of them are unable to shake off this embedded low-risk approach even when they become successful. This week’s decision by the Reserve Bank to raise the Official Cash Rate from 7.75 per cent to 8 per cent clearly demonstrates that economic policy makers in Wellington have no vision and are stuck in a doctrinal time-warp.
They must flagellate themselves with faded copies of Milton Friedman’s economic treatises before shuffling off to work each day.
It is clearly ridiculous to raise interest rates, push up the NZ dollar and put exporters under stress when this is supposed to be Export Year.
It is also ridiculous to increase rates because international dairy prices are rising. Would the Australian Reserve Bank raise its rates because of firmer international iron ore and coal prices?
Inflation is a concern but the determination to keep it in check at the expense of all areas of the economy is crazy, particularly as there are alternative policies to cool the overheated residential property market. The aggressive interest rate approach is also ill-conceived because inflation is partly due to capacity shortages and high interest rates will discourage companies from investing in new capacity.
Inflation was New Zealand’s bogeyman in the 1980s but the main concern now is a paucity of large companies that create exports, high-paying jobs, exciting careers and shareholder wealth. Economic policy should place far more emphasis on encouraging the creation and development of these organisations.
NZX: Takeovers far outweigh IPOs
|Initial Public Offerings|
|Company||Value ($m)||Company||Value ($m)|
|2005||Williams & Kettle||98||Jason Travel Media||8|
|67||Allied Work Force||39|
|Westpac (NZ) Investments||1,146|
|Ports of Auckland||844|
|2006||Carter Holt Harvey||3,586||Delegat’s Group||140|
|Waste Management||875||Viking Capital||13|
|PRG Group||76||Glass Earth||32|
|Mike Pero Mortgages||26||Kermadec Property||61|
|2007||Southern Capital||139||L&M Petroleum||20|
|Trans Tasman Properties||91||Xero Live||55|