Opinionista Sasha Planting 24 March 2021

The Adapt IT saga: Size doesn’t always matter, but small shareholders sometimes do

Mergers and acquisitions are messy affairs, but even more so when the target is unwilling. Usually, they attract a lot of attention – the attempted buyouts of Adcock Ingram by, first, Chilean firm CFR Pharmaceuticals and then by Bidvest; and of Murray & Roberts by German investment firm Aton come to mind. For various reasons hostile takeovers seldom succeed, although Bidvest succeeded through sheer determination: buying up 35% of the shares on the open market gives you a position of strength.

First published in the Daily Maverick 168 weekly newspaper.

The attempt by telecommunications company Huge Group to acquire software firm Adapt IT is also interesting, although initially it did not garner the same degree of public interest. That’s possibly because both companies are small caps with limited institutional shareholding. In the case of Huge, institutions own about 50% of the shares, whereas the institutional shareholding of Adapt IT is even lower, at less than 20%.

It is precisely this that makes this transaction interesting. Adapt IT shareholders need to decide whether to accept an offer of 0.9 Huge shares, per one Adapt IT share. Typically, the outcome of these deals is swayed by one or two large institutional investors and almost never by retail investors who are usually wagged by the dog. That’s because usually 60% or more of a company’s shares not held by management and staff are held by institutions. In Adapt IT’s case, however, it’s a little different in that 45% of its shares are held by retail investors – the likes of you and me. Management holds 17% and former vendors hold 15% to 20%. What is also interesting about this deal is that it’s not an all-or-nothing across-the-threshold transaction. Huge has said that, although it would like to acquire 100% of the software and services firm, it would be satisfied with less, ideally enough to take up a seat on the Adapt IT board. That idea probably gives the Adapt IT team, headed by CEO Sbu Shabalala, the cold shivers.

This makes the opinions of retail investors suddenly important. And it makes the current kerfuffle around the legality of the Huge Group’s share buyback programme important.

An Adapt IT shareholder in the US, Glacier Pass Management, which holds 1.5% of the company, has raised concerns about the nature of this programme, which has accelerated in recent months.

The Huge Group is highly illiquid – five shareholder representatives account for at least 80% of the shares. Accelerated buying of an illiquid share has one result: it pushes the share price up. And so Huge’s share price rose 40% from R4.30 on 30 November 2020 to R6.00 on 13 January 2021. Two weeks later, on 27 January 2021, Huge made its offer for Adapt IT, using a R6.13/share reference price, a 16-month high. There is no denying that this makes the offer look more attractive than it would have been at R4.30.

The JSE has specific rules about when and how a company buys back its own shares.

At issue is not so much the legality of the buyback programme, but whether in the process the price was manipulated. Glacier argues that the share price has been artificially inflated and will fall once the buying stops.

It has laid a complaint with the Financial Sector Conduct Authority (FSCA), accusing Huge of violating Section 80 of the Financial Markets Act, which deals with “abusive squeezes” and “market cornering”. The FSCA is investigating and the regulatory wheels will no doubt turn, but whether they will turn before shareholders need to cast their vote remains to be seen.

The offer opens on 6 April and will be open for 30 days. In that time Huge will post its offer circular, the independent review on the fairness of the offer will be published, following which the board of Adapt IT will post its response circular.

Huge CEO James Herbst has gone to great lengths to explain the buyback programme, and this week the company issued a notice on the JSE’s news service, detailing how many shares it had bought, and when it bought them. He has also denied the allegation of market manipulation. Instead, he contends that Huge Group’s share price is trading below net asset value, not because the market is not interested in Huge’s investment story, but because the concentration in shareholding means there is a lack of sellers, limiting price discovery. In fact, he says, part of the motivation for the share-for-share transaction (instead of a cash offer) is to improve Huge’s liquidity. Shareholders in Adapt IT who accept the offer will become shareholders of Huge Group. Fewer Adapt IT shareholders means its liquidity will decline, whereas the liquidity in Huge Group will go up. It seems the benefits of the deal to Huge are many.

Adapt IT shareholders will need to buy into the notion that size counts – the two companies will create more value together than alone. Shareholders will then need to decide whether there is value in swapping their shares for Huge shares. In this case, their votes truly count. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.

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