intuitively understanding that managers who have
mentally checked out are unlikely to fight for their
company to remain independent.
Directors don’t necessarily have a good knowl-
edge of how to value businesses. In the absence of
a management advocate, the temptation must have
been to assume that the market price was “right”. A
27% takeover premium would therefore have seemed
a good deal to the board, when it wasn’t.2
Negative factors can be the source
of opportunity
Trade Me’s profit growth was sluggish during our
period of ownership. It also operated in the small,
mature New Zealand market. These two factors
were not negatives but were, in fact, the source of
the buying opportunity.
The company’s investment in staff and product
temporarily depressed net profit growth. And by
temporarily, we mean “over a number of years”.
Seek’s management is fond of pointing out that the
benefits of investment show up in operating metrics
first, revenue second and profit last.
Trade Me was lagging behind its peers in Australia
and elsewhere. The investments were designed to help
it catch up. While premium listing products have been
driving growth at Australian online classified compa-
nies for years, they were quite new in New Zealand.
The small size of the New Zealand market was also
an advantage. Management could review what was
going on elsewhere and copy the best ideas, secure in
the knowledge the New Zealand market was probably
too small for others to bother with.
Companies perceived as low growth but with
unrecognised potential can be excellent buying oppor-Take the
money
and run
The surrender
of the
promising
Trade Me
business
demonstrates
the folly of
a short-term
view
I
f you ever wanted proof that long-term-
focused investors are a tiny minority, con-
sider this. Only 0.7% of votes cast at Trade
Me’s scheme meeting in April were against
the takeover of New Zealand’s dominant
online classifieds site.
What were the other 99.3% thinking? That British
private equity acquirer Apax Partners was somehow
buying a lemon? Greed is a powerful motivator, and
virtually all shareholders apparently believed a 27%
takeover premium was adequate compensation to
discard this wonderful business.
The takeover succeeded, delivering an annualised
return of 15% a year since Trade Me joined our “buy”
list in 2014. That’s quite acceptable, although it could
have been much more if shareholders hadn’t let go
of the business cheaply. But the lessons it offers are
also valuable:1
Directors don’t always understand value
Trade Me was reasonably well managed. However,
during our period of share ownership, senior man-
agement spent significant time employing new staff
and developing products to drive long-term growth.
This investment resulted in weak profit growth and
a sustained underpricing in the stock.
Investments in staff and new products can take
years to show up in profits. In fact, they were only
just starting to pay off as Apax launched its takeover.
For example, premium listing revenue in Trade Me’s
property segment doubled in its final year of listed life.
In our view, the board failed to understand these
business drivers, partly as a result of a management
vacuum. Apax launched its bid after the resignation
of long-serving chief executive Jon Macdonald,STORY
JAMES
GREENHALGHSHARES INTELLIGENT INVESTOR