Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 559

Board games: two hidden risks for stock pickers?

Simon Mawhinney has experienced a takeover or two in his time. Allan Gray, the investment firm he joined as an analyst in 2006 and now heads up, has built its track record on taking a contrarian stance and buying cheap equities. Because low valuations often attract buyers, takeouts are a common exit for Allan Gray investments whether they like it or not.

Unfortunately, Mawhinney often lacks confidence in those deciding whether a takeover should happen, and at what price. “I’m not saying this is the norm”, he starts, “but there are instances where boards have a completely distorted view as to what a company is worth”.

You might expect Mawhinney’s main gripe to be with directors letting buyers steal companies for too little. But he’s just as scathing about boards that expect too much from buyers. He sees Ramsay Healthcare (RHC) – which saw a deal with Kohlberg Kravis Roberts (KKR) collapse in September 2022 – as a prime example.

“You can't expect someone to take over a company without accounting for potential downside risks in the price somehow. Ramsay wanted to extract every single last dollar from the would-be buyer. By the time there was sort of some agreement, things had changed, and the deal fell over. Look at what's happened to the shares since.”


Source: Morningstar.com

Things can, of course, go the other way. A few years ago, Allan Gray were the biggest shareholder in construction group UGL. Mawhinney says the board’s expectations were “frighteningly low” here, no doubt influenced by a mining downturn and project write-offs that had battered the shares.

“CIMIC ended up buying that business for around four times earnings. At times like that, you would expect boards to take a long-term view of the world and not be preoccupied with short-termism.”

But Mawhinney thinks boards have strong incentives to do otherwise. Chief among these is the desire to avoid criticism – or a court case – from shareholders obsessed with getting a quick return. This can make lowball offers look more attractive than they really are, a situation Mawhinney sees written all over Nationwide Bank’s bid for Virgin Money in the UK.

“Nationwide’s offer valued Virgin Money at 0.65x net tangible assets. The cheapest major bank in Australia trades well above 1x, but the board probably felt they needed to recommend the offer because it was 40% above Virgin Money’s prevailing share price. But just because it's a 40% premium, does that make it cheap? We should be comparing the offer to the underlying value of the company, not to the share price”.

It's little wonder why Allan Gray don’t want boards to get carried away by pessimism or fall prey to short-term thinking. After all, they are the very same fallacies Allan Gray try to exploit by buying out of favour shares. If the company’s board fall prey to these biases, it can cap the pay-off from what Allan Gray see as a real behavioural edge.

When it comes to building better boards for shareholders, Mawhinney stresses the need for quality over quantity. “Boards have become a box ticking exercise more than anything else. We're getting to boards with ten, twelve people. I'd rather a board that's half the size, pay each member double and attract really good talent. People with fire in their belly and some energy.”

As well as boards, Mawhinney is cautious of another powerful group that usually fly much further under the radar – proxy advisors. These firms consult large passive shareholders like mutual and index funds on how to vote on matters like AGM resolutions and takeover proposals. This gives them a huge amount of power over corporate governance, even if they own zero shares.

“There are times when the proxy firms highlight things that other shareholders might miss, in which case there is definitely some good that comes from it. But recently, like is the case now with Woodside, I think the proxy firm’s influence is far in excess of what it should be.”

Mawhinney was referring here to Glass Lewis, which recently advised clients to reject Woodside Energy’s climate report and block the re-election of its chairman Rochard Goyder. Woodside was a major position for Allan Gray’s equity fund as of March 31st and they disagree with Glass Lewis’s recommendation.

Mawhinney’s caution on proxy advisors is partly down to the scale of Glass Lewis and its peer Institutional Shareholder Services, which hold an estimated 95%+ market share between them.

“They write these things on thousands of companies, thousands. There is no way that it can all be thoughtful and in-depth. A lot of it is quite superficial and I think the Glass Lewis report [on Woodside] was particularly poor.”

He also thinks their need to retain subscribers pushes proxy advisors to publish occasionally “off the wall” research to keep things interesting. It isn’t the first time Allan Gray have disagreed on the right direction for one of their portfolio companies, and it probably won’t be the last.

 

Joseph Taylor is an Associate Investment Specialist for Morningstar and Firstlinks.

 

banner

Most viewed in recent weeks

What to expect from the Australian property market in 2025

The housing market was subdued in 2024, and pessimism abounds as we start the new year. 2025 is likely to be a tale of two halves, with interest rate cuts fuelling a resurgence in buyer demand in the second half of the year.

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

Howard Marks warns of market froth

The renowned investor has penned his first investor letter for 2025 and it’s a ripper. He runs through what bubbles are, which ones he’s experienced, and whether today’s markets qualify as the third major bubble of this century.

The challenges with building a dividend portfolio

Getting regular, growing income from stocks is tougher with the dividend yield on the ASX nearing 25-year lows. Here are some conventional and not-so-conventional ideas for investors wanting to build a dividend portfolio.

How much do you need to retire?

Australians are used to hearing dire warnings that they don't have enough saved for a comfortable retirement. Yet most people need to save a lot less than you might think — as long as they meet an important condition.

Latest Updates

Superannuation

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Investment strategies

The two best ways to maximise dividend income

People often marvel at Warren Buffett now getting 60 cents in annual dividends on every dollar he invested in Coca-Cola 30 years ago. What’s often overlooked are the secrets to how he achieved this phenomenal result.

Taxation

The fetish for lower taxes has gone too far

Since the time of Reagan and Thatcher, most business leaders and investors have clung to a dogmatic belief that lower taxes bring higher profits and economic growth. The truth, as always, is far more complicated than that.

Superannuation

Meg on SMSFs: Winding up market linked pensions with care

Due to recently-introduced rules, many people with old style pensions, also known as legacy pensions, will look to wind them up this year. The temporary amnesty allowing these pensions to be stopped should be navigated with care.

Property

Why our Torrens title property system hasn't been adopted elsewhere

Far from an outdated relic, Torrens title appears to be the revolutionary, cheap, low-risk way to handle property dealings. Here's a look at why this Australian invention from the 1850s hasn't caught on more widely.

Property

DigiCo REIT and the data centre opportunity

Data centres offer compelling growth prospects. But their potential hasn't gone unnoticed, and DigiCo appears to be buying properties in a seller’s market, resulting in better opportunities being found elsewhere.

Retirement

The $1.2 trillion sea change facing Australian investors

Over the next decade, three million Australians will shift from accumulating wealth to living off it. Those taking part in the great migration need a sound strategy that delivers sustainable income and protection from market bumps.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.