A boardroom scene showing how it's not always advisable to follow orders.
SCENE:
Boardroom of institutional investor
CAST:
E Seely-Led, chief executive, WeDidWhatYouAsked (WDWYA) ;
Shaw Termvue, investor with 5 percent holding in WDWYA
E Seely-Led: I’m here to talk to you about our proposed rights issue, which, with your agreement, we expect to announce in two days.
Shaw Termvue: Rights issue? Why is this the first I’m hearing about it?
Seely-Led: As one of the largest investors in WDWYA, I wanted to discuss the proposal with you before making any final decision. It’s a very attractive three-for-two offer, rather like a ‘buy one, get one free’ supermarket deal.
Termvue: Are you jumping on the rights issue bandwagon? I’m rather tired of being asked to fork out new money to buy more shares in underperforming companies. It smacks of throwing good money after bad.
Seely-Led: I truly believe in our business strategy over the long term. Over the shorter term, however, we have some immediate issues that need to be addressed.
Termvue: Such as? Don’t tell me the Chinese order has been cancelled? You didn’t confuse green shoots with bean shoots, did you?
Seely-Led: Certainly not. But our banks are unhappy with us.
Termvue: Why on earth would they be unhappy?
Seely-Led: It seems they do not believe WDWYA will have enough cash to fund interest payments due in the coming months, and there are some concerns we may breach our banking covenants.
Termvue: Breach banking covenants? Good God, Seely-Led. Why is this the first I’m hearing about this?
Seely-Led: It’s out there in the market. A few analysts recently published reports on the subject.
Termvue: Analysts’ reports? Never read ’em. I’m a gut instinct sort of fellow! But why are the banks on your back? How much do you owe?
Seely-Led: A significant sum, Shaw. You’ll recall that on my round of investors’ meetings a few years back, you, er, encouraged me to alter the capital structure of the business and borrow funds at the historically low rate of interest.
Termvue: Borrow money? I said no such thing. Why on earth didn’t you use the company’s cash reserves?
Seely-Led: They were depleted, Shaw. You’ll recall that on an even earlier round of investors’ meetings, you suggested that the funds were doing little for the firm’s balance sheet and would be better served to enhance the final dividend.
Termvue: Enhance the final dividend? I said no such thing. No, I’m a share buyback sort of fellow!
Seely-Led: Yes, that was your 2005 recommendation. As one of our leading investors, we followed all your guidance. But having bought back shares, boosted the final dividend and borrowed heavily from the bank, we need to launch a rights issue.
Termvue: How much will it cost me?
Seely-Led: Taking into account the share price and the proposed discount, nothing. We estimate that taking up your fund’s rights will cost the proceeds of the buyback and the enhanced dividend. The past four years will amount to nothing.
Termvue: Well, hardly ‘nothing’: I still have my performance-related bonuses. Where do I sign?
