Options fading for local investors

By BRIAN FALLOW

Afraid of losing Contact? Sad that Fletcher Energy is now a Shell company?

Wipe your eyes on some Norske Skog paper and have a consoling glass of Allied Domecq wine.

Since the start of last year, 14 companies have disappeared from the stock exchange by being taken over or taken private: Donaghys, Nobilo, Shortland Properties, St Lukes, TransAlta, Fletcher Paper, Fletcher Energy, South Eastern Utilities, Grocorp, PDL, RadioWorks, Email, Kiwi Development Trust and Montana.

Contact Energy, Frucor and Pacific Retail are currently subject to takeover offers.

There have been new listings. This year, Blis Technologies, Kirkcaldie and Staines, Rubicon, Wellington Drive Technologies and Wakefield Hospital have arrived, but they barely offset the loss of the companies that have gone.

They certainly don't offset the loss of market capitalisation provided by major companies such as Fletcher Paper, Fletcher Energy, Montana and potentially Contact.

Why should we care?

On the face of it there are four reasons:

* A loss of quality local companies in which New Zealanders can invest.

* A loss of transparency and accountability as the disciplines of stock exchange listing are removed.

* A danger that locally important business decisions are taken in other places on the basis of deficient information.

* Erosion of the tax base, so that those who remain have to pay more.

Small shareholders' advocate Bruce Sheppard laments the loss of local investment opportunities.

He says investors are increasingly being forced to export their savings and that is intrinsically riskier.

"And it is investment which generates growth, jobs and a robust economy.

"If we could marshall our own savings effort into supporting our own enterprises we would be better off economically."

If New Zealand listed companies commanded more support from local investors, their share prices would be higher and they would be less vulnerable to takeover.

"But that means that [investors] have to have confidence in them, that they are managed with integrity, that they have good corporate governance in place.

"And they have to believe the managers are competent people who can optimise returns and, if appropriate, expand their businesses offshore."

That confidence is missing, Mr Sheppard says.

Every time a company is delisted there is one less enterprise required to disclose to the market information about its financial performance, major transactions it is contemplating, or other information material to its share price.

Most Western countries can rely on the assumption that their major enterprises will be listed companies required to disclose such information. But in New Zealand's case the stock exchange represents a much smaller proportion of the commercial life of the country, and that proportion is shrinking.

It can be argued that the exchange's disclosure requirements are there for the benefit of shareholders, and that when a company is taken private the need for that disclosure vanishes.

Other stakeholders, such as employees, customers and suppliers, although not entitled to that information, still find it useful.

Some disclosure requirements remain. Companies more than 25 per cent overseas-owned have to file annual accounts with the Companies Office.

The Reserve Bank's approach to its supervisory role is to require banks to make quite extensive disclosure of their affairs every quarter.

But it is hard to escape the conclusion that the lights are going out.

An associated problem is the removal of the need for management to explain themselves to shareholders at company meetings.

It is easy to be cynical about how much of a constraint that is in practice. But Brierley Investments' board, which once had to drop a particularly gold-plated executive options scheme in the face of shareholder opposition at a Wellington annual meeting, is less likely to encounter such difficulties now that it is based in Singapore.

When a listed company is swallowed up by a multinational, as Fletcher Paper was by Norske Skog, Fletcher Energy by Shell, Montana by Allied Domecq and potentially Contact by Edison, there are gains as well as losses.

Auckland investment banker Stephen Walker says one of the advantages is access to international management talent.

"The biggest failing in New Zealand business is the lack of genuine international experience among senior managers."

The poor quality of some investment decisions in recent years testifies to that, he says.

Multinationals can provide a sort of institutional equivalent of OE by providing middle managers with an opportunity to work elsewhere in the group before coming back to senior positions in New Zealand.

Multinationals can also be a channel for dissemination of best practice.

"They tend to look relentlessly at the efficiency of their processes and so the most efficient and profitable processes tend to be adopted throughout the organisation."

They also facilitate access to capital.

"In good times, and through the business cycle that is most of the time, the access to capital is far greater.

"You are not as reliant on a pretty pathetic New Zealand sharemarket," Mr Walker says.

But the New Zealand operation of a multinational has to compete with its corporate siblings for the parent's investment dollar.

"We are more vulnerable now to where The Hague [where Shell is based] decides to invest exploration around the world," Mr Walker said.

There is a tendency of multinationals when global times are tough to scale back their New Zealand operations regardless of local trading conditions.

"When blood needs to rush to the heart you can put up with cold feet for a while. We are the feet."

Another drawback is the longer lines of communication between local conditions and centres of corporate decision making on the other side of the world.

That is commonly mitigated by having New Zealand boards to advise local management and the parent company about local commercial, economic and political issues.

The transfer of New Zealand companies into overseas ownership poses a risk to the tax base.

As the McLeod tax review reminds us, non-resident companies can structure their affairs so they pay less tax than their New Zealand-based counterparts.

They can fund their New Zealand operations with three times more debt than equity without falling foul of the rules.

Tax treaties limit the withholding tax that can be imposed on interest paid to overseas "related-party" creditors.

The approved issuer levy limits to an effective 1.3 per cent the tax on interest paid to overseas banks.

The economic burden of the tax falls on the New Zealand borrower, not the overseas lender. Because these banks are the marginal providers of credit, taxing them harder would only push up the cost of capital generally for local firms.