Institutions brought into question

COMMENT

When Howard Poulson launched Farnell's pounds 1.85bn bid for rival component distributor Premier he knew it would take some explaining to investors, but he could hardly have expected it to turn into such a cause celebre. No one, after all, knew very much about either company, despite their considerable size, or had given a great deal of thought to the rather dull business that sustains them, selling electrical parts through giant catalogues.

On the face of it, this was a simple acquisition by one distributor of another, the culmination of several years' impressive growth and an obvious geographical diversification from a home market Farnell had come to dominate. Shareholders would no doubt let a management that had proved itself get on with the job and rubber-stamp the deal.

It hasn't quite worked out that way. Having increased the company's share price five-fold in as many years, Mr Poulson faces the possibility of an awkward snub from the shareholders he has served so well.

No one would deny that the Premier acquisition is a big leap for Farnell, which is half the size of its US target. At 24 times Premier's projected earnings, the price is certainly full. It also transforms Farnell, wiping out its net asset backing and leaving it with debts of more than pounds 400m. The short-term financial risks are substantial. Given the ambitious nature of this deal, it is hardly surprising that it should be challenged.

But it is the way the likes of Standard Life and Legal & General have expressed their doubts that has raised eyebrows, not least in the US where it might have been thought that shareholder activism of this kind would be par for the course. Standard Life's approach throws up some interesting questions about the role of institutions in bids of this kind and the disproportionate power that can be wielded by relatively small shareholders.

First, there is a serious question mark over the ethics of an institution accepting commission for underwriting a share issue, as Standard Life did in this case, when it disapproves of the purpose to which the proceeds are being applied. Standard says it sees no problem separating its investing and corporate finance functions and claims it was open about its intentions throughout. Well, maybe, but it would be surprising if that was Farnell's understanding of the fund's willingness to guarantee the cash call.

Other legitimate doubts include whether Standard Life is really acting in the wider interests of all shareholders in deliberately trying to drum up support for its negative stance. It announced its intention to vote against the deal a week before the poll was due. The process itself also seems suspect. Stock Exchange rules require that the deal receive approval from 75 per cent of those casting a vote. Given usual shareholder apathy, that means that shareholders representing as little as 15 per cent of the company's shares could undermine the deal. If, in so doing, a successful management feels obliged to stand down, then it is plain daft.

One plausible reading of Standard Life's approach is that its plan to take profits on some or all of its Farnell stake was first of all scuppered by the company making it an insider on the Premier deal and then made less attractive by the shares' subsequent downward lurch when it was announced. Shooting down a deal which appears to make long-term industrial sense would be a perverse way of generating a short-term boost to the share price and a more favourable exit.