Despite what he’s been through in the first half of this year, Ferdi Dippenaar, who heads the IR function at South Africa’s largest gold producer, Harmony Gold, has his sense of humor intact. ‘We’ve grown a lot older and a lot wiser,’ he smiles. ‘That’s why we look the way we do.’
When Harmony launched its long-awaited bid for rival local precious metals producer Gold Fields in October 2004 – a move that would have made it the world’s biggest gold company – Dippenaar found himself at the center of the year’s most frenzied business news story. The protracted corporate scuffle and regulatory confusion that followed the $5.6 bn takeover attempt also wiped billions off share prices, dented reputations at a senior level and cost almost as much in legal fees at both Harmony and Gold Fields.
Seven months of petty recriminations and executive mudslinging became a public free-for-all. ‘Everyone had his own version [of the bid],’ Dippenaar recalls. ‘You had the Harmony version and the Gold Fields version, and you had the press version and the views of some fund managers who became involved with the press, as well as those of regulators.’
Hostile takeovers are not new to South Africa, but the Harmony-Gold Fields episode is a reminder of how complex the environment has become for local public companies in very little time. The nation’s traditional culture of passivity and non-aggression in the market has made way for fervent activism and intense scrutiny by a plethora of public and
private audiences, most notably the press.
New complexity
‘The affair highlighted the need for excellent media relations,’ says Nicholas Williams, managing director of IR consultants College Hill. ‘The media love this sort of thing because they don’t see it that often. The press are critical for winning over hearts and minds in a bid like this because everybody is watching, including the government and regulators.’
The local business media were so excited by the story, according to some commentators, that they kept it in the headlines well past its sell-by date. More worryingly, from Dippenaar’s point of view, is that a good part of the coverage was neither objective nor knowledgeable.
In May a South African court ruled that Harmony’s offer had expired. Since then, Harmony’s chief executive, Bernard Swanepoel, has openly blamed what he sees as an overly strenuous regulatory control structure and the inability of various governing bodies – namely the competition board, the Johannesburg Stock Exchange (JSE), the regulation board and the courts – to work within a framework that is conducive to healthy M&A activity.
Meet the owners
But while Dippenaar strived to maintain contact with shareholders throughout the ordeal through roadshows, one-on-one meetings and press interviews, something else became immediately apparent.
‘The gold industry has really changed in terms of investors, so it was a case of dealing with a new way of thinking and different types of investors from those of some years ago,’ Dippenaar explains. ‘Before, you would have been dealing mainly with long holders, so it was quite significant the way hedge funds participated in this matter and how
they determined the outcome.’
The bulk of Harmony’s shareholders supported the bid, but many hedge funds, which had speculated that the company would increase its bid offer before the May deadline, went short on Harmony and bought into Gold Fields. When the bid formally ended, many were left counting their losses.
Craig Hackney, a telecoms analyst at Johannesburg-based brokers Barnard Jacobs Mellet, says South African companies are waking up to the fact that hedge funds have changed
the rules of engagement. ‘The financial community has traditionally been quite passive, but hedge funds now have ownership levels of up to 20 percent at some blue chips,’
he explains. ‘You can say you don’t want to meet them, but you can’t really hide away.’
Hackney believes hedge funds are having a mainly positive impact on the South African market, and is quick to add that many are helping companies appreciate new angles on their business and giving them excellent feedback and advice. ‘Some executives really enjoy sitting down with them and having a good verbal battle,’ he says.
For Rowan Goeller, IRO at JSE-listed industrial brand management company Barloworld, the growing momentum of shareholder and stakeholder activism has shaken mindsets in boardrooms across the nation. ‘Boards are realizing they’re only managing the business on behalf of shareholders,’ Goeller says. ‘This has increased IR professionalism in South Africa because companies are employing in-house people to deal with it. There’s been a marginal improvement over the last few years but it’s still quite patchy.’
A top-down approach
Although South Africa is far from a nation of shareholders, public pressure toward companies is enormously significant because firms have been placed at the forefront of what is arguably the most radical restructuring of the South African economy since the Dutch first settled in Cape Town in 1652.
The South African government introduced the Socio-Economic Empowerment Charter known as black economic empowerment (BEE) in 2002, which requires companies
to transfer 26 percent of their assets to historically disadvantaged South Africans by 2012. Starting with the mining and resources industries, other sectors of the economy have since been gradually phased into the program, with many smaller and medium-sized companies doing a more effective job than some of their large-cap peers.
Each sector also has its own scorecard system for measuring BEE compliance on various issues: ownership, training, employment, procurement and others. The scorecard gives a 20 percent-30 percent weighting to the equity-sharing aspect of BEE, which has rapidly become one of the difficult areas for IROs, because of the challenge of reassuring investors that BEE measures will create share value in the long term.
Marcus Courage, managing director of corporate citizenship and public affairs consultancy Africa Practice, explains: ‘If you speak to IROs, they’ll tell you just how hard it is to communicate to shareholders that you have given up equity and traded it – unless it’s in very favorable terms they can quickly quantify. This is particularly true when investors are sitting in ivory towers in New York. Shareholders sometimes need to be
educated in these matters.’
Certain industries, such as construction, have been quick off the mark, adds Courage, because their BEE credentials are a determining factor for winning lucrative government contracts in the future, and so have a large impact on their bottom line. However, the uptake in other sectors has been patchy and somewhat slower.
‘We’re not at the stage yet where business will entirely lose market face for not being sufficiently empowered but that is likely to change over the next twelve months,’ Courage predicts. ‘It’s getting better: you have the Africa directors sitting in company boardrooms making a case for greater investment in the area. Some people forget that even a large global company like Diageo makes 10 percent of its returns in Africa.’
Stephen Carrot, an analyst at Johannnesburg-based financial services investment firm Andisa, believes the BEE challenge is already helping improve the quality of communications at some of the nation’s largest companies. ‘It’s one of the issues in South Africa and that’s why you have such an improved caliber of individuals taking charge of it,’ he notes.
With the early days of BEE implementation behind them, the government and companies are taking a more pragmatic approach to empowerment. Some firms have moved beyond a simple box-ticking exercise, while others find themselves more empowered than they originally believed they would be. With disclosure pressures increasing, IROs will need to take the pressure off executives’ shoulders.
