Tuesday, February 10, 2015

Aberdeen Activists Lose

For reasons beyond my comprehension, Aberdeen shareholders voted to keep current management given the option of ousting those who have destroyed capital for so many years. As a result, the Aberdeen stock idea I presented about a month ago did not end up working out.

I think there a few lessons that can be taken from this situation:

1) You can't always count on shareholders being rational. Despite a company trading at a huge discount to liquidation value following major destruction of capital, many Aberdeen shareholders appear to have been swayed by a management campaign that in my opinion was pretty irrelevant.

2) Look out for private placements on the parts of incumbents to secure more votes than it otherwise looks like they have. Aberdeen's managers sold parts of the company (at huge discounts to liquidation value, by the way) to related parties, in an attempt to add friendly votes at the expense of original shareholders. In this way, management can end up with a lot more votes than their actual ownership levels.

3) Buy cheap. Despite the fact that the people looking to return capital to shareholders lost, the price of Aberdeen hasn't fallen since the vote count! This is because the company is already priced for the graveyard, so there isn't much further to fall.

There is a major agency problem in the stock market today. When shareholders don't take advantage of opportunities to remove such problems, they do themselves and society no favours; capital ends up being allocated sub-optimally, which helps no one except the recipients of that capital, at everyone else's expense. It is rather sad that in a situation as clear-cut as this one (to me, at least), that shareholders still don't keep their directors and managements honest. Sadly, this result will make investors (including myself) more conservative when deciding to invest alongside activists against managements trying to entrench themselves, which is bad news for society.

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