Minority shareholders of one of Canada's hottest technology companies, Constellation Software Inc. charge that the company is about to be sold out from under them at the behest of private equity players who want to cash out.
The shareholders, who together own more than 12 per cent of the company, are upset with what they see as a decision by Constellation's board to put the firm up for a sale at a time when profits and the stock are soaring. The critics include successful money managers Martin Ferguson at Mawer Investment Management, Jason Donville of Donville Kent Asset Management and Ming Lam of Silver Heights Capital Management.
Constellation's stock has been a stellar performer, so it seemed odd when the company announced in early April that its board planned to conduct a strategic review, and was hiring investment bankers to look at alternatives. That often means a company is about to be sold.
The stock had steadily risen from its initial public offering price of $17 five years ago to almost $63 the day before the review was announced. Earnings have been growing fast as the company acquired more and more small software companies that provide programs for industries from moving and storage to viticulture.
So why hang out a for-sale sign? Constellation has said it won't talk about the review, but there's a shared theory among the three shareholders who are upset about the potential sale. They believe the process is being driven by private equity players who own a big stake in Constellation, and who want their money back. The best way for them to make that happen is to sell the whole company.
"You have a situation whereby the big guy is forcing the little guys to follow his actions, so rather than Jason Donville and us and other holders continuing to hold a great company, [we are]being forced to take a small premium today, potentially," Mr. Ferguson said.
The two big private equity holders of Constellation are Toronto-based Birch Hill Equity Partners, which owns about 16 per cent of Constellation's stock, and OMERS Private Equity, which owns about 34 per cent. The firms also have four of the eight representatives on Constellation's board.
The angry shareholders believe the private equity firms are prime suspects because private equity funds don't tend to hold investments forever. They could choose to just sell their stakes in the open market, but that usually means taking a discounted price. Selling a whole company often nets a premium.
Steve Dent, a Birch Hill partner who sits on Constellation's board, declined to comment. So did Lori McLeod, a spokeswoman for OMERS, a division of the Ontario Municipal Employees Retirement System .
The situation highlights the tension possible when private equity firms hold big stakes in public companies and want to get out. A clash arose at Onex Corp. holding Emergency Medical Systems Corp. when Onex, which controlled the company, decided to sell the company at a 10 per cent discount to the market price. Even at that price, it was a big win for Onex, but it upset other shareholders who were under water and led to lawsuits.
Mr. Lam of Silver Heights said there's a dilemma when board members of public companies come from private equity firms. Such directors have duties both to maximize value for all shareholders and for the investors in their private equity funds.
"Which one should take precedence? I think the duty to the shareholder at large and the long-term value maximization should take precedence."
To be sure, not all strategic reviews end in sales. There are cases where companies decide to do nothing. There are also cases where companies choose other options such as spinning off a division or trying to boost share returns by re-jigging their balance sheet..
However, Constellation's founder and president, Mark Leonard, has spoken out via a letter to shareholders saying that he isn't buying the idea that a sale isn't priority number one of a review.
"In your shoes, I'd interpret that [a strategic review]as meaning that the company is likely to be sold," he said in the May 4 letter, adding that "we hope to get through this process as quickly as possible, generate some liquidity for our major shareholders, and then get back to building our business."
Mr. Leonard didn't sound keen to cash out via a sale. "I'm proud of the company that our employees and shareholders have built, and will be more than a little sad if it is sold," he wrote.
Mr. Ferguson said he would not tender his shares for $70, where the stock is now trading.
Mr. Donville said he believes it doesn't make sense to sell the company because its growth prospects should push the stock past $100 in the not too distant future. The company has been successfully buying smaller software companies and using them to generate growth.
"This is what a cash cow looks like," Mr. Donville said.
Mr. Lam said a sale of the company for $75 or $80 would be a disappointment. "It looks like a big win, but I feel like I'm being robbed," he said.