Telkom managers selling at a loss?
NEWS of corruption in politics seems to have become a daily occurrence, but business can hardly be cited as an example of moral purity.
The latest example happened just this weekend, when shareholders (or in other words, the money managers who have somehow managed to control the voting process of the shares in pension funds which we theoretically own) approved Telkom’s scheme to sell its stake in Vodacom.
How is this comparable? Simple. It apparently dawned on the managers of Telkom that if they sold their most valuable and profitable asset, there would be a good chance that the share price would, you know, go down.
So they decided that selling this asset, which they claim is part of a new business plan, was akin to a merger, a takeover or some corporate action. How they get there, I’m not sure.
Surely selling assets at a profit at the right time is what managers are paid to do. In any event, the result of this manoeuvre is (surprise!) that shareholders share options now vest early. But it’s more than that.
Since they vest early, these new shareholders will not participate in the unbundling of Vodacom and will be entitled to one Vodacom share for every Telkom share held. And they will be entitled to the special dividend in respect of their vested shares. And previous employees of Telkom who might not have met the original vesting criteria will not get Telkom shares, but they will get Vodacom shares and the special dividend.
The pro-forma effect of these changes is to decrease Telkom’s notional headline earnings by 25% — that’s how generous the scheme is to the holders of share options, the vast majority of whom will be of course the executives.
It’s gob smacking.
Telkom’s argument is that employees would have a “legitimate expectation” that the shares they would have received would in the normal course of events have included the company’s stake in Vodacom and that “the decline in value was not due to performance of the company but rather due to corporate action”.
This fudges the issue: employees might not now be getting share options in a company that includes Vodacom. But they do get share options in a company that includes the value of that stake; it’s the company’s choice to jettison this cash through a special dividend.
In any event, this is supposed to be a performance bonus; it’s not theirs by right. Why does it have to vest early? Why not just adjust the terms? The fact is that Telkom gets a huge chunk of change and management somehow believes they should get some sort of a cut.
What’s more, we are talking about a company that just spent R500m on a media venture which it then suddenly decided wasn’t that important after all. To my mind, this does not constitute a management that particularly deserves a boosted performance bonus.
Telkom selling Vodacom – bad business decision?
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