Bain Capital’s buyout bid shows the risks of investing in a company with big shareholders

SHAREHOLDERS with big stakes are kingmakers in takeovers. With power comes responsibility – but to whom?

A contested Swiss bid situation is forcing the issue.

The founding shareholders of tech company SoftwareOne collectively own 29 per cent and are fine with the roughly 3.2 billion Swiss francs (S$4.9 billion) indicative bid being dangled by US buyout specialist Bain Capital. They’ve cut a deal whereby they would sell only some of their stake and keep “a significant part” invested as the company went private.

The snag? The other shareholders are being invited to sell out to a so-so cash offer, and the alliance between Bain and the founders is a serious deterrent to a better bid surfacing.

In an unusual move, SoftwareOne last week publicly appealed to the founders to support whatever transaction would be best for everyone, saying it “expects” them “to support, rather than block, the highest value alternative”. This moralising tone is a novel defence tactic. Sadly, it’s also flawed.

The harsh reality is that investors don’t have any obligations to each other. They can do what they want with their shares and support any suitor they choose.

It’s pretty standard for there to be conflicting agendas between shareholders in less complicated bid situations, usually around the price of surrender. The job of looking after shareholders as a collective belongs to boards and regulators.

If the founders’ primary goal is to switch into an unlisted vehicle, they will care more about choosing the right private equity partner than maximising the overall price of the takeover offer. And that’s their right.

Of course, SoftwareOne should be trying every possible tactic to force Bain higher. But the petition to the founders is a long shot. Its best chance of having any impact comes from tying their reputations to the battle’s outcome.

The situation certainly looks bad for co-founder Daniel von Stockar, the former chairman who took the company public in 2019. The Bain offer comes after a recent share-price slump and would give investors an exit barely above where shares were sold in the initial public offering. Broker Kepler Cheuvreux has a price target around 10 per cent higher.

All this is no doubt frustrating for the non-founder shareholders. But anyone who buys into a company with concentrated shareholdings should know the risks.

Just weeks ago, Silver Lake Management secured victory in a battle to buy Frankfurt-listed Software. The US buyout firm began by clinching an agreement with a foundation to acquire its 25 per cent stake. That pretty much doomed a higher offer – ironically, from Bain – to failure.

Stocks with dominant holders should command lower valuations to capture the fact that smaller shareholders are disadvantaged. How wide that governance discount is will depend on the protections in the local takeover framework.

The UK, for example, would demand that any bidder which is offering a shareholder the chance to partially reinvest in an unlisted vehicle should extend that option to everyone. It also requires that bids made jointly with an existing shareholder aren’t, in effect, a ruse to give that investor a better deal.

Ordinary shareholders aren’t entirely powerless here. Bain needs to get a sizeable controlling stake to make any buyout work. Even if no rival offer emerges, the non-founder investors aren’t obliged to sell. The board should be seeking to persuade them to sit tight if it thinks the price isn’t good enough.

And it’s not a foregone conclusion that an auction can’t happen. There are instances where shareholders with strategic stakes have been persuaded to switch sides for the right price – just consider how 21st Century Fox sold its shares in Sky after losing a heated auction with Comcast to take full control of the satellite broadcaster in 2018.

But this episode, and the Software bid, should be a reminder about the precarious dynamics of companies with big shareholders. Caveat investor. BLOOMBERG