Take The Money And Run

The surrender of the promising Trade Me business demonstrates the folly of a short-term view

- James Greenhalgh

If you ever wanted proof that long-term focused investors are a tiny minority, consider this. Only 0.7% of votes cast at Trade Me’s scheme meeting in April were against the takeover of New Zealand’s dominant online classifieds site.

What were the other 99.3% thinking? That British private equity acquirer Apax Partners was somehow buying a lemon? Greed is a powerful motivator, and virtually all shareholders apparently believed a 27% takeover premium was adequate compensation to discard this wonderful business.

The takeover succeeded, delivering an annualised return of 15% a year since Trade Me joined our “buy” list in 2014. That’s quite acceptable, although it could have been much more if shareholders hadn’t let go of the business cheaply. But the lessons it offers are also valuable:

1 Directors don’t always understand value

Trade Me was reasonably well managed. However, during our period of share ownership, senior management spent significant time employing new staff and developing products to drive long-term growth. This investment resulted in weak profit growth and a sustained underpricing in the stock.

Investments in staff and new products can take years to show up in profits. In fact, they were only just starting to pay off as Apax launched its takeover. For example, premium listing revenue in Trade Me’s property segment doubled in its final year of listed life.