Tuesday, 17 March 2009

Where now for Gladstone?

Unsurprisingly, but in a very close vote at yesterday’s EGM, Gladstone shareholders have rejected spurned bidder, Constellation’s request for a place on the Gladstone Board. As noted in the announcement:

“The Board of Gladstone hopes that the unsolicited approaches and initiatives by Constellation Software Inc. will now cease. Shareholders have twice voiced their rejection of Constellation's moves and their support of the current Board. The Board expects Constellation to respect this statement by its fellow shareholders and work constructively with the Company as a major shareholder. The Board of Gladstone looks forward to delivering the growth plans and shareholder value they believe is inherent in the business.”

So where now?

Firstly, the recent failed bid and EGM vote will undoubtedly have cost Gladstone a six-figure sum in fees and expenses, let alone a significant amount of management time. The diversion of time from the management of the company will inevitably have impacted the business, so even though the external costs will no doubt be shown as exceptional costs, the business will have suffered – let’s hope not too much.

Now the Board must try to concentrate on “delivering its growth plans”, something that will be difficult enough in the current financial environment without Constellation’s diversions. Gladstone is financially strong, a clear market leader, and should be able to succeed in growing both its revenue and profit – left alone, I’m sure that it will prosper.

But will third parties leave Gladstone alone?

Hopefully yes, but most probably no. I suspect that Constellation will keep its 29% stake, wait until the end of the year and then, when Stock Exchange rules allow it, will bid again for Gladstone. Had they bid 28p rather than the 25p they bid last year, I suspect they would have won control (30p would almost certainly have won). The risk is that, with Gladstone management time diverted into defence against last year’s bid and the recent EGM, Gladstone’s growth plans will suffer, and Constellation will again try a low-ball bid of 25p (or less).

Alternatively, will there be a white knight or third bidder? My view is that this would only happen if Constellation decided to give up and sell on its stake. I’m sure there are many potential bidders out there that are put off bidding by Constellation’s 29% stake, but I’ll bet that there will be a few people sounding out Constellation’s intentions and required price for purchase of their 29% stake.

Personally, unless they get a really good price offered, I think Constellation will hang in there and play a waiting game to see how Gladstone performs this year.

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