Independent directors used to fight tooth and nail for shareholders, but now it seems they'd rather just take the easy path. As illustrated by the recent Pushpay sales process, we need a return to a world where governance is less about box ticking, and more about delivering value for shareholders.

Cloud-based online payment solution provider Pushpay helps churches manage their operations including the all-important receipt of donations. In April 2022, Pushpay’s board had received approaches from several parties interested in potentially acquiring the company and appointed an adviser.

Despite the board running a broader sale process, global investment firm Sixth Street already held around 18% of the company. It and private equity firm BGH were clearly in the box seat as they could effectively block any other party from doing a deal. It was always going to be hard for another party to compete with them without paying well over the odds.

The Pushpay board’s recommendation of the initial offer was questionable

Sixth Street and BGH were always likely to make a low-ball initial bid, –however, the way the board has handled the offer leaves more questions than answers.

The actions of a board speak louder than words during a takeover process. How do they engage with suitors? How do they couch the merits of an offer, versus what shareholders will forgo by accepting it?

When the board and its advisers recommended the $1.34 offer in October 2022, they had already sought feedback from institutional shareholders around where they viewed fair value. So it should not have been a surprise that many shareholders would have not entertained an offer that low. The first question is therefore why would directors recommend the offer at that level? While not insurmountable, a scheme of arrangement needs 75% of shares voted to succeed, with the bidder excluded from voting its shares. They should have known that an offer this low may not reach that level of support.

Generally, we remain dubious about schemes of arrangement, where due to the 75% threshold a substantial minority can be forced to part with a company despite rejecting an offer. The 90% takeover threshold is there for a reason – to ensure companies are only taken private at compelling valuations – and we would prefer to see directors not ‘lower the bar’ by readily agreeing to go down the scheme path.

Despite this, directors were happy to proceed with a ‘friendly’ scheme structure, which closely ties the company in to the bidder (there was a $15.3 million ‘break fee’ to stop directors backing out).

The board then stood by its recommendation even after the independent adviser came out in February with a valuation range of $1.33 to $1.53, with the $1.34 bid barely off the bottom end. This report should have caused the board to doubt the conviction of its recommendation; however, it seemed to prompt an unbalanced search for reasons why the independent adviser's range might not be appropriate.

They cited the Kiwi-US dollar exchange rate, which had ticked higher than the independent adviser had used, although overlooked that the forward curve was the reverse and supported a higher valuation. They talked to the risks around the business not delivering on its goals and management's forecasts, although were already using a relatively high discount rate rather than a risk-free rate and so were already factoring this.

Presumably the board had also signed off on management's forecasts. The forecasts which aligned to the growth story they had been presenting to investors. This left investors like us feeling very confused.

There are always reasons why a company valuation can be argued higher or lower. What we as investors want is a management team and board that back themselves to create meaningful value for shareholders over time. Actions speak louder than words.

Pushpay shareholders needed to act to force a better outcome

Shareholders then forced the bidder to come back to the table with a higher offer.

We rejected the first offer of $1.34, against the directors' recommendation, because we thought it did not sufficiently compensate shareholders. This would also pressure the bidder to dig for a better offer. Fortunately, enough other shareholders did the same that the scheme vote failed.

To the bidder's credit, it came up with an innovative structure to put a better offer of $1.42 on the table. Here 10% of sophisticated short term ‘risk arb’ style hedge funds agreed to receive the prior offer price of $1.34. This added complexity only lowers the bidder's 'in-price' fractionally and would have been quite some effort to negotiate. This shows that it is a hard-fought result for the bidder to reach this revised offer.

Pushpay has a bright but uncertain future

Pushpay is the leader in its sector and has an appealing runway for future growth, but several questions remain for investors. Can it hold off competitors and grow market share in the Protestant segment? How successful will it be in its nascent foray into the Catholic segment?

The company has always presented a polished image. However, growth has slowed and it has changed its ‘go-to-market strategy’ repeatedly without a fulsome ‘mea culpa’ of why it hadn’t worked. It is important for companies to be real with investors and own their failures as well as their successes, demonstrating learnings for the future.

The revised $1.42 bid is an adequate offer, rather than being compelling. It is just below the middle of the independent adviser’s valuation range. It has only been achieved after shareholders fought for a higher offer.

Overall, Pushpay still has a bright future but it is not without risks. Through this process, we have new doubts about whether the board has the appetite to work hard to get the best out of management and fight to drive value creation for shareholders over time.

For these reasons, we have agreed to accept the $1.42 offer: the certainty of a bird in the hand.

This article was originally published in the NBR on 21 March 2023.

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