Capital allocation decisions made by management teams during the boom years can make or break companies.
Let’s face it. When shareholders are often asked to support companies during the bear market, boards owe them more than just gratitude when the tide turns. Returning windfalls to shareholders in the form of dividends or buybacks while pursuing smart, value-accretive mergers & acquisitions (M&A)? That’s smart. Pursuing value-accretive M&As? Even smarter, if done with discipline.
Gold mining companies, buoyed by record high prices, have predictably been on an acquisition spree. But here’s the rub: massive consolidation in the industry presents both opportunities and risks.
Elevated gold prices are likely fuelling expensive buying decisions that look good today but unravel tomorrow. Boards and management must pay close attention to the long-term shareholder value, not just the sugar rush of quick returns.
Let’s be honest. Gold prices won’t stay at the current elevated levels forever. And betting on expensive acquisitions in the hope of extracting enough value before the cycle turns is not a strategy. It is speculation. Only time will tell whether the recently concluded mega-deals in gold mining were value for money once the dust settles.
The real challenge for mining companies and everyone else is prudent capital allocation. M&As should be part of a growth plan, not a reflex. Big-ticket investments must go through a rigorous scrutiny, not be driven by FOMO.
Remember Nedbank’s ill-fated foray into West Africa? In 2014, it spent about $500m to buy a 21.2% stake in Ecobank, seduced by the “Africa Rising” narrative and attracted by the Togo-based lender’s expansive Africa geographical spread, stretching across 35 countries.
On paper, it looked like a bargain. In reality, the minority stake left Nedbank powerless to drive strategy. To cut a sad story short: Nedbank is now selling its stake for a paltry $100m — having gained just R400m in dividends from the investment to date.
This was a disastrous, value-shedding transaction. But the failed deal is by no means an outlier.
One only has to cast one’s mind back to Woolworths’ disastrous Australian adventure, coincidentally also in 2014, which wiped out R19.8bn in value. Naspers, too, had to swallow a bitter pill after overpaying for assets in 2021. To its credit, Naspers owned up, publicly admitting it had ignored dissenting internal voices on the deals, and pledging to “capture the diversity of opinions on deals”. That’s smart.
These examples, and others we would not mention, are more than cautionary tales. They are flashing red lights for SA corporates now sitting on piles of cash — and a timely reminder that capital allocation decisions must be well considered.
What these examples underscore is that capital allocation is as much a finance function as it is a governance imperative. Done right, it’s one of the most powerful drivers of shareholder returns.
It is thus encouraging that several companies have prioritised dividends and share buybacks to reward shareholders. With SA stocks still trading at high discounts, that’s a savvy move.
The multibillion-rand share buybacks we have seen over the past year by JSE-listed companies show boards are paying more attention to shareholder returns in the absence of worthy M&A opportunities.
Because let’s face it: shareholder returns must be king. A responsible capital allocation framework must consider all avenues and tools available to a company.
As asset manager Coronation puts it, “share buybacks are one of the most important capital allocation decisions that a board can make, and this allocation should be considered alongside every adventurous capital expansion project”.
And they should be weighed alongside every adventurous expansion project.
Smart money knows when to move and when to hold. Boards would do well to remember that.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.