Paying the price

See also: Hawker resigns

The resignation of IAG chief Michael Hawker after seven years at the helm is a stark reminder of the pitfalls of being a publically listed company.

Massed shareholder discontent is not something to be taken lightly and, in the case of Hawker, seems to have been the final straw following IAG's curiously defiant rebuttal of QBE.

Throw in an unhealthy dose of criticism from analysts and bankers, three years’ falling profits, and the less than subtle positioning of Michael Wilkins on the IAG board after his appointment as chief operating officer in November, and it is easy to trace a Hawker-related line with the word “inevitable” written on it.

“Given ultimate accountability sits with me, I have offered my resignation to the board,” a dignified Hawker said on Monday.

“I have lost the confidence of a number of our shareholders … which is not tenable for the company.”

Foreign policy concerns
The thorn in Hawker's side was his foreign policy: namely the purchase of Hastings and Advantage in 2006 and Equity early last year.

At the time IAG bought Hastings for £140m in September 2006, its shares were trading at A$5.45. When it concluded the purchase of Equity for £570m, they had risen to A$6.54. When Hawker resigned on Monday, they were trading at less than A$4. And since his departure, the share price has not fallen for three consecutive days.

“The thorn in Hawkers side was his foreign policy: namely the purchase of Hastings and Advantage in 2006 and Equity early last year.

Despite the steady improvement in the UK businesses the company has opted to bite the bullet and reshape the portfolio away from the mainstream motor market and towards online trading.

The irony is that Hawker’s departure, far from appeasing shareholders, has only appeared to increase their discontent.

“I respect [Hawker] for taking some accountability,” the outspoken investment director of fund manager 452 Capital, Peter Morgan told the press on Monday. His company owns four per cent of IAG, and were the authors of a leaked letter to the board which described them as “arrogant” following their rejection of QBE's offer.

“But the attack is not totally on Michael, it is on the board itself for not being transparent and accountable,” Morgan added.

"They should be hanging their heads in shame. It is un-Australian just to let one bloke take the blame for everything."

The blame game
Indeed, though Hawker might be accused of many things (not least investing hundreds of millions in a market that had failed to produce an underwriting return since 1994) the decision to reject QBE’s unofficial approach did not rest with him, but chairman, James Strong.

The fact that just weeks ago he said on Australian television that the effect of removing Hawker “would actually be detrimental,” will not instill much faith in the shareholder base. Whatever the case, shareholder confidence in Hawker pales into insignificance compared to the impact a cut in this year’s dividend – likely at this point given two profit downgrades so far this year – would have on the share price.

"If that board thinks it is getting off as lightly as it thinks it is ... it has got another thing coming as far as I am concerned,” Morgan added.

“If [the IAG] board thinks it is getting off as lightly, it has got another thing coming.

Peter Morgan, 452 Capital

"If they are going to say no [to a deal with QBE], they have to be accountable to shareholders, particularly with regard to a hard valuation for a company.”

Nothing could make this point clearer than the sharp fall in IAG’s share price after the termination of talks; even with the corresponding fall in QBE stock, its revised offer still values IAG shares at 37 cents, or 10 per cent more, than their current trading price.

With no detailed explanation of why it rejected the bid, and assuming that the QBE-imposed buffer on the IAG share price will continue to erode, the board is could end up looking foolish.

To QBE or not to QBE?
And, given that things will likely get worse for the company before they get better, IAG’s persistent assertion that QBE’s bid undervalued the business will only ring true if the latter comes back with a third revision - or better yet, a formal bid.

Another option, and the possiblity of which will be significantly impacted by Hawker's departure, is a hostile takeover approach.

IAG shareholders, including Investors Mutual who own 10 million shares, have stated their wish that talks are resumed. And, given the benefits a merger would bring to QBE, such as domination of the Australian market, and thereby pricing; security against currency exchange currently undermining the performance of its numerous overseas investments; and operational synergies that could be as high as A$500m, the move will continue to make sense - as will IAG's determination to hold out for a better offer.

Should that happen, then Hawker’s exit, and the appointment of Wilkins as heir apparent to QBE chief Frank O’Halloran, can be seen as part of a much larger plan.