Sacha at Divestor breaks down the Canaccord privatization proposal by management, including a detailed look at the balance sheet and where the value may be hiding. But it was this quote that spoke to me.
“One danger of investing in smaller-capped companies is that on occasion you will have management try to low-ball an acquisition of the rest of the company. Jimmy Pattison’s firm tried to take out the minority stake in Canfor (TSX: CFP) which nearly succeeded. I still remember being resentful when Cervus Equipment got taken out by management. Almost anything with the name “Brookfield” in it is susceptible to this phenomena. There are plenty of other stories out there. The danger of having these management-lead buyouts increases in proportion to the smallness of the company and the proportion of ownership of management. “
— Divestor
The whole article is worth a read. After having several company’s stolen out from under me in 2022, I’ll be investing in fewer micro caps going forward. The strategy is significantly less effective if you can’t let your winners run to subsidize the losers.
My other general rule is avoiding publicly-traded subsidiaries: I want to own the company extracting the fees rather than the one paying them. Something to keep in mind as you look at Brookfield, Fairfax or Glencore related companies that may appear in equity screens.
