Battle for Idion: A shareholder`s perspective

SA seems an odd place to wage a battle for the domination of the North American managed availability solutions market, but that is what happened recently when Canadian group DataMirror Corporation attempted a hostile takeover of locally listed Idion Technology Holdings.

DataMirror came to the attention of South Africans when it launched its takeover bid in March. Although it attempted to.

DataMirror came to the attention of South Africans when it launched its takeover bid in March. Although it attempted to gain control of the group, it managed to garner only about 37% of its shares, making it Idion`s largest shareholder. About 20% of Idion`s shares were acquired through the bid itself, as it had already amassed a 17% shareholding beforehand.

The ultimate battleground was Idion`s shareholders. Although some sold their shares, Idion has been left with loyal shareholders, some of whom have negligible holdings but are adamant they are not letting go.

Idion Technology Holdings listed on the JSE`s Development Capital sector in August 1998, moving to the main board IT sector in November the following year. In March 2000 the group acquired US-based Vision Solutions in a controversial deal which resulted in the resignation of Marius Vlok, father of Idion CEO Nicolaas Vlok. The senior Vlok said when he resigned that he was leaving the group he helped to found because he believed the $54.5 million paid for Vision was too high, and he believed the deal would not be in the interests of shareholders.

Vision defines its business, managed availability solutions, as the "continuous, uninterrupted access to critical business information, systems and applications, in the state and format needed by an enterprise".

The acquisition continued to receive bad press, particularly as Vision was a loss-maker and several analysts said they failed to see the value of the acquisition at that price. Nicolaas Vlok has steadfastly maintained that the deal`s critics would be proved wrong.

Vision Solutions had also attracted another suitor, Canadian group DataMirror, whose offer was substantially below Idion`s. Although Vision accepted the Idion offer, DataMirror returned this year to attempt to gain control of Vision through a hostile takeover of Idion.

The local operation, Idion Solutions, was restructured to be wholly aligned with Microsoft`s .Net strategy - a vision of a connected world and the delivery of information "anywhere, anytime, via any device". Essentially, Idion Solutions is a provider of business optimisation solutions and services using Microsoft technology.

Vlok says the sale of Idion Solutions, announced last Wednesday, is in line with a board decision to concentrate on Vision Solutions. While Idion is a services company, Vision is a product developer, and that is where the group wants to focus. He believes the sale is in the interest of shareholders, and shareholders appear to agree. Other than those from DataMirror, there were no objections to the deal at the group`s much-publicised annual general meeting last week. The sale is still subject to conditions, and the finer details, such as the status of CEO Ken Jarvis and other employees, have yet to be worked out.

The group`s focus is now on Vision`s market, which is a hotly contested one.

The North American IBM iSeries (AS/400) high availability market is shared by Vision, DataMirror and Lakeview. In March this year, in an apparent attempt to gain Vision`s market share, DataMirror launched its hostile bid to take over Idion Technology Holdings, offering Idion shareholders 65c a share, later raising it to 120c and then 180c.

I couldn`t quite put my finger on exactly what was going on and that set the tone for the entire bid.

Johan Augustyn, Idion shareholder,

By the time Idion held its annual general meeting last week, DataMirror had managed to garner about 37% of its shares, making it Idion`s largest shareholder. Its shareholding allowed it to block three resolutions which would have granted Idion the power to issue shares for cash, to repurchase shares and to allow for online proxy voting.

Johan Augustyn owns just 100 Idion shares and he has been following the events closely since DataMirror`s bid was announced. A former BOE analyst who now works independently, he says DataMirror lost the battle for the hearts and minds of Idion shareholders from the outset.

Describing the process, Augustyn says: "[DataMirror] announces a meeting at 11 o`clock, in Johannesburg. You`ve got virtually no time to get yourself to the meeting. People in Cape Town, who are the major shareholders, can`t go, so they have to hear second-hand information. You get to the meeting and it`s pretty clear that it`s a hastily prepared meeting.

"I couldn`t quite put my finger on exactly what was going on and that set the tone for the entire bid. Sixty-five cents was opportunistic in the extreme. Then when its final bid document was released to us we saw that it bought shares then sold those shares and rebought the shares. The explanation was that R1 was too high and that it had gone outside its range, yet its final offer was R1.80, so there`s another contradiction in this whole saga.

It`s not a way to win shareholders over to your side. And that seems to have characterised its entire approach.

Johan Augustyn, Idion shareholder,

"When it became apparent that it wasn`t going to get control, it became pretty aggressive about its talks and its relations with shareholders. It`s just unsavoury. It`s not a way to win shareholders over to your side. And that seems to have characterised its entire approach."

It was clear at Idion`s AGM that other shareholders were also unimpressed with DataMirror. Questions and challenges posed by DataMirror general counsel Greg Dee were met with groans and muttered comments from those attending. Several shareholders, including Augustyn, said it was clear that DataMirror`s aim at the meeting was to frustrate the company and other shareholders.

It may even be a positive in that it will enforce a discipline on the company to generate cash in order for its businesses to carry on.

Johan Augustyn, Idion shareholder,

"I think it`s obviously the only muscle that DataMirror has left - to block those special resolutions," Augustyn says. "If you run through those special resolutions it blocked, one is the issuing of shares. My view on that is it`s not necessarily a negative because the company doesn`t have a requirement at this stage to issue shares that I`m aware of. In fact it may even be a positive in that it will enforce a discipline on the company to generate cash in order for its businesses to carry on. So it`s not necessarily a negative. I think there are two sides to that story."

DataMirror also voted against the reappointment of the company`s executive and non-executive directors, although that resolution was passed by the requisite majority.

"As far as the blocking of directors is concerned, I find DataMirror`s statements there pretty contradictory," Augustyn says. "On the one hand it is insisting that more non-executive directors are appointed. On the other hand it`s blocking the reappointment of the current non-executive directors. There didn`t seem to be anything constructive in what it was doing from that perspective."

Augustyn indicates that minority shareholders have taken the hostile bid as a sign that there is more value in Idion than they originally believed.

"At the end of the day if you are prepared to sit through this nonsense, value will be realised, markets will return to some sanity in years to come, whether it is two, three or four years from now. The mere fact that DataMirror has made this offer has demonstrated very clearly that there`s more value than was thought in the market six months ago. It was always obvious that there was more than 30c value, but now we can clearly see there`s actually more than R1.80 because nobody makes an unconditional bid at R1.80 without realising there`s substantially more value.

"The other thing that I find interesting is that DataMirror keeps telling shareholders what`s wrong with the company and how many things are wrong, but it`s quite happy to buy the company unconditionally without any due diligence process - another thing that indicates to me that it sees enormous value in the company, way beyond R1.80. It`s just unknown that you make a bid unconditional if you haven`t got a huge margin of safety in the price you`re paying."

He adds that although DataMirror has said repeatedly that the Idion share price will fall after the bid, "the liquidity in that share has dried up completely, so any fallback in price is probably going to be on such small volumes you can actually ignore it. I ask myself which shareholder in his right mind would sell shares now below R1.80 when yesterday he could have accepted R1.80. And who would be left to throw out shares? All the shareholders who have now decided to retain their shares are quite happy to sit on them. They`re pretty aware of the fact that the share price could go down in the short-term. We know what`s happening on the Nasdaq and foreign markets."

Augustyn believes DataMirror`s recent announcement that it had asked the Securities Regulation Panel (SRP) to probe alleged concert party activity by some Idion directors is purely an attempt to have the SRP rule that an offer of 185c must be made to minorities. "Its strategy is not clear in terms of what it`s trying to do, although it seems to me that now it needs to get an elegant exit out of Idion.

"It`s one thing to come into the country as a foreigner, and that`s difficult, but to do it in the way DataMirror did I think was mad. Whoever its public relations people are, whoever ran its whole campaign didn`t inform it correctly."

One public relations failure, according to Augustyn, was the insistence by DataMirror that Idion improve its standards of corporate governance. "It is not exactly the flag-bearer of corporate governance itself in that it shares a common chairman and CEO, so it`s strange to me that it would want Idion to uphold such high corporate governance standards when it is not an example of that itself.

It`s one thing to come into the country as a foreigner, and that`s difficult, but to do it in the way DataMirror did I think was mad. Whoever its public relations people are, whoever ran its whole campaign didn`t inform it correctly.

Johan Augustyn, Idion shareholder,

"If you watch CNBC you will see the issue of chairman and CEO is coming up continuously. In fact, every time there`s a CEO who is both chairman and CEO on an interview they are asking that specific question."

Although DataMirror made an issue of Vlok`s salary, Augustyn says a DataMirror SEC filing shows that DataMirror CEO Nigel Stokes earns substantially more.

"DataMirror clearly failed its objective of getting control, and it`s going to struggle, most likely, to get another 5% over the next year, unless it offers a substantially higher price. It has nothing to show its shareholders for its foray into Africa."