Strike 2 for Romulo Neri

ZOOMING IN

Rudy Romero

10/31/2008

The best test of the professional worth of a financial manager is whether he manages other people’s funds with the same degree of professionalism that he devotes to the management of his own funds.

Applying this test to his decision to recommend to the Social Security System’s board of trustees, the acquisition of 778.44 million shares of the common stock of Philex Mining Corp. — equivalent to a 20 percent stake in the company — SSS president Romulo Neri gets a failing grade.

Neri, the individual who won Supreme Court support for his refusal to be transparent before the Filipino people about Gloria Arroyo’s involvement in ZTE Corp.’s overpriced sale of a National Broadband Network (NBN) project to the Philippine government, is an independent director in this country’s largest mining company and was the only one of the Philex board’s seven members to object to the 778 million shares’ sale to Hong Kong-based First Pacific Corp.

There are several reasons for Neri’s failure to pass the financial manager’s test in this instance.

The first has to do with corporate necessity. Does the sale of the 778 million Philex shares represent a must-buy situation for the SSS? Is the acquisition of the shares a corporate imperative for this country’s largest social security institution? Will the viability and prestige of the SSS be placed at risk by its failure to acquire the shares?

To all three questions, my answer is “No.” The sale of the 778 million Philex shares does not represent a must-buy situation for the SSS to acquire the Philex shares. The viability and prestige of the institution mainly funded by the monthly contributions of 26 million private-sector employees will be neither endangered nor impaired by the sale of the shares to a buyer other than the SSS.

Admittedly, shares of the mining company founded by the legendary Henry Brimo are first-rate equity investments. Philex has always been well-managed and is by Philippine standards, a blue-chip stock. Investing in Philex is a sound decision from both the income and the capital growth standpoints.

But just because it already has a 23 percent stake in Philex does not, by any means, suggest that an institution such as the SSS must increase its holding to 43 percent of the company. The business of the SSS is social security, not controlling or owning large chunks of the stocks of major Philippine companies. Neri and his management team must focus their attention and energies on the faithful performance of their obligations to the millions of Social Security Act beneficiaries. Engaging in inter-corporate power plays is not what the SSS was established for. Or would Neri, who has hardly warmed the president’s chair, have the System’s members (myself included) believe that SSS operations have already reached such a level of efficiency that he is now free to engage in corporate buccaneering?

In seeking to be able to exercise what he perceives to be SSS’s preemptive right, Neri would have the System match the approximately P6.2 billion offered by First Pacific Corp. for the 20 percent stake. Assuming for the sake of argument that there was a sound basis for SSS’s enlargement of its holding of Philex stock, why should Neri buy additional Philex shares at First Pacific’s P7.92-per-share offer price when SSS can buy Philex shares in the market at around P6.80 per share?

One doesn’t have to be an Asian Institute of Management professor to appreciate that paying P1.12 more for a share of a company’s stock does not make financial sense for a buyer not bent on acquiring control of the company. A personal motivation (like, does Neri want to thwart First Pacific’s Manny Pangilinan?) is something else altogether.

Besides, would not payment of a P1.12-per-share premium by First Pacific Corp. be beneficial for SSS and other Philex Mining Corp. shareholders? SSS’s holding of Philex stock would become that much more valuable without the System having to spend P1.12 more for each addition to the number of Philex shares that it currently holds.

This discussion has proceeded on the assumption that no legal question exists regarding SSS’s claim to have a preemptive right over the Philex shares for which First Pacific has made a bid. Does the concept of preemptive right extend to treasury shares, or is it limited to newly issued shares? The president of the Philippine Stock Exchange has expressed doubt as to whether a company’s existing stockholders enjoy a preemptive right to acquire treasury shares. I share the doubts of Francis Lim. Treasury shares form part, after all, of the number of shares approved by a company’s founders at the time of its incorporation.

Newly issued shares — such as the shares that a company issues when it wishes to raise incremental operating capital — are another matter. With regard to such shares, there can be no doubt that a matching price-per-share from the SSS would enjoy legal priority over a First Pacific Corp. offer.

Would Romulo Neri be so free and easy bidding for the 778 million Philex shares if he were using his personal funds? Or is he being so cavalier, matching First Pacific Corp.’s offer centavo for centavo, because he is using funds that are not his own?

You should exercise utmost prudence and care when using the hard-earned funds that SSS members contribute monthly to the SSS, Romy.

In baseball, a player who incurs three strikes is thrown out of the game. His refusal to testify before the Senate on the ZTE deal was Strike 1 for Romulo Neri. His insistence on bidding high for the Philex shares is Strike 2. One more strike, Romy, and the Filipino people will throw you out of the governance game.

(My e-mail address is rudy_v_romero@yahoo.com)

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