Friday, September 3, 2010

Life is not fair, get used to it! Really?

Potash is well below its price peak earlier in 2007-2008. The market in potash has fallen dramatically over the last few years, but has turned around lately. The issue with potash in fertilizer is that farmers, during bad economic times can skip applying it for 1 and a maximum of 2 years. That time frame is now over and like drug addicts they now badly need their fertilizer shots.

Both Agrium and Potash (POT) saw demand shoot up in the last quarter and more is to follow. So many small investors were hoping to recover their losses or make a quick buck. Of course, Billiton also sees this oppertunity and tries to buy when even with a 30% premium they still buy POT cheap.

In takeovers, it is usually the 'small investor' who loses. I have been going through this over and over again. You find a good investment and then a bully like BHP comes in and steals the deal from you. Small investors get steamrolled in these deals and end up having no choice but surrendering their shares because 'big money' has decided so. Basically POT management and BHP are the big winners in this take-over if successful. It is not in the interest of the investor who loses out on a good holding in their portfolio for years to come. A lot more profit than the current offered 30% premium over market price!

I owned Potash and bought it cheap a few months prior to the take over. I took advantage of the initial speculative frenzy and sold at $155. BHP is the only bidder and it will likely go for $130-$140. The only thing that can really stop this deal is government interference. This depends on how Saskatchewan feels about the new ownership and its impact on royalty income and employment. The Chinese are known to be ruthless and as such, their ownership would likely to be considered against the interest of Canada and in particular against Saskatchewan.

So basically, this is not even a 50/50 split typical REIN joint venture (and I think even this split is too high when you don't put up the money). This is at best a distorted artificially low sale of the property and then you, the small investor, will get a 10/90 (for the executive) split. Also, executives are often not the founders of a company and they often cannot claim responsiblity for the corp's growth over the years. They don't take any risks either other than that after a few years at the corporate helm they may have kept (as in this case) profits at an acceptable level. How much of the profits are due to market forces rather than skill is highly questionable and for that dubious contribution management walks away with many millions. If the entire senior executive is included their haul will likely approach a billion.

When senior managers make a 100 times or more what the normal basic staff makes, things are clearly out of whack. This is not a 'free market' this stuff is rigged; even the appointment of the senior executive is rigged and hardly decided by the shareholders but by management's buddies on the board of directors. There are of course exceptions but in general shareholders are not much more than glorified lenders who better do what the management and the board wants. Because, although management has often little money in these companies invested themselves, although they often haven't build the company over many years like company founders and many employees; they tend to be in power and take a lot of the profits. Executive compensation is completely out of whack and certainly not an example of capitalism at its best! If senior managers don't get more reasonable with compensation, this may become an area of government regulation! Not something to be desired, but then neither is current behavior of the management class.

My two cents.

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