He who pays the expert calls the tune

THERE’S nothing like an ignominious company crash to reveal just how empty words like “independent” and “expert” can actually be. Take the case of Protech Khuthele, the civil engineering company that flamed out in recent weeks, leaving investors holding worthless shares and more than 1 100 people without jobs.

But it’s more than just a routine implosion. Some remarkable twists in Protech’s death throes have again cast the spotlight on the people paid millions to safeguard investor interests. The emperor, it seems, is very scantily clad indeed.

But first, the context: last year, rival engineering firm Eqstra put in a bid to buy Protech at 60c a share.

No, said Protech’s board and CEO Antony Page, this isn’t nearly sweet enough — in fact, we value the company at 94.5c.

Protech’s directors then hired an “independent valuation expert”, PricewaterhouseCoopers (PwC), to study the bid and advise investors.

PwC soon reported back that Eqstra’s bid was “unfair and unreasonable”, and a “fair range” for Protech’s shares was 79c to 88c.

Investors ultimately took PwC’s word, and Eqstra’s offer failed.

The question is, considering Protech’s shares are worth 0c right now, how did PwC manage to work out that Protech’s value was so high?

Through “detailed valuation work and other considerations”, it said — whatever that means.

Even at the time, investors took PwC’s view with a pinch of salt.

Vunani analyst Anthony Clarke said then that despite PwC’s assessment, Protech’s “share price remains lower than 60c/share, implying that the market disagrees”.

Now, you can understand why a CEO wouldn’t like a hostile takeover bid. Usually, hostile bids only happen because a company isn’t performing. So once the bidder has wrested control, poorly performing managers are sent packing.

In its offer, Eqstra said it was “unable to confirm whether or not any of the [Protech] directors will continue to act” after the deal.

But this alone isn’t reason to reject a deal. This is why you have independent directors: to keep a rein on the CEO, and ensure that management does what’s best for everyone — not just the top brass.

In the wake of Protech’s collapse, there are some big questions about how well Protech’s “independent directors” did this job.

Did these directors, for example, believe it was right that CEO Page was paid R9-million last year, including a R5.7-million bonus, when this was more than half of Protech’s profit of R16-million?

Did they really believe that when Protech was battling to keep its head above water, it was right to blow R21.3-million on “defending” itself against Eqstra’s bid?

This week, Moneyweb reported that Page, who led Protech from 2007 right to its death bed, still bills himself as a “specialist in business turnarounds” on social media site LinkedIn. This is despite the fact that Protech went into “business rescue” two days after Page quit.

I’m not sure Protech’s scalded investors will agree with Page’s assessment. But then they’re probably pretty angry with PwC too.

But should they have trusted PwC in the first place? There is intriguing research that sheds light on this.

A 2009 study, published in the International Journal of Business and Management, found that “expert opinions are not impartial”.

Researchers studied 44 deals on the Tel Aviv Stock Exchange where “experts” had valued companies before takeover deals, and found that “expert valuations are 29% higher than the market values”.

“While [experts] are supposed to provide an independent expert opinion, they are in fact biased towards majority shareholders who hired them to value the firm.”

In the long term, this overvaluation “appears to be followed by destruction of value”. He who pays the expert, it seems, calls the tune.

What now for PwC, which was instrumental in Protech investors shunning Eqstra’s offer? Eqstra itself still owns 32% of Protech.

Last month, Eqstra CEO Walter Hill told journalist Alec Hogg that Protech’s board “will certainly have to look at the objectivity of the independent evaluation because it certainly has cost us a large sum of money, as well as other investors who took their advice”.

Investors should heed Winston Churchill, who believed that trusting experts could be fatal. “Expert knowledge is limited knowledge, and the unlimited ignorance of the plain man who knows where it hurts is a safer guide,” he said.