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Equity Trustees Ltd drops 22% as IOOF rejects the institutional imperative

The trustee sector continues to consolidate with the announcement last week by Equity Trustees Ltd (ASX: EQT) that it had agreed to acquire ANZ Trustees from Australia and New Zealand Banking Group (ASX: ANZ) for $150 million.

The acquisition comes just over four months after Equity Trustees lost out to Perpetual Limited (ASX PPT) in the battle to win control of peer, Trust Company. An interesting result of Perpetual’s winning bid for Trust Co was an agreement with IOOF Holdings Limited (ASX: IFL) for the purchase of 1.2 million shares in Equity Trustees that belonged to Perpetual as a result of the takeover of Trust Co. The outcome of this transaction was IOOF effectively gaining a strategic 13% stake in Equity Trustees.

While this strategic stake naturally led some analysts to question how long it would be before IOOF launched its own takeover for Equity Trustees and consolidated the sector further, it now appears that the 13% share grab was very much an opportunistic purchase and more about securing a future bargaining chip.

To help fund its acquisition of ANZ Trustees, Equity Trustees last week launched a capital raising at $17 per share to raise $160 million. The offer price of $17 represented a 14.3% discount to the theoretical ex-rights price of $19.83, but a hefty 22% discount to the last traded price before entering its trading halt. Despite widespread support for the raising, interestingly IOOF chose not to participate.

In Warren Buffett’s 1990 letter to shareholders he outlined the problem of the ‘institutional imperative’ which he described as “the tendency of executives to mindlessly imitate the behaviour of their peers, no matter how foolish it may be so to do.”

The institutional imperative is a problem which shareholders face time and time again when they review mistakes made by the people charged to manage their companies. Pleasingly in this case IOOF appears to have remained focussed on the price of the raising rather than any grand notions of acquiring a target or the need to ‘do something’.

Foolish takeaway

According to a report in the Australian Financial Review, “an IOOF spokeswoman said it viewed the raising as overpriced, and opted out.” IOOF’s management has acted in their shareholders’ interests here by refusing to pay more than they believe Equity Trustees is worth. Identifying managers who have this mentality and act for the benefit of shareholders is a key to identifying long-term successful investments.

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Motley Fool contributor Tim McArthur owns shares in Perpetual Ltd.

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