By Julian Hofmann , 08 May 2012
It is usually a measure of investors distrust of firm's motives when the share price rises on completing any acquisitions, which is exactly what happened after Playtech's last trading update, in which it revealed that it wouldn't be spending €95m buying a job lot of social gaming assets from founder and dominant shareholder Teddy Sagi.
Acquisitions have long been problematic for the gaming technology specialist, mainly because the company always seems to buy firms associated in some way with Mr Sagi. By some counts, the Israeli entrepreneur has benefited indirectly from about £500m of acquisitions made by Playtech since the company listed, whereas the current a market capitalisation is £1.1bn. Such goings on have, in the past, led some analyst to dub Playtech a 'black box' operation - in other words, its impossible to know who's pulling the strings. In the case of the aborted transaction, Playtech wouldn't even specify exactly what it was buying for €95m.
The question though for private investors is whether Playtech can straighten out its corporate governance and how it achieves enough respectability to justify its pretensions to FTSE 250 status.
Here are Playtech's basic options:
1) Break up.
Perennial bad boy resources company ENRC is mulling a possible spin-off of its operations outside Kazakhstan in a bid to improve a dubious record in its dealings with minority shareholders. However, this would be difficult for Playtech as its software technology-based operations are not confined by national borders.
Probably not a viable option. Odds for success 50/1.
2) Dilute the biggest holdings.
Offering new shares in the business would help dilute dominant shareholder Teddy Sagi's 48 per cent share of the business, which he controls through his Brickington investment company. The success of such a strategy would rely on Sagi not taking up his rights, however, issuing convertible bonds would get around this.
A move that may require a more forceful board. Odds for success 5/1.
3) Seek a merger.
Finding a buyer would offer an exit route for smaller shareholders but would still benefit the largest shareholder the most. A merger with one of its customers would guard against continual buying of assets from Mr Sagi's companies but there aren't many bookmakers with a market valuation big enough to ensure a partnership of equals. However, a big technology company would be an altogether different proposition given Playtech's specialist expertise. Odds for success 3/1.
4) Shake up the board.
Appointing more genuinely independent directors looks a prerequisite if Playtech wants to be taken seriously at the top end of the stock exchange. Playtech currently has 2 non-executive directors on the board, which looks a bit under-powered given that the company is not much smaller, in terms of market cap, than its biggest customers; William Hill, for example, has 5 non-exec directors on its board with a variety of corporate experience.
An easy problem to rectify and probably the first option the company will take. Odds for success evens.
But what does this all mean for the share price? Leaving aside the presence of a dominant shareholder, Playtech is essentially a technology company with few tangible assets other than the skills of its developers. These may be in demand at the moment, but all the good corporate governance in the world cannot mitigate against the arrival of a nimbler competitor, which happens with alarming regularity in the technology world.
And none of these solutions will immediately overcome the group's tendency to keep its shareholders (Mr Sagi excepted) in the dark on its copious dealmaking. Until Playtech can demonstrate that it takes its corporate duties more seriously, it seems more sensible to invest in the cash rich bookmakers that benefit from Playtech's current technological edge.