Red rag to Boel
Annette van der Laan "categorically denies" that she or any other CS Holdings, Idion or Datamirror insider are part of the mysterious counter-party to the deal that cost her the top job. But though she fell on her sword, the deal was structured by the new acting CEO Dave Vink.Annette van der Laan`s resignation as CEO of CS Holdings on 24 February astonished the investment community, media and public. After 12 years as CEO, during which she had built the company into a darling of an otherwise tarnished South African IT sector, the reversal of a single deal that had already been accounted for proved to be her downfall.The new acting CEO, Dave Vink, commended Van der Laan on taking responsibility for the "error of judgement", even though he, as executive director in charge of EDD at the time, was responsible for negotiating and structuring the transaction in question on behalf of CS Holdings.Van der Laan`s undoing came when Moneyweb`s Alec Hogg, on his radio programme Classic Business, started probing the dubious reversal of a transaction that had the effect of improving the company`s results for the interim period ended 31 December 2003. He raised concerns over just what accounting methods were being employed, and why. For good measure, he added some rather pointed questions over a mysterious outfit named "Faltalia", as well as potential conflicts of interest to an already explosive cocktail.Yet many observers were less surprised at the resignation. First, Van der Laan followed a series of big acquisitions with promises of rapid organic growth that seemed like over-reaching. Moreover, some former non-executive directors who spoke to Brainstorm had been disappointed in the company`s management, and felt they had been treated with some contempt when the transaction at issue first surfaced at the beginning of 2003.The Hogg interview was merely the death blow. Countdown to exitFor Van der Laan, the end began when CS Holdings bought Idion Solutions in June 2002.At the time, a Securities Regulations Panel complaint by Datamirror, which held shares and had on the table an open offer for more shares in its hostile take-over attempt of Idion Holdings, grabbed the headlines. Datamirror claimed the sale of Idion Solutions - the holding company`s South African business - was material and should have been subject to its approval.Under the media radar went a software product called Electronic Document Delivery Systems (EDD), 50 percent of which was bought by CS Holdings in a separate transaction for a relatively measly R2.6 million. CS invested a further R1.3 million into it and some five months later signed a deal with an offshore company called Faltalia to sell 80 percent of CS`s stake in EDD for some R18 million.A sweet deal, it would seem.In what had become usual practice for IT companies in South Africa and abroad, the full amount of the asset sale was included as revenue in the company`s interim results for the six months to December 2002, even though only a small tranche had been paid.The first snag was when the auditors of the June 2003 year-end results pointed out that the transaction might trigger a VAT liability of around R2.6 million. While it had already received R3.4 million from Faltalia, VAT and the AC133 accounting treatment would negatively affect cash flow and the profitability of the deal."We had three choices. We could go ahead as is, we could endeavour to terminate the deal outright, or we could renegotiate the deal," Van der Laan says. "After consultation with non-executive directors, it was agreed that, based on the options available, the cancellation of the deal was the most commercially viable option."Faltalia was given its money back, but demanded the right of first refusal should CS Holdings decide to sell EDD again.Boel Pretorius, the CEO of Reunert, which last year became a major shareholder in CS Holdings, launched an investigation into the transaction. He says that the deal was right and at the time very positive for CS Holdings. "When my people made the report-back in February 2004 and they brought me a copy of the contract, I could see that it held only upside for CS Holdings."The EDD transaction between Faltalia and CS Holdings was brokered by Hans van der Laan, Annette`s former husband, whose consultancy company Havadel Finance rented offices in CS Holdings` building.As a result, the investigation also looked into possible conflicts of interests arising from the relationship between the divorced Mr and Mrs van der Laan.Although the board explicitly concludes no such conflicts existed, and Havadel earned only consultancy fees and not commission, it promptly terminated the contract between Havadel and CS Holdings in the statement that announced the resignation of Annette van der Laan. Not like that"If one of my Reunert managers had brought such a contract I would have said: `Let`s do it immediately`. But then I would have called my financial director and instructed him to account for the deal very carefully so that we would only book revenue and profit when we received it."This approach by Reunert, a company with a conservative business reputation, seems to be in direct contrast with the accounting opinion held by CS Holdings` management. Adds Pretorius: "I was comfortable with the deal, but we (Reunert) would never have done it like that."But Van der Laan comments, "The IT industry is a challenging sector within which to do business. The transaction was in the ordinary course of business and after consultation with management I was satisfied that the accounting treatment of the transaction was correct."Reunert was a relative newcomer to the CS Holdings board. It had only acquired its 31 percent stake from Gensec and Getronics in October 2003 and by then the whole transaction with Faltalia had come and gone.The decision to terminate and renegotiate the deal was made during August 2003 and affected the results for the year ended 30 June 2003. According to Van der Laan, the previous interim results - in which the sale was included - were not restated because "the board of CS Holdings still felt the transaction was correctly recorded and reflected in these results". Scrutinising the dealThe deal had come to the board`s attention in May 2003 when auditors PricewaterhouseCoopers raised a query in preparing the year-end results.The board was not amused. Management and former CS Holdings non-executive directors reported serious discussions in May 2003 that ensured that failure to disclose to the board, in advance, material transactions such as these would never happen again.One of the former non-executives, who asked not to be named, says the board insisted that the matter be reflected in the 2003 results and in the annual report, and that a Stock Exchange News Service announcement be made to announce that the deal had been terminated.The identity of "Faltalia" was not disclosed, ostensibly because of a non-disclosure agreement between it and CS Holdings. Such clauses are reportedly fairly common in software industry contracts."A matter that was settled then, became a PR disaster a few months later," says the former non-exec. "Although initially I was quite cross with Annette personally about the matter, it was a judgement call she made. I was not surprised about the findings of the Reunert inquiry, since we had made similar findings ourselves." Don`t mention us!Exactly who or what Faltalia is has not been answered in full, and the CS Holdings board insists that the non-disclosure agreement should stand. This continues to be a cloud hanging over the whole transaction, and naturally gives rise to speculation of the worst kind.In one of several interviews with Brainstorm, Van der Laan volunteered a strong denial, however. "I can categorically state that neither myself, nor the management of CS Holdings, nor the management of Idion are in any way involved with Faltalia."She also denied that her ex-husband Hans, and as far as she knew, the management of Datamirror, were involved."Such foreign companies are set up to protect their principals and to ensure that they are never made public," she says.The former non-exec concurs: "As directors, we had a duty to find out who exactly `this funny company` was, but we were satisfied that the principals of this offshore entity had to be protected by the NDA."This does seem to defang the speculation to some extent. But it does not settle the suspicion. Faltalia is clearly a front company, but for whom? And for what purpose? Was the ex-Idion asset EDD due to be sold on to someone else?"The principals of Faltalia were extremely unhappy that I had even mentioned the name at all," says Van der Laan. "But our board and the investigations were given the details."However, Thuli Zuma, non-executive chairman of CS Holdings, says, "The board could not establish who was behind Faltalia." As CEO of the company`s second-largest shareholder, he concurs with Van der Laan and Pretorius that the deal was not questionable other than in its accounting treatment, but that CS incurred no material loss as a result.When asked whether there was a possibility of front-running (in which a front company profits improperly as an intermediary for the sale of an asset) he adds: "There was never a suggestion of that happening."CS Holdings shareholders, institutions and private, did not question the trading update of 30 August 2003, which announced the termination of the EDD transaction and the impact it would have on the full year results.The news certainly did not deter Reunert from buying into CS Holdings. As Pretorius says: "We were concentrating on the future. On what CS Holdings could do for us in the long term."Zuma seems to be equally unfazed by the issue, and seems content to leave the matter in Reunert`s hands. Pretorius, however, insists they were equal partners all the way through. "Whatever we did, we did together." Sitting in judgmentJudging the effect of the "error of judgment" on CS Holdings, its shares and the business itself is difficult, mainly because even after the initial publicity resulting from the August 2003 trading update seemed to be a matter of business as usual. The share price did nothing spectacular, as the orderly sale of the Gensec and Getronics stakes to Reunert went ahead and the board was reconstituted with its new members.In fact, if it was not for the fact that the interim results to December 2002 were finally restated when the interim results for the six months to December 2003 were released, the story would have been largely overlooked and Van der Laan would still be CEO.She feels very bitter about the manner in which the story broke."They [the Moneyweb staff] sat like a law court firing questions at us and we did not have all the answers at hand," Van der Laan recalls.Zuma also says, "The allegations where to some extent overdone."But though it had originally expressed confidence in Van der Laan, Reunert`s confidence wavered once it became apparent that a number of errors of judgment had occurred. Now, the reputation of CS Holdings was becoming tarnished. This could not be allowed to go further.Asked if he would stand by the original statement of confidence in the ex-CEO, and the CS Holdings` board, the Reunert boss was unequivocal: "Not after I saw the report of the investigation." Confidence lostOnce Van der Laan had lost the confidence of her main and most influential shareholder, it was time for her to go."In every scenario the executive directors and I drew up, it ended with my resignation being in the best interests of the company," she says. "The company could not continue with the cloud of bad publicity hanging over it."But Van der Laan, who has a reputation for keeping a tight rein on the company, adds that she had been toying with the idea of leaving CS Holdings for some time. After 12 years as CEO, it would have made sense for her to move on, and some former non-executive directors had noticed her management style was changing and she was giving people a lot more responsibility."But the timing was not quite right," she says.The EDD sale was not negotiated or structured by her, but rather by the current acting CEO Dave Vink, assisted by two qualified chartered accountants. While Reunert has expressed its confidence in Vink and the current board, Pretorius may do well to remember that it had done the same for Van der Laan.Vink himself says: "Management had been remiss in not disclosing the deal because of its material nature. But Annette was the CEO and had to take the rap for it. Her resignation put the interests of the company ahead of her own."The first rule in corporate governance is "protect the company`s reputation" and the second is that those in charge take responsibility and Van der Laan seems to have done that. As another former non-executive director says: "The only way forward for CS Holdings was without her."For the time being, Vink`s in charge. And Faltalia remains a curious mystery.
30 April 2004
Annette van der Laan "categorically denies" that she or any other CS Holdings, Idion or Datamirror insider are part of the mysterious counter-party to the deal that cost her the top job. But though she fell on her sword, the deal was structured by the new acting CEO Dave Vink.
The new acting CEO, Dave Vink, commended Van der Laan on taking responsibility for the "error of judgement", even though he, as executive director in charge of EDD at the time, was responsible for negotiating and structuring the transaction in question on behalf of CS Holdings.
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