Governance Gods shine on Discovery Air

It seems like a lifetime ago, but late on Friday, news came out from our friends at Discovery Air (DA.A:TSX). Big news. David Taylor, their Chairman and CEO, was terminated, effective immediately. In 100 press releases about executive departures, you’ll rarely see that word. Euphinisms, such as “by mutual agreement”, or “resigned to explore other alternatives”.

Lose your U.S. bank or investment dealer billions of dollars, and the press release will say you’re leaving by “mutual agreement”. In this case, one might assume the governance Gods are at work (see prior post “The perils of taking stock when you sell” April 29-08). The truth is, it was merely a fews days after Discovery’s August 2007 acquisition of Top Aces closed that it became apparent to me that all was not well in Rome (Orion Securities on Discovery / Top Aces merger details August 28-07). With the new Board members that were brought on board a few weeks ago, this problem is now fixed.

Here’s a snippet from the London Free Press, giving you some insight into where Mr. Taylor is coming from:

“It was basically a difference of opinion between myself and the board of directors and the board chose to terminate me,” Taylor said yesterday.

“As the company grew, they had to make a choice. It needed a full-time CEO. I can’t say I won’t miss it — I am an entrepreneur and love the business — but there are only so many hours in a day.”

As many Discovery shareholders will know, the issue of Mr. Taylor’s part-time CEO status became a public issue on the April 28, 2008 quarterly earnings conference call; investors and analysts wanted to know how he could run a $200 million revenue business on a part-time basis. One day a week, in fact, as I learned during a company roadshow presentation.

Mr. Taylor gave an interview to the National Pest following the call on April 28, 2008, and was quoted as saying that he going to “choose between his job at Pacific & Western Bank and Discovery Air”. Mr. Taylor was also quoted as saying: “There will come a time, probably in about a year, where I will have to make a decision. We will have to see what happens in the banking industry.”

It would appear that the choice was made for him. Around the same time, a 760,000 share block traded — the largest single trade in the name since I began paying attention. Curious timing, as the termination press release came out immediately after the market closed.

But, despite the headline in the London Free Press article, I doubt the termination had much to do with “sagging financial results”. For the recent quarter, Discovery generated almost $9 million of net income, despite a non-existent fire-fighting season. The stock might be trading at 5x current year estimated earnings, but it has risen on the news of the CEO change and the quarterly results. Something that’s hard to fake in a terrible market.

For my money, Mr. Taylor was headed for the exits when he compared himself to Warren Buffett on the April Q1 conference call. As we all know, the Investment Gods created just one of those.

The lessons for any small cap CEO are clear:

1) Bay Street is a small fishbowl, and the relationships between certain brokerage firms, institutional shareholders, research analysts, lenders and private equity players are difficult to ascertain, and harder to undermine

2) don’t ignore your institutional shareholders, particularly when they write you letters with a few simple questions

3) for a Director to be technically “independent”, they can’t be on a professional services contract to the company in question

4) no one goes for this “part-time” thing, so be careful how many Boards you sit on, and avoid any other CEO titles

5) lending money to a public company from your, or the Board’s, personal pocketbook is worth thinking long and hard about, unless it you’re the lender of last resort

For those who’ve never met Discovery’s interim CEO, Dave Jennings, we’ve done business with him and he’s a first rate fellow on every score. Things are looking bright at the company, despite the analyst price target cuts (we’ll publish those later this week); it appears as though they are just catching up with the stock price.

MRM
(our Fund II owns DA shares; I own DA shares and debs)