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Is this share a falling knife to grab after a shock 25% price crash?

I’ve pondered on the idea of buying Amigo (LSE: AMGO) shares in the hope of earning a nice takeover profit. I concluded that investment decisions like this are too risky for me

Founder and major shareholder James Benamor indicated, through his investment vehicle Richmond Group, he wanted to sell his stake. That led to the board deciding to put the company up for sale. In February we heard that several parties had expressed interest, though none had made an offer.

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Things unfolded further Wednesday when we heard Benamor had resigned from the board, three months after he had rejoined, having previously stepped down as CEO in 2016.

Speculation he might be set to make a buyout offer and take the company private gave the shares a boost, and they ended Wednesday with a 3.8% gain. But, at 40.55p, that was still way down on the July 2018 flotation price of 275p.

Accusations

Later, Benamor published a scathing attack on the company, linked on Twitter. Citing a move on the part of the Financial Ombudsman Service (FOS), which raised the bar on companies lending to customers who had shown an irresponsible approach to borrowing, Benamor alleged that Amigo “began refunding almost all complaints received, but continued to lend on a virtually unaltered basis, hoping no one would notice.”

In perhaps his most astonishing allegation, Benamor said: “Within one year of my stepping down from the board, the most efficient company in the FTSE 250 had become a cash cow for consultants, lawyers and suits, all of whom had an interest in keeping the gravy train running for as long as possible, but no interest in the company being honest with shareholders or customers about the situation it was in.”

Claiming he had voted against the attempt to sell the company, he concluded: “They must immediately cease lending, collect in the book, pay down debt, and proceed directly to judicial review.”

The share price crashed as much as 28% at one point Thursday morning as a result.

Response

The Amigo board has said Benamor’s statement “contains several material inaccuracies and is fundamentally incorrect in a number of respects.” As one example, the company says Benamor had contributed to the unanimous approval of the firm’s formal sale process, announced 27 January.

What should investors do now? I’ll quote something Benamor said in February: “Using today’s price to predict the future is like looking at your lawn to predict tomorrow’s weather.”

So, first thing, I’d completely ignore what’s been happening to the share price, as it tells us nothing whatsoever about what’s going to happen.

To make any sense of this situation, we need to know who’s right in this dispute, what might be required by the FOS regarding this kind of lending, whether Benamor wants to sell or doesn’t want to sell, whether he’s planning a private takeover… In short, lots of things we can’t possibly know.

Bargepole

But I don’t really need to dig further into it. I’d simply run a mile from any investment where there’s a dispute between a major shareholder and the board. And I think I’d also avoid any company where the founder has a big financial, or emotional, attachment.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Twitter. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.