We’ve seen the best and worst of Australian business this week, and it almost feels like we’re back in 2006, when the likes of Babcock, Allco and burgeoning executive remuneration were all the rage.
The collapse of Dick Smith’s share price — and serious questions as to whether the business is viable — has shown once again that investors have very short memories. Almost 10 years ago I wrote “never invest in a company being floated by a private equity firm, because only one person will make any money, and it probably won’t be you”. That was before the Myer disaster, which had punters hose more than 70% of their “investment”. (In fairness, not all private equity firms are created equal — some, like Quadrant, have an outstanding record for delivering long-term value).
The Dick Smith disaster was all too predictable, though — a business that was flogged off by Woolworths (which, Masters aside, has been an astute buyer and sellers of assets) for $20 million was never really worth $520 million. Anchorage, which dressed Dick Smith for sale and timed its exit to perfection, will probably never sell another company to public investors again (virtually all of Anchorage’s other exits have been trade sales). Dick Smith is now valued at $82 million, despite recording revenue of $1.3 billion last year. The market simply doesn’t trust what it is saying about inventory levels, and also doubts whether the business is viable going forward. The fact that management has made two profit downgrades in a month (and left the door open for more, if it can’t move its marked-down stock) appears to indicate that one-time wunderkind and Dick Smith CEO Nick Abboud is himself unaware of the depth of the issue.
Dick Smith isn’t the only listed company to have had a torrid week. Former market darling (turned pariah) Slater & Gordon has had its share price fall by 85% after undertaking what appears to be one of the more foolhardy acquisitions since Rio Tinto bought Alcan. Slater & Gordon’s woes stemmed from the decision by the UK government to reduce the ability of car crash victims to make compensation claims. The problem for Slater’s is that it spent $1.3 billion buying a law firm called Quindell earlier this year, whose business is predominantly making the very claims that are now being banned.
Slater & Gordon’s UK head Neil Kinsella, sold more than 200,000 shares during the year and chose not to participate in the rights issue to fund the purchase. At the time of the acquisition, it was reported that Kinsella had been on quite the buying binge, and that “over the past two years, Slater & Gordon … has also bought up Fentons and John Pickering & Co”.
Speaking of boards behaving badly, former liquidator turned prominent company director Lindsay Maxsted has blotted his previously perfect copybook in recent weeks. Indeed, Maxsted’s stellar record has been damaged along with BHP’s share price (Maxsted has been a BHP board member since 2011, before the Big Australian’s disastrous shale gas foray). This week, corporate governance experts Ownership Matters uncovered that Westpac (which is chaired by Maxsted), undertook some dubious accounting manoeuvers to shift a $354 million write-down on IT systems out of its cash profit. While a small percentage of Westpac’s overall profit (of more than $7.8 billion), the accounting moves meant that former CEO Gail Kelly and other executives were able to crystallise huge bonuses (according to Ownership Matters, Westpac needed to make $190 million additional profit to clear the hurdles — so the IT write-off was the reason the multimillion-dollar bonuses were paid).
Kelly, whose legacy at Westpac was mixed, reaped an extra $10 million as a result of the decision by the Westpac board. In her time at Westpac, Kelly took home $71 million for her seven years at the bank. Since she was appointed CEO in February 2008, Westpac’s share price has increased by 32%, or compounded at less than 4% per year.
It’s not all doom and gloom though in the business world. This week, tech superstar Atlassian announced a $5 billion Nasdaq float. Unlike too many big businesses that seem to deliver minimal shareholder growth (while handsomely rewarding managers), Atlassian has been arguably Australia’s greatest export success story, ever. All started by two students from the University of NSW who used credit cards to fund the business in 2002. If the wealth creation wasn’t enough, Atlassian was also named as the Best Place to Work in 2015 by BRW.
Meanwhile, star stock-picker and BRW Rich Lister David Paradice yesterday announced that he was paying 26 senior employees $41 million in dividends (after the business reported a $59 million operating profit). Sometimes nice guys do finish first … along with generously paid bank CEOs and shrewd private equity firms.
*Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed, published by John Wylie & Sons
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