There is another story here. Look at the inventory level at the time of sale: $371 million. In that time frame, they had about 1.2-1.3 billion in revenue. That puts their inventory-turnover ratio at around 3.2-3.5. Meanwhile, Best Buy, GameStop, hhgreg, operate at a turnover ratio approaching 5.5, and Amazon is at over 8.[1]
So here is my alternative take on this: Woolworth's knew that retail consumer electronics is a dead business in the age of Amazon and Apple/Microsoft company stores. They knew that the $371 million of inventory was never going to sell at that price. Who wants to buy 6-9 month old consumer electronics? So they sold Dick Smith at a discount to: 1) get out of a dying business area; 2) have someone else take on the onerous task of liquidating whatever value could be extracted from the company.
Now, as to the subsequent sale. It's not like prospective investors didn't see these transactions. It's not reasonable to assume that institutional investment professionals couldn't have figured out what it takes this blog post a couple of pages to explain. More likely, they were taking on a gamble: here was a leaner, meaner Dicks stripped of baggage that could make profits going forward. They lost that bet, but not because of anything the PE company did.[1] They lost that bet because Dick Smith immediately bloated itself up again with huge amounts of inventory, likely because the company simply wasn't structurally capable of operating as leanly as the market now demands.
From the article: Remember the plant and equipment writedowns? That reduces the annual depreciation charge by $15m. Throw in a few onerous lease provisions and the like, totaling roughly $10m, and you can fairly easily turn a $7m 2013 profit into a $40m forecast 2014 profit. That allows Anchorage to confidently forecast a huge profit number and, on the back of this rosy forecast, the business is floated for a $520m market capitalisation, some 52 times the $10m they put in.
The PE firm didn't do anything "wrong"...they simply charged (much) more than the company was worth off the back of unrealistic and borderline fudged profit forecasts. It's the buyers' fault for not conducting due diligence and calling bullshit on the price set by the PE firm.
But at the end of the day $520m is peanuts compared to the size of institutional mutual and pension funds who need to find places to invest hundreds of billions in a multi trillion dollar market. I wouldn't be surprised if many small-mid PE firms were using financial bloat to their advantage - find small deals, strip and reorg, optimize profit to secure some unreasonably high valuation, but still small in the grand scheme of things, float the new org to huge institutional funds who are starving for new, diversified assets to add to their portfolio in the ZIRP era.
> It's the buyers' fault for not conducting due diligence and calling bullshit on the price set by the PE firm.
The problem with statements like these is that you don't even know who the "buyer" is. It's not as cut and dry as Econ 101 would make you believe. The true buyer of an asset can be people who have no idea they bought it.
For example, Chicago's public pensions have a shortfall of $23,000 per resident[1] due to the poor management of its fund. This means, for all intents and purposes, I bought shitty companies like Dick Smith. And me buying it had nothing to do with my lack of due diligence. I have no control over it. And neither do the teachers or policemen or 99.999% of the residents in Chicago who end up footing the bill for this nonsense.
> The true buyer of an asset can be people who have no idea they bought it.
They're the buyers in the sense that their money is funding the purchase, but they are not the ones negotiating contracts. If their agents failed to perform due diligence or other fiduciary duties, the fund should file a civil suit.
That's only effective in the case of fraud or gross negligence. There isn't a single court that considers being too dumb to properly do your job as either.
Additionally, what would you expect from the civil suit? These guys get paid a few hundred grand a year, and they lose billions. The only people who would win anything meaningful are lawyers.
Additionally, in the case of Chicago, the pensioners don't really care either. The government has guaranteed they'd honor pension liabilities whether they're currently funded or not.
> Additionally, in the case of Chicago, the pensioners don't really care either. The government has guaranteed they'd honor pension liabilities whether they're currently funded or not.
As a former Illinois resident, I'm super excited to see what happens when the government attempts to honor pension obligations with bank accounts at 0, and property owners flee the state as their property taxes skyrocket to foot the bill.
Civil suit? I'd make the case this was fraudulent behaviour and deserves criminal charges.
By way of analogy, if I sold you my car with an added turbo charger yielding a 20% mpg improvement, but had the side effect of causing the engine to seize after 10,000 miles, which I neglect to tell you, then that's fraud.
Similarly, if those inventory write offs and other machinations to inflate standard business metrics at the expense of derived metrics then cumulatively that is fraud. Standard business metrics are used for a reason and that understanding seems to have been exploited to hide the true status of the business.
As a society we need to start doing a better job of seeing white collar crime as activities like this.--Of course I'm making assumptions here, but I'd expect due diligence would have created a paper trail that could be followed to find evidence of statements like 'we streamlined operations that contributed to our surge in profitability' rather than 'we aggressively wrote-off assets and dumped inventory to show a short term surge in profits'.
This is exactly what a lot of wealthy people are doing: "yield arbitration"
Pension funds buy assets that generate between 3-4% a year (i.e. property). Let's say you are able to put together a €30m property portfolio generating 10% a year. Pension funds will pay €50-80m for that.
They sowed the seeds for their own destruction when they got out of the actual electronics hobbies the marketplace. Had they stayed true to that original vision, they'd not be in the mess they are now.
I won't be shedding any tears. They ended up selling worthless, overpriced electronics, so their value proposition became essentially close to zero for many people who used to shop there. Those who did start shopping there had no real loyalty as they could go to any consumer electronics store - and later online store - to get what they needed.
I agree with this, Dick Smith's should have watched the fall of Radio Shack and said, "Gee, we don't want to do that..." but such things take time to play out and when RS first made the switch to de-emphasize electronics and get more into higher margin consumer electronics it looked like a winner for them.
Neither company predicted, nor expected, that kids would go back to a more 'maker' mindset from the packaged goods mindset.
Well my observation, and granted it is limited, is that when I crossed the HS -> College threshold Ham Radio was a 'thing' and then building "microcomputers" was a thing, that lasted until the mid-80s when it started getting killed off. Then in the 90's and the '00s it seemed like the HS -> College age kids were investing all their disposable income into gaming computer rigs with wild liquid cooling and what not.
It wasn't until the time that suddenly you could make a useful computer gizmo again for high school accessible cash flow with Arduino, PIC, and things like BASIC Stamps did you start seeing a return to less commercial construction and more hobbyist type construction. That tools like GCC became widely useful on small machines and cast off computers became reasonable Linux machines that it once again became apparent that people were building things for fun.
Between 1984 and 2006 I participated in the Homebrew Robotics club, and in the 90's and early 2000's it was very very difficult to get people to come and build their own robot, but once things like Arduinos and converted R/C servos got to be more mainstream more and more people started building their own robots. Today with RasPi and BeagleBones etc there are lots of robots in the club and many members have several.
So for me at least it isn't a narrative so much as it is an observation that the 16 - 24 demographic went back to creating things with less structured "kits" and more variety.
I know what you mean about the drought of the 90's and 00's. I was at math-science high school and in robotics club in 1998-2002, and our team's big hardware-related achievement was replacing a burned-out resistor on a Handyboard. By then software (and video games) had already started to eat the whole hobbiest segment.
That said, I'm skeptical that even at the height of the late 1970's and 1980's there were enough kids doing hardware-related projects to sustain RadioShack at their modern scale. In the very early 1990's, I remember my family purchased a Tandy computer and a stereo system at RadioShack. In Virginia, there was really only a couple of places to buy computers: RadioShack, and MicroCenter. 5-6 years later, we ordered our next computer via Dell direct. I think the loss of that business probably had more to do with RadioShack's demise than any change in the number of electronics hobbyists.
Is there a huge retail component market on the Internet, where you can define "huge" by "revenue" and support that with evidence? Adafruit is awesome, but you can't build a national big-box retail chain on it.
I agree that the hobbyist electronics market isn't large enough to support physical stores, and that major suppliers and existing supply chains are sufficient to not necessitate local retail stores.
I don't care if Radio Shack is down the street; Adafruit and Digikey can overnight me whatever I need.
I'm not litigating whether Mindstorms is a good product. For that matter, I like Adafruit a lot too. But for it to work at a big-box retail chain, it has to be a product suitable for a big-box retail chain.
I would be surprised if there were as many kids buying parts today as there were prior to 1990 or so. It used to be pretty normal for schools to have electronics or ham radio clubs.
This. They took a gamble, probably with a very small portion of their total investment. If they were building a total market fund they may have had absolutely no choice but to buy some of the stock. That said, good job Woolworth.
Even more dodgy: Dick Smith was promoting gift cards through December with a "bonus 10% value"[1]. No problem -- except in receivership, gift cards rank as unsecured creditors and already aren't being honoured (even though the stores are still operating atm). Management must have known that the banks were days away from pulling the plug yet worked to sucker the public into giving them further credit...
Never buy store gift cards for non-trivial amounts!
That's a legit concern about Barnes & Noble right now. But with B&N not only gift cards, but their entire digital business (Nook).
If anyone received a B&N gift card for christmas, my advice is to spend it soon, and spend it on physical goods -- not digital. Because when the hammer falls your digital "purchases" are not going to be protected.
Barnes & Noble is in no danger of going out of business. Even when Borders went kaput there was a long warning, and that was a very differently run kind of business (although eerily on point for this topic, as it was run into the ground by PE).
It lost money in four of the last five years. Ebook sales are declining, and they've closed stores.
They've also been making a bunch of bad decisions, like investing massively into 3D printing which hasn't paid off, and doubling down on Nook again and again.
Coloring books did pay off a little for them, I admit, but at this point it is more a question of "when" B&N will go bankrupt not "if."
One thing they do have is a stranglehold on the university bookstore market.
Judging by p. 6 of the 2014 10k [1] the number of Regular Stores has fallen from 720 in 2010 to 661 in 2014. Conversely the number of College Stores has grown from 637 to 700, overtaking the number of non-college outlets.
They're still losing money on college stores somehow (baffles me when students are forced to buy multiple $200 textbooks twice a year), but they lose less on their college segment than their regular store segment.
BN hasn't invested in 3D printing. There is one model of cheap 3D printer sold in stores, which is of course not actually produced by BN. Next time you're in ask how many they're holding in inventory, and you'll find it's not many. NOOK is indeed a money pit, but the expense is rapidly decreasing, not increasing, a fact that can easily be checked as they talk about it every quarter.
The private equity playbook for buying a public company:
1. Find company with lots of cash on the books but trading very cheaply
2. Acquire company and use cash on books to fund it
3. Cut costs as deeply as you can and still have a company
4. (Optional) Combine it with anther firm to create "synergy"
5. Spin it back out for a profit
Corel was a company that got eaten and spit out in this fashion by Vector Capital.
It was purchased for about $120 million but it had $90 million of cash on its books, meaning the deal didn't require putting up alot of capital.
After the deal was done, there was a large head count reduction, which for a technical company is the equivalent of a retailing dumping inventory and not restocking it.
It was then merged with WinZip, WinDVD and a few other companies and then spun back out as a new company under the Corel name again.
It turns out that this didn't work so well for Corel and Vector reacquired them in 2009 to try this all again.
This is definitely the "rose colored glasses" way of describing their playbook. I think, more accurately it's this:
1) Find a company that hasn't optimized the look of its cash flows and balance sheet to the tastes of pension funds and other institutional investors who manage "dumb" money (a.k.a. mom and pop).
2) Buy said company, and make the superficial changes necessary that will fool the dumb money into paying more than the company is really worth.
3) Sell to the public pension funds, whose managers are well-known for being the dumbest in the business, and whose failures are backstopped by taxpayers who will have to make up for this stupidity (and in some cases, corruption[1]) by paying truly scary amounts of taxes.
Out of curiosity; what about apple, exxon and other of these juggernauts? Does cash depress stock price here? Or do they come out on the other end of the wormhole, where they have so much cash because they cannot conceivably put it to work profitably in their domain/industry?
I meant that companies that are trading very cheaply despite having a lot of cash on the books do so because investors think they'll burn through it without producing revenue.
Wall Street has been on Apple's ass re: its cash holdings for years and years now. Until recently, by sheer force of its market growth, Apple has been able to shrug off these concerns. Not as easy to do these days.
Those companies probably are low-value for the amount of cash they have, and quite likely should be loading up on debt and finding ways to return cash to their shareholders. Many of then are doing that.
Dick Smith Holdings Ltd, (‘DSH’) one of Australia’s largest electrical retailers, was placed in
receivership today following the appointment of Voluntary Administrators.
Receiver Mr James Stewart said it was too early to clearly identify the primary causes of the
company’s current financial position and the reasons for its decline other than saying the
business had become cash constrained in recent times.
Who bought into the float? I'm guessing institutional investors, like pension fund managers, bought many of the shares at $2.20. Serious questions should be asked of those guys too. They have a duty of care over people's pension funds, they're investment professionals, and they should be able to read the balance sheets and not get outsmarted by this Phil Cage fellow.
Who were the fund manager bunnies that fell for all this? Perpetual, AXA, Commonwealth Bank and AMP. Well done guys! Now who can name the investment managers responsible so as we can all give them a wide berth?
"Goldman Sachs and Macquarie Capital were joint lead managers, joint bookrunners and underwriters to the Offer. Aquasia advised the Board in relation to the Offer and Minter Ellison was Dick Smith’s legal adviser." [1]
I'm reading an economic history of the pre-industrial age, and when talking about the "la commenda" system (https://en.wikipedia.org/wiki/Limited_partnership#Concept.27...) from Medieval Italy, a concept which is one of the earliest forms of capitalism, the author mentions that this system wouldn't have taken roots if the parts involved hadn't had "a diffuse sense of honesty". Also, if one of the parts involved in the commenda contract were to show dishonesty, "after some time nobody would have given him their own savings to use as investments anymore".
800 years since those times entities like GS are as dishonest as a private entity can be, and still people and other companies choose to involve them in their financial dealings. It's, to say the least, most curious.
While I'm not an expert on the subject, I imagine that one could counter that today we have analysis tools and financial reporting that give potential investors much more informational leverage than a purchaser might have had in Italy in 1200, and that this information battle is the natural balance for equity exchanges.
But regardless, the observation that parties involved must have a "diffuse sense of honesty" in order for a system to function is definitely at play on, for example, ebay, craigslist, private auto sales, yard sales, and the like -- systems where buyers have very little information about the product or reputation of the seller, other than what the seller provides them, to decide whether or not to enter into a transaction. There is a social expectation that people should be honest, I think, and while we would not be surprised to hear of people getting ripped off on craigslist or ebay, and while we encourage others to take the possibility into consideration when making purchases, we (or at least I) nonetheless place the bulk of the blame for fraud on the malicious seller, not the hapless buyer.
> we (or at least I) nonetheless place the bulk of the blame for fraud on the malicious seller, not the hapless buyer.
I agree, and find the tone of this thread interesting because it is very much reversed. In that blame seems to be falling on the buyer for not knowing better. Yet, it was the seller that seemed to manipulate the business to inflate standard business metrics at the expense of sustainability. Further, the investment banks then turned a blind eye to the state of the business and facilitated the sale.
This reminds me of the sub-prime fiasco. Ie. we had a a system where everyone optimized their own position, but overall those optimizations led to net losses. Same seems to apply here--Private equity optimized their own position, Fund managers likewise, yet the company itself is no longer viable. The long term outcome of this is a failed economy unless systemic corrections are made before that happens.
I think the answer to your conundrum is that if you place your best on the best dishonest player you are rewarded with higher returns from their dirty and dishonest gains. Why wouldn't you get in on a deal that is totally legal and can turn $10M into $520M in a matter of a couple months?
This is spot on. I don't have enough money to invest in hedge funds, but when I look at mutual funds I look for consistent returns. I don't care one whit about how ethical the management team is. On some level I care that I'm not dealing with Bernie Madoff, but I don't have the time, inclination, or expertise to suss all that out.
1. I fear you're mistaking the intra-partnership honor for a more general one.
General partners [managers or Venetian sea captains] having high trust with the limited partners [investors, Venetian or otherwise] is key to making a commenda, or limited partnership, work.
However, that partnership may be formed to pursue transactions adversarial with the rest of the world.
If you and I form successive spice-merchant commendas/partnerships over the years, then you and I must continue to trust one another a lot. But we may both be incentivized to repeatedly buy low-end spices, ship them to, say, England, and laugh when they overpay for the bland herbs.
2. Regarding "entities like GS," it's hardly useful to think of them as monoliths, much less as broken partnerships.
First, GS is now a public company but used to be a partnership. However, it wasn't like a limited partnership / commenda, in the sense that it had very passive limited partners and active general partners. It was a partnership among people who worked there and the capital involved was largely their own. This is also how a lot of accounting / consulting / law practices have been structured historically. Not a good parallel to the commenda.
Second, GS is several businesses. There is a business which helps companies go public, but even that is two businesses: part is advising the company, and part is selling the shares to institutions / syndicate. Who is the customer to whom GS owes the loyalty / honesty in your mind?
Let's say company X is "worth" $10 a share in the "honest" mind of the GS corp fin team. Let's further say that the GS sales team has hugely oversubscribed interest at the top of the $8-12 range, and many more institutions want to buy at $12 or higher than are allocated shares. What would you have them do?
(Yes, there are a great many potential conflicts and corner cases here. But the idea that GS doing normal IPO flotation work is somehow intrinsically dishonest is baffling.)
(There is a decent case, in my mind, to be made for totally disentangling corp fin advisory from sales and trading, meaning not even a Chinese Wall but actual different adversarial firms working on it. But, how many more layers of middleman do you want in our financial system soaking up the fat?)
Good point. Which AU Investment Bank underwrote the float? IBs always let their friends in at a lower price so they can flip when trading starts. In this case it was float at 2.20, so they would have mates in at say 1.50. IB spreads the risk a little, and IB mates make a quick little earner...
I really wish there were some kind of reputation tracker for not only these kinds of investment managers and banks, but also just corporations and even politicians.
It's been widely acknowledged that Woolworth's was very smart to sell this at the time and price they did. Their shareholders would be thrilled to have the company back focusing on their core business again.
If you don't know Woolworths is under immense pressure from their competitors Coles and Aldi and with their other side project aka distraction Masters also struggling they really need to focus and execute.
I am so glad an Aldi opened close to my place in Australia. I hope they beat the Australian incumbents into adopting better practices (or drive them out of business).
Masters is a premium products, high margin business competing against Bunnings which is the opposite - a totally different beast to their lower margin, high volume supermarkets. One could see Masters was doomed from the beginning.
Having worked sausage sizzles at both Bunnings and Masters I can corroborate this. Masters is empty in comparison.
Closer to topic though, when buying a new TV last week my wife and I didn't even consider Dick Smith. They can't really compete with Harvey Norman, Retravision, Good Guys or JB Hi Fi.
Meanwhile, Jaycar and Altronics have slotted nicely into the hobby electronics market that used to be Dick Smith's domain.
I mean, for basic goods, there are laws against false advertising and selling defective goods (lemon laws in the US).
But at this level, these bastards can put a fresh coat of paint on a rust bucket and sell it as a Ferrari... and get away with it? Infuriating.
On a personal level... When I was growing up, it was goldmine of electronic components, DIY kits, etc. I visited a Dick Smith a few years ago and it was terribly disappointing... computers, televisions, phones. The DIY stuff that was a makers dream was gone. I believe a parallel in the US is what happened to RadioShack.
I worked at dickies during the last of the components era. I know that makers like to fantasize about it, but the reality is it was gotten rid of because it was a dog.
As a section it made basically no money, very few people were actually buying components, maybe one in 50 customers. Most people came to the store for batteries, chargers, step down converters, antennas etc, and I believe they were the real loss when dickies moved into the TV era.
However, despite the lack of traffic, it was the highest maintainence section of the store. It took three times the effort to maintain, because people would pull out 5 different strips of resistors and three different strips of caps, go back to their color chart and circuit diagram and figure out which two they actually needed, and then shove the six other strips into a random drawer and walk off, and it was the staff that had to go through 300 tiny drawers with a resistor chart figuring out what went where. You'll notice jaycar keeps most of that shit behind the counter.
It's a small point, but actually Jaycar only keep semis, LEDs and similar parts behind the counter. Resistors are on tape in groups of 8 with cardboard or plastic envelopes, and capacitors are free floating. I believe Jaycar selling all sorts of other rubbish helps them keep their component side going, plus besides Aztronics they're generally the only bet for people off the street to get parts these days.
I remember buying parts from DSE back up to when they moved out of this market, and managed to score a bunch of stuff cheap. It's a sad day for the company, although ironically the maker and DIY electronics scene seems stronger today than ever. Too bad they never worked out a way of capitalising on it.
Well, in investing there is the concept of the sophisticated investor, where you're supposed to be capable of determining all by yourself if you're being had, provided all of the relevant information is being provided. Caveat emptor and all of that, so typical consumer protection type laws don't apply. I believe the idea behind this is to allow investors to make risky decisions, because that's kind of what professional investors are supposed to do. Still sucks when your superannuation disappears because a so-called sophisticated investor proves to be anything but.
There are laws about how you do accounting. They're not perfect. They can tweak their operations such that they can say "we made $40m in profit this year", and it's very hard to make that illegal. Investors need to go into the details rather than just assuming that whatever they did to make a profit is indefinitely sustainable.
Mom and pop investors should not be buying single-name stocks. Leave that to the pros. (It would probably be beneficial for small investors for it to be illegal, but that would look like rigging things in favour of the big players, so it's politically impossible)
Was anything falsely advertised? If the Australian market is like the U.S. (and I think it's fairly similar), then all the financial information used in this post would have been available to investors prior to their investment in the float.
Now, if the private equity firm falsified their financial reports for Dick Smith, that would be a serious crime. But that's not what this post is alleging.
It's possible that large investors knew this might not work, but decided it was worth a small investment anyway, just in case it did.
> If the Australian market is like the U.S. (and I think it's fairly similar), then all the financial information used in this post would have been available to investors prior to their investment in the float.
This is what the authors of the article wrote in the comments of their article:
> We were talking about this yesterday. The problem is that they only have to provide you with a balance sheet at one point in time. We knew it was fishy at the time of the float but there was no way of working all of this out until you can see a time series (and, importantly, they had to give you the old balance sheet as part of the business combinations note). The $170m of inventory in the prospectus was roughly two months sales, about the same as JBH. Looks low but you wouldn’t think only half of what is usually required.
While I get the whole buyer beware thing, as it's supposed to be consummate investment managers making the decisions, I can't shake the feeling that this whole thing is shady. Anchorage Capital used a bunch of accounting maneuvers to make the company look stronger than it was in actuality. It's even shadier if you agree with the position that Woolworths wanted out and was willing to take ~60% haircut on $300 million worth of inventory, because then it becomes kind of obvious what Anchorage was going to do all along. I am not sure what is more unsettling. That investment managers didn't realize they were buying a retail company with no inventory and cash flows generated by the liquidation of said inventory, or that a PE company sold what they knew was a stripped down company to the public?
This story might be a little too Australian to appeal to the broad HN community, but what happened to dick smith was completely criminal. Defiantly worth a read.
In the 1980s, at their peak, they had a few stores in the US West Coast. They were better than the native equivalent here (Radio Shack) and I never understood why they didn't make it here.
In the UK, DSE became famous for selling dirt cheap consumer electronics on garage forecourts. But I'm not aware of any actual stores (I may be wrong).
If you're not Australian or especially if you are, this is an fascinating talk by Dick Smith (including quite a bit about his round the world helicopter trips!) https://www.youtube.com/watch?v=V1eivQNtulE
Talking about Dick Smith, when I was in Oz a few weeks ago I stayed in an Airbnb'd house that had 'Dick Smiths fun way into electronics' in a bookshelf. Apart from some funny 1980's anachronisms ('Moore's law will be irrelevant by the early 1990's because who needs that many transistors'), I loved it. I'm trying to learn some basic electronics and the descriptions of the circuits provide the right 'bridge' between 'this is Ohm's law' and 'here is a fully functional schematic'.
So my question - is there a place I can get all 3 volumes? Or does anyone have pdfs of them?
If you search on trademe.co.nz (biggest auction site in NZ) in the book section there are several copies of all the books available cheap.
I was an 80's kid and the Fun Way books and associated kits were definitely one of the ways I got into electronics and related tech stuff. It's a real shame what's happened to Dick Smith but it's been easy to see it coming for a very long time.
Yeah I found those when I was googling for it, but since the site mentions 'still in copyright' several times, I didn't even bother emailing him for pdfs. The site is nice but lacks the actual content.
I may have some spare copies of the first 2 volumes in storage at my parents place. Want to shoot me an email (me at rhys dot io), and I can have a look next time I am there?
A few interesting points in there. Anchorage apparently sold off their entire investment by September 2014, near their peak price, though the shares traded around the same numbers for another year[1].
They describe Dick Smith Electronics as the largest retailer in Australia by "number of stores" - which should maybe have been a warning sign if they had more stores but less revenue.
Anchorage also mention Dick Smith taking over operating the electronics departments of David Jones department stores in October 2013 - but just six months later, David Jones was sold to Woolworths South Africa and taken private[2].
Also worth noting the "Hong Kong sourcing office for private label products". Over-investment in private label products seems to have sunk them: few people want a Dick Smith TV over a Samsung, Sony or LG.
The half-billion dollar number seems overstated, that was a theoretical market cap and doesn't imply that much money really changed hands. If I'm reading this correctly Anchorage's actual takeaway was "only" about $100MM, since they retained 20% after the float, they then sold this off in the market. For those assuming Woolworths was duped I note they got a comparable amount. This suggests they gave up roughly 50% of the extractable value in return for not having to do any of the dirty work. The big losers are anyone who bought the float at list price and still hold it, and of course the taxpayers who are on the hook for "employee entitlements".
That 20% was what was left after they sold 80% to the market, though.
The article mentions the fund acquired 100% of the equity in Dick Smith from woolies so at float time, Woolies had nothing to do with it. I think Woolies got a pretty decent price and people buying shares at IPO need to do their homework.
This, to me, is somewhat funny in the "that train is going to hit that car.." sense.
whenever there's an exploit used by non state actors in an adversarial sense, there's goverment pressure to cyber this, cyber that, banhammer down, on the technology sector.
But several times a year we get to read about predatory behaviour by financial institutions. i'd even venture to say borderline illegal considering the presedences.
i digress, but there's simply low enough of a risk of the goverment getting involved that this type of crime is not only "worth it" but also shows how deeply embedded the finance sector is in the pockets of politicians the world over.
What was "borderline illegal" about it - from what I can see they used a few tricks that are fairly standard in the private equity world and that any "sophisticated" buyers of the stock should have been able to spot if they were any good at their jobs.
Of course, the PE company comes across as sharks - but all PE companies are sharks - that's what they do!
Perhaps you could perhaps argue that PE companies play the same role in the commercial world as scavengers do in ecosystems - rip up the dead or nearly dead and try and extract value from it.
Not something that I could do, or even admire, but capitalism is much about failure as it is about success.
Isn't that the problem here? It seems like Dick Smith was already well on the way to failure, but Anchorage comes in and props it up like it's succeeding enough to cash in on a stock offering.
In general, elimination of uncompetitive companies is one of the important tools that make the economy strong and prosperous.
If some system (company, branch, industry niche, product line - in different scales) in the economy is weak and inefficient, then simply allowing it to operate as-is will be a constant drain on the society, and artificially supporting/subsidizing it will hurt the people/companies who are either doing the same thing better, or doing some different, better thing.
On the other hand, ripping an inefficient company apart as the 'sharks' do - that is a way to reallocate all those resources (subsidiaries, employees, capital, buildings) to other places that will make a better use of them. The whole reason why large companies exist is because it's a way to get 2+2=5, so to speak. If some company achieves 2+2=3, then tearing it apart to get two 2's out of it is a valuable service for the financial ecosystem.
Lack of such 'sharks' increases short-term stability, but at the cost of having a lot of resources tied up in inefficient places; this is considered one of major factors why planned/command economies tend to fall behind to market economies - simply because they tend to leave uncompetitive businesses alone instead of agressively dismantling them.
And in this case, this whole fiasco might actually be partly to be blamed on lack of more sharks: it was not and is not possible to short stocks of Dick Smith.
I think the basic idea is that companies that are unprofitable or barely profitable or otherwise underperforming are chewed up and uhh... spat out, leaving the assets (people, inventory, etc) to be picked up by healthier companies.
Contrast this with 'zombie companies' in Japan, 'zombie banks' like Deutsche Bank, and so forth that are kept animated by gov/taxpayer money instead of fed to the sharks.
Dick Smith could have been wildly profitable and they still would've sold it.
It's all to do with focus and Woolworth's core business is not consumer electronics. It's supermarkets. And their core business is being decimated by their competitors (Coles/Aldi) and they are at real risk of not having a long term future if they don't focus.
I am in the supermarket business so I know exactly how serious their situation is.
"After a period of exclusivity, in November 2012 Anchorage acquired the business for $20 million. "
"At the time of listing the business had a market capitalisation of $520 million. Anchorage retained a 20% stake in the listed entity following the IPO, which was subsequently sold down in September 2014. "
Good mate of mine works there. Been telling me dodgy shit for ages now. Both had a good laugh today about it :P (except for the whole loosing his job thing)
when i graduated from college, everybody wanted to be investment bankers (glorified sales people for businesses). now, everybody wants to be a private equity analyst. the market's replete with firms engineering paydays rather than retooling businesses as investments (the old way), and the newb "desire" to enter the market is definitely a symptom of disease.
Phil Cave was the anchorage capital guy who they made the chair of dick smith, and who must've led this thing.
"Phil was appointed a Member of the Order of Australia in 2007 for services to the community, particularly support services to children and young adults with disabilities, and to business as a company director. He is currently Chairman of the not-for-profit organisations Ability First Australia and Excelsia College (Formerly Wesley Institute)."
this guy needs at minimum criminal charges, preferably a fucking bullet.
Why criminal charges? He wasn't defrauding members of the public, all the relevant information is in the balance sheets (as we can see in this blog!) and the investors who lost out were big equity market players who really should have known better.
The extraordinary thing is buying a business with $371m of inventory for $115m.
It sounds like there wasn't sufficient information provided at the time of the public offering to do this analysis. The article author writes in the comments:
We were talking about this yesterday. The problem is that they only have to provide you with a balance sheet at one point in time. We knew it was fishy at the time of the float but there was no way of working all of this out until you can see a time series (and, importantly, they had to give you the old balance sheet as part of the business combinations note). The $170m of inventory in the prospectus was roughly two months sales, about the same as JBH. Looks low but you wouldn’t think only half of what is usually required.
> and the investors who lost out were big equity market players who really should have known better.
Why do you believe there are no mom-and-pop investors in Australia? What gave you that idea?
> He wasn't defrauding members of the public, all the relevant information is in the balance sheets
The balance sheets were cooked... as explained in the blog post! The strategy was to do whatever was necessary to show good numbers at a single moment in time (a balance sheet is a snapshot in time). To do this, they had to basically destroy future profitability while making it look like the forecast was exceptional. This wasn't incidental... this was a deliberate strategy to mislead the Australian public and con them into thinking that the company had a bright future.
Don't forget that the money that the "big equity market players" invest is mostly held on behalf of members of the public, in their pension and investment funds, so the public is definitely affected.
To the extent that the public is harmed in this way, for this harm all responsibility lies on the administrators of those pension and investment funds for making an unwise purchase.
I've bought several things from Dick in the past 12 months, mainly click-and-collect, where they're competitive with other online retailers when specials are posted via ozbargain. Or a wireless mouse that's cheaper than the supermarket aisle.
But the stock in store? they were recently selling HDMI cables for about $12 that had been discounted from $55. Having low turnover stock sit on the shelves that is vastly inflated in price is what got them in this mess.
The real worth of the goods was probably closer to $115m, but treble the valuation based on insane highway-robbery retail markups.
Not my comment but I think of it in exactly the same terms. You abstract the details of the company away and reduce it to some key numbers, the company viewed at a high level of abstraction.
The company gets to abstract away information that might cast them in a bad light, like bad working conditions, environmental impact, bad financials, etc., and maybe lets them screw over investors. But what makes it really "evil" (thought I don't think evil is a helpful concept to invoke) is that it can also help investors by giving them plausible deniability, they can invest without being bothered by unpalatable "implementation details". It can be used to make it easier to externalize the cost of doing business for both company and investors, to the detriment of the public.
Not necessarily what the original comment meant but it's why I think of it in those terms.
Isn't that abstraction that investors get limited liability? If I invest in a company I don't want to be liable for any possible losses other than the capital I invest.
So here is my alternative take on this: Woolworth's knew that retail consumer electronics is a dead business in the age of Amazon and Apple/Microsoft company stores. They knew that the $371 million of inventory was never going to sell at that price. Who wants to buy 6-9 month old consumer electronics? So they sold Dick Smith at a discount to: 1) get out of a dying business area; 2) have someone else take on the onerous task of liquidating whatever value could be extracted from the company.
Now, as to the subsequent sale. It's not like prospective investors didn't see these transactions. It's not reasonable to assume that institutional investment professionals couldn't have figured out what it takes this blog post a couple of pages to explain. More likely, they were taking on a gamble: here was a leaner, meaner Dicks stripped of baggage that could make profits going forward. They lost that bet, but not because of anything the PE company did.[1] They lost that bet because Dick Smith immediately bloated itself up again with huge amounts of inventory, likely because the company simply wasn't structurally capable of operating as leanly as the market now demands.
[1] http://marketrealist.com/2015/01/best-buy-attempts-optimize-....
[2] This does not appear to be a case where, e.g. the PE company loaded the target up with unsustainable debt.