Tuesday, 28 June 2016

Slater and Gordon: hubris, a roll-up and "work in progress"

Good article from The Sydney Morning Herald:

"The Undoing of Slater and Gordon"

Some snippets:

At one point last year it was the world's biggest listed law firm, a $2.7 billion multinational behemoth, a brand recognised by three out of four Australians. But that was before things went horribly wrong - before, as The Australian Financial Review described it, "one of the biggest falls from grace in Australian business history".

.... Slater & Gordon made world history by listing on the sharemarket, a move made possible by a change to Australian law. (Only a handful of law firms followed Slaters, and only a few have survived.)

The float was controversial, inside the firm and out. The seven most senior partners, led by Andrew Grech, and including Peter Gordon (the mercurial lawyer and custodian of the firm's working-class values, who is unrelated to founder Hugh Gordon), became multimillionaires overnight, leaving other partners feeling shut out. "It was a confronting situation to be told, 'I am worth this many shares and you are worth this many,' " one senior lawyer told Good Weekend. Outside the firm, there was much hand-wringing in the legal community about a lawyer's hierarchy of duties, which are firstly to the court and secondly to the client. Where would the shareholder fit in this brave new world of law?

Since 2007, Slater & Gordon had spent half a billion dollars on 40 firms and had become known as a "roll-up" - a company that grows by eating other companies.

Business history is littered with the corpses of bloated roll-ups, because in order to grow, they have to keep munching away, making bigger and bigger deals, which almost always proves unsustainable. In Australia, market-watchers had seen this before. The Ferrari-driving Eddy Groves, who ran around in his cowboy boots buying childcare centres for his company ABC Learning, engaged in classic roll-up behaviour before he went broke. Several analysts Good Weekend spoke to drew comparisons between Slater & Gordon and ABC Learning. Crikey has described the similarities between the two as "extraordinary".

Slater & Gordon specialises in "no win, no fee" personal injury cases. This means it does not get paid until a case closes, something that typically takes 18 months to two years. If you sell cakes, you report your revenue when you sell a cake. But how does a law firm report revenue? Slater & Gordon decided to record revenue as cases progressed (Work in Progress), estimating the likelihood of success and how much work had been done. It recorded this as revenue, even though it was yet to get any - and, in some cases, would never get paid.

There are several theories about why Slater & Gordon ended up where it is today, with shareholders wiped out, the banks at Grech's heels, and the staff, many of them in financial distress, furious. One is that the firm, as it grew to be one of Australia's top 100 companies, should have upgraded its auditors and senior finance people. Another theory is that Slater & Gordon was in trouble converting its Work in Progress and needed a big acquisition - Quindell - to satisfy the market's relentless desire for a "growth narrative".

Another is that the "gang of four" Slaters managers - who had been there most of their working lives, Grech since 1994 - were reinforcing each other's views and started to believe they could do no wrong. And then there's the sense that there wasn't anyone, in the end, who could stand up to Grech. "It was hard to say no to Andrew at that point in time," one insider told me. "The person who historically said no to Andrew was Peter [Gordon]. When Peter left, who was there to say no?"

And the last theory, of course, is that the cause is one of the oldest authors of failure, a flaw both ancient and common, one that manifests sometimes in snakeskin cowboy boots and sometimes in a suit. "I can tell you what happened," says former Slater & Gordon lawyer Steven Lewis. "One word. Hubris."

The articles in the Financial Times about Quindell can be found here.

A previous blog post about the collapse of ABC Learning Centres can be found here.

Monday, 27 June 2016

Vivocom: still unleashing the giant?

I wrote before about Vivocom.

Two important events from the past months:

  • On November 2, 2015 Instacom (Vivocom's previous name) appointed Yeoh (founder of Vivocom Enterprise Sdn Bhd) as joint-CEO (red line in the above graph)
  • On November 18, 2015 CIMB Research published a 26-page very bullish report about Vivocom ("Unleashing the Giant"), and fixed it's target price at RM 0.72 (green line)

The jump in share price and volume around those 2 days is very noticeable.

The Edge Malaysia published on June 27, 2016 several articles about Vivocom, one of which hinted at the possible stepping down of Yeoh.

The company however announced: ".... the Board of Directors have not to date received any official letter of resignation nor unofficial notification from Dato’ Seri Dr. Yeoh Seong Mok on his purported intention to resign or retire".

Vivocom has gone through many transitions, will it be this time successful?

Saturday, 25 June 2016

Brexit: markets are humbled

One would have guessed that if one mixes poll results with the opinion of a pool of experts the end result would be pretty accurate.

Yesterday events proved that is not always true, as Jim Grant on CNBC said:

Markets just got a hard lesson in humility

Below is a screenshot of Betfair giving the odds of staying or leaving the EU on Thursday afternoon:

And this is how they changed when the first results came in on Friday morning:

Monday, 20 June 2016

"This is not gambling but gaming"

Excellent, courageous article by David Yoong, Tan Hooi Koon and Ng Choung Min (University of Malaya, Malaysia):

‘This is not gambling but gaming’:  Methods of promoting a lottery gaming company in a Malaysian daily

The article can be found here.

The gaming company is Magnum, the daily is The Star.

Some snippets:

..... it was discovered that the odds of actually winning the top prize is much closer to nil, and that articles featuring a local lottery company, Magnum (and their Magnum 4D programme), in The Star are always positive and biased. This prompted us to wonder: as a mainstream newspaper publication, is The Star operating as a Public Relations (PR) media outlet for Magnum? Is there some sort of collusion going on between the two establishments? Textual evidence seems to suggest so, and we present our case in the analysis section.

StarBizWeek: What more can Magnum do to generate income if there is no extension of coverage or more games?

Surin: It is education. Educating people that for a mere RM2, someone can win a jackpot and be a millionaire. This is not gambling but gaming and it can be a fun thing, for if you win it can guarantee a lifestyle change.

In this doublespeak, the senior executive director does not equate lottery gaming with ‘gambling’, despite lottery gaming having the same characteristics as gambling. Moreover, he says that the public ought to be ‘educated’, which is an odd term since education, a basic right, is about the dissemination of knowledge. His interview reflects the capitalist mentality of the company, and he encourages the consumerism of Magnum’s products.

Because of its gambling nature, lottery gaming has been associated with bankruptcy, the destruction of families, crime and gambling addiction (Guryan and Kearney, 2009; Keating, 1998). Not surprisingly then, Magnum has employed PR practitioners to rebrand its image and to remove any negative stigma associated with its lottery gaming. As the textual (and intertextual) analysis shows, these strategies include attaching an array of positive values to the company, such as trustworthiness, ethical practices and consumer focus, incorporating the voices of individuals that further enhance the company’s image, and presenting these textual strategies as news reports.

..... when reporting news articles relating to Magnum, the public has the right to be informed of the perils that can be caused by lottery gaming. As The Star is an influential publication with a huge readership, it needs to be accountable to the public.

Whilst we do not deny that Magnum’s corporate social programmes are beneficial to society, to say that Magnum is a caring role model is disingenuous, because part of the charity money comes from people who have lost their lottery bets. If the company is indeed civic-conscious, Magnum should inform the public that there is a low chance of winning the Jackpot and that part of the losers’ money is channelled into its social programmes while enriching its stakeholders. Having said that, we are not of the view that lotteries should be made illegal, but giving the public a false sense of likely success is harmful.

Also, Magnum’s success in disguising the negative connotations of lottery as an act of gambling is due in part to the way lottery has been defined by Malaysian law. If laws were amended to define lottery gaming as gambling, inevitably lottery companies could not declare that ‘lottery is not gambling’.

The Star must know about the existence of the above article, written in 2013. Has it changed its ways? Is the reporting more objective, is there a more realistic picture about the small chances to win, the negative expectation of the participants (pay-outs are often in the 60% region), the dangers of compulsive gambling that hit so many families in Malaysia?

The reader can find the answer in this link. It is most disappointing, to say the least.