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.

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?

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:

"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.

Libya fund lost all while Goldman earned $200m

Interesting article in the Financial Times:

Libya case against Goldman shines rare spotlight on powerful bank

Some snippets:


Mr Baruni advised the LIA (Libyan Investment Authority) not to invest in two Goldman funds but he resigned after his advice fell on deaf ears. An email he sent at the time read: “Goldman have not been honest in their practices and disclosure.”Ali Baruni, a financial consultant to the LIA, told the High Court that he felt “almost under attack” at one Goldman meeting as a succession of different products and Goldman teams was “relentlessly” presented to the wealth fund.


In other words, this was a hard sale, and the LIA staff were lavishly entertained.

Was it all ethical and within the law? The court case will decide about that.

The result of the investment:


The LIA claims Goldman earned more than $200m in profits for itself from the nine disputed trades whilst the LIA lost its entire $1.2bn investment.


Well, at least the Libyans are fighting back and trying to claw back some of their losses.

Noble Group, an overview

Great article in The Financial Times about Noble Group (I wrote several articles about them in the past):

Commodities: Noble’s House of woe

Some snippets:


Today the market value of the company — which is listed in Singapore — has collapsed to $1.1bn, its chief executive has left, and Mr Elman, 76, has announced he will step down as executive chairman in the next 12 months. In February, it reported annual losses for the first time in more than 20 years after taking $1.2bn in writedowns and charges, largely related to the value of long-term contracts it has been accused of overstating by short sellers, hedge funds and a former employee turned financial blogger.

Noble, which acts as a middleman for oil, coal, iron ore and metals deals, is now tapping its shareholders for $500m of cash and trying to sell prized assets in its efforts to pay down debt and free up capital for its trading operations.


“Noble compounded its problems with aggressive accounting,” says Craig Pirrong, a finance professor at the University of Houston who has written on the industry for Trafigura. “The accounting issues took a big toll on management’s credibility, and that made it very difficult to climb out of the hole.”


Mounting debts and high costs began to weigh on the company as bets in niche markets such as carbon credits backfired. As a listed company, it wanted smoother earnings to keep the stock market happy, former employees say.

Noble did this by recognising upfront a portion of gains from long-term marketing and supply agreements and recording their value on its balance sheet, say ex-employees. This technique, while legal under accounting rules, has seen only limited use among Noble’s rivals who say it is risky because the volatility of commodity prices means the amount of cash eventually received from the deals can be lower than the recorded profits.


Noble's 5-year price chart:

Welcome to the bizarre world of money printing

When central bankers print money, strange things can and will happen.

Just a few random, recent examples:

"Why Uber’s Chinese nemesis Didi Chuxing just raised $7 billion more"

Didi Chuxing, the company that is beating Uber in China, just landed an incredible $7.3 billion in fresh financing.

Seven billion U.S. dollars!

But there’s more. Four-year-old Didi said it already has billions in the bank from its previous fundraising — which amounts to more than $10 billion — and this fresh influx takes it to more than $10 billion of cash in hand.


In case the reader is wondering, Didi does not actually own any vehicle, it is just a platform, most likely a money losing one. Agreed, far away in the future the network might be quite valuable, but on the other side, who can predict the future say five or ten years out? I definitely not.


Which Country’s Bonds Most Likely to Join Germany in Negative-Yield Club?

With yields on 10-year German sovereign bonds going subzero for the first time in recorded history, investors are asking which country’s bonds could cross into negative territory next.

Austria and the Netherlands appear the most natural candidates.

Indeed, as German 10-year government yields hit minus 0.032% Tuesday .....


In other words, one buys these 10-year German bonds, waits for 10 years and gets back less money than one invested.

Many bonds are being managed, for instance in bond funds or pension funds, we can safely assume that on top of the negative yield another say one percent is added in costs. That does not sound very attractive.


The Decline of the Coal Industry in One Chart

.... the market cap of four of the largest coal companies was more than $35 billion in 2011. After a flurry of regulation, it’s now a smudge on the graph below, a decline of 99 percent. Behold, the steep decline of coal in one chart:

I am not a big fan of coal due to the pollution it causes, but one would expect a slow and steady phasing out of this commodity, not a 99% plunge in three years time of the market cap of four big players in this industry. I have no idea if this has to do with money printing, just the speed of decline is mind blowing.


Marc Faber has often warned against the effects of money printing. What the central bankers want is a gradual rise in all asset classes, but that will not happen, some will rise or fall a lot. The only way to deal with this is to diversify in different asset classes. And forget about market timing, that will be very tough to do.

BLand selling BToto shares at a loss after 24 years ......?

Berjaya Land made the following announcement:

In other words, BLand held some of these shares over 24 years, and sold them at a loss?

Although BLand must have received a lot of dividend from its BToto shares over the years, still, it sounds quite disappointing.

I thought the rule is "Buy low, Sell high", but BLand seems to disagree with that.

Also, why did BLand sell the shares now, at current depressed prices, when BToto was trading at a much higher price for many years?

Revenge of the Small Shareholders

This blog often writes about the very limited chances that minority investors have against the major shareholders.

But sometimes, very rarely, they are in control.

Not so much in the case of RPTs (major shareholders will almost often make sure they have enough "friendly" parties to push the deal through), but when the major shareholders screw up.

And that is exactly what seems to have happened at the AGM of Wuyi Pharma.

David Webb wrote:

Wuyi Pharma (1889): everything failed at our AGM

Company announcement, 2-Jun-2016 

With a voting turnout of just 0.63%, all the resolutions were defeated, because the brothers who control the company failed to vote. Incidentally, this Cayman-incorporated company, which has no mainland listing, held its AGM in Fuzhou, making it hard for HK shareholders to attend. Serves them right.


According to the announcement:

• The audited financial statements were not received and considered
• Three directors were not re-elected
• The auditor was not re-appointed
• A general mandate to issue new shares was not given

Why were the small shareholders so angry and/or disappointed?

Besides holding the AGM in a remote location, the below share graph might also have a lot to do with that:

Poor earnings growth for Bursa listed companies (4)

My previous postings on this subject can be found here and here.

I have updated the latest preliminary results for 2016, comparing them with the same period in 2015.

Below the difference in the results (Blue is positive, Red is negative):

Worst performer is SapuraKencana Petroleum, followed by TNB, AMMB and Genting.

Relatively best were IOI Corp and KL Kepong.

So far the net earnings of the Top 30 Bursa companies are trailing the 2015 numbers (over the same period) by more than RM 4 Billion.

That is really bad news, since the 2015 earnings were already lower than the 2012 numbers in MYR, and much lower if counted in USD:

The statement made by UOBKayHian Research "a meek mid-single-digit growth recovery in 2016"  made only five weeks ago seems rather optimistic.

Why REDtone used "auditor of last resort"?

David Webb wrote:


US PCAOB sanctions AWC (CPA) Ltd, its New York affliate and 4 individuals
     
The shocking allegations, which are not denied in this settlement, involve the 2010-2012 audits of Kandi Technologies (Nasdaq: KNDI). Incidentally, AWC (CPA) Ltd changed its name last month to DCAW (CPA) Ltd after combining with Dominic K F Chan & Co. The settlement brings into question the continued role of Albert Wong Chi Wai, the engagement partner on the audits, as an INED of 5 HK-listed companies.    


Paul Gillis wrote about the same matter:

"PCAOB bans auditor of last resort"

On May 19, the Public Company Accounting Board revoked the PCAOB registration of Hong Kong CPA firm AWC (CPA) Limited (AWC), formerly known as Albert Wong & Company. AWC has long been one of the auditors of last resort for Chinese companies listed in the United States, particularly those that came to market through reverse mergers. 

The client that finally brought down AWC was Kandi Technologies Group, Inc. (Kandi). Kandi is a Chinese electric vehicle company that was still using AWC as auditor for 2015.   

Regarding Kandi, a 2014 article from "ShareSleuth" (backed by Mark Cuban).


Some of the companies that were audited by this audit firm can be found here, here and here.

Relevant for Malaysia is REDtone Asia Inc., a 92% subsidiary of REDtone International Bhd, listed on the US OTC (Over The Counter) network.

On May 16, 2016 REDtone Asia Inc. changed its auditor to DCAW (CPA) Ltd.

According to Paul Gillis, that is a "stunt that should not work":

As the PCAOB disciplinary proceeding came to a conclusion, AWC merged with effect from April 30, 2016 with Dominic K.F. Chan & Co to form DCAW, a firm that filed to succeed to the PCAOB registration of Dominic K.F. Chan & Co.  That seems a clever way to circumvent the imminent ban of AWC. On May 9 AWC’s clients announced they were changing auditors to DCAW. The AW in the name presumably is Albert Wong. Albert Wong, however, is personally banned from association with PCAOB registered firms for at least two years. I am sure the PCAOB is looking into this odiferous situation.


Was REDtone really not aware of the reputation of the auditor of its subsidiary?

From Bloomberg: "Here’s How Asia Hedge Funds’ Top Picks at 2015 Sohn Fared".

Hedge funds have highly paid managers based on generous 2/20 management fees, and one would expect that their top picks would in general perform well, but even they can be horribly wrong, as the article shows. Some snippets:

The hedge fund industry has had its worst start to a year, as measured by performance and capital outflows, since 2009, when the world was reeling from the global financial crisis. Asia-focused hedge funds have lost 2.4 percent this year, according to Singapore-based Eurekahedge Pte. Hedge funds’ woes highlight the difficulty of picking investments based on fundamentals in a world kept on its toes by central bank and government intervention.

• The three companies’ shares lost more than 20 percent of their value in the past year .....
• The stock tumbled nearly 34 percent in the one year ....
• Hong Kong shares of Citic Securities Co. and China Galaxy Securities Co., two of the nation’s largest brokers, have lost almost half their value .....
• The broadcasters’ shares all fell, with declines ranging from 4 percent to 20 percent. MMG’s Hong Kong-traded shares plunged 45 percent in the past year ....
• Aoyama’s share price slid 17 percent in the past year.
• Kyocera’s stock has slid 18 percent in the past year

Never follow recommendations of others blindly, best is always to do ones own homework. In the above cases, one can safely assume that the fund managers were already loaded with the stocks that they recommended.