Dick Smith Is the Greatest Private Equity Heist of All Time
foragerfunds.com
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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.
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.
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.
[1] https://www.illinoispolicy.org/chicagos-63-billion-debt-burd...
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.
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.
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.
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'.
Column B: over-promsing.
Column C: under-funding.
Column D: pension gaming.
Column E-N: other stuff.
There's usually more than one reason when $63bn holes arise.
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.
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.
Neither company predicted, nor expected, that kids would go back to a more 'maker' mindset from the packaged goods mindset.
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.
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.
I don't care if Radio Shack is down the street; Adafruit and Digikey can overnight me whatever I need.
Never buy store gift cards for non-trivial amounts!
[1] https://twitter.com/ForagerFunds/status/684196897343471616 & https://twitter.com/ForagerFunds/status/684197213556191232
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.
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."
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.
[1] http://www.barnesandnobleinc.com/documents/bn_annual_report_...
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.
see: http://247wallst.com/banking-finance/2009/10/29/corel-strang...
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.
[1] http://www.sfgate.com/business/bottomline/article/Former-Cal...
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 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?
So, the usual suspects...
[1] http://dicksmithholdings.com.au/events/dick-smith-lists-on-a...
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.
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.
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.
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?)
If you invested in Anchorage Capital you might be thrilled at what they managed to pull off.
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.
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.
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.
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.
If the institutional investors (experts in the field like Commonwealth Bank) couldn't smell a rat, mom and pop investors had no chance!
Also, for those interested, RadioShack was called Tandy Electronics in Australia.
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.
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.
One of their more memorable products, being the Dickheads... https://en.wikipedia.org/wiki/Dickheads
So my question - is there a place I can get all 3 volumes? Or does anyone have pdfs of them?
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.
[1] http://goughlui.com/2014/11/09/tech-flashback-dick-smiths-fu...
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.
[1] https://au.finance.yahoo.com/q/bc?s=DSH.AX&t=2y&l=on&z=l&q=l... [2] http://www.news.com.au/finance/business/david-jones-agrees-t...
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.
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.
Of course, the PE company comes across as sharks - but all PE companies are sharks - that's what they do!
Not something that I could do, or even admire, but capitalism is much about failure as it is about success.
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.
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.
[Reminds me of Liars Poker and bonds...]
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.
Yes, but at a higher price. Or just spun it off and done an IPO for Dick Smith themselves.
"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. "
Nice IRR.
It's related to Google Voice and a startup that went IPO.
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.
The extraordinary thing is buying a business with $371m of inventory for $115m.
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.
The pre-float article is here: https://foragerfunds.com/bristlemouth/bristlemouthdick-smith...
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.
To be fair the buyer can say that the products are obsolete so the inventory cannot be valued at $371m.
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.
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.