The year is 1999 and my parents have informed me that I will no longer be “spending their money”. This is their no-so-subtle way of telling me that I need to get a job if I want to keep doing the things I’m doing, like upgrading my PC every 6 months. I’ve already heard horror stories of my mates working at McDonalds and other, typical first time job places so I’ve set my sights elsewhere. To my surprise the first Dick Smith Electronics store I put my resume in at calls me back right away. No less than a month (and a few questionable training videos later) I’m out on the sales floor, a place I’d come back to routinely for another 6 years.
So suffice to say that I have something of a soft spot for the electronics retailer, even long after it dropped the iconic branding and reputation for being the place to get electronic components and kits. Of course I had long knew about the troubles the company was facing, partly from online but also from their less-than-stellar own product brand. Things were looking up in recent times after they were bought out from Woolworths and then refloated on the ASX however it turns out that might have been the first turn in its current demise.
As it turns out the buyout by Anchorage Capital, a private equity firm, was a carefully constructed scheme to buy DSE for a song and then reap themselves a healthy profit. The whole blog is worth reading in its entirety however the pertinent details are thus. Anchorage “purchased” DSE for a total of $115 million however only $10 million of that was financed with actual cash. The rest was derived from writing down their stock holdings and then selling them off at fire sale prices. This generated them a huge operating cash flow which they then used to pay back the outstanding amounts to Woolworths. Then, prior to relisting DSE on the stock exchange, they used the previous write downs and projections from the clearance sales to forecast a believeable profit for the coming years. This is what allowed them to list DSE for some $525 million, all of which they were able to receive after selling all their shares in September 2014.
This, of course, didn’t leave the company in the greatest state something which was reflected in the share price which meandered around $2 until late last year. Then after their FY2014 earnings failed to meet expectations their share price began to tumble, losing almost 90% of its value. In a desperate attempt to stem the tide DSE then engaged in what many called a “suicidal” sale of their current inventory, hoping to win enough business during the christmas period in order to stay afloat. This, unfortunately, did not work and today they have requested that the ASX put a trading halt on their shares while they look to restructure their debt obligations.
Given this recent turmoil it’s going to be incredibly hard for DSE to find a willing debtor to pull them out of this grief. Previously DSE looked strong due to its lack of debt however the fire sales that Anchorage engaged in to pay back Woolworths left the company without the inventory it needed to continue business. This meant taking on debt in order to keep suppliers on the books, something which is fine if the sales are there to support it. However, as their fire sale over christmas has shown, they simply aren’t making the kinds of sales required to support that way of doing business and so we find ourselves in this current situation.
It’s a prime example of how corporate raiders can carve up a company for a large short term gain that cripples it in the long term. DSE always struggled against the bigger retail giants, especially when it branched out into their territory in early the early 2000s, but it was at least sustainable. Now it’s quite likely that DSE will end up in receivership, unable to finance its debt obligations leaving it incapable of continuing business. For a former employee it’s a sad thing to see happen and I sincerely hope I’m wrong about them being able to restructure their debt.
The wonderful world of tech Initial Public Offerings isn’t the same beast that it was back in the hey days of the dot com boom. Gone are the days when caution was thrown to the wind on any company that managed to demonstrate a modicum of social proof, where the idea of going IPO was just a way to get another round of keeping a company going until they found a sustainable business model. Today whilst going IPO is still done with an eye to gather more funds for expansions they’re also big events for investment companies to make a quick buck on the hype surrounding a tech company going public. So much so that it’s become something of a trend for sexy high tech companies stock’s to soar on the first day only to come back down to reality not long after.
Take LinkedIn for example. On its opening day the share price skyrocketed, more than doubling its price on the opening day. Many took this as a sign that the tech bubble was returning with a vengeance, that tech companies would soon be inflating the market beyond its sustainable limits and that we were seeing the makings of another crash. More astute observers recognised that instead it was actually a ploy by the investment companies managing the IPO process. Instead of it being a sign that these tech companies were fuelling another bubble it was the investment companies severely under-pricing the IPO. Doing this would seem highly counter-intuitive, I mean who wouldn’t want the best debut price? The answer is of course, and unfortunately, very simple.
They wanted to be the ones who profited the most from the IPO.
Pricing the IPO so low meant that the initial buyers could acquire many more shares than they could if the IPO. Knowing that the stock was undervalued they then just had to wait for the pricing to hit it’s trading peak before unloading their shares on the market. Done at the peak of the LinkedIn IPO companies like Morgan Stanley, Bank of America Merrill Lynch and JPMorgan who were underwriters were able to get an easy 1X return without little to no risk. Employees and preferred stock holders who elected to have shares in the IPO got screwed of course, but that’s not a concern for these big name investment firms.
So it was with great anticipation that I watched the recent Facebook IPO. It’s by far the biggest tech IPO in history and also managed to set records in terms of trade volume on the first day. Since then it’s been a slow downhill trend for the nascent stock, shedding something like $11 per share since its high of around $42. Whilst the first day of trading was cause for concern, mostly because there wasn’t an insane pop like there was for all other tech stocks, the following days have been nothing short of astonishing at least for the investors who jumped in alongside everyone else on the first release shares. You’d think that this was a bad thing but for this aspiring start-uper it’s nothing short of glorious.
The other tech IPOs that showed explosive growth only did so because they were engineered that way. Now I have no idea why the Facebook IPO didn’t, it certainly had all the makings of one, but there’s a good chance that the watchful eye of the SEC had something to do with it. For all the people who bought in early they’re undeniably screwed but there is one group of people who (rightly so) profited from Facebook’s IPO: the people at the company.
The shares that made up the original offering would have come from preferred stock (early investors), common stock (employees) and options that other people had accured over Facebook’s 8 year lifespan.For them a right priced IPO that then declines in value means that they’ve got the maximum amount of value they could and were not screwed over by an artificially low stock price. Of course this has the not-so-nice aspect of pissing off a lot of investors, many of whom are now crying foul over the share price making a beeline for penny stock level. That’s warranted to some extent but you’ll forgive me if I don’t shed a tear for those companies who screwed over many a tech company in the past in the pursuit of a quick buck.
The question on everyone’s lips is where Facebook’s stock will go from here. Honestly I’m not sure, they’ve definitely struggling with mobile which is starting to heavily cut into their revenue and apparently the reason behind their Instagram acquisition but you’d figure that they’ve innovated heavily in the past so they should be able to turn it around in the not too distant future. Still all this negative press isn’t going to do the stock price any favours so unless the commentators want to see the price keep falling they should probably just shut their yaps and wait for the market to properly correct. The next few weeks will be very interesting times indeed and I can’t wait to see how the investor butthurt plays out.