Photon's Hughes Got What He Deserved
Photon's Hughes Got What He Deserved
A company director’s job is to protect the interests of shareholders. As is usually the case, theory is easier than practice, but it’s not particularly difficult to assess their performance. All you need to do is add up what shareholders had a few years ago and compare it with what they’ve got now.
Not so, it seems. The Australian Financial Review’s marketing commentator Neil Shoebridge is upset at the send-off given to Photon Group Chairmain Tim Hughes. In an article titled ‘Hughes Deserved More’ Shoebridge accepted that Photon had fallen on tough times as a result of an ‘acquisition spree that saddled it with too much debt’. But he went on to defend Hughes, saying the company’s recent woes ‘should not be allowed to obscure what he and sidekicks such as former Photon Chief Matt Bailey achieved.’
‘Over the past decade’ Shoebridge wrote, ‘Photon grew from a small handful of companies in Australia, to the 15th largest marketing services group in the world, with 50 businesses here and overseas … he deserved a more auspicious send-off than a perfunctory two-line statement’.
No he didn’t, Neil. His job was not to build a global empire (something even I could achieve if you give me a big enough cheque book). His job was to create shareholder value, and in this regard his record was atrocious. Photon listed in 2004 at $1.80 per share, attributing it a value of $88m. It then raised $16m in 2005, $49m in 2006, $77m in 2008, $115m in 2009 and is in the process of raising an additional $102m. That’s a total of $447m shareholders kicked in to fund Hughes’s buying spree.
At today’s $0.115 closing price, the company has an effective market capitalisation of less than $200m (once all the additional shares related to this latest capital raising are issued). I think it’s worth a bit more but there’s zero doubt hundreds of millions of dollars of shareholder wealth have been destroyed. Two lines are more than enough.
Disclosure: The Intelligent Investor Value Fund owns shares in Photon Group and participated in the recent institutional placement.
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This reminds me of Eddie Groves and ABC learning. Eddie too built a global empire, with and in the process destroyed shareholder value and ultimately the company.
Is Mr Shoebridge also suggesting we should applaud Eddie Groves? Eddie turned a nice little earner into a money muncher. It's not the size of the company that's important, it's the quality.
Great blog Steve.
I've been watching your blog almost daily, looking out for the inevitable blog regarding PGA, given I know the Value Fund holds PGA.
I too am a holder and I am disgusted by the performance of previous management. The destruction of shareholder wealth due to the way this company was run is just incredible. I am not pleased in any way with the lack of disclosure from the previous team either.
It is such as shame that a company with a successful underlying business(s), can be brought to its knees by poor management decisions such as we've seen at Photon.
My patience is going to be tested by this company.
My question is this...how does Photon now increase shareholder wealth and reward the patience of long suffering holders? Dividends and share buy backs when they eventually get rid of the burden that is earn out agreements?
Hi David,
From my perspective it's important not to let disappointment with management cloud reflection on my own investment decision.
There were plenty of warning signs over the years that Photon was paying far too much for its acquisitions and that the board was more interested in building an empire than growing the earnings per share.
The $100m increase in earn out payments was certainly a shock (how is the maximum amount payable not a contingent liability at the very least?). But I personally went into the stock with my eyes wide open regarding management.
I'm of the view it's worth between 15 and 20 cents and we've averaged 18 cents in the Value Fund so I don't think it's going to be a disaster (assuming the dramas of the past few months aren't leading to mass staff defections). But it's another lesson in the difficulties of catching falling knives.
Your absolutely right, the acquisition strategy they had employed was a warning sign, however the earn out agreements came out as a real shock as you say. It is this area of management that I am particularly displeased with.
Great post Steve, glad someone is painting this farce for what it was.
The fact that an editor of Australia’s pre-eminent financial newspaper doesn't even contemplate that the primary responsibility of a director is to respect other people’s money (shareholders contributions) speaks volumes. But I guess, as value investors, we shouldn’t be surprised.
It is the common belief amongst mainstream commentators, even in respected newspapers, that the purpose of business is size. It is the blind and irrational mantra of ‘growth’. If Hughes had been directed by shareholders to focus on size and grandeur, rather than providing an adequate return on their investment - then Shoebridge would be quite correct.
Does Dr Patel deserve more respect than what he has received because he performed numerous surgical procedures? Did anyone forget that Dr Patel had a duty to provide a safe and effective procedure to each of his patients – rather than an obligation to perform bigger, more numerous and more challenging procedures? I don’t think so.
Why are professionals in the financial world somehow different? Why is it they don’t seem to have a responsibility to perform a safe and effective allocation of other people’s money?
To take other people’s money, for the purpose of empire building and self aggrandisement, is to be a thief. So you’re right Steve, 2 lines are more than enough, but perhaps without the word ‘thief’, not sufficient.
I wrote a blog on 2nd June 2010 asking if PGA, SGN & MCU could survive. In it I listed the issues that PGA had and how it had destroyed shareholder value over the years.
I still have grave doubts over SGN and MCU surviving (although SGN appears to be doing much better).
When I want to learn something about investing/economics, I'll read something that has been written by a successful investor or an economist.
When I want a story or an opinion that may or may not be true, I'll read something that has been written by a journalist.
You need to remember that journalists are ultimately entertainers, not educators.
There was a time when financial commentators criticised companies for having a "lazy balance sheet."That is now called being "debt free." Prudence at home and in business is always important.
Charlie Munger at the 2009 Wesco meeting used words to the effect, "any idiot can expand a balance sheet...and they usually do".
Steve, in relation to accoutning for contingent liabilities, I agree, but by what amount??
Speaking from experience with earn-outs (being on the end of one between FY08-10), the accounting procedure seems clouded at best in terms or recognising the likelyhood of an earn-out occurring, and what amount to use?.
...seems to be categorised in the too hard basket?
Often the earn out relates to a multiple of 'profit exceeding budget', being paid to the vendor by the acquirer. Sounds good, relatively easy to account for? Not so.
It's fraught with danger trying predicting whether one will meet budget in the immediate financial year, let alone 3 years out, and by what amount? Compounding this problem, sale and purchase agreements, and subsequent earn out terms, in these smaller type acquisitions seem not to be made available to the acquirers shareholders for perusal.
Shareholders get spin about what a great deal it is for both companies, great fit, management love each other, how shareholders, employees and all "stakeholders" will live happily ever after because of this latest acquisition.
You have to ask why a lot of these smaller companies are willing to line up and sell to an acquisitive growth driven purchaser? (the answer usually is becouse it's a great deal for the vendor).
Alarm bells should go off when small listed companies use acquisitive growth strategies, to acquire even smaller businesses with little similarity, or overlap between the businesses acquired. (I was nearly going to use the word
"Synergistic", but I didn't want to make readers vomit?.
Anyway, it usually ends in tears for the acquirers shareholders down the track.
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