Many people here in Australia and I imagine elsewhere in the world are currently watching in horror as companies collapse or go very close to collapse, initiated by the global credit squeeze combined with heavy gearing.
I was motivated to write this blog post after recently watching a report on the Sunday Business Show about an Australian ASX listed company called MFS.
The MFS stock price went from ~AU$6 to ~AU$1 in the space of 4 weeks!
An initial response is to blame the founders who were also large shareholders, bad management, greed, asleep at the wheel, etc. However, this response I believe only seems valid in hind sight and I am inclined to believe that the founders were indeed competent at their jobs, both before this disaster and now after it, and perhaps even better off for it.
If you were the founder of very successful IPO company, with a large paper wealth as a result of your stock holdings, wouldn't you like to turn some of that stock holding into cash by borrowing against it? I think most people would certainly answer yes.
I tried to capture a cause and effect analysis of the situation that occurred to MFS, shown in the diagram below. From this analysis you can quickly see how the control of their company 'got away' from the founders. Some of the visible dynamics are:-
- One cause/effect feed into another, creating a snowball effect.
- The end result cannot be reversed. The echo of this short 4 weeks could persist within the company for many years to come.
- The complicated interactions between founders, lifestyle, shareholders, banks and lawyers.
- Even relatively small debts can have huge impacts on cash flow.
- A directors sometimes conflicting obligations to shareholders and ASX listing regulations. Information and it's suitability for inclusion in a public announcement can be regarded differently by retail investors compared to large share holders. While both being shareholders of the company, the impact on their respective investments can be effected in opposite ways as a result of the announcement.
Therefore how does a successful founder avoid the above? The answer to this question, which is a common answer to questions about a very complicated issue is, "....well, it depends". I will attempt to discuss an answer in an upcoming post. :)
Resources:
- MFS stock price chart
- Cause and effect diagram