Events And Ethics Leading To The Liquidation Of One.Tel, HIH Insurance, And ABC Learning

One.Tel: Events and Ethics

OneTel company came into existence only in 1995 but by the year 2001 the company was the 4^th biggest in Australia telecom sector with an estimated 2,000,000 customers. The company was listed in ASX to years later in 1997 and was immediately valued at $200 million with an initial capital investment of $5 million in 1995. The company built the 3GSM network in 1999 and reported a net profit of $9.8 million. By the end of the year the company entered into an agreement with Lucent Technology and lucent agreed to fiancé a major portion and build OneTel’s European Network for a reported amount of $10bn. The market value of the company reached a high of $5.3 billion as share prices reach historical high form the initial listing of $2. OneTel purchased spectrum paying more than $523 million. The spectrum was purchased at a market premium of over 9 times the going rate. Soon after by the end of Une 2000, the company declared a loss of over $291m. the stock prices of the company soon plummeted to $1. However in January 2001, the company went for negotiation with the investors to raise cash for running the company as the working capital has vanished and cash inflows were insufficient to meet the expenses as expenses galloped. However, a funding of $132 million received form a no of investors in between January and march were highly insufficient for meeting the expenses of the company. The company needed around $300-$350 million more to run the company for the next 6 months and bring things under control. As no more funding could be arranged the company appointed an administrator for liquidation of the company in March 2001 (Cyert, et al., 2002).

The cash follows of the company are summarized as follows for 4 years prior to the collapse of the firm:

Particulars	96-97	97-98 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	98-99	99-00
operating cash flow(OCF)	13.4m	-8.00m	-28.945m	-168.9 m
Cash flows from investing	-4.94m	-10.752m	-32.183m	-614.9m
New Equity issues	0	25.764m	430.35m	818.5m
Loans and Bonds	0	0	58.98m	139.8m

 

As can be seen form the above cash flows the OneTel company was facing major issues regarding operating cash flows and operations of the firm was not able to meet the cash expenditures of the firm. The sales per consumer and OCF per consumer declined for the company which showed that quality of the consumers attracted by the company deteriorated during the last 4 years of full scale operations. This led to multiple issue of loans and bonds to compensate the decline in quality of the cash inflows (Cyert, et al., 2002).

One.Tel: Liabilities as the main factor for liquidation

OneTel company was run by Jodie rich without consulting too much the other members of the board and thus broke the principle of corporate governance since the decisions taken by the CEO were clearly not in the interests of the shareholders (Pascal Quiry, 2015).

The Accounting methods sued by the company changed frequently (1998-99) and the same was done without conferring with the audit committee.

Company management went for acquisition of assets including the telecom spectrum by paying huge amount over and above the market rate and that reduced the cash balances of the firm severely. Again the decision was taken by the CEO without due diligence reports and not keeping the board in confidence.

The overall behavior of the cost increments was not in tune with the cash generated by the company and expansion into different markets without establishing the home market credentials also dented the company’s prospect. shareholders’ interests were ignored altogether.

Liabilities which were increasing each year were the main causes of company debacle. Because of existing debts and increasing expenses, the company was able to convince investors like PBL and New limited to invest more. Bankers of the company were also skeptical of the ability of the company to pay off liabilities in time. This led to severe cash deficiencies and led to collapse.

The collapse of HIH insurance was one of the largest insurance sector liquidations worldwide and the largest collapse of corporate sector in Australian history. The collapse was precipitated because of the crisis that got started as a result of the discovery of liabilities of $8 billion or more as against an asset base of $5.3 billion only.

There are many causes because of which the HIH company found itself in difficulty:

One of the primary reason was losing money in business which the company undertook without fully understanding heir repercussions. It went of insuring film business through its subsidiaries in UK and lost more than $500m on the same. Eventually closed (ALLAN, 2006).

It went for many acquisitions including that of FAI and CIC. All the acquisitions were undertaken without evaluating the due diligence property properly and in some cases the due diligence reports were faulty. Thus, HIH ended up paying too much cash for these acquisitions. Soon after FAI acquisition the HIH insurance was made to pay claims of more than $200 million owing to crop failures and natural disasters. This mans after the business were acquired by HIH the same was never properly integrated into HIH’s core business and did not make any money (Mirshekary, 2005).

HIH Insurance: Events and Ethics

The company CEO took some decision under which the HIH company went for reinsuring all of this insurance plans with reinsurance companies. This was not a normal practice in the industry and normally companies keep a good amount of margin requirement. By reinsuring whole of the insurance plans the company tried to reduce its own liabilities but things got complicated when the reinsurance companies did not do well and pay in time. Thus, to cover its goodwill the HIH company was required to pay the claims itself which caused the company more than $250 million in losses apart from the payment of reinsurance premiums. The problem was highlighted in the failure of Reinsurance Australia. Thus, the management of the risk involved in insurance business was managed badly and this caused losses to the shareholders (BERK & DEMARZO, 2016).

HIH much like OneTel company was run by the CEO and his team without consulting too much the other members of the board and thus broke the principle of corporate governance since the decisions taken by the CEO were clearly not in the interests of the shareholders. Company management went for acquisition of assets including that of FAI and CIC etc. by paying huge amount over and above the market rate and that reduced the cash balances of the firm severely. Again, the decision was taken by the CEO without due diligence reports and not keeping the board in confidence.

Liabilities which were increasing each year were the main causes of company debacle. Because of existing debts were much larger than the assets the company found itself in trouble and liquidated. The HIH company lost a large chunk of cash on account of losses in business which were ill conceived and ill managed such as the employee compensation insurance taken in US and Film insurance businesses. All these business lost the company around $1bn for the company. Apart from the same the business also lost large chunks due to settlement of claims for which the reinsurance failed. So, it can be said that the sudden increase of the company’s liabilities were the main cause of the company’s collapse (Pascal Quiry, 2015).  

ABC came into existence in 1988 and soon became one of the largest care providers in Australia and elsewhere. It grew exponentially following an aggressive acquisition strategy. By 1996 the company was managing just over 18 centers but the Australian government’s decision to subsidize the system by paying the families who can’t afford paying directly opened up the sector. This created a different attitude of the company’s management and the ABC learning went of aggressive buyout of similar companies. The company listed in ASX in 2001 with mere 43 centers but by 2006 the no of centers increased drastically to 2238 centers spread across US,UK, Australia and New Zealand. The market value of ABC in 2001 at the time of its listing was A$25 million but the same increased manifold to A$2.5 billion by the end of FY 2006. In the following year , the revenue reported for 2007 was A$1.7 billion and a profit of $143.3 million (Colin Kruger, 2009).

HIH Insurance: Liabilities as the main factor for liquidation

However the huge amount of debts in the balance sheet took a toll on the cash flows and sold a majority of the US and UK business. Soon the stock prices were down to $.54 down from peak value of A$8.62 in 2006. The company was delisted from ASX in 2008  and administrators were appointed for liquidating the company. Eventually a majority of the Australian operation of ABC was acquired by a consortium (Philip & Tinker, 2012).

One of the main causes which caused the company to collapse was the huge amount of intangible assets in the books of the company. ABC purchased a few companies for growth and this resulted huge amount of goodwill in the books. By the end of 2007-08, there were more than A$ 271 million and licenses were amounted to another A$ 2.4 bn. However, for strange reasons the management did not impair these assets too much. As seen in the past these assets often tend to devalue when the company runs into trouble and this is exactly what happened to ABC learning as well (Terrett, 2009).

In 2006 there was complaint against the valuation of ABC’s licenses in the books but ASIC did not see any problem with the same. Also by the end of 2007, debts were in the tune of A$ 3 billion and of which 40% were due for refinancing. However, the problems started to aggravate when the company failed to generate adequate cash from the firms huge operation to pay for the interest costs, employees and suppliers etc. there were unpaid dues on account of properties under the use of different child care centers as well (Teen, 2012).

The ABC management misused the provision of accounting standards for inflating the value of goodwill and licenses in the books and the same was used for availing more loans. The management also decided to recognize the subsidies received directly from the government as revenue in the annual financial statements.

Acquisitions were made very aggressively resulting in payment of big goodwill which belied the size of the firms and its actual profits. Shareholders benefits were not taken into consideration and the management clearly did not align their goals with that of the shareholders (Philip & Tinker, 2012).

Once again like in the cases of both HIH and OneTel , ABC capitulated because of huge liabilities in the books and not having sufficient assets to meet with the repayments. The company collapsed simply because of higher debts and inadequate cash flows from the continuing operations. It showed lack of planning on the part of management to increase revenue and reduce cash expenditures.

Conclusion 

The failures of three big corporate entities in the span of few years in Australia was caused by ill planning, lack of application by management, pursuing unplanned growth and failing to adhere to the age old practice of financial planning for the long term. what has transpired in most of the above cases is the fact that the Management led by the CEOS have largely ignored the CSR principles and kept the Board of directors out of the loop. The lack of application of regulatory principles by ASIC and oversight by ASIC is also one of the causes for failure of these one-time bright corporate growth stories.

ALLAN, G., 2006. THE HIH COLLAPSE: A COSTLY CATALYST FOR REFORM. DEAKIN LAW REVIEW , pp. 137-159.

BERK, J. & DEMARZO, P., 2016. corporate finance. Boston: Pearson Educaitonal Publication.

Colin Kruger, 2009. https://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-78f8.html. [Online]
Available at: https://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-78f8.html
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Cyert, R., Kang, S. & Kumar, P., 2002. “Corporate Governance, Takeovers and Top- Compensation: Theory and Evidence”. Management Science, 48(4), pp. 453-469.

McRobert, A., 2009. ABC Learning Centres Limited-did the annual reports give enough warning?. the finsia journal of applied finance, Issue 1, pp. 14-17.

Mirshekary, S. Y. A. a. C. D. 2. ‘., 2005. Australian Corporate Collapse: The Case of HIH Insurance. Journal of Financial Services Marketing, 9(3), pp. 249-258.

Pascal Quiry, M. D., 2015. Corporate Finance – Theory and practice. 8th ed. Chicago: Wiley Publishers.

Philip, R. & Tinker, T., 2012. ABC Learning : accounting lessons never learned?. International Journal of Critical Accounting, , 4(1), pp. 20-29.

Teen, M. Y., 2012. The ABC of a corporate collapse, Brisbance: Business Times.

Terrett, T. P. &. A., 2009. Transparency and disclosure: Implications of the bear raid on ABC Learning Centres. Company and Securities Law Journal, 27(3), pp. 139-147.