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

Background of ABC Learning

Question:

Discuss About The Investigating Events Leading To Liquidation Of ABC Learning?

ABC Learning is an Australian company. Once upon a time it was the world’s largest provider of early childhood education services. It was founded in 1998 and by 2006 it had total of 950 centers across New Zealand and Australia.  At its peak in 2006, its marked capitalization rose to A$2.5 billion on the Australian securities and stock exchange. A fallout from the subprime management crisis caused debt repayments to sink the company. It was eventually taken over by Good Start Limited in 2009, after a voluntary liquidation in 2008. Currently it is running around more than 650 childhood centers in Australia

• In the later 6 months of 2007sudden drop in profit of the company and its failure to provide service lead gto drop in share prices of the company.
• Share drop by 43% from $2.15 to $1.15(ferrier, 2016).
• At the end the Grove just held 8% shares of the company. Founder Edmund and his wife 20 million and 6million shares. 2.7 million shares were sold by Martin kemp. Dumping of which was large enough to cause panic within the institutional and retail buyers who followed suit(SUMSION, 2012).
• ABC Learning Company in order to have speedy growth kept acquiring child care centers at a premium over the market rate.[1] For this purpose the company started issuing shares to raise more capital.
• The health of the financial statement like balance sheet, cash flow statement and income statement was an indicator that the company was heading to insolvency but management at that time chose to trade-off that risk with their aggressive growth plan. Leverage was so high that the company owed more than one dollar for 30 cents of equity. In fact to service the loans, the company ran into a negative cash flow in 2007 which prevented it from meeting its day to day expenses and led to insolvency.
• There was also a reported fraud of not disclosing a related party transaction(Keane, 2008).

• Company did not have proper management team with financial prudence which is why they incurred huge maintenance cost, paid too much to acquire new centers, and committed financial mismanagement.
• This is also a failure of both internal and external (auditor) Accounts and Finance teams as these professionals play a very crucial role in company’s growth and stability and advising management on key business decisions. Some lessons for Accounts and Finance professions from this case are,
• Revenue should be recognized properly.
• Company should focus on its core offering, its strengths and management of its primary business even when company is going through massive phase of growth. In ABC companies case the co founders shifted focus from providing quality child learning to simply acquiring/ adding new centers to boost the valuation for which they had to raise external financing and this was a vicious circle ultimately.
• Company’s books should depict the real picture because it does not take long for the markets or investors to gauge the real health and eventual consequences re more catastrophic.
• Emphasis on proper standards of corporate governance is a must and basics like disclosures of related party transactions cannot be ignored(parker, 2016).

In a nutshell, its ironic that a company that found a great product market fit and hit its zenith ended up being insolvent, had to go through the painful process of liquidation and ultimately got bough out for pennies. Had the growth plans (and in most cases the greed to make the fast buck) been checked with proper corporate governance and financial prudence, this company could have been featured in the Good to Great case-studies instead of examining reasons behind its liquidation (Anon., n.d.).

This is a case of failure of corporate governance on their part even though there were enough signals from Financial statements of impending crisis. This clubbed with inflating its intangible asset value to show a stronger balance sheet to investors and shareholders which eventually sent the stock crashing once the realities were out can be identified to be the prime reasons for ABC to go bust.

Health International Holding (or HIH insurance in short) was founded by Ray Williams and Michael Payne in 1968. Around 1997 – 1998 HIH went global and it acquired many companies in Australia, New Zealand, Argentina and in United States. HIH raised funds from public in return of 51% of its share holding and thereafter HIH company’s name changed to HIH Insurance Limited (Anon., 2015).

At one point in time it was Australia’s second largest insurance company. It got placed into provisional liquidation on 15^th march 2001 making it one of the largest corporate collapse in Australia’s history[2]. There were various fraud allegations on the company. The main reason of liquidation was that company was sitting on huge losses to the tune of  $5.3 billion and unable to meet its cash flow requirements (Anon., n.d.).

Factors leading to liquidation of ABC Learning

Investigations by government agencies into the cause of the collapse then led to trial and conviction and imprisonment of several management personnel on various charges relating to fraud (wiley, 2003)

• HIH claimed that it was having $8 billion of assets however in real terms it came out to just $133 million(Anon., n.d.).
• Let’s look at one of their quarterly reports,

Net assets                  $379 million

Net liabilities            $101million and

Bond securities       $288 million

The company illegally showed pledged securities as their own securities and this is how they violated the rule on APRA (AUSTRALIAN PRUDENTIAL REGULATORY AUTHORITY).HIH insurance company did not disclose the fact to APRA and APRA gave HIH Insurance Company a tick.

• In 1999, HIH insurance company gained control of FAI in a takeover bid. As one director in 12^th Sep 2000 argued to a joint venture with Alliaze, it might have been easier to deal with intangible issue.
• After the disclosure of betrayal done by the company, directors were send to imprisonment for several years and prohibited from being in a leading role of a director for minimum of 10-20 years and were also handed over a monetary fine. [3

Summarizing factors that led to the liquidation of one of Australia’s second largest insurance company.

• There was poor management and lack of attention to detail because the power of company was in wrong hands and the top management and directors were interested in their own personal gain.
• Management after knowing the true situation chose to conceal the true information.
• Compromised integrity and ethical values by top management. Senior officers use to allegedly accept bribes(Anon., n.d.).

• It was also discovered that HIH auditor in 2000 earned $8 million from auditing HIH Insurance Company and $7 million from other sources and in earlier period the same auditing company earned $1.7 million from HIH insurance company and 1.6 million$ from other services. This shows some flaw in independence of the auditor.
• Audit committee was related to HIH insurance company this also questions about the independence of auditor.

• Management presented misleading financial statement by overstating their profits. Management after knowing the true situation chose to conceal the true information.
• Compromised integrity and ethical values by top management. Senior officers use to allegedly accept bribes(Anon., 2013).

One Tel telecommunication company was established in the year 1995. Jodee Rich and Brad Keeling were the founders of this company.[4]In 1997 it was listed on the stock exchange with share price at $2 and valuation of about $208 million. The company had also introduced international and long distance services (reza, 2011).

One Tel was launched at a time when cell phone was just introduced in the market and people were looking for cheaper deals since the call rates used to be very steep. By offering some good deals and cheap call rates to its subscribers (which is exactly what they were looking for), One Tel was able to rapidly gain market share (Anon., n.d.).

As part of it’s service offering, One Tel provided internet services, local and international call rates at reasonable rates and very soon it topped the charts and became one of the Top – 30 companies of Australia. In very quick time it was able to attract millions of subscribers and many investors. Subsequently, the company also introduced the brand “THE DUDE”.

One Tel got a good response on the domestic expansion front allowing its management ideas to expand globally. It quickly expanded to Hong Kong, USA, UK, Germany and Switzerland (Anon., n.d.).

The company decided to collaborate with Optus which contracted to pay 120 bucks[5]in cash every time it had activated a SIM card. One Tel grew very fast with this contract which eventually had a ripple effect as the number of subscribers increased from 16000 subscribers to 50000 subscribers. At a later stage, Optus asked to lower the deal value from $120 due to which company’s profit went down.    

• With its strong offering and competitive pricing, One Tel was able to challenge the already established incumbent telecommunications companies and gave them a tough competition.
• Competitive pricing also meant price war with the already present bigger companies which ultimately eats into the businesses’ margins.
• In 1998 company took some major decisions which ultimately led to its downfall. It decided to have its own network that meant acquiring expensive licenses. But, company didn’t have enough reserves which meant it went borrowing huge sums from investors at steep interest rates.
• News LTD. and PBL investment invested $430 million and committed to invest $280 million in future in return of 40% equity. In 2000 One Tel’s valuation rose to $3.8 billion. And after having valuation of 3.8 billion$ but it collapsed within 18 months of this.
• One of the other reasons for its downfall was management’s over confidence and aggressive strategies to gain quick market share.
• Financial mismanagement
• A large proportion of revenue was provided on credit.
• They introduce the policy of chat at discounted rates due to which it suffered loss.
• Company was selling day to day services not at profit the prices were lower than the cost(reza, 2011).

Conclusion

• After going public and taking money from investors (in return of huge chunks of equity), One Tel struggled to show any return on equity as there weren’t any real profits.
• The decision to build its own mobile network meant the company ended up burning 1.5 – 2 billion dollars. [6]
• Management’s planning proved inadequate as they spent immense money in promoting and expanding business instead of focusing on its existing operations.
• Failed to balance the receivables and liabilities(david, 2011)
• Basically, company drowned because it was focusing much on sales volume rather than earning profit.
• Ethical violation Management after knowing the true situation chose to conceal the true information.
• Compromised integrity and ethical values by top management. Senior officers use to allegedly accept bribes.

References

Anon., 2013. the collapse of hih insurance. [Online] Available at: https://prezi.com/q1l75kpyq-pg/the-collapse-of-hih-insurance/.

Anon., 2015. collapse of hih insurance company. [Online] Available at: https://www.ukessays.com/essays/business/collapse-of-hih-insurance.php [Accessed september 2017].

Anon., n.d. [Online] management at: https://www.youtube.com/watch?v=a4rcGpRXD9I.

Anon., n.d. [Online] Available at: https://www.longdog.com.au/be-daring-not-risky/corporate-governance-and/collapse-corporate-governan.pdf.

Anon., n.d. corporate failure for HIH insurance. [Online] Available at: https://www.slideshare.net/Kmittal928/corporate-failure-for-hih-insurance [Accessed september 2017].

Anon., n.d. Case Studies on the hih insurance. [Online] Available at: https://www.iaisweb.org/modules/cciais/assets/files/pdf/061004_BGN-0_hih_background_note.pdf [Accessed September 2017].

Anon., n.d. hih insurance. [Online] Available at: https://www.hih.com.au/ [Accessed September 2017].

Anon., n.d. One.Tel collapse business magnates. [Online] Available at: https://news.bbc.co.uk/2/hi/business/1360346.stm.

david, w., 2011. [Online] Available at: https://onlinelibrary.wiley.com/doi/10.1111/j.1835-2561.2011.00151.x/abstract [Accessed 2017].

ferrier, t., 2016. closes file on abc collapse. [Online] Available at: https://www.news.com.au/national [Accessed thursday September 2017].

Keane, B., 2008. abc learning collapse. [Online] Available at: https://crikey.com/ [Accessed wednesday september 2017].

parker, g., 2016. ASIC probe ends. [Online] Available at: https://www.abc.net.au/ [Accessed september 2017].

reza, m., 2011. lessons for corporate governance. [Online] Available at: https://research-repository.griffith.edu.au/bitstream/handle/10072/42673/74746_1.pdf [Accessed september 2017].

SUMSION, J., 2012. [Online] Available at: https://researchoutput.csu.edu.au/ [Accessed September 2017].

wiley, j., 2003. The Inside Story Of Australia’s Biggest Corporate Accounting. [Online] Available at: The Inside Story Of Australia’s Biggest Corporate Collapse [Accessed september 2017].

[3] https://www.theage.com.au/news/National/Adler-guilty-on-4-charges/2005/02/16/1108500154731.html