In his new book, The Signs Were There Tim Steer, a chartered accountant, hedge fund manager and former Pink Floyd roadie, argues that we should've seen the biggest corporate collapses coming. The hints, he told AccountingWEB, were staring us in the face.
“Cash is fact, everything else on the P&L is a matter of opinion”. This is Tim Steer’s first commandment when discerning a business dud from a dynamo.
The longtime investor, hedge fund manager, former Pink Floyd roadie and now the author of The Signs Were There has seen his share of disasters. The book, written with a wry, easy wit, catalogues these misadventures, with each chapter zooming in on a particular example.
The gang’s all there: Carillion, Conviviality, HP and Autonomy. It’s a rogue’s gallery of financial flops and throughout the book, Steer maintains that despite the credulity of the press, the signs were there all along, usually buried in the annual report.
But couldn’t anyone write this book in hindsight? It’s a question Steer bristles at, noting that most of the businesses profiled in the book are ones he shorted. In the case of Autonomy and HP, his short cost him a substantial wedge as his bearishness on Autonomy was confounded by HP, which paid over the odds for the British software firm.
And to be fair, Steer isn’t claiming to be a stock market savant. He’s just industrious and pays attention. If HP had just looked at Autonomy’s report, he said, they would’ve arrived at the same conclusion he had and avoided the acquisition.
There was no single red flag on Autonomy’s report, but a “semaphore of small red flags”. For example, Autonomy was sluggish on collecting cash from clients. While patents, licenses and brand names worth a cool $400m were all held as assets on the balance sheet, they were depreciated between one and 10 years. “A decade is a long time in IT,” Steer observes, as HP discovered.
Conviviality is another example proffered by Steer as an example of ‘the iceberg principle’: One quirk in the annual report usually points to a bigger issue.
In Conviviality’s case, Steer points to its acquisition of the drinks wholesaler Matthew Clark. “When they bought it for £200m, they made a £5m adjustment because of onerous contracts,” Steer said. “Basically, they paid too much for spirits and beers.”
That’s not necessarily, but a year later Conviviality adjusted this number to £11m. “Basically, they had two bites of the cherry. And yet, this not a difficult calculation, it’s not rocket science. They got it wrong and had to make an adjustment. That tells me everything I need to know about the quality of Conviviality’s finance department. The ensuing tax and forecast mistakes weren’t a surprise.”
"It’s the reports, you see!" Steer is speaking over the phone, but you can almost sense him waving his arms in frustration. And these annual reports, he said, are now more important thanks to new financial directive MiFID II.
MiFID II requires investment managers to either pay for research themselves from their P&L or to use a research payment account, where the budget has been agreed with the client. “There’s less independent research, there’s less opinion being made about companies,” said Steer.
“There’s less research -- definitely down in the small cap, mid cap region. It’ll make it harder for these businesses to fundraise and the annual report will become more important than ever.
“You’re going to have to do a lot more work and look for those icebergs in the annual report. Other people aren’t going to find it for them. All of the examples in my book, the signs were right there in the accounts. If they only looked.”
About Francois Badenhorst
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