Struggled to re-finance its debt, the electronics retailer Dick Smith was forced to close all of its stores due to failing attempts to sell the company. It is estimated that approximately a total of three thousand employees across Australia and New Zealand will be made redundant.
Named after its founder Richard Harold “Dick” Smith, the company was established in 1968 which focused on installing and servicing car radios. The business later expanded its operation to providing electronics components for hobbyists. It widened its product range and launched its private label products in the 1970s, leading the company as an early retailer of personal computers.
Dick Smith later sold the company to Woolworths limited. He initially retained 40% of the shares in 1980 and later sold his share in the company altogether in 1982, followed by leaving the management of the company to Woolworth with 25 millions AUD in his pocket. In September 2012, more than two decades later, Woolworth sold Dick Smith to Anchorage Capital for 20 million in cash as a part of its strategic review and a $300 million restructuring (Thompson, 2012).
This acquisition has created controversy as some people called it “the Greatest Private Equity Heist of all time” (Ryan, 2015). People wonder “how can an iconic chain such as Dick Smith with $1.5 billion in revenue and one of the best brand names in Australian retail — be worth just $20 million?” (Rose and Hatch, 2016).
Less than two years after Anchorage Capital acquired Dick Smith from its then-owners, Woolworths, Anchorage was able to float Dick Smith on the stock exchange for $520 million (Boyd, 2016) in December 2013 at the price of 2.2 dollar/share (ASX, 2016). Whilst impressive, this was typical practice for equity firms – their buy low and sell high strategy was perfectly legal albeit somewhat questionable.
Anchorage was able to do this firstly, by making fair value adjustments to its inventory, a figure that was around $58 million in 2012. It then embarked on an aggressive sales campaign, generating sales revenue growth and subsequently large profits. To add to this, Anchorage did not buy much new inventory and instead, they started opening new stores. Between 2012 and 2013, approximately 15 new stores were opened and Dick Smith had also taken over the electronics departments of David Jones. This bumped up both the company’s sales growth and profit growth (Murphy, 2016).
By the end of June 2013, Anchorage had a company with little inventory, sales growth and big profits to float on the market. It was a good time to cash out on their investment before the following year’s annual report was released. The most important thing to emphasize here was that Anchorage’s strategy was always to exit its investment at a high. Had it been a different company that acquired Dick Smith from Woolworths, one that perhaps had a long-term view of ownership for Dick Smith, things may have been very different. However, that was never the strategy for a private equity firm (Murphy, 2016).
More importantly, it must be highlighted that Dick Smith’s demise was not all of Anchorage’s fault, a turnaround would have been possible for the company had the company’s management chosen to do things differently upon Anchorage’s exit. They instead continued in the same path, obtaining a secured lending facility worth $135 million from HSBC and NAB, acquired dud inventory and were subjected to unqualified audits by Deloitte, the quality of which is pending investigation (Boyd, 2016). Evidently, the demise of the company was a culmination of a series of unfortunate events.
In another two years, the share price plummeted more than 80% from its listing price as the revenue fell and the business was struggling to pay its debts. Therefore, on 4th January, the trading halt was requested before the announcement regarding to its bankruptcy (ASX, 2016).
The chart of Dick Smith Holding (DSH) Share price prior to its bankruptcy
Alas! Is this the end?
No! On 15th of March 2016, Kogan announced that they will buy over Dick Smith (Ong, 2016). The Australian online retailer announced that they planned to operate Dick Smith in a similar manner to their current mode of operations – via only an online website (Stewart cited in Ong, 2016).
Just like how the liquidation of Dick Smith impacted several groups of people, the accusation would also affect these people as well – particularly the employees, past and present customers, competitors, Kogan and most certainly Dick Smith.
Sadly, the acquisition by Kogan did not result in a significant decrease in the size of redundancy as “almost 2,500 staff in Australia, and more than 400 in New Zealand” would have to seek alternative employment (Ong, 2016), due to the fact that Kogan’s online model has resulted in a much less dependency on labour and rent.
Whilst this has and will continue to mean that Kogan will be able to offer products to customers at a much lower price, the abrupt closure of Dick Smith stalls all around Australia and New Zealand has made it necessary for the Australian Department of Employment to step in and run several “job transition support sessions” (Carmody, 2016). Furthermore, the uncertainty of when Dick Smith would be officially closing its retail outlets implies that even if workers were to find jobs during this period they may have to forsake being paid their outstanding entitlements so as to accept their new position (Carmody, 2016).
As for past customers, Dick Smith’s original bankruptcy announcement saw them initially being told that any outstanding gift cards will not be honored. However, the acquisition has seen Kogan agreeing to honor those gift cards. Nonetheless, an equally concerning issue is that this takeover would see past Dick Smith customers have their information being passed onto Kogan unless they opted out within 7 days of the announcement of the takeover (Ong, 2016).
As Millner (2016) postulates, perhaps the true value of the buyover lies more in the database that Kogan would now have access to. Kogan being a purely online business has rather limited advertisement channels and email catalogues that are believed to be a significant method of advertisement. With this, customers are expected to receive a lot more online promotional information. However, the difference in the type of shoppers at both characteristics means that the exact benefit is unknown.
With preparations at Kogan for an IPO, Kogan is hoping that the Dick Smith buyout would offer it a boost in sales and growth, which has slowed down considerably in comparison to the initial years (Mitchell, 2016).
It cost Woolworth a fortune, tainted Anchorage’s reputation, and will soon destroy thousands of people’s jobs by shutting stores. But why would Kogan acquire such Dick Smith, who seems be a troublemaker, as each of its previous owners has suffered somehow except for Mr. Dick Smith himself?
It is argued that the merger will make the two companies bigger, bolder, and better than they could be apart. Warren Buffett once put it as executives see the companies they acquire as handsome princes imprisoned in toads’ bodies, awaiting only the “managerial kiss” to set them free (Suriwiecki, 2008). In fact, Mr. Kogan is quite an ambitious man with his claim that he will make Dick Smith’s online business ‘instantly profitable’ (Mitchell, 2016). His ‘kiss’ would probably be IT-wise. The powerful tool Mr. Kogan has is his patented algorithm, which could predict where the demand will be by looking at customers’ search statistics and Google search data. “We often describe ourselves as a statistics business masquerading as a retailer,” Mr Kogan said (Mitchel, 2016).
Another alleged motive could be that Kogan is rumoured to look to float itself for $300 million (Mitchell, 2016). Good sales figures and revenue growth will definitely make the company more attractive to investors. Kogan has achieved once-stellar growth in its early years but recently the company has slowed down a bit. With its IPO prospect, the company surly can use a boost leveraging Dick Smith’s existing customer base. After the company is listed, Mr. Kogan could even sell his company for more cash just like what Anchorage did. Meanwhile, Mr. Kogan has already told the media his fond memories of Dick Smith since his childhood. If his turnaround plan works out, it would be another good story during roadshows in which a young boy save his childhood dream.
All in all, the collapse of Dick Smith is owed to not only a pragmatic Private Equity firm but also a series of faulty decisions of the company’s management. The event is no good for any consumer as the market power is further concentrated into fewer companies’ hands. Still, let’s wish the best to Dick Smith and its new owner. May information technology revive the once iconic brand before long.
References:
ASX. (2015). ASX Share price & information. Retrieved March 31, 2016, from http://www.asx.com.au/asx/research/company.do#!/DSH
Boyd, T. (2016, January 5). Dick Smith receivership gets the drums beating on risk. Australian Financial Review. Retrieved March 30, 2016, from http://www.afr.com/brand/chanticleer/dick-smith-receivership-gets-the-drums-beating-on-risk-20160105-glzqjl
Carmody, B. (2016, March 23). Dick Smith employees to receive government assistance as frustration over store closure deadline grows. Retrieved March 31, 2016, from Retail, http://www.smartcompany.com.au/industries/retail/66398-dick-smith-employees-to-receive-government-assistance-as-frustration-over-store-closure-deadline-grows/
New Dick Smith owner Kogan offers some relief for gift card holders. (2016, March 16). Retrieved March 31, 2016, from http://www.nbr.co.nz/subscribe/186282
Fresne, P. (2015, October 29). Dick Smith is the greatest private equity heist of all time. Retrieved March 31, 2016, from Insights, https://foragerfunds.com/bristlemouth/dick-smith-is-the-greatest-private-equity-heist-of-all-time
Murphy, J. (2016, January 6). The Dick Smith disaster explained in five easy steps.News.com.au. Retrieved March 30, 2016, from http://www.news.com.au/finance/business/retail/the-dick-smith-disaster-explained-in-five-easy-steps/news-story/b95f243d54f423ced869b8ec77838046
Mitchel, S. (2016, March 29). How Ruslan Kogan plans to ‘very quickly’ makeDickSmith.com.au profitable. Retrieved from Business Insider: http://www.businessinsider.com.au/ruslan-kogan-plan-dick-smith-profitable-2016-3
Mitchell, S. (2016, March 29). Kogan to make Dick Smith’s online business ‘instantly profitable’. Retrieved from Sydney Business Herald: http://www.smh.com.au/business/retail/kogan-to-make-dick-smiths-online-business-instantly-profitable-20160327-gns1dd.html
Ong, T. (2016, March 15). Kogan buys Dick Smith’s online business. Retrieved March 31, 2016, from http://www.abc.net.au/news/2016-03-15/kogan-buys-dick-smith-online-business/7247136
Pennington, S. (2016, January 5). ‘This could be the end of the road for Dick Smith,’ says Forager funds boss. . Retrieved from http://www.smh.com.au/business/retail/this-could-be-the-end-of-the-road-for-dick-smith-says-forager-funds-boss-20160104-glyqsu.html
Suriwiecki, J. (2008, June 9). All Together Now? Retrieved from The New Yorker:http://www.newyorker.com/magazine/2008/06/09/all-together-now-5
Thomson, J. Dick Smith’s $400m fall: How a retail icon stumbled. Retrieved March 31, 2016, from http://www.crikey.com.au/2012/09/28/dick-smiths-400m-fall-how-a-retail-icon-stumbled/
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