by tonytran2015 (Melbourne, Australia).
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#restructured company, #float, #zombie float, #zombie company, #IPO
Avoid Buying Zombie Floats on the Stock Exchanges.
As the Central Banks of major countries send interest rates to zero or even negative values, people have to take their retirement savings out of Government Bonds and they are tempted into sending their money into the Stock Markets of those countries. The people are not verse in calculating return and risks so they may grab any “established names” on the Stock Exchange and pay outrageous prices for them.
There are schemers who live off that ignorance and float the old loss making companies (zombies companies) into the markets and do creative accounting tricks to hide the losses (for few years only). Those buying the zombies at Initial Public Offer (IPO) usually lose most or significant parts of their money right after the contracts have been signed!
This blog reveals the tricks of selling zombies on the Stock Exchanges.
1. Tricks of the trade.
1. A schemer buys a long suffering loss making for next to nothing. Usually he buys it when it goes into liquidation by insolvency.
2. The schemer sacks most low level employees. They would lose their job anyway by the liquidation. The company then ceases trading for few months.
3. The company books are then scanned for any realizable, significant assets for the schemer to take.
4. The schemer draws up a contract between the newly acquired company with one of his other companies (a debt collecting disguised as management company) for an irrevocable, very expensive management of the newly acquired company.
5. The schemer provides a thin working capital to the newly acquired company from an expensive loan from his other company (debt collecting disguised as management company). The loan is characterized by complex conditions such that prospective investors would not understand.
6. New low level employees are hired and the company re-open its doors for trading (in a way which is precarious but is hard to be noticed by prospective investors).
7. The company is then called “restructured” and floated on the Stock Exchange for naive, unwary investors to buy in.
8. The money from new investors helps paying back the loans from the schemer and will make installments to pay the management fees (which are actually installments to pay off an additional debt to the schemer).
2. Analysis of the trick.
1. As management fees to another company at expensive rate are not classified as a debt, the restructured company is now debt free except for an expensive loan used as working capital.
2. The irrevocable management contract just keeps sending money to the other company (debt collecting disguised as management company) whether the management is effective or not. The contract is effectively an obligatory debt repayment scheme but is OFF the BALANCE SHEET.
3. Most capital raised from the float of the zombie will be used to repay the loan for working capital and then sent to the “debt collecting disguised as management company” over the time.
4. The director of the zombie company is untouchable by any company law or security law as the management fault lies with the management company (outside his control) but he cannot revoke the management contract.
3. Illustration by an every day example.
If someone got a wrecked car from a yard, refit it with an engine (on an expensive hire purchase plan from him) and sell it to you. Would you buy that car?
But why do you let your Pension Funds, Superannuation Funds buy the zombie companies on your behalf?
4. Zombie floats from Australian Stock Exchange.
The better known cases of zombie floats from the Australian Stock Exchange (ASX) are:
The Dick Smith Electronic Company (2015),
The Myers Company (2009).
The floating of the zombies does make the Stock Exchange look like an arena for rigged games where novice investors are ripped off by schemers.
5. Avoiding Zombie Floats.
Investors have to check the trading records for the preceding three years of the floated company even if it is traded on the Stock Exchange.
A new float of an old company may be very risky as only the company name is established while the management and operation are totally untested. Investors are buying into only a dream, the dream may turn out to be a nightmare.
Any management contract of the floated company to any external company must be examined in details (How much fee per year, for how many year, whether it is revocable, what are the required termination conditions). The conditions are usually hard to obtained from any such prospectus. For this reason alone, any such float should be avoided.
Investors have to find out if the floater of the new float has a reputation in floating successful companies after claimed “restructuring”. Some floaters are known for only floating non-viable companies.
On the only basis of transparency, I would avoid any float of “restructured companies”.
. dick smith blames-private-equity-owners-greed-for-collapse, http://mobile.abc.net.au/news/2016-01-06/dick-smith-blames-private-equity-owners-greed-for-collapse/7069604
. dick-smith-class-action-ready-to-launch, au.wordpress.com/business/breaking-news/dick-smith-class-action-ready-to-launch/news
. the-private-equity-giants-the-greek-target-and-a-trojan-horse, October 28, 2015
. report-says-big-buyouts-are-likelier-to-default, date 05Nov2009
Added after 2018 Oct 15:
Vulture Fund kills Sears
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