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Business Finance Of Dick Smith Holdings

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Question:

Discuss about the Business Finance And Quantitative Methods Of Dick Smith Holdings Limited.
 
 

Answer:

Introduction

This particular essay attempts to heighten a brief summary of the ownership history of Dick Smith Holdings Limited. It also incorporates the critical evaluation of the valuation of the company when it was acquired by Anchorage Capital Partners and its Initial Public Offer (IPO) amount. The essay also attempts to assess the ethical dilemmas that face Anchorage Capital Partners regarding the floating of the company and the senior executives and directors of Dick Smith Holdings Limited in respect to its financial reports made in the 2014/2015 accounts and reports. Dick Smith Holdings Limited was an Australian wide-chain of retail stores domiciled in Sydney, Australia and was founded by Dick Smith in 1968 (Dick Smith Holdings Limited annual reports, 2015). The company basically sold consumer electronics goods, electronic project kits and hobbyist electronic components for its customers in Australia, New Zealand and other parts of the world. The company expanded effectively into New Zealand and unsuccessful in some other nations globally (Anderson, Sweeney, Williams, Camm, and Cochran, 2012). Dick Smith Holdings Limited expanded to be a leading business in Australia that ensured that almost every electronic enthusiastic in the country has one of its catalogs and thus enhanced profits. In the FY2012, Dick Smith Holdings Limited was formerly acquired by Anchorage Capital Partners at an opening cash payment of AU$20 Million and the total ultimate cost of some AU$115 Million.

 

Brief summary of the ownership history of the Dick Smith Holdings Limited

Dick Smith Holdings Limited was initiated in 1968 by Dick Smith. The company started as small rented buildings in a car park in the Sydney area of Neutral Bay with the total capital of just AU$610 and focused mostly on servicing and installing car radios (Puncheva, and Michelotti, 2014). Due to the company rapid increase and success in the business sector, the company moved to a bigger premises so as to enhance its business operations in the country. The company profited mostly from CB Radio business, and by the end of ten years, it had branches in all the mainland regions in the country. Dick Smith Holdings Limited was owned by Dick Smith and his wife until they basically sold the majority of shares to Woolworth Limited in 1982 (Clements, 2015). The company expanded its diverse range of products especially in between 1970 and 1980 and basically stocked products such as TV receiving stations and Heathkit electronic kits because of the waning interest rates. The business had expanded to about 20 stores and the initiator together with his wife sold 60% of the business shares to Woolworth Limited and the remaining 40% ownership was completed in 1982. Dick Smith Holdings Limited continued to increase to its setup of small main street stores in the regional and suburbs towns across Australia. The company later established Dick Smith Electronic Powerhouse which was a superstore across the east coast of Australia that carried an extensive range of products in the audiovisual, computing and armature radio areas to enhance its productions. In the FY2008, following Woolworth Limited review of its consumer electronics division, Dick Smith Electronic Powerhouse revamped its flagship store as a notion to Dick Smith Technology branding (Lau, 2016). In 2009, Woolworth Company Limited confirmed the end of the Dick Smith Electronic Powerhouse as progressively phased out over the subsequent three years as part of its division. Dick Smith Electronic Powerhouse ended its operations in 2016 with several years of Anchorage Capital Partners acquisition.

 

Critical evaluation of the valuation of the company when it was acquired by Anchorage Capital Partners and its Initial Public Offer (IPO)

Dick Smith Holdings Limited had been owned by Woolworth Limited since the early 1980’s, until early in 2012 when Woolworth Limited announced that the business was underperforming and non-core and instigated a sale process (Schauten, Dijk, and Waal, 2016).  After a period of distinctiveness, in November 2012 Anchorage Capital Partner acquired the company for AU$20 Million. Anchorage Capital Partners announced in FY2012 that it had entered into an agreement with Woolworth Company Limited to acquire 100% of Dick Smith Electronics with the entire transaction anticipated to be completed in November 2012. Dick Smith Electronics was an iconic Australian consumer electronics company that became part of Woolworth Company Limited in 1980 (Essayyad, 2012). The deal had been conventionally structured so that Dick Smith Holdings Limited will emerge from the sale supported by a strong statement of financial position with considerable asset backing and no core liabilities. As part of the acquisition, Anchorage Capital Partners would also support the operations by offering additional guarantees and cash investment. As at FY2012, Dick Smith Holdings Limited reported sales worth AU$1.6 Billion. Anchorage Capital Partners paid as much as AU$115 Million for Dick Smith Holdings Limited because it was agreed that an approximately AU$20 Million would be paid up front. As at FY2012, Dick Smith Holdings Limited was basically valued at AU$420 Million (Dias, and Saizarbitoria, 2016). The company was heavily criticized because it was cheaply sold because the company could not make sufficient profits needed by the company. Woolworth Company Limited having struggled to find a fit for the electronics retailer from its acquisition in 1980, the company was keen to offloading the non-core business division for approximately AU$115 Million. Since Anchorage Capital Partners is a privately owned institution, the price details of the newly acquired asset, the company shares are not routinely made public. When Dick Smith Holdings Limited was basically acquired by Anchorage Capital Partners, the company had less value and was basically valued at AU$20, and its Initial Public Offer (IPO) was at AU$2.20 per share. Following the company acquisition, Anchorage Capital Partners restructured its business, and the retailer was mainly listed on the shares market for AU$2.20 for each share raising about AU$345 Million which was more than five times its initial purchase price (Brigham, and Houston, 2012). Anchorage Capital Partners is alleged to have marked down a substantial value of Dick Smith inventories to sell it at a discount so as to report an attractive incomes data. These particular adjustments did not touch the new Dick Smith Company loss and profit reports, and at the lash of the pen, the company had made or avoided about AU$120 Million in future pre-tax profit. The company financial statements as at 2012 indicated that Dick Smith Holdings Limited had stock that cost AU$371 Million but had been written-down to AU$312 Million (Essayyad, 2014). Consecutively, as at June 2013, the company inventory had decreased to AU$171 Million which basically pointed out an apparent sale of the enterprise. In this case, the reduction in the company inventory produced a massive AU$140 Million profits to the company operating cash flows as a result of selling most of the inventory, but there was no restocking. Due to this particular markdown of most of Dick Smith Holdings Limited inventory and other non-current assets, the company valuation had been decreased tremendously that enabled Anchorage Capital Partners to acquire the new corporation quickly (Oakshott, 2012).

 

An assessment of the ethical dilemmas that faces Anchorage Capital Partners in respect of the floating of the business

Floating of the business shares in the market is usually the duty of management. Floating of shares often enables the company to raise more capital to fund its diverse activities such as expansion. The management of Anchorage Capital Partners basically faces diverse ethical dilemmas when floating of shares because of the negative critics that they face as a result of Dick Smith Holdings Limited acquisition in 2012. The company management is criticized of decreasing the company value so as to enrich themselves which is considered to be unethical among the company operations (Iyakaremye, 2015). Anchorage Capital Partners are faced with the aspect of trust and confidence from shareholders in respect to floating of its shares because they feel less secured from diverse operations of the company. The company management floated the electronics chains that bear the name of Dick Smith which was considered to lack decency and morality and that the managers were faced with a lawsuit with the aim to refund for the clients that were left holding worthless gift cards. Dick Smith Holdings Limited was initially sold off to Anchorage Capital Partners for about AU$115 Million, and the privately owned firm basically floated the business just after fifteen months later for more than five times its initial costs. This aspect was considered to be unethical because the amount paid for the company was too low. There can be absolutely no doubt that the Anchorage Capital Partners Limited managers knew that the things were not doing the right thing to its customers. Investors lost their life savings invested in the company while the company directors walked away with several million (Gendron, and Smith, 2015). The Anchorage Capital Partners misled the directors of Dick Smith Holdings Limited that led to their acquisition at a little value whereas the company management made diverse profits that floated an enormous amount of shares that was considered to be five times the initial value of Dick Smith Holdings Limited.

 


An assessment of the ethical dilemmas that faces the senior executives and directors of Dick Smith Holdings Limited with respect to its financial reports made in the 2014/2015 accounts and reports

According to the financial reports and accounts for FY2014/15, the management board of Dick Smith Holdings Limited duped the firm shareholder and investors using the name of Dick Smith to hide their dishonesty (Wood, 2011). They fooled the company investors and shareholders that the company was making profits and that the company financial students and reports demonstrated a clear picture of the company financial position and in actual aspects, the company financial statements were deceiving. This action was basically unethical and unprofessional because they also fooled financial professionals and banks to push for the company sale (Essayyad, 2012). Another ethical problem that faces the directors and executive management is that according to the FY2014/15 accounts and reports, there was no indication that Dick Smith Holdings Limited will exit the business. According to the reports, the managers rewarded themselves with huge bonuses and salaries that resulted to the company liquation. The company went into receivership five months after the release of the financial statements of 2014/2015 which indicated that the company would continue its operations for a foreseeable future but in real aspect, the company had diverse problems. Due to huge salaries by the directors that resulted in little profits, the company shares were suspended from trading via the ASX. Senior executives and directors of Dick Smith Holdings Limited were blamed for low sales that led to low profits and hence the closure of the business. Anchorage Capital Partners had altered the true and fair value and projections of the company when it registered the company of the Australia Stock Exchange in the FY2013 (Kenney, Cava, and Rodgers, 2016). Basically, it a company cannot be valued at AU$90 Million in FY2012 by Woolworth Limited, AU$500 Million in 2013 and then the company goes into receivership two years later. In this case, the company management deceived the company shareholders and investors. The senior executives and directors of Dick Smith Holdings Limited knew of inventory problems that led to most of the company stocks written off. The management team basically deceived the shareholders, and they were treated poorly, and they had a right to correct information to make informed decisions on the Australian share market. The senior executives and directors of Dick Smith Holdings Limited did not offer viable information to its investors and shareholders that led to the company closure (Essayyad, 2008). This is because it is believed that the managers had concrete knowledge of what was happening with the company and failed to advise on the shareholders on the possible approaches to save the company from downfall.

Conclusion

Proper and ethical management of diverse companies globally is usually the core aspect that enhances the company operations. A company that has better management team usually generate sufficient profits for its investors and shareholders because they ensure that there is continuous production. Dick Smith Holdings Limited sold consumer electronics goods, electronic project kits and hobbyist electronic components for its customers in Australia, New Zealand and other parts of the world. The company was officially closed in 2016 because the company management did not disclose all the problems that hindered the operations of the enterprise. The company management fooled the company investors and shareholders that the company was making profits and that the corporation financial students and reports demonstrated a clear picture of the company financial position and in real aspects, the company financial statements were deceiving.

 

Bibliography

Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D. and Cochran, J.J., 2012. Quantitative methods for business. Cengage Learning.

Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.

Clements, J., 2015. Stamp duty consequences of infrastructure and development agreements. Taxation in Australia, 49(11), p.688.

Dias, A.A.D.S.P. and Saizarbitoria, I.H., 2016. ISO 9001 Performance: A Holistic and Mixed-Method Analysis. Revista de Management Comparat International, 17(2), p.136.

Dick Smith Holdings Limited annual reports, 2015. Retrieved from https://www.asx.com.au/asxpdf/20150818/pdf/430kvhrl8cpg0l.pdf

Essayyad, M., 2012. The Case of Anchorage. International Banking and Financial Centers, p.11.

Ezidinma, V., 2014. Why corporations fail: An exploration & theory on the recurring themes in corporate failure (Doctoral dissertation, Dublin Business School).

Essayyad, M., 2012. 2. The Feasibility of Establishing. International Banking and Financial Centers, p.11.

Essayyad, M., 2008. ‘The Feasibility of Establishing an International Financial Centre: The Case of Anchorage. International Banking and Financial Centers, p.11.

Iyakaremye, A., 2015. Analysis Of Financial Performance And Financial Risk In Agricultural Companies Listed On The Nairobi Security Exchange.

Gendron, Y. and Smith-Lacroix, J.H., 2015. The global financial crisis: Essay on the possibility of substantive change in the discipline of finance. Critical Perspectives on Accounting, 30, pp.83-101.

Kenney, R., La Cava, G. and Rodgers, D., 2016. Why Do Companies Fail?(No. rdp2016-09). Reserve Bank of Australia.

Lau, A., 2016. ASA stands up for shareholders. Equity, 30(4), p.10.

Oakshott, L., 2012. Essential quantitative methods: For business, management and finance. Palgrave Macmillan.

Puncheva-Michelotti, P. and Michelotti, M., 2014. The new face of corporate patriotism: does being “local” matter to stakeholders?. Journal of Business Strategy, 35(4), pp.3-10.

Schauten, M.B., Van Dijk, D. and van der Waal, J.P., 2013. Corporate governance and the value of excess cash holdings of large European firms. European Financial Management, 19(5), pp.991-1016.

Wood, D., 2011. M&A transactions: What are the issues; what are the opportunities?. Tax Specialist, 14(5), p.238.

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