Greenspan slams credit rating agencies

WSJ Online link.

Strategy, financial analysis, credit crunch, and TPI

TPI's recent strategy has been driven by acquisitions. At the end of this year TPI have to refinance about $2.7bn of debt. Given recent events in the credit market, this could prove interesting. More from Adele Ferguson here. Key quote that backs up what we keep discussing in class:

The ride has been exciting, with the share price going on a roller-coaster ride, and profits going through the roof. But analysing a company that makes a lot of acquisitions is tough, particularly one that has reclassified some of its businesses into different divisions and created new divisions.

More on Coles' profit

Elizabeth Knight in the Herald follows up on the Coles profit, and makes the point that I've made in class repeatedly: pro forma earnings numbers are problematic in that it is not clear what has been included and excluded from GAAP income, which makes it difficult to compare with both previous earnings numbers from (in this case) Coles, or to compare Coles with other companies.
Key quote:

And it is fair to say that this week's results support their views to the extent of the rot within the all important supermarkets business is greater than even the harsher critics had expected.

The variance in the analysts' views on the underlying profit also suggests that there is a lack of transparency in the earnings numbers and a lack of trust in how they were presented.

They all came to the conclusion that they were poor but were at odds about degree.

It seems that creating confusion, rather than clarity, appears to be one motivation for using pro forma numbers. Not always, mind you.

Always check the audit report...

It's easy to assume that the financial statements are 'in the clear' simply because they have been lodged with the relevant regulators and distributed in an annual report. Not so: the financial statements can still be issued with a qualified audit report. It's a quick thing to check if you're evaluating a company. Here's an example where we might see a qualification. This sort of thing (i.e. internal control issues) has been a big issue in the U.S. following the implementation of SOX.

AIFRS - all OK so far. Mostly

Two years after the introduction of the International Financial Reporting Standards in Australia [thus AIFRS], the adjudicating body hasn't yet heard a case. This is similar to what happened in the UK, where it took a few years before cases came through. Seems a good start, though.

Earnings quality - Coles

Elizabeth Knight in the Herald has a look at Coles' recent earnings announcement (you can find both the profit announcement and the media release on the ASX website here). The "underlying profit' (i.e. pro forma income) for Coles is just under $45m higher than their net profit. No surprise there. Here's how Elizabeth Knight describes them:

But here come the adjustments. Take off $34.5 million for accounting changes, adjust $55.9 million for ownership review costs, add another $23.9 million in advisory costs and $51.5 million in redundancy costs, then take out $53.5 million in property gains, then tax-effect it and, bingo, the end result is a profit 1 per cent down on last year. And this is not too far off the amount the company has indicated.

A more cynical analysis could come up with a result that was 16 per cent below last year, even after the adjustments.

Yep. That can happen. From the perspective of the Wesfarmers board, it's probably best for Coles to get as much 'bad news' out in the accounts now, so that WES can document improved performance going forward. Assuming that WES can find good managers, improving performance of the Coles stores shouldn't be beyond them!

Profitability analysis - Ipod

Each time Apple releases a new Ipod, folks out there will tear it apart to work out the likely profits per unit. Here's the latest report in BusinessWeek. Nice business line, Apple!

ASX - regulator and profit-maker

In Australia, the ASX is both the regulator of the stock exchange, as well as a for-profit entity trading on the exchange. It's obvious that there is a conflict of interest in these two roles. The conflict is nicely canvassed here.

A sub-prime primer

If you were wondering what all this 'sub-prime' stuff was about, here's a useful little article from the Sunday Telegraph (the U.K one, not the Australian one).

UNSW email down

Just in case you are trying to email anyone at the Australian School of Business, our email server (and indeed webpage) is down, and has been since last week. That's (one) reason why we have not replied to your emails.

Not fair or reasonable, but the only one you'll get...

More on the Wesfarmers takeover of Coles; the "independent expert report" (see prior discussion here) is in; the offer is apparently not fair, nor reasonable. However, with no realistic prospect of a better offer, the recommendation is for Coles shareholders to accept. Grant Samuel says that the Coles Group is worth $16.21-$18.23 a share (at time of posting this, CGJ is trading at $14.57 (up 6c for the day)). As Matthew Stevens says:

Let's be blunt here: the $930 million gap between the price Wesfarmers will pay and the Grant Samuel valuation is effectively the price Coles shareholders have to surrender to replace the company's crippled management.

The fact is, the board has been forced to accept an offer that undervalues Coles by at least $930 million because it has absolutely no other alternative.

We'll have a look at how they arrived at that valuation when the document proper is released to the market - hopefully in time for class 11 this semester (when we're discussing takeovers).

UNSW rail link

Now, I know this isn't directly related to my teaching or research, but it will be fun to keep track of how this is announced, then modified, then scrapped, then re-announced, then re-modified, then re-scrapped etc etc. Herald story here.

Key UNSW station quote:

Mr Staples's plan advocates an east-west underground metro-style line using single-deck carriages and running between Malabar and West Ryde, under Anzac Parade and Victoria Road.

It would ease congestion along Victoria Road, with stations at the University of NSW, Moore Park, Drummoyne, Gladesville and Ryde, all expected to attract large numbers of commuters.

I still say that the Airport rail link should have gone via Taylor Sq, the SCG/SFS, Randwick Racecourse, UNSW, Maroubra, Mascot, Airport. But oddly enough, I wasn't consulted on it. [$14 to go one way from the airport to Town Hall station? You cannot be serious.
/John McEnroe.

The value in Qantas...

The Herald is right: if the Chairman and board of Qantas didn't realise what the company was worth until the private-equity bid, then you really have to ask what on earth they are doing? Again, this highlights the trouble with leveraged buy-outs where the incumbent management team isn't going to be replaced. That is, there is an obviously conflict of interest that the managers face between 1) obtaining maximum value for the shareholders and 2) being able to buy the company cheaply to make more personal profits when the company is subsequently sold back to the public.

Accounting for sub-prime losses

The banks (especially in the U.S.) will be preparing their quarterly accounts at the end of September. One of the big issues they will be facing is how to treat their exposure to the sub-prime mortgages. Their assets should be 'marked to market', i.e., banks should determine the 'fair value' of the mortgages (and securitised tranches of mortgages etc). While there are rules as to what to do (i.e. fair value accounting), there is less guidance as to how to do it (i.e. value the mortgages). One of the issues with fair value accounting is the appropriate treatment when there is no active and liquid market (from an Oz article found here:

The banks are also facing losses on their holdings of complex securities where there is often no clear market price because of low trading volumes.

This highlights one of the key issues facing accountants in the future; are they going to take up the role of valuation experts, or will they subcontract out of that role and focus more on the straight 'bookkeeping'. With the move towards fair value accounting standards globally, there will be a dramatic increase in work for valuation experts.

Plagiarism

Paul Mathews in the Australian writes about plagiarism at universities. Giveaways include sentences of highly complex, technical language in the middle of an assignment with poor grammar and spelling generally. Tip for students: if you're using someone else's work, provide references. If you can google it, so can we. Paul is right when he says that we want to read your opinions, even if they are in 'bad' english.

Takeovers... Wesfarmers/Coles

Some readings for the latest in the Wesfarmers takeover of Coles: here, here and here
Something novel in the 'price protected shares'. I'd be hoping that WES shares are about $45 in 4 years...

How well will Coles have to perform to cover it's cost of capital: from John Durie (linked above):

The deal is one thing, the hard part is getting a $20billion deal to earn its keep over the next four years - and that's no easy task. On some estimates, Coles will earn $1 billion this financial year.

Wesfarmers' cost of capital with Coles will be around 10 per cent - which means Goyder will have to double earnings to make his cost of capital.

This won't be a walk in the park - but just for starters, there are some $400 million in costs that can be readily taken out of the business.

WES has a reputation for getting good managers into a business, and then letting them manage. If the Coles board accepts this revised bid, WES will be able to get on with the business of doing that.

ICAA program

You may know that the Institute of Chartered Accountants in Australia (ICAA), is one of the 2 professional accounting bodies in Australia (CPA Australia being the other). The ICAA have recently lowered its entry requirements to its professional program. You can now qualify for their professional program by completing only one 'financial accounting' unit (note: from 2008 this will be increased to three courses). This seems to be a response to the difficulties in accounting firms currently face in attracting graduates. Hmm. Part of the problem is that accounting graduates are extremely sought-after in the employment market, and in particular are able to earn significantly higher salaries from the investment banks and consulting firms than they can by going to a Big 4 accounting firm. I'm not convinced that lower entry requirements is going to solve the problem. Given the increasing complexity of business, this strikes me as going in exactly the wrong direction. More here and here.

Directors' fee disclosure

Stuart Wilson in the Australian warns shareholders to be careful of automatically approving increases in directors' fees. We know that fees are related to firm size, but Wilson notes that a company should be outperforming its peers if directors fees are higher than its competitors.

Disclosure timing

When should you look for bad news being dumped on the market? On the last day of a reporting period, that's when. Late filers are often (but not always) those with not the best news to report. This year's summary wrapped up by Tim Boreham and Michael West.