What are the chances of saving Babcock and Brown and its empire of 10 listed companies and investments on the ASX, plus a large number of unlisted funds here and overseas?
Very little, if recent Australian business history is any guide. The struggles to rescue Centro, Allco, and MFS, for example, tell us that Babcock and Brown will be that much harder because it’s far more complex.
The banks won’t kill it off because they all are owed money: the Commonwealth and the ANZ are exposed to quite a few, including Centro, Allco and now Babcock. Even if it can be “saved” the present management won’t be there. Just look at the way David Coe was elbowed out of Allco.
Quite a few Australian financial groups have got the staggers since the 1970’s but there are only three notable rescues:
- The Bank of Adelaide which was forcibly merged into the ANZ to save it in 1979. Then Australia’s 7th largest bank, it ran into trouble in the tail end of the 1970’s property boom, just as a number of other finance companies did. The bank’s finance arm — Finance Corporation of Australia — got into trouble which damaged the bank irrevocably;
- Westpac was rescued by a combination of the old style AMP taking 14.9% of the bank in a placement, and a while later investment bank Credit Suisse underwriting a $1 billion rights issue after the bank had lost $1.6 billion in the year to September 1992. So poor was Westpac’s state that it abandoned its long tradition of underwriting its own issues and called in an outside underwriter. Westpac knew shareholders wouldn’t take up the shares, so poor was its image at the time;
- AMP suffered a string of losses and poor results from the late 1990’s to 2003 that totalled around $5 billion, or a bit more: it saw two boards and CEOs and chairman flicked or retire before a new lot arrived to own up to the bad medicine.
AMP survived because of the strength of its core business, funds distribution and management; Westpac survived because of the strength of its name and core business (it had already gone broke twice in the 19th Century).
HIH failed in 2001 with a loss of around $5.3 billion, give or take a few million. It was beyond redemption. The charges and jail sentences for some of the leading players tell us why it wasn’t worth saving.
Some commentators argue that the State Bank of Victoria was rescued by being taken over by the Commonwealth bank in the early 1990’s. But that was a means to an end by then Treasurer Paul Keating: it enabled him to help the Victorian State Labor Government which had stuffed up completely; and allowed the first step in the privatisation of the Commonwealth Bank, which was to kick off the decade or more of privatisations and the boom in financial engineering.
Tricontinental and the State Bank of South Australia were not rescued, even though they threatened considerable financial damage, also in the early 1990s. Nor was Pyramid Building Society.
Likewise Bond Corporation, Industrial Equity/Adelaide Steamship and Bell Resources. All were a combination of investors and market players, with a heavy financial engineering bent.
Takeover raiders, asset strippers, “entrepreneurs”, you name it, the likes of Alan Bond, the late Robert Holmes a Court, John Spalvins and others were not enough to save their groups. They had to walk the plank.
Before he sold out to IEL and Abe Goldberg who vanished overseas, John Spalvins’ Adsteam bought 10% of the National Australia Bank and sought approval to take the stake to 14.9%, which would have been effective control, but was blocked by regulators.
Associated Securities was part of Ansett Airlines and it couldn’t bail it out, nor was anyone else interested in helping when it got into trouble in 1978. That failure helped expose Ansett’s commercial frailties and it became a takeover target for the likes of Ampol, Brambles, Robert Holmes a Court and Rupert Murdoch.
Estate Mortgage failed in 1990, as did a host of other property related companies. None were rescued.
Construction group Mainline failed in the 1970s and couldn’t be rescued because its affairs were so complex and there was considerable doubt about whether there was any value left in the business.
And does anyone in the market still remember the failure of Mineral Securities and Patrick Partners in 1974?
They were the financial engineers of the late 1960s in the big resources boom after the discovery of oil in Bass Strait and the Poseidon nickel boom. Mineral Securities came unstuck on a play in uranium, among a host of other dodgy dealings. Similarly, Patricks came unstuck on a host of dodgy dealings and the recession from around 1974 onwards as the great Whitlam inflation consumed the economy.
IAC was another notable failure in property: it caught Citibank in 1977.
And does anyone remember the failure of Gollin Holdings and Gollin and Co in 1975? They should because it was dud management and too much complexity that brought Gollin down.
When the game stops because the music has ended the people in the corporate failures are usually the last to realise it. And guess what — there was Babcock and Brown and some European mates getting one last deal over the line last week in Europe, organising billions of dollars to buy a train leasing business from another wounded financial group, the Royal Bank of Scotland.
Dud or overly ambitious management is a common theme in all failures, but another more important but linked factor is reputation. Banks can talk all they like about assets and liquidity, but their share prices are almost 100% reputation. So long as that reputation is intact, then people will invest, deposit or do business with them.
When a bank’s reputation is battered, like Babcock and Brown’s is, it has nothing to fall back on. Management assurances are not believed, nor are the financial statements (as we are finding out with Centro and Allco).
Trust and belief in that reputation slide away quickly. It’s what brought Northern Rock down in the UK and Bear Stearns. Why should Babcock and Brown be any different?