The disaster unfolding at Billabong continues to mystify, with all eyes focused on the company’s AGM this Wednesday. The meeting is expected to be a torrid affair, with Crikey founder and current Australian Shareholders’ Association executive Stephen Mayne, recommending that founder Gordon Merchant and long-time employee Collette Paull be removed from the board.
The recommendation is unusual — it is almost unheard of for company founders to be voted off the board of the business they created. This is partially because they usually maintain a large ownership stake, but also because company founders tend to have better business nous and understanding than outside, “professional directors”. For instance, while Rupert Murdoch is certainly not without fault, few doubt his commercial acumen and business judgment (Dow Jones and Gemstar disasters aside).
The putsch against Merchant is, however, not without merit. After founding Billabong in 1973 with his former wife Rena making 20 pairs of board shorts a week, Merchant turned the Gold Coast-based surf company into a global behemoth. In 2007, BRW claimed Merchant was worth $904 million, based on his stake in Billabong as well as interests in industrial businesses Dexicon and US Blanks. But the fairy tale has long since ended for the 69-year-old.
Even before Merchant rejected TPG’s offer earlier this year (which valued Billabong at $3.30 per share), the company had long lost its market darling status. After hitting $17.59 per share in 2007, Billabong fell to $1.70 in December 2011. The share price rose in early 2012 amid takeover speculation and the successful sales of its Nixon business, but has since slumped to 85 cents. Billabong shareholders foolish enough to stay along for the ride have watched on helplessly while the value of their shareholding has slumped by more than 95%. Merchant’s remaining stake (he, along with Paull reaped a combined $206 million from the sale of shares in March 2006) has fallen from more than $513 million to $59 million.
Billabong’s collapse — together with Merchant’s rejections of TPG’s $3.30 per share offer earlier in 2012, renders his long history with the business largely irrelevant. Merchant and Paull’s actual views were that “even if the price TPG Capital offered was $4.00 per share” it would “still represent a discount on the true value of Billabong shares”.
The question also arises — if Merchant is of the view that Billabong is worth so much more than anyone, be it private equity buyers or even retail or wholesale investors believe, why doesn’t he dip into his own pocket and privatise the company? Based on his previous statements, anything less than $4 appears to be a bargain.
The last time this column mentioned Billabong was back in October 2010, when we questioned the company for its somewhat generous remuneration regime towards former CEO Derek O’Neill. Back then, the company, which was chaired by colourful former Qantas head Margaret Jackson, decided to award O’Neill a short-term bonus of $1.19 million, which appeared to be given to be some sort of compensation for the fact that O’Neill failed to meet the hurdles for his long-term bonus. Merchant voted in favour of the remuneration plan back in 2010. After presiding over the share price collapse, O’Neill was finally dumped by the Billabong board in May 2012 and replaced by former Target executive Launa Inman.
Merchant’s questionable record also extends to his hiring of Matthew Perrin. Perrin was originally Billabong’s lawyer before being appointed the company’s CEO in 1999 (and purchasing the stake held by Merchant’s former wife Rena). Perrin controversially sold $66 million worth of Billabong shares in 2002 without telling the board and soon after departed his position, only to invest his windfall in a dubious Chinese supermarket venture and declare bankruptcy in 2009. Perrin is currently facing fraud charges after allegedly forging his wife’s signature over a $13.5 million loan.
Given that Merchant appears unable to properly determine the value of Billabong, and has a somewhat dubious record when it comes to appointing chief executives, it would appear the push to remove him as a director is not without justification. And just in case Billabong wasn’t in enough financial trouble, it is using shareholder monies to pay top-tier law firm Allen’s upwards of $600 an hour to defend Merchant’s place on the company’s board.
*Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed