LoopUp, Audioboom, Social Media Abuse and a VCT AGM

LoopUp (LOOP), a small AIM listed company that provides audio conferencing and in which I have a small holding, have announced a proposed acquisition of a company in the same business – MeetingZone Group. This will more than double the size of LoopUp so it constitutes a reverse takeover. As they are paying cash for MeetingZone it will be financed by a term loan and a large placing. The placing will be at 400p per share, when the share price last night was 435p so it’s only a small discount. The share price normally falls to the placing price in such circumstances but it actually rose today which suggests investors like the deal.

MeetingZone is profitable and is being acquired at 12 times EBITDA. The plan is to deliver a “timely transition of the MeetingZone Groups audio conferencing business to the LoopUp platform” as the announcement says. This is clearly potentially a significant step up in the size and profitability of the merged entity, but my slight concern is the risks involved in this transition as it means the customers will need to learn a new system. Such transitions are never easy.

Another small AIM company is Audioboom Group (BOOM) whose shares have been suspended for some time after they announced a proposed acquisition, with a fund raising to finance it. Yesterday they announced it had been impossible to complete the placing to fund the deal and the company now needs to raise some money just to cover its working capital needs. Audioboom is primarily a podcast hosting platform and revenue has been increasing but for the year to November 2017 it was still less than £5 million and the loss was expected to be a similar figure! Accounts have yet to be published though. Needless to say perhaps, I have never held shares in this company because I considered it to have an unproven business model. Such early stage companies are surely best financed via private equity who can accept the risks rather than public market investors. I wish them the best of luck in raising more funds.

But I did have some contact with the company after a certain person posted a podcast which contained abusive comments about me. So my lawyer asked politely that it be removed which the company did simply because it did not comply with their policies. The result was a torrent of abuse about Audioboom by the same aforementioned person which was totally uncalled for. But now the same person has been on the receiving end of an attack from someone else where he has even had to call in the police for assistance.

Postscript: Let me make it clear that I do not condone racist or other illegal communications of any kind. They can never be justified. I have only recently been informed of the content and likely reasons for it which has resulted in the aforementioned communication being referred to the police.

This is a typical example of the problems of social media and blogging sites which have been getting a lot of media coverage in the last few days. Facebook have reported that 2.5 million posts alone that included “hate speech” were removed in the last 3 months of 2017, and there were many more violent, terrorist or pornographic posts they also removed. However, they cannot easily identify lies, fake news, fraudulent advertisements and common abuse. In other words, the social norms about what should be “published” in a public forum are completely breaking down. Nobody can, nor does, police the internet.

This is now proving to be a major problem for anyone in public life such as politicians. Free speech is a good concept in essence, but when it degenerates to allowing irrational and unconsidered abuse and false allegations to be propagated then surely something needs to be done about it. The laws against “hate speech” and libel law hardly provide effective remedies to stop the kind of behaviour that is now becoming so prevalent. I suggest that the Government needs to undertake a full blown public inquiry into this problem.

It is particularly serious in the financial world where bad behaviour can affect the business of a company and its share price, effectively leading to “market abuse”.

Yesterday I attended the Annual General Meeting of Maven Income and Growth VCT 4 Plc (MAV4). There were only about half a dozen shareholders in attendance in the City of London.

I raised a number of issues and posed questions. Subjects covered were:

  1. The poor performance of the company last year, which I calculated to be a total return of 1.72% (i.e. less than inflation). Total return includes asset growth and dividends of course, and although the company paid out dividends of 12.45p last year representing a yield of 16.5% on the share price at the end of the year (tax free of course), it’s the total return that really matters. Otherwise shareholders are just getting their assets returned to them.
  2. Inadequate explanation for the poor performance in the Annual Report. It does mention that “one of the larger portfolio companies suffered a write down in value which diluted the overall performance in the financial year, but more explanation would have been preferable.
  3. The length of service of the board directors. Apart from director Bill Nixon, who represents the fund manager and which I do not accept should be a director simply for that reason, the other three directors including the Chairman have all served since 2004. So this is one of the few companies where I voted against the reappointment of all of them. I made it clear that the board should look at succession and they indicated they may do so.
  4. The high overhead costs in this VCT – total administration and management expenses I calculated to be 4.0% of net assets at year end, although Bill Nixon disputed this figure.
  5. There was a suggestion made that with high returns of cash to shareholders last year, and a new fund raising, there might have been some “cash drag” in the performance data.
  6. I questioned the impact of the new VCT regulations, and Bill Nixon said the market was getting “frothy” with valuations difficult to sustain. The inability to write debentures on investments limits the amount of control they will have in future. The manager has reshaped the investment team to adjust to the new focus – they now have 4 PHDs. They rarely back start-ups and prefer to back teams with successful track records – they don’t “want them to be learning on our money”.
  7. Advanced approval from HMRC on new investments is getting better (this has been a major concern for many VCTs of late as it delays closing deals). Now closer to 30 to 40 days. There is also a proposal for a “self-certification” scheme where a qualified independent person gives a positive opinion. This might be of assistance but there are still potential problems if a business is subsequently found not to qualify.
  8. The company is looking at using the funds raised to make 10 to 12 investments in the current year, so the new rules about what kinds of businesses can be invested in are apparently not proving to be a major problem. But Bill said the result is they are moving from investing in “old” economy companies to “new” economy runs. This is likely to mean that portfolio volatility will increase so overall returns (and hence dividends) may fluctuate more from year to year.
  9. Bill thought VCTs will raise less money this year so new offerings may be in high demand.

Votes were taken on a show of hands and the proxy counts circulated after the meeting. Only about 10% of shareholders voted which is the typical pathetic turnout these days from private shareholders in such companies. There were substantial votes against one resolution on share buy-backs but apparently this was mainly from one family who may not understand the issues.

In summary this was a useful meeting and worth attending. I am only holding this VCT for historic reasons after Maven took over management of previously problematic VCTs I invested in years ago. Performance has improved as a result but is still not great and high overhead costs would put me off investing more money in it. I am always surprised that such VCTs are able to raise more funds with such apparent ease.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Wey Education Interims and Sainsbury’s Merger

I attended a presentation by Wey Education to private investors on their Interim Results yesterday evening. The Interim Results were issued in the morning, but the share price fell by 31% on the day even though the company reported turnover up by 44% and an adjusted profit before tax when it was a loss last year. The reasons are not difficult to deduce.

Wey Education is a small education company listed on AIM providing on-line education services. A previous extensive report on the company is present here: https://roliscon.blog/2018/01/11/wey-seminar-the-future-of-education/

An immediate issue I spotted in the morning’s announcement was this statement: “Adjusted profits were £145,000 (2017: £75,000) in line with our expectations for the first half. The figure represents profit before tax adjusted for share based payments (£18,000), amortisation of intangibles (£95,000), acquisition costs (£43,000) and the higher than trend expenditure on marketing and other matters flagged up at the time of the November placing to substantially boost group revenues and underlying profits over the next three years (£143,000).”

I made a note to query the adjustment for marketing costs, but I needn’t have bothered because Leon Boros raised the issue in the meeting before I got a question in. As I said though, it is surely unusual to “adjust” for marketing expenditure. Understanding adjusted financial figures can be difficult enough but marketing costs are surely just part of routine operating expenses. If they are particularly high because of management’s decision to spend more on marketing, even though the returns might come in months later in terms of higher revenue, then this is best handled simply by a note in the accounts.

Executive Chairman David Massie said this treatment was consistent with previous financial reports and he had been advised to do this by the Nomad (WH Ireland). I think he got some bad advice on that point. Profitability is of less concern to investors in such early stage companies than revenue growth and progress with business strategy.

Another possible negative was the prospective partnerships (including joint ventures) in China and Nigeria for which David clearly has high hopes. There was clearly skepticism among investors about the prospects for these ventures and the diversion from the key existing UK markets. David does have experience of doing business in overseas markets which may assist.

One slight hiccup on their internet marketing spend was a decision to change bankers from HSBC who apparently queried some of the payments from overseas. From my experience of dealing with HSBC as a business customer that was probably a sensible decision to take. Simply impossible to deal with sensibly and quickly.

One interesting point in the presentation was a description of their interest in AI which I was skeptical about if you read my previous report. It seems this is being funded by the EU which pleases me even if it still a management diversion. A demonstration of the wonders of IBM’s Watson as being implemented by Vodafone for answering customer queries fell flat as it did not provide sensible answers. My experience to date of voice response systems is consistently bad. Even the much-vaunted Google or Apple’s Siri can be very annoying in comparison with a human being, or a written query. Still requires further development to meet real users’ needs I think.

WH Ireland have revised their estimates for sales down for 2018 as a result but eps unchanged. Revenue now forecast to be £4.1 million and “adjusted” EPS of 0.39 but bear in mind the comments above. As others have said, the share price probably got ahead of what is a sensible valuation for this business. Even if David Massie has ambitions to grow it into a world leader, he has a way to go to demonstrate that this can be achieved. But he does seem to be building an organisation that might do so. One of those “wait and see” investment propositions it seems to me at this point in time.

Sainsbury’s Merger. On the opposite end of the financial scale, size wise, the proposed acquisition by Sainsbury (SBRY) of the ASDA UK stores from Walmart has had a very positive effect on the share price. The announcement on the 30th April caused the share price of SBRY to rise by 15% on the day. But it’s interesting to look at the share price trend in the week or so beforehand where it had risen after a long period in the doldrums. Was there a leak, as so often happens in these cases?

This merger would provide a supermarket duopoly in the UK with the merged entity and Tesco both holding about 30% market share. Would that be anti-competitive? In my experience in business undoubtedly so. Neither would be competing on price with the other and they would both end up with a cosy profit maximising strategy. For investors, if the merger is allowed to take place, it should be great news for investors.

But for Sainsbury’s customers like me, it’s going to be very bad news. I hope the Competition and Markets Authority block this deal.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Shareholder Democracy, RBS, Rightmove AGM and Stockopedia

There is a very good article by City Slicker in this weeks’ edition of Private Eye (No.1469) on the subject of “Apathy in the City”. The article comments on the “disengaged” share owners in Persimmon who failed to vote against the remuneration report, or simply abstained. See my previous blog post on that subject here: https://roliscon.blog/2018/04/25/persimmon-remuneration-institutions-duck-responsibility/

The article highlights the issue that the many private shareholders in the company probably also did not vote (they could have swung the result), because they have effectively been disenfranchised by the nominee system that is now dominant. The writer says “This democratic deficit has been richly rewarding for companies, share registrars and those representing retail investors”, and the result “has been a real diminution in shareholder democracy”. A few more articles of that ilk may sooner or later impress on politicians and the Government that substantial reform is necessary.

The article also points out how the EU Shareholder Rights Directive, one of the few good things to come out of the EU bureaucracy in my opinion, is being misinterpreted by the UK Government to suggest beneficial owners are not shareholders.

To get the message across I have written to my M.P. on the subject of Beaufort and the substantial financial losses that thousands of investors will suffer there as a result of the use of nominee accounts compounded by the current insolvency rules. If anyone would like a copy of my letter to crib and send to their own M.P., just let me know.

In the meantime the AGM at the Royal Bank of Scotland (RBS) is due on the 30th May. The RBS board has opposed the resolution put forward by ShareSoc and UKSA to establish a “shareholder committee”. That would be a step forward in corporate governance in my view and shareholders would be wise to vote in favour of that resolution (no.27). I do hold a few shares in the company but will be unable to attend the AGM in Edinburgh so if anyone would like a proxy appointment from me so that you can attend and voice your own views on the subject, please let me know. You would at least have the pleasure of seeing the buildings created in Gogarburn by empire builder Fred Goodwin for RBS.

The RBS Annual Report is a 420 page document which must make it one of the heaviest UK Plc Annual Reports. The motto on the cover is quite amusing. It reads “Simple, safe and customer focussed” – perhaps it means they intend to get back to that because RBS was none of these things during the financial crisis that almost bankrupted the business.

One aspect that City Slicker criticizes in the aforementioned article is the low “turn-out” of voters at AGMs, i.e. the low percentage of shareholder votes cast even including “votes withheld”. A third were not voted at Persimmon. That is not untypical at AGMs in my experience although institutional voting has improved in recent years. It’s often the private investors now who don’t vote due to the difficulty, or downright impossibility of voting shares held in nominee accounts.

But there was no such problem at Rightmove Plc on the 4th May. About 85% of votes were cast. As a holder I could not attend in person, but Alex Lawson has written a report which is on the ShareSoc Members Network. One surprising result though was that long-standing Chairman Scott Forbes got 39% of votes against his re-election and Remuneration Committee Chairman Peter Williams got 37% against. I voted against the latter, against the Remuneration Report and did not support the re-election of Scott Forbes either. With 12 plus years of service, it is surely time to look to board succession planning and a new Chairman. The board is to look into why they got so many votes against the two resolutions which is certainly unusual.

To conclude I see that blogger/journalist Tom Winnifrith is having yet another go at mild-mannered Ed Croft of Stockopedia after a spat at the UK Investor Show over a trivial matter. Since then Tom has been attacking Ed over “recommendations” given by Stockopedia in his usual rottweiler manner. As a user of Stockopedia and other stock screening services, I don’t expect absolutely all the positively rated stocks to be great investments. I know that some will be dogs because either the accounts are fraudulent, the management incompetent or unexpected and damaging events will appear out of the blue. So for example, Globo’s accounts fooled many people including me until late in the day so any system that relied just on analysis of the financial numbers would be likely to mislead. But stock screens rely on the laws of averages. The fact that there will be one or two rotten apples in the barrel does not mean that stock screens cannot be a useful tool to quickly scan and dispose of a lot of “also-rans” in the investment world. They can quickly highlight the stocks that are worthy of more analysis, or prompt dismissal.

Winnifrith seems unable to differentiate between meritorious causes that deserve the full power of his literary talents and those where his imitation of a sufferer from Tourette’s syndrome where he heaps abuse on innocent victims goes beyond the bounds of reason. Stockopedia provides a useful service to investors. Let us hope that the saying there is “no such thing as bad publicity” applies in this case.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

They Do Things Differently in the USA

Former Autonomy CFO Sushovan Hussain has been found guilty of 16 counts of fraud in a Federal Court in California. He was convicted on all 16 counts of wire and securities fraud. This case was based on allegations of false accounting to ramp up the value of the Autonomy business prior to its acquisition by Hewlett-Packard. The latter subsequently wrote down most of the $10.3 billion cost of that acquisition.

More background on this case is given in a previous blog post here: https://roliscon.blog/2018/02/26/autonomy-legal-case-and-revenue-recognition/

Although Autonomy was a UK public company, and the Serious Fraud Office did look at the case they decided to do nothing. However a civil action against Mr Hussain and the former Autonomy CEO, Mike Lynch (who was not indicted in the US case), is still being pursued in the English courts. This decision will clearly strengthen that action.

The US prosecutor suggested in court that the accounts were a façade and eventually proved to be an “unsustainable Ponzi scheme”. Mr Hussain is apparently likely to appeal the verdict, but he faces a prison sentence of up to 20 years – sentencing will take place on Friday.

How different to the UK where prosecutions for fraud based on false accounting almost never take place. Questions were raised about the accounts of Autonomy by investors and a whistle blower also raised issues before the sale to H/P but the UK authorities did nothing. The FRC did announce an investigation into the accounts of Autonomy in 2013. It is still listed as a “current” case on their web site, i.e. no report and no conclusions as yet. Why the delay?

This case demonstrates the typical sloth and inaction of the UK regulatory authorities in comparison with the USA. The FCA/FRC are both very ineffective, and the recent events regarding the Aviva preference shares and the collapse of Beaufort show how ineffective those bodies are in protecting the interests of investors. It’s a combination of a defective legal system and a culture of inaction and delay that permeates these organisations. Well at least that is my personal view.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Beaufort Administration, Intercede and the Mello Conference

Yesterday I attended the first day of the 2-day Mello investor conference in Derby. There were lots of good presentations and some interesting companies to talk to. One hot topic of conversation was the collapse of Beaufort which was forced into administration (see two previous blog posts on the topic for details). There are apparently many people affected by it. There are a number of major issues that have arisen here:

  • The administrators (PWC) have suggested it might cost as much as £100 million to wind up the company and return assets to clients which seems an enormously large figure when the assets held are worth about £550 million. The costs will be taken out of the clients’ funds and as a result there will hundreds of larger clients who will suffer substantial loses (those with assets of less than £50,000 may be able to claim against the Financial Services Compensation Scheme – FSCS – but larger investors will take a hair-cut).
  • The assets (mainly shares) were apparently held in nominee accounts. Surely these were “segregated” accounts, i.e. not available to be treated as assets of the failed business? Most brokers who use nominee accounts will have wording in their contracts with their clients that cover this with often fine words that conceal the underlying reality that if there is any “shortfall” then the clients may be liable. But regardless, PWC are saying that because this is a “Special Administration” they have the right to take their fees out of the client assets/funds.
  • There will be a Creditors’ Meeting as required by all administrations but will the creditors be able to challenge the arrangements put in place by PWC and the costs being incurred? From past experience of such events I think they may find it very difficult. Administrators are a law unto themselves. It is alleged that there were offers from other brokers to take over the assets of Beaufort and their clients very quickly and at much lower cost, but that offer has been ignored. Investors need to ask why.
  • Note that the Special Administration regime was introduced during the financial crisis to enable the quick resolution of problems in financial institutions such as banks. This is where it is necessary to take prompt action to enable a company to continue trading and the clients not to be prejudiced. But in this case it seems we are back to the previous state where client assets are frozen for a lengthy period of time while the administrator runs up large bills at the clients expense.
  • I said only recently that the insolvency regime needs reform after the almost instant collapse of both Conviviality and Carillion. There may not have been a major shortfall in Beaufort and it might have been able to continue trading. But the current Administration rules just provide large, and typically unchallengeable, fees for the administrators who give the impression of having little interest in minimising costs. The result is the prejudice of investors in the case of a broker’s collapse, or of shareholders in the collapse of public companies.
  • Can I remind readers that part of the problem is the widespread use of nominee accounts by stockbrokers. I, ShareSoc and UKSA have long campaigned for reforms to reduce their use and give shareholders clear title and ownership after they purchase shares. In the meantime there are two things you can do: a) Avoid using nominee accounts if at all possible (i.e. use certificated trading or personal crest accounts so your name is on the share register); b) if you have to use a nominee account, make sure you are clear on the financial stability of the broker and that you trust the management. It would not have taken a genius to realise that some of the trading practices of Beaufort might raise some doubts about their stability and reputation.

I do suggest that investors who are affected by the collapse of Beaufort get together and develop a united front to resolve not just the problems raised by this particular case, but the wider legal issues. Forceful political representation is surely required.

See this web site for more information from PWC: https://www.pwc.co.uk/services/business-recovery/administrations/beaufort/beaufort-faqs.html

An amusing encounter at the Mello event was with Richard Parris, the former “Executive Chairman” of AIM listed Intercede (IGP). He was talking in a session entitled “The importance of the right board of directors” and he conceded that “separation of roles” is important, i.e. presumably he would do it differently given the chance. Richard, the founder of the company, has recently stepped down to a non-executive role, they have a new Chairman, and even Richard’s wife who was operations manager has departed. While I was in the session, there was even an RNS announcement saying the “Chief Sales Officer” had resigned (I am still monitoring the company despite having sold all but a nominal holding years back).

Richard pointed out to me that the pressure put on the company over his LTIP package back in 2012 meant that his share options are worthless as the performance targets put in place were not achieved. Well at least he is still talking to me and has joined ShareSoc as a Member apparently. Sometimes time can heal past disputes, and as I said, shareholder activism does work!

But it is regrettable that RBS are recommending voting against a resolution proposing a shareholder committee at their upcoming AGM. Perhaps not surprising, but a shareholder committee could avoid confrontation over such issues as remuneration and would be a better solution that confrontation.

I hope the Mello event becomes a regular feature of the investment calendar.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

Persimmon Remuneration – Institutions Duck Responsibility

Most folks are aware of the absolutely outrageous pay levels at Persimmon Plc (PSN) and the perverse LTIP scheme that permitted them. Today was the day of their Annual General Meeting when shareholders had the opportunity to express their displeasure. Some did but a lot of investors (no doubt institutional ones) did not. The results of the vote on the Remuneration Report were:

VOTES FOR: 74.5 million, AGAINST: 70.2 million, ABSTAINED: 64.8 million.

Because of the very large number of abstentions (votes withheld), the resolution was passed by 51.5% to 48.5% of votes cast.

Is this not a sorry reflection on the corporate governance standards in the UK when such a blatantly perverse remuneration scheme is not censored by a vote against? The excuse that last year’s pay was simply a reflection of a previously approved remuneration policy is a very poor one. When the outcome was so appalling, it should have been consigned to the garbage heap by a vote against.

This is the kind of behaviour by UK company directors and institutional investors that might well lead to a socialist Government in due course who will have a mandate to deal with this problem in a more vigorous manner than the current Government.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

 

The Departure of Sir Martin Sorrell

At last the highest paid and longest serving FTSE-100 CEO has departed from WPP after 33 years. His total pay last year was £48 million, down from the previous year’s “single figure” of £70 million. Sir Martin was certainly perceived to be a “star” businessman, and the financial performance of WPP pleased shareholders for many years. Despite recent problems the Annual Report of the company claims a Total Shareholder Return of 1,006% over the last twenty years as against a measly 241% for the FTSE-100.

Will the company find a suitable replacement manager who can continue to grow the business? Will the company survive in its current form or be broken up? Those are the questions all the media are pontificating upon.

My thoughts on this subject were crystalized by reading the business management classic “Good to Great” on a recent holiday break. First published in 2001, the author Jim Collins reported on research he had undertaken to determine what separated out simply “good” companies from the “great” ones, i.e. those that really offered investors superior returns rather than average ones. He also looked at what turned good companies into great ones, i.e. the crystalizing factors or turning points. It’s well worth reading by investors for that reason alone, even if some of the companies reported on as “great” have subsequently gone bust (e.g. Circuit City), and amusingly Berkshire Hathaway was only rated as “good” at the time so was not included in the analysis.

Management and the quality of the leadership was one of the key factors identified. It seemed that humble, self-effacing leaders were best. They often attributed the company’s success to luck or the other senior management team members. Star managers with high profiles such as Jack Welch at GEC or Lee Iacocca at Chrysler frequently proved to be shooting stars whose achievements rapidly disappeared after they left. In other words, they did not build great companies where their legacy lived on after their departure.

This is one very applicable quote from the book when you are considering director pay in companies: “We found no systematic pattern linking executive compensation to the process of going from good to great. The evidence simply does not support the idea that the specific structure of executive compensation acts as the key lever in taking a company from good to great”. In other words, high pay does not generate exceptional performance in managers, and schemes such as LTIPs which allegedly align managers’ interests with shareholders do not help either.

It’s a book well worth reading for tips on how to identify the companies and their CEOs that are likely to generate great returns for investors.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.