j_a_g - I'm keeping my expectations open. We don't really know the full reasons for the very significant underperformance of the acquired UK business vs target and guidance in H1, so it's difficult to gauge, without any up to date further guidance, what numbers to expect.
I can tell you from a lifetime of experience in the accounting field that the task of successfully integrating acquired businesses is one that is consistently underestimated by the acquirer's management - which very often seems to think the job is done when due diligence has been completed and the deal has been signed. The job real job (driving through the synergies and realising the benefits) has only just begun. Time after time we see failure to realise the promised benefits.
In this case the acquired business (which was itself an amalgam of different businesses only recently 'fused' together) was twice the size of the acquirer (SGH) and there were undoubtedly big motivational issues to address. QPP employees had already been through 18 months of hell within QPP, there were massive cultural differences to smooth out and many different regional locations and different strands of new business areas to understand and react to. These should all have been foreseen - it wasn't rocket science. SGH sent over two previously well thought of members of the SMT in Au to speed everything along "the SGH way" and that seems to have been about it. UK management was effectively sidelined when it looks to me as if the task of managing the new business was a long way beyond the experience level of those sent over to do it. I note they both returned to AU when AG stationed himself in the UK for a few months after the fan was hit by an unpleasant substance. The task that faced those originally sent over to the UK might simply have been impossible for them to perform, but they don't appear to have flagged up all the different issues until it was too late. It is all history now but it is possible to see exactly what went wrong, from a strategic perspective at least. What is important now is that UK performance is good enough.
E&Y should have been appointed 'before the event', not after. At least they would have been able to advise on the likely difficulties involving integration, although the likelihood is that AG would still have thought the job could be completed 'in-house'. He won't be last CEO (with the wrong background for the job) to overestimate his ability to work miracles. Pitcher & Partners had limited international experience and had been around a long time not really passing muster, otherwise the accounting inadequacies in SGH Au wouldn't have gone undetected. It was not before time when they went.
Just to finish on the past, it seems likely to me SGH's previous CFO might also not have been up to the task, after the helter-skelter exercise of bolting on (so quickly) so many new and different law firms during AG's headlong quest for growth. My hope is that in Bryce Houghton, SGH has found someone who's good enough to have quickly understood the problems facing a badly flawed (and subsequently reputationally damaged) business - and who is confident and competent enough to have now set SGH on the path to gaining as much value as possible out of what should still prove to have been the right acquisition; although probably at the wrong price and definitely 'processed' in the wrong way. I make the basic assumption, in the absence of evidence to the contrary, that SGH Au continues to perform well or better, despite the damage to its reputation caused by a hostile and somewhat unbalanced Au financial press.
I believe BH did what any sharp new CFO would have done in the circumstances, in insisting there was an almighty clearance of the decks just after his appointment, with write-offs designed to empty every single cupboard throughout the organisation of anything even remotely resembling a skeleton. "Take it full on the chin" - and blame it all on existing and previous management (fair enough in this case). Start with a clean sheet. If there wasn't a complete clearance, then we're all in trouble. My gut tells me there was, however, and that he and others have been steadily going about the task of repairing the damage, maintaining and improving what was already good within the overall business and building a solid platform for the future.
I hope I'm right, otherwise SGH is going to be right up there with my oil investments, SP performance-wise. I am far from despondent about these however, because what is artificial seldom lasts forever, and if patience can be exercised and chosen investments have cash to see out the storm (such as one caused by the present engineered oil price) fundamentals play out in the end. There's a present deliberate oversupply by the Saudis, but as only 1 in 20 oil futures contracts actually involves the physical supply or uptake of oil, thinking and action is short term and the fall in oil price has thus been wildly exaggerated (plus ca change). IMV it will eventually increase as quickly as it has fallen; quite when that will be is another matter. Investment banks and hedge funds are all over ICE and NYMEX (the two principal oil exchanges) like a rash - Goldman Sachs and JP Morgan lead the cheating and greed exercises in this particular field, Their predictions about future prices change like the wind. Oil prices fell off a cliff. They could easily jump back up almost as quickly Oil fields get emptied and if exploration and development of discovered reserves stops (as it has done these past 2 years) simple economics tells you the rest. Fundamentals usually play out in the end. My theory is flawed mainly in that it might take longer than I think and I might die first. This is certainly a possibility given I'm already 137.
SGH is imo a lot more solid as a timely recovery play than any of my other investments. Sadly I'm not always right about these things. People (mainly company directors) sometimes let me down.
We'll soon know what's happening. In answer to the question: "what numbers would I put on cash-flow for the year as a whole?" I don't know and I'm not that bothered, as long as SGH as a whole, including the UK business,is now operationally sound and the 'direction of travel' has permanently changed. SGH has a base that should allow it to produce substantial future returns for shareholders.
Whether it is likely to do so or not we'll soon find out. I remain optimistic. Hopefully lessons have been learned by management and these have been quickly acted upon. My hope is that a much stronger and better balanced overall international business will emerge from what was presented as and might even have been thought recently by management as a disaster.
Apologies for the essay - it's the weekend (very early Sat morning here) so hopefully not too many will be offended. GLAL.
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