Without seeing the breakdown of how the PSD goodwill write-down was calculated at the end of H1, it is impossible to do any better than guess what caused it. There are a number of factors in play, although tumbleroll and others, as business troubleshooters and all-round experts (we're lucky to have them), have all the answers. Let's examine a few facts.
Due diligence on QPP's PSD was carried out by over 70 of SGH's own personnel (accountants and lawyers), plus its external advisers, over a 3 month period between January and March 2015. SGH paid QPP £12m for a 3 months period of exclusivity in its negotiations with QPP involving the proposed acquisition of the PSD, which was unusually structured in that the £12m (plus VAT) bought ownership of some 8,000 PSD case files to SGH (a cross section of files chosen by SGH) which SGH's lawyers then spent the 3 months working through, so they would gain as full an understanding as possible of QPP's ways of working, the make up of WIP in PSD's files and accounts generally, the ability to turn WIP into sales at target prices and the ability to collect the money.
At the same time as all this was going on, PwC was independently engaged by QPP to examine QPP's entire operations, with a focus on financial reporting over the past two years. PwC's work was carried out over the same period as SGH's (so called) due diligence and it flagged up a number of issues (none involving deliberate misstatement or fraud) in the end all involving the accounting policies QPP had adopted. Following PwC's work, QPP chose to restate its 2014 & 2013 accounts - and subsequently the half year's accounts to 30 June 2015 -using much more conservative accounting policies that took it from one end of the spectrum to the other, with the restated accounts practically adopting the cash basis of accounting, even though hindsight could have been successfully applied by the time the restated accounts were produced. SGH was working on a completely different set of numbers as a result of its own work over the relevant period. It is often said accounting more closely resembles an art than a science and this was a classic case of that. It is all a matter of interpretation. Two sets of the same company's accounts could be completely different, with no-one being able to say either is 'right' or wrong' - even with hindsight - because valuations and judgements always have to be applied.
The results of PwC's work were made available to SGH throughout the peiod its own DD work was being carried out. The acquisition was finally completed on 31 May 2015, SGH commenting publicly at the time that it was fully satisfied with its own work on QPP's PSD and that it had paid a fair price, which (from memory) equated to 7.1 times most recent PSD earnings, which would be accretive to SGH's earnings not just as a result of the 7.1 multiple vs its own relative to SP, but as a result also of a number of identified future synergies, regardless of whether or not QPP chose to restate PSD's results and its accounts generally. Its ability to lay claims against QPP on the grounds it was misled ended at that point imv, so people can forget the escrow except for the matters that would normally be dealt with via a warranties escrow - correction of errors above a de minimis level, adjustment of estimated tax liabilities etc.
My understanding is that on acquisition, two of SGH's trusted executives relocated to the UK to organise and oversee the process of integration of the new UK business into the SGH group. The intention was immediately to adopt SGH's working methods and operating standards generally, and to reshape the business in order fully to separate it (in a practical and physical sense) from that of its former owners. The rest, as they say, is history. This is what happened to Autonomy when Hewlett Packard mis-managed the $11bn acquisition in 2011: http://www.pcworld.com/article/2464...the-autonomy-acquisition-alleges-coverup.html
I have also offered the view before that over the course of my career, due diligence was always a process an acquiring company was prepared to pay top dollar for, whilst almost never would such companies extend the engagement to help plan, manage and execute the process of integration, which (for some curious reason) the acquiring company always seemed to believe it was fully capable of doing on its own, which often it wasn't, sometimes with dire consequences. The process of bringing together two different business and other cultures and working methods can be enormously difficult to complete without significant business disruption. Aside from immediate financial performance there is only one chance to lock in synergies.
Re SGH and its acquisition of QPP's PSD therefore, it seems to me much more likely that the process of integration failed to go as well as it should have done - than that due diligence failed.
The appointment of a new CFO by SGH after some sloppy accounting had brought unwelcome attention so soon after such a sizeable acquisition, then to be followed by George Osborne's UK proposals potentially affecting SGH's new UK ops from next year, together with changes in accounting standards - on top of what I believe became serious integration issues - is what led to the carnage of the reported results in H1. NOT that SGH bought a dud asset in QPP's PSD - it hasn't gone away; I believe it s much more likely its expected valuable contribution has just been delayed. I do not say my beliefs are correct - people should make up their own minds based on the facts and the most likely outcome as they see it.
Why should the appointment of a new CFO lead to carnage? There is a saying: "a new broom sweeps clean" and I believe we might be seeing an example here, with Bryce Houghton (next CEO?) being the 'new broom': "if we're going to have a bad first half, let's make it a real dog and throw in everything we can think of - and then some more on top. Then we can recover from a clean base and repor clear numbers. We have to be able to manage brand damage, keep our bankers from pulling the plug after the world and his cousin throws everything at us it can muster (but why would they when they see revenue starting to flow properly in H2 and cash turning positive) and we also have to make sure we're able to reduce gearing from a lower share price -but it's all do-able because we'll be on the upturn and the recovery in H2 will make it worthwhile. The auditors won't be bothered either because it's only half year and shareholders can wait for their dividends - we'll try to make it up to them with a much better share price and a much more exciting business moving forward.
I don't see any reason why due diligence would have failed, tumbleroll - even if it suits you to paint a picture of it having done so. It is a bit naive to think it did. Revenues may have failed to hit anywhere near target as a result of integration failings, PSD employees' eyes being 'off the ball' and people becoming too introspective, but that would be delay, not permanent loss. NIHL income is also an unknown - will it or won't it come in in any volume? I can't say, but why allocate so many people to process the files in H1 if it wasn't seen as worth it?
I'm looking forward to the next couple of weeks. I can't foretell what's going to happen, but it will be interesting to see what happens anyway. I doubt SGH will have to find a spare office for the receiver. My bets are placed.
Enjoy Anzac Day.
SGH Price at posting:
26.5¢ Sentiment: Hold Disclosure: Held
