Understanding how the internet affects traditional businesses seems to be a young person’s game.
SHAREHOLDERS in News Corporation have learned an expensive lesson over the past few months, but it’s one that all investors should consider – when does the age of a director become a ‘sell’ sign?
Rupert Murdoch, despite his illustrious career, looked painfully old when he appeared before a British Parliamentary inquiry into phone and email hacking by News staff.
The 80-year-old Murdoch has no doubts about his ability to continue running the company founded by his father. Some investors have their doubts, especially after he appeared to have so little knowledge about what was happening at a business ultimately under his control.
Other men (and women) Mr Murdoch’s age might have a better grasp on the detail of their brief, but there is no doubt that the march of time wearies everyone. Mistakes are made, and health becomes an issue – as another 80-year-old Australian business legend discovered last month.
Frank Lowy, founder and chairman of the big shopping centre owner Westfield, was hospitalised because of a blocked bile duct; news of his internal problems even made it to the Australian Securities Exchange in the form of an official company announcement on June 27.
Messrs Murdoch and Lowy, apart from both being octogenarians, have something else they can talk about – falling share prices.
In Mr Murdoch’s case, the plunge in News Corporation’s shares has been well reported, down from a peak in February of $18.48 to as low as $13.65 last week, and then back up to around $15.48. At that latest price the stock market value of News has fallen by $2.4 billion in five months.
Mr Lowy has done even better. Since his Westfield Group peaked at $13.08 last November the stock has fallen to around $8.24, but did touch a 12-month low of $8.14 last week as the chairman was recovering from surgery. At its latest price, Westfield’s market value has fallen by $11 billion in eight months.
Despite News and Westfield seeming to be in different businesses (media versus shopping centres), they are being buffeted by the same economic winds of change. The internet has caused Mr Murdoch to re-think how News works, just as it has lured shoppers away from Westfield.
The worry for investors is whether a pair of 80 year olds, even if surrounded by the most talented team of young advisers, is the right choice to lead a business in tough times.
Getting on a bit
MESSRS Murdoch and Lowy are not alone, or the oldest, in the class of veteran directors having problems with a fast-changing world.
Gerry Harvey, a master retailer, is 71 and struggling to find an internet solution to complement the extensive empire of shops he has built across Australia. Mr Harvey’s primary complaint has been the lack of a goods and services tax (GST) on many imported items purchased on the internet that compete with what he sells via retail.
No matter how valid his complaint might be, the point for investors in Harvey Norman Holdings, the company Mr Harvey founded and still chairs, is that its share price has plunged from a peak of $3.95 in September last year to its most recent sales at $2.35, and a 12-month low last week of $2.23. The cost to investors in the market value of the stock has been $1.7 billion.
Would a younger man have seen the problems confronting Harvey Norman? Perhaps, because there is little doubt that internet retailing is a young person’s game.
Age in itself is not always the issue, as demonstrated by a sprightly 75-year-old Paul Ramsay, who heads Ramsay Healthcare, a business doing very well from selling health services to the elderly. Kerry Stokes also appears to be on top of his game at 70.
The point about age is that is affects everyone differently and no-one knows the answer to when is old too old. In some cases age might even be an advantage, bringing a wealth of accumulated knowledge and experience.
But, the Murdochs’ appearance before British parliamentarians was a sobering reminder that an 80 year old is ultimately responsible for managing billions of dollars of other people’s money.
That’s why it is worth factoring in the age of directors, especially chairman and managing directors, when investing.
Footnote: Winner in the directors’ age competition appears to be Len Ainsworth, 87-year-old founder of the gambling machine company Aristocrat Leisure, but today executive chairman of its rival, Ainsworth Game Technology, which has been doing rather well on the stock market, up from a low of 8.4 cents to recent sales at 42 cents and a market value of $117 million. Well done, Len.
In on the ground floor
APART from bile duct problems, Mr Lowy was given something else to think about last week when the US ‘bulk’ retailer Costco opened its second Australian outlet.
Shoppers, lured by the no-frills Costco offering, queued up for a chance to spend money at its Sydney warehouse, a facility at the opposite end of the retail experience compared with the slick glitz of a Westfield shopping centre.
In overall revenue terms, Costco might not be a threat to Westfield, or big food retailers such as Woolworths and Coles. But, over time Costco’s super-cheap approach will shave a percentage point or so off revenue, and those lost sales will come off the profit bottom line.
The reason Costco succeeds in an already overcrowded retail market is a combination of factors but the most important is that it charges shoppers an annual membership fee of $60, which not only represents the bulk of the company’s profit, but ensures that shoppers return to get the most out of their investment.
In time, Costco will open its big barns in every major Australian city, and duplicate its hugely-successful Melbourne and Sydney developments – not that you will read much about it because another secret of its success is minimal marketing, relying on the best advertising of all ... word of mouth.
THE old advice of knowing your enemy took an unusual twist last week when investment bank Citigroup tipped arch rival Goldman Sachs as a stock to buy. Citi reckons Goldman has been oversold with investors looking at potential 40 per cent gain in its competitor’s share price over the next 12 months.
“If you live long enough, you’ll see that every victory turns into defeat.”
Simone de Beauvoir