Is hot air more prudent than gas?
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Tuesday, 22 February, 2000 - 21:00
At the risk of being politically incorrect (something which never bothers Briefcase) it is worth taking a look at how a particular management theory is affecting some of WA’s biggest companies.
Wesfarmers and WA Newspapers subscribe to a philosophy which says never invest in a business which cannot deliver a higher return on funds employed than those you’re getting today. It is an excellent theory which ensures above-average shareholder returns – for a while.
The problem is what to do in periods of rapid economic growth and accelerating asset values. The answer, which can be seen in these two leading companies, is do nothing. WAN has been under-bidder for at least four acquisitions. Wesfarmers has been bridesmaid on at least that many and non-bidder on many more.
Today’s shareholders can’t complain. The dividend flow from both has been excellent. But what about the future? Where’s the growth plan? Wesfarmers, a company with impeccable credentials, has declared a desire to buy AlintaGas. But what price will Wesfarmers be prepared to pay? Conventional wisdom says not much.
Such criticism is beginning to nark the boys at Wesfarmers. Chief executive Michael Chaney smiles inscrutably at anyone who questions his corporate wisdom and the ability of the forty or fifty busy souls work-ing in the Wesfarmers acquisitions and investment assessment area.
There lies a problem. With such a big team pouring over deals day after day it must be asked how they justify their cost. What has Wesfarmers actually bought, or does the argument from Mike hold water – that they have saved the company from making bad investments?
Error. A team of two chimps from the Perth Zoo could have said do nothing – and saved a bundle in salaries, cars, office space and computer gear. Mike doesn’t like this criticism. So, here lies the trap. AlintaGas is available. It fits. It appears affordable.
Some old and wise investors in Perth fear that Mike and his acquisition team have reached a critical point where they will have to actually buy something to justify their existence and that could be a very poor investment consideration.
CMS Energy is just discovering what happens when you over-pay for an energy asset.
It is fleeing Australia with a multi-billion dollar hole in its pocket after paying $4.8 billion for the Loy Yang power station in Victoria and finding that selling electricity in de-regulated Australian energy market is a lot tougher than meets the eye.
AlintaGas might be another ex-government energy asset full of hooks.
It is a steady-state, mature business. It is not a cost-cutting story and it is about to enter a world of full frontal competition.
The next owner could be in for an interesting time, and it might not be pleasant – especially if the owner overpays because he had to be seen to be doing something, anything.
Wesfarmers and WA Newspapers subscribe to a philosophy which says never invest in a business which cannot deliver a higher return on funds employed than those you’re getting today. It is an excellent theory which ensures above-average shareholder returns – for a while.
The problem is what to do in periods of rapid economic growth and accelerating asset values. The answer, which can be seen in these two leading companies, is do nothing. WAN has been under-bidder for at least four acquisitions. Wesfarmers has been bridesmaid on at least that many and non-bidder on many more.
Today’s shareholders can’t complain. The dividend flow from both has been excellent. But what about the future? Where’s the growth plan? Wesfarmers, a company with impeccable credentials, has declared a desire to buy AlintaGas. But what price will Wesfarmers be prepared to pay? Conventional wisdom says not much.
Such criticism is beginning to nark the boys at Wesfarmers. Chief executive Michael Chaney smiles inscrutably at anyone who questions his corporate wisdom and the ability of the forty or fifty busy souls work-ing in the Wesfarmers acquisitions and investment assessment area.
There lies a problem. With such a big team pouring over deals day after day it must be asked how they justify their cost. What has Wesfarmers actually bought, or does the argument from Mike hold water – that they have saved the company from making bad investments?
Error. A team of two chimps from the Perth Zoo could have said do nothing – and saved a bundle in salaries, cars, office space and computer gear. Mike doesn’t like this criticism. So, here lies the trap. AlintaGas is available. It fits. It appears affordable.
Some old and wise investors in Perth fear that Mike and his acquisition team have reached a critical point where they will have to actually buy something to justify their existence and that could be a very poor investment consideration.
CMS Energy is just discovering what happens when you over-pay for an energy asset.
It is fleeing Australia with a multi-billion dollar hole in its pocket after paying $4.8 billion for the Loy Yang power station in Victoria and finding that selling electricity in de-regulated Australian energy market is a lot tougher than meets the eye.
AlintaGas might be another ex-government energy asset full of hooks.
It is a steady-state, mature business. It is not a cost-cutting story and it is about to enter a world of full frontal competition.
The next owner could be in for an interesting time, and it might not be pleasant – especially if the owner overpays because he had to be seen to be doing something, anything.