Michael Malone has emerged from a month-long trading halt still in charge of Australia’s third-ranked ISP. But in many ways it’s a substantially changed business.
For most CEOs the events of the past six months at iiNet would be terminal.
And while the market, and new significant shareholders, are no doubt still gauging the ability of founder and managing director Michael Malone to restore the ISP’s credibility, his demeanour is hardly one of someone facing the chop.
During the past quarter, iiNet has endured a month-long trading halt, a near 40 per cent cut in forecast earnings, and a share price that has plummeted by almost half.
His personal stake has dropped in that time from more than $60 million at its peak to about $10 million at current prices (Editor's note: Mr Malone spent $4.3 million today - June 21 - increasing his stake to almost 20 per cent).
Yet to Mr Malone, the 2006 WA Business News 40under40 1st Amongst Equals award winner, it appears to have been a setback rather than a catastrophe.
“It is like any sort of crisis,” he said. “Like a car accident. You are running around trying to deal with issues.
“You don’t have a lot of time to contemplate ‘if only’.”
However, while there may not have been the opportunity to regret every mistake as it came to light – and there were quite a few – it is easier for the iiNet chief to reflect on how the crisis was handled.
“I guess it would have been easy for the team to fall apart,” Mr Malone said. “When you look at this there is no one person you could lay the blame on.”
Despite his relaxed mood, Mr Malone now presides over what in some respects is a very different company.
A year ago, iiNet was flying high: its shares were trading as high as $3.40 each; its acquisition of Ozemail made it the undisputed third player in the Australian internet services field; and it was the biggest independent player, showing Telstra and Optus what a nimble, focused company could do.
But the Ozemail integration was not quite the company maker the market had punted on since the acquisition was announced in February 2005, funded by an $85 million placement underwritten by Euroz Securities Ltd at $3.05 a share.
Much of this year’s issues arose from the serious difficulties iiNet had in integrating Ozemail. Unlike a series of smaller ISP acquisitions, each of which delivered almost immediate significant value to iiNet, the Ozemail business was different.
Its customers’ actions were different to those the predatory iiNet was used to.
They did not migrate to iiNet products as expected and were confused by the process, causing meltdown at the call centres.
All this was exacerbated by the scale of the acquisition.
The $110 million purchase had boosted iiNet’s customer base by more than 50 per cent, adding 230,000 mainly east coast clients, many of whom were from a conservative, older demographic, and were totally bewildered by the simplest changes to their accounts.
This drama later came back to plague Mr Malone’s team as the inaccuracy of their forecast expectations was covered up by failings in the financial reporting systems to show that the Ozemail integration was not going as expected.
To the outsider, reading the 24-page May 26 profit update, with its litany of mistakes and miscalculations combining to wipe $15 million from earnings before interest, tax, depreciation and amortisation, this appears to be a business that has simply gone beyond the control of its management.
While Mr Malone concedes that 10-fold growth in four years had left the company vulnerable, he seems to downplay the whole episode.
“A hiccup makes it sound too mild,” he said, aware that most in the market would agree with this understatement.
“Serious indigestion would be a better description. We had 10-fold growth in four years.
“Systems and processes certainly did not keep up with that growth.”
Clearly, some in the market view it as more than that.
When iiNet resumed trading at the end of May, significant numbers of shareholders sought to exit, enough for local telco Amcom Telecommunications Ltd to take up nearly 20 per cent of the stock at about 83 cents, half the price the ISP last traded at.
The price was probably initially stopped from going into freefall by the floor provided by a placement deal with NSW telco Powertel Ltd at 85 cents.
However, it has slumped further, to about 60 cents per share.
Victorian-based Equity Trustees Ltd sold about 1.6 million shares for just over 90 cents each during the few days after iiNet resumed trading, reducing it below substantial shareholder level and leaving it seriously underwater on shares it bought in August and October for $3,26 each and $2.60 each respectively. It had started selling seriously in March as the stock dived to about $1.60.
Portfolio Partners Ltd had a similar story. Sydney’s Eley Griffiths Group also stopped being a substantial shareholder.
Instead, Mr Malone now has two major shareholders in Powertel and Amcom.
Both are rivals in their sector, although not really geographically. Both will have their own intentions, though Powertel – represented on the iiNet board by its CEO, Paul Broad – took its stake without knowing Amcom was set to leap onto the register.
Amcom is backed by Futuris Corp Ltd, a company which has previously sought to get involved in industry rationalisations by acquiring large blocks of stock just below the threshold set for automatic takeover bids.
These two plus Mr Malone now own more than 50 per cent of iiNet stock.
“Of course I think they have a terrific deal, but it’s a good result for iiNet,” Mr Malone said.
Just how this will pan out will be interesting to all market observers.
Both Powertel and Amcom have an interest in iiNet, supplying the distribution the ISP needs to service its customers.
The Powertel placement comes with a deal on the east coast but Amcom wants iiNet’s business in Western Australia, where its contract with Telstra has about one year to run.
Mr Malone said there was a strong possibility that a deal could be done involving one of these newcomers.
“We are hoping Amcom and Powertel will sort that out,” he said.
Amcom CEO Eddy Lee said he was comfortable with his current position.
“We are happy with the level of shareholding and happy to be of assistance with any backhaul deal that will help them reduce costs and has synergies for us,” he said.
Many in the market would be surprised, though, if Amcom waited for a year before moving to make something of new status as a substantial shareholder in iiNet.
But the shareholder register is not the only place where change has taken place.
Chairman Peter Harley, who has extensive experience in technology companies such as Intellect Ltd and ERG Ltd, has taken an executive role.
There is also the growing role of risk management expert David Dans – brought in earlier this year as chief information officer after assisting Integrated Group Ltd get back on track – who arrived just in time to see the crisis unfold.
And advisers from Ernst & Young and GEM Consulting have overhauled iiNet’s systems, including some of the simple disconnections between billing and financial reporting processes, which allowed human error to compound forecast problems.
“We have a lot of new people thrown at it,” Mr Malone said.
Perhaps this is the key to Mr Malone’s apparent relaxed mood.
At the 40under40 awards he revealed the drama of his recent family life – the story of his wife and he having to come to terms with an autistic child.
This time, he has been able to share the crisis with others, both at investor and management level.
