Sometimes being a big fish in a small pond isn’t such a bad thing.
HOW does a business grow after it hits the ceiling in Perth? ‘Go east’ seems to be the easiest answer, though for some strange reason, almost certainly a cultural clash, Western Australian businessmen rarely succeed when they leave home.
That’s why the two latest corporate moves east, and the latest post mortem on failure, provide clues as to why anyone thinking about an expansion to Sydney or Melbourne should think very, very, carefully.
In fact, if you look deeper you discover that doing business in a different market is never as easy as it looks, interstate or internationally; just as most takeovers fail despite management promises that they will create value for shareholders.
Why these twin farces are perpetually played out – the move into a new market and claims that a takeover will be value accretive – is perhaps the most interesting question of all because we all know, deep down, that most expansion moves are questionable, and that an acquisition will contain more hooks than a fishing shop.
The post mortem on Bankwest is the most recent, and one of the better case studies of failure, if only because it was so horribly predictable that even a few simple-minded journalists, such as Bystander, pointed out several years ago that the bank was a train wreck looking for a place to happen.
The problem was as simple as the bank buying business in Sydney and Melbourne mainly to prove that it could get a slice of the action, prising clients away from the big four banks – Westpac, National, ANZ and Commonwealth.
Guess what? The big four were more than happy to see Bankwest roll into town. It was a perfect opportunity to get rid of problem customers, and that’s precisely what happened, with the smart boys from Bankwest doing deals the others wouldn’t touch.
Local knowledge, or lack of it, is the easiest way to explain what went wrong at Bankwest. It was lending money to the wrong people, in the wrong businesses, on the wrong property asset, in the wrong city.
The train wreck predicted years earlier finally happened when the bank’s new owner, the Commonwealth, called in insolvency experts to scrutinise Bankwest’s loan book – long after it had acquired the Perth-based bank in what it thought was a brilliant, bargain-basement, buy.
Losses piled onto losses as the Commonwealth poured through the Bankwest loan book, with the latest set of write-offs leading to last week’s reported $4 million loss in the first half of 2010. Just how much the Commonwealth has now written off from its Bankwest purchase is a closely guarded secret, but it is undoubtedly a lot more than was predicted at the time of the purchase.
Which leads to the next question; did the Commonwealth Bank, which bought Bankwest from its British owner at the height of the global financial crisis, get the bargain it claimed, or is that emerging as yet another takeover flop?
The jury of opinion is out on the takeover, though it is interesting that the Commonwealth has kept the Bankwest brand name alive since the acquisition, purportedly because there is value in the name, but more probably because it wants all the dead wood out before folding it into the parent company.
WITH the Bankwest wreck fresh in mind it is interesting to see two more locals try their hand with expansion moves on the east coast.
Automotive Holdings Group, a successful Perth car dealer, and Fleetwood Corporation, an equally successful caravan and modular homebuilder, announced within a few days of each other ambitious moves into bigger markets.
Fleetwood said it would pay $56.5 million for BRB Modular, a building company with operations in Victoria and Queensland. Automotive has outlaid $24.5 million to buy a big site in Sydney’s Castle Hill area to set up a number of vehicle dealerships.
Both moves could succeed brilliantly, and both appear to be a logical development for companies that have run out of room for further significant growth in WA.
But just because you have become too big for your home market does not mean that expanding east will be easy, as Bankwest discovered, and as a passing parade of earlier examples demonstrate.
Many years ago, probably before some of today’s readers were born, Maurice Walsh thought he could take his chain of clothing stores east. He failed. A decade or so, Alister Norwood travelled the same doomed route with his Jeans West brand.
The list goes on, and on. Alan Bond is one of the biggest examples of interstate (and international) failure with ill-fated brewery and television acquisitions. The late Laurie Connell thought he could play on the national stage, most famously advising Warwick Fairfax on how to privatise the family controlled Fairfax media group. Failed.
The track east is so littered with corporate corpses that it’s surprising someone at a local business school hasn’t analysed the problem and published a ‘how to’ guide – with a chapter headed ‘How not to’.
SPEAKING of Fairfax it will be interesting to analyse the annual results of the media group when they are released on August 27, because a preview published last week by the investment bank, UBS, contains more than a glimpse of what’s to come financially – it might also be a pointer to the result of the weekend’s federal election.
According to UBS most of Fairfax’s 2010 revenue will come from its Sydney and Melbourne dailies; but most of its profit will come from its regional newspapers.
The predicted breakdown is $102 million in profit from $924 million in revenue from the dailies versus $152 million in profit from $510 million in revenue from the regionals – an 11 per cent return from the city versus a 30 per cent return from the country.
The last WA state election provided a similar glimpse of the power of the regions when the rise of Nationals delivered government to the conservatives parties.
The UBS analysis of Fairfax is a ‘follow the money’ example, but it could just as easily be a ‘follow the power’ example, which is a reason why both major political parties have been focusing on swinging marginal seats in the regions.
“The path to oblivion often goes through a triumphal arch.”