Until a week ago, to almost anyone who follows Australia’s small tech community, WiseTech and its billionaire founder Richard White were heroes.
Floated in 2016 for $3.35 a share (which some fund managers believed was overpriced at the time), WiseTech’s share price hit a remarkable $38.80 in September. In just three years, this obscure shipping logistics technology provider was worth more than $10 billion, and its founder was one of Australia’s 20 richest people.
That all changed the week before last. A hedge fund, J Capital, run by former Labor candidate Tim Murray, printed a highly critical piece of research that cast doubt on WiseTech’s reported profits and the quality of its product. Market reaction was swift and brutal. Within days, billions had been wiped from WiseTech’s market value and White’s paper wealth.
J Capital followed up with a second, similarly brutal piece the following Monday. And, in response, WiseTech and White came out swinging. But instead of playing the ball, they played the man.
White told the Financial Review that J Capital’s report was “misleading and entirely self-serving” and noted that the company was based “overseas” (apparently it’s dandy for non-residents to buy shares, but not to have a negative opinion).
Even if everything J Capital said was wrong and unsubstantiated, WiseTech was still incredibly highly priced (it was trading on a price/earnings multiple of 160 when most companies trade on an average multiple of around 20).
But J Capital went a lot further than simply pointing out that speculators had bid up WiseTech’s valuation to extraordinary levels. The hedge fund claimed that WiseTech’s reported profits had also been inflated by $116 million over four years and that it had been using dubious accounting policies to overstate income from its many acquisitions. WiseTech refutes these allegations.
Your correspondent (and many others) had privately been skeptical about the level of WiseTech’s alleged profit growth for years. It’s very rare that companies grow profitability so materially from such a large number of acquisitions over several years. While multiple arbitrage makes sense conceptually (that is, when a highly valued public company uses its expensive scrip to purchase smaller, less costly unlisted businesses), that can only work until you run out of good, “bolt on” acquisitions.
Also, integrating businesses is hard — systems don’t work, integration takes longer than expected, vendors lie during due diligence, and people who are critical to the acquired business leave in the tumult.
What often looks easy from the comfort of the boardroom is always far more difficult from the factory floor.
The market seems, at least to some extent, to have heeded J Capital’s views (even if the media, analysts, and of course White don’t). WiseTech’s billionaire founder even claimed that J Capital’s report was harming poor little mum and dad investors, claiming that “people get scared by this stuff and it is human behaviour that is being attacked”.
The real pain here isn’t for the money that speculators/gamblers will lose on WiseTech, but for White and his team.
Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed and a director of Private Media, publisher of Crikey.
I’m reminded of the old dictum that markets can remain irrational longer than you can remain solvent.
These tech startups and unicorns are the current high profile version of herd investing which to me is not a long step from pump and dump. But someone had to buy early Apple and Cisco too. Those who bought Wise under 8 or 10 dollars have likely been smart enough to sell enough to recoup their initial buy and can now sit and wait.
I still remember the empty Brash’s stores while they were that year’s share market darling right before they went bust. And good riddance too.
More Adam Schwab please.