Between and the company acquired a further childcare centres across Australia, New Zealand, the UK and the United States. Below is a list indicating the growth in the number of ABC Learning centres between and , as of 30 June each year, taken from the Annual Financial Reports:.
But its business model was flawed. Instead of laying the ground for natural growth which it did in the years between — , it embarked on a growth strategy involving acquisition of competitors spurred on by a remuneration policy for its senior company directors to achieve short term business strategies and financial targets.
In other words, the valuation of these licences was a subjective estimate provided by the directors of ABC, based on their experience and future plans. Despite appointing an experienced and well-educated Board of Directors, the inexperienced founders of ABC were driven by a relentless ambition for, and obsession with, growth. As banks started to chase payments from its major customers during the height of the Global Financial Crisis in , ABC Learning Centres found itself defaulting on debt repayments.
This in turn resulted in its liquidity crumbling. Nobody noticed that while the annual reports painted a picture of a prosperous global company, its cash flow was almost non-existent.
Breaches of debt covenants can also have a domino effect. ABC could not generate enough operating cash flow to pay interest, suppliers, salaries and dividends. Olam has an erratic pattern of operating cash flow, which has been generally negative. Although its profits had been increasing steadily over the last few years, there have been many cases of companies which have failed on the back of positive profits and negative operating cash flow. It emerged that the Groves and some of the other ABC directors had pledged their shares to borrow money.
As the share price plummeted, they were forced to sell shares equivalent to 5. This flooded the market with shares and pummelled the share price further. This was in response to cases where forced sales of pledged shares by controlling shareholders in some companies have triggered breaches of debt covenants.
All corporate collapses have certain broad similarities and differences, and Olam is not a mirror image of ABC. However, the similarities in terms of issues which brought down ABC and the concerns raised by Muddy Waters about Olam are quite remarkable.
Even their corporate histories bear a striking resemblance. The two companies were founded a year apart as relatively small domestic companies, with ABC founded in in Brisbane, Australia, and Olam in in Nigeria. Both became listed companies, ABC in and Olam in , and grew very quickly on the back of opportunities created by booming demand in their respective industries.
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Dr Philip Ross, the head of the school of accounting at the University of Western Sydney, describes it as a "failure of regulatory and accounting processes" and says that despite changes to corporations law and accounting standards ABC Learning's situation is not that different to the One. Tel and HIH collapses. He notes that ABC Learning's profits increased rapidly through acquisitions, which should have raised questions about the underlying valuation of assets it acquired - especially given that 70 per cent of its assets were intangibles.
Embarrassingly for the Australian Securities and Investments Commission, this issue was pointed out to it in , but the regulator could find no fault with ABC Learning's massive intangible assets, which would go on to play a crucial role in the expansion that brought the company undone.
The ASIC complainant said: "It's suggested that the methods of financial reporting being employed here are designed to artificially create apparent shareholder value, when, in fact, that shareholder value associated with the child-care licences 91 per cent of net assets is based entirely on the future net cash flows of the company, which may or may not be realised. It's also suggested that this may be misleading to potential investors in the company. An ASIC official replied to the complainant in September stating it had "made a number of inquiries into the issues" raised.
Conflicting public statements from the child-care operator provide an embarrassment of riches that even the corporate watchdog can't ignore. ASIC won't be the only one in the doghouse. The roles of the auditors won't be ignored and the repercussions may go well beyond ABC Learning.
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