The news that Fairfax are selling their stake in TradeMe is no surprise. This is because Fairfax has made a string of poor decisions over the past decade.
They failed to aggressively expand in online media, benefiting primarily through the acquisition of TradeMe. They loaded up on debt and TradeMe was a key contributor to maintaining Fairfax’s debt servicing ability over the past few years.
The reduction in Fairfax’s debt will give them a lot of breathing room. But it will basically take them back to the position they were in pre-TradeMe. That’s a poor online strategy.
It is a fascinating insight into how executives are not very good stewards of shareholder wealth, if you subscribe to that theory. It’s also an interesting insight into how supposedly smart people can make really dumb decisions.
If we look at Fairfax’s most recent investor presentation, we see Fairfax are trading away a business with a margin of 75% (TradeMe) and EBITDA growth of 11.2% for a core group of businesses with margins between 5% and 28%.
The Fairfax executives are basically betting that their transformation strategy will deliver more cost reductions and revenue growth than using TradeMe as a cash cow to pay down their other groups debt.
Their arrogance is amazing. From their own financials, only their internal whole of group restructuring (HR, IT, operations) is delivering higher returns than TradeMe!
One of the biggest contributors to their cash flow – enabling them to stay alive – was the proceeds from the TradeMe IPO!
But we have to remember that the major Fairfax loss is a non-cash impairment as a result of their ~$2.8 billion writedown in masthead value and goodwill.
They have to write down the value of their print assets, yet somehow think selling off TradeMe is a good strategy.
This action reminds me of something Bob Jones wrote in one of his books – whatever AMP is doing, do the opposite.
Corporate executives have a track record of poor decisions. Fairfax loaded up on debt during the boom and delayed aggressive cost reduction until it was too late.
Now they’re letting go of a franchise business with massive margins that can fend off any competition for the foreseeable future.
This whole debacle is another reason why excessive executive compensation is so wrong.
You can make completely stupid decisions that put a company on a trajectory to insolvency but there is no likelihood of Fairfax executives having to repay their “make hay while the sun shines” compensation.
If I was a major institutional investor in Fairfax I’d be extremely annoyed to the point of spending the rest of my career aggressively shorting companies with executives responsible for this at the helm.
“Go short the idiots who think selling TradeMe is a good idea” could be a rewarding hedge fund strategy over the next decade or so!