Great news – real company owners to be disclosed

The Prime Minister has announced that the details of who really owns and controls UK companies will be made publicly accessible. More details will be announced in early 2014,, but the key paragraph in the announcement from the BIS Department includes the statement that the Government will “………potentially use as a model the disclosure regime that currently applies in relation to disclosure of information on company shareholders. This would mean that companies would hold information on the names and addresses of their beneficial owners and details of their interest in the company. Companies House would hold – and make publicly accessible – the names of the beneficial owners and details of their interest in the company”. This will enormously help shareholder activism and democracy.

ShareSoc did of course make clear its strong support for public disclosure of beneficial ownership in our response to the “Trust and Transparency” consultation paper – see www.sharesoc.org/consultations.html for a link to our response. It is good to know that the Government has listened.

We will await more details with interest.

Roger Lawson

Bulletin boards and Globo

I was at the Annual General Meeting of Ideagen yesterday (a full report is on the ShareSoc Members Network), and happened to talk to one of the advisors present about recent events at Globo, another software company. We agreed there was a problem with bulletin boards that should be tackled.

As mentioned in a previous blog entry, Globo has come under attack in the last few days on a number of bulletin boards and financial blogs for the quality of its business and its accounts (more comments on those allegations below, but let’s discuss the general problem of bulletin boards first).

As a result of these postings (which are not all one-sided), the share price has been driven down from over 80p on the closing of 21st October to about 55p at the time of writing. The volume of trading has also gone up significantly. Simon Cawkwell, aka “Evil Knievel”, seems to be one of the leaders of a concerted campaign to destroy the reputation of the company and, it is alleged, has been “shorting” the stock.

At least Mr Cawkwell has been posting using his own name on ADVFN (one of the main sites involved), which is more than can be said for many of the commentators. There are of course a myriad of other sites where these allegations have been made, or replicated.

Some sites are moderated, but others have no or minimal moderation. That means you get not just gossip and unsubstantiated allegations made thereon, but often personal abuse. I understand for example that on ADVFN, the creator of a board can moderate comments, but not those made by a paying subscriber. Otherwise the organisation itself does not moderate and takes no legal responsibility for what is posted – indeed even if the posts are defamatory and a company complains, they will not be removed. Certainly some of the comments on Globo were inaccurate and defamatory (“justification” and supporting evidence for them is not supplied of course).

Now you may want to preserve the freedom of the internet, like some people want to preserve the freedom of the press to publish and be damned, but it does seem to me that some regulation is required, just as some press regulation is being brought in. The press have a commercial incentive to behave badly (such as illegally tapping phones and bribing the police for information) because a scoop gains them business, and in addition they can sometimes generate more profits from libelling someone than they might pay in costs – even if someone libelled has the resources to fight a legal battle, which they often do not.

In the case of companies, bringing an action for libel is exceedingly dangerous because it just tends to spread the allegation around, thus affecting their reputation even if they are in the right. Look at the “Maclibel” case for example. So very few companies do so.

The big problem with financial bulletin boards is that posters can make money by either puffing or ramping companies (i.e. promoting their merits) or disparaging them (i.e de-ramping). In the latter case the speculators can short sell the stock to make a quick turn. And of course they can do this anonymously because they don’t declare who they are and even the board organisers do not know. So in effect, we potentially have anonymous “market manipulation” and “market abuse” – the latter is a criminal offence. The FCA have the powers to investigate market abuse but would they likely do so on a small cap company like Globo where there may be relatively few investors – the answer is no. Because they simply do not have the resources to do so.

Globo is of course not an isolated example of possible market abuse. There have been lots of others. So the question is what to do about it.

It would not seem sensible or wise to shut down financial bulletin boards altogether, although they are full of garbage and frequented by the ill-informed and pusillanimous. Some boards are better quality than others and some posters make useful contributions to the information available on companies. But so often they mix up reportage with comment,  and seem unable to separate fact from rumour.

At least it would seem wise to me that posters should declare who they are, i.e. their real names and some background information – for example whether they are short or long on a stock. Even Facebook and Twitter insist on real names before you can register.

It is currently possible to register with different names repeatedly so that you can post lots of different comments appearing to be from different people, when it’s actually one person. Some checks on email addresses of posters and their IP addresses might prevent that. So regulations to remove anonymity of posters would be one positive step to stop abuse.

In addition I think board operators should have a responsibility to “moderate” them, i.e. review and remove posts that exceed the bounds of decency or prudence, particularly in response to complaints. In other words I would propose that they would not be required to monitor all posts all the time, but particular boards brought to their attention should be. Boards and blogs might need to have some kind of licensing system imposed so that they were clearly signed up to a code of practice and could have their license removed if they consistently ignored the rules.

It’s one of the oddities of the modern world that giving financial advice generally requires you to be a regulated person. But anyone can post any garbage on company shares in the form of “advice” on a bulletin board or blog without any regulation whatsoever, or any penalties if you behave outrageously or in your own personal financial interests.

The reasons for these proposals are that it’s a lot easier to prevent abuse at source, rather like it’s easier to prevent crime rather than catch the criminals later and get restitution for the victims.

If you think that something needs to be done about this problem, and have any comments on the above suggestions please let me know.

Globo – the allegations

Let me first declare that the writer is a small holder of Globo stock, but I have not traded the shares recently. I have attended a number of presentations by the company and talked to the CEO. I have also attended the last three Annual General Meetings of the company and there are extensive reports on those in the ShareSoc Members Network. In addition ShareSoc has reviewed the company in past newsletters and they also presented at one of our Technology Company Seminars   (see www.sharesoc.org/techseminar.html). In case readers are not aware, I have also had a past career in the IT world so I may have a better understanding of early stage software companies than many.

It’s worth repeating what I said at the end of the last AGM report in June 2013 (the share price rose rapidly thereafter to a level I thought was unreasonable bearing in mind the risks and financial profile of this business – was this a “ramping” episode one wonders?):

In conclusion a very useful meeting with an open response to all the questions posed. My explanation of why the share price is relatively low is partly the historic “Greek” connection (apart from the political turmoil in Greece, it’s not exactly a location with a reputation for software development), but also because of the uncertainty about the future sales of Go!Enterprise. It is clearly going to take time to educate the IT market about the company’s BYOD offering. Using a distributor as the main US channel (and it is clear there is a big bet on the US market taking place), may be the best option but such arrangements, particularly exclusive ones, often do not work out. We will have to wait and see on that. But Ingram is probably one of the best companies to establish such a partnership with.

It is also clear that the company has chosen to compete primarily in the SME market rather than the corporate sector which their competitors are targeting. This could be tricky because the ‘early adopters’ of new software technology are often the larger companies. Selling to SMEs is never easy and it can take as much effort to sell to an SME company as a large corporate.

Reviewing the marketing material on the company’s web site (and the box containing a packaged version of GO!Enterprise Mobility that was circulated at the AGM), I am not sure what the compelling proposition is for such customers (or more specifically whether it is being communicated in the best way). Why should I buy it is the key question? What do I get for my $699 that will save me time or money? Having a clear sales proposition and focused marketing is absolutely necessary, particularly in the USA, if the company is to “cross the chasm” from the early adopters to commonplace users.

Well we will have to see whether the company has got the business model and marketing right. As with any new product, there could be quite a learning curve. That is surely what is holding back investors to some extent”.

The negative comments made on boards (which I will not repeat verbatim) seem to fall into the following areas:

1. Go!Enterprise is not a viable or real product, which undermines analysts’ projections for the business.

2. The company has excessive debtors and profits do not turn into cash (and as a result they need to keep raising more money.

3. The sale of the Greek business to its management (which is only partly paid for with extended credit terms) cannot be reconciled to the cash flows in the company, and/or the Greek company’s  accounts (now accounted for as an “Associate” as Globo still has a substantial holding) cannot be reconciled to those of Globo.

4. The company is comparable to Aruba but has a very different financial profile.

5. Concerns about recent share sales by management.

Here’s some brief comments on them, short for the sake of brevity. It seems unlikely to me that Go!Enterprise is not a real product but making it a world leader may not be easy as I made clear in my AGM report. Cash flow is certainly of concern, but there are reasons for this if you understand the business in detail. One of the best comments on this question was a post by “Robbie125” which mentioned Mr Cawkwell’s past enthusiasm for Monitise which said: “Clearly this Mr Cawkwell cannot be the same person as the shorter of Globo, since I believe Monitise is a company which has a market cap of £750m, but has never made a profit, consumed vast amounts of cash and has no prospect of being cash flow positive any time soon”. Yes early stage, high growth software companies can consume cash rather than generate it.

As regards comment number 3, the company is to disclose more information later this week to try and clarify that issue.

On comment 4, a quick review of Aruba would tell you this is a totally different business with a different history and different products, although they have moved into the BYOD space recently (and note that Globo revenue is not totally derived from Go!Enterprise which a lot of folks seem to be ignoring). Their accounts are not likely to be easily comparable to Globo.

Obviously significant share sales by management are usually of concern, but it’s possible they simply took advantage of an opportunity to dispose of some stock when the share price got a bit ahead of reality. Monitise management have in the past sold large amounts of stock, relying on bonus schemes to replenish their holdings.

At best the comments made might highlight some of the risks faced by investors in this company, but are not necessarily a balanced view of the subject.

The suggestion has been made that analyst’s who cover the company have produced forecasts that are unreal but they may have more understanding of the business and its financial prospects than the commentators on bulletin boards some of whom have clearly not looked at the details of the business model.

But as with any business of this nature, analysts’ forecasts depend on the expectations and forecasts of management so could well be wildly wrong. That’s the nature of investing in early stage businesses. That’s all the “health warning” you should need.

NOTE: This article is the personal view of Roger Lawson and does not represent any adopted policy of ShareSoc as an organisation nor the views of anyone else on Globo.

Roger Lawson 30/10/2013

Postscript 31/10/2013.  This morning Globo did publish additional information on various accounting issues, and also included a trading statement. The latter was positive with revenues up 58% for the nine months to the 30th September and “was ahead of management expectations”. They also reported positive cash flows in the period.

The “additional information” on accounting covered the accounting of the disposal of the Greek operations which contained no new news so far as one could see. They confirmed that revenue recognition and R&D capitalisation/amortisation were in accordance with IFRS, as one might expect.

They provided in-depth information on the business segments and collection terms, which obviously show quite long payment terms. For example 150 days “typically” on the CitronGO! and GO!Social segment,  a mix of terms on GO!Enterprise Licensing depending on how sold (but again can be 90 days, or 120-150 days) and 120-210 days for GO!Enterprise projects. Most of this is not new news to anyone who knows much about the business or has asked questions about this area. The extended payment terms are also dependent they say on the “country concerned, including currency export and other regulations” as one might expect from some of the countries they operate in. The only disappointment here is the lengthy payment terms permitted on GO!Enterprise Projects after completion (and no mention of progress payments or advances). That’s not really the best way to run a project focussed business so that’s certainly an area to question at the next opportunity.

Globo, RM and Tesla Motors – What’s the connection?

Globo, RM and Tesla – what’s the connection? You will see.

Globo managed to get their name mentioned in the Financial Times yesterday as coming “under pressure after bloggers question cash flow”. This probably refers to comments from Paul Scott on Stockopedia where he writes a daily small cap report which covered Globo on the 17th October. Not only were those comments spread around on bulletin boards but he and other folks have said similar things in the past.

In essence what he said was that despite reporting profits, the company has historically had to raise money (such as via the recent placing) because profits did not turn into cash. Debtors were too high he suggested and he typically does not like capitalisation of software development costs. He also expressed concern that directors sold stock in the placing rather than participate.

Globo has been covered in past ShareSoc newsletters – for example in April 2012 when it was reviewed and the price then was about 25p. At the time of writing it is 67p after falling from a high of 83p. We have also reported on previous AGMs of this company as the author of this item holds the shares (and asked a question on revenue recognition at the last one).

There are undoubtedly valid concerns about the cash flow, but the situation was not helped apparently when Globo recently did a presentation for investors and overran their presentation time leaving no time for questions.

One of Globo’s key products is software to support “Bring your own device” (BYOD) in the corporate IT world. One announcement last week was from RM who sell IT products into the educational sector. It is closing down its sale of personal computing devices (mainly PCs) which will mean reducing staff by 300 and one-off costs of circa £10m in the current year. As Anthony Miller said in Techmarketview, “It really should come as no surprise – and really it should have happened years ago. But educational ICT and resources group RM has finally decided to throw in the towel on its PC sales activities and concentrate on software and services.”. (Editor: I definitely agree – it should have been done a long time ago as margins in hardware have been falling for years and it’s a commoditised sector. Why the previous Chairman, who briefly came in to restructure the business, did not take that step I do not know). Of course one of the reasons for this move is that schools are moving to a BYOD model – the kids take their own computing devices to school.

Also last week was the news that Tesla have opened a London showroom with a launch event (although you won’t be able to buy a right hand drive version until next year). The Tesla Model S is one of the few viable and successful all-electric cars, but at a price. It has been a great success in the USA where the company’s stock is now valued at over $20bn despite the fact that it’s still losing money (i.e. no profits and it’s on a multiple of over 15 times sales). Wealthy stock market investors who read this article (aren’t you all?) should certainly take a look at this vehicle. It would be ideal for London residents as it’s exempt from the Congestion Tax (a.k.a.  Charge). The price you might have to pay for one is not totally clear but it might be in the range of £60,000 to £85,000 depending on options. Incidentally the car is of course named after Nikola Tesla who invented A.C. electric power and whose biography is well worth reading as a business story. Book your test drives now!

What’s the connection between Tesla and Globo? It’s that the Globo Chairman, Barry Ariko, owns a Tesla and gave a good report on it when I spoke to him at the Globo AGM (Mr Ariko lives in California where no doubt the vehicle is popular with the high tech crowd). It’s always interesting what you can learn from attending AGMs, as I keep on telling people.

Roger Lawson

London Investor Show Olympia

ShareSoc StandShareSoc exhibited at the London Investor Show at Olympia on the 25th October. It proved to be a good show in terms of attracting new members and meeting existing ones even though there is substantial effort in organising and manning a stand. A photograph of the stand is shown to the right – Member Steve Holdsworth assisting at front, Director Chris Spencer-Phillips talking to a visitor.

Incidentally the posters we used on the stand were printed by Printed.com – a division of Tangent Communications Plc, who offer a web based printing service. That company presented at a recent Mello company presentation meeting and it seemed an opportune chance to try out their service. It was easy to use, was certainly a quick turnaround and low in cost (without doing any exact comparisons with other services). Only one slight hiccup along the way relating to whether “crop marks” were required or not. But the end result was certainly good quality.

I spoke on the subject of Shareholder Engagement – specifically “HOW AND WHY SHAREHOLDERS SHOULD ENGAGE WITH COMPANIES”. Apart from problems with the audio system and too much background noise, it otherwise seemed to go down well. The slides from the presentation are available on the ShareSoc web site here: www.sharesoc.org/news.html .

There were a number of AIM companies presenting at the show. But with only a 10 minute slot each there was only limited information conveyed, and little or no time for questions.

As with any “trade show”, it was also a good forum for making new business contacts and meeting prospective partners so it was also helpful in that regard. This event probably just needs a bit more attention to the details, but no doubt ordinary visitors would have found it worth attending.

Roger Lawson

Problem companies – Hibu, Vicorp and Avia Health Informatics

News today on three companies in financial difficulties. Hibu (formerly Yell) have announced that they have received a requisition for a general meeting of the company, which they apparently intend to convene. They reiterate that shareholders will get nothing from their proposed restructuring where the debt holders will gain overall control and state that the board “is unanimously of the opinion that the proposed resolutions are not in the best interests of Hibu and its subsidiaries nor its key stakeholders including its 12,000 employees, customers, suppliers and creditors”. They don’t mention the interests of shareholders though. Aren’t they stakeholders?

The requisition makes interesting reading and can be found here: www.hibu-shareholders-group.com/egm-request.html . There are 37 resolutions in all which is certainly a very large number. A lot of them are requesting information and the answers certainly might be of interest to shareholders. Shareholders have surely nothing to lose from voting in favour of these resolutions.

Vicorp was an AIM company which delisted in 2009. It specialises in voice recognition products and had revenue of £875k last year and profits of £276k, but the forecast this year is a loss of £81k after losses of contracts. Indeed times are so tough that they have had to sell the company car. Shareholders who subscribed prior to 2009 have seen their financial interest dwindle after past refinancings, but now they should probably consider it a write-off because the company is proposing to sell the business to the current CEO for £1 and then wind it up. If approved the company will buy all the shares offered for £1 (that’s not per share, that’s all the shares – just as a way to expedite holders claims for tax losses rather than await the liquidation). The major concern is that there seems to have been no attempt to look for other possible buyers for the business, which would not appear to be totally valueless. Shareholders should vote against the proposed disposal. Or consider making a bid of more than £1!

Avia Health Informatics. This was another financially troubled AIM company which looked like it was going bust as it never seemed to develop a viable business. It’s had its shares suspended more than once in the past but them decided to dispose of the operating business and become an investment company, with more fund raising which will dilute shareholders. Today the suspension was lifted and the share price immediately fell by over 60%. But at least shareholders will not be totally wiped out as is likely in the above two cases.

Roger Lawson

What happens to bond prices if interest rates rise, and the latest Co-Op news.

If interest rates rise, what will typically happen to bond prices? That was a question posed to 30,000 US adults according to a report in the FT today. I would hope readers of this blog know the answer because it is quite important now that QE might be tapering off and interest rates rising. Only 28% got the answer right, which is of course that bond prices will fall.

People buy bonds in the belief that they are “safer” than equities. It is often recommended by IFAs, and other financial advisors, that the nearer you get to retirement age the more bonds you should have in your portfolio. But bond prices can be as volatile as equities. The only aspect that is more secure about bonds is that the income is more guaranteed and generally fixed (so long as you hold them to maturity).

Now the holders of Co-Operative Bank subordinated bonds (PIBS and preference shares) may not be concerned in the short term because trading in them has been suspended. This is because the bank has indicated it is in the process of revising plans for the refinancing so as to achieve “an acceptable outcome for bondholders, including private investors”.  The bonds will likely stay suspended until the new deal is announced, which may be towards the end of October. It looks like the Co-Op will have a much reduced stake in the bank with the bondholders more control, so presumably a debt for equity swap will be part of the deal (most of the debt is held by institutions). But Mark Taber who is running a group for private investors has suggested they should be taken out by a “debt for debt” swap where they receive debt in the larger Co-Op group.

Certainly this is a more positive outcome than was first proposed by the Co-Op, and it is good that pressure has been brought to bear to get the deal revised. It still leaves the problem that the FCA has done little to protect the interests of retail investors in these bonds, the issue of the failure to disclose the financial problems faced by the Co-Op at an early date and whether the accounts truly reflected the position of the bank.

Roger Lawson

Trusting the regulators? You should not.

The recent case of Catalyst Investment Group highlights the fact that sensible investors should not rely on the financial regulators to warn them about dubious investments and those who promote them. Indeed so far as the FCA, and its predecessor the FSA, is concerned, the fact that a business is regulated by them does not necessarily mean they are trustworthy at all. All it means is that they have met the regulatory requirements at some point in the past.

The recent outrageous example of Catalyst Investment Group makes the point. This was a company that promoted bonds issued by Luxembourg based ARM to intermediaries such as IFAs in the UK, who sold them to retail investors. However the bonds concerned had never been approved by the Luxembourg financial regulator who had actually told ARM to stop issuing them.

But that did not apparently stop Catalyst selling the bonds (£17m worth, plus £37m of other ARM bonds). ARM has now been placed “under supervision” by the regulator and all payments have been suspended. Any investors in their bonds should go to this FCA web page for more information: www.fca.org.uk/news/consumers/arm-investors .

Even more alarmingly, the FSA were aware of the issue and “invited” Catalyst to stop selling them, but they did not do so. In addition this was a private communication which was not published.

Finally the FCA have taken tougher action with a £450,000 fine on former Catalyst CEO Tim Roberts (and banned him from working in the financial sector) for reckless behaviour plus lesser fines on other staff. The company itself was not fined as it has been declared “in default” by the FCA.

Similarly the FSA did not warn investors in small cap stocks (such as “US Regulation S” stocks) a few years back that some of the companies promoting them were selling them to inappropriate investors, i.e. those incapable of understanding the risks associated with them. In other words some of the firms operating in the “boiler room” style were regulated by the FSA until quite late in the day.

Likewise, if the LSE disciplines an AIM Nomad they often don’t disclose it in public. At least the FCA seems to be taking a different stance on disclosure now, but it’s well overdue for the LSE to change its ways.

However you look at it, it is down to you the investor to make sure you understand what you are buying. If you do not, you should not buy it. Even a little research on what Catalyst and ARM were promoting might have disclosed that it was complex and possibly risky. You can still see the “prospectus” for some of these bonds on the internet – all 73 pages of easy reading which explains these were bonds that securitised the pooled payments from the cash benefits of “life settlements”, i.e. life insurance policies where the insured had not long to live and the policies had been assigned for some reason.

In the USA where securitised mortgage debt was the source of a major worldwide financial crisis (again selling products that the buyers did not understand), JPMorgan have just agreed to pay $13bn in settlement and it looks like the Bank of America (BofA) will also have to pay compensation of record amounts. Pooling risks did not reduce them in this case, it just concealed them while the regulators took no notice.

So the moral is, don’t trust anyone trying to sell you an investment proposition, and don’t trust the regulators to ensure you are not mis-sold a pup. Likewise don’t rely on the regulators or AIM Nomads to ensure AIM companies behave in an responsible manner and act in the interests of shareholders.

Roger Lawson