Think Twice Finance

ABC Learning Centre: Swimming with the Sharks, Pre-Kindy Learning by Doing.

ABC Learning Corp. has in the last few days taken on a new curriculum: teaching Austalia’s children about modern corporate finance. Topics include corporate governance, corporate disclosure, insider trading, corporate leverage and prudent expansion. This is what media tells us we may now be teaching our kiddies about corporate finance.

Corporate Governance at tea time – ABC is governed by Fast Eddie Groves and his buddies. Tried and true friends all. The management team sits on the board. Independent directors invest in the firm, and corporate insiders have cross-holdings at outside director-controlled firms.

Corporate Disclosure Show and Tell – Fast Eddie and his buddies on the board of directors borrowed heavily against their own holdings of ABC stock without disclosing this to other investors. This makes them highly exposed to decline in the value of the stock. Worse, when the stock actually declines as it has, they no longer have substantial positions in the stock. That is, they are broke unless a miracle happens. This means their decisions, if they result in losses, will have little effect on Fast Eddie’s wealth. Only decisions that pay off big are of any benefit to him now. Perhaps Fast Eddie is on his way to Vegas as we speak.

Insider Trading Pin the Tail on the Donkey – One of the directors may have sold the stock above $3/share the day before the announcement that there were debt problems at ABC.

Corporate Leverage Hide and Seek – The lenders to ABC didn’t know that Fast Eddie and the other executives had leveraged their stock position, meaning that from management’s point of view the operation was much more risky than the Debt-holders realized.

Prudent Expansion – Australian dads and moms think of ABC as a big Australian operation. 30% of all child care facilities in Australia are ABC, and by most accounts (including mine. I have a two-year old in ABC’s daycare) it is. But perspective is important. ABC’s growth has mostly been in the US. It is safe to say that if ABC is making losses, those are mostly due to US growth financed by debt.

Well that is our little lesson. I have been chatting with the staff and parents over the last few days. They have a sanguine view, based on arguments like the below, with my niggling concerns attached.

“The Australian Government won’t let the centers close.” Niggling concern: How will the Australian government prevent this? They can’t simply provide ABC with capital. That money will service American-spending related debt, not child care centers. The British government copped enormous abuse doing that with Northern Rock, where at least the taxpayer’s money stayed in Britain. Short of nationalizing strictly the Australian branches, I see no obvious government solution. And that solution has an unpleasant banana republic feel to it.

“Our branch is a money maker.” Niggling concern: Wonderful, if ABC was a cooperative. But it is a corporation.

The best solution appears to be to send ABC into immediate receivership and let the judge keep the branches running while the market is tested for bidders. This will permit time for due diligence and an opportunity to see what components of ABC are safe bets, what components are speculative but of interest to risk-seeking participants, and what is going to be mopped up by the government.

In any event, this disaster presents us with a whole new rationale for introducing finance into early learning curricula. Indeed, like the internet, children may soon be learning more about the ins and outs of finance without the need for parental encouragement.