Dick Smith Holdings Financial Distress

This assignment delves into the financial woes of Dick Smith Holdings Limited, utilizing their annual reports (2015) to dissect their financial performance. While company presentations portrayed a seemingly stable picture, a critical analysis of their financial statements unveils a deceptive reality. The assignment investigates discrepancies between presented financials and actual company health, exploring the underlying factors that contributed to Dick Smith's downfall.

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BUSINESS FINANCE AND QUANTITATIVE METHODS
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Introduction
Dick Smith Holdings Limited
This particular essay attempts to heighten a brief summary of the ownership history of Dick
Smith Holdings Limited. It also incorporates the critical evaluation of the valuation of the
company when it was acquired by Anchorage Capital Partners and its Initial Public Offer
(IPO) amount. The essay also attempts to assess the ethical dilemmas that face Anchorage
Capital Partners regarding the floating of the company and the senior executives and directors
of Dick Smith Holdings Limited in respect to its financial reports made in the 2014/2015
accounts and reports. Dick Smith Holdings Limited was an Australian wide-chain of retail
stores domiciled in Sydney, Australia and was founded by Dick Smith in 1968 (Dick Smith
Holdings Limited annual reports, 2015). The company basically sold consumer electronics
goods, electronic project kits and hobbyist electronic components for its customers in
Australia, New Zealand and other parts of the world. The company expanded effectively into
New Zealand and unsuccessful in some other nations globally (Anderson, Sweeney,
Williams, Camm, and Cochran, 2012). Dick Smith Holdings Limited expanded to be a
leading business in Australia that ensured that almost every electronic enthusiastic in the
country has one of its catalogs and thus enhanced profits. In the FY2012, Dick Smith
Holdings Limited was formerly acquired by Anchorage Capital Partners at an opening cash
payment of AU$20 Million and the total ultimate cost of some AU$115 Million.
Brief summary of the ownership history of the Dick Smith Holdings Limited
Dick Smith Holdings Limited was initiated in 1968 by Dick Smith. The company started as
small rented buildings in a car park in the Sydney area of Neutral Bay with the total capital of
just AU$610 and focused mostly on servicing and installing car radios (Puncheva, and
Michelotti, 2014). Due to the company rapid increase and success in the business sector, the
company moved to a bigger premises so as to enhance its business operations in the country.
The company profited mostly from CB Radio business, and by the end of ten years, it had
branches in all the mainland regions in the country. Dick Smith Holdings Limited was owned
by Dick Smith and his wife until they basically sold the majority of shares to Woolworth
Limited in 1982 (Clements, 2015). The company expanded its diverse range of products
especially in between 1970 and 1980 and basically stocked products such as TV receiving
stations and Heathkit electronic kits because of the waning interest rates. The business had
expanded to about 20 stores and the initiator together with his wife sold 60% of the business
shares to Woolworth Limited and the remaining 40% ownership was completed in 1982.
Dick Smith Holdings Limited continued to increase to its setup of small main street stores in

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the regional and suburbs towns across Australia. The company later established Dick Smith
Electronic Powerhouse which was a superstore across the east coast of Australia that carried
an extensive range of products in the audiovisual, computing and armature radio areas to
enhance its productions. In the FY2008, following Woolworth Limited review of its
consumer electronics division, Dick Smith Electronic Powerhouse revamped its flagship store
as a notion to Dick Smith Technology branding (Lau, 2016). In 2009, Woolworth Company
Limited confirmed the end of the Dick Smith Electronic Powerhouse as progressively phased
out over the subsequent three years as part of its division. Dick Smith Electronic Powerhouse
ended its operations in 2016 with several years of Anchorage Capital Partners acquisition.
Critical evaluation of the valuation of the company when it was acquired by Anchorage
Capital Partners and its Initial Public Offer (IPO)
Dick Smith Holdings Limited had been owned by Woolworth Limited since the early 1980’s,
until early in 2012 when Woolworth Limited announced that the business was
underperforming and non-core and instigated a sale process (Schauten, Dijk, and Waal,
2016). After a period of distinctiveness, in November 2012 Anchorage Capital Partner
acquired the company for AU$20 Million. Anchorage Capital Partners announced in FY2012
that it had entered into an agreement with Woolworth Company Limited to acquire 100% of
Dick Smith Electronics with the entire transaction anticipated to be completed in November
2012. Dick Smith Electronics was an iconic Australian consumer electronics company that
became part of Woolworth Company Limited in 1980 (Essayyad, 2012). The deal had been
conventionally structured so that Dick Smith Holdings Limited will emerge from the sale
supported by a strong statement of financial position with considerable asset backing and no
core liabilities. As part of the acquisition, Anchorage Capital Partners would also support the
operations by offering additional guarantees and cash investment. As at FY2012, Dick Smith
Holdings Limited reported sales worth AU$1.6 Billion. Anchorage Capital Partners paid as
much as AU$115 Million for Dick Smith Holdings Limited because it was agreed that an
approximately AU$20 Million would be paid up front. As at FY2012, Dick Smith Holdings
Limited was basically valued at AU$420 Million (Dias, and Saizarbitoria, 2016). The
company was heavily criticized because it was cheaply sold because the company could not
make sufficient profits needed by the company. Woolworth Company Limited having
struggled to find a fit for the electronics retailer from its acquisition in 1980, the company
was keen to offloading the non-core business division for approximately AU$115 Million.
Since Anchorage Capital Partners is a privately owned institution, the price details of the
newly acquired asset, the company shares are not routinely made public. When Dick Smith

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Holdings Limited was basically acquired by Anchorage Capital Partners, the company had
less value and was basically valued at AU$20, and its Initial Public Offer (IPO) was at
AU$2.20 per share. Following the company acquisition, Anchorage Capital Partners
restructured its business, and the retailer was mainly listed on the shares market for AU$2.20
for each share raising about AU$345 Million which was more than five times its initial
purchase price (Brigham, and Houston, 2012). Anchorage Capital Partners is alleged to have
marked down a substantial value of Dick Smith inventories to sell it at a discount so as to
report an attractive incomes data. These particular adjustments did not touch the new Dick
Smith Company loss and profit reports, and at the lash of the pen, the company had made or
avoided about AU$120 Million in future pre-tax profit. The company financial statements as
at 2012 indicated that Dick Smith Holdings Limited had stock that cost AU$371 Million but
had been written-down to AU$312 Million (Essayyad, 2014). Consecutively, as at June 2013,
the company inventory had decreased to AU$171 Million which basically pointed out an
apparent sale of the enterprise. In this case, the reduction in the company inventory produced
a massive AU$140 Million profits to the company operating cash flows as a result of selling
most of the inventory, but there was no restocking. Due to this particular markdown of most
of Dick Smith Holdings Limited inventory and other non-current assets, the company
valuation had been decreased tremendously that enabled Anchorage Capital Partners to
acquire the new corporation quickly (Oakshott, 2012).
An assessment of the ethical dilemmas that faces Anchorage Capital Partners in respect
of the floating of the business
Floating of the business shares in the market is usually the duty of management. Floating of
shares often enables the company to raise more capital to fund its diverse activities such as
expansion. The management of Anchorage Capital Partners basically faces diverse ethical
dilemmas when floating of shares because of the negative critics that they face as a result of
Dick Smith Holdings Limited acquisition in 2012. The company management is criticized of
decreasing the company value so as to enrich themselves which is considered to be unethical
among the company operations (Iyakaremye, 2015). Anchorage Capital Partners are faced
with the aspect of trust and confidence from shareholders in respect to floating of its shares
because they feel less secured from diverse operations of the company. The company
management floated the electronics chains that bear the name of Dick Smith which was
considered to lack decency and morality and that the managers were faced with a lawsuit
with the aim to refund for the clients that were left holding worthless gift cards. Dick Smith
Holdings Limited was initially sold off to Anchorage Capital Partners for about AU$115

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Million, and the privately owned firm basically floated the business just after fifteen months
later for more than five times its initial costs. This aspect was considered to be unethical
because the amount paid for the company was too low. There can be absolutely no doubt that
the Anchorage Capital Partners Limited managers knew that the things were not doing the
right thing to its customers. Investors lost their life savings invested in the company while the
company directors walked away with several million (Gendron, and Smith, 2015). The
Anchorage Capital Partners misled the directors of Dick Smith Holdings Limited that led to
their acquisition at a little value whereas the company management made diverse profits that
floated an enormous amount of shares that was considered to be five times the initial value of
Dick Smith Holdings Limited.
An assessment of the ethical dilemmas that faces the senior executives and directors of
Dick Smith Holdings Limited with respect to its financial reports made in the 2014/2015
accounts and reports
According to the financial reports and accounts for FY2014/15, the management board of
Dick Smith Holdings Limited duped the firm shareholder and investors using the name of
Dick Smith to hide their dishonesty (Wood, 2011). They fooled the company investors and
shareholders that the company was making profits and that the company financial students
and reports demonstrated a clear picture of the company financial position and in actual
aspects, the company financial statements were deceiving. This action was basically unethical
and unprofessional because they also fooled financial professionals and banks to push for the
company sale (Essayyad, 2012). Another ethical problem that faces the directors and
executive management is that according to the FY2014/15 accounts and reports, there was no
indication that Dick Smith Holdings Limited will exit the business. According to the reports,
the managers rewarded themselves with huge bonuses and salaries that resulted to the
company liquation. The company went into receivership five months after the release of the
financial statements of 2014/2015 which indicated that the company would continue its
operations for a foreseeable future but in real aspect, the company had diverse problems. Due
to huge salaries by the directors that resulted in little profits, the company shares were
suspended from trading via the ASX. Senior executives and directors of Dick Smith Holdings
Limited were blamed for low sales that led to low profits and hence the closure of the
business. Anchorage Capital Partners had altered the true and fair value and projections of the
company when it registered the company of the Australia Stock Exchange in the FY2013
(Kenney, Cava, and Rodgers, 2016). Basically, it a company cannot be valued at AU$90
Million in FY2012 by Woolworth Limited, AU$500 Million in 2013 and then the company

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goes into receivership two years later. In this case, the company management deceived the
company shareholders and investors. The senior executives and directors of Dick Smith
Holdings Limited knew of inventory problems that led to most of the company stocks written
off. The management team basically deceived the shareholders, and they were treated poorly,
and they had a right to correct information to make informed decisions on the Australian
share market. The senior executives and directors of Dick Smith Holdings Limited did not
offer viable information to its investors and shareholders that led to the company closure
(Essayyad, 2008). This is because it is believed that the managers had concrete knowledge of
what was happening with the company and failed to advise on the shareholders on the
possible approaches to save the company from downfall.
Conclusion
Proper and ethical management of diverse companies globally is usually the core aspect that
enhances the company operations. A company that has better management team usually
generate sufficient profits for its investors and shareholders because they ensure that there is
continuous production. Dick Smith Holdings Limited sold consumer electronics goods,
electronic project kits and hobbyist electronic components for its customers in Australia, New
Zealand and other parts of the world. The company was officially closed in 2016 because the
company management did not disclose all the problems that hindered the operations of the
enterprise. The company management fooled the company investors and shareholders that the
company was making profits and that the corporation financial students and reports
demonstrated a clear picture of the company financial position and in real aspects, the
company financial statements were deceiving.

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