In-depth Case Study: The Rise and Fall of Dick Smith Holdings

This report provides a comprehensive analysis of the Dick Smith Holdings case, examining the company's history, from its establishment by Dick Smith to its eventual liquidation. It delves into the key factors contributing to its failure, including poor inventory management, questionable financial practices, and ethical dilemmas involving Anchorage Capital Partners. The report assesses the valuation of Dick Smith, highlighting irregularities in financial reporting and the impact of debt. It further explores the role of various stakeholders, including investors, auditors, and management, in the company's downfall. The analysis also covers the acquisition of Dick Smith by Kogan.com and the implications of these events. Overall, the report offers a critical evaluation of the business decisions and external factors that led to the collapse of Dick Smith Holdings, providing valuable insights into corporate governance and financial management.

A case of Dick Smith Holdings
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Contents
Introduction......................................................................................................................................3
Brief Review of Dick Smith............................................................................................................3
Assessing the Valuation of Dick Smith...........................................................................................4
Anchorage Capital Partners and its Ethical Dilemma.....................................................................5
Conclusion.......................................................................................................................................7
References........................................................................................................................................8
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Introduction
DS Holdings is a public company based in Australia; the company is holding company of
Dick Smith Group that has 11 subsidiaries (Dick Smith- Annual Report, 2014). The business
organization operates in consumer electronic retail stores and also online consumer electronics
retails throughout Australia and New Zealand. The business organization has a reach up to 390
locations with a huge workforce (Chung, 2016). The company was owned by Woolworths from
1982 and later was acquired by Anchorage. The famous brand name Dick Smith was liquidized
in the year 2016 causing a massive loss to its investors and shareholders. However the company
marked profit in the year 2014-15 and has also provided huge amount of dividend to its
investors. The plan for expansion however caused hurdle and the company went on making
losses (Chung, 2016). The report tries to analyze the organization on a broader view. The
company was later purchased by Kogan.com and it is also speculated that to get listed in
Australian Stock Exchange the company has hyped the amount. The report aims to provide a
broader and wide view in relation to the company and factors that has played an important role in
its success. The various problems such as the ethical problem faced by the business organization
are also discussed in the report.
Brief Review of Dick Smith
In the year 1968, Dick Smith established a company which came to be known as Dick
Smith Company in Sydney, Australia. With a small initial capital, it started its business focusing
on installing car radios. The company gradually expanded its business by entering into different
products and established approximately 20 stores throughout Australia. The major shares of
Dick Smith were sold to Woolworths during 1980. The remaining shareholding was also owned
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by Woolworths. After getting major shares of the company Woolworths decided to restructure
the brand Dick Smith, but later it closed some 100 stores of the brand in Australia (Dick Smith-
Annual Report, 2014). This action of Woolworths also brought another surprise for Dick Smith.
Woolworths sold Dick Smith to Anchorage Capital Partner for $115 million (Anchorage Capital
Partners, 2017). In November 2012, the company appointed Nick Abboud as its chief executive.
After the appointment, Dick Smith got listed in the Australian Stock exchange in the year 2012,
which increased its net worth. nobody have ever realized that a company who went on setting
profits mark could collapse suddenly, however this happened, the company went into losses and
collapsed in the year 2016. The major reason behind its situation was the disputed
administration. The board of directors of the company and the investors didn’t reach at a point
of agreement so they chose different personalities each representing their groups. The board of
directors of the company appoints McGrath Nicol, while the investors appointed Ferrier
Hodgson as receiver. Today the brand Dick Smith is owned by Kogan.com, which sold its
product online. Kogan.com acquired the company in 2016 (West, 2016).
Assessing the Valuation of Dick Smith
The brand Dick Smith was acquired by Woolworths in the year 2016, it was being
purchased by Anchorage Capital Partners at an initial capital of $20 million. In the year 2013, the
shares of Dick Smith were floated in the Australian Stock Exchange. The Annual reports of the
company disclosed that in the previous one year the EBITDA of the brand Dick Smith got
increased which not a good sign for a healthy company. It has been assessed that the rise in
EBITDA was due to carelessness and irregularities in the management of inventory (Dick Smith-
Annual Report, 2014). The annual reports didn’t show the value for the assets which have been
write off. However the depreciation in the inventory was declared which was $58 million
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(Chung, 2016). Noncurrent provisions were written off with $58 million and all the required
was done carefully and judged as fair. In a short duration of 7 months the poor management of
the inventory lead to the further decline of the same, the inventory got declined by $171 million
in the year 2013. In the year 2014, the total depreciation was only $10 million because plants,
equipments and other assets were written down in the year 2013.
In addition to this, it has also been observed that loans and other borrowings of the Dick
Smith got increased in the year 2015, which was not reported in the balance sheet of the year
2014. The loans got increased by $70.5 million. This was quite unusual as the scrutiny of the
reports of the year 2015 showed everything normal and fair. At the same time, when the case of
the company was assessed quite closely, it was noticed that the debt ratio of the company was
67% which didn’t indicate a sound business practice (Walker, 2016). The percentage of debt
ratio i.e. 67% was quite high and termed risky for business operations.
In the year 2015, Dick Smith was not able to arrange its short term debts because of the
poor working capital. Apart from this, the inventory turnover ratio was also examined which
didn’t showed any significance increase in its profits from the year 2014. The whole business
operations and other functions of the company was mismanaged, the staff of the company was
also not working efficiently due to no long leaves were given to the employee in the year 2015,
this has laid a great impact on the efficiency and productivity of the employees (White, 2016).
The top level management of the company has also announced the breakdown in the prices of the
products of the company. Apart from this they also announced that the company has failed in its
operations in the year 2015. All these announcements lead to sudden decline in the prices of the
shares of the company in the Australian Stock Exchange. Thus whole of these processes has
severely impacted the productivity and efficiency of the company.
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When it comes to initial public offerings, DSE source has been added in the balance
sheets of the company so that manipulation can be done. Apart from this, the profits and losses
of the company were also not assessed properly. This shows that the people with higher ranks in
the top management didn’t paid attention to increase the performance of the company in the
market. It’s been reported that the accounts and finances of the company was not audited from
2010-2014 that created an atmosphere of mistrust in the investors and auditors (Ong and Janda,
2016). They developed a kind of suspicion regarding the authenticity of the accounts. All these
activities confronts that the company Dick Smith was not operating properly, it was not
following the accounting standards and has not recorded its financial statements from 2010-
2014.
Anchorage Capital Partners and its Ethical Dilemma
The company Anchorage Capital Partners is situated in Australia and is a private equity
firm, it majorly focuses on turnovers and revenue generation (Anchorage Capital Partner, 2016).
It has take over Dick Smith in the year 2012 from Woolworths and paid $115 million in total.
Dick Smith got listed in Australian Stock Exchange in the year 2012. However the company lost
the trust of investors and various stakeholders because it has presented documents and accounts
which were completely mismatched. One of them was the poor management of the inventory,
due to which the EBITDA was the company raised. In addition to this the debt of the company
was also increased and in lack of the short term debt, the top level management of the company
declared that the company is operating in losses. The company also failed to record their
financial statements from the last 4 years which developed mistrust among its stakeholders.
Anchorage capital partner is a profit making company, which increases the profit of shareholders
irrespective of their investment (Anchorage Capital Partner, 2016). The company is working not
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only for those which are listed in the stick exchange but also for the medium and small sized
companies. It uses equity shares as a means of operation.
In addition to this, it has been seen that such firms severely deducts the assets to show an
increment in the profit margin of the company. The top management was quite satisfied with the
performance of the Dick Smith and they were hoping for more investment in the company in
future. The financial statements presented by the company were not valid as several figures
mentioned in the books were not clear and their proper source was also missing. In addition to
this, the unaudited accounts of the company was also recovered which shows that the company
has not audited its accounts from 2010-2014 (Wright, 2016). All these activities show that
serious carelessness an irresponsible behavior of the management leads to the decline of the Dick
Smith. The financial statements showed by the company were a mere attempt to influence its
shareholders and investors.
Deloitte has played a significant role in the liquidation process of the Dick Smith. The
company claimed that the financial statements were prepared with utmost care and is also in
compliance with the accounting standards. However it was observed that the future prospects of
the company was not listed and previous operations were also not present. Deloitte was working
on the project as accounts auditor, after three days of proper observation it ceased the accounts of
Dick Smith. Deloitte observed that the top level management who have opted a clear
irresponsible behavior towards its shareholders and investors. The company has not made any
effort in increasing the sources of finances, apart from this they has also not showed their sources
in the financial statements (Boyd, 2016). They were trying to maintain the fake performance of
the company in the market so that in order to impress its stakeholders and investors. Deloitte
observed that the senior executives of the company has not laid down their future courses of
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action and the ways through which they can improve the goodwill and share prices of the
company. Deloitte ceased the subsidiaries of Dick Smith after properly analyzing the financial
statements of the company. In addition to this National Australian Bank and HSBC Bank of
Australia with major shareholders AMP was also ceased. Thus it is evident that the suspicion of
the shareholders and investors won against the fake reports and financial statements of the
company (The Dick Smith Group, 2016).
Conclusion
The report provides a wide spectrum in the case of Dick Smith, it is observed from the
report that mismanagement on every level was responsible for the liquidation of the Dick Smith.
Poor management and some false representation of financial accounts have laid to the decline of
the company in the year 2015. The company is presently operating under Kagon.com in which it
is selling its products online (Dick Smith- Annual Report, 2014). The sudden increase in the
share prices of the company leads to suspicion in the investors of the company. The sudden
increase of share prices from $115 million to $520 million in Australian Stock Exchange in a
year attracted the attention of the stakeholders. The major cause behind the loss of the company
was the poor management of the inventory and writing of assets from huge amount (The Dick
Smith Group, 2016). In addition to this, the company has also not audited its accounts for four
years. The financial statements and accounts books showed no proper sources of finance. In this
case, Deloitte played a quite significant role in assessing the operations and functions of the
company. In addition to this it also concluded that a company named Anchorage capital partner
was also present which deals in increasing the profits of the company by severely reducing its
assets. This is done so that shareholders can be impressed and they invest in the company. This is
done by the company to attract more finances. As per the annual financial reports the top level
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management was also involved in the misrepresentation of accounts. Thus it can be concluded
that various factors such as poor management of inventory and misleading facts were the major
causes behind the liquidation of the Dick Smith.
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References
Anchorage Capital Partner. 2016. Senate economics references committee inquiry in relation to
the causes and consequences of the collapse of listed retailers in Australia [Online] Available at:
https://www.google.de/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=5&cad=rja&uact=8&ved=0ahUKEwjP6NLAuPrVAh
VNL1AKHeOlC1oQFghCMAQ&url=http%3A%2F%2Fwww.aph.gov.au
%2FDocumentStore.ashx%3Fid%3Dfd49fc87-6bc3-460c-81fc-293c5a92edc5%26subId
%3D410892&usg=AFQjCNFNELD2mWphtkCrcXWvqTsSSTUMgg
Anchorage Capital Partners. 2017. [Online] Available at:
http://www.anchoragecapital.com.au/news/
Boyd, T. 2016. Dick Smith collapses a case study in electronics retailing. [Online] Available at:
http://www.afr.com/brand/chanticleer/dick-smith-collapse-a-case-study-in-electronics-retailing-
20160713-gq54s0#
Chung, J. 2016. Dick Smith blasts private equity firm behind retailer’s stock market float.
[Online] Available at: http://www.news.com.au/finance/business/retail/dick-smith-blasts-private-
equity-firm-behind-retailers-stock-market-float/news-story/
41a067495cc4bef5c8109bce7a97ae50
Dick Smith- Annual Report. 2014. [Online] Available at:
http://corpdocs.msci.com/Annual/ar_2014_317027.pdf
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Ong, T and Janda, M. 2016. Dick Smith enters receivership due to bad sales, banking woes.
[Online] Available at: http://www.abc.net.au/news/2016-01-05/dick-smith-enters-voluntary-
administration/7067798
The Dick Smith Group. 2016. [Online] Available at:
https://www.mcgrathnicol.com/app/uploads/DS-Australia-Report-to-Creditors-13-July-2016-
updated-15-July-2016.pdf
Walker, A. 2016. [Online] Available at: https://www.kotaku.com.au/2016/07/dick-smith-finally-
goes-into-liquidation/
White, A. 2016. [Online] Available at:
http://www.theaustralian.com.au/business/companies/dick-smith-goes-into-liquidation-
insolvency-under-probe/news-story/609593cad7d6d52c522de95cb8616e8a
Wright, H. 2016. [Online] Available at: https://channellife.com.au/story/dick-smith-creditors-
vote-liquidation-failed-company/
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