Listener 6 May, 1991.

Keywords: Business & Finance;

It is a pity that Yvonne van Dongen did not write more about Ron Brierley the stamp collector in her book, Brierley: The Man Behind the Corporate Legend. He took up stamps at an early age, trading them at school – “Buy, sell or exchange stamps in room four during interval” – as the Kiwi Stamp Company. He even sent out reminder notices of debts owing -the headmaster is said to have been furious. “That boy Brierley is using the institution for his commercial gain. This business has got to stop.”

If I judge the story right, Brierley in business was more or less a sophisticated stamp dealer. It went like this. Identify a company which is (like a packet of stamps) badly organised, with various assets (stamps) whose value is not fully recognised. Buy the packet, re-arrange the stamps, sell some to pay for the purchase and have a bit over to purchase the next packet which comes along.

A simple enough strategy. All it requires is that the owners of the packets of stamps do not appreciate the values they are sitting on. In the 1960s and !970s there were plenty such owners, and so Brierley Investments (BIL) was born.

I want to know more about Brierley’s stamp-collecting hobby. Did he just collect, or did he onsell? He probably sits on his best stamps. That was the record for BIL – Brierley would not sell some key assets. They had to be wrenched off him by his younger staff. Sitting on them posed a real problem in financial terms, because the cash flow was not realised.

Van Dongen describes the ingenious solution in her chapter on “Brierley’s Accounting”. It begins, “Accounting is probably the only profession in the world where the word ‘creative’ has pejorative connotations.” {Economics may come a close second.) She then describes various methods which had the effect of making the BIL accounts not what they superficially seemed. Brierley did nothing illegal. The law was not sufficiently precise to prevent his creativity bewildering many onlookers. For those stamps/assets which Bricrley chose not to sell, BIL included in it, profits the diffcrence between what it paid for an asset, and what it thought it was really worth. This “surplus on acquisition” did not itself generate cash, but appeared in the balance sheet as a revalued asset.

Cash was generated by selling some assets, borrowing against those which were not sold, or by selling more shares to the public. And, thus, BIL boomed through the 1970s and much of the 1980s.

Firms also generate cash from the profits assets make from rents, and trading. This does not seem to have been a key aspect of BI L, until the arrival of Brucc Hancox. Van Dongen says, “Brierley tended to ignore investments once he acquired them, and it showed. Most of BIL’s investments [in the late 1970s] were operating at a loss.” See what I mean about Brierlcy being a stamp collector? His concern was the market value of the assets, not the cash they generated. Ultimately, the two are closely related, but Brierly was lucky to be operating at a time when they were not.

Certainly BIL was lucky. Van Dongen reports some close shaves, but there is no detailed of just how close the shave was after the !987 sharemarket crash. BIL was incredibly fortunate to sell NZI just before the crash. And, even then, it was creative accounting and providence that got 81L through !988. By then Brierley was no longer in command of his ship, and the book’s concern is with him rather than the firm. There is a super book to be written about the latter too.

Because the firm fades out of the picture, Van Dongen does not tell the story of the ill-fated purchase of New Zealand News Ltd, that once-proud publishing company (including the Auck!and and Christchurch Stars). Almost every journalist I know remarks bitterly that the firm was brought to its knees by BIL management and asset-stripping.

Assel-stripping: that is the term that most often comes up when abusing Brierley. But, some caution should be used when applying it. Think of a firm in the 1960s sitting on a pile of valuable assets and getting an annual return of, say, one percent. Along comes BIL, buys the firm for a song, and converts the assets into real market uses returning !0 percent. That is assel-stripping, but is not the economy the better off for it? Don’t we want our assets to be productive, giving good returns?

Of course, re-organisation sometimes meant redundancies. In the 1960s, with low levels of unemployment, that was traumatic, but workers usually found new (and more productive) jobs. It is more difficult to justify redundancy in the 1980s and 1990s, because the economy is now distorted by a management regime worse than anything BIL did to NZ News.

But there is also less asset -stripping. Business managers have learnt that if they do not manage their stamp collections wisely, firms like BIL will swoop down, take their firms over, and they will be sacked. Brierley the predator probably lifted the quality of New Zealand management at least one whole class.

So I am not as critical of BIL on the asselstripping charge. Its real damage was the blazing of a trail for the Mickey Mouse operators that followed. They took creativity to the point of accounting. for assets which did not exist, and plundered cash from productive firms in an orgy of takeovers which destroyed so much of our economic base.

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INTRIGUING BRIERLEY

Footnote to Listener 26 September 1998 (Not published)

A recent article by the London Economist compared the Brierley share with the kiwi’s inability to fly. It is also a parable for the New Zealand economy.

Brierly’s big $1200m writedown of asset values, making a $900m loss for last year says just how deep the company is in trouble, as it desperately sells assets to rebalance its books.

At the time of the April coup the ratio of the value of each Brierley share was only 87 percent of the net tangible assets (NTA) backing the share. In the Business Roundtable analysis that means the company management was at least 13 percent inefficient. The dismissed Brierley chairman, Bob Matthew, was also chairman of the Business Roundtable.

The outgoing directors did very well. Matthew got a $750,000 redundancy payment, paid by ordinary shareholders, while the retiring Chief Executive Paul Collins got $4,000,000. (What would they have paid if the company had been efficient?) Workers redundant from restructuring will be lucky to get a hundredth of that, even if they are highly productive.

The coup replaced Matthew with Roger Douglas. The logic of a low shareprice-to-NTA ratio is to sell assets, so Douglas seems the right man for the job of downsizing the company. Recall that crass Australian joke of the 1980s. How do New Zealanders get to manage a small company? They start with a big one.

Brierley investors tell me the jokes are a lot better than the return they are getting, as the share price continues to trend downwards to near half the level it was at the time of the coup.