Entrepreneurs on the outer
Tuesday, 6 May 2008
Last Updated: Tuesday, 6 May 2008
By James Thomson
As the economy slows, boards and investors are shunning entrepreneurs with aggressive growth plans in favour of managers with more conservative strategies. SmartCompany explains how entrepreneurs need to adjust.
The market is turning against entrepreneurs. As the economy slows and the credit crunch bites, leaders with a focus on aggressive growth are being dumped or forced to re-think their strategy by worried boards and investors.
Destra founder Domenic Carosa has been dumped as chief executive. Investors have wiped 47% of the value of Gerry Harvey’s retail giant Harvey Norman and almost 30% of Kerry Stokes’ Seven Network since the start of the year.
Pub baron Tom Hedley is undertaking a “strategic review” of his hotel property trust after receiving a hammering from investors. Richard Webb, a co-founder of digital media group BlueFreeway, recently resigned as director citing differences with the board.
So why are entrepreneurs on the outer?
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Perhaps the person best placed to answer that is Eddy Groves, chief executive of embattled child-care company ABC Learning Centres, who summed it up best when he said: “The world has changed.”
Groves is the perfect example of this trend. Less than a year ago, ABC was a market darling. It’s shares were trading at around $8, the company had a market capitalisation of more than $3 billion and Groves was expanding into the United States and Britain.
Then, in late 2007, the world changed. The sub-prime crisis in America developed into a full-blown credit crisis and companies with debt found themselves under scrutiny. ABC managed to refinance its $1.43 billion debt facility, but that did not stop investors selling the stock. Things came to a head in early February, when rumours that ABC had breached its debt covenants spread throughout the market.
The rumours weren’t true, but investors didn’t stick around to find out. ABC Learning shares fell $3.74 to $1.15 in two days. Groves and his wife were then forced to sell their shareholdings – once worth a combined $300 million – to meet margin calls.
In the last month, Groves has been forced to sell part of ABC’s US business to pay down debt. There have been wholesale management and board changes and new chairman David Ryan has effectively clipped Groves’ wings, pushing him to focus on the company’s core Australian business and wind back ABC’s aggressive overseas expansion strategy.
It’s been a personally humbling fall for Groves, who has been left with a stake in ABC worth less than $10,000. Admirably, he’s been philosophical about the experience and brutally honest about the lessons he’s learnt. "Companies were rewarded 12 months ago for growth, and clearly companies are rewarded right now for being prudent in their capital management and capital structure," he said on a recent conference call. "As an entrepreneur my focus was on growth. When you see it change in the world markets like we've seen in such a sharp, timely fashion, you have to adapt.”
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