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I've never held a position long or short in Quindell.. I did work in insurance for 25 years & am sure that there is the potential to significantly improve the claims handling process - but should stress that insurers are constantly trying to do this. In my experience, outsourcing the claims process is rather hit & miss in terms of value to the insurer and therefore the customer. It's possible that Quindell have managed to bring together a wider range of services than their competitors.
Heisenberg's post is a superb dissection of 2 key acquisitions of Quindell's. Unless there is a substantial & lucid response from Quindell I'll not be buying into the story.
To be honest, I couldn't follow any of this article.
Any chance you could post a summary, in plain English, of the key points?
P.
As far as I understand, he means to say "them numbers, they don't add up". Hope this helps :-)
(the main methodology seems to be comparing the price paid/booked by the company for subsidiaries they bought, with whatever numbers he could get for the subsidiaries' underlying business, extrapolating changes based on what happens to comparable businesses in the normal world.)
Paul,
I believe the OP is not giving any conclusions which I agree makes the article more difficult to read. However my understanding is that the gist is by using the amounts paid by Quindell for stakes in these businesses at different points in time we can infer the valuations on those businesses that Quindell put on them at those times. We can then compare the known revenues of those businesses to get a kind of P/S ratio for each business. Then using our own experience of what P/S we consider reasonable we can decide whether we think that Quindell got a good deal on these acquisitions or not and how much we should value these parts of Quindell on a sum of parts valuation.
HTH,
Danger
I have a question vaguely related to this post, if anyone can help:
When a company makes acquisitions using its shares as currency and imposing a lock in period - how is compliance with the lock in monitored/policed? For example, are the shares are held in escrow until the lock in period expires and then released to the vendor?
Sticking to the Facts
This whole episode has clearly brought out many emotions but there is a need to keep to the facts. Many people may not like the sensationalist language, conclusions and tactics of GCR but they did at least provide a long list of references so anyone can review the original data sources for themselves.
A number of message boards and social media sources have also been claiming that Daniel Yu, who seems to be the individual behind GCR, is a “convicted short-seller”, has “convictions for fraud” etc. Helpfully, several reference the following link on which this assertion seems to be based:
http://www.sec.gov.ph/notices/advisory/CRIMINAL%20ACTIONS.pdf
It only takes a second to notice that this is for the Securities and Exchange Commission - Republic of the Philippines. The actual case referenced, in which a Daniel Yuis noted, is for Capitol Plans Inc and relates to the selling of a certain type of life plan by this firm without the required permit for that particular plan (technical breach of the rules?). This all took place in the Republic of the Philippines. In any event, this has nothing to do with short selling.
• Has Daniel Yu of GCR had a previous career selling life plans in the Republic of the Philippines?
I have seen no evidence he has and on the balance of probabilities it seems quite unlikely this is the individual / activist investor that apparently resides in the US.
By the way if you type Daniel Yu into google it produces a lot of people with that name (including a guy who worked on Shrek 2, Kung Fu Panda and Madagascar …) – are they all linked to GCR or only the ones with a conviction?
Excellent article for any private investor. And for Paul Scott, my synopsis of the article is this:
Quindell's share price has broadly increased in %age terms from the time of their first investments in Ingenie and Himex by an amount equivilant to the increase in valuations of both of these companies that Quindell has placed on them. Both these companies have not issued consolidated accounts to 'prove' their valuations, which have both shown extremely rapid rises. It is Quindell's valuation, not the markets.
GCR says these valuations are not right. Quindell stands by them. We will all know who is right when we see the current years revenues and free cash flow.
I think the questions that Heisenberg raises here is a little bit more subtle than is Quindell worth the sum of it's parts. At the risk of confusing things further here's an (admittedly imperfect) analogy:
Suppose I have a friend who makes furniture and I want to buy a cabinet from them, what price should I pay? Well we can discuss what we think it's worth and come to an agreement of the market value for such an item. If we are both happy with the price then the transaction goes ahead.
Now suppose instead of buying the cabinet for myself I have been paid by a client to source a cabinet for them. If I choose to pay my friend significantly more than I would pay for the cabinet myself then I am failing in my duty to my client by favouring my friend.
Now suppose that when my friend set up his furniture business I lent him all the tools and bought him the wood and trained him in furniture making. I would expect to pay a lower price for the cabinet given my help and input into creating it - in fact the price I would expect to pay him would simply be a fair price for his labour since all the margin should go to the provider of the capital i.e. me.
So you see that when buying a company from a friend or former colleague in a related industry or where I already have a business relationship with them there is the potential for a conflict of interest. In these cases I should make every attempt to show that my decisions are correctly aligned.
When buying the cabinet for a client I would:
a) Disclose that I've chosen my friend as a supplier.
b) Show that the price I paid is similar to items of similar quality etc.
c) If my client has provided tools or materials I would explain how these have been used to obtain a reduced price for the client.
So Heisenberg's questions really just come down to clarifying has there been sufficient disclosure to shareholders for them to check that potential conflicts of interest have been managed well. He makes no conclusion himself but gives the shareholder the sort of questions they should be asking to make these sort of assessments.
For a guy who allegedly doesn't hold a position in QPP, that's an awful lot of work just to provide (for free) his very detailed view. Almost certainly written by EK, TW or one of the Batcrew.
I still don't see what QPP are supposed to have done that is wrong. Acquisitions using your stock is certainly not a new or wrong way of growing a business. In addition, acquiring a private business does not require you to separately disclose the financial accounts of those businesses. Trying to work out, down to the penny, whether the market is valuing the combined transactions efficiently is also an impossible and fruitless exercise. The combination of several businesses is clearly worth more the the sum of the individual parts. That is the whole point of Quindell, it's an end to end solution in insurance. A business is worth what the highest bidder thinks it's worth.
I could refer you back to thousands of companies on the stock market that through history and still today are valued at huge multiples of revenues and some of which are loss-making. The stock market is a discounting mechanism.
Inferring that because Quindell is transacting with previously known associates, that they are not acting in the best interest of shareholders is ridiculous. Again, I can think of numerous 'successful' businessmen, who failed multiple times before they became a success. That is what entrepreneurs do and Rob Terry is certainly an Entrepreneur. High profile early-stage failures would of course include the likes of Ålan Sugar, Richard Branson, Philip Green etc, who blew up in several ventures before finding the right business opportunity. You'd almost rather back people who have gone through a difficult time because they are unlikely to make the same mistakes again. They tend to keep the same business associates with them throughout their careers, which would make sense as employing people you know and trust well is far easier than taking on board unknown personalities.
In addition, as regards conflict of interest, that is the whole idea of independent non-executive directors (board members). They are there to ensure transactions are done in the broader interest of shareholders and to evaluate other potentially substantial company events such as a takeover approach to the company, without being involved in the day-to-day running of the company. Importantly, if you look at the recent Director purchases of Quindell's stock, they are precisely the non-execs I describe above.
Every company has different accounting practices and disclosures. Look at the aerospace industry. Some (blue-chip) companies like Rolls Royce, choose to book revenues for maintenance contracts upfront. Others are more conservative and book as a percentage of completion. Neither is wrong, but both would produce different EPS numbers.
It is over time and through the delivery of earnings and dividends to shareholders that we correctly value companies. We shall see.
Please feel free to add some data or financials into your next reply and I can take it from there
Anyone interested in Quindell should look at Note 10 from today's interims, in particular the figure of £68,780k under "Consideration Shares (389,972,171)", and compare this to Note 38 from the 2013 Annual Report.
Note 38 shows the number of shares issued - 325,000,000 - and issue price per share - 39.625p - for the increase in the Himex shareholding by 66% to circa 85%.
325m shares multiplied by 39.625p is £128.8m - this is significantly higher than the share consideration of £68,708k set out in today's interims under Note 10. The discount of £4,205,000 set out in Note 10 does not explain this gap.
Could it be the difference in timing between the acquisition date of 4 February and the date the shares were issued of 17 February? (even though Note 38 clearly shows the issue price as 39.625p). The share price on 4 February was 31.125p (according to Note 38, for the Ingenie deal). Multiplying this by 325m is still much higher than £72.9m (taking the £68,780k and adding back the discount of £4,205k). This doesn't seem to help either.
In summary, for Himex there appears to be 389m shares issued which equated to c. £135.7m of consideration - however the gross shares consideration figure in Note 10 today is £72.9m. Clearly there must be some other undisclosed adjustment for Himex to explain the difference of c. £62.8m.
By the way the shares difference between the 389,972,171 and 325,000,000 is due to the initial stake acquired in Himex in July 2013. This also explains why the cash figure provided today is £24,807k as this is the cash consideration in both the July 2013 and February 2014 transactions.
As an aside if the above calculations are repeated for the "Other acquisitions" under Note 10 where share consideration is involved and compare this to Note 38 in the Annual Report, these work out and the results match.
Never understood this either:
"Both the Himex investment and ingenie acquisition have been completed at favourable valuations compared with current and historic share performance due to belief in the underlying value of Quindell by the independent shareholders in these businesses."
i.e. have the intrinsic valuations of these businesses all of a sudden gone down because the Quindell share price has also gone down? Either a business is fundamentally worth a certain amount or it isn't - or perhaps the sellers of these business have been extremely generous in lowering their exit prices in sympathy, or maybe previous valuations were simply way too high.