JOHANNESBURG - The Sagarmatha spat is ongoing, but I think that realism will eventually prevail. A company's development over the long-term involves six different phases and the owners and management of almost all companies can actually plot their companies in the various stages.
The first stage is the start-up stage where an idea turns into a business. This fledgling stage involves development of intellectual capital.
The risk of failure during this phase is very high and the buy-in by outside investors and even financiers is very limited, resulting in significant seed capital from the entrepreneurs or developers of the ideas themselves.
The second phase of a company's development is where the idea has successfully developed in a success recipe with the prospect of future profitability emerging. In this phase the financial environment may still be tough, but investors and other financiers are more willing to commit funds, especially if they see long-term potential in the product/s of the company.
During this phase the prices paid by the new investors or shareholders will be higher than the new net asset value of the company after the cash proceeds of the issue of shares are accounted for.
It is also obvious that the equity holdings of the entrepreneurs, or original shareholders, will also be valued at the same prices paid by the new investors.
This is part of the first unlocking of value in the company development as the entrepreneurs are rewarded for their efforts in moving the company from an idea to a potential successful recipe. This phase is also characterised by initial losses, due to substantial investments in the development of the product/s and inventories.
The third phase is where the company experiences solid above-average growth by focusing on its core business. High earnings multiples reflect the growth prospects as more and more investors want to share in the company's success.
The fourth phase is where the company’s balance sheet is growing stronger and management and the owners want to diversify into other fields. The company, therefore, acquires growth via takeovers to try to sustain high levels of profit growth.
Initially high earnings multiples reflect the growth prospects, but weaken as the market starts to worry about the now conglomerate losing focus.
The fifth phase is when growth starts to slow and profits tend to disappoint on the downside. Earnings multiples fall and the company's share price moves to the net asset value of the company and even below that.
The sixth phase is when declining profits and losses force the company to desperate corporate actions such as selling off or closing loss-making businesses or placing them under business rescue or even file for bankruptcy.
But a refocus of the company is paramount and new ideas are necessary to put the company on a new growth path.
Naspers was an excellent example of the development phases of a company. The company found itself in the sixth phase, where it was in need of a solid new growth path and to keep abreast with the changing technologies and future consumer spending trends.
In 2001 Naspers invested heavily in Tencent, thereby entering the first or new phase of the company's development.
In 2001 and 2002 the share price fell to a discount to the company's net asset value. It took nearly five years for its idea to become a success recipe and the company now finds itself in the focused growth stage.
Another example of a company development over the long-term is PSG. I fondly remember when Jannie Mouton came to see me in my capacity as senior portfolio manager at Sanlam in 1996 after he acquired PAG.
He wanted to place shares to enter the financial services industry and he had my commitment on the shares for one of the Sanlam portfolios under my management. His idea became a success recipe and the rest is history as the company has been on a solid growth path over the past 20 years.
The Sagarmatha spat - yes, the company is still at the idea phase and the risk is high, especially because it is moving into as some would say, uncharted territory. The price - all I can say is that those who initially subscribed for the share have probably done their homework, bought the idea and probably think it would be a success recipe. As in the case of Jannie Mouton and Naspers with Tencent - give the newcomers a chance. It is your prerogative to decide whether you want to invest or not.
Ryk De Klerk is an independent analyst.
- BUSINESS REPORT