The mere notion of bidding for in-trouble rival iSoft must be satisfying to the board of Australia’s IBA Health given the previous in the relationship.

In 2004 IBA and Torex Chief Executive Chris Moore appeared to have a plan to work together to open European markets for IBA in exchange for some of IBA’s UK assets. Mr Moore, currently assisting the Serious Fraud Office with their inquiries into Torex’s novel accounting methods, decided merging some of his empire with iSoft - thus handing them various Torex assets in Australia which competed directly against IBA - was a better idea. With fingers in competing pies, both of which he helped cook, one might think “conflict of interest”. Mr Moore would disagree.

Fast forward to 2007 and IBA’s busy (and apparently resident) investment banker is putting together the imaginative finance to consolidate its home base with the aforementioned iSoft/Torex assets as well as expand into the UK via iSoft’s large, mature and eminently exploitable (upgrades, service and support) install base. Coupled with IBA’s promising operations and expansion plans in the mid-east, South Africa and the Asia-pacific basin the combination is attractive.

However, IBA is only a £200m market capped company with forecast revenues to end June 2007 of £30m. IBA has, therefore, to find its own total worth again to take iSoft on board. That means a paper deal. Setting aside the bulk of academic studies concluding that paper mergers under perform cash offers by a long shot, it is the significant integration risks that the relatively poor and untested-to-this-magnitude IBA would find on its plate that concern. All in all, little margin is left for error given the resources the firm can marshal to the cause.

Conceivably, IBA might sell part of iSoft’s continental European operations to help the re-financing negotiations it would have to enter into to fund the new beast. These are probably worth (gross) between £45m and £55m on the iSoft balance sheet (they are not broken out). Whether the opportunity cost of that sale would be less than the promises of IBA’s nascent Malaysian, Chinese et al activities is an interesting question: but to be compelled to sell any strong, established operational arm would be a shame.

For all its trouble, iSoft is still going to turnover circa £175m to end April 2007. What it is missing is cheap working capital of £40m to £50m per year for three years in order to unwind the obligations previous management took on for upfront payments that they subsequently recognised as revenue (wrongly) and spent. This requirement equates to a bridging loan; and post-bridge what materialises is a market leading UK asset base, robust German and Dutch operations and something small but attractive in Spain.

It would be a surprising missed chance for the likes of deeper-pocketed Cerner, Mckesson and Philips (and even, dare it be thought, a dark horse like SAP) if they did not extend hitherto short arms and make the deal instead. Do they really want a new ultra-competitive Australian competitor on their doorsteps?

World Cup Cricket viewing from 13 March may help them decide.

The writer holds iSoft equity.

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It was not obvious walking around it on a recent weekend that Turin is an appendage of the supposed economic sick-patient (recent strong Q4 GDP data notwithstanding) that is Italy. It looks a thriving (if the number of top-end luxury kitchen and furniture shops is anything to go by), handsome city. And clean - which is a sharp contrast to this scribe’s last visit in 1990 when it was a grimy World Cup football venue.

17 years ago Turin impressed this fan with its carefree parking style, hard-bargaining laundry ladies, brazen transvestites and friendly pick-up games of footee in Parco Valentino. There was also the unexpectedly difficult matter of finding accommodation when one of your group was black: guest books were shut in our faces; and the few black faces on the streets were Senegalese selling leather goods on the pavements.

Today, the African hawkers are still there; and fellow immigrants have arrived in numbers to the same (though less now) run-down neighbourhood between Porta Nuova and the Po where this scribe and friends eventually holed up with partying (until the last 16) Brazilian fans in 1990. How smoothly this social transition has gone, your scribe could not say. But the demographic shift appears substantially greater than that caused by the immigrant numbers attracted in prior decades to man Turin's factories.

The daily market, for example, in Piazza della Repubblica (by far the largest this tourist has seen anywhere) is a testament to the significant immigrant presence and their economic impact. Halal butchers, Chinese merchants of electronic goods and African clothing vendors are as numerous, it seemed, as the Italian farmers and fishmongers.

Historical Turin remains impressive and quite apart from this world: the Mole Antonelliana, Palazzo Madama (where the Sardinian standard bearer pictured stands) and as many stunning churches, chapels, piazzas and museums as one might care to wander into. Yet the over-arching parting impression of Torino was of the unexpected economic energy that a controversial aspect of contemporary globalisation has shot through the classical Piedmont city.

A Risorgimento Economico perhaps.

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UK retail sales cycle

Friday, February 16, 2007 | | 1 comments »


Headline writers had a shock-and-amaze-on-every-page item with yesterday’s poorer than expected UK January retail sales data. Yet a graph on the website of the Office for National Statistics, whose data it is, belied the drama.

Exhibit 1: UK Retail Sales growth

Seasonality is at play; and the trend does not look bad.

However, a picture of a longer run of data (excluding food) with a couple of additional data items is less sanguine.

Exhibit 2: UK non-food retail sales, mortgage rates and real disposable income 1989-2007 (click to enlarge)


The last data point is noteworthy in that quarterly non-food retail sales growth has not, on this graph’s timescale, ever been so robust whilst real disposable income is at what appears to be a trough-level low: quarterly retail sales growth is, in fact, comfortably and curiously above its 4 period average despite the trend in disposable income.

Looking ahead, energy bills are forecast to drop and recent pay settlements have been generous. Real disposable income rises on this scenario. But with recent peak-to-trough retail sales cycles running at 15 to 18 months such a crutch might be short-lived: the last trough was in Q2 2005.

The bidding up of sterling bonds looks about right.

Sources: Office for National Statistics; Her Majesty's Treasury Pocket Databank, 13/02/2007

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When the auditor feels obliged to put ink to paper in order to transmit concerns to his client's board regarding the probity of the accounts it is frequently the Start of Something Unpleasant. This is the there's-never-but-one-cockroach rule.

BDO Stoy Hayward wrote to the Torex board with such worries in mind days after the interims. They took the chance to also pass along the confidence inspiring news that they were “continuing to give due consideration to our position as group auditors”.

Ass covering manifests itself in numerous guises. Unfortunately for BDO this is one of them. If fraud has occurred it may turn out that they were duped; they may have gone native; or otherwise been kept ignorant. But the style and magnitude of alleged accounting fraud is such that it is prima facie difficult to accept it went wholly undetected by the gamekeepers over a period during which Torex was acquiring businesses and debt frenetically. However, it is always possible that this may still prove to be the case.

Auditors have a thankless job. They show up, take sample transactions, ask for year-over-year data, pose uninformed (usually) questions regarding variances and are regarded (frequently) by their clients as supremely overpaid pains (“£120,000 for fees? Man, I just met you”). Auditors know all of this. They also know they don’t want to lose clients by being (or at least appearing) too strict. It is an often boring yet legally precarious existence from which many audit staff, understandable, turn poacher.

But BDO may not deserve bad press. From their website, a nice graphic and encouraging blurb:

Graphic refers to reported UK business fraud
We have the experience, skills and discretion needed to uncover fraud and protect your business…The cases we have worked on range from a few thousand pounds to multi-million pound international frauds…Our dedicated team of investigators are highly trained interviewers who can think laterally and ferret out the truth.
"Think laterally and ferret out the truth" – nice phrasing and a cutesy USP in the circumstances. But can they do it in a timely manner?

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One of the side effects of corporate compliance dictates is that they may leave investors under the impression that are protected from malfeasance on the part of company directors.

However, the sad fact is that where an intent exists amongst controlling officers to enrich themselves wrongfully neither Sarbanes-Oxley, the Cadbury Code nor any other compliance structure is likely to save the trusting outside investor who, in the words of the late Richard Pryor, is likely to be taken hook, line and sinker...on dry land.

Initially this intent might inspire a selfish but legal attempt to mitigate the risks of financial downside to their often large insider equity holdings or their own possible poor job performance (somewhat self-fulfilling once said intent appears). Thus are spawned generous consulting roles, supine boards, interestingly conceived sign-on and exit packages, jobs for the boys and so forth. Any polite investor who has attempted to test or question the value of such items at an AGM or by phone and letter can attest to the difficulty and outright aggression sometimes encountered.

The story of Torex Retail plc is currently in full sprint in the UK. With possibly slightly more knowledge of the details than most it is tempting to wonder if this case fits the cynical view outlined above. Especially when one of the pseudo-accused held (until 3 hours ago) a non-executive directorship at one of this scribe’s holdings because, a reasonable deduction maintains, he knew the ex-Chief Exec very, very well. Non-execs are, of course, supposed to protect the shareholdi ignoranti from the potential selfishness that over-collegiality in the boardroom can bring. A guy whose home is raided by the Serious Fraud Office seems either unlucky or an unsuitable candidate for the role.

Of course, there is slightly more to it than that and it is all interesting. Amongst these aspects is a small Enron link with (probably) a big behavioural impact on one of the key players; a somewhat larger link to the lesser known circus that is iSoft plc; alleged physical intimidation by heavies involving a street chase; alleged threats of reputational ruin; alleged keeping of twin sets of books; and alleged insider dealing. And that is the short list – but it would be rash to prejudice what is certain to be a wider-reaching denouement.

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