Bruce Whitfield
When interviewed on Classic Business shortly after taking over as Specialised Outsourcing (Outsors) chief executive in March last year, Dave McLean was on top form.
Upbeat about the firm’s prospects and promising to continue previous management’s policy of promptly releasing quarterly results, he vowed to continue the firm’s rapid growth strategy and insisted its aggressive dividend policy would continue. He said the company had matured; it was moving away from an owner/manager culture and was going to deliver great returns to investors.
On March 10 last year, McLean forecast earnings growth as high as 60% for that financial year. “That’s our forecast, remembering we are coming off a high base.” The high base was R157-million.
When the news broke on March 13 that Greg Morris, the man who had really run the business for Dave King, had resigned the share price dropped from the pre-weekend close of R22,90 to R16,00. It hasn’t closed above R20 since.
While there have been periods where the share price has picked up, a constant stream of bad news has driven the share price all the way down to its current level around R2.
McLean appeared to underestimate the effect the departure of King and Morris would have on the company. While several institutions celebrated King’s departure because of his well-publicised decision to sell his stake into the market (to the same institutions) at far higher levels during the Johannesburg Stock Exchange’s bull run, they underestimated the impact the founder would have when later taking on his old firm.
On April 3 last year McLean was oblivious to what was to come, saying: “I see the departures behind us as old news, and no real need to discuss it any longer.”
He remained positive about Outsors getting new business, and said at the time that even with the bad publicity, “we’ve had business walk in”.
Cracks were starting to show when interims were released on July 4. Profits grew just 20%, far away from McLean’s forecast of 60%. For the first time Outsors’s new CE appeared less confident, abandoning his initial firm forecast for a more speculative “at least” 30% growth that had been published in the annual report.
Said McLean: “We’ve got a very tough road ahead of us for the next six months but I am very confident we’ve cleared the decks and we know exactly where we need to be, and we are working jolly hard towards it.”
He was also confident there would be a dividend of 150c for the year ended December 2000, even hinting it could be higher. As it turned out, six months later a dividend of just 20c was declared.
Also at the time of the interim report, McLean ruled out competition from King’s new company, Financial Insourcing Specialists: “It’s not in Dave King’s interest to compete with Specialised Outsourcing. It’s a little bit like his old girlfriend he’s proud of it, he wants to look after it, so if anything there will be synergies between our businesses.”
Over the next two weeks rumours circulated of a merger between the companies. Apparently, King and McLean bounced the idea off three institutions, but McLean insisted the idea was never treated seriously, merely explored as a remote possibility.
The Outsors share price dropped after the interims. Investors didn’t like the adjustment from a firm 60% growth to a “minimum 30%” earnings growth projection, reading that statement as a profit warning.
It was soon clear Outsors and Insourcing were competitors. Morris, now the operational head at King’s new business, said on Classic Business the firms were at war. McLean said: “We’re very disappointed.”
Despite the falling share price, McLean remained upbeat, saying there were plans to explore the possibility of expanding further into the local market and rest of Africa.
The company, he said, was going global and McLean was making big plans: “The jury is still out on whether you could replicate the Specialised Outsourcing model in North American markets, given their belligerent legal regime so it needs some exploring there.”
The share price took a further hammering in October and there were rumours McLean had either been fired or was resigning. He denied both and said he had the support of his board and shareholders.
The news of the profit warning came on November 17.
It also emerged that Umgeni was investigating how the original contract had been awarded. Umgeni summarily cancelled its contract, and in an effort to remain in the parastatal’s good books, McLean agreed to continue working for them without a contract until the investigation was completed.
South Africa was also holding its municipal elections, so potential new business was put on hold. Outsors was being squeezed, and McLean was feeling the pressure.
Shareholders started getting edgy when quarterly results for the third quarter were delayed. The share price fell even further and McLean said he could not release the results until the details of a report by Ernst & Young into the accounting practices of previous management had been finalised. Eventually the results were released ahead of the final report.
Two of Outsors’s highly rated non-executive directors resigned about this time. Effective number two of global resources group Billiton Plc Mick Davis said he had to step down because of his growing commitment to the rapidly expanding group.
Fellow non-exec Clive Cohen, a leading South African advocate, was less complimentary. According to an official statement from the company, Cohen placed on record that he was expressing “dissatisfaction with decisions and proposals made by the executive of the company, and resigned to avoid further conflict.”
On November 24, Outsors and Umgeni agreed to appoint a joint task team to investigate a range of issues, including how their relationship could continue without a signed contract.
The Ernst & Young report was released at about the same time, and in a direct sequel three institutions, Old Mutual, Coronation and NIB, sought an opinion from South Africa’s leading commercial lawyer, Michael Katz, on whether they would be able to sue King for damages. The institutions were seeking to blame King for the destruction of the Outsors share price and wanted to try recouping some of their huge losses.
There has been no public announcement on the status of that investigation or whether institutions will be taking the matter further. It is possible that they are waiting for the outcome of the Umgeni probe.
If that is what they are waiting for they may be disappointed. In a recent interview Morris said the King camp was not at all concerned about the investigation as they had nothing to hide: “If there was a clear case of corruption,” Morris said, “it would have been cleared up long before now.”
He was adamant that he and King would be cleared by the investigation, and if they are, and Outsors loses the contract anyway, the consequences for other parties could be serious.
Among those who will be hoping Morris is dead wrong are obviously McLean himself, and those who have publicly backed him, such as Outsors chair Adams and a number of leading investment professionals, including Coronation’s Kokkie Kooyman.
ENDS