Natural tendency for corporate bloating, page-6

@travelightor and @MarsC,

I like it when I come across something about a company in which I am invested, and that something causes an anxious feeling in the pit of my stomach. (Well, when I say "I like it", what I mean is that I like it in a similar way that I "like" broccoli or brussel sprouts... it might not taste that nice, but I know it is good for me to eat it.)

I have to admit that when I think of the DLX board, the CEO and the CFO, I don't automatically think of a cavalier attitude towards deploying shareholder capital willy-nilly (the ALESCO acquisition aside, but I'll deal with that one later in this post), so I took your comments to heart and did some quantitative soul searching to see if I was somehow deluding myself.

Here's what I did: I summed the total capital that DLX has generated over the past 6 years of its listed life, and looked at how that was deployed by the company's board and management.

Since listing, DLX has generated a cumulative $740m in Operating Cash Flows.

Of that, 30% went into investing in the business by way of Property, Plant and Equipment (i.e., capex) and 2% went to the purchase of IP, which was capitalised.

Dividends consumed 44% of OCF.

Acquisitions, which all funded cash-funded (the conpany doesn't make use of scrip considerations), spoke for 27% of the OCF generated.

Let's dispense with discussing the dividends (which are self-explanatory in their desirability) and the investment in the assets of the business which, I am happy to think is a sensible way to spend shareholder capital to the extent that it enhances the company's industry-leading position.

In tat case, onto the acquisition history (recall, 27% of OCF - which a not insignificant amount - was deployed to buying stuff): I'd like to take the liberty of dividing acquisitions into two distinct buckets, namely Alesco and non-Alesco. (Alesco represents 23% of that 27% figure; the remaining 4% is attributable to other smaller acquisitions, such as the ones you quoted) .Because there is no doubt, buying Alesco was inordinately dumb thing to do.

To this day, I don't really know what possessed them. I heard and read a lot of things at the time, ranging from them wanting Alesco to serve as a poison pill to fend off overtures that they themselves were receiving from would-be Dulux predators, to them really believing they could create value by operating the Alesco.

But what is for sure is that they were duly criticised for it from all quarters at the time, and the criticism is ongoing. I know that PPT gave them hell for it when it was announced, as did a number of their other major institutional investors, and so I like to think that they are duly chastened by the experience, and that similar big ticket deals are verboten.

So, given the ensuing circumstances, in Alesco I see largely a one-off event.

Which brings me to the 4% of OCF which has been spent on small bolt-on acquisitions. To me, in terms of investing in the potential to establish new beachheads from which to grow organically, that's not an overly reckless level of expenditure. As a conservatively-minded shareholder, that level of outlay on growth optionality "feels" about right to me. Maybe 1% or so too high, but not egregiously cavalier.

Of course, I hear your reference to the potential for distraction from attending to the core business, but so far, it looks like the folk running DLX have proven they can walk and chew gum at the same time, because the core DLX business keeps doing what it does best: prosper and flourish.

But, as I try to argue, I think one definitely needs to draw the distinction between Alesco and the others, when viewing DLX’s acquisition credentials.


So I guess my conclusion is that I am now somewhat more sensitised to the issues you’ve raised, but I do think they’ve had a Road to Damascus type epiphany on even contemplating another Alesco-scale deal, and as I’ve shown, smaller acquisitions aren’t exactly burning a hole in my pocket as shareholder.


So while I don’t see the sort of indiscriminate capital ill-discipline that I thought I detected when I first read your post, I do agree that your alternative capital management strategy of harvesting all the surplus capital and returning it to shareholders does sound more optimal, and less risky, than a piecemeal acquisition strategy. After all, there is enough secular growth for DLX to enjoy; it doesn’t need to go out and acquire it.

Maybe when I get a quiet moment I’ll pen something along those lines to the company chairman.


PS. I’m a bit bemused by your seemingly vehement dislike of DLX management; to the point of precluding you from owning the company (which, as you yourself say, is of such a calibre that it has not skipped a beat despite the strategic blunder that was Alesco). Sure, they might have had a rush of blood to the head four years ago (which saw a serious shareholder expectation exchange ensure), but I think that they – on balance – do add value to the business.