Year 12 IB Extended Essays 2017

Dick Smith by Anchorage in November 2012 for $115, the company was floated on the ASX

in December 2013 with a market valuation of $520m. After the nine months, they said the

focus turned to growth and profitability and that was when the decision was made to take the

company public. This valuation of the company upon its initial public offering was extremely

overvalued. In an interview with Fairfax, Smith labelled the valuation “clearly ridiculous”,

“You can’t have that type of gain in a short time” he said. Dick Smith Holdings entered on the

ASX with an initial share price of $2.20 in December 2013, but after a dispute which caused a

trading halt on Monday, Dick Smith’s shares were trading at 35.5 cents, a huge loss that cost

the company and its shareholder’s millions. What can be learned from this is that

overestimation of stock value is a major risk when delivering financial reports and valuations

that determine the success of a business. Sourcing the right private equity floats and

accountants in order to minimise risk of failure is an essential part of business that Dick Smith

failed to recognise.

Investment in Fading Systems Will Ultimately Lead to Failure

With minimal large electronic companies in Australia, the consumer electronics market in

Australia is a competitive arena and in that environment, correct marketing and investing

matters. Dick Smith held a very small 9% of market share, yet unreasonably invested millions

in retail stores in the hope to expand their company whilst the continuation of growth in the

online sector was seemingly apparent. Businesses can learn from this mistake and be sure that

appropriate research and knowledge of future trends are well known before making a large

investment into the expansion of their company.

The Importance of Due Diligence Upon Investing

The failure of prior to the purchase of Dick Smith by Anchorage to recognise and estimate the

company’s unstable financial reports and its inability upon the purchase of Dick Smith due to

its increasingly decreasing cash flow is a large aspect that led the company to collapse. Prior

to acquiring any business, comprehensive due diligence is critical in order to be conscious of

all the risks involved, and to get a genuine idea of expected returns on the investment. Some

aspects to consider for due diligence when purchasing a business include:

- “Financial performance and records – including analysis of financial statements, sales

records, accounts payable and receivable, disclosure of all expenses, profit history, and

relevance of the products and services to a current market.

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