Empire builders often reached out to banks help fund extending their midas touch to undervalued firms where dispassionate controlling shareholders rely on outdated strategy. Leverage is a powerful tool. It’s allowed these bold visionaries a path to their dreams. Mountains of debt however can be a double edge sword. In the last few years the intoxicating cocktail of debt coupled with greed took the stock market to stratospheric heights. Alas the great bull market didn’t endure; undone by investor gluttony and economic mismanagement that slowed corporate profit growth to a trickle.
Few epitomize the greed and excesses of those years as do computer vendor PC House and its founder and controlling shareholder Saheedul Mohamed Rishan. PC House’s unraveling isn’t easily explained by just the popping of the stock market bubble, although that was the trigger. The rot set in a year or so after the firm went public when controlling shareholder Saheedul Mohamed Rishan – against saner advice – took what he believed was a quicker route to build a conglomerate; raising debt by pledging as collateral shares in businesses he had built and of a holding company which he also took public.
PC House, the Sri Lanka’s largest retailer of computers, was worth over Rs2.5 billion when it successfully offered a 25% stake to the public in August 2010, but by mid July 2013 its market capitalization was less than a fifth of that at Rs412 million. March quarter 2013 group revenue was 73% below levels in the same period a year earlier and annual revenue for 2012/13 has halved. PC House lost Rs1.73 per share in the last financial year, the first such reported loss by the company in the period beginning 2006 when its financial performance has been made public.
Greed had a free reign during 2010 and 2011 at the Colombo Stock Exchange when securities laws were seem to have been temporarily suspended or rendered useless to allow a well connected mafia to plunder at will, destroying the credibility of the market as place to fund business expansion. For awhile the fruit of market manipulation may have appeared to be an irresistible opportunity to pass by for some business people who already had significant wealth against which they could borrow to trade in stocks. PC House founder Mohamed Rishan – who built the business from 1997 against tremendous odds – committed himself to a double act; as entrepreneur and stock market trader.
The crises facing the firms controlled by Mohamed Rishan are twofold. Firstly four listed businesses he controls PC House, PC Pharma, PCH Holdings and Orient Garments have seen significant reversals in their fortunes. Declining revenue has taken driven to the red the bottom lines of all except Orient Garments. Secondly some of Mohamed Rishan’s business diversification funded by borrowing, using as collateral holdings in his four listed firms, have been impacted by the steep decline in share prices.
By the time Rishan threw his weight behind stock trading, the market had already peaked. A businesses associate recounted how even during meetings, Rishan would stare at market data on his laptop. He soon installed a second larger screen in his office for live market updates and anyone meeting him during stock market trading hours had to contend with two monitors for his attention. “In the course of a 10 minute conversation he makes 10 orders; ‘buy this, sell that,’ with 10 different brokers,” says an associate giving an augmented take on Rishan’s distraction with the stockmarket.
Mohamed Rishan declined to be interviewed for this story claiming, when contacted on the phone, that his schedule didn’t offer the time for an interview. He did not respond to emails. However former non-executive directors of PC House, current and former employees and the investment bankers who took the firm public shared with Echelon their views of the company and challenges it faces.
PC House’s sales has almost ground to a halt because its retail network is almost entirely shut and government contracts, the biggest segment of its revenue, are uncertain in the future because the firm has been unable to fulfill a major order.
All PC House branches in cities outside Colombo – more than 20 at their peak – are closed. At Unity Plaza, Colombo’s most popular IT mall, PC House operated ten showrooms under various brands allowing it to control prices there. Now it only has three outlets at Unity Plaza – PC Partner, Notebook Arcade and PC Tech. Its main office on Galle Road where its showroom was open 12 hours daily from 9 am is also closed and now retails readymade clothes, part of Rishan’s relatively new foray in to apparel.
Software sales, mostly to private companies and government, have also slowed to a trickle because most of the firm’s senior staff have quit due delayed salary payments – sometimes touching five months – and a bureaucracy allowing only a few Rishan loyalists to get work done. At the time it went public PC House group employed 470 people a majority of whom have now left the group including almost all showroom, sales and PC repair staff.
The idea that big pay-offs come only from taking big risks was being reinforced at the height of the stock market bubble. Mohamed Rishan wasn’t one to let that opportunity pass. “Greed made him want to grab everything,” says a non-executive director who joined the firm ahead of its 2010 listing but quit in 2012. “He didn’t consult anybody; on his own he started trading to become a billionaire,” To indulge in his stock market trading Mohamed Rishan had pledge stakes in firms he owned as collateral to banks and stock broking firms to raise money to trade. But “he didn’t buy fundamentally good shares,” says the former non-executive director.
Four former non-executive directors of PC House insist Rishan isn’t a spent force. However the four – who spoke to Echelon – resigned their directorships in August and September 2012 because weak corporate governance at PC House was undermining their role; after which the financial deterioration at the firm markedly accelerated. They had all served the company’s board for over two years and were disappointed at Chairman and Chief Executive Mohamed Rishan’s disregard for board opinions and collectively decided to quit. As one director observed, “the board had become a rubber stamp and it came to a point where we decided, enough was enough.”
Every crash has its villains and now that PC House is in deep crisis fingers are being pointed at former directors and the investment bankers who took the firm public. In the financial year ending March 2012 directors pay topped Rs9.6 million and investment bankers also usually make fat fees from successful IPOs.
The entire board, in place when PC House went public barring Mohamed Rishan, has quit. Non-executive directors who quit include treasury specialist Mangala Boyagoda, former Union Assurance chief executive and NDB Bank & AIA Insurance Director Sarath Wikramanayake and management consultant Modarage Thilakasiri. Non-executive and independent directors, lawyer & President’s Counsel Kuvera de Zoysa and marketing specialist Shanti Kumar Nadarajah have also quit.
Founder Mohamed Rishan’s wife Sithy Sharmila Rishan, also a board member at the time PC House offered shares to the public resigned in December 2012 completing the change of guard.
Around the time five non-executive directors quit PC House’s share price was off the dizzying Rs30 levels, at around Rs18. Another price slide was triggered after the directors quit in mass reducing the share to around Rs1.10. PC House investors at the IPO have now lost 90% of their investment value from the Rs11 IPO price. In the March 2013 quarter PC House’s finance costs were 20% of revenue. Cash strapped PC House in May 2013 raised Rs343 million in a rights issue, offering shareholders one new share for every two held at Rs3. June quarter 2013 financials, where the impact of the rights issue will be shown, haven’t been published yet. However the PCH’s borrowings and overdraft topped Rs1.55 billion on a balance sheet of Rs2.8 billion at March 2013.
Even in Sri Lanka investors are starting to demand more accountability from boards, especially when things go wrong. In the case of PC House however it appears the board of directors had been stonewalled by the Chairman and controlling shareholder. A former non executive director says although there were issues in the first year after listing the board was receptive to the request for ‘more time to sort things out’, like the appointment of a chief executive to PC House. The IPOs sole purpose was to fund diversification from the firm’s reliance on selling mostly computers and software in to services like Knowledge Process Outsourcing and data centers. Investment bankers NDBIB – which structured the IPO – says Mohamed Rishan had a clear vision for the firm’s future growth coming from new investments in these areas.
PC house’s champions like its non-executive directors, the investment bank that took it public and some investors in the IPO were charmed by the idea that a guy who didn’t wear an elite school tie or hobnob at extended club lunches, had built a company with a three billion rupee annual top line at the time it went public. Mohamed Rishan’s beginnings were humble. The son of a postman, he started retailing computers in a 100 square foot store opposite Unity Plaza in 1997. In a decade he had built a firm that commanded 25% market share in one of the fastest growing sectors in the country.
“One year had gone by and we had not done anything significant,” confesses a director about the frustration that was beginning to set in at the board after the IPO. By this time – August 2012 – Rishan was deeply mired in trading in the stock market. Even the market regulator the SEC warned Mohamed Rishan about some of his trading. He was however relentless, once dismissing advice from NDB Investment Banking cluster chief executive Vajira Kulatilaka to focus on his core business saying, “sir, that’s not what’s needed in this market.”
Once Rishan had set himself a course of building a conglomerate in quick time on a perverse set of incentives, corporate governance took a turn for the worse. Usually shareholders who are also managers have the strongest possible incentive to maximize returns over the long term, which is also ideal for minority shareholders.
However Rishan seems to have miscalculated the tyrannical power of the market when a controlling shareholder is as willing as he, to rape the minority in pursuit of his greed to build a conglomerate that’s not going to benefit other shareholders. While stock prices in general rose around 20% in the last year, PC House shares have crashed to a tenth of their IPO value. In August 2011, Rishan though PCH Holdings (a private firm controlled by his wife and he) acquired control of Orient Garments PLC which had listed in the market through an introduction just months earlier then under control of Finco Holdings, for Rs603 million.
By this time Mohamed Rishan was aggressively trading in the shares of his own firm PC House. Rishan controlled 67% of PC House stock and his wife 7% immediately after the IPO. A year later (by September 2011) Rishan’s personal holding was down to 55%. Again at end March 2013 firms controlled by Rishan had acquired stakes in PC House including PCH Holdings PLC which had almost 12%, Dynaris Holdings Ltd with 6.9% and PC Pharma PLC and Orient Garments PLC a combined 5%. The Employees Provident Fund had also acquired 7.5 million shares immediately after all the non-executive directors with no family connection to Mohamed Rishan had quit; a glaring instance of incompetence by EPF fund managers.
Rishan’s acquisition spree adventurism largely happened under PCH Holdings, a firm he listed at the Colombo Stock Exchange through an introduction in June 2012. At the time of its listing PCH Holdings didn’t own any shares of PC House but other investments included 51% of Orient Garments PLC (which was also listed separately), 62% of PC Pharma (which was listed six months later), full ownership of activated carbon firm Belco Link Carbons (Pvt) Ltd and four other smaller firms. By March 2013 PCH Holdings had also acquired a 12% stake in PC House. Embarrassingly PCH Holdings in late 2012 disclosed to the market that due to an oversight the firm had not withdrawn a guarantee offered to the Chairman’s margin trading account, used to obtain personal credit from stock brokers. It withdrew the guarantee but did not disclose the quantum of the guarantee.
Mohamed Rishan’s been avoiding media who are shining a light on his bamboozling minority shareholders, customers and regulators. Those who expressed alarm have been allowed to leave businesses Rishan controls or have been drowned out. Former directors, including board audit committee members, are confident the firm won government contracts – which accounted for a large chunk of revenue – cleanly.
However recently PC House had secured a Rs300 million advance from a government ministry, almost as much money as it raised from the rights issue in May 2013, to supply a sophisticated piece of equipment which it hadn’t been able to do, even by late June. Non fulfillment of government contracts could result in the firm being blacklisted from bidding for all state contracts, which may severely undermine its business model.
In the March quarter 2013 cost of sales far exceeded revenue at PC House. Negative gross profit is usually indicative of a stock write-down. However the firm didn’t explain this steep rise in the cost of sales. PC House ramped up its retail network soon after the IPO, although it moved far more slowly on IT service projects it had pledged to invest the new cash in. Its growing stock holding costs was a huge concern for its board, but Mohamed Rishan persisted with the strategy despite objections. “He strongly believed that he was right. He didn’t want to put the effort in to what we were suggesting to him,” points out a former director of the firm.
Among the businesses PC House and related firms abandoned were distribution of an energy drink brand RED, where container loads of expired stuff had to be discarded. An Indian wannabe smart phone brand, Karbonn also didn’t sell well.
The most contentious issues at board level were the need for greater management depth at the large units of the business, the need for the chief executive (Rishan) to pay greater attention to the operations of PC House and precise management information to assist board decision making. Former board members feel Rishan’s impatience to match the success of his contemporaries like the Softlogic group which has successfully diversified in to a number of generally unrelated businesses, may have fuelled his greed. “We were telling him the firm needs management depth. You (Rishan) has to take the helicopter view,” went the argument at board meetings. “If the chairman has to go to the warehouse to find out what the inventory is, there is a problem.”
Mohamed Rishan was preoccupied setting up a complex holding company structure for the firms he had acquired or created since PC House went public. At the top of the structure is privately held Dynaris Holdings Ltd., which Rihan and his wife control. Dynaris controls PCH Holdings which in turn has controlling interest in two other listed firms Orient Garments PLC and PC Pharma PLC. At PC House, Rishan’s direct ownership of 43% is the single largest. PCH Holdings, PC Pharma, Orient Garments and Dynaris Holdings collectively control another 27% of PC House stock.
Essentially Rishan listed the same business and cashflow streams a number of times over making it possible for him to barrow, by offering shares as collateral, much more than cash flows otherwise would allow.
In his bid to build a conglomerate, the initial assets acquired were bad and overpriced, concludes a member of the NDB Investment Bank team that took PC House public. “In the year after the IPO the business did well. In the second, some of the subsidiaries started doing badly. Very recently it started hitting the main company. It’s a sign of the distress creeping in and becoming a cancer,” he concludes.
Rishan and firms controlled by him have been selling down ownership in group companies. Observers think this is because banks and brokerages are force selling shares he has pledged as collateral to obtain loans for his buying spree. For instance in July 2013 alone over 106 million PC House shares were traded which is almost a third of the shares in issue. July 2013 trades included the 35 million share block purchased by veteran market investor Dr T Senthilverl.
Mohamed Rishan may have learnt from his mistakes. Clearly in the past, he has shown a remarkable ability to emerge even stronger through challenges. During the period 2007 to 2009 when – due to the war – consumer spending dipped alarmingly tight cost control and smart strategy made it possible for PC House to emerge out of the crisis with greater market share.
Speculation that a strategic investor may soon step-in bringing credibility to PC House didn’t come to pass when the firm successfully concluded its rights issue. Dr T Senthilverl’s taking a 10% shareholding in the firm gave the market some confidence. However PC House will have to do a lot more to prove it can survived this crisis.