Rises and falls of Strathmore

By BRIAN GAYNOR

Strathmore Group has all the ingredients of a red-hot investment: information technology, Eric Watson, a surging share price and insider trading allegations.

Its share price has risen nearly eightfold since early June and a substantial part of the increase was achieved before price-sensitive information was released to the Stock Exchange.

The Securities Commission investigated these dealings but dismissed allegations of insider trading despite strong evidence to the contrary. This highlights the difficulty of enforcing the insider trading laws.

The latest developments are another chapter in Strathmore's colourful history. The group has gone through four distinct stages and attracted some of the country's highest profile businessmen.

It has had a remarkable tendency to invest in the latest business fashion and come unstuck. Shareholders will be hoping that its move into the highly fashionable IT sector will be more successful than its previous experiences.

Strathmore, which was originally called Australasian Breeding Stables (ABS), was listed in December 1985 during the bloodstock boom. The late Sir Frank Renouf was its first chairman.

The bloodstock activities were unsuccessful and in December 1986 the company embarked on stage two when it acquired the business interests of Angus Fraser, Carol Todd, Clive Currie and Pat Wilson.

Thus ABS, which changed its name to Strathmore, became an investment company during the investment company boom. It had interests in publishing, sports promotion, marine development, the Westhaven Marine Centre, financial services and bloodstock.

As part of this restructuring Omnicorp, which was controlled by Chase Corporation, took a major shareholding in Strathmore. The directors of Omnicorp were Colin Reynolds and Peter Francis of Chase, Lloyd Morrison and Ray Thomson.

By June 1987, four months before the sharemarket crash, Strathmore was in trouble. Its stage two development had also failed.

In February 1988 Ray Thomson bought 52.6 per cent of the company from Omnicorp at 11.3c a share. Stage three had begun and Strathmore now concentrated on cost reduction and raising cash. This was consistent with the fashion of the post-crash period.

In 1988 shareholders' approval for a sale to an associated party was not required. Several institutions tried to stop the sale but Omnicorp's directors dismissed their objections.

Throughout most of 1989 and 1990 Dr Thomson must have wished the institutions had been successful. Strathmore was knee-deep in litigation - as many as 10 suits at a time - and it struggled to survive. Its share price never exceeded 10c and at one stage it hit a low of 2c. Dr Thomson took advantage to increase his family shareholding.

The company operated on a shoestring, it vigorously pursued its legal battles and gradually built up its cash reserves. Dr Thomson made investments but his overall strategy was conservative and most assets were held in cash or short-term deposits.

In the mid 90s Strathmore had several share buybacks, including a major one at 35c a share in March 1998.

Stage three of Strathmore's development, which lasted 11 years, came to an end in June this year with two announcements to the stock exchange. These were:

* On June 3 the company said it would distribute its 33.1 per cent shareholding in Wellington Drive, the holding company for the development and commercialisation of an internationally patented brushless direct current electric motor, to Strathmore shareholders.

* Six days later the Thomson family announced it was selling its 70.5 per cent shareholding in Strathmore to John Sorenson.

Before the first statement Strathmore shares had been trading at 26c on extremely low volumes. After the second announcement the price picked up and traded in the 40c to 50c range during most of July, but fell back to 30c to 40c in early August.

There was much speculation about the future direction of Strathmore but no official announcement.

From August 17 August to September 3 the group's share price rose from 32c to 99c on exceptionally high volume. After the final trade on September 3, these announcements were made to the exchange:

* John Sorenson had settled his purchase of 70.5 per cent of Strathmore at 18c a share.

* Mr Sorenson had immediately sold 19.9 per cent to Advantage Corporation, 10.6 per cent to Eric Watson and 10.3 per cent to Ken Wikeley. These were all transacted at 18c a share.

* Strathmore would have a 10 for one cash issue at 5c a share.

* The company was going to concentrate on the IT sector and Phil Norman, Peter Wright and Don Cowie would be appointed to the board.

For Dr Thomson it was a bittersweet experience. He had turned his original investment of approximately $5 million into at least $15 million including his large shareholding in Wellington Drive. On the other hand he received a final payment of 18c a share on the same day as Strathmore shares traded at 99c.

John Sorenson, Ken Wikeley, Eric Watson and Advantage were the major beneficiaries of the share price rise. The shares they bought for just 18c are now worth 285c, adjusted for the cash issue.

The Stock Exchange was asked to investigate the sharp rise in Strathmore's share price before the September 3 announcement. It passed the issue on to the Securities Commission.

Last week the commission released a short statement that concluded: "We have not found evidence of insider trading in the listed securities of Strathmore Group. In light of this we do not propose to take the matter further."

It is difficult to comprehend that a share price can rise over 200 per cent on heavy volume in 13 trading days for no apparent reason. It is also difficult to believe that John Sorenson would have sold a large part of his holding at 18c a share unless the negotiations for September 3 transactions had commenced at an earlier date.

There is no suggestion that Mr Sorenson, Mr Wikeley, Mr Watson or Advantage Corporation bought shares on market, but if their purchases were negotiated before September 3 these arrangements could have been known to other parties.

The commission is in a difficult position because of its lack of resources and the poorly drafted insider regulations. The act was introduced in 1988 yet there has never been a successful action for insider trading.

The commission's unwillingness to give a full and detailed explanation of its investigation and the reason for its findings, does nothing to enhance its reputation or the credibility of the sharemarket.

At 35c Strathmore has a total market value of more than $60 million. This places the group in the highly speculative and over-priced category. Its only investment is a 22 per cent shareholding in Commsoft, acquired for $1.25 million, and just over $10 million of cash after the completion of the current cash issue.

Brokers are claiming that the proven expertise of Phil Norman, the company's new chairman and chief executive officer, is one of the company's major assets. His technology career spans 25 years.

He led the early development of Telecom's Xtra website but left after Chris Tyler, a Texan, was appointed chief executive. He has since held consulting roles in the New Zealand software industry.

Long-term shareholders will remember that brokers originally promoted the group's bloodstock activities because of the board's expertise - three business knights and the Australian trainer Bart Cummings were on the board - and its investment company activities because of the expertise of Chase and Omnicorp.

As long as Wall Street's IT sector continues to boom and new and inexperienced investors are attracted to Strathmore, the company's share value can be maintained.

But in the long run it will be a pleasant surprise if the group's IT activities are any more successful than its earlier adventures.

Disclosure of interest: Brian Gaynor is a Strathmore shareholder.