Small firms caught in web of mergers

Many were lured by high-flying Australian accountant Steve Hart's promises of greater wealth from the sharing of resources. KARYN SCHERER reports.

In the cautious and conservative world of accountancy, the merger mania that struck the industry last year must have been intoxicating.

As the world's Big Five accountancy firms waltzed down each other's aisles, a swag of small and middle-sized New Zealand businesses chilled their champagne glasses as a posse of shiny-shoed Australians came wooing.

A year on, however, the hangover is only just starting to subside for those who got caught up in the hype.

Te Puke-based chartered accountant Viv Brownrigg is one of those who now is able to laugh about the experience.

In December, Brownrigg's firm, Business Results Group, was bought by Brisbane-based financial group Harts Australasia.

The company, headed by high-flying accountant and aerobatic pilot Steve Hart, had floated on the Australian Stock Exchange just seven months earlier, raising $A30 million from investors eager to cash in on his aim of creating one of Australasia's largest financial groups by merging dozens of provincial accounting firms and using them to distribute financial products.

At its peak, Harts was worth more than $A150 million.

However, the company soon hit turbulence and last week it joined other Australian corporates such as HIH Insurance by crashing and burning.

Last Wednesday night, Hart was held in a Brisbane jail. The following day he was remanded on bail on 11 charges, including organised fraud, defrauding the Australian Taxation Office, forgery and false pretences.

His passport has been taken away and his pilot's licence confiscated for fear he might flee the country.

The arrest was part of a broader investigation by Australian authorities into the promoters of tax-minimisation schemes, which are believed to be responsible for inducing up to 65,000 investors to claim more than $A4 billion in deductions.

Separate investigations are under way by the Australian Securities and Investment Commission.

From her stylish office in Te Puke's main street, Viv Brownrigg manages a tentative smile.

"I can find it very amusing now, but it was definitely a rollercoaster ride," she recalls.

"At the time, it was like being part of Monty Python's Flying Circus."

Like dozens of other small firms, Brownrigg was lured into Hart's net through her relationship with others in the company.

She was persuaded that her 30 staff and 1300 clients would benefit from sharing resources and was also promised a starring role in the company, which would lead her to mentor other firms.

She was approached in late November, and by late December had satisfied herself it was an opportunity too good to pass up.

"We placed a huge reliance on the balance sheet of the company at the time and on various forecasts for the next 12 months.

"We were assured that while the property division had taken a little bit of a hammering post-GST, that broadly speaking they expected to be within 10 per cent of their target."

On January 11, she was asked to visit Australia. What she discovered horrified her.

A Canberra office had been threatened with eviction because its rent had not been paid, and a manager on the Gold Coast had not been paid for three months.

She also discovered an expenditure freeze had been announced on November 20.

Brownrigg rang her husband and business partner Ashley, and told him to place a hold on Harts signage and letterhead.

A couple of weeks later, she returned to Australia. On January 25, a New Zealand colleague, David Steele, knocked on the door of her Brisbane hotel room to tell her that Harts had that morning reported a $A9.7 million loss for the six months ending in December.

A huge row blew up with the company's senior executives: "We were told we were just being paranoid - that we were just suburban accountants."

Brownrigg contacted her lawyers and despite "repeated threats, corporate thuggery and various, but futile, legal bullets" eventually managed to cancel her deal with the company.

"If it hadn't been for Ashley I don't know how I would have coped. I was very lucky to have him to talk to."

She is still at a loss to explain how Harts could lose so much money in such a short time. The company's balance sheet for the previous financial year, displayed in its annual report, had shown it was flush with cash.

She was assured the company had at least $A12 million set aside for acquisitions.

"Of course, what the annual report didn't say was that by November they'd chewed through a fair bit of that capital."

Steele had his own reasons for being alarmed. As one of five partners who agreed to sell Taupo accountancy firm Iles & Campbell to Harts the previous September, he also had nagging concerns about the company.

Steele's role at Harts was mainly to find potential acquisitions.

During his short time with the company, he examined the books of more than 40 firms in both Australia and New Zealand.

In December, Harts told the Australian Stock Exchange it was in "deep discussions with over 70 progressive firms".

A press release issued by Wellington-based PR firm Shandwick two days later mentioned plans to acquire up to 20 chartered accountancy firms in New Zealand over the following six months.

It soon became clear to Steele the company was in no position to buy anything. In February, he quit the company, and was not surprised when in July it reported a full-year net loss of nearly $A100 million.

The prospectus had forecast a net profit of $A12 million.

Those who worked with Hart describe him as a charismatic, driven businessman with a passion for paintings and feng shui, who could also be a bullying control freak.

According to Australian reports, his employees called him the Blue Leader - a reference to the fighter pilots who flew over Normandy beaches on D-Day in 1944.

His prized collection of 17 planes - with "Bushranger Steve Hart" emblazoned on the side [Steve Hart the bushranger was a member of the Ned Kelly gang] - is believed to have been impounded.

"We ran a quick check on his background and knew he had been involved in property deals in the 80s which were a bit questionable, but there were no charges," says Steele.

"We knew he was fighting with the tax office but thought, 'That's good, he's aggressive'. We looked at his business and talked to a few people, and we had the Ernst & Young report."

There were also two encouraging brokers' reports - a CSFB report that predicted the company's shares would hit $A2.50 within a year (at the time, the shares were trading at around $A1.20), and a Merrill Lynch report that predicted a price of $A1.65.

The author of the CSFB report, Chris Northwood, later worked for Brierley Investments.

While the company's prospectus at least mentions Harts' disputes with the tax office, neither the auditor's report nor the brokers' reports raised any concerns about the company's finances - a fact that now disturbs many disgruntled investors.

"This was a financial services accounting company that couldn't even get its budgets close to being right - how embarrassing is that?" asks Steele.

While the board and senior management maintain they had no knowledge of the losses until January 11, Brownrigg has since seen balance sheets that appear to show the company knew as early as October that it was in serious trouble.

"I know Harts is just a little company, but the issues are wider than this," she says.

"Directors have to ask questions. They have to have management reports. If they don't understand the management reports they have to ask - they have duties and responsibilities. The public should have been cautioned."

Harts is not the only Australian firm to have left a stain on the smart suits of New Zealand accountants.

In December, Melbourne-based consolidator Stockford bought Auckland-based Hamilton & Associates for $1.35 million in cash and shares. The firm was one of more than 50 accountancy and financial businesses snapped up by Stockford in less than a year.

Investors who paid $A1 each for Stockford shares when the company floated in November have since seen the shares slump to around one-third of their original value.

Brownrigg is no longer a fan of the consolidation model.

"While there are some aspects of the model I still like, I don't think ultimately the model that Harts had can work because it's too top heavy.

"They set up head offices in Brisbane and Auckland which sucked profits out. They talked about back-office efficiency, but all they did was add layers of additional cost."

Steele, who admits he "sold a very good story" to other firms, is even less enthusiastic. Around the world, he notes, attempts to merge accountancy and financial services are meeting with mixed results.

"At the end of December and January when I first had concerns I relooked at the model, and the bottom line is you cannot buy relationships. Professional services are all about relationships."

Steele realises he is one of the lucky ones. Since leaving Iles & Campbell, he has set up a coaching and mentoring business, with clients including departing All Black Todd Blackadder and Canterbury coach Steve Hansen. He claims he has never been happier.

"I've only lost what I never had. If you had bought Air New Zealand shares, you would have lost a lot more money - depending on when you bought them, of course."

Fortunately, his former firm never got around to changing its name. He acknowledges, however, that some of those he has left behind are not so sanguine.

Many of Iles & Campbell's 35 staff, and even some of its clients, bought the now-worthless Harts shares. Others remain bitter that their trust was abused and their ambitions thwarted.

"Over the next two years it's going to be incredibly interesting, the stories that are going to come out of investigations.

"They're already likening him to Christopher Skase, which I think is a compliment to Hart. It was only a piddly company, after all."

Brownrigg, meanwhile, has discovered that being small has its advantages.

"Small is lovely," she grins. "Our organisation is a happy one, we have a great team, we are profitable, we know what we are doing, and we can make decisions quickly without inertia, which seems to be a part of big organisations. We think small is beautiful and that's the way we're going to stay.

"Maybe my brief experience in the corporate world has not been a typical one, but what I have learned about the quality of small business is unbelievable.

"Would I go down a track like this again? Never. Would I be able to take at face value ever again what was in an annual report? Probably not.

"And that is sad - that really concerns me."