Brian Gaynor: Small is poor in a billion-dollar world

One of the biggest problems facing the Stock Exchange, and the New Zealand economy, is the inability of our companies to grow.

Many of them quickly run out of growth opportunities in New Zealand. At that stage they stagnate, diversify into another sector or move overseas and destroy a large amount of shareholder wealth.

The New Zealand Stock Exchange has had 30 companies with a market value of $1 billion or more. The current status of these is as follows:

* Twelve are still New Zealand based and have maintained their value.

* Baycorp Advantage, Goodman Fielder, Lion Nathan and Nufarm have moved overseas.

* Chase, Equiticorp and Renouf Corporation went bust.

* Bank of New Zealand, NZ Forest Products, NZI, Wattie and Wilson & Horton were taken over by overseas interests. NZFP was subsequently bought back by Carter Holt Harvey.

* Capital Markets, which was taken over by Sir Michael Fay and David Richwhite, has been the only $1 billion company to be acquired by New Zealand interests. The company was worth only $254 million when it was taken over by Fay and Richwhite.

* Brierley Investments (now called BIL International), Fletcher Challenge, Magnum (now DB), Robt. Jones Investments (now Trans Tasman Properties) and Tranz Rail have either disintegrated or fallen sharply in value.

Some of the companies that have remained in New Zealand have struggled to maintain their value. Telecom's sharemarket capitalisation was in excess of $15 billion throughout most of 1996 to 1998, but it is now worth less than $10 billion.

Carter Holt Harvey had a market capitalisation in excess of $5.5 billion during the mid 90s but it has been much closer to $3 billion in recent years.

Only a small number of our larger companies have increased their value year by year. Auckland International Airport and The Warehouse are the two standouts, although Sky City Entertainment Group and Sky Network Television have also performed well.

The publication of the Business Week Global 1000 highlights the small size of New Zealand companies. Telecom is our only company on the list, ranked 878 with a sharemarket value of just US$4.6 billion ($9.8 billion).

By comparison several other countries with populations of 6 million or less have a much bigger representation:

* Denmark, with a population of 5.3 million, has six companies on the list with a total value of US$49.8 billion.

* Finland (5.2 million) has six on the list with a combined value of US$104.3 billion. Nokia is worth more than three times the value of all NZSE listed companies.

* Ireland (3.8 million) has five companies with a total value of US$43 billion.

* Norway (4.4 million) has five companies with a total market capitalisation of US$47.5 billion.

* Singapore (4 million) has six companies with a combined value of US$62.4 billion.

We aspire to the same standard of living as these five countries yet our companies are not creating the wealth to achieve this objective. To raise our standard of living we need to develop companies that grow and create wealth for all stakeholders.

Our companies remain small mainly because of their inability to successfully expand overseas. Air New Zealand, Brierley Investments, Fletcher Challenge and Telecom have all made unsuccessful overseas acquisitions and have destroyed a significant amount of shareholder wealth in the process.

The 12 $1 billion companies that have remained in New Zealand and retained most of their value reported fairly dismal returns from their overseas activities last year (Fisher & Paykel did not disclose the profitability of its overseas operations).

The three largest overseas investors, Air New Zealand, Carter Holt Harvey and Telecom, reported a combined operating loss (earnings before interest and tax) of $239 million on overseas assets of $8 billion and gross revenue of $7.2 billion.

Air New Zealand's $193 million overseas loss reflected the poor operating performance of Ansett. The figure does not include the additional $1.3 billion write-off when Ansett was placed in voluntary administration.

In the nine months ended December 31, Carter Holt reported operating earnings of $41 million from overseas activities. This represented 36 per cent of group earnings, the highest percentage of any of the $1 billion-plus companies.

Although Carter Holt produced a better result than Air New Zealand or Telecom, its operating profit represented a return of only 3.2 per cent on sales of $1.3 billion.

Telecom reported an operating loss of $88 million from its overseas operations in the June 2001 year. That included a write-off of $215 million after the close-down of its CDMA rollout in Australia.

Last year Telecom had an operating loss of $99 million from overseas activities. That was before a further CDMA rollout provision of $12 million and an $850 million write-down in the value of AAPT.

Australian companies have been far more successful overseas. A major stockbroker says Australia's largest listed companies derive the following percentage of group earnings from overseas operations: National Australia Bank (38 per cent), BHP Billiton (42 per cent), News Corporation (94 per cent), AMP (50 per cent), Brambles (85 per cent), CSR (55 per cent), Macquarie Infrastructure Group (75 per cent), Foster's (37 per cent), Westfield (75 per cent), Lend Lease (65 per cent) and James Harvey Industries (80 per cent).

The strong overseas performance of Australian companies has two positive impacts: it helps the growth of companies and the creation of wealth and it allows domestic investors to diversify their portfolios by buying into local companies that have a strong overseas presence.

New Zealanders, by comparison, have to invest through foreign stock exchanges to obtain a profitable exposure to large international economies.

There are several reasons most listed New Zealand companies have not been successful overseas. These include:

* They adopt an acquisition strategy, rather than an in-house growth approach, and pay too much for newly acquired assets. Air New Zealand, Brierley Investments, Fletcher Challenge and Telecom all paid far too much for overseas acquisitions. By contrast, Fisher & Paykel has adopted an in-house growth approach that has been more successful.

* The purchase of overseas assets has been paid for mainly by debt. This strategy, which is partly due to the poor state of the New Zealand equity market, puts huge pressure on management and leaves companies exposed to any unexpected economic downturn.

* The companies are reluctant to appoint overseas people to their boards. Telecom waited until it had paid too much for AAPT before appointing an Australia-based director.

* New Zealand companies do not commit enough senior managers to new acquisitions and try to run overseas operations from head offices in New Zealand.

But there has been some positive news. Lion Nathan made an extremely successful acquisition of National Brewing just over a decade ago and Michael Hill International has adopted a successful organic growth strategy across the Tasman.

There are also encouraging signs that The Warehouse is making good progress with its Clint's and Silly Solly acquisitions in Australia.

* bgaynor@xtra.co.nz