THE independence of PartyGaming’s non-executive directors was called into question last night after it emerged that they will receive big payments when the internet poker company completes its £4.7 - Sunday 12th of June 2005
IT IS a golden rule of poker that if you sit down at the table and cannot spot the sucker who is liable to lose his shirt, it is probably you.
Much the same goes for those seeking to buy the shares of companies that organise poker games on the internet. Indeed, it is even easier to spot the winners in the market flotation poker game because the founders of the company are going to sit there and rake it in by the billion. Where does that money come from and who is going to give it to them? If you have to ask, you are the sucker.
PartyGaming, the online poker company being marketed in the City ahead of its float in a few days' time, is the biggest new issue in London this year - and it is rubbish. The shock horror story of the week was that the asking price of the company has been slashed by £1 billion compared with the expectations at the start of the month.
But who created those expectations and financed the PR campaign to get them disseminated? The people selling the shares, of course. Forget about expectations, what you need to hang on to is that they are asking between £4bn and £5bn for a business that is still wet behind the ears, is built on a craze and whose prospectus contains more dire warnings than an army of Oxford Street sandwich boards. Here are a few from the 200-page prospectus:
'There is uncertainty as to the legality of online gaming in most countries, and in most countries including the United States the group's services are considered to be illegal by the relevant authorities.'(Page 14)
'The enactment of any legislation prohibiting or restricting the use of credit cards ... for online gaming ... could severely and adversely affect PartyGaming's business and financial position.' (Page 14)
The group is based in offshore tax havens. 'If it is found to have been tax resident elsewhere ... this may significantly increase the amount of tax payable by the group.' (Page 15)
'New entrants ... may lead to a significant decline in customer base, revenues and margins.' (Page 16)
'Maintaining and enhancing PartyGaming's brand has become increasingly difficult and expensive and this is a trend which the directors expect to continue.' (Page 15)
Well, no one can say they weren't warned. I have nothing against the company, its founders or directors. Good luck to them - they had a bright idea and it has worked. But it is a fad like the yo-yos and hula hoops of my youth and all the other fads and fashions enjoyed by every generation since, which grab the attention for a few months or years and are then as forgotten as the Spice Girls. When something is hot, its profits go up like a rocket. When people get bored, they come down like a stick.
It is hoped to sell PartyGaming on an earnings multiple of 14. That means it will take 14 years at the current level of profit - if all profits are distributed - for investors to get back what they have paid for the shares. But it beggars belief that anyone could think this business will be able to maintain, let alone grow, its profits for 14 years.
Even if none of the hazards outlined above come to pass, and even if people remain addicted to poker to the exclusion of everything else, competition will flood in because there is nothing to keep it out. The company will be doing well still to be earning this kind of money in four years, let alone 14.
Having said that, the issue will no doubt be a success but that is because of the dysfunctional nature of fund management in this country, not because of the merits of the business. The people entrusted with the safe keeping and shrewd investment of your and my pension money will buy these shares, not because they think they are any good but because they think every other fund manager will buy them and they don't want to be the odd one out.
The risk to such fund managers comes from deviating from theFTSE 100 index benchmark, which is effectively a measure of what everyone else is doing. So buying overpriced shares and losing our money is not a risk to them, provided everyone else loses too. It works because in this game we are the suckers.
RISK management is not about avoiding failures. There were few failures in Soviet banking but that did not make it a success. Successful risk management means those who want to take risk know how much they are taking and manage it accordingly, so capital is properly allocated and the economy prospers.
All credit then to HSBC's Douglas Flint and the team reviewing the Turnbull rules on reporting risk for understanding this and leaving the Sarbanes-Oxley-type idiocies of risk reporting firmly on the other side of the Atlantic.
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