28-May-2020:  WTC updates acquisition earnout arrangements

On the surface of it, this seems prudent enough, mostly reducing or closing out future earnouts with 17 of their acquired businesses and replacing significant cash payments with equity (WTC shares).  These negotiations resulted in:

• Reduction in contingent liabilities overall from $215.5m to $68.5m;
• Removal of $151.5m of future contingent cash liabilities;
• Equity issuance of $81.4m of which $45.7m remains escrowed for 12 months;
• Complete close-out of all future earnouts for ABM Data, CargoIT, Cargoguide, CargoSphere, CustomsMatters, DataFreight (LSI), Microlistics, Pierbridge, SmartFreight, Softcargo, SaaS Trans, Trinium, and Xware; and
• Replacement of cash earnouts with equity for Cypress, Depot Systems, Forward, and SISA: part immediate equity close-out, and part future equity earnouts of $10.9m based on product development.

In the coming months, they plan to embark on a similar earnout review for a number of remaining acquisitions, which are primarily geographic footholds with product development targets already in place. 

The change in fair value estimate of contingent consideration is expected to necessitate a one-off A$69.5m fair value gain in the 2H20, however this non-cash, non-taxed item does not affect revenue nor EBITDA.   Wisetech Global does not anticipate any impairment of goodwill as a result of these earnout changes.

--- click on link above for more ---

I like the debt and future liability reduction aspect of this, however WTC is around 3.8% down today as I type this.  Maybe the market has been reminded of just how many acquisitions WTC have made over recent years - and the associated risks of that strategy.

22-April-2020:  WiseTech business update and FY20 guidance reaffirmed

7-Nov-19:  Livewire: Buy-Hold-Sell segment on WAAAX stocks

Matthew Kidman talks to Shane Fitzgerald from Monash Investors and James Gerrish from Market Matters about WiseTech Global, Appen, Afterpay, Altium and Xero. 

The only one of those five that they both have a "sell" on is WiseTech (WTC).  Click on the link above to hear their reasons.

19-Oct-2019:  After the market closed yesterday afternoon (on Friday October 18), WiseTech released their response to the first of JCAP's short-seller documents about WTC.  That announcement can be read here.  It is titled: "WTC responds to misinformation in the market"

It details many of JCAP's accusations about WiseTech and responds to each of those.  As expected, WTC refutes all of JCAP's claims.  For some idea of how this may play out, RFF have been going through something similar.  I don't expect it to play out like QIN or BLA - who were both targeted by similar short sellers and both went into administration for a 100% loss for shareholders.  While growth rates may have been somewhat exaggerated, I am reasonably confident that WTC is NOT a house of cards ready to come tumbling down - like QIN or BLA did.  WTC is a real business with real profits and real growth and certainly one of Australia's largest tech companies.  I doubt they're worth $30/share (where they are now), but I thought they were expensive at $17 also (last year).  However - they're also not worth $0.  They're worth something.  In the coming weeks they may get down closer to a sensible valuation.  Of course, they might not also.  The market might just shrug this off and keep backing WTC to keep growing at the rates that they have been so far, and price them accordingly (on future profits rather than current ones).  We shall see.

Disclosure:  Not holding WTC.

To continue on about the rationale behind the acquisition strategy that WiseTech employ...

Richard White has devoted much of his time in recent years to developing a reliable and highly repeatable system to integrate these acquisitions into WiseTech Global.  He says that's he's an engineer and is focussed on systems, and repeatability - so systems that work consistently the same way every time.  He believes that he's developed such a system to enable seamless integration of all of these acquisitions into WiseTech Global. 

In reality, there are always some issues, including culture differences, the continued motivation of management when they become employees rather than employers/business owners, issues around valuation - including the value of intangible assets that are often written down in subsequent years in many cases, and in this case we can also add language barriers to that list.  Richard White tells us that he's got all of that under control.  Perhaps he has.  However, I think it's certainly prudent to assume that there is still significant risks attached to this strategy. 

I think the strategy looks sound.  I think they really have to go about it this way to achieve their objectives.  However, it would be a mistake to assume that this is without risk.

There are risks with all investments.  That brings us to likelihood and risk mitigation.  Regarding the integration risks and other risks associated with this extraordinary level of acquisition activity, it probably gets down to how good Richard White and his systems are.  He won't be able to completely eliminate the risks, but he has probably significantly reduced them, and mitigated the possible effects of those that remain.  Probably...

I don't own any WiseTech shares currently, having recently sold out because at these lofty levels the downside looks greater than the upside to me.  However, I really, really like this company and do really admire what Richard White has been able to achieve with WiseTech.  At more reasonable levels, like back closer to $10, I'd be back in.  They will have another correction at some point because there is a rediculous amount of growth priced in up here.  They are rising purely on momentum now.  However, that correction could come tomorrow, or in another 6 or 12 months.  I don't know.  The biggest risk with WiseTech currently is jumping on them at around $17 (where they are today) just in time to catch that correction.  That's the risk I'm most worried about.

Update:  19-Oct-2019:  Didn't need to be worried about the downside so much it seems - when they were $17 at least - that was all written almost a year ago - in late November 2018 - and they more than doubled from there to over $38 in early September this year (2019).  They are a little lower at $30 now and under attack from a short-seller "investment research" firm based in the USA, ("JCap"), so when they emerge from their trading halt on Monday we'll see where they land.  However, it will be a damn sight higher than the $17 level I was worried about last year.  I wasn't so much worried about their accounting and overstating of growth rates and profits as much as the nose-bleed valuation when compared to profits (stratospheric PE ratio) and the extrordinary level of aquisitive growth - and what can go wrong with companies that make SO many acquisitions (remember QBE a few years ago?).  Anyway, JCap have said that this was the first of a series of reports on WTC, so we can expect this to drag on for a little while, like the attacks on RFF (Rural Funds) have.  WTC's first statement of rebuttal can be read here.  

Disclosure:  I am neither long nor short WTC at this point in time.  I never short.  I don't hold WTC purely because I think their valuation looked stretched at $17, and looks even more stretched at $30.  I have held them as a momentum trade in the past however (for a good time, not a long time).

Just on the acquisition risk with WiseTech.  This is not your traditional roll-up model played out on a global scale, although it can look like that sometimes.  Richard White, the founder of the company, explains it well in this interview:

Richard White Interview with Tom Piotrowski, CommSec Executive Series, 15 March 2018

At about the 4 minute mark of that interview, Richard explains that they are making very targeted acquisitions, mostly in foreign language companies, to bring talented people and expertise into the WiseTech Global business, as well as the customer base that those companies bring with them.  To develop those sort of businesses in those countries from scratch would require a lot more time and effort - and money too in most cases - than to acquire existing businesses that have already done all the hard yards.  These businesses already have relationships with regulators, the government, and other businesses within those countries, which fast tracks the whole process. 

WiseTech already have the best freight forwarding and tracking software suite in the world, CargoWise One, and these acquisitions are now just plugging the remaining gaps for the most part, to give them complete global coverage.  Every country has its own laws and regulations, especially around freight coming into that country from elsewhere, and getting all of the compliance paperwork right and collecting and storing all of the necessary information, in the correct format, is vital for the CargoWise One platform so that they can deliver on their productivity promise.  Increased productivity and lower costs (due to accurate streamlined systems) are core promises that require a lot of local knowledge from every jurisdiction in which they operate (which is - all of them).  To build this global network mostly via acquisition is just the fastest and most efficient way of doing it.  

WiseTech Global aren't building this network to compete against other freight forwarding companies.  Those companies are WiseTech's clients.  WiseTech sell their software to those companies.  The idea is that CargoWise One will be so comprehensive and complete, in terms of geography, accuracy, relevancy and features, that every serious player in the industry will NEED to use it, or they will be at a competitive DISadvantage.  They're already almost there, hence why so many players in the industry (including most of the big players) use CargoWise One already.

[Continued]