Thursday, 18 October 2007

Management turmoil at Ansearch (ANH)

I first mentioned this company back in March of this year and noted that despite their lack of profitability, at least in comparison to some other small companies profitability seemed to be a priority for them.

Briefly, Ansearch (ANH) is an online media company that derives revenue from selling advertising space on a network of search engines, portals and popular websites. The latest FY07 results showed a more than 400% increase in revenue and a much reduced loss from operations of -$1.2m as opposed to a loss of -$4.4m in the prior period.

In the latest quarter to September 30th, ANH posted a $0.74m profit before tax. Revenue has continued to grow strongly in 1Q08 rising to $4.78m, more than the first three quarters of 2007 combined.

The company has not only demonstrated the ability to grow revenues but to keep their costs under control and transform itself into a profitable entity. However all is not well on the management front at ANH.

Management turmoil
A storm has been brewing in management ranks over the past few months. The first public signs of this were the resignation of former CEO and founder Dean Jones as a director of the company in late July this year. What follows is a brief summary of events. However I would urge anyone interested to read the ASX releases by the company over the last few months for more details, especially today's 16 page release that summarizes Dean Jones' position.

As Jones explains it, Glenn Ridge, better known for his role as the host of Sale of the Century, manoeuvred himself into the position of chairman of the company and installed a character by the name of Robert Edge as CEO with the approval of another director Terry Grigg. Dean Jones claims that both Ridge and Grigg are unfit to hold their positions on the board as they show little understanding or interest in the business.

Of course Ridge and Grigg refute these allegations and claim that Jones is being disruptive to the company. On the surface it would seem to be a case of he says, she says. However what Ridge and Grigg fail to mention is that the man they were so keen to install as CEO of the company is in fact a very shady character. In a recent finding by the Australian Securities Commission:

Justice Dodds-Streeton concluded that the evidence established that Mr Edge repeatedly contravened numerous provisions of the Corporations Act (the Act) and Corporations Regulations and that his failure to comply with statutory requirements was ‘chronic and widespread’.

Her Honour stated that Mr Edge’s ‘repeated contraventions struck at the heart of the statutory regime designed to ensure the liquidator’s accountability, to facilitate the audit and review of his conduct and to inform and protect members, creditors and the public’.

Mr Edge failed on numerous occasions to lodge forms of account, convene and hold final meetings of creditors, lodge final accounts and had destroyed books and records of companies in contravention of the Act.

Her Honour also found that remuneration was paid to or at the direction of Mr Edge in circumstances where there was no permission given by the creditors in contravention of the Act. Her Honour found that Mr Edge had intermingled the funds of various companies in his firm’s bank account and that the payment of remuneration without approval or supporting documentation amounted to the ‘most serious breaches of duty’.

Her Honour considered that Mr Edge should be required to pay amounts drawn by him for remuneration without approval, estimated by ASIC to be over $400,000, into the Supreme Court fund. He will then be required to apply to a Master of the Supreme Court for approval of his remuneration.

Her Honour stated that she was not satisfied as to what work had been performed by Mr Edge and concluded that satisfactory supporting documentation was either not prepared or was not in evidence before her. Her Honour concluded that the ‘wholesale destruction of the books and records of many companies’ in breach of the Act made a detailed and comprehensive review of Mr Edge’s conduct impossible.

Finally, her Honour concluded that Mr Edge was unfit to be an official or registered liquidator and that he should be prohibited from holding the office of liquidator, provisional liquidator, voluntary administrator, deed administrator or receiver for 10 years.....

During the proceedings her Honour stated Mr Edge’s attitude to ASIC’s investigation had been ‘needlessly uncooperative’. There were a number of inconsistencies between Mr Edge’s initial letters to ASIC, documents in evidence, affidavits filed on behalf of Mr Edge and oral evidence given at the inquiry.

If you were a shareholder of this company would you want this guy to be CEO? And what of the people who pushed so hard to get him there? Remember that Dean Jones is the founder of this company. He is the largest shareholder and has the most at risk.

In the traditional sense of the word, Dean Jones is a capitalist, that is, he has risked his own capital and thus has a considerable stake in the success of the company. He is not a hired hand with a generous salary and option based compensation package who can walk away with a generous severance deal regardless of the performance of the business.

Ridge and Grigg on the other hand have very small shareholdings but rather large options holdings. That's not to say that Ridge and Grigg don't want the company to succeed, but that they have much less at stake.

More importantly Jones is the key driver of the success of the business to date. Jones has been interviewed numerous times on boardroom radio, he is driven, articulate and very knowledgeable about the business he is engaged in. He has been instrumental in the company's key acquisition of Webfirm, and the agreements signed with Google and Yahoo.

On Monday the 22nd October a general meeting will be held, at which shareholders will be asked to vote on 3 resolutions put forth by Dean Jones. The first is the appointment of Jones as a Director of the company and the other 2 are the removal of Grigg and Ridge as directors.

Whilst not being an insider and privy to the machinations of the inner workings of the company I believe that the choice to vote 'for' each of the resolutions is clear.

It would be tragic for a company with such excellent growth potential to be usurped by opportunists such as Ridge and Grigg and be subject to the whims of a CEO who is clearly unfit, in light of the ASIC findings, to hold such a position.

As a way of disclaimer of have no shareholding in ANH or any association with any of the parties involved.