Five lessons from the spectacular fall of Eddy Groves

ABC Learning Centres is in receivership and its shares are suspended, sealing the financial fate of founder Eddy Groves. JAMES THOMSON underscores five salient lessons from Groves’s downward spiral.

By James Thomson

ABC Learning Centres is in receivership and its shares are suspended, sealing the financial fate of founder Eddy Groves. Here are five salient lessons from Groves’s downward spiral.

The incredible fall of ABC Learning Centres founder Eddy Groves has been completed with the company being placed in receivership. Now the desperate scramble to keep its 1200 childcare centres afloat begins.

It is less than two years since Groves was seemingly sitting on top of the world. In mid December 2006, ABC’s share price hit its peak of $8.62, valuing the company at a staggering $3.4 billion and Groves’s personal fortune at around $300 million. ABC had just entered the US market and Groves’s vision for a global childcare empire seemed within reach.

For a company that had only listed in March 2001, the rise of ABC Learning was spectacular. Eddy quickly became a market darling and his maverick image – the cowboy boots, black t-shirts and ever-present mullet – was all part of the charm.

Two years later it is clear that Groves was horribly out of his depth. The mess that he has left the company’s accounts in, the insanely complex way revenue flowed back from individual centres to the parent company, the high level of related-party transactions involving family members, the unprofitable centres – these are Groves’s unfortunate legacies.

So where did Eddy go wrong? And what can other entrepreneurs learn from his mistakes?

Too much, too fast, too expensive

Groves’s original vision to corporatise the cottage childcare industry was sound. The industry was supported by good demographic trends (increasing birth rates and growing numbers of working mothers, and underpinned by large government subsidies which provide a steady platform for cashflow and earnings). Groves’s strategy of creating economies of scale by bringing together large numbers of childcare centres worked well.

But Groves was hell-bent on buying as many centres as he could, as quickly as he could. Between 2001 and 2005, he made an almost non-stop stream of acquisitions, taking ABC’s centre numbers from 43 to 697. The price paid for centres was not important – the key was to keep growing at all costs.

The biggest acquisition was of rival Peppercorn Childcare in 2004. ABC grabbed 450 centres for $340 million, a price that Peppercorn’s founder Michael Gordon just couldn’t refuse.

It is telling that Gordon is still worth around $180 million while Groves is facing struggle street. It is also proof that expansion at any cost can kill a company.

He forgot to run the business

In 2005, Groves started his global push with acquisitions in the United States. This was followed later by acquisitions in Britain. But while Eddy was travelling the world with his new title “CEO – global” he took his eye of the company’s Australian childcare operation, which had been ABC’s cash-cow and main profit generator.

In the last two years, there has been a significant blow-out in costs in the Australian business, particularly staffing costs. When Eddy was in charge and focused, ABC never used agencies to find staff because it costs more. When he was off travelling, rostering and recruitment costs blew out and profits slumped. ABC is yet to recover from these problems, and there are estimates 200 Australian centres are unprofitable.

The lesson is clear – never let your grand vision distract you from actually running the business.

His accounts were a terrible mess

ABC’s shares remain suspended pending the release of the company’s accounts for 2008-09, which were supposed to be released by the end of August. ABC’s auditor Ernst & Young has spent months pouring over the company’s accounts of the past three years, trying to unravel the complex way revenue and profit was accounted for, particularly the way compensation payments from centre developers were counted as revenue. The corporate watchdog ASIC is also reportedly examining ABC’s accounting practices.

The shoddy state of the books has also made it impossible for ABC to attract a buyer for all or part of the business in the last few months.

If you think boring financial reports don’t matter, think again.

His corporate governance practices were poor

Eddy Groves never seemed to worry too much about corporate governance, and entered into a number of related-party transactions during his time at the helm. In 2006, ABC paid broking firm Austock – in which Groves owns a sizable stake – $27 million in transaction fees.

Also in 2006, ABC paid Queensland Maintenance Services $74 million for untendered renovation and maintenance work on ABC centres. QMS’s sole director is Frank Zullo, who was listed as Groves’s brother-in-law in property documents in fiscal 2007.

ABC also sponsored the Brisbane Bullets basketball team, which Groves owned.

ABC always argued that these transactions were conducted at arm’s length, but for many investors that wasn’t the point. Becoming known for poor corporate governance can damage a company’s reputation and kill investor confidence.

He was an entrepreneur, not a manager

Eddy Groves was energetic, aggressive and visionary, and his passion for his company and the childcare industry was unquestionable. But Groves’s drive consumed him. He took his eye off the management of the company to concentrate on his growth strategy – and then became so wrapped up in the idea of a global empire that he overpaid badly for ABC’s US and British acquisitions.

“There is an enormous amount of pressure that the public market can put on a company to continue to grow,” he said recently.

“Even though you tell yourself not to fall into that trap, it’s very difficult not to, because the share price continues to grow, the returns were continuing to grow, and people want you to maintain that pace.”

Eddy was always confident that he was the best person – the only person – to run ABC.

He was wrong. Eddy was the right person to grow ABC, but it was his lack of focus on the company’s operations that has brought it to its knees. Had Eddy bought in the right manager and the right time, the company could have been saved.

For a full wrap up of ABC Learning’s travails, go to SmartCompany’s special ABC Learning page.