ative accounting that is well within the rules, then maybe the rules need to be changed.” He said it was also time to “put the blowtorch” to private equity companies like Anchorage to closely examine their tactics. In the wake of this opinion and all the other opinions flying around as to what went wrong at Dick Smith, Sinclair Davidson, professor of Institutional Economics at RMIT University, blogged that administrator Joseph Hayes from McGrathNicol is barely in the door but already the post-mortems have appeared. “The future of the business – and its 3300 employees – hangs in the balance. But an important question is whether this is an isolated failure, or the first of many business failures in some sort of contagion?” he wrote. “Woolworths sold the retailer to private equity firm Anchorage Capital Partners in November 2012, which then floated the company on the stock exchange a year later for $520 million. After the sale the new management team set about getting rid of what it called ‘aged and obsolete’ stock, writing down the value of its inventory by $58 million. “It may well be that the business expanded too rapidly in the last couple of years. The retailer’s annual report highlighted the opening of 25 stores. “If, as suggested by Stephen Batholomeusz, the market was at fault for not properly analysing the implications of the restructure before the initial public offering, this is small comfort to employees and consumers now.” Davidson explained that in a dynamic economy businesses should fail on a regular basis while in a growing economy those businesses will be replaced by other, more efficient businesses and consequently workers and consumers, and investors too, will be better off over time. This is what Prime Minister Malcolm Turnbull had in mind when he spoke of a disruptive economy. “So on the one hand, a business that expands too rapidly and experiences financial distress, as may have happened to Dick Smith, suggests an isolated failure. On the other hand, with economic growth being sluggish and world economic growth predicted to remain sluggish,we might expect more business failures in the short term, with workers struggling to find new jobs and consumers reining in their spending,” he wrote. “Dick Smith has many competitors – including JB Hi-Fi and Harvey Norman, and even Office Works, Bunnings, and Aldi for some product lines. Despite deep discounting well before Christmas, Dick Smith was unable to generate the bumper Christmas sales it was expecting. But it seems Dick Smith was never expecting massive sales growth – looking at its prospectus in 2011 it had revenue of $1.28 billion and by 2014 it was forecasting revenue of $1.226 billion. “Yet investors seemed to believe a company then worth about $20 million was worth $520 million. Investors and regulators are going to look long and hard at private equity floats. But the lesson here is that equity investors need to do their homework before investing. The old adage, ‘if it’s too good to be true, it probably is’ applies. “This all suggests that a poor competitor has exited the market. Sad, and not without a human cost, but that is how our economic system operates and is intended to operate.” Davidson added that that perspective, however, is not grounds for complacency. “All of Dick Smith’s competitors have been expanding too. They too have financing costs that require servicing. They too have to work at meeting the demands of consumers who can be quite fickle. Just because the economy is sluggish doesn’t mean the disruption is going to go away anytime soon, if ever,” he wrote. “On a positive note the failure of a poor competitor does suggest that we’re unlikely to see a wave of business failures. This isn’t the beginning of a contagion where we see a whole spate of similar firms suddenly experience financial stress and failure. There are lessons to be learned (actually re-learned), but no profound revelations.” Currently Dick Smith’s receivers are out to get the most money possible to pay the banks. The best scenario would be for the whole business to be bought as a going concern, which is improbable. What will probably take place is that there will be attempts to discard as much stock as possible as well as sell some of the shops, such as the New Zealand chain. The company’s last report showed NZ  sales falling nearly seven per cent though, with margins under pressure and an annual profit down nearly two-thirds on the year before, at a little over $1 million. With the overabundance of  consumer electronics retailers in NZ, established retailers would be loathe to buy Dick Smith in its entirety. Mr Smith began his retail chain in 1968 for $610, and sold it to Woolworths for $25 million in 1982. Interestingly enough, the founder blames Dick Smith’s collapse on too much economic growth.