The agony of St Jeffrey of Philadelphia

Friday 7th September 2001

IT CAPITAL

Despite its advance billing as the greatest sadistic spectacle since the Romans fed Christians to the lions, Shoeshine was unable to attend last Friday's annual meeting of IT Capital shareholders.

That's probably as well. According to the media coverage, IT's directors endured "a prolonged, merciless grilling" lasting almost three hours.

Down in the cheap seats the main protagonists were an unholy alliance of long-time small shareholder activists Brian Gaynor and Oliver Saint and a more recent addition to the mums-and-dads advocacy brigade, Bruce Sheppard, the leading light of the newly formed Association of Shareholders.

Saint claimed to hold proxies for 16.5 million shares, or around 9.6% of the company's voting capital. His main targets were a trio of Philadelphia-based directors: chief executive Jeff Dittus, Don Caldwell and Jay Snider.

As the latter two hold 15.4% of the shares between them, Saint's rather impressive proxy collection was never likely to win the day.

It wasn't lost on the media or shareholders that the duo didn't make it over for the meeting, creating an impression of arrogance that will be hard to dispel. If International Paper chief financial officer John Faraci can make it over for Carter Holt Harvey's meetings surely these guys could have spared a couple of days.

Even so the rabblerousers' manifest distrust of any director who doesn't live in Remuera or Raglan betrays an attitude better suited to the 1960s than the 21st century.

IT Capital is, after all, still a going concern despite having launched into life on the upswell of the technology investment wave that crested in April last year.

The company is in fact now in its third incarnation as a listed entity. The mists of time have obscured its original name from the retrospective gaze of Shoeshine and his colleagues but it was an oil and gas explorer which came to the end of its shareholders' funds without encountering hydrocarbons.

In 1994 it was re-employed by the Seton family which changed its name to Iddison Group Vietnam and raised $10 million of fresh capital.

It went off prospecting for Vietnamese nickel and gold and was involved in various colourful adventures including part ownership of a chicken farm.

In 1998, once more down on its luck, it transformed itself into a venture capital investor concentrating on high-tech.

Since then its brief history has seen one spectacular success and a less than spectacular failure.

It sunk $3.9 million into a 35% stake in Australian "integrated accounting and e-commerce solutions provider" exo-net and flicked it on to Solution 6 in August last year for $12.7 million, booking a $8.8 million gain.

The coup came in the first half of IT's financial year and, under an admittedly unusual arrangement, a lump of the gain was paid out to CEO Dittus by way of a performance bonus, bringing his remuneration for the March 2001 year to $908,000.

IT's stroppy shareholders gave directors little or no credit for this coup. But the timing of the buying and selling have more significance than the quantum of the investment or the gain.

Armed with perfect hindsight Shoeshine reckons IT paid way too much for the stake in the first place, back before the bubble burst.

But its achievement in selling for an even sillier price, four months after the April 2000 "tech wreck," deserves proper recognition - even if the buyer was the gormless Solution 6.

Any impression this might have created that IT's directors had the Midas touch was dispelled in May this year when IT sank $1.2 million into an 11.7% stake in "electronic procurement software provider" Streamlink. Streamlink went into voluntary administration two months later.

To put this into perspective the total loss of IT's investment was less than a seventh of the gain it made on exo-net.

Even so, at the shareholders' meeting chairman John Robertson was forced to acknowledge the due diligence process should have picked up Streamlink's inherent weakness.

More significant by far was IT's $4.6 million goodwill writedown of the value of its investment in web designer Terabyte Interactive.

IT bought Terabyte from Independent Newspapers. As INL booked a hefty profit on the sale its directors are no doubt giving themselves a quiet pat on the back for their acumen.

Less clear are the values that can fairly be attributed, post-tech wreck, to IT's investments in Deep Video Imaging (DVI) and Virtual Spectator.

DVI is still in the pre-commercialisation stage but its fans include The Warehouse's Stephen Tindall. Virtual Spectator is likewise still soaking up cash rather than generating it, but to Shoeshine's tech-untutored eye it looks as promising as any digital cash burner can look.

At last week's AGM IT's more vocal shareholders and their advocates' main worry seemed to be the expertise of the Philadelphia trio in picking winners in the up-and-down world of technology development.

This is an odd outlook in a country that agonises constantly about its isolation from the rest of the world, about its ability to retain its own smart people and about its ability to attract the attention of smart people from bigger economies.

IT's capacity to deliver worthwhile returns has hardly been tested yet - the company is only in its third year. Its directors didn't deserve the public pillorying they got last Friday.

IT shouldn't be a listed company at all.

The venture capital game is one for sophisticated investors who appreciate that you have to take big risks to get big rewards. Joe Blow New Zealand investor doesn't fit that category and he never will.

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