Technically Speaking: Law is no remedy when Kiwis choose to follow pied pipers

Friday 8th December 2000

Advantage Group

The rise and fall of Advantage Group makes an instructive parable for students of sharemarket bubbles.

Advantage has had a history of shameless ramping from its first days of listing. When it made its debut on the sharemarket, the company was promoted as the best thing since sliced bread because of its dominance of the local eftpos market and was supposedly set to take Australia by storm.

Its management at the time was vaunted as being in the world class entrepreneur category, but that sort of thing was also once said about Alan Hawkins, another Kiwi business genius who came to grief on Australia's inhospitable shores.

Things did not turn out the way they were supposed to do and Advantage went down the drain. Australian expansion turned out to be a costly disaster and the share price crashed.

The management sold out. New blood came on board, but for a while the share price continued to plunge and it looked as if Advantage was finished for good.

Then along came the internet stock craze and it seemed that, as a reputable information technology listing, Advantage's fortunes had turned up again. The second great Advantage bubble commenced.

Involvement by local tycoon Eric Watson helped pick up the share price. For a while Watsonmania dominated the local sharemarket.

Every rats-and-mice company he touched turned to gold on the Stock Exchange, whether in the retirement home or information technology areas.

Now he could be said to have a reverse Midas-touch effect considering how the companies he invested in have fared in share price movements, but back then he could do no wrong and everyone, it seemed, wanted to know where Mr Watson's money was going next so they could throw their life savings after it.

Advantage got caught up not just in a sectoral bubble but also a personality cult.

For some reason, New Zealand investors seem particularly vulnerable to guru worship, leading them to bow down before false idols and kiss feet of clay.

Mr Watson floated the idea of backing Advantage on to the Nasdaq index by way of a joint venture he set up, the grandly called Qixel Capital Group.

Quick-buck QCG was just what the doctor ordered for local investors and Advantage's share prices went through the roof.

Unfortunately the Nasdaq crashed before QCG graced its board and now the venture has been unwound, causing Advantage shares to drop like a stone. The share price is down about 80% and falling.

There will be a lot of blood to mop up off the floor as investors come to terms with what Advantage is worth as a real business as opposed to a pie-in-the-sky one.

As battered investors gather their rueful thoughts, they might like to ask themselves why they ever believed the Qixel ruse had a hope in hell of success for all concerned.

The Nasdaq's fall may mask recognition of the stark fact that Advantage is an obscure New Zealand company, small in capital base by international standards, operating in a tiny, isolated market at near saturation point and devoid of unique intellectual capital.

Advantage operates in the service sector and lacks any distinctive claim to value in the information technology area that would make it interesting to global capital. It has no characteristics that would persuade US investors to prefer its stock over that of firms that operate in the US.

Only local dummies would have paid a premium for Advantage on the basis of a Nasdaq listing, enabling Qixel's slick shareholders to make a quick exit that in the end did not eventuate.

After all, the key question was - why list Advantage shares on the Nasdaq? Would that add any lasting value to the company? Somehow the market missed these considerations.

Advantage's example is instructive in light of calls for greater sharemarket regulation. Probably our rules are too lax in some respects by world standards and could do with convergence at least to Australian standards.

Perhaps we could do more to protect investors from others. But what do we do to protect people from themselves?

The law is no remedy. Over and again New Zealand investors rush off on wild goose chases and dance along behind pied pipers. They grizzle about the results but are and should be free to take risks and make mistakes. There will be whining about what happened to Advantage but who is really to blame?

Rewriting securities laws should not be undertaken where there is no legal solution to personal failings. Let's preserve caveat emptor as the leading consideration.

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