Case Study Of ABC Learning Centers Collapse

Introduction

The daycare schools have long been in the society. The schools are aimed at providing training and supervision for small children in the preschool age and also for the old and the disabled. (Daycare, n.d.). The concept of the child care centers were conceptualized in a big way in Australia when the ABC Learning centers were established in 1988. It soon became the largest of the child care centers in Australia. It operated in the form of a company and the corporate management at its helm accelerated its growth in a short span of time. The growth accelerated in the latter half of the 1990s. In 1997, the ABC centers were only 18 in number in the whole of Australia. The number rose to 800 centers all over Australia which was 20% of all the child care centers of the country. The growth of the company reflected in the market price of the shares. The share price went up to 300% in the space of 5 years from 2001-the year in which the shares were traded in the Australian Stock Exchange. In the financial year of 2004-05, the company had profits of $50 millions.(Rush & Downie, June, 2006). However, from the highs of financial gain, the company’s fortune fluctuated and it faced trouble. There were many reasons for the fall of which many were related to the macroeconomic factors of the country. Some of the reasons were because of the mismanagement of the company. The paper will reflect on the issues that brought about the downfall of the company from such a tremendous track record. For this purpose, the paper will discuss the background to the rise of the ABC centers and divulge on the possible reasons for its dipping fortunes.

Background to ABC Learning Centers

The daycare programs in Australia have been a significant service provider in the case of the children below the age of five. Some of the centers are operated in the semi-Government mould or in the community based programs. In the latter half of the 1900s, the corporate sector took stock of the opportunity of the situation and entered the market. Some of the corporate houses operate in the market but they are not listed in the stock exchange. Some of the bigger names in the industry like ABC Learning has been enlisted in the stock exchanges and operate in the form of corporate chains. It has to be noted that ABC only got access to the stock exchange in 2001. Before that they operated like any other small corporate houses. However, the entry of ABC has revolutionized the industry like never before. At the time of listing of the ABC, there were other companies in the stock exchange like Future One, Peppercorn Management Group, Kids Kampus etc. ABC successfully acquired the companies and its size only grew bigger. The number of centers rose from 43 in 2001 to 1037 in 2008. At its peak point, ABC provided service to 100,000 children and employed 16,000 staffs. (ABC Learning Centers, n.d.). The growth in the number of learning centers can be understood by the graph below:

Source: Parliament of Australia, n.d.

More amazing has been its rise in the stock exchange. In 2001, the shares opened in the ASX at $2 which rose to $13.94. The growth of the ABC was also helped by the Governmental tools. The Government had the policy of “child-care benefit schemes” and fee subsidies that were given to the centers. Before that the income of the parents of the children were tested. The day care centers were eligible to get the benefits. Therefore, the centers like ABC got the amount from the Governments if the parents of the children were not able to pay the fees. (Child care benefit, n.d.). This essentially meant that the industry was recession proof as the cash flows were constant whether from the parents or that of the Government.

The growth of the corporate chains in the day care centers accelerated the growth of the other sectors like that of the real estate that were related to the industry. The growing number of centers needed to be supported by the growth in the real estate sectors. The rent of the learning centers rose rapidly in a matter of 2-3 years. However, it was evident that an industry as sensitive as that of the child care was being taken over by the corporate. There was a concern over the quality and voices were raised against the profit mindedness of the companies. The smaller companies that were in the market were being wiped out by the financial powers of the bigger corporate chains. According to Ms Gwynn Bridge of Australian Federation of Child Care Associations,

“what it means is that if the owners don't want to sell, the large chains can just put up another centre and put them out of business...we really need a return to a system under which the Federal Government designated which areas were high needs and licensed accordingly...a child care centre is very difficult to operate. A lot of these new players think it is just a license to go in there and make money, but you need years of experience.” (ABC Learning Centers, n.d.; Schwab, 2010: 31-65).

This was the time when the downfall of ABC began in the true sense of term. However, the period was boom time for the corporate chains and the management of ABC did not understand the consequences it will be facing in the coming years. The following paragraphs will help us to digest the reasons for the downfall of the company that revolutionized the market of the day care centers. (ABC Learning Centers, n.d.; Schwab, 2010: 31-65).

The Downfall

As mentioned above the downfall began long before it was realized by the management of the company. Besides the problems of making the market their own, there was some quality issues regarding the education provided in the centers. There was a prescribed format for the child to stuff ratios. However, it was not possible to make the amount of profits the bigger centers did in those days keeping in terms with the rules. Therefore, there were certainly in the degradation in the quality in providing education as there were never enough staffs to attend to the students. Some of the students were disabled and others had problems which required them to be attended by a larger number of staffs. However, this was never possible. In 2003-04 the financial statements of ABC provided a grim picture. Only 56.7% of the revenues earned by the company were provided to the staffs. The percentage in the case of the small non profit organizations was 80%. It was evident that there would be a difference in quality. It was a boom period for the corporate chain and the management did not anticipate the danger. It went on operating in its way and there were several discrepancies in the financial statements of the company. The growth of ABC into such a big player in the Australian market, according to some, had been helped by the policies of the Government. According to Professor Deborrah Brennan,

“I think that everybody is aware that [the extraordinary level of market concentration] is unusual, but I just want to really drive that home. We think that ABC Learning had around 20 to 25 per cent of the Australian long day care market. But in the UK the largest 40 providers altogether own 10 per cent of the places, and in the USA all corporate chains together own 13 per cent. So I argued, and I think this took Sue’s attention, that we have really entered into a vast national experiment with our children in Australia. My concern, and I am happy to elaborate on this, is about not individual private for-profit centres but the system-level consequences of market concentration.” (ABC Learning Centers, n.d.).

The economic and the financial problems rose in the wake of the global financial crisis of 2008 which ultimately led to the fall of the company. It is evident that if the company was aware of its misdeeds which it committed in the wake of expansion, then the situation would not occur. (Schwab, 2010: 31-65)

Financial discrepancies

One of the major reasons that have been attributed to the fall of the company is that of financial discrepancies. According to one of the representatives of the Australian Competition and Consumer Commission (ACCC), the downfall of ABC has not been the result of rising competition. Rather it has been due to some financial mismanagement like high debts and more than normal acquisitions. In addition to this, the fall can be attributed to some major discrepancies in the financial information provided by the company.

ABC fell into the glare of the public eye in the wake of the financial crisis in 2008. The whole world was waking up to stories behind the real sector boom. The sub prime crisis made the people and the Governments of various countries aware of the malpractices used by many companies in the economy. (Will subprime trigger a recession, 1^st January, 2008). The financial information of ABC provided a grave picture on the whole. The assets side of the balance sheet of the company constituted of 72% to 81% of intangible assets. The intangible assets consisted of various operating licenses. These operating licenses were the matter of concern for the Government. The Government set up a commission to question the matter to the Australian Securities and Investment Commission (ASIC). The Commission questioned the failure of the ASIC in this matter to effectively value the operating licenses of the company. ABC claimed high value on those licenses which were actually of no value in the trading sense of term. The valuation of the operating license was used to attract traders in the market and high values were raised. The Committee had made ASIC to investigate the true value of the operating licenses and if they were of any value to the company. The investigation is still underway but in a declaration the ASIC has stated that the licenses were not 'material to the company’. (ABC Learning Centers, n.d.). In addition to this, ASIC has stated to the Committee as follows:

“Revaluation of licenses was permitted under the accounting standards for the year ended June 2005 and new accounting standards applied thereafter. The new standard AASB 138 "Intangible Assets" ("AASB 138") only allows the revaluation of intangible assets in certain circumstances. However, the standards only apply where an accounting treatment has a material impact...ASIC noted that at the time of its enquiries, the financial impact of these concerns on the 2006 financial statements was not material to the company.” (ABC Learning Centers, n.d.).

Therefore, it was evident that ABC was following malpractices in the course of maintaining its accounts. The value of the shares fell as the question of the malpractices rose. Legal actions were to be taken against the company. The founders of the company Mr Eddy Groves and Dr Le Neve Groves resigned in September, 2008. The new management took center stage and the first activity for them was to restore order in the company. This was done by acknowledging the malpractices that have been followed up to now.

“Unfortunately the accounting practices that underpinned this growth strategy appear to have served to materially inflate the true underlying operating performance of the business which is at the core of the problem. The public reporting of ABC’s profitability (Analysts forecasts in Jan ‘08 pointed to a profit of $200 million) gave rise to the perception that the provision of childcare was an extremely lucrative and profitable industry. This attracted significant investment and enabled ABC to accelerate its expansion plans, including forays into international markets.” (ABC Learning Centers, n.d.).

It has to be noted in this regard that the intangible assets are of important consideration for the valuation of the company. Some items for the companies are not tangible like goodwill. However, for the true valuation, these items are to be taken into account. (Canibano, Covarsi & Sanchez, March, 1999). The AASB has formulated its standards stating that the revaluation of the intangible assets is possible if the assets in question are material to the company. For example, the goodwill of the company is material as it is connected to the company. (Intangible assets, 2009). However, in the case of the licenses of ABC, the majority were not material. The values of the licenses were increased form year to year whereas they should have not appeared in the Balance Sheet. This inflated the amount of assets of the company and thus increased its valuation. This provided wrong information to the shareholders which are not approved by AASB.

Related Party Transactions

One of the major ingredients in the fall of the ABC Learning Centers has been the presence of related party transactions. Eddy Grooves was instrumental in the development of the company and the growth of it. The rise of the company was exceptional in the space of such a short time. However, it has to be said that Mr. Grooves was unsuccessful in the managing the company. The company did not follow the corporate governance rules. There were a number of related party transactions during the reign of Mr. Grooves. In 2006, Austock, a broking firm which had major shares by Grooves entered into transactions with ABC. Austock received $27 million as transaction fees from ABC. Queensland Maintenance Services (QMS) was under the directorship of Frank Zullo, who was the brother-in-law of Mr. Grooves. The company was paid $74 million for works in the ABC centers. The Brisbane Bullets Basketball team that was owned by Grooves was sponsored by ABC. In addition to these, there were transactions relating to 1,2,3 Global group of companies. ABC stated that these transactions were not related and there were no interests of the company in the transactions. However, this was a confirmation of the poor corporate governance measure of the company. This killed the confidence of the investors on the company. (Thomson, 6^th November, 2008)

Related party transactions should never be attempted and done by the companies because, it tends to kill off the positive reputation in the market. The investors and general people think that the management is running the companies for their own stake and they do not have any thought for the investors. The company does not follow the corporate governance rules which are a criterion for good performance at the end of the year. This is dangerous for the company.

Change in the Government Policy

The Australian Government has changed policies in the past that has affected the operations of the day care centers. The Child Care Act of 1972 provided the base for the deployment of the financial assistance to the children in these centers. Up to 1991, the non profit organizations which operated the day care centers were eligible to get the financial assistance. The law changed in 1991, which effectively brought end to the financial assistance to the non profit organizations. From then on, all the organizations, be it profit making or non profit making. It has to be noted that the growth of the learning centers were the highest after 1991. The industry got an impetus from the Government and the corporate chains began to enter the market. The budget of 1996-97 changed a little bit. The Government stopped all the funding arrangements for the community based daycare centers. The child care programs that were in the relevance till now were changed. A new system called the family benefit payments was introduced. This was a comprehensive program including the child care benefits and a new plan for the family. The new policy had the option of giving the fees at the time of payment made to the schools. The parents then had to pay the difference of the amount between the fees and the Child care benefit program. (ABC Learning Centers, n.d.).

The family benefit program had the option of providing financial benefits to the parents of the children. However, before providing the amount, the income of the parents will be tested. The system is adjusted with the tax structure. People receiving the family benefit program will forego the tax benefits in the case of families. This means that higher the amount of the family benefit program, the lower the tax benefit for the families. This made the families susceptible in taking the benefit programs. Moreover, the high amount of verification of the parents did not encourage the parents to send their children to day care centers. The Government has not been encouraging the growth of the child care centers as researches put forward show that the children in these centers develop peculiar mental problems in the early years of their life. (Introduction, n.d.)

Conclusions

It has been an amazing turnaround in the daycare industry in Australia. ABC rose like a phoenix in the space of 20 years and controlled 20% of all the centers present in Australia. However, its fall was swifter. This underlined the fact that the management of the company was inefficient in controlling the fortunes of the company. The management had the vision to grow but in the meantime it forgot to strengthen its base. The accounting discrepancies and the change in the policy of the Government accelerated the downfall of the company which once ruled the roost in the day care market in Australia.

References:

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