A Brief Account of the Adsteam Saga

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A Brief Account of the Adsteam Saga

The Adelaide Steamship Company Limited began operating passenger and cargo ships since 1875.  A downturn in its core activities during the 1960’s and 1970’s led the company to diversify into other activities.  Under the leadership of John Spalvins it went to acquire enough interests to effectively control some of the leading companies in the food, ship towage, building, retailing and financial industry throughout the 1980’s, without having majority ownership or more than 50% interest.   Clarke et al described how this acquisition strategy resulted in an extremely complicated cross-shareholder-based structure for Adsteam (2003, p. 158).

Things took a different turn in 1989. Adsteam went for two ambitious investment schemes that went bad, one of which involved the 100% debt-financed acquisition of IEL for $900 million.  Analysts took notice of this and gave unfavourable assessments of Adsteam’s liquidity and ability to pay its debts.  With the growing perception from its financers that it lacked assets to guarantee its loans, the money stopped flowing to prop the conglomerate’s operations, leading to John Spalvins’ departure and the eventual breaking up of Adsteam under a new administration.

Building The Adsteam Pyramid

Debt and gearing

The Adsteam acquisition binge was fuelled by massive borrowings.  In order to elicit the trust of investors Adsteam had to show its performance in the best possible light (Gay and Simnett, 2003).  Clarke et al (2003, p. 261) refers to the ‘judicious use of controlling shareholdings’ by Adsteam management to hide debt off the company’s balance sheet.  The prevailing accounting standards of that time, as Deegan explains, did not require companies to consolidate a subsidiary company’s activities if no effective ownership or more than 50% ownership prevailed (2003, p.760).  Adsteam knew well what the accounting standards allowed them to do in order to keep the high gearing on its subsidiaries off its balance sheet.  Clearly misleading, these assertions were given further credibility with the mark of approval from Deloitte, the company’s auditors of the time.  

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Profit

Adsteam’s financial statements did not really reflect the true and fair view, because they were based on the intra-group transactions. Dividend from the other members of the group contributed to a large part of each company’s income. The non-consolidation and consolidation reports also give quite different pictures of the company’s performance. In 1991, for example, the non-consolidation profit was $980 million, compared with the consolidation profit of $250 million (Sykes, 1993).

Asset

Adsteam deliberately increased the value of its asset in several ways (Sykes, 1993):

  1. It carried forward FITB as an asset when its realization was ...

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