KEY POINTS:
Hindsight is a wonderful thing. In hindsight there are plenty of major corporations that have made acquisitions in the past two years which now look expensive and problematic.
But the story of Fletcher Building's $1 billion Formica purchase is not about hindsight.
It is not even about the foresight of a whistle blower who tried to raise alarm bells with the board prior to the purchase - even though those details, leaked to the Business Herald this week, do hint at some serious dissension in the management ranks.
For the sake of shareholders, the story from here needs be about what management and the board do with the Formica business now they are stuck with it.
The timing of the purchase was terrible whichever way you want to look at it and whoever you blame.
Fletcher Building had too much cash on its balance sheet for a couple of years and was under pressure from shareholders to spend it or to give it back.
It finally made its big purchase in May 2007. At that time the US sub-prime mortgage crisis was just starting to become an issue.
It was reasonable to expect a property slump in the US but also reasonable for a big business to look through what still looked like a normal property cycle. The credit crisis did not escalate to something more worrying until August 2007.
But now the US housing sector is in ruins. The Formica business cannot possibly be worth US$700 billion that was paid 18 months ago. That much is obvious.
How badly the business is performing and how far its value has dropped are yet to be fully revealed.
Chief executive Jonathan Ling and chairman Rod Deane this week reiterated their commitment to Formica.
Deane told theDominion Post that he was "very satisfied" with Formica's performance. Presumably he means in the context of a US economic meltdown. Because compared to projected earnings offered up at the time of the purchase there is little to be satisfied about.
Shareholders should expect a great deal of transparency and accountability in the way the business is handled from here.
The damage to the wider Fletcher Building group needs to be limited.
In the current environment there should be no tolerance for businesses that fail to take a tough and realistic approach to writing down poor-performing divisions.
Fonterra's management has been lambasted for the disastrous outcome of its investment in the Sanlu business. But to their credit they have not kidded themselves or their shareholders about what that investment is now worth. The entire $200 million is likely to be written off they told farmers at their AGM this week.
One of the last investment banks left standing - Goldman Sachs - may have had an edge over rivals because it runs a staunch policy of encouraging staff to raise alarm bells.
Ironically Fletcher Building appears to have been promoting a similarly admirable system. They had engaged consultants KPMG to run an anonymous hotline. But when the prophetic call came it was ignored.
That's hindsight talking again. Ling and Deane may yet prove the naysayers wrong, but let's hope they don't feel they have a point to prove. Let's hope they deal with the worst quickly and move on.
