Of all the entrepreneurs that personify the tragedy of the global financial crisis, few have a story to rival that of Irish entrepreneur Sean Quinn.
Last week, Ireland’s debt-ridden banking giant, Anglo Irish Bank, took the incredible step of seizing control of Quinn’s assets after receiving the approval of the Irish Government. The imaginatively titled Quinn Group spans 13 businesses in everything from manufacturing and mining to insurance, commercial property and chemicals.
Quinn owes the bank a staggering $4 billion. The title of Irish’s richest man – Forbes valued his fortune at $6 billion in 2008 – is a distant memory.
Quinn’s story perfectly illustrates the Irish rise and fall. Quinn left school at 15 and started a small business extracting gravel from his family farm, later expanding into concrete and from there into a wide range of building products.
In the late 1990s he successfully diversified into insurance, reinvesting in a range of sectors, primarily property, hotels, pubs and retail. All the while, his building products and manufacturing businesses rode the Irish property boom, sending his fortune skyward.
But like the rest of Ireland, the banks were Quinn’s undoing. Quinn built a 28% stake in Anglo Irish, using money borrowed from the bank to acquire shares.
When the Irish economy crashed in 2009 and Anglo Irish was nationalised, Quinn was left owing about $4 billion to Anglo Irish.
The bank now plans to continue to operate most parts of Quinn’s empire, which is actually profitable. Other assets – particularly property – will be sold off as the bank starts the process of recovering its debts.
“Our mistake was to place an overreliance on the Irish banking system and the many predictions for continued sustained growth in the Irish economy, from some of the country’s leading financial services experts,” Quinn said in his first public statement this week.
That’s one take. But there are other lessons for entrepreneurs here, particularly about the dangers of expansion and the use of debt.
Regardless of how safe Quinn thought he would be buying into a bank, the sheer size of his bet compared with the size of his empire was asking for trouble. When diversification takes an entrepreneur out of their comfort zone, trouble looms. When that diversification is fuelled by debt, trouble is almost certain.
The Irish will be extracting the lessons from Quinn’s fall for years to come. But with this spectacular fall front of mind – and the GFC now firmly in the rear-view mirror for Australians – let’s take this opportunity to study 10 of the big rich list collapses of the last few years from Australia and abroad.
Bernie Madoff might have confessed to the biggest financial fraud in history, but unlike alleged Ponzi scheme mastermind Allen Stanford, he was never actually a member of the billionaires club.
Stanford, currently in a prison hospital awaiting trial for running an $8 billion Ponzi scheme, was once valued at $2.2 billion by Forbes, but saw his empire unravel when US regulators accused him of luring investors by offering seemingly brilliant returns. It was yet another story of an entrepreneur extending their reach too far.
Stanford made his first fortune buying and selling property in his native Texas, before inheriting his family’s property and insurance business. But when he expanded into financial services, and areas such as south and central America, Stanford started to go closer and closer to the edge. He has denied that he operated a Ponzi scheme and is fighting all charges against him.
Lesson: The bigger the promises, the bigger the trouble.
The name Timothy Blixseth is hardly well known in Australia, but he does hold a special place in recent rich history as the creator of a special club: The Yellowstone Club.
Blixseth, who was valued in 2007 at $1.3 billion by Forbes, earned his money from timber and owned 140,000 acres of timberland near Yellowstone National Park. It was on that land that Yellowstone Club was situated – the ultra exclusive, members-only ski resort in Montana boated members including Microsoft’s Bill Gates and former vice president Dan Quayle. But when Blixseth’s divorced in early 2008, things began to fall apart. His ex-wife Edra got the club and other businesses, but later accused Blixseth of taking cash out prior to handing these assets over. In April, Blixseth faced a bankruptcy petition from three US states.
Lesson: Divorces destroy families – and fortunes.
The fortune of reclusive Perth entrepreneur Rick Stowe peaked at $875 million in 2008, less than two years before his empire collapsed. When the dust settled, it emerged that Stowe had done something quite similar to Quinn in that he took a profitable business and leveraged it into a bad one.
Stowe’s Griffin Coal business was a nice little coal mining operation, which struck troubles when it lost a contract to supply government power stations. Stowe decided that the best way to find a buyer for his coal was to create one – so he set about building a coal-fired power station. Costs blew out, the credit crunch hit, the debts piled up and Stowe was stuffed.
Lesson: When expanding into a new area, don’t put your established business at risk.
It is only three years since Chinese billionaire was named China’s richest man, with a fortune estimated at $6 billion by a local rich list. Today, he is in prison.
In mid-2010, the founder of the Gome Electrical Appliances empire was sentenced to 14 years in jail after being convicted in a Beijing court of bribery, insider trading and illegally buying foreign currency. The son of peasant workers from the south of China, Huang and his brother dragged themselves up from selling small electrical goods on the side of the road outside Beijing to owning one of the biggest electrical goods companies in the country. Huang and his wife still own 32.5% of the company, worth well over $1.5 billion, but it will be a long time before he can spend much of it.
Lesson: Even if you’ve got money, you must still play by the rules.
Cairns-based entrepreneur Tom Hedley is another entrepreneur who diversified his business empire and lost it all.
Hedley made his original fortune from construction – he’s a plumber by trade – but later expanded into pub ownership in North Queensland and then across the state, using large amounts of debt to fund the establishment of a pub-based property trust in the space of 12 months. Then the music stopped. A downturn in Cairns stopped his construction business in its tracks and the GFC weighed heavily on pub returns. Hedley’s empire collapsed in mid-2009 and his $715 million fortune was gone.
Lesson: Fast growth is dangerous when funded by debt – especially when the business cycle turns.
Little-known Sydney investor Steven Eckowitz cruised onto the rich list in 2007 with a fortune of $300 million, courtesy of a large stake in the listed hedge fund business Everest Financial, which was set up by his son-in-law, Jeremy Rein. But when the GFC hit and hedge funds were scorned, Everest shares plunged, taking Eckowitz’s stake in the business down with them. In late 2009, his creditors voted to put his investment company in liquidation.
Lesson: All your eggs should never be in one basket, particularly if that basket is in a volatile space.
Few rich list collapses contain a better lesson for SME entrepreneurs than that of Tony D’Antonio and Peter Hosking, founders of the GMC power tool business and once the owners of a fortune worth $327 million. The business, established in the late 1990s, sold affordable power tools (usually imported from China) for the DIY market. Revenue hit $300 million, but then the company’s big customers – particularly Bunnings and Mitre 10 – wised up, and started sourcing products directly from China. Bunnings cut back its GMC range in 2007 and revenue plunged to $190 million. By the end of 2008, the company was gone.
Lesson: Your competitive advantage must be hard to replicate. If it’s not, you cannot have sustained success.
The founders of MFS Financial Services started out with a seemingly simple dream – to replicate the success of financial services giant Macquarie Bank. But behind their simple goal was an extraordinarily complex beast built on a web of related subsidiaries doing inter-company transactions and loans. In the end, the business owned everything from investments funds to tourist attractions to property, all underpinned by huge amounts of debt. When the credit stopped flowing, MFS was doomed.
Lesson: Complexity can make it impossible to monitor and manage a business. Adding debt to that mix is asking for trouble.
Patricia Kluge’s fortune – estimated to be $1 billion at its peak – was derived from her former husband, media baron John Kluge, in 1990. It was rumoured to be the largest divorce settlement ever and much of the money was pumped into a winery and property business established in Charlottesville, Virginia, in 1999.
But when in late 2010 several banks foreclosed on the winery business, the bulk of the Kluge fortune was gone. Reports suggest Kluge, known for her lavish lifestyle, spared no expense on the winery – French wine masters, imported oak barrels and $75 bottles of wine. Early success convinced Kluge to keep borrowing to fund expansion, but when the GFC hit sales plummeted and Kluge was unable to service her debts.
Lesson: Don’t let your ambition overrun your business ability.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
