Selling T3, continued

Alan Kohler has a piece on T3 in Wednesday’s Herald that, as you would expect, does a pretty decent job of unpacking what’s going on. He notes the huge commissions being offered to the stock salesmen, and concludes that:

…you can’t believe anything most brokers say about Telstra now – unless it’s bad…

He says the most common question he gets is “Should I buy shares in T3?”, and his answer is:

Definitely not, in my view. It’s a short-term yield play and a high-risk turnaround bet…

But even this, in my view, only hints at the real problem with T3 namely, the irresponsible, manipulative marketing techniques that the government is using to convince the “mum and dad” investors to buy T3 shares.

Australia already permits advertising and marketing techniques to be used in securities offerings that would be illegal in many countries, including the US. I spent four years drafting offer documents and prospectuses for a Wall St law firm, and I couldn’t believe my eyes when I came to work in Sydney and first saw an Aussie offer document.

Aussie securities prospectuses are glossy, colourful and fun. They are full of charts with arrows pointing in various directions and have lots of pictures of happy people using life-enhancing products. (Actually, let me qualify that: the front sections of Aussie prospectuses the bits that contain the so called “investment highlights” are colourful and fun. The back end, where you find the risk factors and financial statements, is nothing but dry, boring, unfriendly text. It’s a triumph of form over substance.)

US offer documents, on the other hand, are as boring as all get out. They are printed on matte paper and have almost no illustrations. The focus is on the business of the company, with a heavy emphasis on risk factors. US prospectuses are not designed for mum and dad investors but rather people who understand business and know their way around a balance sheet. A US offer document is designed to be informative, not appealing, while in Australia it is all about marketing.

(If you don’t believe me, have a look at the prospectus for the 2005 Australian IPO of Dominos, and then compare it, for example, with the “Form S-1 Registration Statement” filed in connection with the 2006 IPO of Alien Technology Corporation. Do a search for the word “risk” in both documents; look at how the Aussie prospectus pushes any meaningful discussion of risk to page 81, while the US prospectus gets stuck into the risk factors on page 9.)

And now, in Australia, not only is the government getting into the game but it is actually pushing the limits of what is acceptable. I have already argued that the government should be advocating sensible investing that is, it should be educating retail investors about the benefits of investing in diversified baskets of stocks and other securities, rather than encouraging investment in a single stock in a risky sector with an uncertain future. But our government has not only disclaimed any responsibility for educating and informing Australians about investing, it is actually using some of the cheapest tricks in the book in order to turn a quick buck.

For example, it has been widely reported that T3 is being pitched with an emphasis on Telstra’s profit in the past year; indeed, the T3 website and the T3 advertising released so far give no financial information about Telstra other than the fact that:

Telstra is one of Australia’s largest listed companies, recently announcing a net profit of $3.18 billion for the year ending 30 June, 2006….

As it happens, the federal corporate regulator, ASIC, has released numerous statements concerning the use of past performance in the marketing of investment products. ASIC points out what all responsible financial commentators know, which is that:

An undue emphasis on past returns can lead to consumers having unrealistic expectations and making poor investment decisions

ASIC’s firm view, stated repeatedly, is that:

if an ad includes past performance figures, it should give a five year return figure in addition to figures for any other periods

Why do you think the government is using only a one year profit figure for T3, instead of the five years called for in ASIC’s guidelines? Because last year’s $3.18 billion figure represents a 26% fall on the previous year and is in fact the worst annual result since Telstra was listed. If the government followed its own guidelines, it would be forced to explain to the mums and dads why they should buy a company that gives the appearance of being in a death spiral.

So to sum up: Australia has relatively lax prospectus disclosure rules. The federal government, in selling off its shares to “mum and dad” investors, is pushing the already lax disclosure rules. But even this isn’t enough – it still has to offer above market commissions to the salesmen and embark on a $20 million advertising campaign to get T3 over the line.

And the whole while it is using the prestige of the Commonwealth as backing for the sale.

Is anyone still wondering why the government is giving Sol Trujillo such a hard time? Mark my words it’s because they are setting up a fall guy for when this all goes horribly wrong and the mums and dads are wondering where their life savings have gone.

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17 years ago

To be honest I reckon most money managers don’t read a prospectus. They are truly useless documents in assessing a particular issue I think.
The best way of treat IPO’s is to either avoid them entirely- watching the companies’ performance over a space of time- or simply take an allocation at an IPO and dump the crap on the first day of listing. The “dump” strategy works quite well because it is a known fact that most “junk” is priced to rise on the first day or so of issue to make it look attractive.
Do not follow this practice when an well known immensely wealthy Australian investment bank does an IPO as their practice is to screw every last cent from everyone to meet heavy annual bonus commitments so that the executives can cover heavy mortgage payments on the harbor home and the annual private jet lease fees – 400 hours for a mid sized Lear or Citation does not come cheap these days. Most of these guys are on their second marriages now so the cost of running two harbor homes and a trophy wife has to form part of the IPO issue price. How can you avoid that?

That’s what I do anyway and it pays the light bills while I focus on more important trades like getting BHP on the cheap if the punters panic and dump it down to 20-23 bucks per share over the next few days.

Back to Telstra.
The government hates Sol and with good reason so it seems. During his reign of terror the stock has lost the citizens close to $10 billion in value and only now seems to have stopped falling for a little while. My guess is there is value coming back into the stock now. And the only reason is that everything that all bad news about the stock is out there in the market. There is nothing we don’t know about it on the negative side. I use Kohler and the rest of the gaggle as a good contrary weather vein in telling me where stocks won’t go. Al seems a bit late to the party and it would be interesting to see what he was saying about the stock when it was at 7 – 8 bucks.

Look, I think you’re giving the Gov. too much credit for being stupid.

This is what I think. Word on the street is that the government is going to be really generous with the punters this time round because they want a whole bunch of happy campers into next years election. As I heard it the deal will come in 2 or three tranches and with the dividend yielding where it is, paying 1/3 of the price now and getting that dividend is going to be quite compelling. The government is going to be very generous with this deal wanting lots of happy campers next year. The gossip is that they will issue the junk at a good discount to participating shareholders as a gift, hoping they remember them next year. I am therefore going to do the patriotic thing and participate. Of course I’ll offload them as soon as I can to all the hungry institutions coming in post IPO. It sounds as though the Institutions are going to get left out of the party so that the punters can on sell their holding in the after market. There is a time to be cynical about all this, but not just now. It’s time to party and watch the institutions getting left out in the cold. Now that’s going to be fun as lot of these money managers are too wealthy for their own good anyway. Greedy piglets.

I wouldn’t totally discount this stock for those reasons.

17 years ago

One other thing
Analysts are close to being the most thoroughly useless bunch of mammals in the animal world. As a group their calls are truly shocking, or more cynically, amusing to watch. Most of the time these days they are buying tops and selling bottoms of stocks.
If most of the anal ysts are negative on the stock, it should cynically suggest that an important bottem has been formed. My rough guess is that they reached this important milestone with Telstra. One shouldn’t underestimate the lack of any savvy when it comes to this group of underperforming humans

17 years ago

I’m no analyst, nor much of an investor, but frankly I’m suspicious of any stock that needs a $20m ad campaign to sell it.

17 years ago

Jc, are you describing analyst groupthink?

Nicholas Gruen
17 years ago

JC – I agree with you regarding prospectuses. Especially about the enumeration of risk in them. They’re mostly obvious and routine – market risk, technical risk, exchange risk and on it goes – run them off the template. And in this age of the internet there should be no obligation to print off millions of prospectuses and send them to all investors. A url would be sufficent.

17 years ago


I don’t know what I am describing, but they truly are a pathetic bunch worldwide. There are some good ones though, but I think the legal changes after Enron and the tech crash ruined most of them. Now 99% are totally useless.

For instance.
Take a look at Coles Myer. The analysts were telling us for a long time how the price reflected reality how they were maximizing capital etc etc. …. how the price was about right, how the CEO was doing a good job blah,blah.

Then KKR’s bid comes in much higher than what any of these guys were expecting… not even close. Next up the CEO talks about making changes to the plan…… and 3,500 jobs get threatened…. not his own of course. The CEO tells us why the KKR’s bid isn’t enough.
Why weren’t the anlysts telling us all this. How could KKR know and they didn’t?

Not one of thee guys has ever suggested Fletcher should have got the boot when he “sort” of agreed with KKR. 3500 people are going to get sacked when they probably shouldn’t have beenn hired in the first place and would have allowed them to find jobs with firms that weren’t so useless. And what does the board and the Chairman do? thay protect the CEO! This story really sucks.

Back to analysts.

I’ve seen a case where they copy and read each others work. They actually share info amongst themselves . They’re truly a pathetic bunch.

Nick, you’re right the thick booklets are just a waste of trees. I reckon each one must cost at least $250G to put out.

James Wheeldon
17 years ago


Three points about prospectuses:

First, the risk factors in a prospectus (especially an IPO prospectus) shouldn’t just be boilerplate. Of course, the best way to hide a truly significant risk that is peculiar to the business is to bury the disclosure in pages and pages of generic discussion about global warming risk, terrorism risk, interest rate risk etc…

But IMHO a big reason for putting risk factors in a prospectus is just to make sure that the retail investor understands that, geez, there are a lot of risks involved when you drill down into any particular stock, and always will be. And that’s why risks shouldn’t start at page 81 but should be highlighted from page 1, as they are in the US.

And of course the way to avoid the risks associated with any particular stock is through diversification. That’s the point of diversifying – to reduce/manage risk. But we hear nothing about that from Canberra – it’s all just “buy buy buy”.

Second, as far as the commonwealth is concerned, the T3 prospectus – and the prospectus alone – is what counts in terms of making an investment decision. As I noted in my personal blog site, Peter Costello himself has said that “people should only be influenced by the [T3] prospectus”.

And I guess my overarching point is that retail investors are going to read the T3 prospectus in a vacuum: if you don’t understand balance sheets, if you don’t know what to look for in risk factors, and – most importantly IMHO – if you don’t understand the importance of building a balanced, diversified portfolio, then the T3 prospectus is worse than useless.

Finally, most prospectuses are now available electronically, but I understand that T3 will be mailed to every existing holder of TLS.

James Wheeldon

Nicholas Gruen
17 years ago

I think there remains a requirement to send PDSs – the equivalent of prospectuses for the purposes of this comment – out with any form that invites subscription. Ridiculous. If you’ve got enough money to plonk a few thousand into a stock or fund you can look up the pds on the net.

And generally a prospectus is of virtually no use to the mug investor. Instead spruikers should be advised to make some sort of very simple disclaimer.

“Warning, if you are inexperienced you should consult an expert. Go to this website to find one that government accreditation systems find to be
1) reputable
2) not facing any conflict of interest (or who will inform you if they do)
3) have a track record of stock and fund picking which adds value.

That would be my form of regulation for retail investors. As John Kay says in his (excellent) little summary of all you wanted to know about economics “The Truth about Markets” “Reputation is the principle means through which a market economy deals with consumer ignorance”

Chris Lloyd
Chris Lloyd
17 years ago

James: You said that “US offer documents… focus on the business of the company, with a heavy emphasis on risk factors…while in Australia it is all about marketing.” Why would this be? Is it more regulated in the US?

Nicholas Gruen
17 years ago

James, I’m not recommending financial advisors in their current form. They’re conflicted to hell. And ignorant to boot. I’ve offered some suggestions on how to regulate to actually reveal ones to the market that can add value. As I argued here:

We also need a system where advisors keep independently auditable ‘sample portfolios’ operated in ‘real time’