SIMON BROWN: When going off is just not on

Spar’s interim results, released last week, offered yet another reminder that offshore expansion nearly always ends in tears. The JSE is packed with companies that had grand offshore plans before they eventually admitted defeat and came home with their tail between their legs and a lot less cash (or more debt) on the balance sheet. (Looking at you, Woolies and Famous Brands.)

The reason is simple, the solution simpler.

The reason is that executives see growth slowing in their home market. They’ve run out of places to put a new store or launch a new product, so the company is becoming ex-growth. This is a horror for executives whose bonuses are tied to growing revenue, earnings and dividends. They don’t want to admit to the market that growth is largely over, so they look for new opportunities.

They find a target, get the bankers and lawyers on board and put together an impressive presentation for investors about how this is going to be an absolute game-changer.

And then the problems start.

First, there is a very real chance they’re overpaying for the asset. This is generally true of all acquisitions.

Second, the executive teams know the South African market like the back of their hand. They’ve worked here for decades; the country is part of the business’s DNA. They have zero experience in a new market, which will have its own unique challenges, competition dynamics, regulations and risks. These are largely unknown at the time of purchase and have to be managed on the fly as executives learn the new ground rules in their new market.

So what’s the alternative?

Simple: be comfortable with being ex-growth.

Of course investors love fast-growing companies that produce increases in revenue and headline earnings. But that can’t go on forever, and there is a second type of company: the ex-growth dividend-paying business.

Instead of throwing money into the offshore dark hole, executives should explain to investors that future growth will be inflation plus perhaps some market share gains and efficiency gains.

Then return the cash that’s still being raked in to shareholders via dividends and share buybacks. Nothing out of this world, just solid and reliable.

When a stock I own goes offshore with a big bang, I sell it. I don’t sell immediately because often the stock will pop higher on the news, but as soon as I start to see price weakness, I take my money elsewhere.