The haves and have-nots
An overseas expansion used to spell disaster for Aussie companies. The new breed is changing that.
Aussie companies used to share a value-destroying playbook. It was called an international expansion – alluring and often enriching for management but downright costly for shareholders.
It went like this: when the main business matured, management set about making a hail-Mary acquisition overseas. Many were ill-fated, mistimed or overpriced, and sometimes all three. Fosters had its costly dabble in China, ANZ (ASX:ANZ) was humbled in Asia and Slater and Gordon's (ASX:SGH) UK foray was a complete disaster.
With so many examples, it's little wonder Australian investors distrust international expansions. Deep scepticism seems to be part of the local psyche.
But a new breed of global success stories is slowly changing that. The AFR dubbed them 'the WAAX', an amalgamation of Wisetech (ASX:WTC), Altium (ASX:ALU), Afterpay Touch (ASX:APT) and Xero (ASX:XRO) - Australia's answer to the FANGs. With business models that harness the wonders of the internet, the new breed marks a new era of international success, but its one that only a select few will participate in.
Here's why. When Fosters entered China in 1993, it spent a few hundred million dollars buying three Chinese breweries, amassing a big tab long before it sold a single lager. After years of under performance, it went on to write most of it off.
Contrast that to Afterpay, which didn't need an acquisition to enter the US, as it simply hired more staff and opened a new premise. The new breed can enter new markets organically as their software can be sold globally. The low upfront and marginal costs - an industry term for when the next customer costs much less than the first – drastically reduces the risks of expansion.
Then there's the question of how international growth influences competitive advantage. ANZ's strong domestic operation meant diddly squat for its prospects in Asia. Going overseas left homegrown advantages behind, and it took earnings generated within the moat and reinvested them outside it.
But for the new breed, going overseas could actually strengthen their moats everywhere. Take Xero, whose customers use the same software the world over (apart from a few tweaks to address any geographic or cultural nuance).
As customer numbers grow, so too does Xero's R&D budget, which gives it more firepower to improve its products for all users. Conquering new markets, like Xero has done in Australia and the UK, not only strengthens it at home but it improves its chances of further success abroad.
This resembles Facebook's growth path, involving a series of progressively bigger monopolies, starting with Harvard University, then Ivy League Universities, then all Universities, schools, US citizens and finally the world, as described by Peter Thiel.
That's partly why the WAAX stocks are so richly priced. With scalable models and big runways, they've got the potential to grow quickly for years yet, and today's investors have high hopes of it happening. Viewing Wisetech as a compounding machine, capable of reinvesting a large portion of earnings at high reinvestment rates, may be the only way to justify its 20-times sales price tag. But we'll leave their valuations to ponder another day.
It looks like a new era is upon us, defined by the 'haves', the companies that can unlock these forces, and the 'have-nots'.
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