Table of contents
Impact of One.tel collapse
Legal proceedings against One.tel’s directors
Things can be learnt from One.tel’s failure
Lack of proper corporate governance can be a disaster for campanies. In recent years, major Australian companies such as HIH, One.tel and Harris Scarfe failed under dramatic and high profile circumstances. As a result, executive and non executive directors from each of these companies have spent time in jail. They were vastly different companies, operating in different industries, and failed for very different reasons. However, there was one common link between them. All had poor corporate governance. In this paper, I would like to take the One.tel collapse as one example and analyse how it went collapse through its poor corporate governance.
One.Tel was was established by Jodee Rich and Brad Keeling in1995. Its business grew rapidly and expanded into Europe and the USA. One.Tel had 2.4 million customers world-wide including 500,000 in the United Kingdom. One.Tel came to do business reselling Optus Mobile Phone Services, reselling Telstra Local and Long Distance International Calls, reselling Telstra internet services, selling pre-paid phone cards for long distance calls, and set about but did not complete constructing a mobile phone network of its own. A huge expansion of activities and liabilities was involved in constructing the network, including contracts committing expenditure of more than $1.1 billion with lucent Technologies. The Group associated with One.Tel employed 3000 workers throughout the world and had many subsidiaries. In 1999 News Ltd and Publishing and Broadcasting Ltd made investment around $1 billion in One.Tel
Impact of One.tel’s collapse
The collapse of One.Tell was the 4th biggest corporate collapse in Australia. One.Tel was placed in administration and subsequently into liquidation in May 2001 with estimated debts of $600 million. One.Tel's 1,400 workers, who were owed a total of $19 million in accrued entitlements were dismissed.
Problems in the structure of One.tel
One.Tel’s rapid expansion was way beyond its financial capacity coupled with its misguided management decision. It was also badly hit by the changes in the European network providers and more generally, One.Tel was caught up in the international collapse of dotcom ventures. The company’s high risk, low yield strategy, with generous incentives for new customers could not be sustained in the small Australian market which had six mobile phone providers – the second largest number of any country in the world. The fatal flaw in the business model of the company was that the telecom services were offered to subscribers at lower than the price the company was paying for them itself. It could only survive as long as it could raise new capital investment more rapidly than it was burning money.
There is a number of factors that led One.Tel’ to collapse. Each factor is discussed in details below.
Focus on sales volume while operating at a loss
Figure 1 shows One.Tel’s sales revenue and profit after tax in 1999 and 2000 respectively. The firm’s sales revenue showed successive growth to reach $653.4 million in 2000 which is about double of the sales revenue of the previous year. However, this dramatic increase in the sales revenue did not result in higher profitability. One.Tel’s profit dropped from $7 million to -$291 million between 1999 and 2000. The reason is simply because the company was focusing on increasing sales rather than making profit. Surprisingly, while the company is making a loss of $291, One.Tel’s top six executives were paid a total remuneration of $1,595,000. Furthermore, $6,904,000 were given to each of the two executive directors as a performance bonus.
Issue of shares to cover up deficit
One.Tel has been also investing in...