Wednesday, March 27, 2019

Hero To Zero: Interserve

It was with a great deal of confidence that I bought Interserve just over a year ago. My portfolio was running hot; I hadn't had any losers in a while. While I knew that this was probably just due to luck, I couldn't help but think (expect?) that I wouldn't have any losers for some time. That attitude no longer prevails. Taking a company from seemingly healthy to bankruptcy in just 13 months will do that.

I severely underestimated Interserve's debt profile. A read of my original thesis on the stock kind of buries the importance of just how much debt the company had. Some recurring revenue, some asset-light segments, and a liquidating competitor are all well and good, but a lack of focus on the downside can be deadly. A few weeks ago, the company essentially went bankrupt following a long, steady share price decline.

There's more than one lesson here, though. Management did not exactly fight for shareholders here. Contrast this situation with that of Hornbeck, where management is fighting tooth and nail to keep the company out of bankruptcy. The reason for the difference seems clear to me: skin in the game. Another mistake on my part was not paying enough attention to this facet of the investment.

Finally, a blunder by a major shareholder also cost all of us. Lenders were prepared to cancel some debt in exchange for equity, but a hard-headed major shareholder felt that this level of dilution would be too much to bear, so he held out for...in the end, nothing. Nice one!

Hopefully, one can learn from mistakes. Lucky for me, I have a lot of them to draw on. Interserve becomes the latest company to join my Value Fail page.

1 comment:

Baruch said...

Thank yoi for your post, very interesting to learn from you!

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