Over the past few weeks,Globo (LSE: GBO) has become one of AIMs most controversial companies. However, this isnt the first time that Globo has attracted criticism. The company has been under fire for years now regarding its accounting policies.
Butafter the release last night of a report from Quintessential Capital Management, whichclaims that a large portion of Globos business has been fabricated, it now looks as if Globo is in serious trouble.
The company has requested that its shares be suspended following the scathing report as management needs some time to put together a conclusive response to the accusations made.
Quintessential claims that there is:
overwhelming evidence suggesting the existence of what appears to us a large-scale conspiracy to deceive investors and creditors through pervasive and systematic accounting manipulation.
Whats more, analysis suggests that more than half of Globos business is spurious:
While a minor portion of its business is authentic, the results of our investigation strongly suggest that at least 60% of Globos turnover is fabricated. The companys alleged activities, in our view, suggest possible criminal behaviour and to cause its total demise if exposed.
These are very serious accusations, and shareholders should be extremely concerned. There have been few cases where such damning claims have been made and the company has pulled through.
Red flags
It seems as if the City has been wary of Globo for some time. The companys recent failure to find buyers for a high-yield bond was a big red flag.
According topension fund managers,the demand for high yield bonds has surged recently as the yield on more secure sovereign issues has continued to decline to record lows. With this being the case, it was pretty easy to see through Globos excuse that market conditionshad prevented the companyfrom selling its high-yield bonds.
Further, since 2009 Globos revenue has grown at a compound annual rate of 35.3%, making it one of the fastest growing companies in London. But despite this growth Globos valuation has remained depressed, a strong indication that the City didnt believe the companys growth story.
Whats next?
Unfortunately for Globos existing shareholders, it looks to me as if the company is a value trap. It is rare that a company survives a bear raid like the one that was launched on Globo yesterday. The companys reputation now lies in tatters, and even if management can prove that Globo isnt a fraud, its going to be difficult for the group to find business partners going forward.
Still, if Globos accounts are to be believed, the company had over100m of cash in the bank at the end of June. This cash cushion will give the company some wiggle room, and the financial firepower to mount a comeback.
Uncertainty
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
