Wirecard and Steinhoff are both companies of German origin which had accounting scandals. In this post I want to describe why these two accounting scandals are completely different and why I choose to take a long position in Steinhoff after the scandal, although I did make a profit with a short position in Wirecard.
I am writing this article because I want to describe that shorting a stock with an accounting scandal / fraud isn’t always the best option. Sometimes this can be a chance for a long position.
The Wirecard Scandal
Wirecard is a German payment processor and financial services provider. It was higher valued than any German Bank and viewed as very successful by many German Investors because of a growing revenue.
In 2020 it was reported in an audit that €1.9 billion were “missing”. I shorted Wirecard after the announcement because it meant that the majority of Wirecards revenue didn’t exist while there were multiple billion Euro of credit from banks.
I realized that there was a way higher debt to the creditors than actual revenue or profit which could pay for the credit, so there was no real way that Wirecard could save itself from insolvency.
Also, Wirecard is a payments provider used by companies — which company does trust a payment provider which manipulates balance sheets?
The Steinhoff Scandal
Steinhoff International is an international retail holding company. Before the scandal it was the second-biggest furniture company in the World after IKEA.
Basically the scandal which took off in 2017 was that Steinhoff manipulated transactions worth of $7.36 billion from the years 2009 to 2017.
Now comes one important part: The revenue alone in 2017 was nearly 19 billion Euro!!! Even if you subtract all manipulated transactions from that there is still value!
Steinhoff also is a holding company which holds many different companies which can be sold. That’s what happened after the scandal: Many subsidiaries were sold.
From the financial side:
- Wirecard made up most of the revenue
- Steinhoff didn’t made up most, but part of the revenue
From the strategic side:
- Wirecard was basically one company which hadn’t much to sell
- Steinhoff had many companies with actual real estate and products — many things to sell
I bought Steinhoff shares after the scandal because I estimated that after selling some of the subsidiaries there would be enough money for paying the creditors and restructuring the company. That process is still ongoing and Steinhoff still exists. Why? Because they simply had more value and the manipulations were in an area where it was possible to pay them down.
I shorted Wirecard because there was noting to hope. With basically all revenue made up there is no real revenue which could help paying the credits down.
You should look at the actual numbers after an accounting scandal. I also know there were investigations about an accounting issue at GE, but I didn’t see it effecting the share price too much — because the numbers in question were too small.
Putting all accounting scandals into the same bucket is wrong, but I experienced that happens.
(To be honest I was laughing my ass off because there are German finance influencers which always talked bad about Investors in Steinhoff but then were heavily invested in Wirecard, didn’t see that scandal coming and even invested after there were many signs that the balance sheet was faked)