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Business Briefs: March/April March/April 2003 The following business briefs are brought to you by the March/April issue of Financial Executive. Information on how to subscribe to FE is located at the bottom of this page. Business Briefs:
Fewer Bankers Chasing M&A
As the merger business has wound down with the struggling economy and three years of declines in the stock market, major companies can probably expect a lot fewer calls from investment bankers. One big reason: Those bankers may not be there any more. Wall Street ratchets up and down with the economy and major deal flow, and in recent months, things have been at very low ebb. At Merrill Lynch & Co., for instance, the ranks of senior relationship bankers has been slashed dramatically, and lesser cuts have rippled through other big firms at regular intervals. Some of those senior people have ended up at smaller firms and are still eager to put deals together. Those don't have to be mergers; many will be sales, as multinationals continue to "rationalize" their businesses.
Indeed, divestiture is reasonably hot. "Large public companies are very focused on building their core businesses and divesting whatever is non-core," says Dale Dawson, head of investment banking/corporate finance at Stephens Inc. in Little Rock, Ark. While the market often realizes that the seller is strapped for cash or has other compelling reasons to spin off a unit, sellers don't always have much choice. Last year, for instance, Tyco International sold the CIT Group for considerably less than it had bought it for the previous year, in order to meet liquidity needs.
Large or small, these deals are bringing idled investment bankers running. "We're seeing bulge-bracket bankers who would compete for a $50 [million] to $100 million transaction; they had never done that before," Dawson says. "They show up when they sense an opportunity to get engaged -- it's become something of a cattle call for transactions." Coby Sonenshine, CEO of RMS EquiCo Capital Markets, an investment banking firm to the middle market, adds: "It depends on the size of the transaction. If you've got a $100 million deal, you would expect to see competition in terms of other bankers. Smaller than that, it's really quite rare."
Dawson and others see more opportunity among middle-market companies than large corporations, especially established ones that are looking for mergers to grow. "The middle market tends to be more opportunistic -- their thinking revolves around strategic M&A," Dawson says. "They will merge or liquidate a business if the circumstances suggest it. Sellers are more realistic now about their expectations, so that will make it easier to get deals done."
Sonenshine agrees that the forces driving middle-market sellers - "98 percent" of his company's clientele -- aren't the same as those spurring public company CEOs weighing a sale. "Economics may not be foremost on their minds -- it could be health or timing, if they're planning to retire and their children don't want to run the business," he says. Or they may simply be interested in offering a piece of the company in exchange for fresh capital.
Recapitalizations often involve private equity groups, and there is considerable attention in that area these days, says Stephen S. Gray, managing director of TRG, a troubled-company consultant headquartered in Boston. However, he adds, "The leverage isn't there to do 'good management, good earnings' deals. [Private investors are] looking at bargain deals, and some are doing them quite effectively. But there is always a battle between the old money and the new money. A lot [of recapitalizations] are being done in bankruptcy."
Gray adds that while an increasing number of public companies are contemplating returning to private hands, that's not always a straightforward matter. "The biggest issue is valuation -- how the public shareholders get treated. They don't have a seat at table," he says. "Legally, they are represented by the board, but creditor constituencies are much more aggressive."
Dawson and Gray don't believe that this year will be especially rosy for earnings, or investor optimism. "No one thinks there will be big turnaround in '03," says Dawson. Echoes Gray: "There's no rising tide at this point."
-- Jeffrey Marshall
Source: Mergerstat
Allianz Targets D&O Marketplace
The drumbeat of corporate scandals, earnings woes and slumping stock prices has put untold executives and directors on the hot seat. Directors and officers' insurance has become more scarce and far more expensive, with many premiums doubling and tripling last year.
As many rivals have pulled back in the face of huge potential claims payouts, Allianz Insurance Co. is pushing ahead. The German-based giant's American arm has created a startup led by industry veterans, consolidating operations and underwriting authority in its Chicago and New York offices to ensure responsiveness and speed decision-making. And in a market that has historically relied largely on instinct to judge risk, it claims to be pioneering the development and use of analytical tools.
"We see a tremendous opportunity to provide D&O coverage to larger public companies using an innovative yet disciplined approach," says Donald Bailey, Allianz Global Risks U.S.'s senior vice president of the specialty products group. Allianz has its sights set on becoming one of the top three U.S. D&O players, with a share of 25 percent or more, within three to five years. AIG is the dominant player, with 35 percent of the market, according to a 2002 Tillinghast-Towers Perrin report, followed by Lloyds of London and Chubb Corp. at 14 percent and 13 percent, respectively.
"The entry of Allianz into the D&O market comes at a most opportune time," says David Nikolai, managing director of Marsh USA's FINPRO division. "Clearly, personal liability exposure for directors of public companies is greater than ever in light of corporate scandals and recently enacted legislation. In addition, the D&O market is in turmoil as insurers' capacity is contracting as a result of serious operating losses over the past few years."
R&D Spending Forecast Weak
If research and development spending on new product development is supposed to help companies pull out of the doldrums, things aren't looking good.
An annual survey by Battelle Memorial Institute and R&D magazine found that respondents were projecting an anemic 0.1 percent hike in R&D spending this year, the lowest in a decade. Last year, amid all the turmoil in corporate suites, the estimated growth was 0.3 percent. As recently as 2001, growth was a robust 5 percent.
Government R&D outlays are a different story, however. The survey finds that spending there is expected to jump 10.5 percent in 2003 after an 11 percent estimated hike last year. A big reason: reorganization of the federal government and the creation of the Department of Homeland Security.
Of course, some companies will be spending considerable sums on R&D, like Microsoft. According to The Wall Street Journal, Microsoft plans to spend $5 billion on R&D in its current fiscal year, which ends June 30, up from $4.3 billion the previous fiscal year -- with much of the focus on long-term products.
10 Steps For Meeting New Governance Rules
Source: Boardroom Consultants 'To-Do' List for Board Compensation Committees Bruce Ellig, author of The Complete Guide to Executive Compensation, has 10 suggestions for compensation committees:
New Corporate Governance Handbook Responding to the growing trend for more informed boards of directors, more boards are establishing governance committees. A new handbook published by the National Association of Corporate Directors (NACD), The Governance Committee, addresses four key areas for governance committees to focus on: clarifying the duties of the board (charter), assembling the right people for the board (director nomination); monitoring the governance practices of the organization and compensating directors for their service. It also suggests practices the committee can adopt to improve its effectiveness. For more information, go to the Web site: www.nacdonline.org and search publications. Online Site Focus: Business Assurance
Every CFO knows that failure to identify and correct potential weaknesses in internal controls and compliance policies and systemic transaction risks can expose organizations to financial loss and diminished credibility.
In response, ACL Services LTD has launched a newly designed Web site with what it calls improved resources for both the auditing and broader financial management sectors. The re-architectured site highlights information about the ways clients around the world have used ACL Business Assurance solutions to first identify indicators of profit erosion, revenue leakage and financial loss, then address such areas through data analysis and continuous monitoring..
The site also includes improved online services, such as a headline news page with key articles relevant to the audit and finance sector, white papers on pertinent issues and customer touch points. For more information, click on www.acl.com.
Subscribe to Financial Executive! The flagship publication of Financial Executives International (FEI), this premier magazine provides senior financial executives with financial, business and management news, trends and strategies to help them work better, faster and smarter. For more information about FEI, visit www.fei.org.
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