CFO Studio | Monthly Archives: October 2016 | Page 2October 2016 - Page 2 of 4

On the Up and Up

As Seen in CFO Studio Magazine Q4 2016 Issue

THE CFO OF JAGUAR LAND ROVER IS FEELING GOOD, WITH A STRONG NORTH AMERICAN ORGANIZATION IN PLACE AND NEW MODELS SETTING SALES RECORDS

“Luxury cars are back,” said David Chambers, Chief Financial Officer of Jaguar Land Rover, North America. “The luxury car segments were up 18 percent year over year, last year, and the Land Rover brand was the fastest-growing luxury car brand in the U.S.” Not only that, “Jaguar is really on the verge of something historic for us.”

About 75 finance executives at the Upper Montclair Country Club in Clifton, NJ, heard Mr. Chambers speak at the Q3 CFO Studio Magazine Reception. The British-themed event featured specialty drinks and foods like bangers and mash to showcase the heritage of Jaguar Land Rover (JLR), headquartered in Coventry, England. Held outdoors under a marquee, the event also showed off 2017 models of the Jaguar F-Pace crossover; the XE, a compact sedan; and an F-Type British Design Edition in French racing blue. The 2016 Range Rover Sport SVR and SVAutobiography were also on display. Thanks to a JLR-sponsored raffle, two finance execs won a weekend’s use of a 2017 Jaguar XE and 2017 Jaguar F-Pace, respectively.

In his remarks, Mr. Chambers recounted a bit of the history of JLR from the time the two brands were sold in June 2008 by the Ford Motor Co. to Tata Motors, an India-based company. Mr. Chambers worked for Ford until the sale. “We had these two brands—one of them was actually a division of Ford Motor Co. and the other was a legal entity of Ford Motor Co.—and we had to carve them out and put them together. We had a period of time to get some of the basics together. We immediately had to get tax compliance in place. We had servicing agreements in place with Ford for a year,” he said, but after that, “we had to have an accounting organization, treasury organization, purchasing organization, etc., etc.”

Of course, this occurred during the great recession, which did not make it easy to start a new company. “What Tata Motors has done,” said Mr. Chambers, “it allowed the business to reinvest, and that’s why you see those great products that are out here today.”

Mr. Chambers said the first years of JLR, North America were about “survival — and then stabilization.” Only recently was it possible to focus on growth strategies. Now, he said, with a smile, he can finally look back and say, “Wow, that was the greatest learning experience I ever had.”

A Hot-Button Item

As Seen in CFO Studio Magazine Q4 2016 Issue

No longer just the responsibility of IT professionals, the threat posed by cyber attacks is in the CFO’s bailiwick

The issue of cybersecurity has become a matter for entire organizations, from the IT department through all of its layers. “It’s now discussed upstairs at the Board level. It’s that serious,” said Paul Mallen, CFO of Amalgamated Life Insurance Company, as he talked about “CFO Perspectives in Managing Cyber Risks” at a Middle Market Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at Blue Morel in Morristown, NJ. CFOs from select New Jersey–area companies attended the invitation-only dinner discussion.

“Detection,” Mr. Mallen pointed out, “is just as important as prevention.” He cited an intrusion at an insurance provider in the Pacific Northwest that made headlines last year. “Hackers were in the system for several months before anyone knew it, accessing an estimated 11 million customers’ personal, financial, and medical records.”

In terms of how to detect such a breach, Mr. Mallen said, “There’s really no silver bullet. And the hackers are typically one step ahead of the rest of us. Multiple layers of technology and processes are necessary.” Still, from what he called “a low-hanging fruit perspective,” there are a few hot-button items to consider when attempting to defend against a cyber attack. “Only allow approved software to run on employees’ computers, and minimize administrative privileges by preventing individuals, except those authorized, from making changes in the system.” In addition, he advised keeping applications, plug-ins, and software up-to-date and operating systems current with the latest patches and updates.

The CFO’s Role

Increasingly, CFOs are paying more attention to such measures and controls because, as Mr. Mallen stated, “Typically, our job is to manage corporate resources and risk. …CFOs think in terms of risk vs. return, but when it comes to the issue of cybersecurity, you can’t quantify the return. And the risk could be reputational, financial, and/or customer losses.”

To begin laying the groundwork for a more secure computing environment, Mr. Mallen suggested attendees ask themselves a couple of critical questions: “Where is your data? What data are you trying to protect? Who has access to it, and should everyone in a department have access to the same data?” Once answers to these questions are reached, he said, it’s an opportune time to conduct a risk assessment and a gap analysis. “Then you can methodically approach where your gaps are and attempt to [protect the assets] cost-effectively.”

From a finance perspective, Mr. Mallen said CFOs should determine the amount of money that can be allocated to cybersecurity efforts. “You have to spend your funds appropriately; you can’t allocate capital to all IT requests.” In addition, “As middle market CFOs, we have a unique challenge in the areas of managing capital, and finding and retaining top talent,” he said. He pointed out that it can be difficult for mid-sized companies to hire all the knowledge workers necessary to deal with cybersecurity, due to the many and varied systems most enterprises use and competition for resources from big-name firms.

As a result of this predicament, Mr. Mallen noted that many companies are outsourcing a number of their IT functions as well as turning to cloud computing, which brings along its own set of issues. To that point, he cautioned: “Before picking a vendor to store your invaluable data, attempt to determine if that company is taking all the right measures to secure it.” He recommended compiling an “appropriate and comprehensive questionnaire” in order to glean an understanding of the vendor’s overall security system. “Some of those inquiries should include: How do they segregate data? Who has access to the data? And what are all of their security controls?”

In terms of managing third-party vendors, he added, be sure to get the appropriate reports. “Many CFOs receive a Service Organization Controls report, or SOC 1 report, from a vendor and think that it’s adequate in this area, but it’s not,” as it mainly focuses on financial reporting controls. Mr. Mallen advised requesting a SOC 2 report, which is centered around a business’s other controls as they relate to security, confidentiality, and privacy.

Risk Prevention

The issue of USB drives, or so-called “thumb drives,” came up at the dinner and, as Mr. Mallen pointed out, there is a “ton of risk” associated with these handy little gadgets. “An employee can inadvertently unleash a virus onto the organization’s network by plugging in a thumb drive that is, unbeknownst to them, infected.” In addition, an employee could download sensitive information onto a thumb drive and then leave the company, or simply lose it.

One way to mitigate this kind of risk, Mr. Mallen said, is to use encrypted thumb drives. A more aggressive approach would be to “lock down your computers so they don’t accept outside drives,” only those that have been issued by the company. To take it a step farther, “Provide thumb drives only to employees that department managers approve” to receive them. In this vein, he said, “You begin to minimize and narrow down your areas of risk.”

From a non-gadget standpoint, Mr. Mallen said, “One of the most important things you can do that is not technology related is to make sure your staff is continuously trained and educated on phishing emails and websites. Links in emails and websites are one way that hackers install malicious software on a computer, which then allows the hackers access to systems and data. Mr. Mallen also recommended that staff be expected to adhere to all prudent cybersecurity policies and protocols.

Mr. Mallen acknowledged that cybersecurity adds complexity to the system, and “if you make it too complex, there’s more chance for human error or misconfigurations.” In addition, he advised the attendees to “build cybersecurity into new systems that are being put into place, so that it’s already a part of the process for your business units.” You don’t want to create changes in the workflow, he said, nor do you want to make it harder to operate your business. The hackers have that angle covered for us already.

The Business of Buying

As Seen in CFO Studio Magazine Q4 2016 Issue

STICKING TO A RELIABLE METHOD FOR ACQUIRING AND INTEGRATING BUSINESS IS THE KEY TO SUCCESS

They say there’s more than one way to skin a cat, but when it comes to buying a business, it’s best to follow a tried-and-true formula. That’s the advice of Craig Steeneck, CFO of Pinnacle Foods, a branded foods company that has gobbled up four multimillion-dollar household names —Birds Eye and Wish-Bone among them— in the past five years. “We have an acquisition manual that we call our ‘playbook,’ and every time we purchase and integrate a new business into our own, we use it.”

Mr. Steeneck spoke on “Valuation and Integration —Keys to Successful Buy-side M&A” at a World-Class Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at Roots Steakhouse in Morristown, NJ. CFOs from select New Jersey–area companies attended the invitation-only dinner.

Mr. Steeneck said his company has been “highly acquisitive” over the past several years, and “by sticking to an MO that has consistently worked for us, we continue to outpace our competitors in the industry.” He shared his recipe for success with dinner attendees, going through his “playbook” page by page, from beginning to end.

“When a business goes on the market, the first thing you need to do is determine how much it’s worth and what you should be paying for it.” Mr. Steeneck said he relies heavily on support from outside resources to come up with that valuation, and highly recommends this tactic. “I work closely with external bankers and people in the industry to be aware of what’s being sold and for how much. This is one of the most important things I do.”

He also advised completing a five-year forecast, including cash flow, to come up to a discounted cash flow. And then benchmark what that five-year free cash flow translates to against other deals that have occurred in the marketplace in order to help determine what to pay for the business. He cautioned attendees to keep in mind that, these days, companies don’t come cheap. “Acquisitions are more expensive now than they’ve been for quite some time. In fact, they’re at an all-time high, particularly in the food industry.”

Searching for Synergies

The only way to justify paying a premium to acquire a business, Mr. Steeneck noted, is with cost synergies, which translates to the elimination of duplicative Sales, General, and Administrative Costs, or SG&A costs; in other words, the purchase reduces overhead expenses and head count. And don’t overlook the scale benefit, he added, that is achieved from the supply chain. “Adding the weight of the new company’s product to my truck, for instance, allows me to reduce my overall shipping costs.”

Once a price is negotiated and both sides are ready to shake on it, the buyer should do a hefty amount of due diligence before signing on the dotted line. “Kick the tires,” Mr. Steeneck advised. “Understand exactly what you’re getting.”

When a deal is finally in place, it’s time to set a plan for integration—and it must include a timeline. “Do whatever you can to execute that timeline and put the newly purchased company on your platform as quickly as possible” after the acquisition. He said, “If you leave it dangling out there on its own and separate, you don’t get the cost savings as soon.” Plus, he pointed out, “You could allow for some bad practices that the company might have employed in the past to continue.” Also, bringing products together in cross-promotional efforts (e.g. bagels and spread) will help to drive revenue.

Again, Mr. Steeneck advised seeking “outside help” to organize and structure the integration, in an attempt to “stay on course and integrate as quickly as possible” in order to realize the cost savings. “It’s very difficult to get people to focus on their day job while trying to do all of this integration work” on the acquisition, he said. “Flex up your resources with consultants who will help you meet your very fast and aggressive timeline.” Otherwise, he cautioned, “something will go afoul with either the base business or the newly acquired one.”

The View from the Top

Mr. Steeneck spends about 25 percent of his time on M&A-related activities, including sourcing possible acquisition opportunities, and performing due diligence on integration efforts. “One of the most important things I do as CFO is look for acquisitions. I keep my ear to the ground as I go through the rest of my day-to-day, making sure I’m always aware of what’s happening in the industry in terms of available assets and when they’re coming up for sale.”

He said this is something that is very much managed “at the top of the house” at Pinnacle Foods, noting that the CEO joins him in such endeavors. “We are always in the market and prospecting, while keeping everyone else focused on their daily workload.”

David Chambers, Vice President and CFO of Jaguar Land Rover North America, attended the dinner and in an interview afterwards expressed surprise over how involved Mr. Steeneck and his CEO are in the process. “Most companies likely employ an M&A team to identify opportunities, and then bring them forward to the CFO for review, and finally up to the CEO and the Board.” He thinks the Pinnacle way makes better sense. “They do it together, and so there is alignment from the beginning, which makes for a more efficient process.”

Mr. Chambers noted that “All CFOs look for benefits from an acquisition, but realizing them is not always as easy.” The way Mr. Steeneck operates, “he has this intimate knowledge with a hands-on approach, so that leads to a higher level of success.”

In an interview, Ralf Hermkens, Executive Consultant/Principal at Hermkens Consulting, LLC, called Mr. Steeneck’s playbook “invaluable.” As someone who has successfully completed multiple acquisitions and integrations in his own career, Mr. Hermkens added that Mr. Steeneck’s best practices are “easily transferable to other sectors.”

Mr. Steeneck agreed, adding, “You have to be disciplined and regimented in order to stick to it and make it work.” And that holds true, he said, no matter where you work.