Windows of opportunity in the middle market open and shut much faster today than they did historically. Many experts believe by the end of 2014, higher yields and a higher stock market will heighten skittishness in capital markets. To discuss strategies and insights on how to deal with this uncertainty, CFO Studio recently invited finance executives to an Executive Dinner on debt equity, held at The Capital Grille in Manhattan.
Moderator Jonathan Stearns, founder of Stearns Associated Partners, a strategic consulting and transaction advisory firm led the discussion. Accounting firm Rothstein Kass and legal services firm Lowenstein Sandler sponsored the event. Real Estate Strategies Corporation hosted the evening.
Early in the discussion, execs spoke about how they evaluate their companies’ financial needs and make sure their companies are in a position to quickly act on opportunity to take advantage of lower rates.
Several of the participants talked about the advantages of shelf registration in economic climates like the current one. “When you put up a shelf, all of a sudden, you create an overhang and that is going to cross the stock,” said Steven E. Siesser, partner, at Lowenstein Sandler. “Last year, one of our clients had two transformative acquisitions. We advised them to put a shelf up in between the two. Then, we were able to go into the bidding process with our $100,000,000 shelf.”
On the topic of raising capital with private equity, several members of the groups said that many PE firms are subscribing to a crowd mentality. “You need the one [private equity investor] who has enough faith in you to go ahead and make the commitment, and that seems to be the tipping point for having other investors commit rather than standing on the sideline,” said, Kevin Lynch, managing director at Tetra Private Equity Services, LLC and CFO at Cava Capital.
Ed Schultz, principal at Highland Business Group, agreed. “Right now, I’m finding “A”-round crunch to be terrific. Many venture capitalists are waiting to see what the other venture capitalists do before they even think of investing. There’s this wait and see strategy.”
Who Calls the Shots?
Stearns followed up by asking the group who should be driving theses types of financial decisions – the CFO, the CEO or the board?
“Who’s the driver? More often than not it is the CFO, but quite frankly it depends,” said Howard Reba, finance executive currently advising smaller companies on strategic and operational matters. “That’s not a copout answer. “Any successful company has a team leading it; not just one person. To me, the key to a successful team is having complementary pieces. In some cases, the CFO may be more of the driver on some things. In other cases, it may be the CEO. What you have to make sure is that you have someone on the team playing point and looking after every piece.”
Schultz agreed, but added that the CFO role should be a leading one. “The CEO, in most cases, doesn’t have a finance background. He or she is not going to be able to make determinations about cash and keeping the company liquid. In fact, many CEOs come [to middle market companies] from businesses with large resources to smaller companies. As for the board driving capital decisions, that can be an issue. A lot of times, the board is from private equity and there is that crowd mentality there, too. They may not know the business as well as the CEO and the CFO. The senior partner is thinking about the return he’s got to give the limited partners and may want to go ahead with some [aggressive] idea. It comes back to the more conservative person – the CFO – to make the final decision.”
While the person actually calling the shots on capital-raising strategies varies from company to company, depending on the culture and the personalities of the CFO, CEO and board, the participants did feel that clear communication between the CFO and the board was essential in all cases.
“The best CFOs are the ones who tell us that they’re no longer rearview mirror types,” said Andrew Zezas, publisher of CFO Studio magazine, host of CFO Studio On-Camera and General Counsel Studio, and CEO of Real Estate Strategies Corporation. “They’re no longer focused merely on qualitative or historical reporting or compliance. They are business executives who use their knowledge of finance to help their companies grow and generate profit.”
The relationship between the CFO and the CEO in these matters often can be drawn with a dotted line. According to Stearns, in his experience as a both a board member and an investor, the CFO must balance working with the CEO to support his goals as well as provide unbiased analysis and distilled information to the board. This is true in the case of weighing M&A opportunities as well as other capital-raising issues. “If the CFO has the ear of some of the board outside of the CEO channel, he or she has the opportunity to actually use soft skills to let those other board members know whether those synergies are really there in a potential acquisition and whether that sales opportunity is truly going to be reliable.”
Thomas Angell, partner at Rothstein Kass added that part of those necessary soft skills is the ability to translate from finance to business. The CFO not only has to be prepared with the right kind of data, but also the understanding of how to translate the financial results into a business opportunity,” he said.
Working With Investment Bankers
The discussion moved to weighing opportunities for acquisition and working with investment bankers. For the participants, the value of investment bankers’ varies greatly, depending on whether your business is on the buy side or the sell side of the deal.
“The most important thing to remember about investment bankers, is if the deal doesn’t close, they don’t get paid,” said Steven Heumann, US controller at ORBCOMM. “They’re very important because the investment bankers may present various debt and equity financing arrangements. Further, these financing arrangements have to be reviewed by management, deal modeled and approved by the board of directors. This process is very time consuming and ultimately takes time away from running the business. Before entering into a financing agreement, management needs to understand what type of financing arrangement is right for its company and its stockholders. For example, due to the low interest rates, a company might consider debt financing to be a better option compared to the cost of capital and subsequent dilution of an equity financing. Another company might prefer equity over a debt financing because they don’t have to use the cash generated by operations to pay down the debt and incur subsequent interest charges.”
Stearns added a different perspective. “I think there’s a way to use investment bankers as information people,” he said. “Not only for the buy and sell, but also, think about utilizing investment bankers when raising debt. They could be incredibly productive conduits of information as to, ‘Is a window of opportunity opening? What’s the general spread right now?’ Investment bankers can be very efficient parts of helping you evaluate if your company has appropriate capital. You can use them as an information matrix.”
In the end, most of the executives at the table agreed that while the decision maker in matters of debt and equity varies, the CFO is integral in making sure the desires of both the board and the CEO lead to financially sound decisions for the business. “What I’m hearing is we all agree that a CFO has the technical skills to do the analysis and use the information as best as available [to make the best capital decisions]; but equally important if not more important, are the CFO’s soft skills,” said Reba. “He needs to be able to communicate and explain his recommendations, and try to say yes, but sometimes has to say no. The CFO has to be the role of the impartial presenter of clear and concise facts.”