VideoThe disaster wreaked by Hurricane Katrina has prompted businesses to donate time, products, and money. Possibly unknown to many financial executives is a way that companies with large underperforming or non-performing assets could donate those goods to a charity and get cash for their fair value in the process: corporate barter.
When a marketing blunder or a logo change prevents perfectly decent products from being sold through the usual channels, such assets become ripe for swaps with other corporations. After the catastrophic December 2004 tsunami, for instance, a pharmaceutical company had 48 million prescription pain-relief and anti-inflammatory pills it wasn't selling, according to Clarence Lee, CFO of Icon International, a corporate barter company owned by Omnicom.
The drug company had bought pills manufactured by another company that doctors commonly prescribed along with theirs. The idea was to sell both drugs in tandem under a new name. But physicians persisted in prescribing the drugs as they previously did because they did not remember the new product's name, explained Lee, who said he couldn't identify the company because of a client confidentiality agreement.
Icon paid the pharmaceutical company $7.5 million in cash for the medicine, which could have been destroyed, sold to another company for remarketing, or donated. The parties agreed to donate it. Icon provided the medicine to AmeriCares, a charitable organization that supplies humanitarian aid and disaster relief, which used the medicine in the Pacific Rim as part of the charity's relief efforts after the tsunami. In exchange for the $7.5 million, the pharmaceutical company committed to buying $52 million of media advertising—ads it would need to buy in any event—from Icon over three years.
At Icon's request, the Food and Drug Administration certified the drugs' viability in a letter to AmeriCares. Further, Icon received a charitable tax deduction for its cash payment for the medicine. For its part, besides the cash, the pharmaceutical company got to take credit for the donation.
Just as the pharmaco's barter produced the effect of a donation of medicine, companies with hefty amounts of unused or underperforming assets could help relief efforts in Katrina-devastated areas and get value from the transaction, barter-company experts say.
Besides medical supplies, the assets could be clothes, machinery, or many other kinds of excess goods or capacity. "A number of clients have called us to ask if they can use their cash purchase obligations or trade credits [with the barter company] to buy hotel rooms" for hurricane victims, said Lee. So far, Icon's clients have been unable to "donate" their hotel credits because extended-stay hotels across the Gulf Coast have been sold out. "The problem is that hotels are booked and know they can get full rates," he explained.
High Spirits and Hardware Deals
Perhaps companies can find other ways to use barter—also known as "corporate trade"—to help storm victims. In general, barter companies make profits because they buy such goods and services as media, cargo space, and hotel rooms before they're used and therefore get them at a discount. When the barter firm resells an airplane seat or a hotel room, for instance, it can sell it at the prevailing market price and take advantage of the difference in the cost of a product over time.
The corporate barter industry's revenues are about $1.75 billion, estimates Lee. "By engaging in a barter, a company doesn’t need to take a loss on the asset and can receive full value of that asset going forward by using trade credits to offset cash outlays of things they buy," explains Elliot DeBear, senior vice president at Active International, a corporate trade firm.
Businesses, however, have used barter to solve an array of different problems. For example, Allied Domecq, a company that manufactures and sells spirits and wines, had $5 million worth of spirits that the marketing team no longer wanted sold because of label and bottle changes, said Regenia Cafini, Allied Domecq's controller for North America.
The spirit-maker, which owns Dunkin' Donuts and Baskin-Robbins and other brands, entered into a $5 million corporate-trade transaction. Icon paid $5 million in cash to Allied Domecq, which agreed to buy over $5 million in goods and services, mostly consisting of advertising, from Icon. The spirits' ownership and risk of loss was transferred to Icon, and the barter firm managed the logistics of taking physical possession of the goods. Allied Domecq has a reason to fulfill its part of the deal by buying advertising through Icon: the contract lists penalties if the client doesn't comply.
In another case, Ace Hardware Corporation two years ago engaged in corporate barter to jump-start the promotion of one of its brands. The company, a $3 billion co-operative that has 4,800 retailers across the country, wanted to replace a supplier's builders' hardware products—including such things as hinges and door stops—with those of an Ace private-label brand. "The challenge was that we had a significant amount of inventory with an existing vendor in our stores," recalled Peter Ting, assistant controller at Ace.
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