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The SEC helps companies support their stock prices in the wake of September 11. Plus: alternatives to air travel; convertible issuers dodge hedge-fund arbitrage; PIPE dreams; and more.
CFO Staff, CFO Magazine
November 1, 2001
The Feds Lend a Hand
The shock of the September 11 attacks radiated instantly throughout Corporate America, and grief and anger over the thousands of deaths was accompanied by fear and uncertainty over the direction the economy might take. Financial regulators and rule makers went to work to offer their own brand of relief, with mixed results.
To help companies support their share prices after an unprecedented four-day shutdown of U.S. stock markets, the Securities and Exchange Commission relaxed limits on stock buybacks for the first four weeks of trading after the attacks. The looser rules on timing and the volume of shares available for repurchase prompted more than 200 companies to announce new or expanded buyback plans.
Most of those companies didn't specify when they'd make the buybacks, but one, Maverick Tube Corp., bought 1.2 million shares of its own stock in the first eight trading days after the market reopened on September 17. "We were concerned that our stock would be impacted negatively when the market opened," says CFO Pamela Boone, "and we saw a window of opportunity that was available to us only under this ruling." A pooling combination in 2000 should have prevented Maverick from buying its own shares, but the SEC's emergency order waived that restriction also.
For its part, the Financial Accounting Standards Board stopped short of permitting companies to exclude costs related to the attacks from their earnings calculations. FASB's 13-member Emerging Issues Task Force initially said it would allow companies to report such losses as extraordinary items, but reversed its guidance after a contentious four-and-a-half-hour meeting. The main sticking point: how companies could distinguish those losses from losses due to the ongoing economic slowdown. Task force chairman Tim Lucas notes that although companies may have suffered lost revenues, that value can't be subtracted below the line, because it didn't show up on the top line.
FASB's about-face won't stop finance executives from attributing earnings shortfalls to the terrorist attacks, or from continuing the popular practice of reporting pro forma results that exclude all the bad stuff. "It's going to be pro forma like we've never seen before," predicts Robert Willens, an accounting expert at Lehman Brothers. --Stephen Barr
One and Only
Here's a new metric to consider: biometrics. Used to verify an employee's identity before granting access to a building or room, biometric devices--including finger, hand, eye, and face scanners, as well as signature and voice verification systems--are becoming more common among big and small businesses alike.
In fact, International Biometrics Group says that industry revenues in 2001 will jump 13 percent from last year's total, to $524 million.
Most large companies relegate biometrics to secure rooms and data centers, because employers are reluctant to say they don't trust their workers, says Bob Mannal, senior manager of KPMG LLP's Information Risk Management practice. Small businesses, such as check-cashing outlets and jewelry stores, deploy biometrics to expedite identity checks or curb crime, he adds.
The price tag for a typical hand-scanner system is about $10,000, 50 percent more than a key card system, says Scott Adams, sales manager of New Yorkbased Mutual Central Alarm Services Inc. But unlike the latter, of course, a hand scanner doesn't require employees to memorize codes or carry cards. -- Marie Leone
IRS Pushes Back
Taxpayers that were affected by the terrorist attacks and that had an original IRS filing deadline between September 11 and November 30 have been granted a six- month-plus-120-day extension to file the return and make appropriate payments.
Fast Cash: Companies can claim a quick refund of estimated tax overpayments before filing returns by using Form 4466, says the IRS.
The FTC's New Formula
Worried about what the government might say about a merger with a rival? Concerned that the deal might be nixed because the combination gives you too much market share? A recent decision by the Federal Trade Commission, now chaired by Bush appointee (and Reagan Administration veteran) Timothy J. Muris, could allay your concerns.
The commission's 5-0 approval in late August of the $3 billion merger of AmeriSource Health Corp. and Bergen Brunswick Corp. set two precedents for how the FTC might go about evaluating future combinations. First, the Herfindahl-Hirschman Index (HHI) may no longer be the final word on analyzing market concentration. Second, the so- called efficiency defense may represent a more effective argument for enabling deals to go through.
The HHI is a metric for determining changes in market power based on the parties' combined market shares. A result of more than 1,800 and an increase of more than 100 points typically raise anticompetitive concerns. The AmeriSource-Bergen deal brought the index to 2,700, with an increase of 450 points, but that was not enough to scuttle the merger--perhaps, some surmise, because Bergen's market share had fallen in the past year.
Likewise, regulators backed the companies' claim that combining the nation's third- and fourth-largest prescription drug wholesalers would result in efficiencies not possible without the merger. "The proposed transaction likely will give the merged firm sufficient scale, so that it can become cost-competitive with the two leading firms and invest in value-added services desired by customers," the FTC stated in its ruling.
What does this mean for others contemplating mergers? The ruling, says David Balto, a partner at White & Case and a former FTC policy director, "demonstrates a greater willingness to appreciate potential efficiencies and greater sensitivity to the competitive positions of potential also-rans."
In 1998, the FTC derailed the proposed acquisitions of AmeriSource by the industry's number-one player and of Bergen by the number-two player. But by creating a stronger number three, says Balto, "the companies make a compelling case that, but for this merger, there would not be a competitive discipline on the marketplace." --S.B.
Poor cash flow is a recurring problem for 20% of small businesses, says Wells Fargo. Overdue receivables and unexpected sales variations are key culprits.
Like many executives, James McDevitt is reevaluating his company's travel policy in light of the events of September 11. "The fewer employees we have traveling, the safer everyone will be," says McDevitt, CFO of software maker Clarus Corp. At sneaker and sporting-apparel company Saucony, CFO Michael Umana is looking at "creative options" for air travel, which the Peabody, Mass.-based company suspended immediately following the attacks.
Corporate executives around the country are exploring a range of commercial travel alternatives, from using corporate jets to spending more time on phone sales to videoconferencing and Webcasting--the transmission of audio and video to personal computers via the Internet (see "Fear of Flying," www.cfo.com/article? article=5145). The latter is an important technology at Suwanee, Ga.-based Clarus, which has been using it as a cost-effective sales and marketing tool for some time, says McDevitt.
The hospitality industry is also paying more attention to Webcasting. "Since September 11, we've seen several hotels hard-wire their properties and recast conference services departments as local Webcasting business centers in an effort to compensate for lost meeting revenue," says John Onorato, CEO of Red Bank, N.J.- based Desktop Live Inc., a Webcasting service provider. In turn, Webcasting vendors are rushing to introduce new applications to meet the armchair salesperson's needs, such as streaming video, slide presentations, spreadsheets, and Q&A sessions.
Hoover's Inc. CFO Lynn Atchison acknowledges that managers may now be more inclined to experiment with technology, but she's confident that sales executives will continue to meet with clients face-to-face to sell big-ticket products and services. "Maybe now you do a better job making sure that a lead is good before jumping on a plane," concludes Atchison. -- Jennifer Caplan
Video Input: Only 7% of large companies pay board members to participate in tele- or videoconferences, says The Segal Co.
Hedging Hedge-Fund Risk
With equity markets slow and debt markets cautious, hybrid vehicles such as convertible bonds may be the only refuge for capital-starved companies this quarter. Indeed, after a sharp slowdown in third-quarter issues, many expect the convertible market to rebound.
"I think we're going to see massive convertible issuance toward the end of the year, because companies just aren't going to get this capital from anywhere else," predicts Andy Reckles, chairman of Hyperion Partners Corp., an Atlanta brokerage. Hyperion had three such deals pending in mid-September.
The good news is there's plenty of hedge-fund money waiting to absorb the convertibles, according to Tim Rudderow, president of fund management firm Mount Lucas Management Corp., despite the low coupon rates and favorable 30 to 50 percent conversion premiums that issuers have been able to command. The bad news, however, is that hedge- fund investors may push stock prices down by shorting the underlying shares, thereby triggering a sell-off among long-term equity investors.
Share shorting in convertibles "is always a concern," says Finisar Corp. CFO Stephen Workman, but it becomes more acute when stock prices are low. In response, Finisar executives are planning a miniroad show for the company's first convertible offering, originally announced September 10 and now postponed until later in the year. "You can put a fence around some of the downside if you're able to engage a broader base of investors," says Workman. "Some will still be hedge funds, but some will hold your stock afterward."
About 50 percent of Finisar, a $189 million fiber-optic equipment maker based in Sunnyvale, Calif., is held by institutional investors, which accepted the plan despite reservations about the net income losses the company has suffered during the past year. Finisar didn't require the approval of investors, but "we had a general nod of understanding from them," says Workman.
Other convertible issuers try to minimize the impact of the hedge funds' arbitrage by going into stealth mode around such a deal, providing little future notice and sealing it after the markets close.
"It's important to be very quiet before going to market so your stock isn't driven down," says Mike Jennings, vice president and treasurer of Cooper Cameron Corp., a pressure-control equipment maker in Houston. Last May, the company, which is more than 80 percent institutionally held, sold $450 million of convertible bonds with an average annual yield of 1.5 percent in a two-part overnight deal. Although Cooper's stock price bobbled for about two weeks after the issue, Jennings says the long- term benefits were enough to win a "very positive" reaction from equity holders.
"We probably saved 400 to 500 basis points relative to straight- debt borrowing costs at that time," he says, "so the feedback from institutions was generally, 'Great job.'" Comments Lennar Corp. treasurer Waynewright Malcolm, who also prefers overnight deals in an equity-linked transaction: "Even in a down market the strategy still works, because you remove the uncertainty about what the share price is when you do the transaction."
Obviously, deal structures can also help eliminate convertible- arbitrage opportunities. Floors, collars, and restrictions on pre- and postconversion trading tend to make convertibles less attractive to hit-and-run investors. However, Reckles, who also owns a hedge fund, believes such fears about shorting are overblown. Hedge fund managers have to "tie up so much money on top of what is already invested, and face so many risks about being able to trade it, that the cost to carry a short position becomes enormous and short-selling doesn't make any economic sense," he maintains. -- Alix Nyberg
Come December, the SEC may ease restrictions on short-selling big blocks of stock if its proposal survives the public comment period.
Early Bird, No Worm
In accounting, ignorance is anything but bliss. Confusion surrounding early adoption of the Financial Accounting Standard Board's new purchase accounting rules has forced at least one eligible company to put its plans on hold for a year. "We had every intention of being an early adopter" of FAS 141, "Business Combinations," and FAS 142, "Goodwill and Other Intangible Assets," says Tony Ryan, CFO of Ansoft Corp. Unfortunately, he tried to move during "that odd period" when the rules had yet to be sorted out (see "Goodwill Games II," www.cfo.com/fasboct01).
Just before Ansoft reported its results for the fiscal first quarter (ending July 31)--a month after FASB approved the standards, and during the period when the Pittsburgh-based company should have disclosed its adoption plans--KPMG International advised the software company to hold off adopting the new standards. Consequently, Ansoft will have to amortize $1.2 million per quarter through April 30, 2002, when it adopts the goodwill standards. That advice, according to KPMG, was consensus guidance among the Big Five accounting firms. "In reality," Ryan says, "there didn't appear to be consensus among any of the firms and the Securities and Exchange Commission about how to adopt the rules."
The auditors' limited ability to interpret the new rules delayed Ansoft's reporting by nearly a month. During that time, the company worked with a third party, KPMG Consulting, to learn how to adopt or implement the standards.
The SEC's guidance on disclosures still puzzles auditors, particularly with respect to the treatment of intangibles that are separate from goodwill. FASB intends to reconcile its rules with the SEC's in early November. Brian Heckler, a partner at KPMG Transaction Structuring Services, says that the subjective nature of the standards is a possible deterrent to early adoption, and suggests that companies wait and see how peer groups or similar industries handle the new rules.
Although Ryan says Ansoft management has since "moved on" from the snafu, the series of events has left a bad taste in his mouth about FASB's early adoption regulations, which he now calls "cumbersome." "They've created a lot of work for valuation groups and accountants," he says. --Craig Schneider
Over 33% of the world's largest companies use a treasury management system to automate the function and generate financial data, says Greenwich Associates.
Cost cutting may be rampant throughout Corporate America, but when it comes to producing the annual report, it's business as usual.
According to an August client survey by Thomson Financial/Carson, 94 percent of respondents say they will release their 2001 annual report in both print and online formats. While most indicate they would like to eliminate, or at least reduce, the cost of mailing and printing the reports, 66 percent of those using both formats say they will print at least as many copies as they did for 2000.
Among the reasons cited for printing annual reports is the belief that Regulation FD requires a hard copy of them. However, Boris Feldman, a securities lawyer in the Palo Alto, Calif., office of Wilson Sonsini Goodrich & Rosati, dispels that notion. "Reg FD recognizes the efficiency of markets," he says. "The 10-K is filed with the SEC, and that's all that matters," not the format of the annual report.
Kara Newman, vice president of strategic research at Thomson, says corporate belt-tightening in the wake of September 11 makes the survey results "more relevant." Printed annual reports offer companies "one way to talk to investors," she explains. Hard copies are especially important for international firms, adds Theodore Economou, director of investor relations at ITT Industries Inc., because many of their constituencies may not have easy access to the Internet.
For his part, Scott Greenberg, chief operating officer and president of Curran & Connors Inc., a design firm that specializes in corporate communication and annual reports, has not seen an "appreciable drop-off" in the number of reports companies are printing. That doesn't surprise him, he says, since an annual report "articulates a company's value drivers, vision, and strength, in spite of cost cutting." -- Joan Urdang
Reasons for maintaining current production level of annual reports:
Source: Thomson Financial/Carson
Not My Default: In Q3, Moody's loan downgrade-to-upgrade ratio was 5:1, the highest since borrower ratings began in 1995.
Breaking the Supply Chain
With local currencies slated to disappear in Europe in the first quarter of 2002, harbingers of business disruption are surfacing. The European Commission reports that less than 5 percent of all companies in the eurozone--except Luxembourg and Belgium, which have higher compliance--have fully switched over to the new currency as of Q3, and it frets that the rest won't make the January 1 deadline.
Industry analysts share the gloomy prediction. Fewer than 40 percent of small businesses in the European Union, and only 65 percent of midsize businesses, will be prepared to trade an account automatically in the euro currency by the deadline, estimates Simon Pollard, vice president of European Research at AMR Research Inc.'s London office.
However, most large companies are far from panicking. "This is not the Millennium Bug," says Helmut Vethake, spokesman for General MotorsFiat Worldwide Purchasing Group, which handles more than 2,000 eurozone suppliers. "Perhaps my coins won't work in the vending machines, but at least in the business world, we don't see any problems."
Gillette Corp., meanwhile, has already hammered out euro-denominated price lists, purchase orders, and contracts with its 10,000-plus European suppliers, and it expects that they will meet the deadline. "In cases where they need assistance, we're providing it," says spokesman Steve Brayton.
Suppliers to the eurozone also say they are up to speed. "We turned everything over last June, the beginning of our fiscal year," says Christian Storch, CFO of Standex International. The Salem, N.H.-based miniconglomerate has about $60 million worth of sales in Europe, where it supplies components to big-name appliance makers and automakers, such as General Motors.
Storch is now turning his attention to the broader implications of the conversion, such as how price transparency in eurozone countries will affect the $30 million in sales Standex currently makes in the United Kingdom, which is not switching to the euro. Allegiance to the pound "makes it difficult in general for U.K. companies to be competitive," he notes, "so we're watching closely to see how multinationals react: Will they reinvest or simply pull out?" --A.N.
Rise And Fall
During the first three quarters of 2001, 12 corporate issuers rose from speculative to investment grade, says Standard & Poor's, but 39 fell from grace.
The wave of desperation may have finally crested in the PIPE (private investment in public equity) market, as fewer capital-hungry issuers have come to the table this year. During the first three quarters of 2001, only 810 PIPE deals were inked, albeit a healthy $57.6 billion was raised, reports DirectPlacement Inc. That's compared with the record 1,348 transactions completed last year, which raised $58.5 billion.
It's likely that the decrease in PIPE activity means that issuers are avoiding the infamous "death spiral" deals that were plentiful when E- companies were desperate for capital at any cost. Long time PIPE purveyor Warren Baga- telle, managing director at Loeb Partners Corp., says that such floorless debt gives PIPEs a bad name, and he warns issuers to avoid any transaction that is similarly tied to short-term investor incentives, such as sinking stock prices.
Some experts believe, though, that the deal structure isn't the problem when a PIPE goes up in smoke. "It's the management that fails in these transactions," asserts Richard Rosenblum, managing director at investment firm vFinance Corp., referring to distressed companies that have terrible business plans and misuse PIPE proceeds. Consider the debacle surrounding Nasdaq-delisted World Wide Wireless Communications Inc., whose anemic business plan and management team burned through a $7 million PIPE in eight months. Its private investors claim that among other fiduciary offenses, WWWC's original executives didn't register shares in a timely fashion, leaving convertible bondholders holding nothing more than the proverbial bag. In April, investors kicked out three board members and brought in a new CEO.
Rosenblum says that PIPEs are successful when companies are smart with their capital. Witness Rail America Inc., an Old Economy short-haul carrier that was shut out of the public markets last June. CFO Bennett Marks used a PIPE to raise $38.3 million in a straight stock transaction. Since then, Rail America has steamed ahead, doubling its stock price--now $12--in one year. -- M.L.
Convertible bond 144A private placements, Q3.
Payroll Technology from Visa and five major banks allows companies to use prepaid payroll cards instead of paper paychecks.