Tag Archives: financial

Selling Businesses

Tips On Finding A Buyer For Your Company In Tough Economic Environment

Yes, the lofty business valuations supported by an overabundance of cheap debt have come and gone, but valuations are still attractive by historical standards and deals are still getting done. The companies that are achieving the highest valuations, best terms and actually getting to the closing finish line are approaching the market in a more systematic and pragmatic fashion. Even in today’s turbulent economy, it is still possible to achieve an attractive deal for your shareholders.Here are some practical tips CEOs should consider before endeavoring to sell their companies:

Strategic buyers are driving valuations
Corporate buyers are back with a vengeance after years of being at a significant competitive disadvantage relative to private equity groups flush with cheap debt and the ability to over-leverage deals to justify higher and ever higher valuations. While the market uncertainty has certainly made everyone more cautious, many companies have responsibly maintained conservative balance sheets and are actively seeking acquisition opportunities. You can expect a more thorough and lengthy diligence process, but the strategic buyers are often the most attractive and viable liquidity event available for most sale candidates in today’s market. Most sellers should now focus their efforts on well capitalized strategic buyers to achieve the most favorable outcome for shareholders.

Private equity groups are down but not out
Typically, private equity groups (PEGs) seek significant debt leverage on their equity investment to achieve higher equity returns. With the unprecedented collapse of the debt markets, there is little to no debt available for a typically structured PEG transaction. However, some PEGs specialize in full capital structure solutions, essentially underwriting their own debt for the deal. These PEGs are especially attractive in today’s market. Many of these full-capital-solution PEGs are understandably looking to capitalize on their unique advantage by acquiring companies at lower deal valuations, so they are not likely to outbid a well capitalized strategic buyer. At the same time, many traditional PEGs are still flush with cash and need to put the money to work, so they are accepting lower returns and are pursuing deals with more conservative capital structures. While PEGs are less aggressive on valuations across the board, they should still be approached by most sellers and included in any sales process intended to maximize valuation. Don’t count out the PEG world entirely, but at the moment, the smart sellers are focused more intently on well capitalized strategic buyers.

Create a competitive environment
The primary function of an investment banker is to identify all the likely potential buyers for a company, both strategic and financial, and then create a competitive environment whereby you are able to achieve the best possible transaction for your company by comparing various alternative proposals simultaneously. The best transaction usually involves numerous factors that are specific to each seller, but will generally include price, terms (cash, stock, earnouts, etc.), certainty of closure, cultural fit, and many times other qualitative factors. The sales process is part art and part science, and the experience of your investment banker is critical to achieving the optimal outcome. You should carefully evaluate the expethem, and be sure to ask for client references. Occasionally, a one-off negotiated sale can achieve an optimal outcome, but more often than not, a professional process run by an experienced investment banker will yield far superior results.

Create value with pro-forma “add-backs”
The primary valuation metric in most deals is a valuation multiple based upon earnings before interest, taxes and depreciation (EBITDA). Most buyers are willing to give credit for reasonable pro-forma “add-backs” to EBITDA. If you raise your EBITDA, the purchase price is raised correspondingly by a factor of the purchase multiple (every dollar you gain here can add $5, $6 or $7 to the purchase price). This can be a huge value creator, and can increase the valuation achieved for your company by 10 percent to 30 percent in most cases compared to relying on Generally Accepted Accounting Principles (GAAP) EBITDA. A professional investment banker is well versed in the types of issues that can effectively be positioned for “add-back” credit. These typically involve one time or unusual expenses, investments that GAAP won’t allow you to capitalize, excess salary draws (salary that should be viewed as dividends), M&A process costs, and certain legal costs, among others. This is another area where a good investment banker can add significant value to a transaction by providing good advice identifying and negotiating for these items and not leaving any economic value on the table.

Run your business and leverage your advisors
Letters of intent, or LOIs, are almost always non-binding; you don’t get your check until the deal closes. It can be a long and frustrating process managing the due diligence and documentation process, often taking between 8 to 12 weeks and hundreds of hours of time that can be a serious distraction from running your business. Make sure you have a point person on the management team to coordinate, and most importantly leverage off your legal advisors and investment bankers throughout the process. Good lawyers and investment bankers can take a good portion of this burden off your shoulders and leave you more time to run your business. This is critical. If the interim financial results of your business suffer as a result of your management team being distracted, this can sideline your deal or at the very least result in a downward renegotiation of valuation. Run your business, run your business, run your business. Nothing is more important.

Financial Institutions Receive Bailout

Financial Institutions In Arizona Are Expected To Receive Bailout Money

While most of Arizona’s state-chartered banks were mulling over their options for federal assistance late last year, Uncle Sam was injecting billions of dollars of new capital into national banking companies with Arizona subsidiaries. The question is whether any of that money from the Department of the Treasury’s $700 billion Troubled Asset Relief Program (TARP) will find its way here.

Although there were a couple of exceptions, nationally chartered banks with Arizona operations didn’t know whether portions of their capital infusions would be earmarked for deployment in Arizona, and they may not know until sometime during the first quarter. The capital comes in the form of federal purchases of senior preferred shares. The Treasury set aside $250 billion for the program.

The Treasury purchased $200 million of shares in Seattle-based Washington Federal Inc., the parent company of Washington Federal Savings. John Pirtle, senior vice president and Phoenix division manager for Washington Federal, estimates the thrift’s Arizona operations will receive about $20 million and use it for mortgage lending.

Western Alliance Bancorporation in Las Vegas, owner of Alliance Bank of Arizona, received $140 million from the Treasury. James Lundy, chief executive officer of the Arizona bank, expects his parent company to share the new capital.

“I would expect we’ll get somewhere between $8 million and $12 million,” Lundy says. “That would be a good estimate. We are well capitalized now, but we do have plans to continue our growth trajectory, which has been pretty strong.”

Alliance Bank would use the capital to “support a bigger balance sheet, so we can gather more deposits to make more loans,” Lundy says. “Banks like ours are the ones making loans to small and mid-size businesses. Despite the economic issues Arizona is facing, we have strong loan demand from borrowers we think are very creditworthy.”

Ten million dollars in new capital can be leveraged to generate $100 million in new loans, Lundy says.

The Treasury purchased $1.715 billion of stock in Milwaukee-based Marshall & Illsley Corporation.

“All the funds are going to be used throughout the franchise,” says Dennis Jones, chairman and president of M&I’s Arizona region. “It’s not a matter of allocating a certain amount of it for Arizona.”

Chicago-based Northern Trust Corporation, parent company of Northern Trust Bank, received a $1.576 billion capital infusion. David Highmark, chairman and chief executive officer of the Arizona subsidiary, says he expects enough of the capital will flow to his bank to allow it to keep growing. Northern Trust Bank’s loan volume is two to three times its normal level.

“If our loan volume continues to grow as it has, we will get a portion of that money allocated to us,” Highmark says.

The parent company is classified as well capitalized, “but we knew, based on our growth, that we would ultimately need more capital. This was a timely opportunity for us,” Highmark notes.

Zions Bancorporation in Salt Lake City, owner of National Bank of Arizona, received $1.4 billion from the Treasury. Keith Maio, president and chief executive officer of the Arizona bank, says he expects his bank will receive some of the capital, but the amount has not been determined. Maio says the funds will be used to bolster the bank’s capital ratios to keep it actively lending, targeting small to medium-size businesses.

Other Treasury stock purchases of nationally chartered banks with Arizona subsidiaries break down as follows:
JPMorgan Chase & Co., New York — $25 billion.
Bank of America, Charlotte, N.C. — $25 billion.
Wells Fargo & Company, San Francisco — $25 billion.
U.S. Bancorp, Minneapolis, owner of U.S. Bank — $6.599 billion.
Comerica Incorporated, Dallas, owner of Comerica Bank — $2.25 billion.
Mutual of Omaha in Omaha, Neb., which acquired First National Bank of Arizona, did not apply for TARP funding.

The Treasury gave publicly traded banks the first opportunity to receive capital infusions, with a Nov. 14 deadline to apply for stock purchases. It issued capital-infusion guidelines later for privately held banks, which had until Dec. 8 to apply. According to the Arizona Bankers Association, most of Arizona’s 33 state-chartered banks are privately held and had not applied to the Treasury while they weighed their options as their deadline neared. Jack Hudock with the Arizona Department of Financial Institutions said eight state-chartered banks or bank holding companies had applied, but he could not identify them and did not know the status of their applications.

Meridian Bank of Arizona, a privately held, nationally chartered bank owned by Marquette Financial Companies in Minneapolis, applied for a federal stock purchase and was awaiting a decision from the Treasury concerning how much capital it might receive. Doug Hile, president and CEO of Meridian, is not happy that publicly traded banks had first shot at a capital infusion. He does not mince his words in his displeasure over how the government treated privately held banks.

“From a public policy perspective, it’s not fair to small banks that have opted not to go public with their stock,” Hile says. “We are up in arms about it. This is harming Main Street banking by not allowing them to participate on an equal basis.”

Blood Systems Inc

Blood Systems Inc. Succeeds With A Delicate Balancing Act

When donating blood, many people probably only have a vague understanding of how the entire process works. Most donors certainly don’t understand how complex the mechanisms are that take blood to its final destination, or about the people who make it all happen.

“The general public does not understand what goes on behind the walls of a blood bank,” says Susan Barnes, Vice President and Chief Financial Officer for Blood Systems Inc. “I actually had someone say to me, ‘Oh, you’re the guys who take my blood, don’t give me anything for it and then sell it to the hospitals and make a fortune.’ I said, ‘There’s a lot in between that you don’t know.’ ”

Founded in 1943 as the Salt River Valley Blood Bank, the nonprofit Blood Systems is one of the nation’s oldest and largest blood service providers with operations in 18 states. Blood Systems is also a high-tech, efficiently run company entrusted with a life-or-death mission.

“We budget very carefully to return to the bottom line just enough to allow us to re-invest in our facilities, in processes that the FDA requires, and to keep things state-of-the-art so we can make sure we always provide the quality of blood product that the community expects,” Barnes says. “Not everyone understands that we can’t have a zero bottom line just because we’re a not-for-profit. It’s important to make money to re-invest, because if you don’t re-invest in the organization, you can’t continue the mission.”

Blood Systems mission is “to make a difference in people’s lives by bringing together the best people, inspiring individuals to donate blood, producing a safe and ample blood supply, advancing cutting-edge research and embracing continuous quality improvement.”

To keep such a noble mission in these trying times is a difficult balancing act, says Blood Systems President and CEO Dan Connor.

“In this particular environment that we have now with the economy, we see many companies laying off folks, so there are fewer people available to donate blood and that makes our job more difficult,” Connor says. “Our hospitals are less able to withstand any new tests or new procedures or new costs that we might have to pass along. As a result, we are trying to do that balancing act between doing everything we can to ensure an ample and safe blood supply, while also understanding the limitations that hospitals face as far as paying a reasonable cost for the blood products that are provided to their patients. That’s particularly difficult right now.”

Thanks to Barnes’ financial acumen, Blood Systems has built up a strong bottom line in its cash reserves.

“These reserves allow us to proceed with projects and expenditures, as well as still give our employees a cost-of-living increase in those years that we are not going to generate as much cash,” Barnes says. “There are also those years that we know our customers (hospitals) cannot afford to absorb our entire increased costs, and these reserves allow us to hold some of these new costs without our usual reimbursement.”

Perhaps Blood Systems greatest strength to its bottom line is its diversification, which has helped the company create new and needed revenue streams. That diversification is centered on four main divisions.

The Blood Centers Division is a network of more than a dozen regional blood centers and about 70 donor centers stretching from the West Coast to the Gulf of Mexico and from the Canadian border to the Rio Grande. The centers are operated through United Blood Services and Blood Centers of the Pacific, and serve patients in more than 500 hospitals. Last year, nearly 700,000 people donated blood an average of 1.5 times through the Blood Centers Division.

The Blood Systems Research Institute in San Francisco has conducted scientific research into transfusion medicine for more than 50 years, studying infectious diseases such as HIV and the West Nile virus. A second institute is located in Tempe.

Blood Systems Laboratories operates two of the most highly rated and high-volume blood-donor testing and infectious disease reference laboratories in the nation. The labs in Tempe and the Dallas area tested about three million donations in 2007, with two-thirds of the blood coming from other nonprofit blood centers.

BioCARE distributes plasma derivative therapies available to patients 24 hours a day, every day of the year at more than 200 locations across the country.

Blood Systems is also extending its reach internationally. For about the last four years, Connor says Blood Systems has sent the plasma portion of blood donations to the United Kingdom in order to help that country reduce the risk of transmitting the human form of Mad Cow disease.

But diversification alone hasn’t made Blood Systems a company that just recently received an upgraded ‘A’ stable credit rating from Standard & Poor’s at a time when many other companies are being downgraded. Blood Systems has instituted performance-improvement efficiency standards such as Six Sigma and LEAN tools, which have resulted in the reengineering of processes in the Blood Centers Division and Blood Systems Laboratories. That in turn has improved efficiencies and ushered in cost savings of more than $2.5 million throughout the organization in 2007 alone.

Blood Systems is also investing in its human capital by developing its own program to produce specialists in blood banking.

“We were having trouble finding qualified blood banking specialists to staff our laboratories,” Barnes says. “We partnered with the University of Texas Southwestern Medical Center (at Dallas), and wrote the actual online modules to train the students and taught them through the University of Texas to become specialists in blood banking.”

Blood Systems graduated its first class of specialists in blood banking in 2007.

“It’s basically growing our own blood banking specialists,” Barnes says. “We have the opportunity to put our own staff through the course and allow them to earn the certification. This enhances their careers while staffing our laboratories with the most qualified specialists.”

Making such long-term investments in its employees’ futures has helped Blood Systems decrease turnover by more than2.5 percentage points from 2006 to 2007, with the average length of service now up to almost seven-and-a-half years. And then there’s the mission.

“When I interview a candidate for a job here at Blood Systems,” Barnes says, “one of the things I always make a point of telling them is it doesn’t matter whether you’re collecting blood from a donor, or volunteering to give the donor a cookie and juice afterward, working in our testing laboratory, or working in accounting and finance — everyone who walks in the door every morning understands and is proud of the fact that they’re helping to save a life that day.”

Tanya Wheeler is president and CEO of the Arizona Bankers Association.

Arizona Bankers Association Continues To Advocate For The Banking Industry

One thing that hasn’t changed at the Arizona Bankers Association since it was founded 105 years ago is its dedication as an advocate for the banking industry. The cornerstone of the association has always been advocacy of bank-related issues with elected officials, state legislators, members of Congress and regulators at the state and federal levels.

“It’s the most significant service we offer,” says Tanya Wheeless, president and CEO of the ABA. “We serve as a clearinghouse when those decision-makers are considering new legislation or regulations. We can weigh in on behalf of the industry on anything that might have an impact on banking. And we do it with a single voice. That’s why we started and that’s what we still believe in.”

The association’s Grassroots Advocacy Resource Center focuses on communicating with state and federal lawmakers and arranging meetings between bankers and local legislators and in Washington with members of the Arizona congressional delegation.

“When we need to communicate on a bill,” Wheeless says, “we provide our members with contact information. Nearly 1,000 letters from Arizona bankers were sent to our congressional delegation opposing a farm credit bill earlier this year, and we were successful. It didn’t pass.”

But the association doesn’t overdo its use of the grassroots program.

“We only pull the trigger when we need to, when it’s really an important issue,” she says.

Wheeless characterizes banking as being different from other businesses.

“They compete viciously in the market, but they all offer basically the same products and services,” she says. “Where banks set themselves apart is in customer service and convenience. Even though they are great competitors, they recognize that when it comes to laws and regulations, we’re all in it together. A law that’s bad for one bank is bad for the bank next door.”

By the same token, a good law helps all banks. For example, the Arizona Legislature passed a bill this year that requires loan officers to be licensed and to undergo continuing education. Sponsored by Sen. Jay Tibshraeny, a Chandler Republican, the measure was supported by the Bankers Association and the Arizona Mortgage Brokers Association.

“It passed in the final hours,” Wheeless says. “Mortgage brokers were largely unregulated. They had to have a license, but little could be done to revoke a license and communicate problems to others — like don’t hire this person. This law provides that they have the same oversight and training that banks have to provide. There was a time when you had people doing mortgages in Starbucks. They had passed a test, and that was all they knew about the mortgage industry.”

The bill was a good way to provide some uniformity in education and licensing requirements, regardless of who the employer is, Wheeless says.

In collaboration with the governor’s office this year, the association produced 50,000 cards containing resource information for people feeling financial pressures, Wheeless says. Printed in English and Spanish, the cards were distributed through grocery stores, nonprofits and social service agencies.

FMLA

Caring For A Relative Injured During Active Military Service Now Permitted Under FMLA

Most Arizona employers associate the Family Medical Leave Act (FMLA) with employee time off to care for an ailing parent or spouse or to tend to a newborn baby or newly adopted child.

Since early this year, the list of reasons for granting extended employee leaves has become longer, and in some cases, so has the permitted time off.

As of Jan. 28, when President Bush signed the National Defense Authorization Act of 2008 into law, the FMLA extends coverage to employees who are caring for a spouse, child, parent or “next of kin” injured while on active military duty. It also covers unpaid leave “for any qualifying exigency” arising from a spouse, a child or parent of the eligible employee being on active duty (or being notified of an impending call or order to active duty) in the armed forces.

It is well documented that military members who are injured in battle are surviving in record numbers, leaving active duty and requiring short- and long-term care to convalesce. This law recognizes this new fact of life for military families.

Companies with 50 or more employees must now grant up to six months of leave in a 12-month period to an eligible employee who is caring for a wounded service member, and 12-weeks leave to an employee helping a relative with a pressing need related to getting his or her affairs in order in preparation for military service.

The two provisions for military families represent the first expansion of the FMLA in the nearly 15 years since it was enacted. The expansion is expected to have significant impact on companies covered by the FMLA as long as overseas deployment of troops — and resulting casualties — continues.

The law is causing confusion in the business world, especially with regard to the definition of an “exigency.” We believe the intent behind this provision is to offer assistance to families who must now prepare for, and deal with, the service member’s deployment. That could include time off for an employee helping to arrange for childcare, attending pre-deployment briefings, handling legal, economic or financial-planning issues, paying bills, or providing emotional support.

Another area of confusion surrounds certification. What information can an employer properly require, for example, regarding the service member’s active duty status and the employee’s “next of kin” status?

The U.S. Department of Labor has promised to issue regulations to clarify the confusion, but they are not expected before this fall. Until then, employers are required to provide leave to employees caring for wounded relatives and are not required but are being encouraged to provide leave for qualifying exigencies.

We advise employers to amend their FMLA policies and practices immediately to reflect these significant changes in the qualifying reasons and duration of protected leave. In addition, as we await final DOL regulations, employers must proceed with caution in addressing an employee’s request for military-related leave.

Employers with questions about employee-leave rights should consider contacting experienced employment law counsel.

Mark Ogden is the managing shareholder of the Phoenix office of Littler Mendelson, the nation’s largest employment and labor law firm representing management. He can be reached at 602-474-3600 or jmogden@littler.com