Forte Financial Blog

Equity Analysts Focus on CFOs Rather than CEOs

Are CFOs ready for the spotlight? According to CFO.com research from Greenwich Associates reveals that for the first time an annual survey of Wall Street equity analysts ranked the credibility of a company's finance chief as more important to the overall IR effort than that of the chief executive.

But it was the endorsement of the CFO's that captured the most attention in the report. "In a slowing economy, analyst focus shifts from broad questions of strategic positioning relative to future growth potential to nuts-and-bolts measures of cash flows and financial health," said Greenwich Associates consultant Bill Bruno. As a result, he says the firm is recommending that clients to make sure "their CFOs are ready for the spotlight."

Said Bruno, "Analysts today are often much more interested in questioning and judging the capability of the CFO than in talking to the CEO. But many CFOs have backgrounds in accounting or finance as opposed to sales, and many have not received the same type of speaking and presentation training common among CEOs. Our data suggest that, outside of ensuring transparency in our accounting, one of the best things you can do to buttress your IR effort is to get your CFO some good communications training."

Analysts Now Turn First to the CFO, Not CEO
Stephen Taub
CFO.com, US
June 9, 2008

Flight to Quality

New research from Greenwich Associates indicates that corporates are willing to settle for lower investment returns in exchange for reduced risk on short-term investments. 293 CFOs, Treasurers, and Assistant Treasurers were surveyed in February and the results are compared to results of a similar survey in May of last year.

Learn more:

• Treasury & Risk
• Greenwich Associates

Funny: Market Madness Fed Rate Cut Bracket

from the St. Louis Post Dispatch, via What I learned Today

Meanwhile, up on Capital Hill the regulators were busy defending their actions, receiving coverage everywhere:

• CNBC Video: Financial All Stars on Capital Hill
• Wall Street Journal
• Bloomberg
• The New York Times
• American Banker

Leveraged Planet - Wall Street's Reluctant Globalization [NYTimes Special Feature]

The New York Times DealBook blog has a special section on globalization & Wall Street:

Wall Street's fate is increasingly linked to far-off locales, whether they be bustling financial hubs like Dubai or emerging markets like Kazakhstan. In some cases, the link is more like a lifeline, such as when foreign money emerged to help shore up big-name financial firms in the United States and Europe.

Select articles (there are many more):

Leveraged Planet:  argues that, although Wall Street makes a show of thinking globally, when it comes to opening up its secret society to foreigners, doing so is often still an afterthought.

Follow the Money: Sovereign wealth funds have emerged in recent months as the world’s power brokers. They have used their tremendous wealth to make big cross-border investments and prop up some of Wall Street’s best-known firms.

See also To Court or Shun the Wealth of Nations a piece exploring the contradicting messages our government sends to Sovereign wealth investors.

The Fine Art of Deal-Making Gathers Dust: The market for mergers and acquisitions is in the doldrums. And according to many deal professionals, that won’t change anytime soon.

The Restructuring Pros Are Back in Business: For restructuring experts, recess is over. Many had found themselves sidelined during the recent buyout boom: cheap and plentiful debt led to some of the lowest default rates in recent memory. But that easy financing has evaporated, roiling the credit markets and shaking up companies as big as Bear Stearns.

Read more:

The New York Times' DealBook blog
Special Section Spring 2008

Tighter Lending Standards Challenge Corporate Finance

The March issue of CFO magazine is focused on banking, or more pointedly, how companies are paying the price for the subprime crisis. There is an article on how poor risk management at banks contributed to the crisis, but more interesting was a thorough exploration of the impact on corporate lending:

Credit Crunch

As banks regroup, they are increasingly cautious about lending to businesses, even to those companies with outstanding credit. The market upheaval has limited banks ability to sell corporate debt in the secondary market, regardless of the quality of the underlying assets.

According to the Federal Reserve's senior loan officer survey:

• One-third of banks tightened credit standards for mid-size and large businesses in 4th Quarter 2007;
• Two fifths increased loan spreads over their cost of funds;
• Not one of 56 banks surveyed eased standards.

This is a dramatic change versus the relatively easy financing available over the last few years (chart below), during which corporate finance teams could be relatively complacent, confident that their bank would loan funds for capital investment, M&A, and shorter term working capital.

Graph: CFO Magazine, March 2008; data source: Federal Reserve

The growing consensus is that this will be a long downturn, and with the banks at the center of the crisis, it may be many years before credit standards loosen again. Corporates will need to develop well honed back offices in order to tightly manage their working capital in the interim.

Why companies will need to work harder for credit.
Karen M. Kroll
CFO Magazine
March 1, 2008

Derivitives as power tools and skinny-dipping

The recent financial uncertainty has prompted some eyebrow-raising metaphors in normally staid financial coverage. I'm amused.

In a weekend news analysis piece on the global financial turmoil set off by subprime mortgages, the New York Times quotes a strikingly apt analogy likening derivatives to power tools:

In the United States, regulators appear to think that the new and often unregulated investment vehicles — which have shrunk the world and speeded up business in much the same way as the Internet — are not all inherently flawed.

This opinion is captured in an analogy offered by Peter Douglas, the founder of GFIA, a hedge fund research firm in Singapore. He likens using derivatives to power tools. If you know how to use them, he said, they are exponentially better and faster for building a house, compared with using hammers, screwdrivers and handsaws.

If you don’t, “you could drill a hole in your head," he said.

I have to admit I only noticed the article because it was accompanied by a great photo of Mick Jagger from a recent performance for employees of Deutsche Bank.

On the same day, an editorial piece quoted a naked swimming analogy from Warren Buffet:

A chestnut from the investor Warren Buffett — “you only find out who is swimming naked when the tide goes out” — has been quoted a lot lately as investors learn more about excessive risk-taking by lenders, bankers, hedge funds and other investors.

There’s just one problem. The tide hasn’t gone out. The nudists identified thus far were exposed by the first round of bad news from the credit markets — among them, hedge fund managers at Bear Stearns, bankers at HSBC and a handful of other European banks and executives at Countrywide, the nation’s largest mortgage lender. In the coming months, we’ll get a better view of many others.

Read the news analysis article:

News Analysis: Why a U.S. Subprime Mortgage Crisis Is Felt Around the World
By JENNY ANDERSON and HEATHER TIMMONS
The New York Times
August 31, 2007

Read the editorial:

Editorial: The Tide Is Still Going Out
The New York Times
August 31, 2007

What should Apple do with all its cash?

In reaction to a recent article at BusinessWeek.com considering what Apple should do with its $12 billion cash hoard, Wall Street blogger Roger Ehrenberg explores the pros and cons of an internal VC fund for Apple and suggests that Steve Jobs et al consider the following questions:

1. What is the right amount of cash Apple should keep on-hand to cushion variability in free cash flow?
2. What is the process for benchmarking internal vs. external investment opportunities? Are there suitable analytical frameworks in place for making these assessments?
3. What is the current dollar value of projects - be they internal or external - that warrant investment, given the Company's ROI objectives?
4. In the event that additional cash exists beyond that required to fund 1 and 3 above, is this excess likely to be a durable phenomenon (e.g., indicating that a change in dividend policy might be appropriate) or a transient event (e.g., meaning an opportunistic stock buyback might be a better fit)?

Its a great post - read the rest here.

Roger Ehrenberg's blog is new to me this morning and I've already been sucked in by his insight, strong prose, and humbly corrected take on possible arbitrage when the DJIA dramatically dropped last week (another post well worth reading: here).

Information Arbitrage blog
by Roger Ehrenberg

What to Do with Apple's Cash
by Arik Hesseldahl
BusinessWeek.com
March 1, 2007