April 3rd, 2013 Business News

Overnight, the Nikkei Index (Japan) rose 3% after a few days off and continued news of easier monetary policy which will aid the export firms in the country.  The balance of Asia was mixed regardless of China’s Services Sector PMI numbers moving to new highs for March.

In Europe, after a strong up day yesterday, profit taking is occurring today going into Mario Draghi’s monthly press conference tomorrow.  On average markets in Europe are off about a half a point on low volume trade.

In North America, the ADP Employment Survey was released this morning which should provide some insight into the Government numbers which will be released on Friday morning.  The number came in below estimates at 158000 vs. 200000,  however February was revised up by more than 39000 jobs to 237000, which is suggests a relatively neutral bias.  Looking into the numbers further, 74000 of the new jobs created were by companies with less than 50 employees, which in my view is a very positive trend as small business, the driver of the north American economies’, continues to see solid growth.

In earnings news Monsanto, a mandate position posted strong Q2 earnings beating estimates by 10%.  Top line numbers were also ahead of estimates and were up 15% year over year.  The company also increased guidance for 2013 by 10%.  The big driver was the corn business in both North America and South America.

Futures in the US are flat this morning on the employment numbers.

Gold is continuing its downward spiral this morning off another $5 to $1570 after a big down day yesterday of more than $25 per ounce.  Oil is also trading lower off 70 cents to 96.50 and the Loonie is up slightly this morning at 98.68.

In Canada, Valeant Pharma, a mandate company is increasing its bid for Obagi Medical Products to $24.00 per share from $19.75.  The increased offer will bring some pressure to the stock today.

Lastly this morning, the ED Clark era at TD is coming to an end next November with an announcement this morning that Bharat Masrani, the current head of US operations will be taking over.  Clark will be know for his entry in a big way into the US and Masrani is the man that has run the show for him down there.  Masrani was instrumental in adjusting the risk profile of the bank in the mid 90’s and got the institution through the tech wreck and the 2008 crisis.  With all that said however, since Clark took over as CEO in 2002, the stock has returned approximately 139% to shareholders (8.24% compounded), which is a pretty impressive number.  However, the Royal Bank over the same period is up approximately 325% (14.06% compounded) and the Bank Index is up approximately 240% (11.77% compounded).  Mr. Clark has been paid more than $100mm all in since he took over the role and will have a very nice retirement package to sit back and enjoy.  While I understand the shareholder value he has created, it is sub-par to the rest of group and his compensation is just simply grotesque.

Kenneth A. Dick, BA, CIM, CFP, FCSI

Portfolio Manager & Branch Manager



Improve Your Turnaround’s Forecast

Today’s business climate poses many challenges – from increased global competition to a tight capital environment – that can hinder or even destroy a business. Companies struggling with poor cash flow, inadequate capital and weak leadership are especially vulnerable. Such companies can provide significant upside potential to the right buyers. But to turn an unprofitable company around, new owners must have an implementation plan and be ready to execute it.

Getting to the Core

If you’re a potential buyer of a troubled company, you must examine it closely for hidden values, such as untried territories or poor leadership. Then decide if these opportunities mitigate acquisition risks and potentially provide enough financial benefits.

It’s essential to understand the company’s core business – specifically, its profit drivers and roadblocks. Without a clear understanding of this, you may misread the company’s financial statements, misjudge its financial condition and, ultimately, devise an ineffective course of rehabilitative action.

Due Diligence Matters

While due diligence is an important part of any acquisition, it’s probably the most critical stage in a turnaround deal.

Buyers should use a professional business intermediary who will take the time necessary to perform due diligence, request the supporting documentation needed and perform personal audits that cross-check reported and actual data. At this stage, it is important that the source of the company’s distress (such as maturing products or overwhelming debt) is pinpointed to determine what, if any, corrective measures can be taken. You also need to determine if the business harbors significant liabilities, such as pending legal judgments, product claims or dissatisfied customers.

This is the time to find hidden flaws. But due diligence may also unearth potential sources of value, such as tax breaks or proprietary technologies. Benchmarking the company’s performance with its industry peers’ can help reveal where opportunity lies.

Hit the Ground Running

hit the ground runningGenerally, the first post-transaction step is for new owners to determine what products drive revenue growth and which costs hinder profitability. This may be the time to divest the business of unprofitable products, services, subsidiaries, divisions or real estate. Staff cuts may further be in order. Make sure you keep key players. They may be expensive, but as long as they are pulling their weight and have good relationships, they have value when retooling.

Implementing a longer-term cash-management plan and forecast based on receipts and disbursements are also critical. Owners can manage each line item of the company’s weekly or daily receipts and disbursements in accordance with:

• Profit and loss projections,
• Changes in working capital, and
• Major debt and capital expenditures.

With a strong cash-management plan and a thorough evaluation of accounting controls and procedures, buyers should be able to identify lost revenue opportunities, such as unbilled services. This plan can also help buyers determine where they might be able to cut costs.

Mapping the Future

Buyers should ensure that accounting and reporting systems are producing the data necessary to run effective management reports. If these systems don’t accurately capture all company transactions and list all assets and liabilities, company leaders will be unable to fully pursue opportunities or respond to potential problems.

One troubled manufacturing company, for example, wasn’t tracking future purchase commitments. When the new owner took charge, it prepared and circulated among managers a comprehensive commitment and contingency report that helped senior management renegotiate the terms of the customer agreements.

Because the task may seem overwhelming, it’s easy for new owners to focus only on the business’s day-to-day operations. But a strategic plan that maps the path toward revenue growth and improved cash flow is necessary. Buyers may find, for example, that the company’s best revenue-producing assets aren’t reaching customers and that their potential could be realized with a more sophisticated marketing campaign or bigger sales staff. Macro- and micro-level planning is equally important.

Return to Profitability

Only a small window of opportunity is available to realize a turnaround’s potential. To take full advantage of it, buyers must get up to speed on the acquisition’s products, departments, delivery systems, staff and overall operating systems as soon as feasible.

Insurance specialists can also be used in a risk-management role, evaluating company insurance coverage and claims. Auditors may be useful for interviewing accounting personnel and financial statements to verify their accuracy. Finally, private investigators can research the backgrounds of key executives for possible fraudulent activity and misrepresentations.

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Corporate News For February 20th, 2013

In The United States

The S&P 500 touched its highest level in five years, on optimism over
dealmaking and data showing rising investor confidence in Germany.

Office Depot (ODP) surged, as did OfficeMax (OMX) after The Wall
Street Journal reported that the two office-supply retailers are in advanced
merger talks. Rival Staples (SPLS) was also up sharply on the report.

Google (GOOG) traded above $800 for the first time. The gain was, in
part, fuelled by reports that the Internet company is looking into launching
retail stores to sell Google-branded products.

Rockwood (ROC) jumped higher after the company reported Q4 revenue
that beat estimates. The company said sales during the most recent quarter
climbed 2% to $829 million, benefiting from higher sales from its lithium,
advanced ceramics and titanium dioxide pigments businesses.

Humana (HUM) fell as the Centers for Medicare and Medicaid Services
proposed a decline in 2014 rates for Medicare Advantage that was lower
than the health insurer had expected.

In Canada

The S&P/TSX Composite rose for the first time in four days, led by gains
among banks, after a measure showing an increase in German investor
confidence added to signs of a European economic recovery. Great-West

Lifeco (GWO) agreed to buy Irish Life Group for $1.75 billion from
Ireland’s government, as it seeks to expand European operations. The
transaction should add about $215 million, or 10%, to Great-West’s 2014E

Canadian National Railway (CNR) named Jim Vena, 54, its new Chief
Operating Officer after Keith Creel left earlier this month to be President
and COO of rival Canadian Pacific Railway (CP).

Fission Energy (FIS) and Alpha Minerals (AMW), who each own 50%
of the Patterson Lake South property, released news highlighting exciting
new results from ongoing drilling at the property. Results from hole
PLS13-038, which was a 385-metre step-out hole, yielded two zones of
strong mineralization. Keegan Resources (KGN) and PMI Gold (PMV)
announced that they are terminating their merger plans. The decision
comes as a result of the mutual determination of PMI and Keegan that it is
unlikely that PMI’s shareholders will approve the transactions
contemplated by the Arrangement Agreement.

Fortress Paper (FTP) jumped higher after the company announced that
they have hired Yvon Pelletier as the company’s new President of
Dissolving Pulp operations. Pelletier is a specialty cellulose industry
veteran with 30 years pulp and paper sector experience most recently as
EVP and President of Specialty Cellulose & Chemicals at Tembec (TMB).

Courtesy of Canaccord Wealth Management

Don’t Recycle Business Valuations

Recycle Bottles, Not Valuations

recycle business valuationsValuations are valid only for a specific time and purpose. Typically, a valuator explains the valuation’s scope in an engagement letter and again in the written report. Despite this, business owners sometimes mistakenly think they can save time and money by recycling old valuations for new purposes.

In fact, the unintended use of a valuator’s conclusion can diminish the report’s credibility. It may lead to misinformed business decisions, fiduciary breaches and embarrassing courtroom mishaps.

One wrong turn leads to another

To illustrate the perils of recycled valuations, consider Otto’s Auto Mall, a fictitious private business that reused a valuation three times to save on appraisal fees. Below are the four scenarios under which Otto used the valuation.

Gift scenario 1. Otto initially sought an appraisal when he gifted 10% of the auto mall to his daughter, Olivia, in 2001. The valuator estimated that the fair market value of the business interest was $68,000, including a 15% minority interest (or lack of control) discount and a 20% lack of marketability discount.

Dissenting shareholder scenario. At about the same time, the value of Otto’s Auto Mall was subject to debate in a lawsuit with a 10% minority shareholder.Without disclosing the fact to his valuator, Otto applied the value from the gift tax return to the dissenting shareholder’s interest.

But Otto didn’t understand that a different standard of value-fair value-applied in dissenting shareholder cases in his jurisdiction. Based on relevant legal precedent, his partner’s interest wasn’t subject to valuation discounts. Rather, it should have been valued on a controlling, marketable basis. Unfortunately, because Otto’s recycled report applied an inappropriate standard of value, the judge disregarded it entirely and, instead, relied exclusively on the opposing expert’s analysis.

Divorce scenario. A year later, Otto filed for divorce. To value his largest marital asset-a 90% interest in Otto’s Auto Mall-he turned again to the valuation prepared for gift tax purposes. Otto reviewed the valuator’s analysis and adjusted her conclusion for marketability and control discounts taken on the 10% interest. Accordingly, he conceded during settlement talks that his 90% business interest was worth $900,000.

But Otto failed to consider the issue of goodwill. In his state, personal goodwill is specifically excluded from the marital estate. If a valuator had advised Otto about this issue, he could have argued that elements of personal goodwill existed. For example, over the past 40 years, Otto had fostered relationships with repeat customers, personally guaranteed bank debt and directly managed the service department.

Without Otto’s continued support in these activities the business value would drop substantially. In addition, Otto had historically taken very little salary and had just taken distributions from the business. An appraiser with divorce experience might have helped him avoid the “double dip” by making appropriate compensation adjustments to the business’s income stream.

Again Otto didn’t contact his appraiser before recycling her report. Assuming that the auto mall’s value included $300,000 of goodwill and roughly one-third was directly attributable to Otto’s personal efforts, Otto unwittingly overvalued his 90% interest by approximately $90,000 ($900,000 minus $810,000). Further, he was ordered to pay alimony on the distributions from the business while also paying for the value of these distributions in the business valuation.

Gift scenario 2. The most recent wrongful reuse occurred in 2006 when Otto gifted a 10% interest to his son Oliver. He erroneously assumed that the company’s value hadn’t changed much since 2001 and recycled the original gift tax valuation one more time.

But over the previous five years, the local marketplace had changed dramatically. Urban sprawl had finally reached Otto’s town, bringing in four new dealerships and two national service station franchises. Otto also had retired and relinquished control to Olivia and Oliver, who were still learning the business and building relationships and reputability.

Despite the population growth, adverse risk factors significantly diminished the dealership’s value. The outdated report value stated on the gift tax return substantially overstated the value of Oliver’s 10% interest.

Think twice before recycling

Value is a function not only of the performance of the company, risk and the size of the business interest, but also of the valuation’s purpose and timing, as well as the relevant statutes and legal precedent. As this hypothetical example illustrates, recycled valuations can lead to significant errors.

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Companies Can Improve Their Bottom Lines with a Spin-Off

Slimming Down

Companies Can Improve Their Bottom Lines with a Spin-Off

If your company suffers from growing pains or anticipates a hard stretch due to the current economic climate, you may want to consider a spin-off. Spinning off a business or unit can provide a variety of benefits, such as yielding much-needed cash, removing poorer-performing entities from your balance sheet and freeing up management to concentrate on your core business or pursue more profitable initiatives. To effectively grow your company, in fact, you may need to first scale back.

Several Forms

Spin-offs can take many forms and are accomplished in various degrees. A unit may be fully divested of its parent and become an independent, publicly owned entity. Or it may merely become a subsidiary of the original company, gaining owners but still being run by the same management.

Whatever the spin-off form a company adopts, a wholly owned segment of a larger company becomes a fully or partially independent business. Most often, the divested company’s shares are offered in the public marketplace.

Staging the Transaction

Spin-offs involve several stages, the first – and one of the most critical – being the “pre-spin” period. This is when a company prepares a division to be spun off and announces its intentions to the public. During this period, the company will work with the IRS and SEC to ensure the proposed deal meets all tax and regulatory requirements. The company also must gain its board of directors’ final approval.

From here, spin-offs generally are executed in one of two ways:

  1. Pure spin-offs. This is when the parent company distributes 100% of its ownership of a subsidiary operation as a dividend to current shareholders. After the spin-off is complete, there are two separate public companies. Shareholders have the option of selling their holdings in the new entity, if desired.
  2. Partial spin-offs. Here, the parent company sells an interest of less than 20% in the subsidiary in an SEC-registered initial public offering. This method often appeals to companies that need to raise capital but want to maintain ownership of their subsidiary or shine a spotlight on an undervalued division.

Which type of spin-off a company should pursue primarily depends on its long-term goals. A partial spin-off, for instance, may be a better choice for a division that’s not yet ready to stand on its own but that a parent company nevertheless believes the market has undervalued. Spinning off part of the division could enhance its value for an eventual sale or pure spin-off.

Why Do It?

Spin-offs have long been a popular and successful way for companies to improve their bottom lines and streamline strategic plans. As of this writing, General Electric, for example, is in the process of spinning off its 101-year-old, low-growth appliance business, planning either to sell it outright or accept outside investors in a strategic partnership.

Companies spin off divisions for many reasons. A company may need to raise cash for capital-intensive projects. Similarly, a unit’s elimination could improve the parent company’s credit rating and make it a more attractive loan candidate. Some companies even enjoy tax benefits from a spin-off.

Government regulators may require a public company to remove a division if it’s considering a merger with a competitor. For example, the Federal Trade Commission might ask merging companies to divest similar businesses that could, if joined, enjoy too large a market share.

Sometimes spin-offs are accomplished for strategic reasons. A company might spin off a healthy entity with strong growth prospects to gain greater investor attention. Say, for example, that a company has a promising software division that’s undervalued because its parent company isn’t well known in the software sector. If that division is put up for sale and no longer buried in a larger company’s basement, it could receive the market attention it deserves.

Finally, a unit could be a poor performer that has become a drag on the parent company’s earnings. Selling troubled units can be challenging, however. To compensate for additional buyer’s risk, you may need to retain an equity stake in the division or provide financing for the seller.

Benefit of Separation

Whether your company is undercapitalized and looking for cash with which to pursue new markets or make business acquisitions, or you simply believe that a current division could be more competitive as a separate company, consider a spin-off. Separations can be painful, and they require some time and expense. But the benefits can more than make up for the trouble. ______________________________________________________

Ensure Your Spin-Off Isn’t Taxing

One advantage of spinning off a subsidiary is the potential for major tax savings. Although, selling a subsidiary outright typically means that your company will pay substantial capital gains taxes, tax professionals can help you structure the transaction to minimize the burden.

The key is to comply with Internal Revenue Code Section 355, which requires a spin-off company to have existed as a subsidiary for at least five years. It also demands that:

  • The spin-off be undertaken for “a real and substantial non-federal tax purpose” and not just to dodge the IRS;
  • Before the spin-off is conducted, the parent company own at least 80% of the total combined voting power and 80% of each class of nonvoting stock of the subsidiary;
  • Both parent and subsidiary be involved in what the IRS terms an “active” business immediately after the spin-off, and
  • At least one shareholder of the parent company retains a minimum 50% equity interest in the spin-off.

If you spin-off doesn’t conform to Sec. 355, your company could be held liable for the full tax obligation on the divestiture. Meanwhile, your shareholders could be taxed as if they had received a dividend. _______________________________________________________________

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Keys to Negotiating a Successful M&A Deal

Keys to Negotiating a Successful M&A Deal  Whether you’re buying or selling a business, a few guidelines can help you negotiate a deal more effectively and improve your chances for an advantageous outcome. While you’re probably already familiar with basic negotiation strategies, most parties to an M&A transaction can use a refresher course when it comes to what may be the biggest deal of their lives.

Know Yourself

Good negotiators start by knowing themselves. Before you enter into sale negotiations, take time to identify your goals and your tactics for achieving them. If you’re buying, what’s your “reservation price”-the most you’re willing to pay? Would you be able to walk away from the deal if the seller refuses to budge on price?

If you’re selling, similar questions apply:

  • What’s the lowest offer you’ll accept?
  • Are you in a hurry to sell?
  • What conditions will you require as part of the sale?

For example, the retention of certain employees may be a priority. Also be prepared to speak confidently about your business’ strengths and address any perceived weaknesses. Since the buyer’s negotiating leverage emphasizes your weaknesses, you need to be aware of them and ready to provide a solution that mitigates an adverse effect on the buyer’s offering price.

Know the Other Party

Knowing the other side is as important as understanding your own priorities. This knowledge allows you to map out the negotiation ahead of time. As a buyer, you should have a thorough understanding of the business-gained through extensive due diligence.

If you’re a seller, it’s essential to know that your buyer can afford to purchase the business and, if the deal will be seller-financed, how well the company will be run while the note is being paid off. It’s also helpful to learn if your buyer has looked at many other businesses. Buyers who know they have other options if your deal falls through will probably drive a harder bargain.

Gathering knowledge involves more than research; you also need to be a good listener.

If you’re talkative by nature, make an effort to speak less and listen more when meeting with the other party. The better you understand them, the greater chance you have of anticipating their moves and preparing counter offers.

Build a Relationship

There are plenty of opportunities for differences of opinion in any business transaction, and a business sale is no different. Establishing a cordial relationship can go a long way toward reducing misunderstandings or unintended offenses. Social occasions such as dinner or a golf outing can break the ice. Expressing interest in the other party’s opinion and a sense of humor also can help build a good working relationship.

Going back on your word, exaggerating points or misrepresenting facts in an attempt to strengthen your position, on the other hand, can damage goodwill. Finally, don’t try to box the other party into an untenable position-it’s a tactic that’s likely to misfire.

Flexible is Vital

Selling a business is a complicated process, of which price is only one component. When entering the negotiation stage, keep in mind other items that are subject to bargaining:

  • Down payment amount;
  • Interest rate on a seller loan;
  • Collateral;
  • Seller warranties;
  • Earn-out provisions;
  • Non-compete agreements.

Also consider the structure of the deal-whether the company’s stock is being acquired, or just its assets. In general, sellers prefer a stock sale and buyers prefer an asset transaction, which provides better cash flow after the deal.

Good negotiators take advantage of the multifaceted nature of the process by remaining flexible throughout. This may mean compromising on some elements to get the ones that are most important to you, such as those related to financing terms, the closing date, employee retention or seller warranties.

With so many moving parts to consider, flexibility can get you past obstacles. If you’re hung up on a tough issue-say, the price of a particular asset-try putting it aside temporarily, moving to less controversial points such as the price of other assets, and then circling back later.

Selling a Family Business Isn’t Business as Usual

selling family businessFamily businesses may resemble their non-family counterparts in most ways, but there’s one crucial difference. Whenever close relatives work together, deep emotions invariably become involved – emotions that can further complicate the already difficult decision whether to sell a family enterprise.

If you’re thinking about selling a family business, don’t overlook what your emotions are telling you about the potential sale. In some instances, of course, you’re better off listening to your head. But in this case, it’s just as important to consider what your heart is telling you too.

Why You Might Sell

Your decision to sell a family business may start with financial need. Maybe you’re looking ahead to retirement and want to feel more secure. Or maybe you see stiff challenges ahead for your company, with fewer growth prospects available or increased competition looming.

You might also look to sell a family business if you’re concerned that no one in the next generation has stepped up as an obvious management successor.

In addition, the stress of working together can be too much for some families to handle comfortably. Family strife is always unpleasant, but when family members who work together don’t get along and the tensions spill into the workplace, it can make for a destructive personal and professional environment.

Why You Might Not

Selling a family business can feel like selling a part of your family. If you sell, your decision will have a significant impact on the lives of people you care about – relatives, employees, and, especially if the business is in a close-knit community, local residents.

Your decision to sell may be especially stressful if you’re thinking of selling a business handed down to you over many years. You may wonder about what your forebears would do in your shoes.

With such factors to consider, you may decide to refuse an otherwise attractive offer and keep your business going – a decision that will allow you to maintain your independence, and pass on to future generations the same opportunities that you received.

Yet before you turn down an attractive offer, make sure you discuss your expectations with the members of the next generation. If your chosen successors aren’t interested or able to manage the business, you may be setting the stage for serious family conflict.

No Easy Answers

Sometimes, selling your business may be the best solution for everyone involved, providing you and your family with the assets you need to pursue your next dreams.

But because the decision to sell can be highly emotional, make sure you are comfortable with the idea of selling. Just because the numbers may add up doesn’t mean you’ll be happy when you no longer have the business that has been an important part of your family

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