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November 29, 2006Final Days of the Alternative Minimum Tax (AMT)?
In an article published in today's Financial Times House Ways and Means committee member Charles Rangel (D-NY) said that repealing the Alternative Minimum Tax (AMT) was one of his top priorities. As the 110th Congress convenes next year, Rep. Rangel is expected to become the Chairman of his committee and will likely have bipartisan support to change this tax code, as it will equate to a tax cut for millions of middle-class Americans from whom both parties hope to win favor. While this proposed change will have no direct effect on other taxes, if it is to occur the US Government could lose up to $1 trillion in tax revenues. What this means in an age of increased attention being paid to fiscal responsibility is not only that any easing of the estate tax over the next 2 years should be all but forgotten but that the discussion of relaxing Sarbanes-Oxley constraints for private companies will also quickly stop.
Assuming that the AMT is removed, both parties will try to make up some of the lost tax revenues through budget cuts; but spending cuts don't win elections. The 2 years making up the 110th congress will be dominated by both parties posturing for the 2008 Presidential election, meaning that the lost revenues from AMT will have to be made up by stricter enforcement of other standing tax codes.
November 28, 2006When 11 times projected EBITDA isn't enough...
Early this morning, Rinker (NYSE: RIN) formally rejected a $12 billion Cemex (NYSE: CX) bid. Despite being the largest proposed take over from our southern neighbor, it
wasn't enough. The offer works out to be 11 times current EBITDA and 9 times
next year's projected EBITDA of $1.4 billion. Management stated that they
believe it is worth nearly 40% more or (let's do the math together, 11
times 1.4 equals...) 15 times EBITDA! Holy cow! Sure the cyclical industry
is at a trough (or so some say) but even at last year's EBITDA, the offer
exceeds 8 times. Management's justification? A management report
recognized that the premium was high, though justified as Rinker was
strategically important and a superior asset relative to recent acquisition
targets in the sector. And who says private equity transactions have not
influenced the public markets?
November 19, 2006Circumventing Corporate Governance By Going Private
An article in Saturday's Wall Street Journal, titled 'On Going Private: Investors Beware' highlights how the corporate executives who play a critical role in advising boards to take companies private often stand to gain substantially. The main reason being that private equity firms can "shower executives" with incentives that kick in when the company returns to the public market. In other words, as we crack down on back dating, executive compensation, and corporate perks in the public market we are creating a personal incentive (in some cases) for executives to help take companies private. The private market doesn't publish the size of your compensation package and in many cases allows you to use the corporate jet to fly to Disneyland. The more we crack down on the public market, the more we encourage companies to go private and with significant dollars chasing these deals the larger the "hidden private equity bubble". In the end, are we truly solving corporate governance problems or hiding them from the public eye? When you think about it, private equity investors are actually managing the same dollars that would be invested in the public company market if not for corporate governance.
November 15, 2006When an IPO is not a homerun...
Quist has done a large number of 409A valuations this year, many of them for early stage, pre-revenue biotech firms. Our analysis, as within all 409A engagements, is heavily based on the projected value of the company at certain exit points. When we sit with management to discuss probable exits, often management estimates the probability of an IPO at 20-50%. Even more surprising is that the majority of management teams characterize an IPO as a "homerun."
November 13, 2006Backdating Options = Embezzlement
The option backdating scandals continue to get an enormous amount of
attention in the financial rags. The lead Business and Finance article in
today's Wall Street Journal is on yet another CEO, Bruce Karatz with KB
Home, who "is leaving the housing-construction giant after an internal
investigation found he backdated his own option grants". It is absolutely
amazing however, that America in general is not simply outraged at these
crimes. Some people believe that the backdating issue is either "just an
accounting issue" or "simply the way things were done at the time". While I
understand that in some circumstances backdating may well have to do with
proper record keeping, in many of the situations its simply taking cash
directly out of the company account and putting it in your own name.
November 10, 2006Does New Congress Mean New Focus on the Estate Tax?
With the shift of power in Congress, the estate tax question will most
likely languish for a while. The likelihood of repeal is pretty much dead as
the debate will focus on rates and exemption limits. As a result, we
anticipate that family gift and estate tax planning will expand in 2007 and
2008 as families recognize that a full repeal is unlikely. Now is a good
time to revisit your gift and estate tax planning strategy as the dust is
definitely settling on a Democratic Congress.
November 08, 2006Thoughts on Walter Mossberg's view on Technology Value
Today I had the pleasure of hearing Walter Mossberg, personal Technology columnist of the Wall Street Journal, speak at the Consumer Technology event in San Jose. It would appear that if Walter were to manage an equity portfolio he would start by shorting Google and buying as much Apple as possible. He had three key points to ponder. First, the soon to be released Microsoft Zune (which he will review in this Thursday's Journal) is not so much an analysis in competitive products as it is in competitive process. Apple functions as an end to end producer. That is from conception to user, Apple owns the process. By comparison, the PC environment is component driven: Software=Microsoft, Chips=Intel and hardware=Dell. As computer usage grew in the 80's and 90's the component model clearly won, mainly because it had to grow faster that any one company could achieve. As a result, end-to-end companies, such as Apple, fell behind in market share. However, as consumers have matured, we have demanded higher quality and ease of use, something that is rather difficult in the component environment. But not for Apple. The IPod serves as a testament to this approach and was validated by Microsoft's Xbox, a product that was developed internally end to end. The same group was unleashed on the latest product, the Zune.
November 05, 2006Competition in the Marketplace
Keep your friends close, but your enemies closer. The old adage seems particularly appropriate these days.
In a recent post, I referenced the idea of 'making nice with your competition'
that raised some questions, so here's more clarity. Regardless of your
industry, tech, medical, financial, you probably know most of the people you
compete with or even have grown to dislike.
In the not so distant past, the business model for many startup companies
used to be, first to market, acquire as much market share as possible,
squash the competition and get to an IPO (worrying about margins at some
later date). It was in many ways a binary win / lose environment. Winners
got to ring the bell as the market opens, losers had to rewrite their
resumes, embellishing on their internal successes.
Today, the idea of an IPO is almost silly for an early stage company to
consider. Instead, many investment firms are contemplating the distant
sale to a larger competitor, willing to pay that strategic premium for your
successful technology or customer list. Just think of how many companies set
out to destroy Cisco, got a taste of success and poof; got an offer they
couldn't refuse. Now they're workin' for the Man! (at least until their
employment agreement runs out).
This certainly isn't a new concept; just ask any of your buddies in the
banking industry. The strategic shift though seems to be filtering down to
the earlier stage, venture backed companies. We now see VC funds owning multiple
(nearly) competitive companies, looking to vertically integrate and package
the two at some later date as an even tastier acquisition target.
I do not mean to dilute the spirit of competition. It is, in fact, what makes
capitalism so successful. Moreover, if you do not beat the competition, you
will probably not give cause to be acquired (at least not at a price in
which your options are worth anything). This doesn't mean don't try to destroy the
competition either. The difference will determine whether or not your
competition works for you one day or you work for your competition. Either
way, make nice, you may be car pooling one day.
November 02, 2006Future of 409A Becomes a Little Bit Clearer
It appears that we are getting close to final regulations on 409A. For those
interested in the state of 409A regulations and the progress being made by
the Treasury, see the article released yesterday by CCH® PENSION AND BENEFITS -
11/1/06. "409A guidance "well along," says Treasury benefits tax counsel",
http://hr.cch.com/news/pension/110106a.asp. The message appears clear that
1) "the definition of nonqualified deferred compensation is broad, with most
exceptions and carve outs limited in scope" and 2) "the basic structure and
fundamental principles underlying the proposed rules have remained intact
during the comment process". In terms of underwater stock options "the
spread, not just the discount, would be considered as the stock value
increases" and "underwater stock options would not require any reporting
since a violation would take place only if and when an option was
exercised." In other words, "something for the file" will only be exposed if
and when you are successful and the IRS can identify that there are
significant dollars at stake.
November 01, 2006Buy/Sell Agreements
Buy/sell agreements are often dusty documents written 10, 15, 20 years ago.
Every client that engages Quist (if they can find them) provides us with
that old buy/sell agreement that hasn't been read in years. When asked about
the buy/sell language, clients usually "kind of" remember what it says and
rarely do they remember the valuation language. The attorney suggested the
language, they understood it at the time, and went with it.
Yet when a partnership fails, an owner tires of his/her role, or simply
moves in a different direction, that unclear language becomes very clear
from two sets of lenses, the buyers and the sellers. One set of lenses is
near sighted and the other far sighted so to speak. The remaining partner
shifts their expectations from bullish to chicken little and the departing
shareholder remembers the amazing growth path and opportunities that he/she
built into an 'amazing' organization.
So how do you avoid the anxiety? Its simple, have the value of your company
determined periodically and well before the horns grow out of your partner's
head. A simple review of value in accordance with the buy/sell can set
realistic expectations, identify potential risks and weaknesses in your
business model, and in the end save you a very expensive dispute that almost
always ruins one of the most important relationships in your life, the
partner with whom you are building your business.
