Car Guy Steers Finance
In November 2008, Lewis Booth, chairman of Ford of Europe, had just wound up the sale of Jaguar and Land Rover and started work on the possible divestiture of Volvo. Instead of heading off for a vacation, Booth locked up his London home and caught a flight to Detroit to move into the CFO's office at Ford at a time when the auto industry looked as if it might be going under. Ford still had cash, but it had treacherous financial waters to navigate. And Booth, who had spent nearly his whole career with
Ford, was not really a finance skipper. He was a car guy. But he knew Ford was fighting for its life, and he didn't want to watch from a safe distance. "This has been--and still is--a fight for survival, not just for Ford, not just for the auto industry, but for industrial America," he says. "We bring so much to the American economy. We're responsible for driving a great deal of industrial innovation." The stakes, he insists, are very high. "It's been a traumatic experience for us and our competitors and our suppliers. A lot of companies have gone out of business. A lot of people have lost jobs.
"I've been in this business my entire life. It's been good to me," Booth adds. "I want to be part of leaving something to the next generation."
So when the call came to succeed CFO Don Leclair, Booth packed his bags.
"Those were dark days, but there was no despair," recalls Ford's controller, Bob Shanks. "We believed there was an answer and that by working together we could find it."
If the war is for survival, the battles in Booth's first months were about preserving enough liquidity to live to fight another day. One of his top priorities was getting acquainted with Ford's treasurer, Neil Schloss. "We spent much of our time those first weeks trying to stay on top of our cash position," Booth says. "We had good cash reporting and discipline, but it was critical that we keep that knowledge as precise and up-to-date as possible. We're still fine-tuning our cash forecasting tools. It was something I watched every day. I still do."
As CFO, Booth was also involved in intense senior management strategy sessions. "Ford is known for our Thursday morning senior management meetings, but we were meeting every day when I started. It seemed like seven days a week," he recalls. "We had to know the facts, which kept changing, and we had to know what each other was doing. "
Booth brought a lot of credibility to the CFO office. "Lewis Booth is a capable financial executive who deeply understands the operations of the business, which is just what Ford needs now," says John Casesa, managing partner of advisory firm Casesa Shapiro Group and a former equity analyst for Merrill Lynch. "They did a lot of financial engineering back in 2006, raised a lot of money and bought themselves time. Now the challenge is to execute an operations plan to get the company back to health."
Booth "thinks and talks like an operations pro," Casesa adds. "A lot of CFOs can talk the numbers, but Lewis provides context around the numbers."
Booth's pedigree in Ford operations served him well in those C-suite meetings. "It was pretty clear that I spoke the language of the senior operations executives," he says. "I could sit down with the business heads and make sure our goals were aligned. We had to keep the financials right, but our greatest need was to run the business right and improve the operating experience.
"I didn't need to be a treasury expert," he says. "We had Neil Schloss for that. My job was to make sure Neil understood the operations strategy and then support him as he did whatever he decided was necessary for liquidity, but our treasury strategy was driven by operations."
The tactical battle for liquidity may be a treasury function, but Booth remains convinced that strategic victory will be won through operations. "The single biggest thing we can do for liquidity is to operate profitably," he insists. "The way we fix our balance sheet ultimately is to generate operating profits."
Now that things look brighter, Booth happily charts Ford's recovery from the big cash burn. "When I took over as CFO, one of the first things I had to do was announce a net outflow of cash of $7 billion for the third quarter of 2008. That was a really bad day," he recalls. "I had another bad day when I had to announce that we had lost another $7 billion of operating cash flow in the fourth quarter." That was followed by operating cash flow losses of $3.7 billion in the first quarter of 2009 and $1 billion in the second quarter. "It felt good to finally announce a positive increase in cash of $1.3 billion for the third quarter of 2009, and we'll be positive again for the fourth quarter," Booth says. "We're not declaring victory yet, but things are going in the right direction."
Ford is staying true to its strategy of locking in future liquidity, even if the cost is dear. In 2006, the company raised $23.5 billion in the debt market, giving it the resources to avoid government assistance last year and pull off a dazzling debt buyback. Last March, Ford spent $3.5 billion to buy back $10 billion of debt, which was trading at discounted prices. (See Treasury Keeps Ford From Running on Empty, June 2009.) When its stock ran up following the debt buyback, Ford raised $1.6 billion by issuing 345 million new shares.
Keeping its revolver secure is a huge part of Ford's debt strategy. "Drawing down our revolver in January was one of the big decisions for the year," Booth reflects. "When Lehman Brothers failed, we lost $890 million of availability. Given the uncertainty in the financial markets, we believed it prudent to draw the remainder, and hold it as cash.
"That money was scheduled to be repaid in late 2011," he adds. "We saw that the markets were open to an amend-and-extend deal, and we learned from all the borrowing we did in 2006 that it pays to lock in liquidity when you can, so we took advantage of an opportunity to extend the maturities on our debt."
In November, Ford renegotiated its $10.7 billion bank revolver to lock in a commitment on most of the drawn facility until Nov. 30, 2013. The price Ford paid was accepting a smaller revolver of just $7.2 billion, which meant that it had to pay back $1.9 billion so banks could reduce their exposure. Banks in the group also swapped $724 million in revolver debt for $724 million in term loans that mature Nov. 20, 2013, raising the total due in late 2013 to $7.9 billion. Lenders of another $886 million declined to extend and kept their maturity at Dec. 15, 2011.
Ford also had to accept a 1% increase in the interest rate, to Libor plus 3.25 points, as well as higher quarterly fees and an upfront fee for the amend and extend. At about the same time, it issued $2.9 billion in senior convertible notes due in 2016, more than offsetting the $1.9 billion it repaid its banks. It also plans to dribble out up to $1 billion in equity as opportunities present themselves, Booth says. With the November transactions, Ford lengthened the maturity on its debt at least two years, and if it sells all $1 billion in stock, it will have increased overall liquidity by about $2 billion.
Ford is still a highly leveraged company in a troubled industry, so the refinancings were a cautious move, Casesa says. "We could still have a double-dip recession, which would hurt Ford. They're making sure they're prepared for good times or for more hard times."
"Having liquidity has made a big difference," Booth says. "You have to lock in liquidity ahead of when you need it."
Ford's 2009 moves were a combination of carrying out the company's long-range financial strategy and seizing short-term tactical opportunities. It's important to have a financial strategy in place and work methodically to execute it, but tactical decisions depend on opportunities that CFOs and treasurers can't entirely control, Booth says. "There are times when the markets are receptive and times when they aren't. The ability to execute a strategy isn't entirely in your hands. You have to watch the markets and move when the time is right. That's the genius of our treasury team and outside investment bankers.
"Our strategy is to strengthen our balance sheet and reduce debt," he adds. "They watch for the best ways and times to do that. They did that last spring, and again last November."
Keeping the Deals Coming
By Russ Banham
Working at Platinum Equity, one would be hard-pressed to realize that the mergers and acquisitions market is in the dumper. Other private equity firms may be perched on the sidelines, shut out of deal-making by the collapse in credit, but not Platinum Equity, which gobbled up 14 companies in the first 11 months of 2009, eight of them full buys. The financial crisis and the recession jibed nicely with the firm's business model. Platinum Equity focuses on buying solid companies with strong business prospects that are currently underperforming and would benefit from its operational expertise and resources to release this value.
"We call them Platinum deals--companies that look good from a balance sheet and asset perspective, yet would benefit from a restructuring," says Mary Ann Sigler, CFO of the Beverly Hills-based private equity firm. They're the types of companies that lenders, even in the current tight financing environment, will loosen the purse strings for. And that has made Platinum Equity the most active private equity investor (as measured by number of transactions) in the first half of 2009 and put it on track to take the top spot for the entire year, according to research firm PitchBook. While CFOs of other private equity firms twiddle their thumbs or hone their resumes, Sigler is on the go, scouring the firm's database for deal leads, evaluating the financial condition of potential targets and conferring with key banking partners to arrange financing. Small wonder she lists her hobbies as "working, working, more working."
When not toiling, Sigler "relaxes," she says, by gunning the family's speedboat on Lake Havasu or speeding her ATV in off-road derring-do. Obviously, a love of thrills coincides nicely with the blistering pace at Platinum Equity. In 2009, the firm vetted more than 1,200 possible deals before pulling the trigger on the ones meeting its return-on-investment criteria. Most other firms remained gun-shy, locked out of the action by lackluster leveraging. How gun-shy? In the first half of 2007, private equity racked up $215 billion in deals; in the first half of 2009, a measly $26 billion in overall M&A activity was recorded, down an eye-popping 88%.
Not only has Platinum Equity outdistanced its rivals in making deals during the recession, it had no trouble securing investment dollars to put together a second fund. In September 2008, it closed a $2.75 billion leveraged buyout fund. The fact that Platinum initially sought $1.5 billion and nearly doubled that at a time of pronounced uncertainty in financial markets testifies to its standing among investors. Its stellar track record also played a role--the company's $700 million Fund I closed in 2004 with a reported net internal rate of return of 62.5%.
The new fund gave Platinum Equity the financial clout to make more and bigger plays, an important factor given banks' more stringent debt-to-equity ratios. Lenders want more equity in transactions, and Platinum Equity now has more equity to put on the table. Not that it will give it away like a drunken sailor. "We're ever-cautious, but that doesn't mean we won't pay a bit more to get the right deals done," says Sigler. "Our model has solid legs, in terms of how we figure out how to make a return on the equity. Lenders have comfort in that. They know that when a company is in trouble, we have proven management teams that can go in and run them, and turn them around."
Many companies fail to meet Platinum's strict return-on-investment measures. "The other day we were looking at a potential deal, and when we gauged the return, we asked each other, 'Are we really happy with that kind of return for what would be a significant dollar investment?'" Sigler says. "After a couple of iterations, everyone said no. For that kind of money, we realized, we could get a better return elsewhere. Others may be willing to overpay for stuff; that's just not us."
Before joining Platinum Equity in 2004, Sigler spent much of her career at Ernst & Young, where she rose to partner. She contrasts Platinum Equity's approach with her work at E&Y, where she did "traditional accounting of public companies, which focuses on different metrics like [earnings per share] and investment trends.
"At Platinum Equity, cash is king," she says. "We measure cash in terms of the return we can get back on it. We are very cash-focused."
While her title is CFO, Sigler says there's a high degree of collaboration at Platinum. She sees her role as a partner to her colleagues, all of whom are involved in deal-making, of which the financing is a part. Tom Gores, the company's chairman and CEO, credits Sigler with the ability to "anticipate and look around corners.
"Her ability to identify problems and then execute solutions is the best that I've seen," Gores says.
By the time Platinum arrives at lenders' doors to leverage a deal, banks can trust the prospective deal is solid, Sigler says. "We don't tell our investors or lenders that a target will produce 8% growth every year, unless it's true," she says. "We paint a realistic picture. Obviously, the companies we're buying are not experiencing positive growth, otherwise they would not be on the block."
Its track record explains why all the investors in Platinum Equity's first fund--aside from one that pulled out of private equity altogether--re-upped to invest in the second fund. They could have bet their money elsewhere, of course, but Sigler believes "they wanted to consolidate their private equity investments to the managers they felt were best equipped to succeed in this market."
The new fund has already been put to work making several investments, among them Ryerson, a metals distributor and processor, acquired in a public-to-private transaction valued at approximately $2 billion.
Platinum Equity eschews businesses that are too frail to be resuscitated or that lack reliable revenue streams, solid relations with longstanding customers and substantial assets. "The way we manage our deals is to put the deal team in place, then they stay with it 'cradle-to-grave' until it's time to divest the business at a profit," Sigler explains. "We take cost out, and at the end of the day it's a numbers game."
The numbers at Ryerson are still being tabulated, but some costs have already been pared. Platinum Equity found the company's centralized management structure wanting and pushed decision-making down to local operational levels. The decentralized structure has resulted in more effective communication, greater accountability, closer interactions with customers and lower costs, Sigler says.
Platinum Equity also is known for its creative deal structures, particularly situations where the seller maintains a position in the business "to ride the upside with us," as Sigler puts it. Nearly half the deals concluded in 2009 were partial buys, where the firm took a majority slice in the acquired company but not the whole pie.
Ryerson is just one of the more than 100 acquisitions Platinum Equity has closed since opening its doors in 1995. Its current portfolio comprises more than 20 companies in a wide array of markets. One of them is the San Diego Union-Tribune newspaper, perhaps not the best business to be in at the moment. But then what business is good to be in at the moment?
Sigler, however, sees a silver lining in the recession. "These are tough times for companies, which need to look inward at their operations and cost structures to figure out ways to rationalize expenses and unlock value," she says. "But, that's our environment. We've looked at organizations for years with an eye toward streamlining processes. That's our strength, and this market is ripe for us."
Orchestrating a Big Merger
By Richard Gamble
Aa3-rated Merck felt confident enough to forge ahead with a major merger in 2009, combining its $24 billion pharmaceutical business with $19 billion Schering-Plough in spite of the turbulent economy. The deal, which required raising $8.5 billion in outside financing, closed on schedule Nov. 3, but for Merck CFO Peter Kellogg, it wasn't all smooth sailing.
"On Monday, March 9, the day the merger was announced, our stock fell from $22.74 to $20.99, a 7.7% drop. During the first day, we went through a busy schedule of investor meetings, and between meetings, we'd all pull out our BlackBerries and check on how the stock was doing," he recalls. "I could feel my heart beating faster than normal. When I went to bed that night, I didn't get the best night's sleep. Fortunately, as we kept explaining why this merger, which was driven more by the science than the synergies, made sense, the stock began to respond," Kellogg says. "By market close on Friday, March 13, it was up to $27.07, well ahead of where it started the week. We had made a wise decision and the market recognized this, but those were volatile days and we had some anxious moments."
Now Kellogg is sleeping much better and working to put together a new finance team using parts from two complex organizations. Kellogg, who got his undergraduate degree in engineering, doesn't have to re-engineer the finance organization because Merck had just done that in the two years before the merger, with a project called the Global Finance Transformation Initiative (GFTI). The new animal health and consumer healthcare businesses acquired in the deal will have to be incorporated, but the basic GFTI structure will "serve us well," he says.
"It's set up with a controllership spine," Kellogg explains, "so the controller organization has finance units from all over the globe reporting to it. The centralized controller organization was set up to standardize our policies and procedures all over the world." The central nervous system running along that spine will be a global SAP system that Merck is still in the process of implementing.
As vital organs surrounding that spine, Merck has what Kellogg calls corporate centers of excellence--including treasury, tax, investor relations, internal audit and business development--that operate centrally, with full global reach.
A third organizational structure--say, the muscles--is "a series of client-facing groups that specialize in supporting our major businesses: global human health, research and development, manufacturing and supply chain, animal health and consumer health care." A business planning group coordinates the client-facing groups, taking in their information to produce a strategic business plan and a budget, he explains.
That's a lot of moving parts for one CFO to oversee, but "it's not really that complicated," Kellogg insists. "People here understand how our organization works and why. Having a strong organizational concept and strong people on my team make my job easier." He reports that the new finance org, which has been in place for about a year, is already producing results. "Treasury now has the tools to allow us to be efficient worldwide. They operate a global liquidity and transaction platform through our banks and treasury management system that gives us good visibility and control over our cash," he says. "The client-facing groups can immerse themselves 24/7 in those business operations and help make good real-time decisions."
The payoff can be seen in process efficiency, liquidity management and informed decision-making, Kellogg says. "I'd love to say that we're perfect in all three areas, but the system hasn't been in place long enough for us to have picked all the fruits. However, we now have a clear line of sight to where we are trying to go, and everyone is working together to get there."
Having that clarity and coordination in place helped to free Kellogg to immerse himself in merger preparations. "That merger has been the primary focus of my life for the past year and a half," he says, noting that the heaviest lifting came before the announcement. "Finance had a central role in evaluating all the strategic options and how they can create shareholder value," he explains. "We had to pull together a great deal of information and organize it in ways that helped the top executives and the board make the best decision. It takes a lot of work to pull off a merger on this scale, but I'm blessed to have so many really talented people on my team."
The merger also required Kellogg to coordinate the inside team with several outside teams, such as Merck's law firms, its bankers and investment bankers. Successfully orchestrating a big merger, which Kellogg calls "an adventure," means "planning really well, and then executing with great teamwork. There's usually not a single moment that requires heroic effort; it's an extended process. We had to pull strength from the finance team, organize the project and then work well together. I think we accomplished that. It's the accomplishment I'm most proud of."
Being a CFO, Kellogg says, "is the best job in corporate America. I love it. I can't imagine a job where you get a wider variety of issues coming across your desk every day, a job with more intellectually stimulating challenges or a job where you get to work with a greater group of colleagues. I wouldn't call the past year stressful. I'd call it fun."
"Peter is particularly good at articulating the vision for finance and getting us aligned on goals and objectives," notes Merck treasurer Mark McDonough. Kellogg delegates effectively, McDonough says. "He gives us direction and then the freedom to do what we need to do and whatever support we need."
Treasury's contribution to the merger was critical. "We demand a lot from our treasury department," Kellogg says. "They had to do a lot to help us execute this merger." Most notably, in anticipation of the closing, when Merck paid $10.50 in cash for each Schering-Plough share, in addition to some stock, treasury led a $4.5 billion senior unsecured note offering in June, which allowed Merck to retire a $3 billion bridge loan.
Treasury had to line up commitments for a syndicated bank bridge loan when the merger was announced, then term it out in the capital markets, McDonough explains. Treasury also had to be sure that Merck's invested cash would be available to help pay Schering-Plough shareholders. In all, Merck used $18 billion in cash to buy Schering-Plough, $4 billion from new debt, $4 billion from the sale of a subsidiary and $10 billion of balance-sheet cash, all without hurting its credit ratings, he explains.
Treasury staffers "have to be at the top of their game every day. We operate in a very complex cash-flow environment," Kellogg says. "We manufacture products and ship all over the world. Treasury has to anticipate and manage cash flows on a global basis. They have to understand our balance sheet with its corporate and pension assets plus manage them wisely, so that we always have the resources to continue our research and development without disruptions.
"We've gone through one of the most challenging economic periods most of us have ever seen, and treasury came through it very well," he adds. "Relative to our overall investment portfolio returns, which remained positive, write-downs on individual securities were manageable. Our financial assets were always safe. For treasury to have managed our cash flow and assets so well and still stepped up and delivered all that we needed for the merger was a great performance on their part. Now they have to keep up that performance for a company twice the size of the old Merck."
While GFTI may be a legacy Merck structure, the slots are being filled with a balanced mix of finance pros from Merck and Schering-Plough. "I think finance has one of the highest levels of participation from Schering-Plough people of any part of the new Merck," Kellogg says. McDonough, a Merck veteran, remains treasurer, but a number of Schering-Plough's assistant treasurers will play a role in the new Merck, he reports.
Going forward, it's not what happens to interest rates or credit availability that matters most to Kellogg and Merck; it's the evolution of healthcare around the globe. At a time when the U.S. is determining the future of citizens' healthcare, a big pharmaceutical company like Merck is poised to adapt.
"We're pleased to have a seat at the table during the current healthcare debate in the U.S.," Kellogg says. "If you participate, anticipate and adapt, you can spot opportunities that can allow you to come out ahead.
"There are a lot of parts in the proposals that we support that provide patients broad access to our medicines and recognize the value of them. And there are some that we'd like to modify," he says. "But we're doing this in other countries all the time. It's the nature of our industry. We think of it as part of our enterprise risk management process."