Wheeler Dealer...MetLife rolls out M&A
By Russ Banham
During the worst of the recession, while the CFOs of many other financial services companies were biting their nails, Bill Wheeler was quietly plotting. The CFO and executive vice president of MetLife was negotiating to acquire Alico, the international life insurance unit of embattled American International Group, in a $15.5 billion transaction that would be the largest in MetLife's history.
Wheeler was no stranger to big deals--in 2005, in his role as M&A overseer at the New York-based life insurer, he closed its $12 billion acquisition of Travelers Life & Annuity and other international insurance businesses from Citigroup. "There's an old adage that most M&A deals fail," says Wheeler. "But the Travelers acquisition, despite a complex post-transaction integration, was a success, and it gave us the confidence to think about other large transactions."
But early 2009, when MetLife began mulling the Alico acquisition, was a sobering time. MetLife's stock price had nosedived to $12 per share, from $70 per share only two years earlier. Other financial services companies had their hands out to Uncle Sam for help. Not MetLife, even though it would post more than $2 billion in losses in 2009, despite revenues of $49.1 billion.
On Nov. 1, MetLife finally closed the Alico acquisition for $16.2 billion, becoming, by some counts, the largest life insurance company in the world.
The deal adds 20 million customers to MetLife's 70 million, enlarges its market share in Europe, positions it in South America, Eastern Europe and China, and strengthens its presence in Japan, the second largest life insurance market after the United States. Japan had accounted for approximately 70% of the pre-tax operating income of Alico, which sells life, accident and health insurance, as well as retirement and wealth management products.
Rob Henrikson, MetLife's chairman and CEO, chalks up much of the deal's success to his number two.
"Bill has been a great CFO by several counts, but particularly in his oversight of our M&A strategy," Henrikson says. "One of the things that has served Bill, and consequently MetLife, well is his ability to bring together the right people needed to get the job done. On the M&A front, this is critical."
His boss also credits Wheeler with building MetLife Bank into a major financial institution. The company obtained a banking license in 1999, but didn't begin operations until three years later. The bank initially offered basic products like FDIC-insured deposits over the Internet, primarily as a service to MetLife's agents and institutional customers.
"It had a narrow, utilitarian focus," says Wheeler, who was given responsibility for the bank in 2006. "I started thinking about how we could broaden the bank and grow it."
Since then, he has done just that, via a series of--what else--acquisitions. In 2008, MetLife Bank acquired the residential mortgage origination and servicing business of First Tennessee Bank, a subsidiary of First Horizon. The deal came with more than 230 retail and wholesale offices across the country, augmenting MetLife Bank's Internet presence with face-to-face sales opportunities.
Why the residential mortgage business, given the real estate industry's disastrous condition and continuing turmoil? "We felt if we could acquire an entity that wasn't burdened by all the baggage of the big players, we could make a mark and earn a very attractive return," says Wheeler. "We are now a top 10 originator of residential mortgages in the U.S."
In 2008, the company also purchased EverBank Reverse Mortgage, one of the country's top three providers of reverse mortgages, a product with growing appeal to retirees. "The reverse mortgage business was a good fit for us as an insurance company, since it requires significant actuarial skills and a well-managed retail sales force to be successful," Wheeler says. "We felt the business leveraged our strengths."
In 2010, MetLife acquired the servicing rights to residential mortgages previously serviced by AmTrust Bank. With more than $10 billion in customer deposits, MetLife Bank is now ranked as one of the top 100 commercial banks in the U.S. CEO Henrikson again touts Wheeler's oversight as crucial. "Under Bill's watch, the bank has had tremendous growth, both organically and through acquisitions," he says. "He brought the same approach to overseeing our M&A activity in the retail banking business."
Wheeler's dealmaking expertise was honed during his years as an investment banker with Donaldson, Lufkin & Jenrette (DLJ), where he was involved in M&A activity, leveraged buyouts, equity and debt financings and corporate restructurings, including a few in the insurance industry. In the 1990s, DLJ was actually owned by a life insurer?Equitable?which sold 20% of DLJ in a public offering in 1995. "Bill worked on that deal and was a major factor in its success," recalls Eric Steigerwalt, then vice president of investor relations at the Equitable.
"Unlike your stereotypical CFO numbers guy, he's someone who visualizes how to operationalize others' high-flying strategic ideas," Steigerwalt says. "He's always thinking, 'Do the financials match what others are suggesting strategically?' and it sets him apart."
This was evident in Wheeler's approach to MetLife's banking business, says Steigerwalt, now CFO and executive vice president of MetLife's U.S. business. "Bill recognized that the macroeconomic environment would work to our advantage, and he put together a couple of acquisitions that leveraged our strengths and positioned us really well," he explains. "He's also been able to bring in a lot of good people at the bank, which puts us in good stead as it continues to grow in the future."
Wheeler has been MetLife's CFO since 2003, when he was just 42 years old. He joined the company as treasurer in 1997, and played a key role preparing MetLife to become a public company three years later (previously it was a mutual insurer). He's a "down to earth and very likable guy," says Steigerwalt, "who despite his intellectual gifts has a great sense of humor. That's the real hallmark of his personality?that and the fact that he's a great communicator."
Timing is crucial in business, especially for M&A transactions. In the case of Alico, MetLife bought the company at a time when life insurance markets were opening up in several emerging economies. "The U.S. is a very mature market; strategically it made great sense to increase our presence in growth markets internationally," Wheeler explains. "A good example where the life business is really just emerging is Poland, where Alico had a very big operation for some 20 years. Now that business is growing quite fast and is providing us a high [return on equity]. There are several other countries just like Poland that are in similar early stages of development."
Alico has operations in 55 countries, many representing new markets for MetLife. Steigerwalt calls the deal "a once-in-a-generation opportunity--the right deal at the right time and a perfect fit for us."
Wheeler agrees, noting that there was "no other property like Alico in the world for us to buy--other than one." That exception was AIA Life Insurance. "Although both companies are of similar size and profitability, AIA is focused on Asian markets other than Japan, whereas Alico is focused on the rest of the world," Wheeler says. "We also felt it offered great growth prospects and significant ROE. Even though we'd be dealing with AIG and all its issues and challenges, we felt we had to hang in there."
The acquisition process was full of "fits and starts," he explains, "made worse by the huge swoon in the stock market [in early 2009]. But we kept in touch with AIG and Alico through the year and really began negotiating in earnest again in late 2009."
Of the $16.2 billion MetLife paid for Alico, about $7 billion was cash and the rest was in securities. Now that the deal is done, Wheeler says MetLife is not about to rest on its laurels.
"We'll certainly continue to make acquisitions, and though some might be in the U.S., we will have a big international focus because that is where the growth markets are," he says. "This is not a question of whether or not we can get the capital?we can. It's more of a management bandwidth issue." He explains that Alico is "a big deal" and "we need to get it integrated over the next year--before we start getting aggressive looking for bigger properties to acquire."
Only a year to integrate the biggest acquisition in MetLife's 147-year history? "They operate in a lot of countries we're not in, so the integration issues are relatively minor," Wheeler replies. "Of the 55 countries they're in, we overlap in about eight."
One integration challenge is to rid Alico of its AIG baggage, given the brand's negative associations. "In some countries the company was called AIG Life, so we will switch the name immediately to MetLife," says Wheeler. "In others it had a variety of names, including Alico, which actually has good brand equity. Eventually, we may think of a way to mix MetLife into it."
Given the iconographic power of Snoopy, the "Peanuts" character who has served as MetLife's ambassador for 25 years, the company should have little trouble distinguishing itself from AIG across the globe. As Snoopy himself once said, "Yesterday I was a dog. Today I'm a dog. Tomorrow I'll probably still be a dog."
Indeed, when you're doing things right, just keep on doing.
Gutsy Rescuer...Freeport looks forward
By Richard Gamble
When the economic cataclysm hit in the late summer of 2008, many finance teams rushed to cushion the fall. At Freeport-McMoRan Copper & Gold, Kathleen Quirk and her team rushed to prepare for the bounce. Working with operations and senior management, the finance team preserved liquidity by shutting down production selectively, delaying some capital expenditures and stopping optional cash outflows like the common stock dividend, but the strategy was always to protect future growth, not sacrifice it for stronger fortification.
"We were running in high production mode for a very different global economy than we were suddenly facing," notes Quirk, CFO, EVP and treasurer at Phoenix-based Freeport. "We needed to take steps, drastic steps, to cut back production and protect liquidity, but we were always looking ahead. We thought that if we took the right steps, we were dealing with an opportunity as well as a crisis."
Those moves paid off when copper, the company's biggest revenue source, rebounded to an average price of $3 a pound by the end of 2009 after falling to less than $1.50 in December 2008. It now trades at over $4. Prices for the company's other products, gold and molybdenum, also rebounded. Higher-cost operations that were temporarily shuttered are coming back online, and Freeport-McMoRan has returned to strong profitability, generating $2.7 billion in net income in the first nine months of 2010. Cash on the balance sheet, roughly $1.2 billion when the crisis began, fell to a low of $600 million in March 2009, then bounced back sharply, to $3.7 billion at press time.
"We quickly implemented a plan for stopping or slowing down certain cash outflows," notes Roger Stack, director of finance. "We are executing a disciplined plan for reversing that process and returning to higher levels of production now that the markets have improved."
And enjoying the cash buildup. With its new prosperity, Freeport has been able to retire 35% of its outstanding debt through redemptions and open market purchases, reinstate its regular dividend, announce a supplemental dividend and fund the restart of several mines without borrowing and still see cash swell, Quirk points out.
Freeport first had to make sure there would be a bounce. In just weeks in the fall of 2008, vanishing demand and plummeting prices had cut Freeport's revenue in half, costing the company between $8 billion and $9 billion.
CEO Richard Adkerson assembled a team of senior managers to set a clear strategy for responding to the global crisis. Quirk organized a team with representatives from operations, treasury, finance and business development, accounting and purchasing. The group expanded to include accounts payable, sales and marketing, legal, insurance, investor relations and environmental compliance. Leaders from various operating sites in the U.S., Indonesia, Chile, Peru, Africa and Spain were included in conference calls.
"Our culture emphasizes teamwork, and Kathleen is the ultimate team player," Adkerson says.
Preventing unnecessary cash outflows was a top priority. That meant eliminating the common stock dividend, which saved nearly $800 million annually. In addition, the company converted its 5.5% preferred to common through privately negotiated transactions and redemptions, saving over $60 million annually in preferred dividends.
Any cash that could be claimed was hunted down. By filing for eligible reimbursements from certain benefit plans and an environmental trust, the company added over $500 million to cash in 2008 and 2009, Quirk reports.
Quirk and her team also had to do something about mounting margin calls. "We deliver copper for some customers who require fixed pricing to match sales to their customers under fixed price contracts." Quirk explains. "In order to provide the customer with a fixed price while ensuring we achieve market prices for our products, we enter into a hedge with a third party. As the price of copper fell, our counterparties made cash margin calls on these hedges, and those margin calls kept rising.
"The margin requirements were creating a drain on our cash at a time when liquidity was critical," she notes, "so we worked with our marketing team and made the case that these arrangements were a service to customers and we shouldn't be left holding the liquidity bag. Our marketing team convinced our customers that we needed to pass on the margin calls. Since we implemented this, other commodity companies have also adopted this practice."
Meanwhile, Freeport was right on the edge with S&P and Fitch, holding the lowest investment-grade ratings, and was already rated a notch below investment grade by Moody's, so avoiding a downgrade was critical. "We kept the rating agencies informed as our plans evolved," Quirk says. "By taking a broad range of liquidity-protecting actions, the company held its investment-grade ratings with S&P and Fitch and subsequently saw upgrades by Moody's and Fitch," she reports.
One step that added cash and reassured rating agencies and investors was a shrewdly managed equity offering in early 2009. Selling equity under such conditions would normally be expensive, but Freeport used an innovative "equity drawdown" offering to sell $750 million of shares in a flexible and efficient manner, Quirk explains.
"We were able to choose the days when we sold stock and dribble it out when the market looked favorable rather than taking the risk in a volatile market of being required to price on a single day," Quirk says. "We did this in February 2009, after our release of our 2008 earnings. During our earnings call, we outlined the steps we were taking. Investors could see that we had liquidity and a plan. We expected to spread the stock sales over several weeks, but it went so well we wrapped it up in 10 days."
Good timing, good execution and good luck combined to allow Freeport to sell the shares at an average of $28 each, 22% above the price on the day the offering was filed. This increase easily beat the 0.2% rise in the S&P, the 6% pick-up in copper prices and the 11% increase in the stock prices of its competitors during the period the shares were sold.
Probably the most important moves Freeport's management team made involved downsizing mining operations. "Our biggest task," Quirk says, "was to work with operations to revise mine plans at each site. We didn't want any of our mines to be a cash drain, so we looked at what we could do to make them cash-flow positive at very low prices." Exploration, research, administrative costs, equipment purchases, material and supplies inventory and expansion projects all were cut back.
"We worked with each operations team on alternatives to reduce the cost of producing copper," Stack recalls. "We deferred or eliminated some planned capital expenditures. We curtailed or closed down some operations where we couldn't generate cash at lower copper prices. We did all we could to reduce cash outflows without hurting our long-term prospects."
Operations costs were cut by 18%. Facilities were idled. The work force in the U.S. was cut by a third. Mine plans were shrunk dramatically. "We had to make tough calls on what to fund, what to delay," Quirk says.
"They reacted quickly and found constructive ways to conserve cash in a challenging environment," agrees Brian MacArthur, a managing director and analyst at UBS who follows Freeport-McMoRan.
"In every case, the goal was to preserve cash during the crisis without sacrificing the value of an operation after the crisis," Quirk says. "Our motto was Prepare to Prosper. If we had to stop production at a mine because it was temporarily a cash drain, we took pains to do it in a way that we could restart operations efficiently when that mine would be a cash contributor. Now we're growing, hiring and investing aggressively in the business. Finance is working with operations, doing the analysis this time to expand operations. The crisis experience has made us a stronger company. All this attention has made our operations better."
Detail Detector...Eastman stays steady
By Richard Gamble
When a corporation sells a money-losing business amid a stubborn worldwide recession for twice what Wall Street experts thought it would go for, something is up. And something is definitely up at Eastman Chemical Co., which had $5 billion in 2009 sales. In October, Eastman announced a deal to sell its PET (polyethylene terephthalate) business for $600 million. Wall Street doubted Eastman could get more than $300 million for the business, which had been losing money for several years, says Frank Mitsch, a senior equity research analyst who follows the chemicals industry for BB&T Capital Markets. "They put $7 a share on the balance sheet by shedding a money-losing line of business," Mitsch says. "It was a very positive deal, done by auction."
Under CFO Curt Espeland and CEO Jim Rogers, Kingsport, Tenn.-based Eastman is racking up a lot of points not by throwing long bombs but by mastering the art of blocking and tackling. Persistent attention to details like streamlining transaction processing has helped to land Eastman's finance operations in the elite group of world-class companies, according to the Hackett Group's benchmarking studies.
The success of the PET deal illustrates that blocking and tackling. The divestiture exceeded expectations because "we had greatly improved that business during the year leading up to the sale," Espeland explains. "We had invested in technology and put an effort behind improving its operational performance. Our people identified the would-be leaders in the PET field, and then they ran a good, competitive sales process."
"It worked because they knew which doors to knock on and how to pitch it," Mitsch observes.
The global economic meltdown hit Eastman--a capital-intensive commodities provider--hard. "Our production utilization rate went way down, to just 50% at the low point in December 2008," Espeland recalls. "We were not in grave danger, but we were not able to use our assets fully and had to make a quick shift to protect liquidity. We paid more attention to inventory levels and collections, and only proceeded with the most valuable of our capital expenditures."
By the spring of 2009, "We were looking into an abyss," Espeland recalls. "But it was our culture to meet challenges. We conserved cash. We only spent money on mission-critical things."
Eastman contemplated large layoffs, he says, but instead "almost all employees took a 5% across-the-board pay cut." By the end of 2009, the company was doing so well that full pay was restored after eight months, Espeland reports. Now the chemicals sector has recovered almost to its pre-crisis levels, and Eastman is reporting record earnings, he points out.
Espeland and his finance team proved adept at cutting capital expenses quickly when the crisis hit, according to Mitsch, who notes that the company went from $520 million of capital expenditures in 2007 and 2008 to $310 million in 2009. "They can be pretty tight-fisted when they need to be," he says. "Compared to other companies, Eastman is quite disciplined when it comes to spending money."
Lessons learned in the recession of 2001 helped. "We found in 2001 that we needed a more variable cost structure," Espeland says. "So we made changes, and they helped us in 2008. Our trough earnings in this recession were three times higher than in the last recession."
For Eastman, the bottom came in March 2009, when first-quarter gross revenue fell to $1.1 billion and net income to $2 million, while its stock price neared $18 a share. By the third quarter of 2010, the bounce-back brought the company to gross revenue of $1.7 billion and net income of $170 million, and the share price topped out at a 52-week high of $83 as of press time.
Eastman is winning through steadiness, and Espeland is a master of steadiness. "He is good at taking complex situations and reducing them to clear sets of goals," says Eastman controller Scott King. "He finds the key themes and gives you a framework to work with and a feasible action plan. After talking with Curt, you come away with a good feeling about the path forward."
That path forward becomes the standard for judging performance. "If he doesn't like what you've done, he can be pretty crisp and clear with his communication," King says. "He'll come back to that path that was discussed, remind you of what was expected, and point out where things got off track."
Espeland takes a strong interest in training, and developing both the technical and interpersonal skills of the finance team has been one of his goals. Team members need both types of skills so they can sell projects like reducing cycle time to the businesses, he says.
"We had some natural resistance to change," Espeland notes. "We had to convince them that we were reducing their work. We have been trying to drive productivity improvements throughout the company, not just in finance."
Espeland started his career at Arthur Andersen and joined Eastman in 1996. Since then, he has served in positions including controller, chief accounting officer, vice president of finance for the polymers business, and director of finance for the Asia Pacific region.
"I've benefited from good international experience, having lived and worked on four continents," he says. "I had worked in most of the functions that report to the CFO except for treasury, so I had to spend more time at first learning what goes on there."
On the controller's side, Espeland notes the group's achievement of a quick, quality close while simultaneously implementing Sarbanes-Oxley compliance and reducing the cost of that operation by 13%.
Treasury won praise for improving cash visibility and cash flow forecasts, as well as developing commodities hedging programs.
Investor relations, in the person of Greg Riddle, director of IR, moved to New York City in 2007 to spread Eastman's "no surprises" culture to institutional investors. Although Eastman has not been a very active issuer, its Wall Street presence is paying off. "We are covered by 10 sell-side analysts, and eight of them currently give us high ratings," Espeland reports. "And our access to credit is solid."
The PET sale was not the only big gain for Eastman's M&A operation. On the acquisition side, Espeland points to the $160 million purchase of Genovique Specialties Corp. last May. Eastman is throwing off enough cash from operations--more than $750 million in 2009--that it doesn't need to issue debt to fund acquisitions of modest size, he adds.
Eastman also recently completed a joint venture in Korea to manufacture acetate tow that Mitsch calls "a terrific deal in a high growth region."
Like his counterparts at other companies, Espeland's role keeps expanding. The CFO role has "absolutely and dramatically changed," Espeland says. "We still have the accounting, tax and treasury processes to manage, but we also have to work more closely with the CEO and the board and serve as consultants to the businesses," he explains. "It requires finance professionals with broad skill sets that go beyond finance."
Espeland and Eastman CEO Jim Rogers enjoy a close relationship. For much of their time at Eastman, Rogers was CFO. Serving as CFO for Rogers means Espeland is working for the man who was his mentor for much of his time at Eastman. "He knows my job, but he respects me and counts on me to make the financial decisions," Espeland says. "Our communication is easy and efficient. He gets it quickly."
Having a CFO working under a former CFO means "we often start at the same place and speak the same language due to our financial training, but we aren't carbon copies," Rogers says. "He's often a counterweight. We may share a common discipline, but we both have to take broader executive roles and get involved with the businesses. He has the functional excellence the job calls for, but he goes beyond that and thinks like a CEO needs to think. I value him as my business partner."
"The CFO role has changed since I left it and gotten tougher," Rogers says. "Curt came in with Sarbanes-Oxley and Reg FD. The whole financial environment has become more demanding."
Neither Rogers nor Espeland has a background in chemicals, but that's OK, Rogers says. Executives in functions like finance, legal and HR can easily move from one industry to another.
"A financial background is powerful regardless of the industry," he says. "To be a successful CFO, financial savvy is more important than industry expertise."
To learn more about Eastman's finance efforts, read Seeing Results with Benchmarks.
Check in with other CFOs to see what 2011 brings in CFO Checkpoints.