something to smile about

The magazine forthe internationalfinance function

March 2004 Nº 229www.corporatefinancemag.com

»France Telecom’sCFO on financing€68 billion debt»Managing Cash:The CP reversal

»Managing Risk:CF’s FX Forecasterof the year results»Manchester andGlasgow SSCs

SOMETHING TOSMILE ABOUT?CF lists the top value-based management corporates

Gerard Ruizendaal,Group Controller,Royal Philips

corporatefinancemag.com March 2004 cf 1

For the finance executive March 2004Issue 229

Editor Tabitha NevilleDeputy editor Robert Pink Reporters Monica Woodley, Jason EdenProduction editor Emma PearceResearch editor Sarah ChuleCover photography Maarten UdemaIllustrations Russ TudorHead of sales Graham Combe Advertising managersDan Brennan, Jonathan WrightMarketing manager Maeve Doherty Publisher Will Goodhart

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Directors Padraic Fallon (Chairman andeditor-in-chief), The Viscount Rothermere,Sir Patrick Sergeant, Richard Ensor(managing director), CJ Sinclair, NeilOsborn, Christopher Brown, Dan Cohen,Gerard Strahan, JP Williams, John Botts,Edoardo Bounous, Colin Jones, Simon Brady,Tom Lamont, Diane Alfano, Gary Mueller,John Bolsover, Mike Carroll.

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The publication is not a substitute forprofessional advice on a specific transaction.Next publication date: April 2004

Cash, cash and cashShareholder value is a mantrathat gained sway many years ago.But almost as soon as the phrasehad been coined, detractors beganto ridicule the reality of theconcept, claiming that mostcompanies simply paid lip serviceto the idea of building value fortheir shareholders. CF’s coverstory reveals that – for somecompanies at least – shareholdervalue is more than just rhetoric.

In association with globalconsultants Stern Stewart, CF hassurveyed corporates in the US,Europe and Japan on a marketvalue-added (MVA) performancebasis. MVA is a measure of excesscash generated by a company andso a positive MVA is a sign that acompany has managed its cashwell and that shareholders canbreathe easy about how theircompany is being run.

But MVA is more than just ameasure to see if a corporate isspending and using money wisely.In a corporate world gripped bygovernance fever, it is just theapproach a company needs toadopt to prevent money goingastray and accounting scandals.

So how do corporates defineand measure shareholder valuecreation? Tabitha Neville talks tosome of the top 75 companies on

page 22 to find out and revealswhich CFOs really know how tomanage cash.

In CF’s Managing Cash featureon page 34 we look at short-termdebt, with a particular focus oncommercial paper. The CP marketis currently a shadow of its formerself. A combination of ratingsdowngrades and the economicslowdown has seen the size of theUS market fall to $1.3 trillion - thelowest level since 1999. So whatare corporates doing to fund theirshort-term debt? Those who canmuster the ratings are still usingCP – and banks and ratingagencies all claim that an upswingis just around the corner – butalternative short-term debtfinancing solutions are availableas Robert Pink discovers.

On page 30, Jason Eden puts FXforecasters to the test in CF’sManaging Risk feature and revealsCF’s Forecaster of the year. Howaccurate are the forecasts theyprovide and what currencies havetaken them by surprise over thelast 12 months?

Editorial [email protected]

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EDITOR’SNOTE

For reprints of any article in this issueplease contact Liz Onisiforou:+44 (0)20 7779 8591 or [email protected]

CONTENTSMARCH 2004

4 Month in ReviewHad a busy month? Then enjoy our bite-sizednews for the over-stretched finance executive.

6 Market FocusJapan’s pharmaceutical industry gets M&Ainjection; Invensys engineers financepackage; trends in high-yield debt; globalconsolidation to rise.

14 Moving OnGoodyear creates assistant treasurer role forCavanaugh; TippingPoint gets Chibib thetechnophile; ProxyMed recruits veteran;Crudele joins the Gibson team.

18 CFO Profile“Financing €68 billiondebt was the easy bit.”Michel Combes, the finance chief at the heartof France Telecom’s sensational reversal offortunes, talks to Tabitha Neville about debt,destiny and getting the French utility back ontrack with the investors.

21 Treasurer’s View The technology puzzleAs a corporate treasurer, how do you manageto stay abreast of developments in the worldof payments and messaging standardization?With so many different organisationsentering the market Robert Pink decided totake stock.

22 Lead story

The value creationequationThe mantra of shareholdervalue gained momentum someyears ago. But whichcompanies have embraced theconcepts behind managing forvalue? And how do youmeasure it anyway? TabithaNeville reports.

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CONTENTSMARCH 2004

ABB 12Allegiane Telecom 5Alstom 12Amaar Properties 4AngloGold 5Ashanti Goldfields 5AstraZeneca 38Balfour Beatty 36Bank of America 35Belgacom 5BMW 34Cazenove 10Chanin Capital Partners 13China Green 4China Telecom 5Citibank 35Clydesdale Bank 41Coca-cola 24Commerzbank 32Credit Suisse 13DEPFA 37Eaton Corporation 40ExxonMobil 24France Telecom 18France Telecom 5Fujian Zijin Mining Industry 4Fujisawa 8Georgia Pacific 38GFI Group 31Gibson Guitars 19Giorgio Armani 4Goodyear 14Heidelberg Cement 8HSBC 10ING 13InvensysInvensys 12JT International 39KO Communications 5Latham & Watkins 41Lexmark 36Lloyds TSB 30Michelin 39MIDAS 38Novartis 24NTGI 35ONGC 10Pacific American Securities 13Petronus 5Philips 24ProxyMed 17ProxyMed 43Randgold 5RBoS 30S&Ps 34Sasol 5Scottish Development International 41SEB 33SG CIB 34Shanghai Forte 4Shell 23Shinsei 4Siemens 24Singapore Computer Systems 15Singapore Telecommunications 4Societe Generale 30ST Assembly Test Services 13Stern Stewart 24Tetra Pak 38The Final Test Reporter 13The Hackett Group 43The Loan Market Association 43TippingPoint 16Total 24Travelex 10Tyco 4, 35Veolia Water 4Visteon 14Wanadoo 5Weatherford 36Worldwide African 5Investment HoldingsYamanouchi 8

Companies in this issue

1 Goodyear finds a brandnew assistant treasurerMoving On, page 14 2 Working capitalmanagement Managing Cash, page 34 3 Northern SSCs Treasury Location, page 38

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30 Managing Risk: FX Forecaster of the yearHow accurate are your forecasts: CF hascollated the results for its FX Forecaster of theyear survey. So which bank topped the tablefor FX forecasts? Jason Eden finds out.

34 Managing Cash: Commercial Paper focusHow are you funding your working capitalneeds? The US commercial paper market hasundergone its largest contraction in 40-years.So how are corporates financing their short-term needs? Robert Pink looks at alternativeways of financing short-term debt, anddiscovers why CP is still the best financingsolution for corporates.

38 Treasury Location:The UKThe Manchester and Glasgow scene:Corporates are increasingly open tosuggestion when it comes to the location oftheir shared service centres. Taking this onboard, Robert Pink and Jason Eden look toManchester and Glasgow as alternative SSCs.

42 Cash & Tech Europe’s corporate treasurers look to acentralised future.

43 Legal Brief LMA launches LBO blueprint; SEC delaysSection 404

44 M&A and Fee Analysis

47 FX Forecasts


HIGHS [& LOWS] INCHINA»Despite being 481 timesoversubscribed by retailinvestors, Shanghai Forte’sshares only rose eight percent on the day of its HK$1.5billion ($192,000) IPO – adefinite cool down from the60% and 73% risesexperienced by ChinaGreen and Fujian ZijinMining Industry in theirrecent market debuts.

»China’s largest listedlender China MerchantsBank reduced its plannedRmb10 billion ($1.2 billion)bond issue aftershareholders, angry at thedilution of their stakes,threatened to sue. The issuewould have been the largestin Chinese history but wasreduced to Rmb6.5 billion.The bank will make up thedifference by issuingsubordinated debt.

»Ahead of its planned $1billion listing in Hong Kong,China’s first private lenderMinsheng Bank hasadmitted that it falsifieddocuments in 2000 to showshareholder approval of thebank’s name change.Former director Qiu Yingxinsaid his signature had tohave been forged as he wasin police custody at the timeof the supposed meeting.

»Another asset sale isplanned in China, this timein the southern town ofShenzhen. The town wantsto reduce its stake in about26 state-owned companies.An asset sale in China lastyear attracted intenseforeign interest. VeoliaWater of France invested$390 million in Shenzhen’swater utility in December.

DOUBLE YOURMONEYSingaporeTelecommunications ispunching above its weightas south-east Asia’s largestphone company by morethan doubling its third-quarter profits. Net incomerose to S$854 ($504 million)on the back of subscriptionsto its Optus Australian unitand favourable currencyfluctuations which saw theAustralian dollar rise 31%against its Singaporecounterpart in 2003.

»Singapore Air hasbounced back from thenegative effects of SARS onits balance sheet byrecording third-quarterprofits more than double Q32002. Net income rose forthe company rose to S$378from S$180 a year earlier.

HIGH FASHION» It may come as news toyou - it certainly did to CF -that fashion branding hashit the hotel sector. Italianfashion group GiorgioArmani is to launch a $1billion luxury hotel chainwith Dubai developerAmaar Properties. Withhis 10 hotels and fourresorts, Armani will joinother fashionable hotelierssuch as Bulgari, Versaceand Salvatore Ferragamo.

NO BONUS TOOGREAT OR SMALL»Former Tyco CFO MarkSwartz has admitted that a$12.5million special bonuswas given to him by mistake– as was a $25 million bonusgiven to CEO DennisKozlowski – according toDavid Boies, a lawyer who

THE MONTH IN REVIEW

Making or breaking dealswhile playing a few roundsof golf before disappearingto the 19th hole has beenpart of corporate businessfor ...well forever. Sadly, ifgolf clubs keepdisappearing as rapidly inJapan as they are currently,then businessmen therewill have to go alltraditional and movedecision-making back intothe boardroom.

Japan’s golf-courseindustry is ridden withbankruptcy and Februarysaw another club,Taiyoryokka, file forprotection from creditorswith consolidated debts of¥243billion ($2.3 billion).The Japanese arm of USbuyout firm Lone StarFunds which owns 35 golfcourses, or Goldman Sachs,the biggest foreign investorin Japanese golf courses areseen as likely contenders toacquire the company.

Japan suffered 90 golfcourse bankruptcies in2003 with debts of ¥2.02trillion. In 2002, 109 courseoperators failed with debtsof ¥2.19 trillion.

»Japanese bank Shinseiwas allowed to list on theTSE despite last minuteopposition from theDemocratic Party of Japan,which sought to delay theIPO because of a pendinglawsuit that could cost thebank billions of yen. TheIPO went on to be thebiggest listing by a Japanesecompany since NTTDoCoMo’s $18 billionlisting in 1998. Shinsei isthe first bank in Japanesehistory to have beenrelisted on an internationalcapital market aftercollapsing and beingrevived by new owners.

Japan’s government isn’tthrilled that the bank itbailed is now owned by aconsortium headquarteredoffshore in The Netherlandswhich allows it to avoidcapital gains tax on half ofits 67% stake that it sold atthe time of the listing. TheMinistry of Finance is intalks with the Dutchgovernment to add a clauseto their tax treaty allowingit to charge capital gains taxon share sales in banks thathave received public funds.

Fore! Japan goes off-course

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conducted an internalinvestigation into Tyco. Incourt it was a different story.Swartz claimed the $100million paid in bonuses wasearly payment of annualbonuses that Kozlowski hadtold him had been approvedby board member PhilHampton (deceased). Sixformer Tyco directors – allvery much alive – say theynever approved them.

»The butterfly-effect ofcorporate scandals has nowmade its way to thecorridors of the big fouraccountancy firms. A surveyhas revealed the firms arequietly divesting themselvesof their riskiest corporateclients. The prominence ofsmaller companies in theranks of the culledcorporates from theportfolio’s suggests thatthey may be more willing totake on risk when the auditfees are far larger.

AFRICAThe South Africangovernment has announcedan easing of its exchangecontrols, which will allowforeign firms to access itsstock and bond markets.The JSE has been hit byfalling trading volumes soforeign firms will soon beallowed to list on SouthAfrican capital markets toraise debt and equity financeon the JSE SecuritiesExchange and the BondExchange.

»The Ghanaian parliamenthas approved AngloGold’s$1.55 billion all-sharetakeover offer for AshantiGoldfields after theopposition boycotted thevote, saying the deal willreduce the government’sstake below the 10% levelset by legislation. Ashanti’sboard approved the mergerdespite receiving animproved offer of a €1.6billion share swap fromsmaller South Africanmining group Randgold.

»South African oil and gasgroup Sasol and Malaysia’sPetronas have agreed amerger between Sasol’sLiquid Fuels Business andEngen, 80% owned byPetronas. The merger will bea joint venture, with eachcompany holding a 37.5%stake. The remaining 25%will be held by blackpartners - as required underSouth Africa’s BlackEconomic Empowermentrules. This includesWorldwide AfricanInvestment Holdings,which owns 20% of Engen,and former shareholders ofExel, a liquid fuels companythat merged with Sasol inDecember 2004.

A month ago the telecomssector was bobbing alongquite nicely, then bam!All hell breaks loose.

First up was the bustlingfor position in the AT&TWireless deal. CingularWireless and Vodafoneboth made plays for thecompany, but Cingularsnatched AT&T last-minutewith a bid for $41 billion –one of the largest cashtransactions in history –making it the fourth largesttelecoms group in theworld (see box).

Vodafone claims it wasprudent to walk away fromthe auction but rumoursabound of its executivesbeing in bed asleep whenthe deal was struck andalso that loose tongues inthe Vodafone camp blastedits offer from the water (itis alleged Vodafone toldreporters that the Vodafoneboard were going toapprove a bid of $14.50 pershare; Cingular got hold ofthis information and heypresto a bid of $15 pershare). What’s thatexpression? Careless talkcosts acquisitionopportunities.

»February also saw Belgianincumbent telecomscompany Belgacom putthe finishing touches to itsIPO. The €3.5 billion ($4.4billion) share sale will bethe largest IPO in Europe inthe last three years.

»France Telecom gotround to launching an offerto buyout the remaining29.4% of Wanadoo, itsdirectories and internetservices division. The €3.9billion offer is awaitingWanadoo’s approval.

»XO Communications,which emerged fromChapter 11 a year ago,unveiled plans to acquireother distressed telecoms.The company has just wonan auction for the bulk ofAllegiane Telecom’s assetsfor $628 million.

»China Telecom may raiseas much as $3 billionthrough a share placing tofund the acquisition of 11regional telecom networksfrom its state-owned parentcompany, which would add45 million users to itssubscriber base.

Top Telecoms GroupsRank Company Home Country Mobile Subscribers

(million)1 China Mobile China 153.62 Vodafone UK 118.93 China Unicom China 86.64 Cingular/AT&T Wireless US 67.15 Deutsche Telekom Germany 65.86 NTT DoCoMo Japan 50.87 France Telecom France 41.98 America Movil Mexico 36.79 Telefonica Spain 29.910 Verizon US 28.8

Source: FT

What’s happened tothe telecoms sector?

Neil Preston, companysecretary, Punch Taverns

CF would like to apologise toNeil and Neal. You really dolook nothing alike:

Neal Neilinger, DresdnerKleinwort Wasserstein

Oops, silly us


MARKET FOCUS

»Issue volume hit €16.6billion in 2003»Move from refinancingactivity to find M&A

The high yield market inEurope was the turnaroundstory of 2003. New issuevolume hit a record high of€16.3 billion after amiserable two years. Whatcan issuers expect this year?

Standard & Poor’s saysthat prospects of a cyclicalrecovery, a continuedaccommodative monetarypolicy stance, decliningdefault rates, and aslowdown in credit qualitydeterioration in theEuropean high yield marketwill mean that corporatesshould have strongconditions in which to issuein – though S&P also notesthat corporate downgradescontinue to be substantiallyhigher than upgrades.

“Conditions remainfavourable in Europe,” saysDiane Vazza, managingdirector in global fixedincome research at S&P inNew York. “Monetary policyis really helping to keep itthat way.” StephaneTremelot, head of creditsyndicate at BNP Paribas inLondon, agrees that “slow[erthan expected] economicgrowth in the eurozone andthe dollar/euro exchangerate mean that it is unlikelythat the ECB will raise ratesin the short term. Thatmeans that there is anopportunity for issuers tobenefit from issuing bondswith low yields.”

Even if rates do rise, itdoesn’t necessarily spell anend to issuance, accordingto Nicholas Coates, head ofhigh yield at RBS in London.“Some issuers may makeopportunistic moves to dodeals before rate rises takeplace but issuers can alwaysuse the swap market to getcomparatively lowerfloating rates.”

While spreads in the UShigh yield market havewidened by around 8bpsince the beginning of theyear, in Europe they havecontinued to tighten and arearound 38bp tighter than atthe end of 2002, accordingto Tremelot. Indeed, theaverage absolute yield forEuropean issues remainslower in Europe at 7.44%than in the US at 7.87%.

Some market observersfear that Europe is about tosuccumb to the problemstroubling the US market,where fund flowsinformation provider AMGData Services has reportednet outflows from highyield funds in the US forthree of the four weeks toFebruary 25. While theseoutflows are specific – andthus far isolated – to USfunds, their impact is morewidely felt: many of thosefunds also invest in theEuropean market; andtrends in the US high yieldmarket frequently pre-emptthose in Europe.

Nevertheless, S&P’s Vazza– and most market observers– say that this is just ahiccup. “Investor demand is

still there but there has beena realisation that corporatespreads have tightened toofast compared to creditquality and that there was aneed to set that right.”Coates adds: “Whilst theEuropean high yield markethas softened over the pastmonth, we believe this to bea temporary phenomenon: acorrection to a bullishmarket. The long-term trendis for increased liquidity inEurope and demand willremain strong as fundscontinue to flow into themarket.” More bullishcommentators say that thesoftening of the market hasresulted from investorsselling bonds in order tohave cash to respond to theexpected deluge of newissuance expected.

Either way, no-oneexpects the high yieldmarkets in Europe toflounder this year. IssuanceYTD has been limited –around €2 billion from 10deals compared to $25billion from around 100deals in the US – but BNPParibas’ Tremelot says thatthis is common for thisperiod of the year. “Unlikethe high grade world Januaryand February are quietmonths as issuers and banksprepare new transactions.”

While it is impossible toknow if we are at thebottom of the credit cycle,all the indicators show thatthe economy is improving,credit quality is improving,and investor demand isn’tabout to collapse.

And while all thesefactors may be pullingissuers to the high yieldmarket, the long-termstructural trend of reducedbank lending – not leastbecause of Basel II – is alsopushing issuers toward it.

“Banks have become muchmore focused on the riskadjusted returns of theircredit provision and areoften less resistant than theyhave been in the past tocorporates diversifying theirsources of funding awayfrom the bank market,” saysRBS’s Coates. “That is asignificant change.”

Who’s issuing?The high yield market hastraditionally been driven bythree sources of issuance –leveraged buyouts (LBO),telecom, media andtechnology (TMT) andgeneral corporate issuance.“For the first time thesethree components of theprimary high yield marketin Europe will produce dealssimultaneously this year.That means that we canexpect a strong level ofissuance,” says Coates.

LBO issuance is expectedto provide a quarter of themarket in 2004 while TMTissuance should match lastyear issuance of almost €6billion. But the key to thepotential market growth iscorporate issuance.

One of the main reasonsfor the growth of theEuropean high yield marketin 2003 was issuance fromfallen angels – issuers thathave fallen to speculative(rated BB+ and below by S&Pand Ba1 by Moody’s) frominvestment grade (BBB- andabove by S&P and Baa3 byMoody’s). Of the total €16.3billion raised in Europe,fallen angels accounted for

Strike while high yield’s hot

“European corporatesincreasingly view thehigh yield product as amainstream financingtool.”Nicholas Coates, RBS


€6.4 billion or 40%. S&Ppoints out that that is a 25%increase on 2002 figures. Asa direct consequence ofincreased fallen angelissuance the average dealsize in the European highyield market increased from€251 million in 2002 to €286million in 2003.

Investors have beenunderstandably eager to buypaper from such issuers.“HeidelbergCement came tothe market at a time wheninvestors were looking for away to get a better yield ontheir investments,” saysChristian Kammann, grouptreasurer at the company.“HeidelbergCement alsostrongly pointed out thecommitment to go back toinvestment grade. The dealbrought by us was thelargest European high yielddeal then and in many waysset a market standard.”

Issuance from fallenangels has not only swollenthe market’s overall size ithas coaxed other issuers intothe market. “Issuance fromhigh quality borrowers suchas HeidelbergCement andVivendi in 2003 helped to‘destigmatise’ the marketand it’s now a lot easier forCFOs to justify using themarket to their boards,” saysCoates. “The corporatesector will continue to bebuoyant as Europeancorporates increasingly viewthe high yield product as amainstream financing tool.”

The use of that financingis expected to change, saysS&P’s Vazza. “The focus isshifting from refinancing tocapital spending. It can beexpected that the Europeanmarket will follow the US inthe move away fromrefinancing activity to fundexpenditure and M&Aactivity.” LN

The European high yieldmarket has traditionallybeen dominated by 10-yearbonds with a five-year non-call. If issuers wanted toredeem before that five-yearcall they would have totender for the bonds – acostly process most wereeager to avoid. The rationalewas that a five-year call gaveissuers reasonable flexibilityto get their finances inorder and work their wayback to investment gradewhile investors would notget unduly punished bycompanies eager torefinance debt once theircredit quality hadimproved.

Issuers are now in poleposition, with vastly more

demand than new issuesupply. As a consequence,issuers have been able toget better terms frominvestors. Instead of 10-yeardeals, issuers have begun tobring seven- or eight-yeardeals. Crucially, the calls onthese bonds are also shorter– giving finance executives’greater flexibility torefinance should theirfinancial and ratingposition improve.

There has been a movetoward seven-year bondswith a four-year non-call athalf-coupon meaning thatinvestors get half thecoupon rate if the bonds arecalled. A number of issueshave also come with three-year non-calls at full

coupon. Issuers might haveto pay a bit more to get thiseven shorter call, but itoffers them an enormousflexibility advantage over atraditional 10 year non-callfive bond. Understandably,investors are unhappy withthe changes but concedethat they are a function ofan efficient market.

S&P notes the near-termoutlook for European highyield is benign “with theoutlook and CreditWatchdistribution indicating animprovement in creditquality relative to a yearago”. Only 25% ofspeculative rated issuerscurrently have a negativebias, compared to 30% ayear earlier.

Europe – Structure changes benefit issuers

High yield bonds takelonger to come to marketthan investment gradebonds for a number ofreasons. Chief among theseis that issuers arefrequently unrated beforethey issue. Meanwhile, thedocumentation andoffering circular must beput together by the issuer’sinvestment bank.

Choosing your market isa key decision saysChristian Kammann, grouptreasurer atHeidelbergCement. He saysissuers should weigh upboth the cost and investorfamiliarity benefits. “TheEuropean investor base wasmore familiar to theHeidelbergCement credit.”He adds that the complexlegal environment in the

US market dissuaded thecompany from issuingthere. Simply printing a“144A issue [allowing thesale of a non-US marketbond to qualified USinvestors] makes the duediligence process moreextensive”. Although itallows issuers to benefitfrom the price tension thatreaching a broader investorbase creates.

A further timeconsuming element of highyield bonds is that thecovenant package offeredto investors is frequentlymore complex than withinvestment grade issues.High yield issuers have ahigher risk of default andtherefore investors requiregreater protection, asKammann explains. “High

yield investors are morefocused on covenants andprotecting or keeping thecash flow in the companyfor debt reduction thatresults in a much moredetailed indenture.”

The less developednature of the market alsomeans that some covenantpackages become a matterof negotiation withinvestors rather thansimply being drafted by theissuer. “Familiarity with thehigh-yield style ofdocumentation and cross-checking withoperational/strategic needsof the issuer group arevital,” Kammann says.

From the awarding ofthe mandate to completion,a high yield issue shouldtake around two months.

Timetable of a high yield bond


MARKET FOCUS

DEAL AT A GLANCE» $8 billion merger ofJapanese pharmas » Pharma consolidation inJapan set to rise

Pharmaceutical companiesYamanouchi and Fujisawaagreed an $8 billion mergercreating Japan’s secondlargest pharma entity inFebruary.

Yamanouchi andFujisawa PharmaceuticalsJapan’s third- and fifth-ranked drug makersrespectively, aim to reachan agreement by March2004 and integrateoperations by early 2005.

Enhancing R&D andmarketing opportunitiesare the principal factorsbehind the merger whichwill see each Fujisawa shareexchanged for 0.71Yamanouchi shares. Thedeal will create the 17thlargest firm in the globalmarket. “From a businesspoint of view most peoplehave said it’s a very goodcombination, as well asfrom a geographic point ofview,” said a bankingsource close to the deal.

Japan is the secondlargest pharmaceuticalmarket after the US, withsales of around $52 billionin 2002. Yet Japanesepharmas have never beenviewed as global players.Yamanouchi , for example,has been struggling in theUnited States. A core reasonfor this, is R&D spend. Theratio of R&D to total sales in2002 was 12.8% for Japan’spharmaceuticals,

compared to an average ofover 17% for Westerncounterparts. And bylimiting the influence offoreign competition inJapan, governmentprotection has furtherlimited R&D investment tobelow that of foreign rivals.The merger will, analystshope, address the imbalance.(The acquisition of Pfizer byPharmacia in 2002 createdan R&D budget worth $6.5billion. The combined R&Dbudget for Yamanouchi andFujisawa will be ¥150 billion($1.3 billion)).

“The merger shouldimprove the competitivenessof the new entity,”comments ShinsukeTanimoto, an analyst forMoody’s Japan. “The increasein the size of the businesswill, on a global basis,broaden sales coverage andstrengthen R&D capabilities.”It may also spark off moresector consolidation.

Yamanouchi and Fujisawahave both admitted thatthey needed to merge tofend off overseascompetition in the world’ssecond-largest drugs market.And with the governmentactively promoting foreignshare-ownership andcompetition in the market

and western companiessuch as Merck, GSK andPfizer expanding theirmarketing in Japan, it islikely other Japanesecompanies will follow in itsfootsteps. Tanimoto agrees:“The merger of Yamanouchiand Fujisawa could affectthe balance of the marketcompetitiveness in the toptier players and mightaccelerate marketreorganisation.”

Japan’s government isalso in the mood for change.It is has publicly stated thatit wants to see consolidationin the industry. It is slashingboth the number of drugswhich can be sold only byprescription, and theamount paid for drugsthrough the national healthsystem, both changes whichweaken domestic drugmakers in their battle withforeign drug companies.

Yamanouchi’s president,Toichi Takenaka, willbecome chief executive ofthe new company, whichwill retain his company’sname. Fujisawa’s president,Hatsuo Aoki, will becomechairman.

Morgan Stanley Japanadvised Yamanouchi;Lehman Brothers Japanadvised Fujisawa. RP

Pharma’s strength in numbersDeal of the month: Yamanouchi Pharmaceutical

COMPANY INFO

Yamanouchi is strong in ulcerand urinary treatments and isbest known for Harnal, amedicine for urinaryproblems. It was founded in1923; has capital ¥99,760million; total assets ¥890,525million; and 8,957 employees.»Fujisawa makes theimmuno-suppressant drugPrograf, and focuses onimmune-related treatments. Itwas founded in 1930; hascapital ¥38,589 million; totalassets ¥508,354 million; and8,059 employees.»Combined sales ofYamanouchi and Fujisawa inthe current financial year toMarch 2004 will likely reach¥920 billion ($8.4 billiondollars).»The two companies have¥890 billion in combinedsales, and the deal will allowthem to surpass the onetrillion mark. It will have thelargest market share amongJapanese pharmaceuticalcompanies.»It will be 17th in the globalpharmaceutical market»The combined companywill: have an annual R&Dbudget in excess of ¥150billion;have more than onetrillion yen for sales; and 25%as an operating margin. »In 1995 overseasshareholders held 17.1% ofYamanouchi stock. By 2002the figure had risen to 44.7%.Takeda, Japan’s leadingpharmaceutical, has seenforeign share ownership risefrom 10.1% to 29.6% in thesame period.

Global Pharmaceutical sales by Region, 2002 (US$ bn)World Audited Market Sales Global Sales % Growth %North America 203.6 51 12Europe (EU) 90.6 22 8Rest of Europe 11.3 3 9Japan 46.9 12 1Asia, Africa and Australia 31.6 8 11Latin America 16.5 4 -10Total 400.6 100 8

Source: IMS World Review 2003 and IMS Consulting


MARKET FOCUS

»Invensys replaces £1.4billion credit expiring 2005»Plan reduces disposals to£250 million

Early in February UKengineering group Invensysannounced a broadrestructuring backed by a£2.7 billion ($5 billion)refinancing package - itsthird attempt in two years tocreate a new plan for itsfuture.

The Invensys refinancingpackage includes a £450million share placing, a£625 million high-yieldbond, which later had to bescaled back in the face ofinvestor resistance, and a£1.6 billion five-year creditfacility. The new packagereplaces £1.4 billion ofborrowing facilities due torun out by 2005.

The group has sufferedfinancial problems almostsince its inception - it wasformed by the merger ofBTR and Siebe five years ago.At the time of theannouncement in Februarythis year, its debts wereestimated at about £1.4billion, compared to amarket capitalization of£840 million.

The refinancing packagehas more than a hint ofopportunism in it - takingadvantage of improvedmarket conditions andinvestor sentiment. It is alsoa definite change of tackwhich has been ill-received(see box).

Immediately, Standardsand Poor’s lowered its long-

term corporate credit ratingto B+ from BB-, as a result ofthe company’s expectedhigh levels of leverage in themedium term, and itsexisting debt ratings to B-from B. Moody’s isconsidering downgradingInvensys’s current rating ofBa3, citing: “the impact ofthe changes in disposalsstrategy on the company’sfinancial profile and the sizeand stability of theremaining business tosupport residual debtlevels.”

Fitch Ratings comparesInvensys’s refinancingunfavourably to those offellow engineering groupsABB and Alstom. “UnlikeABB and Alstom, Invensys isnot subject to materialexternal factors, which actas a drain on financialservices, other than thoseinherent in the industry. Inthe case of Invensys, thegroup’s problems havearisen from ongoingoperation and financialissues, notably poorworking capitalmanagement. Invensys isproposing to issue a placingand open offer in contrast tothe rights issues carried outby ABB and Alstom [which]is indicative of the degree ofuncertainty and lack ofmarket confidence as towhether or not the groupwill gain the supportrequired from its existingshareholders.”.

Victoria Scarth, SVPcorporate communicationsat Invensys, refutes the

accusation of a lack ofmarket confidence in thecompany, pointing to thesuccess of the refinancing.“The success proves thecompany is doing what isneeded and that investorshave confidence in thecompany. We’ve had a lot oflegacy liabilities, productand environmental issues,litigation, that have beenobscuring our operatingcash flow. Adrian [Hennah,CFO] has done a forensic jobof isolating the liabilitiesand addressing issues fromour long conglomeratehistory.

“We’ve set up an escrowaccount of £560 millionring-fenced to deal with theliabilities. That caps thevalue of the liabilities for themarket and we report onthat quarterly, which makesour work on the workingcapital more transparent.Our commentators will see acleaner flow through profitto cash. These changes haveestablished confidence andthat’s why investors havesupported the refinancing.We didn’t ask for equitybefore because the businesswas complex. Thingsweren’t clear but a lot ofwork has been done in twoyears to improve this.”

There is no questionabout the deal’s success forInvensys’s advisors. Thechallenging nature of thedeal and the fact that thebanks underwriting the dealtook on so much risk meansthat the bankers, lawyersand other advisors will earn

up to £108 million in fees –12% of the company’smarket value. DeutscheBank was lead underwriterwith Morgan Stanley andCazenove also underwritingthe equity placing. MorganStanley, Cazenove andTricorn Partners advised.

Nick Wiles, co-head ofcorporate finance atCazenove, one of Invensys'sadvisors, says: "It was aparticularly challenging dealbecause of the use of thedebt market and the equitymarket simultaneously.There was intense pressureto coordinate and execute atthe same time, but it was areal moment to take in themarket." MW

PENSIONS UPSET

In 2001, CEO RickHaythornthwaite told investorsthat he planned to cut the sizeof the company by a third. Lastyear he named more divisionsto be sold and in November2003, he revealed the companyexpected to make £1.8 billionin disposals. But thecompany’s restructuring plansreveal this figure has beenreduced to the paltry sum of£250 million. This aspect ofthe restructuring has beenbadly received by Invensys’spension scheme trustees.When the company planned tomake £1.8 billion in disposalsin November last year, itpledged to put 15% of anyproceeds over £1 billion intothe pension fund. Withdisposals set at £250 million,Invensys isn’t saying whetherany of the £2.7 billion ofrefinancing will go into theplan. The company’s pensionplan has a deficit of £885million. It has 100,000members, only 15% of whichare current employees.

Invensys restructureswith £2.7 bn refinancing


»Increased earningsencourage acquisitions»389 deals totalling $21.5billion in tech sector YTD

In a scene akin to the lastdance at a disco witheveryone scrambling to finda partner, corporates can beseen scanning the landscapefor acquisition opportunitieshoping to cherry pickvictims before the M&Aspree really kicks off.

Year-to-date more than$350 billion of proposedacquisitions have beenannounced - more thanthree times the amount inthe same period for 2003.Some of this can beaccounted for by deals thathave been moving throughthe investment bankingpipeline for some time andare finally coming to a close,but stock market rallies, lowinterest rates and renewedoptimism in the deal-making environment are allhelping to push corporatesto make M&A decisions.

“Companies have beenfocused on their balancesheets and earnings for thelast few years, but now thatearnings are growing againand their internal problemsare fixed, they are looking togrow and the best way togrow and the best way to dothat quickly is throughM&A,” says RichardMorgner, head of mergersand acquisitions atinvestment bankingboutique Chanin CapitalPartners. It seems the boardsof technology and telecomsfirms as well as of financial

institutions are of the samemind. The tech sector hasseen 389 deals totalling$21.5 billion YTD, while inthe finance sector, therehave been 132 dealstotalling $111.6 billion YTD.

TechnologyWithin the tech sector, thesemiconductor industry hasseen a spate of acquisitionssuch as Singapore state-controlled ST Assembly TestServices (Stats) purchase ofUS-based ChipPAC for $1.6billion in February.

“The wholesemiconductormanufacturing side of thebusiness is getting to wherethe investments to domanufacturing are so high,you’ve just got to have a bigcompany to play in thegame,” says industryobserver Jim Mulady,publisher of The Final TestReporter, a semiconductorindustry newsletter.Consolidation in thesemiconductormanufacturing industry isnecessary to contain costsand increase efficiency, headds.

Acquisitions in thesemiconductor sector arefollowing an increasingtrend towards outsourcingby integrated devicemanufacturers (IDMs) - largechip companies that havetraditionally designed,manufactured, tested andassembled semiconductors -who now need to streamlinetheir operations to helptheir cost competitiveness.

A recent report from

Morgan Stanley’s GlobalSemiconductor ResearchTeam says that by 2010, thesemiconductor industry willgrow to $360 billion with34% of the industry drivenby outsourcing revenue.

“Streamlining can bedone easily throughoutsourcing and assemblyand testing are good areas tooutsource because theyrequire less disclosure ofproprietary information,”says Chris Hsieh, regionalhead of Asian technologyresearch at ING in Taipei.

Outside of thesemiconductor industry,there have been severalother major acquisitions,such as US Internet systemsprovider Juniper Networks’spurchase of US networksecurity provider Netscreenfor $3.6 billion. The dealinvolves 1,404 shares ofstock for each of Netscreen’sshares.

Michael Cohen, directorof research for PacificAmerican Securities, saysthe Juniper acquisition is aperfect example of howsome larger tech companiesare willing to use theirshares to do deals. As such,he predicts “there will bemore acquisitions to comesince many tech stockssurged last year.”

Financial InstitutionsFollowing the announced$58 billion merger ofJPMorgan Chase andBankOne, and Bank ofAmerica’s acquisition ofFleetBoston Financial for$43 billion, the financial

institutions sector is rifewith speculation of moreM&A activity to come.

In a recent pan-Europeanstudy, Credit Suisse analystssaid that with economiesrecovering, capital buildingup and questions over futureearnings growth “somemanagement teams maynow feel under pressure toturn to acquisitions as a wayof boosting earnings”.

Co-CEO of Credit SuisseOswald Grubel has said hesees opportunities foracquisition-led expansion inGermany and MBNA EuropeCEO General Charles Krulakis expecting furtherconsolidation in the creditcard business, following hiscompany’s purchase of thecredit card books of UKbanks Abbey and Alliance &Leicester (A&L).

“Over a period of timethere will be banks whoissue credit cards right nowwho say maybe the ideawould be to do somethinglike Abbey and A&L havedone. I think you will seeconsolidation.

“The questions regardingEgg [which has been put upfor auction by Prudential]are an example of that,where you have a very nicebusiness that is owned by ashareholder who is sayingmaybe someone else can dothis,” adds Krulak.

Meanwhile, BNP ParibasCEO Baudouin Prot says heis “actively searching” foracquisitions to follow thepattern set by the €9 billionof deals done by the banksince the merger of BNP andParibas in 1999. MW

Global consolidationefforts set to rise So begins the consolidation


MARKET FOCUS

» Biggest off-loading ofshares undertaken » Privatisation toregenerate state-ownedindustry» ONGC 10% stake sale

March 2004 is gearing up tobe a busy month in theIndian equity markets. Somuch so that investors havealready nicknamed itprivatization month.

Privatization month willsee the biggest off-loading ofshares ever undertaken bythe Indian government (orany government worldwide)– it will divest more than $3billion of state-owned stock.If the part-privatization is

fully subscribed it willbecome the largest equityplacement in India’s capitalmarket history.

The equity sale formspart of a governmentinitiative designed toregenerate a percentage ofthe country’s hithertotraditionally state-ownedand controlled industries.By selling a proportion oftheir share holdings,expanding the capitalmarket base and increasingliquidity, the IndianGovernment hopes toattract foreign investmentand intellectual expertise.

“The government islooking to establish

widespread ownership, andeventually, a totaldivestment in companiesthat it perceives as being innon-core areas, i.e. sectorsthat are not classified asaffecting national security,”says Ravi Menon, director ofinvestment banking atHSBC in Mumbai.

“This is all part of agovernment initiative thatreally kicked off in June2003, when the IPO fromMaruti began to open up thedomestic equity markets toforeign institutionalinvestors,” says YogeshShetty, group director ofcommercial foreignexchange at Travelex.

The government’s jewelin the crown, and ahighlight of privatisationmonth, will be the publicoffering of a 10% stake inthe Oil and Natural GasCorporation (ONGC) India’slargest domestic companyby market capitalisation,worth an estimated $2.5billion. The governmentowns 84% of ONGC atpresent and will retain amajority stake in thecompany, along witheffective control after thesale is completed.

Other state-ownedheavyweights hitting themarkets in March includeGail, the largest gasdistributor, the Bank ofMaharashtra, IBP, the oilretailer, and the DredgingCorporation.

The Government hastried and failed in the pastto partly privatise some ofIndia’s largest state-owned

Indian government pavesway for privatisation

»Nokia plans to buy outPsion’s share in Symbian,in a move to consolidate itsinfluence on the operatingsystem used in mostEuropean smart phones.The £135.7 million dealwould increase Nokia’sstake from 32.2% to 63.3%,but it is facing strongopposition from Psion’slargest shareholder whosays an IPO of Symbianshould be consideredinstead.

»Juniper Networks is toacquire network-securitysoftware maker NetScreenTechnologies for $3.6billion in stock. Juniper hasbeen buoyed by a recoveryin the telecoms sector. It

reported fourth quarter netincome of $14.7 million upfrom $8.5 million.

»Singapore-based STAssembly Test Servicesmade a $1.6 billion bid forSilicon Valley’s ChiPAC. Thedeal will create the third-largest company in the chipassembly and test services“back-end” service providermarket behind Amkortechnologies and AdvancedSemiconductor Engineering.

»Diners Club Malaysiaannounced the first asset-backed securitization for itscharge card receivables inMalaysia with the issuanceof Domayne AssetCorporation Bhd’s (DACB)RM132 million ($34.7million) Medium TermNotes of 3.5 years tenure.

Diners Club Malaysia willsell its charge cardreceivables on a revolvingbasis to DACB which will, inturn, raise the financing bydeclaring a trust over thesereceivables and issuingMTNs. This is the firstsecuritization deal of itskind in Malaysia.

»Russia’s sixth-largest oilcompany, OAO Tatneft,won approval from theTurkish government to buya majority of oil refinerTupras for $1.3 billion.Tupras controls 87% ofTurkey’s refining market.

»Enersur, the Peruvian-based subsidiary of Belgianenergy company Tractebel,won a 30-year concessionfrom the Peruviangovernment for the 130MW

Yuncan hydroelectricproject. Enersur bid $53million. Norway’s statepower company Statkraftand the US-based PSEGdeclined to take part in thebid.

»Financing for the largestpipeline project in history –the $3.65 billion Baku-Tbilisi-Cayhan – wascompleted in February. Thefinancing for the projectwhich spans threejurisdictions and over 1700km, needed 17,000signatures to be finalised.The project is beingdeveloped to provide aprimary export route for oilproduced off-shoreAzerbaijan.

»Suez-Tractebel ofBelgium and Mimag of

In brief


companies – in February2002 it privatised VNSL(Videsh Sanchar NigamLimited), one of India’slargest ISP providers, withonly limited success. Menonbelieves the government’stiming is better this timearound.

India is emerging as oneof the fastest growingeconomies in the world,propelled by rising

consumption, and therecord inflow of foreigninvestment. GDP is expectedto hit 7.5% in the fiscal yearto March. This figure is wayabove anything theEurozone or America canhope to achieve. As for thetiming of the sell-offs, itcould not be better: theequity capital markets haveexperienced anunprecedented bull run in

the last six months (theysaw a 60% rise in 2003). “It’sa great time for thegovernment to act. Thesefactors ensure that investorsare subscribing, and thegovernment gets a greatprice for its divested stock,”says Menon.

The performance of oneof the first deals to hit themarkets certainly bodeswell. Petrochemical

company IPCL’s shares havesoared 97.8% over the last 12months and the offeringwas healthilyoversubscribed by 10% asinvestors flocked to whatthey see as stable companieswith under-valuationmandates. “Many of thesecompanies are extremelyhealthy and are blue-chip intheir own right,” saysMenon. JE

Turkey, closed a $475million financing for theBaymina power projectnear Ankara, Turkey.

»Fiat’s asset sale programwas completed in Februarywith the sale of 70% of FiatEngineering to privatelyheld Maire Holding for€80.5 million ($101.7million). In 2003 thecompany sold insurancecompany ToroAssicurazioni to publisherDe Agostini for €2.4 billionand Fiat Avio for €1.4billion to the CarlyleGroup and Finmeccanica.

»Singapore saw its largestIPO of the year in February.UTAC’s offer was 32.5

times oversubscribed. Thesemiconductor test andassembly company raisedS$182.6 million ($107million).

»Las Vegas-based BoydGaming is to buy rival CoastCasinos for $1.3 billion incash, stock and debt.

»Brazil’s two largestairlines Varig and Tamhave decided againstmerging. They spent a yearnegotiating, unsuccessfully,to deal with a complexownership structure, largedebt and legal challenges.They will instead form asmall joint venture andexpand their code-sharingarrangement.

»The Mexican governmenthas approved Spanish bank

BBVA’s $4.2 billion offer tobuy the remaining 40.6% ofMexico’s BBVA Bancomerthat it does not own. Thiswill take BBVA Bancomerout of the Mexico City stockmarket, where it is thelargest financial servicesstock accounting for 85% ofthe financial services index.This deal, in combinationwith the recent buyout ofMexican cement firmApasco by Swiss Holcim,will reduce the liquidity ofthe Mexican stock exchangeby 10%, according toanalysis by UBS Warburg.

»PwC expects the volumeof IPOs in China to grow by70% in 2004. The firmbelieves 100 companies willgo public in Hong Kong in2004, raising approximatelyHK$100 billion ($12.9

billion) compared to HK$59billion raised in 2003. IPOsby Chinese companiescould account for 80% offunds raised in Hong Kong,with large listings expectedfrom China ConstructionBank and Minsheng Bank.

»Aventis, the Franco-German pharmaceuticalcompany fending off a €46billion bid from Sanofi-Synthelabo, has gone onthe offensive. It hasannounced plans to buy-back between €2 to3 billionof shares, and dispose ofnon-strategic products inan effort to streamline thebusiness. Aventis’schairman, Igor Landau,says that Sanofi’s €46billion offer hadfundamentallyundervalued the group.

In brief

Indian IPO Quarterly Breakdown 01/01/00 - 20/02/04Amt. m (US$) Iss.

2000 1st Quarter 29.78 32000 2nd Quarter 66.34 32000 3rd Quarter 22.37 12000 4th Quarter 50.85 62001 1st Quarter 44.83 52001 3rd Quarter 0.96 12002 1st Quarter 205.72 22002 2nd Quarter 42.85 12002 3rd Quarter 59.19 12002 4th Quarter 92.51 22003 1st Quarter 9.91 12003 2nd Quarter 213.66 12003 3rd Quarter 63.15 42003 4th Quarter 72.38 22004 1st Quarter 150.18 3

Follow-ons by Indian Issuers 01/01/00 - 20/02/04Amt. m (US$) Iss.

2000 1st Quarter 499.49 42000 2nd Quarter 108.75 12000 3rd Quarter 86.38 22000 4th Quarter 130.85 12001 1st Quarter 0.00 02001 2nd Quarter 294.69 22001 3rd Quarter 172.50 12001 4th Quarter 0.00 02002 1st Quarter 0.00 02002 2nd Quarter 0.00 02002 3rd Quarter 50.00 12003 1st Quarter 0.00 02003 2nd Quarter 0.00 02003 3rd Quarter 346.25 22003 4th Quarter 87.97 22004 1st Quarter 0.00 0

SOU

RCE

: DE

ALO

GIC

SOU

RCE

: DE

ALO

GIC


MOVING ON

When CF spoke to JohnCavanaugh in February, itwas surprised to learn thattwo weeks into his newly-created role of assistanttreasurer for Goodyear TireCompany, he didn’t have anoffice or a phone.

Cavanaugh, 33, a formerUS marine, joined Goodyearin July 2003 as director offinancial strategy beforebeing promoted to assistanttreasurer by Goodyear’streasurer Darren Wells, whorecognised there was a needfor a skilled andexperienced assistanttreasurer to assist with thethe restructuring.

The past two years havebeen difficult for the tyrecompany. It has lost $1.3billion in revenue and facedconsiderable difficultycutting costs because ofprotracted trade union talksin the US. Things picked upin April 2003, when a three-year $1 billion cost-cuttingdeal was agreed on with theunions and there wasfurther good news inSeptember when it achievedthe partial restructuring ofits corporate debt with thereplacement of a largelyunsecured portion of $2.94billion in financing with$3.3 billion in secured creditlines. Reports of accountingerrors, uncovered inOctober worth $84.7 millionsince 1998, and an SECinvestigation, set it back.

“The move to assistanttreasurer is at the forefrontof Goodyear’s refinancing

plans,” says Cavanaugh.There was an assistanttreasurer at Goodyear 10years ago, but the positionwas deemed surplus tonecessity as the company’sfortunes grew. “As thecompany ran in to problemsthe need to reorganise thetreasury to deal with thecomplexities it facedbecame more important.”So how does his role differto that of director offinancial strategy?

More responsibility, saysCavanaugh. “As director offinancial strategy, I wasresponsible for domesticand international financing,foreign currency, and tosome degree corporatereporting. Now I managecash management and thebanking and rating agencyrelationships too.” Not aneasy task. Goodyear’s planto operate a $650 millioncredit line has promptedS&P to downgrade itsexisting bank loan andnotes from BB- to B+. Fitchalso downgradedGoodyear’s seniorunsecured rating to CCC+from B, affecting around $5billion worth of debt.

“Obviously, coming fromKmart, which is aninvestment grade company,the finances at Goodyearwill be more of a challenge.In an investment gradecompany, there is much lessreliance on the banks toprovide liquidity and cash.You can access the CPmarkets or put up an asset-

backed receivablesprogramme, for example. Ata sub-investment gradecompany you are reliant onthe banks for a liquidityfunding line to draw on.”

Cavanaugh’s immediateconcern is to help turn thecompany round, a processthat will take some years, hesays, but that’s not to sayhe’s not looking ahead toGoodyear’s rejuvenation.“After we have stabilised thecompany, the next bigchallenge is to manage cashglobally. Historically,Goodyear has beendecentralised but we plan toput a system in place whichwill allow us to move cashacross borders more easilyand that provides capitalwhen it is needed. Wewould also like to be able tomanage the costs ofmanaging the cash.”

The ‘we’ here isCavanaugh and DarrenWells, Goodyear’s treasurerand a past colleague ofCavanaugh’s. The pairworked together at Visteon -the principal supplier ofparts to Ford and fromwhere both joinedGoodyear. Wells joinedGoodyear in the summer of2002 as vice-president andtreasurer and obviouslyrates Cavanaugh’sexperience enough to bringhim on board.

“I have worked withtalented people, and I verymuch enjoyed working forDarren. When he left wekept in touch. The move to

Goodyear was an obviousone. I was the director ofcapital markets at Visteon,and so was familiar with therefinancing procedurebefore I joined,” explainsCavanaugh. “As such, I wasable to come in to thecompany and help rightaway.” RP

AT 33, CAVANAUGH ISCLIMBING QUICKLY

John Cavanaugh spent fiveyears in the US Marine Corps,before opting for a careerchange. “Smartening up,” hecalls it. An MBA stimulatedhis interest in finance and aCFA qualification followedbefore a position at Kmart. “Ienjoy the financial engineeringaspect to treasury, I enjoy therelationships you develop withlenders and optimizing thecapital structure of thecompany.”

»Feb 2004: appointedassistant treasurer atGoodyear»2003 – Jan 2004:director of financial strategy atGoodyear»2000 – 2003: director ofcapital markets at Visteon»1998 – 2000: involved infinancial analysis and treasuryat Kmart

Mover of the month: John Cavanaugh, Goodyear

‘New’ assistant treasurerpost for Cavanaugh

“The finances at Goodyearwill be a challenge. In aninvestment grade companythere is much less relianceon the banks to provideliquidity and cash.”

Rock stars can be quitehard to find in the world ofcorporate finance,although we did once speakto the accountant for PinkFloyd. And CF isn’t about todeliver a rock profile but ithas found a strong link tothe world of pop withAnthony Crudele, therecently appointed CFO ofGibson Guitar.

CF: So what’s it like to be afinance man in theentertainment industry?AC: Although we are anentertainment company,our core business unitcentres on themanufacturing of frettedinstruments.

CF: But manufacturing Gibsonguitars is surely more sexy thantraditional manufacturing, isn’t it?AC: Technology is a greatchange agent and our CEO,[Henry Juszkiewicz], hasutilized technology toimprove our businessprocesses in manufacturingas well as to bring thepower of the Gibson brandto bear in other areas andparts of the world. In justthe last few years, we haveexpanded the Gibson nameinto web based retail,bricks and mortar retail,artist showcases and mostrecently in digital audio.

CF: You bring 25 yearsexperience to Gibson. How willyou use it? AC: By working in thetrenches [Crudele was

controller at SportsAuthority before beingappointed to CFO] you gaina thorough understandingof the critical nature ofcontrols and how abreakdown can have acrippling effect. It alsoprovides a more disciplinedand organized approach toproject management andday-to-day administration.This allows you tounderstand your businessand grow it. As you gainexperience, then you canlead. The glitz – IPO, M&A,debt deals – is greatexperience, but it’sworking with the operatorsthat is the foundation stoneof a strong CFO.

CF: So how will you spend theearly months at Gibson?AC: In my first year I willbe focusing on harnessingthe full power of oursystems to providefinancial information forreal-time decision making. Ialso want to provideleadership to the financearea so that it is perceivedas a value add partner. Weare a decentralisedorganisation and I believethat we can highlightefficiencies throughout theorganisation and enhanceproductivity.

Our sector hasconsistently had steadygrowth; but at Gibson wewant to be a leader. We areconstantly looking atadvancements and have tobe selective in how weallocate our resources. We

have made a significantinvestment in two areas –developing the technologyfor a digital guitar anddeveloping an extremelyuser friendly digitaljukebox. Making sure weare properly capitalizedand have the appropriatebusiness partners to movethese ventures forwardwas/is a priority.

CF: What does ‘properlycapitalized’ mean?AC: We have alwaysleveraged our growth andhave continued to do so. Werecently completed arefinancing with twopremier partners – FleetCapital and BlackstonePartners. We look at ourbankers as businesspartners. I consult withthem on business issues andtheir varied backgroundsprovide a strong experiencebase which is invaluable.Blackstone’s equity anddebt groups are premierWall Street professionalsand have access to resourcesthat otherwise may not beaccessible.

CF: Do the scandals at publiccorporations affect the world ofprivate corporations?AC: A lot has been saidabout accountingmisappropriations and SECscrutiny, but as a privatecompany, we are focusedon growing a business.

CF: And do private investorsdiffer from their publiccounterparts?

AC: We have limitedoutside investors, butreacting to our board ofdirectors and lenders isquite similar to dealing withoutside investors. Questionswill vary from generalquestions about thebusiness to deep probinginterrogations whichrequire extensive analysis.

The most significantdifference between us and apublicly traded company isthe ability to shareinformation more openlywith our business partnersand investors. In the publicarena, you must ensureequitable dissemination ofdata to all parties; andtherefore, you must beguarded in your commentsprior to a general pressrelease of the information.

CF: So as the CFO of GibsonGuitars, can CF assume youplay the instrument yourself? AC: I enjoy all types ofmusic and would neverwant to do anything toharm the industry;therefore, I do not play anytype of instrument!Growing up, my brotherhad a Gibson and a GibsonAmplifier. So my musicalcareer ended on the bestequipment. RP

Crudele strikes a chordwith Gibson Guitars

“As you gain experience,then you can lead. The glitzof an IPO, M&A and debtdeals is great, but it’sworking with the operatorsthat is the foundation stoneof a strong CFO.”



MOVING ON

Adam Chibib, recentlyappointed CFO ofTippingPoint Technologies,a provider of intrusionprevention technology -network securitymanagement to the ITilliterate - has made asuccessful career for himselfin technology all withoutleaving Austin, Texas, hishometown since age 10.

Following a degree inbusiness administrationfrom the University of Texasat Austin, Chibib started hiscareer in accountancyworking for FranklinFederal Bancorp. But eventhen he had an inclinationtowards technology and wasresponsible for thecompany’s successfulconversion to newaccounting software.

“Public accountancy wasa great starting point for mycareer,” says Chibib. “Ittaught me how toeffectively solve differenttypes of problems, atdifferent companies, indifferent industries. Fromthese collective experiencesI was able to learn the bestway to build operationalinfrastructure.”

After stints at Coopers &Lybrand and PriceWaterhouse where he wasTechnology Industry groupmanager, Chibib made thejump to software companyTivoli Systems. He wascontroller and responsiblefor the worldwideaccounting functions of themulti-billion dollarcompany.

“What attracted me totechnology companies wasthe chance to apply thetechniques I had learned inpublic accountancy to thetechnology start-upenvironment. Technologycompanies provided mewith the opportunity tobuild something from theground up and have theresponsibility for thesuccess or failure of thecompanies that I work for.”

That entrepreneurialspirit was given full reinwhen Chibib co-foundedbroadband softwareprovider BroadJump in1998. There he shaped thecompany by creating andimplementing the businessmodel, product licensingstrategies and all internalpolicies and procedures.Under his guidance, thecompany maintainedsequential quarter afterquarter revenue growth,from its first revenuequarter in late 1999, andwas profitable for the lastthree quarters of 2002 – twoquarters ahead of schedule.BroadJump earned revenuesof $50 million in 2002 – a137% increase over 2001 – invery challenging economictimes.

Those kind of resultsearned Chibib the 2002Ernst & Young Entrepreneurof the Year Award andhelped BroadJump achievemention in Deloitte &Touche’s “50 FastestGrowing Companies” list in2001. They also made itpossible for Chibib and his

team to sell the company inNovember 2002 to MotiveCommunications, in a stockfor stock transaction.

Not one to take themoney and run, Chibib tookover as CFO at WaveSetTechnologies in May 2003.Seven months later WaveSetmerged with SunMicrosystems and he movedon again. So why the moveto TippingPoint which is,after all, a listed companyand not a start-up? It comesdown to his entrepreneurialpersonality, says Chibib.

“The entrepreneurialspirit is alive and well atTippingPoint,” says Chibib.“The company is in agrowth phase so the keyfundamentals of my rolehave not really changed. Iam still focused onshareholder value, accurateand timely internal andexternal financial reporting,compliance with applicablelaws and smart growth. Theopportunity at TippingPointis as exciting andchallenging as any start-upthat I have worked for.”

Chibib has spent most ofhis first four weeks atTippingPoint looking at thecompany’s internal controls– “making sure that we areable to grow the companyefficiently and effectively[by] having the right team inplace, operational readiness,streamlined businessprocesses and the right levelof infrastructure.”

Looking ahead, Chibibsays that his financial goalfor the company is to create

shareholder value. He says:“Because we are an earlystage revenue company,shareholder value will mostlikely be created throughtop-line revenue growth anddriving the company toprofitability. Our focus willbe creating the rightbalance of investments toaccomplish this.”

But can TippingPointever achieve the amazinggrowth that BroadJump did?“The extraordinary growthat BroadJump was certainlyatypical for the economicclimate at that time.[However] I do see severalsimilarities betweenBroadJump andTippingPoint that, coupledwith an improvingeconomy, may provideTippingPoint with growthopportunities.

“TippingPoint has done atremendous job of definingthe intrusion preventionmarket and creating aworld-class product inUnityOne. [And] I think thatour sector will see bothvalidation and growth in2004. Corporations willbegin allocating budgetdollars to intrusionprevention solutions and wewill benefit from thematuration of our market,”says Chibib. MW

Technophile CFO turns toTippingPoint

“What attracted me totechnology companies wasthe chance to apply thetechniques I learned inpublic accountancy to atechnology start-up.”


Starting a new job in themiddle of a merger isprobably every CFO’snightmare, but for GregoryEisenhauer, newlyappointed CFO of ProxyMed,the electronic healthcaretransaction servicescompany, its all real.

Denied the luxury of ahoneymoon period, he hasspent his first two months atProxyMed dealing with anaudit, and figuring out howto manage Sarbanes-Oxley.

“It’s a lot to get up tospeed on and the wholecompany is in a state ofchange. Anytime you moveinto a new field there is awhole new language to learnbut I must say that everyoneis very excited about theopportunities this mergerwill bring, and they havereally helped my transitiongo quite smoothly.”

The merger is withPlanVista Solutions, anotherhealthcare claims serviceprovider. The twocompanies signed a three-year joint marketingagreement in June 2003, aprelude to merging, butcomplemented each otherso well they decided tocomplete the merger early.

Eisenhauer saw thebenefits of the mergerstraight away. “It is cheaperand more efficient toprocess claims electronicallyrather than manually. Butno one in the industry hasput this together before,selling certain aspects of ourservices to providers andother aspects to payers.With PlanVista we will havea unique footprint.

“The merger allows us toexpand the range of savingsto medical cost

management solutions.”The merger also puts

both companies at thecutting edge when dealingwith healthcare claims.“Healthcare lags behindother industries in usingtechnology to make itsprocesses more efficient. Butthe government willcontinue to apply pressureto the industry to increasethe automation to reducecosts and errors.”

Prior to ProxyMed,Eisenhauer worked for moretraditional healthcarecompanies. He worked atRehabCare Group, aprovider of therapyprogramme managementand temporary healthcarestaffing, ultimatelybecoming its CFO inSeptember 2000. Eisenhauerwas with RehabCare foralmost 10 years and during

his tenure there, revenuesgrew from $40 million toover $500 million.Eisenhauer left in May 2002to became CFO for USHealthworks, a nationaloccupational healthcareservices company.

Eisenhauer is ahealthcare veteran but likeall the best career choices, itwasn’t planned. His first jobwas with APEX Oil andSverdrup Corporation, aprovider of technologyengineering services. Hemoved to RehabCare whenhis boss at Sverdrup becameRehabCare’s CFO.

Similarly, Eisenhauerknew ProxyMed CEO MikeHoover and Nancy Ham,president and COO, beforemoving there. He is contentto stay. “Healthcare is agrowing field. [At ProxyMed]I liked the space, the growthopportunities and themanagement. It was theright time to join. I amfortunate to be joining acompany that representssuch an exceptional growthopportunity.” MW

ProxyMed recruitshealthcare veteran

»The New York StockExchange board ofdirectors has appointedAmy Butte as executivevice president with plansfor her to succeed KeithHelsby as CFO when heretires in April. Mostrecently Butte was chiefstrategist and CFO of CreditSuisse First Boston’sfinancial-services division.

»Uniform providerAngelica Corporation’s CFOTheodore Armstrong hasretired after 18 years withthe company. James

Shaffer, who has been withAngelica for nearly fiveyears as vice president andtreasurer, will succeedArmstrong as CFO.

»Generic drug makerAndrx has promoted formerfinance VP John Hanson toCFO. Former CFO AngeloMalahias has becomepresident.

»United Technologies, aprovider of products andservices to the buildingsystems and aerospaceindustries, has appointedtwo vice presidents toassume the responsibilitiesof CFO Stephen Page when

he retires on April 14.James Geisler has beennamed vice president,finance and Gregory Hayeshas been named VP,accounting and control.

»Discount retailer TJXCompanies has namedJeffrey Naylor, former CFOof Big Lots, CFO. FormerCFO Donald Campbellassumes the newly createdposition of executive vicepresident, chiefadministrative and businessdevelopment officer.

»Mary Winston, mostrecently vice president andcontroller of Visteon

Corporation, has beennamed as CFO of ScholasticCorporation. KevinMcEnery, who held thisposition since l995,resigned to pursue newcareer opportunities.

»Apple executive vicepresident and CFO FredAnderson will retire onJune 1 2004 and hand thereins over to senior vicepresident of finance andcorporate controller PeterOppenheimer. Andersonwill be appointed to theboard of directors upon hisretirement. He currentlyserves on the board of eBayand E.piphany.

In brief


CFO PROFILE

“Financing €68 billiondebt was the easy bit.”In December 2002 France Telecom had €68 billion in debt andwas being bailed out by the French Government. A year laterdebt has reduced by a third and the company is successfullyplaying the capital markets. Tabitha Neville talks to MichelCombes, the modest finance chief at the centre of it all.

“2003 was a good year in terms of revenue growth. It was ayear in which France Telecom took control of its destiny again.“

ILLU

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It is fair to say that France Telecomhas had a difficult couple of years.In fact, it is probably an under-statement when you look closelyat how far the company had

fallen down the financial black holeand how far it has had to travel to getout of it. There isn’t a better turnaroundstory around.

The teleocm company spent about€80 billion ($97.5 billion) in cash onexpansion between 1999 and 2000 (ithas 11.7 million customers over fivecontinents) and racked up more than€100 billion debt. Plans to refinanceand reduce the company’s debt werenot implemented due to the marketturnaround and by April 2001 the com-pany’s share price had fallen 70% anddebt had ballooned to €60 billion (pre-ceding the fall, France Telecom’s (FT)shares had climbed 200% in less thansix months).

In December 2002, the French gov-ernment advanced a €9 billion loan tohelp the company out of its deepeningfinancial crisis, and to prevent it miss-ing a €15 billion debt repayment in2003. For 2002, FT reported a record fullyear loss of €20.7 billion.

In February 2004, the companyreported revenues of €46.1 billion. Thecompany’s full-year net profit was €3.2billion a €23.9 billion turnaround from2002. Group debt amounted to €45 bil-lion at the end of 2003 compared to €68billion a year earlier.

CF caught up with Michel Combes,CFO of France Telecom, on the day thecompany issued a €2.5 billion threetranche deal in euros and sterling. Aftera year’s absence the company’s bondswere oversubscribed across all threematurities – the £500 million tranchewas three times oversubscribed and the€750 million eight-year tranche fourtimes – which enabled the company’sbookrunners DrKW, HSBC, JPMorgan,SG and Natexis to increase all threetranches. The banks were delightedwith the deal’s reception but Combesplays its success down.

“Markets are generally good at thebeginning of the year, and the recep-tion our issuance received is areflection of this and of the scarcity ofcorporate bonds coming to market.”

The €2.5 billion issue was a technical refinancing move, and a lia-bility management exercise, saysCombes; a debt optimisation process.“The conditions of the three tranchesare better than the average cost of debtfor FT at the tme and it was not a ques-tion of liquidity but a question ofreprofiling debt and rebalancing currencies. We had low reimbursementin 2007 and 2008 and no reimburse-ment in 2012, 2013 and 2014. The bondimproves this maturity profile. It wasan opportunistic move by us [FT is cashflow generative and positive and has noneed for funds] and allowed us to strikea better balance between our euro andsterling debt. Our sterling cash genera-tion is rising and it seemed anappropriate time for increase in sterling denominated debt.”

More importantly, the success of thebond demonstrated the quality of FT’scredit and the financial markets’ voteof confidence in FT’s financial health. Itwas also further vindication of the com-pany’s management, turnaround plansand execution. It is a long way from the

state of affairs in December 2002, whenFT struggled to raise financing in thecapital markets and avoid a liquiditycrisis. “We were facing such huge reim-bursement amounts that the marketswere effectively closed to us.

“What has been achieved in the last12 months is due to a dedicatedmanagement team with clear strategicgoals and strong execution skills,” saysCombes.

On December 4 2002, the same daythe French government agreed its €9billion bailout of the company, ThierryBreton, CEO, announced the initiativethat was to turn the company around.

Called the FT2005, the initiativeincluded: TOP – a program to improveoperational performance and generatemore than €15 billion in free cash flowto reduce debt; and 15+15+15 – a planto strengthen the group’s financial structure through the TOP program,raising €15 billion in equity and €15 billion from refinancing the company’sdebt (see box). The majority of savingsin 2003 concerned optimization ofinvestments and working capital

France Telecomlaunched FT 2005, inDecember 2002. It wasan initiative comprisingfour components:»TOP: a program toimprove operationalperformance, whichwill generate more than€15 billion in free cashflow to reduce debt forthe period 2003-2005;»“15+15+15”: a plan tostrengthen the group’sfinancial structure;»€15 billion via the TOPprogram;»€15 billion in freshequity, with theparticipation of theFrench State in itscapacity as shareholder

pro rata to itsshareholding interest,i.e. for approximately €9billion;»€15 billion euros fromrefinancing debt;»A strategy focused oncustomer satisfactionand integratedoperationalmanagement of aportfolio of assetscomprising businessesthat are leaders in theirprincipal markets, withstrong brands such asFrance Telecom,Orange, Wanadoo andEquant. Assets withweak strategic andfinancial positions orthose for whichmajority control is notpossible will beconsidered fordivestment. FranceTelecom will pursue

strategic partnerships inareas outside its coreactivities or those whereit cannot achieve criticalmass;»A completely newmanagement team ledby Thierry Breton,with asimplified organizationand greaterresponsibility assignedto managers.

Just over a year later,the company hasreduced its on-balance-sheet net debt by €23.8billion to €44.2 billion.The TOP indicator“Operating incomebefore depreciation andamortization lessCapex” increased by66.1% on a comparablebasis (63.4% on ahistorical basis), toreach €12.2 billion atDecember 31, 2003.

FT 2005:break down


requirements. Additional free cashflow would be generated from fixed-line activities in France (40% to 45%) andby Orange (35% to 45%). Wanadoo willaccount for less than three per cent ofthe total.

The company also aimed to achievegreater strategic and financial flexibility with the aim of a net debt/EBITDA ratio of between 1.5 and two bythe end of 2005.

It was an ambitious plan, admitsCombes, but the market believed in itand, as a consequence, reopened to thecompany in December 2002.

France Telecom wasted no time inacting upon the new initiative andaddressing its liquidity crisis. On 11December 2002, it issued a €2.5 billion,seven year eurobond. This was followedup in January 2003 with a €5.5 billionbond which covered the refinancing ofdebt maturing in 2003. In February, thecompany secured the signing of a newthree-year syndicated credit facility for€5 billion. It was a turning point for thecompany.

“The liquidity crisis that was facingus at the end of 2002 was over by Feb-ruary 2003.” In late February, FT’sshareholders approved plans for equityissuance of up to €30 billion and onMarch 24, the company launched itslong-awaited €15bn ($15.9bn) rightsissue, representing the third tranche ofits €45bn rescue plan. Some €9bn of theissue was taken up by Erap, a publicbody that holds the industrial stakes ofthe French state, which owns 54.5% ofFrance Telecom.

In its Q1 2003 results, released inApril 2003, FT achieved an EBITDA mar-gin of 36.2% (32% 2002) and EBITDA netof capital expenditure reached 27% ofsales compared to 15% in 2002. Almostimmediately, S&P raised its long and

short-term corporate credit rating on FTto BBB from BBB- and A-2 to A-3 ( S&P hasjust raised its long-term outlook toBBB+). Fitch swiftly followed. For a com-pany that saw its credit rating go fromthe top to the bottom of the investmentgrade scale between 1996 and 2002, thiswas a tremendous achievement.

“The rating in itself is not a commit-ment of the management team,” saysCombe, who reemphasizes that the.company’s objective and commitmentvis a vis the financial markets is toreach a net debt/EBITDA ratio ofbetween 1.5 and two by the end of 2005.“This level of leverage will mean wehave the same leverage as a single Arated company. The rating therefore isonly a result of our commitment. Thespreads we got on our bond issue thisJanuary reflects the good assessment ofFT credit quality by the market.

“It signals that the company is oper-ating as a normal company again andthat the market believes in FT and

believes in our future in telecoms. I amproud to be working for one of themain European players again.” cf

CFO PROFILE

“The rating in itself is not acommitment of themanagement team. Ourobjective is a netdebt/EBITDA ratio ofbetween 1.5 and two by theend of 2005.“

France Telecom is one ofthe few telecomoperators with apresence in wireless(Orange), the internet(Wanadoo), fixed-lineservices and corporatesolutions. It hasmanaged this throughan aggressiveacquisition policy whichsurfaced late in 2003,when it bought outOrange shareholdersand in February when itput forward a proposalto do the same forWanadoo shareholders.

In September 2003,FT agreed to pay €7.1billion in stock to buy-out minorityshareholders in Orange– just 30 months after it

spun its mobilesubsidiary off.

This move reflectedthe rapid return tohealth of FT and themove to reverse thedecentralised make-upof the company which,CEO Thierry Bretonclaims, did not let thegroup take maximumadvantage of thepotential synergiesacross different businesslines.

“Orange is core toFT’s strategy and that iswhy we decided tobuyout Orange minorityshareholders and takeover full ownership ofthe company,” saysCombes.

In February, FTlaunched a $4.9 billionoffer of cash and stockfor the remaining 29.4%of Wanadoo – itcurrently owns 71% ofthe company.

Wanadoo has seen itsshares rise over 60% inthe last year andreported net income of€159 million in 2003, upfrom €30 million in2002 and it has longbeen expected that FTwould make moves tosqueeze out theminority shareholders.

The deal, to befollowed by a listing ofWanadoo’s Yellow Pagesdirectory business, willenable the French Stateto reduce its stake in FTto 50% from 54.5%. ( Alaw was passed inDecember 2003allowing the FrenchGovernment to decreaseits stake in FranceTelecom. It has yet todeclare its intention todo so).

The offer put forwardby the company valuesWanadoo at €13.25billion ($16.56 billion).

Orange &Wanadoobuy-outs

COMBES’S CAREER PATH

»Michel Combes, 40, began his career atFrance Telecom in 1986 working onexternal networks and industrial andinternational affairs. In January 2003, hewas appointed CFO.»In February 2004, Combes steppeddown as non-executive director ofEurotunnel citing an increased workload atFrance Telecom.»In 1991 he was appointed technicaladvisor to the Minister of Post,Telecommunications and Space, then to theMinister of Public Works, Transport andTourism. He returned to France Telecom inJune 1995. »Combes was executive vice president ofthe Nouvelles Frontières Group fromDecember 1999 to the end of 2001.


TREASURER’S VIEW

Hands up those who knowwhat TWIST, SWIFT, FIX,Identrus, Eleanor andRosettaNet are about.There aren’t many of you,

are there? Well, let CF explain. They areall organisations pushing for standard-ized messaging in the corporate andbanking spheres.

Of the six groups, only TWIST andRosettaNet are directly open to corpo-rate membership, but all of them caninfluence the daily working life of youthe corporate treasurer.

Applying new message standardsaround the commercial paymentsprocess based on XML can bring thefollowing additional benefits to corpo-rates:»increased process transparencythrough tracking of payments based onstatus information provided by thebanks;»improved STP in reconciling accountsreceivable to payments receivedthrough automatically delivered remit-tance details that are uniquely linked topayment transactions;»improved opportunities for cash posi-tioning and working capital financing,based on the effective use of informa-tion available on future payments.

“Corporate treasurers spend 90% oftheir time involved in the internal provision of liquidity and gathering liq-uidity, so for a treasurer his neck is onthe line for 90% of the time,” says Tom

Buschman, development manager atShell Finance Services. If this is the case,then the liquidity improvements theorganisations promise by way ofimproving business processes for theglobal trade lifecycle, will be an impor-tant weapon for the treasurer.

Buschman is one of the drivingforces behind TWIST, a relative new-comer in the world of paymentsorganisations. TWIST – or the treasuryworkstation integration standardsteam – was founded in 2001 and boasts

70 members including treasury indus-try bodies and investment banks. Itsavowed goal is to create a not-for-profitindustry group driving towards openand universal standards to allow corporate treasurers to communicatewith their banks, brokers and elec-tronic trading platforms for FX andother financial instruments.

TWIST is one among many vying forthe ultimate prize – a universal, openand non-proprietary standard. But whatexactly do the other organisations do? cf

Getting to grips withtechnology puzzlesAs a corporate treasurer how do you manage to stay abreast ofdevelopments in the world of payments and messagingstandardization? With so many different organisations enteringthe market Robert Pink decided to take stock.

SWIFT – Society forWorldwide InterbankFinancialTelecommunication. What is it?: Its primeobjective is tocontribute to thecommercial success ofits members throughgreater automation ofthe end-to-end financialtransaction process. Itaims to be the globalfinancial community’sforemost messaginginfrastructure of lowestrisk and highestresilience.

FIX – FinancialInformation ExchangeProtocol.

What is it ?: A messagestandard for real-timeelectronic exchange ofsecurities transactions.

IdentrusWhat is it?: An identitymanagement, policyand standard definitionsetting organisationestablishing rules andprocesses fortechnology, riskmanagement, legalcontracts and businesspractice in the course ofbusiness-to-business e-commerce. It aims toassist organisations,including corporates, toapply identityauthentication.

EleanorWhat is it?: An Identrusinitiative to introducesecure, direct business-to-business paymentson the internet.

RosettaNetWhat is it?: Anelectronic messagingstandard and anindustry group settingmessaging standardsand business processesfor its members; its coremembers existprimarily in the Asianmarket.

It aims to create andimplement industrywide, open ebusinessprocess standards.


LEAD STORYVALUE CREATION

Business journalists,from their first dayon the job, are told toleave their preju-dices at the door ofthe office. Justbecause a reporter’scar isn’t working

doesn’t mean he can lay into Ford nexttime its results are released.

Nevertheless it was with a certaindegree of schadenfreude that I spoke toChaith Kondragunta, co-managingdirector of Stern Stewart Europe, twoweeks before we published this issue.

He calls me to talk about CF andStern Stewart’s survey of the top 25companies in Europe, the US, andJapan. At the same time, I’m on hold onmy mobile phone to Vodafone, theworld’s largest mobile telecom company. Having switched over to theirnetwork a week before, I’m already onmy third call to customer service.

“You should have asked them abouttheir poor MVA performance,” jokesKondragunta.

“I don’t think customer serviceworry about such things,” I reply.

“No, but their management will.”The schadenfreude resulted from the

revelation that Vodafone is ranked 25in CF’s survey of the top 25 corporatesin Europe by market value added (MVA)performance.

To be fair, coming bottom of a top 25poll is still something of an achieve-ment – they beat many othercompanies, of course. But Vodafone’slack of attentiveness in customer serv-ice seemed – to me at least – to be areasonable metaphor for a negativeMVA figure of 142,865 – well below

Vivendi Universal’s negative MVA of37,963, which is ranked at 24. Kondra-gunta doesn’t seem surprised byVodafone’s ranking. “The only surprisewould have been if Vodafone hadn’tbeen at the bottom of the list.”

As global consultants, Stern Stewarthelps companies develop a systematic

The value creation equationThe mantra of shareholder value gained sway years ago. Butwhich companies have embraced the concepts behindmanaging for shareholder value? And how do you measure itanyway? Working with global consultant Stern Stewart, CF hasendeavoured to find out. Tabitha Neville reports.

»MVAMathematically MVA isthe difference betweenmarket value –calculated as the sum ofthe market value ofequity, debt and themarket value ofoutstanding stockoptions – and thecompany’s investedcapital – the cashinvestors, both equity-and debt-holders,contributed to thecompany’s operations. Ahigh MVA indicates thecompany has createdsubstantial wealth forshareholders. MVA isequivalent to the presentvalue of all future

expected EVAs. Apositive MVA indicatesthat investors expect thecompany to generatesignificant amounts ofEVA in the future. Acompany with a negativeEVA but positive MVAcan mean one of severalthings: the marketexpects it to turnaround;that it may be a potentialtakeover candidate; orthat it is following abusiness cycle.

»EVAEconomic value added(EVA) is an estimate oftrue “economic” profit,or the amount by whichearnings exceed or fall

short of the requiredminimum rate of returnthat shareholders andlenders could get byinvesting in securities ofcomparable risk. In itssimplest form it’s acompany’s trading profit– net operating profitafter taxes paid (NOPAT)minus a capital chargefor both debt and equity.Stern Stewart has madechanges in thecaluculation of profitand capital to make theresult more realistic. Itcapitalises investmentsin intangible assetsplacing them on thebalance sheet wherethey belong.

What is...


focus on creating shareholder valuethrough its MVA/EVA (see box) performance ratios. The firm was theperfect choice to help CF create a ranking of top performing companies.

Both MVA and EVA are value-basedmetrics, which have grown in popularity as traditional accountingmetrics have been proven to be unreli-able. MVA is the difference between themarket value of a company (both equityand debt) and the capital entrusted toit. Put simply it is the differencebetween ‘cash in’ (what investors havecontributed) and ‘cash out’ (what theycould get by selling at today’s prices).

The true aim of a company should be tomaximise MVA rather than the value ofthe company – as this can be easilyachieved by investing increasingamounts of capital.

EVA essentially reflects the differ-ence between a company’s achievednet operating profit (NOPAT) in anygiven year and the net operating profitit needed to achieve in that year inorder to compensate shareholders forthe cost of capital.

Show me the moneyFinance executives have been spoutingplatitudes about shareholder value for

as long as most business consultantscan remember. As a consequence ofthis familiarity, there is a sizeable contingent of detractors – not leastbecause many companies only appearto pay lip service to it.

The faith that the market had inshareholder value, and the methods ofachieving it, has taken a severe beatingover the past five years. Corporate gov-ernance scandals, endless downgradesand executives massaging figures dom-inated the headlines and underminedconfidence further.

But the happy consequence of theserather distasteful events has been

CFOS LEADING JAPAN

NTT DoCoMo Keiji TachikawaTakeda Chemical Hiroshi TakaharaToyota Motor Fujio ChoCanon Toshizo TanakaEast Japan RailwayMasatake MatsudaTokyo Electric PowerShigemi TamuraNissan Motor Carlos GhosnSony Nobuyuki Idei

Honda Motor Takeo FukuiKDDI Tadashi OnoderaChubu Electric PowerTakatoshi FujitaniKansai Electric PowerHiroshi MorimotoKyushu Electric PowerMichisada KamataTohoku Electric PowerYasumasa MakutaToshiba Tadashi OkamuraItochu Sumitaka Fujita

Mitsui Tasuku KondoMitsubishi Ichiro MizunoNippon Steel Akira ChihayaNippon Telg. and Tel.Toyohiko TakabeMarubeni Nobuo KatsumataSumitomo Motoyuki Oka Fujitsu Hiroaki Kurokawa Hitachi Takashi MiyoshiMatsushita Electrical Kunio Nakamura

Top 25 Japan (by market value)Company Name Industry MVA Market Value Capital EVA NOPAT ROCE

1 NTT DoCoMo Inc Communications 56,603 95,349 38,746 915 3,310 8.54%2 Takeda Chemical Inds Pharmaceuticals 20,097 30,871 10,774 1,512 1,834 19.52%3 Toyota Motor Transport Equipment 19,277 132,370 113,092 2,784 6,683 6.74%4 Canon Electrical Machinery 15,386 30,337 14,950 658 1,515 10.24%5 East Japan Railway Land Transport 7,993 30,335 22,343 1,074 1,690 7.46%6 Tokyo Electric Power Electric Power and Gas 7,662 84,747 77,085 246 2,149 2.65%7 Nissan Motor Transport Equipment 6,742 49,083 42,341 2,082 3,306 7.84%8 Sony Electrical Machinery 6,570 37,262 30,692 (1,446) 813 2.54%9 Honda Motor Transport Equipment 5,385 47,738 42,353 1,856 3,076 8.14%10 KDDI Communication 3,736 22,612 18,877 (468) 670 3.41%11 Chubu Electric Power Electric Power and Gas 2,972 40,111 37,139 431 1,315 3.46%12 Kansai Electric Power Electric Power and Gas 2,570 40,886 38,316 365 1,294 3.30%13 Kyushu Electric Power Electric Power and Gas 626 23,434 22,808 197 747 3.12%14 Tohoku Electric Power Electric Power and Gas 600 22,510 21,910 319 852 3.71%15 Toshiba Electrical Machinery 155 21,722 21,567 (507) 455 2.05%16 Itochu Wholesale (817) 25,317 26,134 (194) 616 2.27%17 Mitsui Wholesale (935) 35,421 36,356 (176) 675 1.87%18 Mitsubishi Wholesale (1,013) 41,283 42,297 (134) 861 2.04%19 Nippon Steel Steel Products (1,155) 22,259 23,414 (245) 441 1.84%20 Nippon Telg. and Tel. Communication (1,580) 113,082 114,662 (277) 4,796 4.14%21 Marubeni Wholesale (2,481) 23,778 26,259 (128) 492 1.68%22 Sumitomo Wholesale (2,844) 28,639 31,483 (350) 479 1.71%23 Fujitsu Electrical Machinery (6,209) 20,101 26,311 (1,309) 190 0.73%24 Hitachi Electrical Machinery (10,567) 37,477 48,043 (1,778) 593 1.21%25 Matsushita Electrical Electrical Machinery (12,622) 26,789 39,411 (953) 642 1.62%

Market value as of 31 March 2003Capital as of 31 March 2003, year-end operating capitalExchange rate as of 31 March 2003, EUR per JPY 0.00776, source BloombergExcludes banks, insurance and other financial institutions SOURCE: STERN STEWART



greater assertiveness by shareholders.They are more eager than ever to discover exactly how much value cor-porate management has added to theirinvestment capital and spelling outwhat it is that the management teamshould be credited with achieving.

Value Based Management, based onMVA/EVA, is a management approachthat ensures corporations are run con-sistently on value – and normally onmaximising shareholder value. Itincludes creating value, managing forvalue and measuring value. It uses simple transparent metrics that notonly highlight where a company hasadded or destroyed shareholder valuebut gives investors a good indication ofhow capable the management team is.

Define shareholder value?Nurturing the conditions to best createshareholder wealth is harder than youmight think. Boards can often lack ashared perspective on how stock mar-kets evaluates corporate performance.Equally, they may not fully understandthe key strategic factors for creatingvalue in today’s market. That’s wherethe CFO is meant to step in.

The CFO has traditionally served as acompany’s shareholder value steward.He is often the first to introduce corevalue principles, is the one pushing forthe resources, methodologies and –most importantly – management timerequired to make ‘value´ work. It isinevitably he who argues that effectivecompany-wide programmes will return

many times the initial investment. So ifa CFO is the shareholder value steward,then a positive MVA/EVA is surely acredit to his strong leadership, clarity offocus and firm controls over cash.

But what is shareholder value?“Shareholder value is why we come towork everyday,” says Pat Mulva, head ofIR at Exxon Mobil, the world’s largest oilcompany (which does not have a CFO,by the way). “Everyday we compete forthat investment dollar and it is our jobto provide value to the people makingthat investment decision everyday.”

Mulva defines shareholder value asthe appreciation of the share price andthe long-term impact of dividends andshare buy-backs. In 2002, Exxon dis-tributed more than $10 billion to

Top 25 Europe (by market value)Company Name Industry MVA Market Value Capital EVA NOPAT ROCE

1 Shell combined Oil Comp - Integrated 93,946 195,314 90,772 6,125 12,416 15.9%2 GSK Medical - Drugs 86,968 121,994 37,503 6,347 9,107 25.7%3 BP PLC Oil Comp - Integrated 69,006 192,160 112,251 144 8,786 8.0%4 Novartis Medical - Drugs 59,662 96,985 37,260 2,743 5,252 13.8%5 Nokia OYJ Telecoms Equipment 56,686 73,530 16,671 2,429 3,852 24.6%6 Nestle SA Food-Misc 52,254 103,950 51,136 3,953 7,082 13.6%7 Total SA Oil Comp - Integrated 51,952 114,630 65,399 1,798 6,703 11.3%8 Roche Holding Medical - Drugs 43,661 89,207 42,126 (1,203) 1,742 4.0%9 ENI SPA Oil Comp - Integrated 28,990 84,195 53,111 1,471 5,729 11.0%10 Unilever Group Food-Misc 27,541 62,008 33,839 1,494 4,292 11.5%11 Carrefour SA Food-Retail 21,978 44,808 21,947 621 2,435 10.5%12 Orange SA Cellular Telecom 16,757 39,844 22,676 (6,049) (3,819) -15.4%13 Siemens AG Diversified 11,999 52,082 39,542 (1,031) 2,244 5.4%14 Philips Electronics Electonic Compo 11,548 31,170 19,443 (4,925) (2,907) -13.2%15 France Telecom Telephone - Integrated 11,360 113,852 92,711 (29,954) (18,476) -18.0%16 ENEL SPA Electric - Integrated 9,877 63,308 53,360 (1,289) 2,694 5.2%17 BASF AG Chemicals 8,556 32,077 23,125 249 2,043 8.9%18 Tesco PLC Food-Retail 8,143 26,609 18,404 305 1,776 10.1%19 E. ON AG Electric - Integrated 5,132 99,743 88,101 (5,408) 789 1.0%20 Telefonica SA Telephone - Integrated 4,834 83,745 73,398 (6,053) 996 1.3%21 DaimlerChrysler AG Autocars/Light Trucks 248 139,642 138,962 (9,128) 5,521 3.8%22 Deutsche Telekom AG Telephone - Integrated (2,005) 125,748 123,764 (20,258) (7,559) -5.6%23 Telecom Italia S Telephone - Integrated (17,723) 65,550 74,288 (4,638) 3,557 4.5%24 Vivendi Universal SA Media (37,963) 50,621 83,087 (10,413) (1,938) -1.9%25 Vodafone Group Cellular Telecom (143,865) 150,541 295,675 (11,676) 11,130 4.1%

Market value as of 31 December 2002Capital as of 31 December 2002, year-end operating capitalExchange rate as of 31 December 2002, EUR per USD 0.9531, source BloombergExcludes banks, insurance and other financial institutions SOURCE: STERN STEWART

CFOS LEADING EUROPE

Shell Judith BoyntonGSK John CoombeBP Byron GroteNovartis Raymond BreuNokia Olli Pekka KallasvuoNestle Wolfgang H ReichenbergerTotal Robert Castaigne

Roche Holding Erich HunzikerENI Marco MangiagalliUnilever Rudy MarkhamCarrefour Jose-Luis DuranOrange Wilfried VerstraeteSiemens Heinz-Joachim NeuburgerPhilips Jan H M HommenFrance Telecom Michel CombesENEL Fulvio Conti

BASF Kurt BockTesco Andrew Higginson (FD)E.ON Erhard SchipporeitTelefonica Santiago ValbuenaDaimlerChrysler Dr Manfred GentzDeutsche Telekom Karl-Gerhard EickTelecom Italia Enrico ParazziniVivendi Sandrine DufourVodafone Kenneth Hydon


shareholders through dividends andshare buybacks. In 2002, its dividendincreased for the 20th consecutive year.

There is little disagreement with thisbasic definition. Ladislas Paszkiewicz,head of IR at oil company Total, agreeswith Mulva’s definition of shareholdervalue as the sum of a contribution ofstock performance and yield throughdividend. Likewise, a spokesman atNovartis, the Swiss-based pharmaceu-tical giant asserts that, “The ultimatemeasure [of shareholder value] is thedevelopment of the share price, divi-dend pay outs and value of spin offs.”

But Paszkiewicz also says that share-holder value is simply a by-product ofhow well (or badly) a company per-

forms. “At Total, shareholder value isthe result of our emphasis to improvecompany performance. We controlwhat we deliver through the company’s internal plans that focus ongrowth and productivity. This trans-lates into shareholder value creation.The two are linked.”

Exxon’s overriding objective is tocreate sustainable shareholder value byseeking high returns at low risk andfocussing on the long-term, says Mulva.“Exxon has an investment discipline,operational excellence and is carefulwhere it invests. Exxon’s standards ofinvestment discipline have consis-tently delivered superior returnsdemonstrating we are using [investor’s]

capital wisely and creating long-termsustainable growth and value.”

Novartis takes a similar approach.“Novartis is committed to shareholdervalue but on a sustainable basis, notjust for optimising short termmeasures,” It attributes its success to aclear focus on sustainable growth, acorresponding, consistently innova-tion-oriented strategy, and thecapabilities and commitment of itsmanagement.

Interestingly, pharmaceutical com-panies, which feature strongly in thelisting, perform well in MVA measuresbecause of their investment in R&D.“MVA is made up of the future cash lineof the company,” says Stern Stewart

Top 25 US (by market value)Company Name Industry MVA Market Value Capital EVA NOPAT ROCE

1 Microsoft Corp Software & Services 208,888 233,329 24,441 1,025 4,371 17.75%2 General Electric Co Capital Goods 174,786 269,547 94,760 5,667 12,930 14.51%3 Wal-Mart Stores Retailing 174,198 244,370 70,171 2,797 8,652 13.03%4 Johnson & Johnson Pharmaceuticals 110,938 156,298 45,360 2,706 6,785 15.01%5 Merck & Co Pharmaceuticals 98,803 134,590 35,787 3,690 6,771 19.12%6 Coca-Cola Co Food 87,701 110,671 22,971 2,331 3,847 17.46%7 Procter & Gamble Co Household 85,514 125,333 39,818 1,835 4,824 12.99%8 Exxon Mobil Corp Energy 80,422 260,108 179,686 (2,072) 11,685 6.61%9 Intl Business Machines Technology Hardware 71,650 170,328 98,678 (7,655) 3,517 3.66%10 Dell Computer Corp Technology Hardware 60,659 67,533 6,874 356 1,229 17.64%11 Intel Corp Technology Hardware 56,961 92,397 35,436 (3,560) 2,282 6.25%12 United Parcel Service Inc Transportation 54,968 74,327 19,359 834 2,457 13.05%13 Lilly (Eli) & Co Pharmaceuticals 54,390 70,969 16,579 1,045 2,396 15.52%14 Pfizer Inc Pharmaceuticals 50,114 183,869 133,755 (3,367) 8,759 6.59%15 Pepsico Inc Food 47,326 77,093 29,767 1,032 3,073 10.55%16 Altria Group Inc Food 47,158 117,027 69,868 5,705 9,951 14.25%17 Cisco Systems Inc Technology Hardware 45,156 89,180 44,025 (5,616) 566 1.30%18 Bellsouth Corp Telecomms 21,488 67,993 46,505 (1,225) 3,697 7.76%19 Verizon Communications Telecomms 18,446 193,812 175,366 (5,349) 12,285 7.04%20 Chevrontexaco Corp Energy 6,725 92,812 86,087 (2,991) 3,248 3.76%21 Viacom Inc -Cl B Media 5,960 90,482 84,522 (4,854) 2,924 3.46%22 General Motors Corp Automobiles (14,724) 99,437 114,161 (6,014) 2,058 1.80%23 SBC Communications Inc Telecomms (24,649) 124,922 149,571 (8,287) 7,190 4.82%24 AT&T Corp Telecomms (61,066) 78,583 139,649 (27,148) (12,982) -8.70%25 AOL Time Warner Inc Media (79,113) 95,276 174,389 (31,211) (14,360) -8.01%

NOTE:Market value as of 31 December 2002Capital as of 31 December 2002, year-end operating capitalExchange rate as of 31 December 2002, EUR per USD 0.9531, source BloombergExcludes banks, insurance and other financial institutions

SOURCE: STERN STEWART

CFOS LEADING US

Microsoft John ConnorsGeneral Electric Dennis DammermanWal-Mart Stores Thomas SchoeweJohnson & Johnson Robert DarrettaMerck Judy LewentCoca-Cola Gary FayardProcter & Gamble Clayton Daley

Exxon Mobil N/A Intl Business Machines John JoyceDell Computer James SchneiderIntel Andy BryantUnited Parcel Service Scott Davis(Eli)Lilly Charles GoldenPfizer David ShedlarzPepsico Indra NooviAltria Group Dinyar Devitre

Cisco Systems Dennis PowellBellsouth Ronald DykesVerizon Comms Doreen TobenChevrontexaco John WatsonViacom Richard BresslerGeneral Motors John DevineSBC Comms Randall StephensonAT&T Thomas HortonAOL Time Warner Wayne Pace



Europe’s Kondragunta. “There is a lotmore future growth associated withcompanies with high R&D so naturallythey have a higher MVA.”

Value creationAn analysis of investments in the sharesof Stern Stewart’s publicly-owned USclients showed they produced 49% morewealth after five years than equalinvestments in shares of competitorswith similar market capitalisations.

How?As a company you are committed to

shareholder value creation. But do youunderstand where and how value isbeing created and where opportunities for value creation lie?MVA, EVA and value-based manage-ment companies do, saysKondragunta, and that is why those UScompanies produce 49% wealth.

Managers, and this essentiallymeans the CFO, at value-based man-

agement companies believe that thereare only three basic ways to increaseand manage value. The first is toincrease the returns from the assetsalready in the business by running theincome statement more efficientlywithout investing new capital. The sec-ond is to invest additional capital andaggressively build the business so longas expected returns on new invest-ments exceed the cost of capital. Andthe third is to release capital from exist-ing operations, both by selling assetsthat are worth more to others and byincreasing the efficiency of capital bysuch measures as turning working cap-ital faster and speeding up cycle times.

Total and Exxon do not subscribe tovalue-based management, but bothfirmly believe that the culture, strategyand financial controls of value-basedmanagement are firmly in place attheir companies.

“We have a global functional organ-isation operationally consistentthroughout. It is this consistentapproach that embraces the core prin-ciples at Exxon,” says Mulva.

Exxon subscribes to a high returnand low risk strategy, “not overcapital-ising on investment [but] being focusedon the long-term,” says Mulva. It is anapproach that has steered the companythroughout its history, and enabled it tooutperform its competitors over thepast 20 years. So how does Exxon measure the value its core principlesbring? Through return on capitalemployed (ROCE - income before finan-cial items relative to average capitalemployed). “Shareholders entrust uswith their capital and we tell them howwell we have managed it throughROCE. People understand ROCE. It is avery powerful,” says Mulva.

It is a similar tale at Total. “We runthe company from an industrial view-point. We allocate cash in an efficientmanner and measure through returnon average capital employed.” (ROACE- operating profit before amortizationof goodwill x 100/ average invested cap-ital, accumulated amortization ofgoodwill). “It is a consistent measure ofshareholder value in our industry andallows our investors to compare likewith like.” In its 2003 report, Total

Royal PhilipsElectronics, the thirdlargest global consumerelectronics maker, hasbeen using EVA as aninstrument to measurefinancial performancesince 1997.

Philips recognizedthat the normal netincome profit and lossaccount didn’t accountfor a company’s cost ofcapital, says groupcontroller GerardRuizendaal. “We wantedto make it visible so wecould understand thiscost.” EVA has sincebeen ingrained in thecompany’s standardsand is based on the costof capital that in eachactivity, reflects the riskrelated to the business,geography and effectivetax rates. “The mainidea is to improve ourEVA every year so ourreturn of capital is morethan our cost of capital,”says Ruizendaal.

One of Ruizendaal’smain responsibilities asgroup controller isperformancemanagement, “lookingat systems, metrics, andhow to measure thevalue of our strategies.”

Philips measuresvalue creation on astrategic level and forinvestments throughnet present valuetechniques, saysRuizendaal. At theoperating level, valuecreation is measured viaEVA. “With EVA youdon’t look to short-termmovements in shareprices, but toconsistently improvingthe returns above thecost of capital.”

EVA is not theexclusive measurementtool at Philips. Thecompany also uses thebusiness balancescorecard. Ruizendaalexplains: “Currentfinancial performance isessentially aconsequence of whatyou have achieved inthe past in the business,so we try to correlatethis financialperformance withleading non-financialdrivers such ascustomer satisfactionbased measurementsand process basedmeasurements.” (eg, onsupply chainperformance).

“All the decisionmaking tools must beconsistent for drivingvalue creation within

the company, and withevery year, with everyprocess, it becomes away of life.

Philips also looks athow to integrate EVAinto its staff incentivestructure, with EVAaccounting forapproximately 50% ofthe criteria for yearlybonus incentives. “Theamount of share optionsoffered to employeesdepends on the shareperformance versus 24benchmarkedcompanies, and theincentives are less if wedon’t outperformagainst our benchmarkpeers.”

Over the last twoyears, Philips hassystematically changedits portfolios tobusinesses with returnof capital greater thanthe cost of capital.Gerard Kleisterlee,president, emphasizedthis in his message inthe company’s 2003annual report, saying,that over the past yearPhilips had madeconsiderable progresson its journey to createOne Philips - a single,focused and clearlyidentifiable companygeared to sustainedvalue creation.

Philips


offered a cash dividend of €4.7 a share– a 15% increase on 2002. The ROACEwas 19% in 2003 – the highest levelamong its competitors.

Reward ProcessesShareholders invest in people. Theyentrust people with their capital. Butshareholders have learnt to their costthat they can be too trusting.

At the heart of the recent spate of corporate scandals are employeesmanipulating figures for their owngain. As financial incentives to achievetargets have become more attractivemore employees have massaged the fig-ures to achieve them.

Until recently, granting stockoptions had potentially hazardousimplications for long-term success at acompany. Firstly, in a rising marketthey tend to reward management thatisn’t necessarily creating shareholdervalue and may even be destroying it.Secondly, they focus attention on theshort-term – the perception that valuehas been created becomes as importantas creating value. Hence, the incentiveto massage figures.

How pay is tied to performance is athorny issue, but the structure of financial incentives has a key part toplay in preventing such corporate mis-demeanours from happening again.“Using EVA and MVA allows less roomfor gaming,” says Kondragunta.

Because EVA can be measured at anypoint in an organisation, bonuseslinked to EVA are a powerful influenceon corporate behaviour as you arealigning an employee’s interests to thelong-term value creation expected byinvestors. “The no improvements, nopay-off approach will incentiviseemployees to seek out truly profitablegrowth opportunities rather thaninvesting in wealth destroying ven-tures,” says Kondragunta. Acquiringcompanies at high premiums whilenever realising adequate returns on thecapital employed is a good example.EVA will capture the fact that profit isgrowing but not fast enough to com-pensate the rise in capital invested.

“We are all paid on the basis of performance with a long-term view,”says Mulva. “It is a broad-based incen-

tive scheme based on how we performas a company and how we performonan individual basis.” Novartis sees noantagonism between a company’sshare price performance and internalincentive and bonus schemes. “A risingstock price will in the long run reflectthe value creation. There is no contra-diction between the two.”

The true value of a good conversationValue-based management has beencredited with many things: increasedtransparency, lower capital costs, moreaccurate forecasting and improveddecision making. But Exxon Mobil’sMulva says that the real key to improving shareholder value is communicating with shareholders,investors, and the market. In fact justabout everyone.

“It is essential to communicate toour shareholders,” he says. “You can’tjust have one annual meeting and oneannual report.” Exxon has increased its

face-to-face public meetings and says ithas increased its output of informationten-fold, as its website testifies. If com-munication is the key, then the CFOs atcorporates we contacted are doing asterling job. The CFOs at Total, Nokia,Roche and Novartis were on trips glad-handing shareholders when CF called

Siemens introducedEVA in 1997. “It requiresmanagers to radicallyrethink all businessdecisions and to forgetROI and measureprofitability with an eyeon the cost of capital,”said Dr Karl HermannBaumann, CFO back in1997. He credits theintroduction of EVAwith helping to turnSiemens around.

Siemens has apositive economic valueadded (EVA) of €449million in fiscal 2003, animprovement of €768million compared to theprior year’s figure of anegative €319 million,excluding a €936million tax-free gain onthe sale of shares inInfineon. Including thisgain, EVA for fiscal 2002

was a positive €617million.

“Shareholder value isabout a strongperformance orientedculture and creating asustainable economicvalue – not only on aday-to-day-level – but ona sustainable basis inthe long term,” saysSabine Kromer,corporatecommunications officerat Siemens. “A centralaim for Siemens, as itwas defined by our CEOMr. v. Pierer in thecompanywide Ten-PointProgram in the year2000, is to generate apositive economic valueadded (EVA) and toimprove it further.

“We see innovationas a main driver forshareholder value in ourdaily business,” saysKromer. “At the

beginning of fiscal 2004we decided toconcentrate on threecompany-wideprograms: innovation,customers focus andglobal competitiveness.As part of ourinnovation program, wewill focus more ondeveloping trendsettingtechnologies and cross-group technologyplatforms. With ourcustomer focus programwe intend tosubstantially boostgrowth, but not at theexpense of earnings.Global competitivenessto us means that weplan to expand ourpresence at lower costlocations. This meanspurchasing,manufacturing,software developmentand administrativeservices.”

Siemens

ABOUT STERN STEWART

Stern Stewart is a global consulting firmthat specializes in helping clientcompanies in the measurement andcreation of shareholder wealth through theapplication of tools based on modernfinancial theory. The company pioneeredthe development of its proprietary EVA®(Economic Value Added) framework,which offers a consistent approach tosetting goals and measuring performance,communicating with investors, evaluatingstrategies, allocating capital, valuingacquisitions, and determining incentivebonuses that make managers think likeowners.


Facts & figures

30 Managing RiskThe volatility is self-evident by the see-sawing

we’ve seen in the currency markets and the scaleand speed of the moves during 2003.

34 Managing CashBanks are changing their approach to lending.

They focus on the most efficient use of their equity,so in the future, bank borrowing will be a lessattractive source of funding compared to CP.

38 Treasury LocationMuch of Glasgow’s growth and success can be

directly attributed to a flexible, stable andmotivated workforce with highly developed skillsfor the treasury shared service centre.

42 Cash & Tech With the corporate treasurer under increasing

scrutiny, and with increased certification, peoplewant to know where their cash is.

43 Legal Brief Sarbanes-Oxley is a well intentioned piece of

legislation. But the cost and time necessary toimplement and certify compliance with theprovisions is much greater than first expected.

44 M&A & Fee Analysis

47 FX Forecasts


MANAGING RISK FX FORECASTER OF THE YEAR

The past 12 months haven’tbeen easy for FX forecast-ers. The war in Iraq, SARSand only a fledglingrecovery of the world’s

economies have kept many of them ontheir toes.

But, judging by the results of theanalysis of FX forecasts published in CFduring 2003, some of the forecasters outthere have done a damn good job,despite these difficulties. (Some, to befair, have done a pretty poor job, butwe’ll leave you to work out who has eggover their face).

So, the results are in and for the firsttime in four years, CF is pleased toannounce a new titleholder of its FXForecaster of the year trophy. Or, to bemore precise, two new titleholders.Royal Bank of Scotland’s (RBoS) fore-

casting duo Neil Parker, marketingstrategist for G7 countries, and AdrianSchmidt, senior currency strategist,have toppled Societe Generale’s BobEveling from the top spot he has heldfor the past three years.

“We are very pleased to be numberone. We believe it is due, in part, to theclose working relationship that Adrianand me have at RBoS,” says Parker. AndRBoS deserves its place at the top of theleague table. Not only was it the overallwinner, but it placed first in cable and €-JPY – two currency pairs that saw someserious volatility during 2003 - and fin-ished in the top five of all the currencypairs we categorised in our leaguetables. “RBoS would expect to do verywell in cable, as it is our home market.We feel confident in predicting whatdrives this currency pair,” says Schmidt.

A volatile market - maybeDepending on which forecaster youtalk to, 2003 was either a very volatileyear or pretty flat. Such varying viewsmay explain the array of forecasts CFreceives every month.

“Volumes were massive in 2003,”says Trevor Williams, chief economist,financial market division at Lloyds TSB,“largely due to the volatility.” AndWilliams predicts 2004 to be as inter-esting, and busy, a year. “Theglobalisation of the world economymeans an increase in trade, and withChina and Russia joining in, capital

markets expanding and volatility ris-ing.” Parker agrees: “The volatility isself-evident by the see-sawing we’veseen in the currency markets and thescale and speed of the moves during2003. Moving forward, we’d expectvolatility to be high this year as well,although perhaps slightly lower thanlast year. Moves will remain abrupt andlarge by recent historical standards.”

Bob Eveling, senior vice president,FX and derivative sales at Societe Generale, disagrees with both Parkerand Williams: “Volatility levels becamerelatively flat as it became obvious theUSD was a one-way bet, i.e. it would godown. Apart from brief flurries onprofit-taking driven orders in general,volatility was quiet.”

USD weakeningFor most analysts, developing a weak-ening dollar strategy was the key to asuccessful 2003. Parker, for example,

How accurate areFX forecasts?Every month financial institutions across the UK provide CFwith their FX and interest-rate predictions. But how accurateare they? Jason Eden analyses the submissions for 2003 andreveals who is CF’s FX Forecaster of the Year.

METHODOLOGY

The methodology consists as follows:Each month the participants forecastwhere the spot rate will be in 3 monthstime. We have taken the mid-month spotrate for each applicable month andawarded the 10 nearest forecasters pointsstarting from 10 for a first place, down toone for 10th place. CF chose to rankforecasters by total points, not averagepoints, hence rewarding those who havebeen most diligent in providing forecastseach month.

OVERALL BEST FX FORECASTER BANK

Total Frequency Average Points points

RBoS 236 36 5.88Lloyds 228 37 6.16Societe Generale 222 42 5.42SEB 203 28 7.25Commerzbank 201 37 5.43UBS 184 33 6.90Citigroup 181 28 6.46AMEX 168 23 7.30CSFB 137 24 5.71

Currency volatility is an issue that con-cerns the finance department in everylarge corporation across the globe, andthe recent instances of a depreciatingdollar and a strengthening euro over

the last year provide ample evidence of the kindof challenges they face.

But how can a corporate treasurer gain greaterunderstanding of currency fluctuation or accessindependent price discovery and analytical toolsfor the FX options markets? CF decided to sit downwith GFI Group, an inter-dealer brokerage, mar-ket data and analytical software provider for theglobal cash markets, to get the inside view.

Activity in the currency options business is ris-ing, largely due to the levels of volatility that GFIhas seen in the FX markets over the last 12months. This volatility in FX increases the need forhedging and therefore the demand for pricingtools, such as GFI’s FENICS® FX.

So why is FENICS® FX such a good optionfor corporate treasurers?GFI’s FENICS® FX has over 15 years experiencedelivering transparent and independent front-office pricing and analysis software to themajority of banks active in FX options. But increas-ingly corporate treasurers of varying market capsare looking to adopt this kind of technology tomanage their company’s currency risk exposure.Nicola Williamson, the FENICS® FX product man-ager explains: “While some corporates engage incurrency hedging transactions of millions of dollars a day, any company hedging their currencyexposure with FX options would have use for FEN-ICS® FX.”

FENICS® FX has a range of analytical tools allow-ing users to perform “what if” analysis. It also runsthe critical reports required for instant overviewof currency derivative profiles and the system can

be customised and integrated with corporates’middle and back offices.

Judging from its existing client base theprospects for the product seem strong. As Fiatnotes: "We value FENICS® FX because it offers usan independent and accurate tool for pricing andrevaluing vanilla and exotic currency options"

“FENICS® FX also delivers independent data,”asserts Michel Everaert, global head of productdevelopment and marketing. “As a broker whichdoes not take market positions, GFI is ideally posi-tioned to provide corporate treasurers withhard-to-find, independent, real time and histori-cal market data.” Demand for GFI’s data services,particularly its popular daily Revaluations Fixinginitiative, is expected to grow over the comingmonths in response to new accounting standardsrequiring market participants to mark their deriv-atives positions to market. Corporate treasurersmight have the technology and advice from theirbanking partners but they also need the inde-pendent and objective perspective as well.

Pricing derivatives needs an independentmodel and independent data inputs. Everaertadds: “FASB 133 affects how you account for yourderivatives. As a treasurer you have to specify ifyou are using a hedging or speculative trade. If youcan’t account for the trade as a hedge you have touse a mark-to-market rate – in other words therate has to be ‘market observable’. That’s whereGFI steps in. Treasurers need a market observableprice for their trades.”

The installation of FENICS® FX can also com-pliment the relationship between a corporate andits bank. Because the product is widely used in theindustry it means major banks are conversantwith the technology. “You’d be hard pushed to findprofessionals in the industry who aren’t well-versed in the use of FENICS® FX”, points outWilliamson. cf

GFI GROUP OFFERS SOLUTIONS TO CORPORATE TREASURERS FORMANAGING CURRENCY RISK EXPOSURE

A STATEMENT BY GFI GROUP

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MANAGING RISK FX FORECASTER OF THE YEAR

attributes his success to “predicting theweakening dollar trend very early on”.

The dollar fell steadily against mostof its major trading partners through-out the latter half of 2003, including theeuro and the Japanese yen.

“The momentum of the dollardepreciation at year-end 2003 caughtme by surprise,” says Michael Schubert,senior economist at Commerzbank,“because this development was out ofline with the behaviour of the funda-mental factors.” Eveling, who wasranked first in 2000, 2001 and 2002, butwho is placed third this year, admits itcaught him on the hop too. “I have to behonest here and say that rather thandevelop a weakening USD strategy, itwas thrust upon me. My basis for pre-dicting the future rate does ratherdepend on spot levels at the time, soconsequently as the USD weakened mypredictions would as a matter of courselead to a weakening USD scenario.”

The factor most cited as the cause foran on-going fall of the US currency isthe unsustainability of the huge US cur-rent account, says Williams, whoforecast dollar weakness early in 2003.

“The current account deficit is caus-ing a major problem for the USeconomy and its currency level,” saysWilliams. “I wonder how the US gov-ernment is going to keep the currentaccount deficit under control and stopit getting to a level where drastic meas-ures have to be taken.” The downsideisn’t over yet, he adds, saying dollarweakness has another 10% to go.

Schubert disagrees with Williamsthat the US current account is the causeof the dollars fall. “Our analysis showsthat at least until November, the devel-opment of the dollar versus the eurocould be well explained by other fac-tors. Estimating the dollar-euroexchange rate on the basis of relativesector productivity differences and the10-year bond yield spreads leads to anaverage estimation error of just two percent. It would be premature to con-clude that the exchange rate during2003 was mainly driven by the market’sperception of the unsustainability ofthe current account deficit.

“The dollar’s decline has developeda momentum of its own, which we feelhas transformed into speculative exag-

It is early days, but whatare the eventscorporates should bekeeping an eye onwhen deciding their FXstrategy over thecoming months?

On the political front,Trevor Williams atLloyds TSB is keepingtabs on the presidentialelections in the US. “Theobvious politicalbanana-skin is the USpresidential election inNovember. It is difficultto call who will win atthis juncture.” BobEveling at SocieteGenerale, on the other

hand, doesn’t see muchfall-out from theelections. “If Kerry iselected then the statusquo will be maintainedin the USA,” he says.

Neil Parker at RBoS isconcerned with affairsnearer home. “The UKgovernment has comein for plenty of politicalpressure of late [two-fifths of the labourgovernment would liketo see Tony Blair, PM,quit before the nextelection according torecent reports in thepress] and its standingin the polls has sufferedaccordingly. We may seea surprise election.”

On the economicfront, Parker andEveling are inagreement. “As far as

economic banana-skinsare concerned, the riskssurrounding theChinese economy andcurrency and thepotential for revaluationof the yuan (or a movein the peg) could createturmoil in currencymarkets,” says Parker.For Williams it is the“continuing upside riskto the euro,” that iscausing him mostconcern. “Astrengthening euro willnot help the euro zoneexport their wayforward throughout2004,” he says.

Bananaskins for2004

€-JPYTotal Position Frequency Average

RBoS 52 1 7 7.43SocGen 39 2 7 5.57AMEX 32 3 4 8.00Lloyds 32 3 6 5.33SEB 31 5 5 6.20UBS 29 6 6 4.83ABN 28 7 4 7.00Citigroup 28 7 5 5.60Commerzbank 28 7 6 4.67CSFB 26 10 4 6.50

€-USDTotal Position Frequency Average

Lloyds 41 1 6 6.83RBS 41 1 6 6.83Citigroup 36 3 5 7.20AMEX 35 4 4 8.75Commerzbank 32 5 6 5.33CSFB 29 6 5 5.80UBS 28 7 5 5.60Bank Montreal 27 8 4 6.75SocGen 27 8 6 4.50HSBC 26 10 3 8.67

USD-JPYTotal Position Frequency Average

SocGen 48 1 8 6.00Lloyds 45 2 7 6.43SEB 43 3 6 7.17UBS 36 4 6 6.00RBoS 29 5 4 7.25Deutsche Bank 27 6 4 6.75HSBC 26 7 4 6.50AMEX 25 8 4 6.25CSFB 25 8 4 6.25JPMorgan 24 10 4 6.00

€-CHFTotal Position Frequency Average

Commerzbank 54 1 7 7.71Lloyds 45 2 7 6.43SEB 39 3 6 6.50RBoS 38 4 6 6.33SocGen 37 5 6 6.17Citigroup 31 6 4 7.75JPMorgan 30 7 4 7.50AMEX 28 8 4 7.00UBS 24 9 5 4.80Deutsche 21 10 3 7.00

£-USDTotal Position Frequency Average

RBoS 41 1 7 5.86SEB 40 2 5 8.00Lloyds 35 3 6 5.83SocGen 35 3 6 5.83Citigroup 30 5 5 6.00Commerzbank 27 6 7 3.86AMEX 23 7 4 5.75CSFB 23 7 4 5.75HSBC 23 7 4 5.75Deutsche Bank 22 10 3 7.33

“If Kerry is electedthen the status quowill be maintainedin the USA.”


geration, but which will be the moredifficult to halt the longer it lasts. Ourassessment does mean that there is aserious risk of the dollar losing furtherground as long as there are - besides theconcern that the US current-accountdeficit is no longer sustainable - otherreasons (yield spreads, doubts about thedurability of the US recovery) suggest-ing that the dollar is unlikely to makeup for its losses.”

Yen going from strength tostrengthA good FX forecast can act as an early-warning signal to off-set futureliabilities. The USD-JPY currency pair isa good example. Forecasting the resur-gence in strength of the Japanese yenwould have been very profitable tomany of the banks’ corporate clients inthe past 12 months, who generate profits in yen but later repatriate into

dollars. Equally, a good relationshipwith your FX forecaster may have con-vinced you to take out a forwardcontract to pay for goods that youintended to purchase later on in theyear. “If the Bank of Japan hadn’t inter-vened,” says Williams, “I could seeUSD-JPY trading as low as 100 or even95. It certainly would have damagedtheir recovery.”

Williams admits to being taken bysurprise by the Bank of Japan’s action.“I was very much surprised by how farthe Bank of Japan intervened. Theyneeded to prevent further deflationarybias against the yen, but I was still sur-prised by the amount of dollars theybought.” So what other currenciescaught our forecasters off-guard?

Parker and Schmidt say the SouthAfrican rand and the Turkish lira, whileEveling looks to the euro. “I expected arecovery when it broke back throughparity in early December 2002. Iexpected it to stabilise at around 1.18,which I consider fair value for the cur-rency.” The current high level of theeuro will, he adds, be detrimental to arecovery in the euro zone.

Mans Grunberger of SEB on theother hand was shocked by the impres-sive strength of the Australian dollar.“Despite some question marks aboutthe global economic recovery, geopoli-tics and Australia’s poor externalbalances, the AUD has been supportedby strong productivity growth.”

CF would like to congratulate the top10 forecasters of 2003. It was a difficultyear, with some unexpected currencymovements. CF would also like to thankthe industrious forecasters who con-tinue to reply to our monthly requestsfor information. It is extremely appreciated. cf

The modern corporatetreasurer operateswithin a risk-averseenvironment. Thetreasury is run not as aprofit-centre operation,but as a cost-centredepartment. It isaccountable for itsbottom-line.

“Very few corporateclients run FX profit-centres, as they do notappear to have the timeto run positions andcover their needs for thecompany,” says BobEveling of SocieteGenerale.

So, how have thechanges of focus andoperations withintreasury affected its FXrequirements?

“We have seen adivergence away fromthe standard vanillaproducts into a morestructured approach tohedging FX positions,”says Neil Parker at RoyalBank of Scotland. MansGrunberger of SEBagrees: “We cannotidentify any majorchanges in hedgingtechniques during thelast couple of years, but

corporate clients havebecome moresophisticated incombining instruments.

Eveling claims FXoptions have becomepart of their corporateclients’ arsenal againstFX exposure but in CF’sFX Survey in its Octoberissue, some of thecriticisms levelled at thebanks were that thebanks were offeringstructures and productsthat were toosophisticated and thatthey were over-promising and under-delivering. “We send outthe best strategy bestsuited for our clients.On a weekly / monthlybasis we continue toprovide our in-houseforecasts and economicviews. We also provideour own ideas on FXrates and moves on adaily basis via directcontact on thetelephone.”

Trevor Williams atLloyds TSB would notaccept such criticisms.“We aim to provide aservice corporates want;a service which involvescharts, keeping a closeeye on volatility andearly-warning signs oftrend movements aswell as any upside ordownside risk that we

feel a client needs to beaware of.”

Demand varies, saysGrunberger. “Somecorporates want a short-term view which reliesmainly on technicalanalysis, flow analysisand market behaviour,whilst the majority ofour corporate clientshave a medium or long-term view and wouldlike analysis whichcombines marketbehaviour andpositioning, structuralcapital flows, macrofundamentals, politicalanalysis.”

Whatever thecorporate need, be itshort- or long term, saysMichael Schubert, atCommerzbank, the keyfor any successful client-bank relationship isconsistency.“Consistency in ourforecasts is important.We try to elaborate inour reports the variousinterdependenciesbetween the variablesmentioned. It isnecessary that theamount of depreciationor appreciation wepredict for a currency isquantifiable from theclient’s point of viewand that changes in ourforecasts arecomprehensive.”

What acorporateneeds

USD-CHFTotal Position Frequency Average

Commerzbank 40 1 6 6.67RBoS 37 2 6 6.17Citigroup 35 3 5 7.00Lloyds 34 4 6 5.67SocGen 32 5 7 4.57SEB 31 6 5 6.20UBS 29 7 5 5.80AMEX 26 8 3 8.67JPMorgan 26 8 4 6.50Goldmans 24 10 3 8.00


MANAGING CASH SHORT-TERM DEBT

Is the commercial break over forUS commercial paper?” That wasthe question raised by S&P inMarch 2002. The US commercialpaper market had undergone its

largest contraction in 40 years and theoutstanding market stood at $1.35 tril-lion – the lowest level since the lastquarter of 1999 and 6.1% down on theyear-end for 2001.

“As business investment picks upsteam,” asserted a bullish S&P, “work-ing capital requirements will accelerateamong firms, in turn fuelling increaseddemand for commercial paper.”

Market players, hoping for goodnews, heaved a sigh of relief and lookedforward to a return to normality.

Almost two years later the US market has further contracted toaround $1.3 trillion, although the Euro-pean market has continued growing.So what are the corporates using tofinance their short-term debt needs?Commercial paper, say banks.

Why CP remains top Commercial paper is used by large cor-porates, with high credit ratings (andlow investment risk), to finance day-to-day working capital managementneeds such as accounts receivable andinventory. It is available in a wide rangeof denominations, can be either dis-counted or interest-bearing, and

usually has a limited or nonexistent secondary market. Maturities typicallyrange from two to 270 days. It is sold tomoney market funds, banks, institu-tional investors and corporates.

“Corporates have become increas-ingly large investors in short-termpaper,” says Arnaud Achour, head ofcorporate debt origination at SG CIB.“They have built up enormous stockpiles of cash as a consequence of theirdeleveraging efforts.”

“The advantage [of CP] over bankfinancing – where interest rates mayfloat two to three per cent above thebase rate – is that the cost of borrowing[with CP] is at Libor flat or less,” saysColin Withers, managing director ofshort-term products at Citibank. It isalso flexible – allowing a company tomatch financing needs directly withcash flow. Libor stands for the London

Interbank Offered Rate and is the rateof interest at which banks borrowfunds from other banks, in marketablesize, in the London interbank market.

“Commercial paper offers a highgrade of flexibility and a very deep mar-ket,” says Norbert Mayer, head ofcorporate financing at the BMW Group.As head of corporate finance, Mayer isresponsible for corporate strategy onshort-term debt financing. BMW uses amixture of CP and the short-end of theMTN programme for its short-termneeds, says Mayer. “Having direct contact with the investors is part ofBMW’s funding strategy. Bank loans arenot that important for us.”

For Mayer, commercial paper is stilla viable option, but the figures releasedby S&P suggest BMW is one of the fewremaining corporates to be able toaccess the market.

How are you fundingyour WCM needs?The CP market is the ideal short-term debt financing solution. Itis cheap for the issuer and low risk for the investor. But a fall inratings and economic stagnation has knocked the wind out ofCP and investor appetite. And, if CP is no longer an option whatare the alternatives? Robert Pink reports.

Corporate ECP Issuance from 1 Jan 2002 to 1 March 2004Rank Issuer USD Eqv (at issue) m Trade %Share1 Unilever NV 81,100.34 1,134 8.332 E.ON AG 52,057.91 761 5.353 Eni Coordination Center SA 37,926.09 480 3.904 Coordination Center Volkswagen SA 32,643.47 1,604 3.355 KarstadtQuelle AG 26,058.33 1,521 2.686 Deutsche Telekom AG 23,472.18 851 2.417 DaimlerChrysler AG 20,514.38 997 2.118 RWE AG 17,368.86 387 1.789 Tesco plc 16,738.54 327 1.7210 METRO AG 16,711.12 792 1.72

Total 973,440.10 31,145 100.00Source: Dealogic


The ratings game“The decrease [in the market] has beendue to three factors,” says Steve Hunt-ley, head of money markets at Bank ofAmerica. “Firstly, issuers ‘terming out’commercial paper balances in the long-term debt market; secondly, decreasingneeds for working capital manage-ment; and thirdly ratings downgrades.”

Commercial paper is only issued bylarge corporates with high credit rat-ings – BMW has short-term debt ratingsof A-1 from S&P and P-1 from Moodys –the best short-term rating it offers.

Large multinationals with an A1-P1rating, such as BMW, often use both theEuropean and US commercial papermarket. That gives them access to apotential investor base of $6 to 7 billionin short-term debt in this year’s market.

“The only risk for corporates raisingmoney in the short-term debt marketsis if the market closes,” says Achour. “Inthe past there have been some corpo-

rates who have relied too heavily on theshort-term finance markets. They havethen been faced with liquidity prob-lems when downgraded because themarket had closed on them.”

Withers agrees: “An A2-P2 issuer canstill get $2-3 billion in the US marketsbut once a company starts a ratingsslide the availability of funds dries up[investors will start backing out] and itslides into bank financing at moreexpensive borrowing rates.”

In 2002 Tyco lost a reported $400 mil-lion after losing the confidence ofinstitutional investors in its commercial paper programme.

Amid investor concerns aboutaccounting at the firm, the conglomer-ate had to draw on a backup line ofcredit from its banks to come up withthe cash it needed. The move to replacecheap commercial paper with the moreexpensive bank line cost Tyco about$400 million in additional after-taxannual borrowing expenses, slicingabout five cents per share from first-quarter earnings, which were expectedto come in at 80 cents per share. Accord-ing to Withers, the ratings slide beganlong before Tyco’s accounting troubles.In January 2001. “There were a few sur-prises from Californian utilitiesfollowed by downgrades in the tele-coms and automotive sectors.”Prominent US issuers of commercial paper programmes down-graded in 2003 would be too numerousto mention, but they include Cargill,Eastman Chemical, Carnival and Schering-Plough.

“In the corporate bond market if youlose one notch rating you will still haveaccess to the investors, but in the com-mercial paper market you could end up

being completely cut off, especially onnon-domestic programmes,” saysAchour.

“The majority of short-durations arepooled vehicles, generally rated AAA,and we have to invest a large percentage of our cash in higher ratednot lower rated vehicles,” says WayneBowers, the director of global fixedincome at Northern Trust GlobalInvestors (NTGI). “If you look at the cost-client mandate we manage, one of therequirements is the ‘preservation ofprinciple’. If you have money held inthe short-term the last thing you wantis to suffer a fall in your investment. Thelevel of risk on duration and the riskperspective is very limited.”

Not all domestic markets are as strictas the US market. “The European market is more forgiving,”says JC Perrig, Bank of America’s head

THE CF GUIDE TO SHORT-TERM DEBT

»Operating term loans: used forworking capital management to coverinventories, monthly expenses, interest onoutstanding loans, rent, utilities, leases. »Revolving lines of credit: a creditfacility which allows the borrower, withina credit limit and for a set period, toborrow or repay debt as required.»Revolving loan: a loan where theborrower decides the number and timingof withdrawals against the bank loan; anymoney repaid may be re-used at a futuredate. (A line of credit where the customerpays a commitment fee and is then allowedto take and repay funds at will. It is usuallyused for operating purposes, fluctuatingeach month depending on revenues andexpenditures.)»Commercial paper: used bycorporates to issue short-term IOUs forshort-term financing – lasting up to 270days or just one day only. Commercialpaper invariably doesn’t require anyguarantees and is the cheapest source ofdebt financing. Rates are typically belowlonger-term bonds and loans from banks,largely because it is less risky to lendmoney for such a (relatively) short timeperiod in which it is so much easier topredict the fortunes of the company.

Bank ECP Issuance from 1 Jan 2002 to 1 March 2004Rank Programme Dealers USD Eqv (at issue) m Trade %Share1 Deutsche Bank 10,153.29 1,507 13.412 Citigroup 9,192.56 1,330 12.153 Barclays Capital 7,583.72 1,274 10.024 UBS 7,262.38 1,141 9.605 JP Morgan 5,188.88 918 6.866 Goldman Sachs & Co 5,185.36 820 6.857 Royal Bank of Scotland 5,020.43 759 6.638 ING 3,410.30 800 4.519 Credit Suisse First Boston 2,381.00 516 3.1510 Lehman Brothers 2,343.23 465 3.10


Norbert Mayer, BMW: “Commercialpaper offers a high-grade offlexibility and a very deep market.Having direct contact with theinvestor is part of BMW’s fundingstrategy. Bank loans are notimportant to us.”


MANAGING CASH SHORT-TERM DEBT

of international debt capital markets,“especially in Germany and France.Name recognition still stands for a lotmore in Europe where as in the US themarket is driven by hard ratings.

“The credit markets in Europe havematured a lot and can make the dis-tinction between an isolated event andthe broader environment. A one-offcredit incident doesn’t fundamentallychange the picture.”

Securitization: the alternativeoptionThe increasing number of downgradesover the last two years, combined witha global slowdown and falling interestrates, may have been bad news forstraight commercial paper but alternative methods of short-termfinancing, such as securitization, havebenefited. By borrowing money againstdefined revenue streams, issuers canaccess funding at costs which wouldotherwise be unavailable to them.

In December 2003, the US securiti-zation market was worth €625 billion,in Europe €98 billion. In Europe, theasset-backed commercial paper sectoris about 25% of the total commercialpaper market and in the US it represents over $700 billion or 55% ofthe total commercial paper market.

“The good thing about securitization

is that for corporates rated BBB orbelow it’s cheap money for them,” saysAchour. “Using securitization isn’t toocost effective for A-rated corporates,but it’s a good complementary shortterm funding [strategy].”

Huntley agrees. “Corporates withlower ratings will use asset-backedsecuritization as a source of off-sheetbalance sheet funding that is attrac-tively priced.”

One corporate treasurer to takeadvantage of securitizaton is US oilcompany Weatherford. The companydoes not run a commercial paper pro-

gramme because, “the company wouldprobably be an A2-P2 issuer, meaningless access to investor cash,” says treasurer Joe Gocke.

Instead it has an asset-backedaccounts receivable programme. “Webegan the programme in 2001, primarily as a less expensive source offunding,” says Gocke. The programmeoperates in the US, a source of a third ofWeatherford’s revenues. “Weatherforddoes business in 100 countries aroundthe world so the administrational costsof an asset-backed programme in all ofthese countries would be prohibitive,”he explains.

Rick Pelini controls treasury opera-tions at Lexmark, the US printingsolution provider. He tells a similarstory. “Lexmark doesn’t have a tradi-tional commercial paper programme.Instead, we choose to fund our short-term working capital needs through asecuritized receivables programme.This provides access to the stable A1/P1commercial paper market at pricesonly slightly higher than actually having an A1/P1 programme.

“Because of our excess cash position,Lexmark doesn’t actively manage ashort-term versus long-term debt port-folio. Our overall philosophy is toensure adequate lines of credit throughbank revolvers (we currently have $500

overdraft – we don’t usecommercial paper as wedon’t have a public ratingand don’t really think it’sworthwhile to do so,” saysJanet Hargreaves who headsup the treasury team.

“We monitor cash on adaily basis and know withina month when we’re goingto be short of cash,” shesays. “The flexibility of themoney markets is the mainadvantage – I can raisemoney for any period fromovernight to one week to sixmonths.”

According to SanderBoelen, global head ofliquidity management atABN AMRO, the money

markets are maturing fastand there is a growingappetite for the funds.

“There has been a shiftfrom corporates tocorporates to corporates tomoney market funds.Falling interest rates havehelped encourage this, ashave recent high profilecorporate fraud cases.”

More and more corporatetreasurers are askingthemselves: “Do I want toinvest this money myself oroutsource the capital todiversify. The first concernfor the treasurer is capitalpreservation. Personally, Idon’t believe that atreasurer should be going

after every last basis point.”“His [the treasurer’s]

second concern is liquidity.“Can I get my capital backwhen I need it? Return oncapital is not the maindriver in most cases. It isliquidity and thestreamlining of thetreasury. The funds allowyou to be part of a largergroup of investors whichgives economies of scale.The other thing you buy isthe whole riskmanagement systembehind it. When there istwo per cent interest for apiece of paper there is notmuch room to play with ifthings go wrong.”

Janet Hargreaves,treasurer at BalfourBeatty and MMF

Balfour Beatty providescivil engineering anddesign services to rail, roadand utility systems. It’sshort-term needs are great.

“Our short-termborrowings are all on themoney markets or on an

Rick Pelini, Lexmark: “Lexmarkdoesn’t have a traditionalcommercial paper programme. Wechoose to fund our short-term needsthrough a securitized receivablesprogramme.”


million of unused revolver capacity)and the receivables securitization. Fiveyears ago the company issued $150 mil-lion of ten-year notes which remainoutstanding.”

Looking aheadSo where is the market heading? S&Pcontinues to predict an upturn in theUS corporate commercial paper market. “The steady erosion in US non-financial commercial paperoutstanding appears to be at a plateauwith economic indicators hinting thatcorporations will have an increasedneed to tap external sources – namelycommercial paper and bank loans – tofinance working capital,” says DianaVazza, managing director of globalfixed income research at S&P.

Achour agrees: “Some corporates

are reactivating their short-term debtinstrument programmes. They want tobe ready in case their working capitalneeds increase. If the economic recovery speeds up then working capital needs will also increase. In thepast few years corporates have restructured back to their core businesses – they are now slim and cashrich.”

But, the low interest rate environ-ment makes bank lending moreattractive than ever. “Bank debt usuallyprovides a convenient source of fund-ing with as much capacity as acorporate needs to finance its require-ment,” says Perrig. “The presentenvironment for bank-debt is veryattractive for borrowers as the spreadsare so narrow. In the long-term how-ever, structural changes in the bank

market means that bank funding willbecome scarce.”

He is of course referring to Basel II.Basel II aims to maintain the overalllevel of capital in the global bankingsystem while aligning it more closelywith the underlying risks of a bank’sactivities, i.e. by basing minimumcapital requirement on the credit rat-ings of borrowers. In a nut shell whatthis means is that banks will not lendfunds to a corporate unless it can besure of sufficient profitability on theaccounts at the same time it isproviding credit facilities.

“Banks are changing their approachto lending. They focus on the mostefficient use of their equity, hence, forthe future, bank borrowing will be aless attractive source of fundingcompared to commercial paper. Thecommercial paper situation will stabilize and the short-term marketwill develop towards the commercialpaper market once again,” says Mayer.

Rick Pelini at Lexmark agrees:“There is a trend among corporates toreduce reliance on banks and to pursueother sources of capital. This is logicalgiven the mergers that have takenplace in the banking community; netbank lending capacity has declined andwill probably continue to do so.”

“Corporates are finding that linesfrom the banks are drying up and thecost of borrowing is increasing. Inresponse they are creating their own CP programmes,” adds Brian Farrell,global head of money markets atDEPFA bank. cf

“The capital markets arevery wide open rightnow, both from abanking perspectiveand a capital marketsperspective,” says JoeGocke, treasurer at US-based oil companyWeatherford, “It’s afunction of the generaleconomy in the USmore than anythingelse. As companies lookto produce more andmake more acquisitions

it naturally leads to aneed to access thecapital markets.”

Weatherford doesn’tuse the CP markets, saysGocke – they have a$500 million revolvingcredit facility and anasset-backed accountsreceivable programme.“We don’t use them,firstly because we wouldbe an A2-P2 issuer andthis market is not asdeep as the A1-P1+market and secondly,because we would onlybe infrequent users ofthe market.” Instead,Gocke uses bank loansto fund the company’s

short-term debt needs.“The bank market is alittle more expensivethan commercial paperprogrammes but wethen would have to goto the trouble of settingit up and then rarelyusing it. A bankingfacility allows usimmediate access tofunds; it is notdependent on ratings.”Weatherford is alsopaying down short-termdebt at the moment anddeleveraging, saysGocke, so it wouldn’tmake sense to start acommercial paperprogramme.

Weatherfordchooses loanflexibility

Corporate ECP Outstanding as at 1 March 2004Rank Programme Dealers USD Eqv (at issue) m Trade %Share1 Unilever NV 4,489.80 96 5.932 Eni Coordination Center SA 3,578.70 47 4.733 Volkswagen AG 3,436.20 45 4.544 Network Rail CP Finance plc 3,180.02 71 4.205 E.ON AG 2,532.11 60 3.356 RWE AG 2,000.80 30 2.647 Enel Investment Holding BV 1,834.66 59 2.428 Procter & Gamble Co 1,766.46 24 2.339 Pfizer Inc 1,764.33 15 2.3310 Housing Finance Agency Plc 1,715.60 28 2.27


JC Perrig, Bank of America: “Thepresent environment for bank-debt isvery attractive for borrowers as thespreads are so narrow. In the long-term however, structural changes inthe bank market means that bankfunding will become scarce.”

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TREASURY LOCATIONMANCHESTER & GLASGOW

In 1783, Richard Arkwright,inventor of the Spinning Jennyand father of the industrialrevolution, built his first textilefactory in Manchester.

Based in the north of England, thecity quickly became a hub for thetextile industry, and a premierindustrial centre.

Two hundred years later and thetextile factories have disappeared. Intheir place? Sophisticated sharedservice centres.

Multinationals have traditionallylooked to sites in London, Amsterdamor Dublin to locate their Europeanshared service centres, but recognisingthe investment such centres bring to anarea, other European cities threw theirhats in to the ring. Manchester was onesuch city.

Manchester’s riseIn 1997, MIDAS – the ManchesterInvestment and Development AgencyService – was created to promote thecity as a viable alternative to London orDublin.

“We identified Manchester as ashared services location because Man-chester shared the same labour forcecharacteristics as places like Dublinand Glasgow,” says Chris Norwood,development manager at MIDAS. Loca-tion consultants perceived that Dublinand Glasgow were over-heating andwere looking around for the next bigthing in SSC location selection, he adds,and MIDAS put forward an offer basedaround the availability of customerservice languages and technical skills aswell as a large international airport. Itmust have been persuasive. GeorgiaPacific set up its SSC in Manchester in

1998, Tetrapak in 1999, andAstraZeneca in 2001.

Popular shared service locations canbecome victims of their own success.Too many corporates join the party, theemployee base shrinks and costs rise.That happened in Dublin, says Nor-wood, and MIDAS is working hard notto allow it to happen in Manchester.

“In 1998 eight SSCs arrived in Dublinat the same time and attrition in somecompanies rose to 75%. The ‘fear’ ofgoing to a location that would overheatbecame a major feature of locationselection. Location consultants havebeen trying to write Manchester off as‘overheated’ for the last five years everytime we have won a project.

“The Manchester SSC communityhas grown incrementally over thattime and the ‘exceptional’ attrition levels and associated salary inflationthat reached in Dublin five years agohave not been witnessed here (or inmany other successful locations).”

To mitigate the prospect of Man-chester’s ‘over-heating’, MIDAS hascreated a shared services forum to dis-cuss best practice on a quarterly basis.Norwood hopes this will foster a sharedservice community and will stop anystaff poaching; there are agreements inplace on salary benchmarking to helpthe process along.

Employing capitalManchester is located in one of Europe’smost heavily populated regions, whichmeans corporates located there are ableto call on a large employment pool. Thecity supports 90,000 students at any one

Manchester SSCeneManchester haslong been anindustrial andfinancial hub in thenorth of England.But, says RobertPink, it is a SSClocation too.

Chris Norwood, businessdevelopment manager at MIDAS: “Weidentified Manchester as a sharedservices location because it sharedthe same labour characteristics asplaces like Dublin and Glasgow.”

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time at its four universities and is fastbecoming a target for young Europeanslooking to improve their English andfind employment in an area whereaccommodation is affordable. “Theblend of UK nationals and foreignnationals is an important factor in Man-chester’s success,” says Norwood. “SSCsin Manchester will find their staff are40% to 60% from outside the UK and areoften nationals of the country whosemarket they are serving. This has sig-nificant advantages when dealing withexternal customers and suppliers andmeans that a higher quality or morevalue-added service can be offered thanfrom some other locations.”

Cammie Seymour at Michelinagrees. Project manager at the French-owned manufacturer, Seymour hasoverseen the creation of the Manches-ter base since its inception in October2002. “Manchester had a huge advan-tage in that is has a very largeinternational population and graduateswith strong language skills. We sendour graduates abroad for four monthsat a time to learn treasury skills inanother country - they have to fit in cul-turally but also be able tocommunicate,” she says. The skills arethen transplanted back to Manchesterwhere Michelin employs 150 people inaccounts payable, fixed asset account-ing, general ledger and intra-groupaccounting.

CF was lucky to track down Seymour.She spends much of her time flyingbetween Michelin’s European bases tocheck on the treasury teams and ensurethe employees are fully trained beforetheir final return to Manchester. “Wedid a study over two years on whetherto create a shared service centre at theEuropean level. We looked at 15 citiesin total but the shortlist came down toManchester, Madrid or Michelin’s basein Clermont-Ferrand in France.”

Michelin’s consultants suggestedBarcelona and Lisbon, or real off-shoring locations like India. But asSeymour notes, “it’s important to be inEurope as our customers are inEurope.” With official corporate lan-guages of French or English, Seymourpoints out that Michelin needed a des-tination where at least one of the

JT Internationalannounced the openingof its Manchester-basedEuropean BusinessService Centre inFebruary 2003. As asubsidiary of JapanTobacco – the world’sthird largest cigarettemanufacturer – JTInternational boastssales in excess of $30billion.

JT International (JTI)is a shared serviceprofessional. As the t-shirt says, “Been there,done that”. In additionto Manchester, thecompany has one inKuala Lumpur,managing the Asianmarket, and one in St.Petersburg, for dealingwith the Russian marketwhere the company hasa particularly strongpresence.

The choice for aEuropean location wasbetween sites such asManchester, Barcelona,Rotterdam, Dublin andPrague. For MartinBraddock, JTI’s CFO, thecreation of a sharedservice centre in Europewas linked to an overallcorporate strategy:“Throughout theprocess, JTI was tryingto become a low-costquality producer. Thatapplied to the productitself as well as the back-office functions. Thisdrove the thinkingtowards a shared servicecentre.”

The employee basewas top priority. “Thecriteria for the shared

service centre wasessentially theavailability of labour,the skill of labour andthe cost of labour. Weformerly evaluated theNetherlands and our St.Petersburg operationsbut we discounted anumber of otherlocations as we weremoving very quickly.

“We heard Dublinwas over-heating interms of its sharedservices and that we’dbe moving in to a zoo,competing for staff. InBarcelona we heardthere were problemswith retaining the rightquantity and quality ofstaff and in Prague therewere similar concerns.”So why Manchester?

A grant from theNorth WestDevelopment Agency(NWDA) of £630,000($1.2 million) proved agood incentive, as didcooperation offered bythe ManchesterInvestment andDevelopment AgencyServices (MIDAS). “Thegrant was not the over-riding factor in ourdecision, but it didindicate an acceptanceby the NWDA of ourmoving in to the area. Insome countries thedevelopment agencieswere only luke-warm intheir reception.”

The challenge forBraddock was theconceptual change.“Any shared servicecentre experience isdifficult - you’re

changing processes,systems andorganisation. We did theprocess in 12 monthsbut it was very painful.”

After his experiencesin creating a sharedservice centre, whatadvice does he have fora CFO setting out on theshared service route?“You can’t do enoughplanning, you have tomanage the executionissues and theorganisation has to havethe stomach to gothrough the change.” Itis also worthremembering, saysBraddock, that, “sharedservice centres are onlypart of the road map tostandardised processeswithin a company.”

The EuropeanBusiness Service Centrehas 86 employeesranging from seasonalqualified accountants toprocessing clerksworking on corporateconsolidation,reporting, generalledger activities for theEuropean entities,accounts payable andreceivable, processingpayments and ancillarySAP support.

JT International

“Throughout theprocess JTI wastrying to become alow-cost qualityproducer. Thatapplied to theproduct itself aswell as the back-office functions.”


TREASURY LOCATIONMANCHESTER & GLASGOW

languages was spoken. Manchesteroffered a good track record and anattractive cost base. “Cost was a defin-ing factor. In Europe there is littledifferentiation in cost for the top-endaccounting positions, but Manchester ismore competitive for costs at theaccountancy entry-level,” she adds.

Norwood denies any competition

between Manchester and other Euro-pean SSCs, but with the reduced riskfactor of operating in Eastern Europetoday, he must recognise there is athreat to Manchester’s popularity?

“If you choose between the two typesof locations [western and easternEurope] you choose between differentkinds of shared service centres. At eastern European locations you havethe low-cost offering but will you havethe value-added aspects, such as cus-tomer relationships or infrastructure?”says Norwood, who points out that TetraPak, Bristol-Myers Squibb and Kellogg’salready cover eastern Europe from Man-chester. “An SSC in Manchester (or

Rotterdam or Barcelona) will offer awider range of languages, a wider rangeof professional expertise and may createvalue through greater efficiencies andanalysis of business performance ratherthan simply through lower cost salaries.

“I am not convinced that there is atruly pan-European SSC in EasternEurope operating on the single centremodel that you will find is the norm inManchester. No one is sure what’sgoing to happen after May 1st. The driftof professionals away from EasternEurope may actually increase theshared service centre culture in thewest, and employment costs may alsoincrease there.” cf

Glasgow’sSSC scene

Scotland is shakingoff its image as anindustrialbackwater and ispromoting itself asa location forcorporate sharedservice centres.Jason Eden looks atwhat Scotland’ssecond city Glasgowhas to offer thebrave-heartedcorporate.

In June 2003, Glasgow waslabelled the “Coolest city in theUK,” by the National GeographicTraveller magazine. Now, beingsomewhere ‘cool’ may not be a

priority for most corporates consider-ing relocating their operations, butwhen you are trying to attract multi-lingual, skilled professionals to manshared service centres, it is a pretty bigselling point.

So too is a £500 million ($932million) district purpose-built for thefinancial services sector with thou-sands of highly skilled people, 24/7operations, dual routing telecoms andexcellent international transport links.

In Scotland, traditional industriessuch as shipbuilding and heavyengineering have given way to IT, lifesciences (the Roslin Institute inEdinburgh cloned the first mammal,Dolly the sheep), and communicationtechnologies. Glasgow and Edinburghhave also become locations for callcentres and shared service centres. Onesuch corporate to fall for Glasgow’scharms is the Eaton Corporation, an

electrical power distribution company.Eaton set up operations in Glasgow

in 1997 and currently employs over 90staff. “We looked at London, Dublin,Amsterdam and Glasgow. For us, itreally wasn’t a choice. Glasgow wonhands down,” says Jim Ward, Europeanshared-service centre finance leader.“We thought the Amsterdam economyhad too much labour inflation and Lon-don had the twin problems ofaffordability and retention of multi-lin-gual staff due to a buoyant labourmarket.” Glasgow, says Ward, didn’tsuffer from these problems back in1997, and still doesn’t.

A flexible, multi-lingual labourforceWithin a 20-mile radius of Glasgow’scity centre there is a catchment labourforce of 2.5 million people; more than28,000 people work in the finance sec-tor. This number is expected to increasedramatically during 2004, when the£500 million, purpose-built Interna-tional Financial Services District (IFSD)is completed.

“I’m not convinced there isa pan-European SSC ineastern Europe operatingon a single centre model.“Chris Norwood, MIDAS

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“There is a ready supply of skilledtertiary-sector labour at extremelycompetitive levels,” says David Thor-burn, COO at Clydesdale Bank, part ofthe National Australia Group. “This isone of the reasons why the bulk of ourUK treasury service centre operationsare now based in Glasgow.” DavidSmith, director of EMEA for the Scottish Development International,an investment agency, agrees: “Much ofGlasgow’s growth and success can bedirectly attributed to a flexible, stableand motivated workforce with highlydeveloped skills for the treasury sharedservice centre.” That Glasgow-basedcorporates will pay 32% less in wagesthan London-based companies shouldalso be factored in.

Glasgow’s financial districtThe International Financial ServicesDistrict (IFSD) is taking shape fast. Mor-gan Stanley, JPMorgan, esure andGoldfish have already moved in bring-ing with them over 1900 new financesector jobs. It has been designed as a pre-equipped business area to allow fasttrack occupancy. There is no waitingaround. If you decide that Glasgowoffers everything you need from a treas-ury service centre, you can pretty muchmove in tomorrow – subject to givingnotice to your current provider.

The district is actively supported byScottish Enterprise Glasgow, and, whencompleted, will comprise over 20 mil-lion square feet of office space. It willalso push Glasgow in to the top threecities in Europe for office availabilityand fifth for office value for money.

“The treasury shared service centreis already a major employer in Glasgow.We now seek to build on thesestrengths by creating the highest qual-ity business environment forcorporates. The competitiveness ofGlasgow in the market is compoundedby a cost base which is up to 40% lowerthan many of its main competitors,”says Ron Culley, chief executive of Scot-tish Enterprise Glasgow.

World-class infrastructureWith the largest number of ISDN linesper capita in the UK and an extensivetelecommunications infrastructure it isno surprise to find Glasgow home to BTScotland, NTL and Thus. BT has evendesignated Glasgow as an eLocation,and is investing £50 million in its tele-com infrastructure.

New buildings in the IFSD have dualrouting – put simply, if there’s a prob-lem with one exchange, business isrerouted through the other with cor-porates none the wiser. “Our technicalpeople say the telecoms infrastructurein Glasgow remains better than almostanywhere in the UK,” says Eaton’sWard. But the excellent infrastructureprovisions don’t end at the phone lines.The IFSD offers excellent transporta-tion links too.

Glasgow offers the largest suburbancommuter rail network in the UK out-side London, and boasts two majorairports – Glasgow and Prestwick. “TheEaton Corporation is an $8 billionglobal business. Therefore, we have anumber of international clients. It isextremely important for us that our

European and stateside clients and personnel are able to access Glasgoweasily and affordably,” says Ward, whocites Glasgow’s transport infrastruc-ture as a compelling reason why EatonCorporation chose Glasgow. With theonset of the no-frills airlines such asEasyjet and Ryanair servicing the city,flights have become even cheaper andmore frequent.

So would Ward recommend Glas-gow to other corporates both as a placeto work and, perhaps more importantly, as a place to live? “The cityis flourishing. It’s a vibrant, bustlingplace to live. It’s got something foreveryone – lots of free museums, gal-leries, pubs and clubs, plus two majorfootball teams.” For those who perhapsdon’t follow Scottish football they areCeltic and Rangers. cf

SHARED SERVICECENTRE OROUTSOURCING?

Corporates can outsource back-officeoperations or create a shared servicecentre – the degree of control is thedefining factor. But which is best for you?“There is an increasing willingness tooutsource – a feeling that a shared servicecentre can take you to a certain point butno further,” comments Alex Hamilton, atLatham & Watkins. He has identified fourpressure points for corporates:

»a desire to improve reporting and riskcontrol in treasury»cost pressures on the back office»increased requirements for treasurywhich is, in turn, struggling to growinternally»pressure to invest in new technology

The question is a simple one. Can acorporate outsource its back-officetreasury operations and then repurchasethem at a lower price than it would haveotherwise cost? “Companies have to createa comfort zone. There has to be awillingness to allow providers to do certaintasks.” Though Hamilton admits there isan obvious corporate concern about a lossof control, it is largely a question ofswapping one type of control for another.

Glasgow School of Art: part ofGlasgow’s cultural heritage

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“There is a ready supply ofskilled tertiary-sectorlabour at extremelycompetitive levels. This isone of the reasons why thebulk of our UK treasuryservice centre operationsare now based inGlasgow.“ David Thorburn,Clydesdale Bank


DEAL ANALYSIS

Any doubts surrounding the health ofthe global M&A market have beenresoundingly dispelled by the latestbatch of deal information fromDealogic. The announced volume ofM&A deals so far in 2004 has reached$471 billion – this represents awhopping increase of 170.9% oncorresponding 2003 figures. Given thenumber of announced deals – 3,274 and3,566 for 2004 and 2003 respectively –it seems that sheer deal size is respon-sible for the uplift.

Goldman Sachs again leads the wayin the US M&A standings, consolidatingits position at the head of the packagainst rivals JPMorgan and Morgan

Stanley. And even though Goldmanactually advised on three fewer dealsfor year-to-date 2004 compared to 2003,total deal volume shows an increase of637.17%.

In the US, energy and computerindustries led the way in the last weekof February with the decision by Tran-sCanada to acquire Gas TransmissionNorthwest from National Energy & GasTransmission for $1.7 billion and FirstData acquiring Concord for $7.1 billion.

And while America is traditionallythe most vibrant M&A market it isacross the Pacific in the islands of Japanthat has seen the most exciting M&Anews for some time. Yamanouchi Phar-

maceutical announced its intention topurchase Fujisawa, its smaller Japaneserival, for around $8 billion. The deal –to be completed in April 2005 – willcreate Japan’s second largest pharma-ceutical company and may heraldfurther M&A speculation in Japan’s oth-erwise quiet M&A sphere.

But it’s not positive news every-where. PwC’s report ‘Power Deals’shows 2003 as something of a nadir forthe global electricity and gas markets;deal volume fell sharply from $84.9 bil-lion in 2002 to $43 billion in 2003. Thegas market, in particular, is suffering asdeal values slumped from $36.3 billionin 2002 to a pitiful $3.3 billion in 2003.

Champagne anyone?Bumper figures forM&A growth in 2004

TOP 10 GLOBAL M&A DEALS FEBRUARY 2004

11/2/04 Walt Disney Co US Leisure & Comcast Corp Goldman Sachs, Bear Stearns, 66,603.98Recreation JP Morgan, Morgan Stanley,

Quadrangle, Rohatyn17/2/04 AT&T Wireless Services Inc US Telecomms Cingular Wireless Goldman Sachs, Merrill Lynch, 46,770.00

Lehman Bros, Evercore Ptnrs,Citigroup, JP Morgan, Rohatyn

5/2/04 Canary Wharf Group plc (Bid No 2) UK Real Estate/ CWG Acquisition Cazenove, Deutsche Bank, 9,699.57Property Ltd (IBO) Merrill Lynch, Lazard

24/2/04 Fujisawa Pharmaceutical Co Ltd Japan Healthcare Yamanouchi Pharma- Lehman Brothers, Morgan Stanley 7,880.77ceutical Co Ltd

16/2/04 GreenPoint Financial Corp US Finance North Fork Bancorp Keefe Bruyette & Woods, Lehman Brothers, 5,671.65Sandler O'Neill & Partners, JP Morgan

23/2/04 Wanadoo SA (29.4%) France Computers & France Telecom SA ABN AMRO, BNP Paribas, Societe Generale, 4,841.15Electronics Morgan Stanley

2/2/04 Grupo Financiero BBVA Mexico Finance Banco Bilbao Vizcaya Goldman Sachs, Morgan Stanley 4,076.90Bancomer SA de CV (40.58%) Argentaria SA - BBVA

9/2/04 NetScreen Technologies Inc US Computers & Juniper Networks Inc Goldman Sachs, JP Morgan 3,504.29Electronics

19/2/04 Carlsberg Breweries A/S (40%) Denmark Food & Carlsberg A/S Goldman Sachs, Lehman Brothers, JP Morgan 3,279.02Beverage

16/2/04 Industriforvaltnings AB Kinnevik Sweden Finance Invik & Co AB Handelsbanken, Deloitte & Touche, 2,838.64Morgan Stanley

Source: Dealogic

Announced Target Target Target Acquiror All Advisors Value $(m)Nationality Sector


10/04/03 FO Allianz AG Insurance Deutsche Bank, Goldman Sachs, Citigroup, UBS 4,826.1223/10/03 FO Muenchener Rueckversiche- Insurance Deutsche Bank 4,688.01

rungsgesellschaft AG - Munich Re24/03/03 FO France Telecom Telecoms ABN AMRO Rothschild, BNP Paribas, Groupe Credit Agricole/ 6,566.66

Lazard, Credit Lyonnais, DB, GS, Merrill Lynch, MS26/11/03 FO Koninklijke Ahold NV Retail ING, Rabobank Nederland, ABN AMRO Rothschild, GS, JPM 3,384.6920/11/2003FO ABB Ltd Construction Citigroup, CSFB, DB, Enskilda Securities 2,525.39

Source: Dealogic

Pricing Issue Issuer Sector Bookrunner Deal Value $(m)Date Type

EMEA Top 5 Fee Generating ECM Deals 2003 & 2004 YTD

EMEA Top 5 Fee Generating DCM Deals 2003 & 2004 YTD

EMEA M&A SECTORSPREADS ‘03 & ‘04 YTD

EMEA DCM SECTORSPREADS ‘03 & ‘04 YTD

EMEA ECM SECTORSPREADS ‘03 & ‘04 YTD

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26/1/04 Aventis SA France Healthcare Sanofi-Synthelabo GS, ML, Rothschild, Citigroup, BNP Paribas, MS, UBS 68,700.3912/3/03 Telecom Italia SpA (59.65%) Italy Telecoms Olivetti SpA GS, ML, Lazard, JPM, UniCredit Banca Mobiliare, 44,387.33

Banca Intesa SpA10/10/03 Amersham plc UK Healthcare General Electric Co Goldman Sachs, JP Morgan, Morgan Stanley 9,797.305/2/04 Canary Wharf Group plc UK Real Estate/ CWG Acquisition Cazenove, DB, ML, Lazard 9,699.57

(Bid No 2) Property Ltd (IBO)5/12/03 Canary Wharf Group plc UK Real Estate/ Silvestor Holdings Cazenove, GS, Lazard, Rothschild, MS 9,113.39

(Bid No 1) Property

Announced Target Target Target Acquiror All Advisors Deal Value $(m)Nationality Sector

EMEA Top 5 Fee Generating M&A Deals 2003 & 2004 YTD

11/2/04 PREF ABN AMRO Capital Funding Trust VII Finance Netherlands 1,800.0026/6/03 PREF ABN AMRO Capital Funding Trust V Finance Netherlands 1,250.0029/7/03 BOND-HY Valentia Telecommunications UPC Telecoms Ireland 1,213.652/7/03 BOND-HY Vivendi Universal SA Leisure France 1,546.2328/2/03 PREF Endesa Capital Finance LLC Utilities Spain 1,621.62

Source: Dealogic

Pricing Issue Issuer Sector Nationality Deal Value $(m)Date Type

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Source: Dealogic

GLOBAL ECM RANKINGS

GLOBAL DCM RANKINGS

Announced M&A Adviser RankingJan to Feb 2004

Rank Adviser Deal Value No. Volume ($m) Share

1 Goldman Sachs 219,281 40 48.72 JP Morgan 199,090 37 44.23 Morgan Stanley 174,470 36 38.74 Merrill Lynch 140,696 21 31.25 Rohatyn 113,374 2 25.26 Rothschild 79,186 22 17.67 BNP Paribas 77,060 7 17.18 Citigroup 73,298 35 16.39 Lehman Brothers 70,278 24 15.610 Bear, Stearns & Co. Inc. 68,749 5 15.3

Grand Total 450,720 3,212 100Source: Dealogic

GLOBAL M&A RANKINGS

M&A Net Revenue RankingJan to Feb 2004

Rank Adviser Total Net Revenue Market ($m) Share

1 Goldman Sachs 107 8.82 JP Morgan 103 8.43 Merrill Lynch 92 7.64 Citigroup 81 6.65 Lehman Brothers 80 6.56 UBS 75 6.27 Credit Suisse First Boston 70 5.88 Morgan Stanley 70 5.79 Deutsche Bank 57 4.710 Lazard 50 4.1

Grand Total 1,218 100Source: Dealogic

DCM Bookrunner RankingJan to Feb 2004

Rank Bookrunner Total Deal Value No. Volume ($m) Share

1 Citigroup 68,324 244 8.02 Deutsche Bank 58,486 299 6.83 Merrill Lynch 54,954 175 6.44 Credit Suisse First Boston 52,606 178 6.15 Lehman Brothers 51,288 210 6.06 Morgan Stanley 50,507 191 5.97 JP Morgan 50,267 175 5.98 Goldman Sachs 47,159 114 5.59 UBS 41,862 203 4.910 Barclays Capital 29,448 127 3.4

Grand Total 857,725 4,091 100Source: Dealogic

DCM Net Revenue RankingJan to Feb 2004

Rank Bank Total Net Revenue Market ($m) Share

1 Citigroup 294 9.32 Credit Suisse First Boston 253 8.03 Morgan Stanley 207 6.64 Deutsche Bank 207 6.65 JP Morgan 182 5.86 UBS 173 5.57 Lehman Brothers 168 5.38 Merrill Lynch 154 4.99 Goldman Sachs 151 4.810 Banc of America 123 3.9


ECM Bookrunner RankingJan to Feb 2004

Rank Bookrunner Total Deal Value No. Volume ($m) Share

1 Morgan Stanley 12,004 39 13.62 Citigroup 9,119 44 10.33 Merrill Lynch 7,990 34 9.04 Goldman Sachs 7,661 23 8.75 UBS 6,100 31 6.96 Lehman Brothers 4,603 20 5.27 Deutsche Bank 4,543 22 5.18 JP Morgan 3,451 30 3.99 Credit Suisse First Boston 3,418 20 3.910 Nomura 3,154 36 3.6

Grand Total 88,471 798 100Source: Dealogic

ECM Net Revenue RankingJan to Feb 2004

Rank Bank Total Net Revenue Market ($m) Share

1 Morgan Stanley 215 9.32 Citigroup 201 8.73 Goldman Sachs 182 7.94 Merrill Lynch 173 7.55 UBS 147 6.46 Nomura 116 5.07 Lehman Brothers 102 4.48 JP Morgan 95 4.19 Credit Suisse First Boston 95 4.110 Deutsche Bank 95 4.1



FEE ANALYSIS

corporatefinancemag.com March 2004 cf

Outback takeson greenbackOut of all the G7 members, Australia’sovernight interest rate of 5.25% is by farthe highest. (The six other industrialnations trail far behind with an interestrate range between 0.25% - four percent.) This may be a factor in the rise ofAUD above the 80 cent figure - a six-year highs against the dollar.

If so, there may be room for furthergains. Glenn Stevens, deputy governorof the Reserve Bank of Australia, hasopenly stated that he sees an interestrate range between five per cent and6.25% as being within a neutral rangeby today’s standards. Not only doesthis attract further speculation ofanother bout of rate hikes, but alsomakes the AUD a hive for carry tradeopportunities. Investors simplyborrow from low interest ratecurrencies like the dollar, and holdrollover overnight positions in AUD.Admittedly you have the downside ofprofit-takers spoiling the free lunch,but with the state of the US currentaccount deficit worrying analysts, andthe dollar-bears shunning the currencyit might just remain a profitable plan.

The reasoning behind Stevens’statement is hard to reconcile with theAustralia’s treasurer Peter Costello. Heworries that AUD strength is not onlydamaging domestic exports, buthurting the economy as a whole.Perhaps that is why the Royal Bank ofAustralia sold AUD 1.86 billion ($1.4billion) in January in an attempt to tryand stem the rising tide. Whateverhappens in the mean time, another 25basis point rise in the differentialcould see the AUD smash through the80 cent mark. JE

Cable hitssterling heightsSterling hit a fresh 11-year highagainst the dollar in February. Itclimbed to the heady heights of1.9140, a level not seen since the UK

FXFORECASTS

10-year benchmark long-bond yield forecasts for May 2004US UK Euroland Japan Switzerland

ABN Amro 4.20 4.90 4.15 1.25 ▼ ---BMO 5.00 ▲ 5.40 ▲ 5.00 ▲ 1.90 ▲ 3.40 ▲

Commerzbank 4.40 5.00 4.40 1.40 2.80Goldman Sachs 4.20 5.00 4.50 1.40 2.70JPMorgan Chase --- --- --- --- ---Lloyds TSB 4.10 ▼ 4.80 ▼ 4.00 ▼ 1.25 ▼ 2.50 ▼

RBoS 4.40 5.00 4.60 1.40 2.60Societe Generale --- --- --- --- ---SEB Merchant Banking 4.30 4.90 4.30 1.30 2.75UBS 4.53 5.00 4.57 1.33 2.68Mean 4.39 5.00 4.57 1.33 2.68Low= ▼ High= ▲ Source: Corporate Finance

10-year benchmark long-bond yield forecasts for February 2005US UK Euroland Japan Switzerland

ABN Amro 5.40 5.35 4.90 1.90 ---BMO 5.50 ▲ 5.80 ▲ 5.70 ▲ 2.60 ▲ 4.10 ▲

Commerzbank 5.10 5.40 4.80 1.40 ▼ 3.20Goldman Sachs 3.90 ▼ 5.40 4.90 1.60 3.80JPMorgan Chase --- --- --- --- ---Lloyds TSB 5.00 5.30 4.90 1.70 3.50RBoS 5.00 5.50 4.80 1.50 3.00Societe Generale --- --- --- --- ---SEB Merchant Banking 4.70 5.00 ▼ 4.50 1.60 2.95 ▼

UBS 5.00 5.20 4.73 ▼ 1.67 3.07Mean 4.95 5.37 4.90 1.75 3.37Low=▼ High= ▲ Source: Corporate Finance

Three-month foreign exchange forecastsEuro/$ £/$ $/¥ $/CHF Euro/£ Euro/¥ Euro/CHF

ABN Amro --- --- --- --- --- --- ---BMO 1.28 1.83 106.00 ▲ 1.22 --- --- ---Commerzbank 1.31 1.84 104.00 1.19 0.71 136.00 1.55Goldman Sachs 1.26 ▼ 1.75 ▼ 105.00 1.25 ▲ 0.72 ▲ 132.30 1.57JPMorgan Chase 1.33 --- 101.00 1.15 ▼ 0.69 134.00 1.54Lloyds TSB 1.35 ▲ 1.93 104.00 1.16 0.70 140.40 ▲ 1.56RBoS 1.31 1.88 103.00 1.20 0.70 135.00 1.57Societe Generale 1.29 1.92 105.00 1.23 0.67 ▼ 135.60 1.59 ▲

SEB Merchant Banking 1.30 1.94 ▲ 100.00 ▼ 1.21 0.67 ▼ 130.00 ▼ 1.57UBS 1.31 1.88 104.46 1.15 0.70 137.17 1.51 ▼

Mean 1.31 1.87 103.69 1.19 0.69 135.00 1.50Spot rate on 1 March 2004 1.24 1.87 108.95 1.27 0.67 135.59 1.58Low= ▼ High=▲ Source: Corporate Finance


FXFORECASTS

Forecasts for three-month interbank rates, for May 2004US UK Euroland Japan Switzerland

ABN Amro 1.15 4.30 2.05 0.06 ---BMO 1.25 4.30 2.20 0.10 ▲ 0.80Commerzbank 1.30 4.00 ▼ 2.10 0.00 ▼ 0.40Goldman Sachs 1.20 4.30 2.20 0.10 ▲ 0.70JPMorgan Chase --- --- --- --- ---Lloyds TSB 1.00 ▼ 4.25 2.00 ▼ 0.10 ▲ 0.40RBoS 1.10 4.40 2.10 0.10 ▲ 0.30Societe Generale 1.16 4.25 2.10 0.06 0.25 ▼

SEB Merchant Banking 1.30 4.50 ▲ 2.20 0.10 ▲ 0.30UBS 1.41 ▲ 4.26 2.25 ▲ 0.10 ▲ 0.86 ▲

Mean 1.21 4.28 2.13 0.08 0.50Low=▼ High= ▲ Source: Corporate Finance

Forecasts for three-month interbank rates for February 2005US UK Euroland Japan Switzerland

ABN Amro 2.45 3.65 ▼ 2.15 0.05 ---BMO 2.45 4.90 3.10 ▲ 0.60 ▲ 1.90 ▲

Commerzbank 2.60 4.50 2.70 0.00 ▼ 1.40Goldman Sachs 1.20 ▼ 5.20 ▲ 3.00 0.10 1.80JPMorgan Chase --- --- --- --- ---Lloyds TSB 2.50 4.75 2.00 ▼ 0.20 1.30RBoS 2.60 4.90 2.10 0.10 0.60 ▼

Societe Generale 1.36 4.63 2.20 0.12 0.67SEB Merchant Banking 2.00 5.00 2.80 0.30 0.80UBS 2.75 ▲ 4.70 2.37 0.10 1.25Mean 2.21 4.69 2.49 0.17 1.21Low= ▼ High=▲ Source: Corporate Finance

Twelve-month foreign exchange forecastsEuro/$ £/$ $/¥ $/CHF Euro/£ Euro/¥ Euro/CHF

ABN Amro --- --- --- --- --- --- ---BMO 1.30 1.85 105.00 1.20 --- --- ---Commerzbank 1.20 ▼ 1.74 ▼ 110.00 1.26 ▲ 0.69 ▼ 132.00 1.51Goldman Sachs 1.30 1.78 95.00 ▼ 1.22 0.73 ▲ 123.50 ▼ 1.59JPMorgan Chase 1.37 --- 95.00 ▼ 1.11 0.71 130.00 1.52Lloyds TSB 1.30 1.83 110.00 ▲ 1.18 0.71 143.00 1.54RBoS 1.27 1.81 99.00 1.26 ▲ 0.70 126.00 1.60 ▲

Societe Generale 1.27 1.85 104.25 1.24 0.69 ▼ 132.40 1.56SEB Merchant Banking 1.25 1.82 100.00 1.24 0.69 ▼ 125.00 1.55UBS 1.40 ▲ 2.00 ▲ 99.17 1.06 ▼ 0.70 138.83 ▲ 1.48 ▼

Mean 1.29 1.83 101.94 1.20 0.70 131.35 1.54Spot rate on 1 March 2004 1.24 1.87 108.95 1.27 0.67 135.59 1.58Low= ▼ High=▲ Source: Corporate Finance

withdrew from Europe’s exchangerate mechanism in September 1992.

The high yielding currencycontinues to gain momentum againstthe dollar with many traders takingthe Bank of England’s (BOE)unanimous vote to raise interest ratesin February as a sign that there isn’tthe same level of concern aboutcurrency strength at the BOE as thereis at the European Central Bank.

This sentiment could not have beenbetter for sterling, as analystsinterpreted the news as allowing forfurther rate hikes in the next fewmonths. Currency strategists haverenewed their predictions for cable,advocating that it could hit $2 to thepound in the months ahead, asinvestors follow the high yieldcurrencies and stay away from holdingdollar positions. JE

Euro stuntsgrowthLet’s hope the euro has a good head forheights. The European Union’s basketcurrency hit a lifetime high of $1.2926against the dollar in February, after yetanother European Central Bank (ECB)council member waxed lyrical aboutthe currency’s pain threshold againstits continuing meteoric rise. It seemsthe ECB’s preoccupation withappropriate interest rates in theeurozone outweighs any worries itmay have on the currency front.

But, Europe could well do without astrong euro. The French economy, theeurozone’s second largest is strugglingto grow, posting its worst growth levelof the last 10 years at just 0.2 % in 2003.Germany, the eurozone’s largesteconomy, fared even worse,contracting 0.1 % during 2003. Is it acoincidence the euro trades where itdoes and the largest economy in theEuropean Union contracts for the firsttime since 1993?

The euro is likely to see-saw overthe coming weeks as traders test theresilience of the ECB and profit-takingorders take effect on the risingcurrency. JE

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