Being a CFO and other topics

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Being a CFO. Some of my thoughts and observations after years of being a CFO

Presenting Well From Home

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On April 2, 2020

In CFO, Investor Relations, Leadership

I have not written a blog entry in a while, but I decided that I had a few things to share since many of us are working from home and are spending a lot of time on video conferences.

Here are the three most important areas to focus on to make you look better when you are on a video conference using a webcam.

First, get the webcam to the correct position. You want it eye-level or slightly higher and looking down. If the webcam is embedded into your laptop, elevate the laptop until it is at a better angle. it is much more flattering to have the image being recorded looking straight ahead or slightly down that it is to be recording in an upward angle. When talking to people, look into the camera lens as that is makes it appear that you are looking at the person you are speaking to.

If you can, try and get your camera control software to zoom in and adjust where you appear on the screen. Many good webcams cameras are fairly wide angle, and that makes you look smaller and picks up more of the background.

Should Look Like This (video is not mirrored but appears correctly to viewer)

Try to wear a plain shirt and shirts with lines or a plaid pattern can “swim” when being recorded on a webcam.

The second important area to focus on is lighting. You want to be lit the most from in front and slightly above is better than straight on as looking directly into a bright light can make you squint and cause eye strain. Some side lighting helps, especially if it is diffuse and a specific back light can also help to separate you from the background. Most people look better with side lighting just from one side to provide a little bit of shadowing as it adds definition to your face.

I use an elgato keylight as my main lighting source. It is behind my camera and elevated. I like the clamping mounting system as it takes up very little desk space. If you think you will move where you do the video conferencing pretty often, the key light air might be a better choice.

If you do research on lighting for video shooting, you will see the above advice echoed. Most professionals use three point lighting. The closer you can emulate that, the better you will look.

The last area to focus on to look as good as possible is the background. Where possible, try and have as plain a background as you can. I use an elgato green screen as it sets up quickly and it easy to store when not in use.

Plain Background

If you can’t be close to a plain background, or create one via a green screen, you end up with something that looks more like this, which is not as good looking on video:

Busier background.

We all don’t have complete control over what is in the background, that is why a pop-up green screen helps. Note how distracting the window in the background is. Try and avoid that as much as possible, especially if you do not have a good light in front as it will back light you and make you look dark with your face hidden in shadows.

With a green screen, the virtual background feature of zoom is much better. If you are not using zoom with its built in virtual background, you can use a program such as XSplit Vcam that will take your webcam feed and insert green screen/virtual background functionality into pretty much any video conferencing software.

As a more advanced topic, if you want an even better video feed than a standard webcam, elgato makes a device called a camlink, which is a USB interface between a DSLR camera with clean HDMI and your computer that allows you to use the superior lenses and sensors in the DLSR camera as a web cam. You probably want to pick up a magic mount by elgato as well.

As it is a little more advanced, here are 2 videos on camlink and using a DSLR camera. They are from the point of view of streaming, but the advice applies to video conferences.

I also provided link to the various product pages below.

https://www.elgato.com/en/gaming/key-light

https://www.elgato.com/en/gaming/green-screen

https://www.elgato.com/en/gaming/stream-deck

https://www.elgato.com/en/gaming/cam-link-4k

https://www.elgato.com/en/gaming/multi-mount

If you want to sound better, the microphone that comes with this headset is quite good.

https://www.corsair.com/us/en/Categories/Products/Gaming-Headsets/Wireless-Headsets/VIRTUOSO-RGB-WIRELESS-High-Fidelity-Gaming-Headset/p/CA-9011180-NA

Evaluating Opportunities

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On February 12, 2018

In CFO, Investing

When I first moved to Silicon Valley in 1999, I routinely received phone calls from DotCom start-ups looking for a CFO. I was a Controller of a division (close to $1B in revenue) of a big company, but I had just been promoted to that level for the first time and had near zero experience in what I thought was needed to be a CFO (the general advice these days seems to be to pretend you can do it and just take the job). I used to have a list of the companies that called me, and none of them made it. At the time, they told me I was an idiot for not leaping at my chance. Cryptocurrencies remind me of that.

Now, before I continue, I must admit that one of the companies that contacted me was Amazon.com. This was after they had gone public and their stock was quite high. They were looking for employees with inventory and supply chain experience, the title and pay was far below what I was making and I would have had to move to Seattle. The stock suffered in the DotCom bust, so it seemed that my decision to not change jobs was smart, but if I were really the genius that many bitcoin experts claim to be today, I would have invested then. I would have been quite wealthy now if I had.

I can only console myself in that I was also offered a job a few years later for a lower title and pay at a major networking company. When I declined, the recruiter scolded me for being turned off by their attitude and then not long thereafter, they took the largest inventory write-off that I am aware of and the stock really has neve recovered its high-flying ways since then. Finally, and more directly related to cryptocurrencies, I was a long time participant in distributed computing projects like SETI at Home and such and the early appearance of bitcoins and the first miners came from people like me that were using idle cycles of our CPUs to do something else. However, I never installed the bitcoin mining software. In theory, I could have been mining bitcoins when it was possible to solve for them using a regular PC and do it as an individual. If I had done so and kept the bitcoins I made, at today’s prices I would be far wealthier than my reasonably successful career has taken me to.

I added those three examples because I want to make it clear that I have no magical ability to know the future and perfectly guess every opportunity. This is compounded by the fact that you need to choose now and will not know until later, and often much later, if you made the right choice. Using bitcoins as an example, there is not guarantee that I would not have sold the coins at $100. Considering that I have played Magic the Gathering (a card game) off and on for quite a while, it is likely that I would have placed coins in MtGOX and lost everything I put in there. When you back solve what could have happened, most people solve to the best possibility, not the likely one even if you made one arbitrary correct decision that you did not in the past.

I have seen quite a few posts on bitcoin value cross my feed on Linkedin in the past few weeks, much more than when it was going up and all from people that claim some expertise or professional skill for bitcoin and all suggesting that now is the time to buy the dip.

Blockchain is real technology that is finding new applications. All the cryptocurrencies are experiments and they are valuable for the same reason why anything is valuable – people are willing to spend money on them. There certainly is a good argument that a currency linked to a blockchain has merit and can quite valuable for online transactions. There is no doubt at all that blockchain as a technology will see many applications, like perhaps tracking materials in the pharmaceutical production chains.

There also is no doubt that there will be lasting wealth that comes from the innovation, but I don’t think that trading advice (buy or sell) is the right thing to promote on Linkedin or on a Facebook feed. That type of decision needs to be an informed one from individuals, and older advisers may be trapped in past expectations, but they have also seen a few bubbles pop as well.

Even the arguments around cryptocurrencies and why they have value and are a currency themselves or are more valuable than other traditional currencies are suspect. For those of you that don’t know the standard argument, the normal value drivers mentions are i) production cost, ii) scarcity and iii) utility. The basic argument is that the cost to produce a bitcoin is high, they are scarce by design with only 21 million that can be produced and the blockchain technology makes them useful.

However, the production cost is based on current brute force problem solving and scarcity is all about bitcoin itself, not cryptocurrencies in general. There are near infinite algorithms that can be designed to generate a cryptocurrency and there are plenty of new industries where the first mover did not ultimately dominate (Netscape is a good example as is Visicalc and many other similar examples). The utility is even questioned because the transaction time and process to verify a transaction is thought to be too long and many merchants that had been accepting the currency have abandoned it as the transaction time exposed them to too much valuation variance. Even the early criminal use of bitcoins (the initial foundation in its value came from criminals using it to transfer money for drug deals and to do money laundering) has suffered as authorities have proven to be much better at tracking and shutting down bitcoin fueled deals than was originally assumed.

Even the crypto part of the equation may ultimately prove to be flawed as there still is the real possibility that the assumptions behind the math that powers it may ultimately prove to be false. Eventually there may be no more “greater fools” and there is a risk when you buy that you will end up being the last and most foolish.

I’ll try and parse through my thinking on these types of opportunities to show the how I think through I as an example of what I have done in the past as a CFO and what I do today when asked for advice as a consultant.

First, the normal reaction is to shut down and say “no” to new opportunities because these always represent additional effort needed and additional risk. In the case of bitcoin, the easy responses are “tulip mania”, “artificial bubble” and “ponzi scheme”. I am not saying that those responses are correct, but the longer I have been at it, the easier I find my mind comes to a way to say no. Saying no is easier, and, since the consequences of saying yes or no are rarely immediate, you can insulate yourself from the lost opportunity or loss easily. The problem is, saying “no” is easier, but it also closes down growth and opportunity and isolates you from changes in the market. When I detect that instinctive “no”, I push it down and listen and ask one or two simple questions. This is not free, that costs time and mental effort and causes some distraction, but I think that cost is worth the possible upside, so I pay it more often than not.

The questions I normally ask are: 1) Is this a decision I can or should make, 2) Can I or we afford the expense (or not afford to spend it), 3) How long do I have to consider it, and 4) Can I understand pretty quickly what the idea is all about and how it would be profitable?

The first question is an interesting one. As a Finance professional, and especially as you move up the management ranks, you will get both increasing power over spending and increasingly be lobbied for many different ideas outside of the traditional Finance responsibilities. However, you also need to know your limitations. One advantage of being part of a team is access to opinions and expertise of your team members, and using that will probably result in more informed decisions. You also need to consider that the latest encryption standard may seem cool to you, but the head of IT may not want you to install the ransomware you were just pitched in email.

The second question really is about practicality. I would love to have several different phones and VR headsets and whatever else comes out to see which one is good, but I only really need one phone at a time and I barely have time to use the VR headset I already have, so even more does not help. In the case of bitcoins, like most people, I have a wide variety of investment options in front of me, and bitcoins are just one of them.

Coupled with the cost and time commitment is the need to understand if you should be doing without it. I could just use pen and paper and brain power to calculate my taxes, but Turbotax does a much better job and does it much faster. The danger with budget or time pressures are that you may ignore something important. I have used the time when I was flying to read up on new technologies and I have always carved out some time to look at what has changed in the market compared to what has been happening. This is important for personal portfolios and reserving even a small amount of your investment capital (5%) to invest in new technologies or trends can help here.

It has been my experience that the shorter time you have to make a decision, the less something makes sense. There always is lots of marketing and media hype to buy or sell now, but rarely do you need to make an instant decision. If a technology is good, or a trend really has changed, you can enjoy the benefit well enough if you spend a little more time to make sure you understand what you are considering. Most importantly, the risks it brings. In the case of cryptocurrencies, there are a lot of self-proclaimed experts, but most a simply hyping without any depth or new information. I also have seen a disturbing pattern emerge of people with fairly questionable backgrounds suddenly getting involved. It sure is easy to promote this new idea that replaces traditional investment products when you lost your broker license because you were convicted of defrauding your clients.

Counter to the previous concept of making sure you have enough time to consider the new opportunity, it also must be something that you can grasp with a reasonable amount of time and effort. There are always slight edges that someone with a decade of experience and education can exploit, but it might not be the right thing for you to try and figure out. Quite often new technology products work well for people with the specific skillset to use them but are not worth the cost f you cannot program or change all the base setting on your computer to get the additional 5% performance boost. Learn to recognize when something is more complex than you have the training and time to understand quickly and deeply enough and reach out for help. Do not be afraid to say you do not know or do not understand.

I have always been an intuitive problem solver but working in my chosen field which is seeped in process and logical progression, I have to take what I feel is right based on my internal process and break it down in a way that I can repeat and explain it to the people waiting for my decision.

In the case of bitcoins, and other cryptocurrencies, I have seen little reason other than pure speculation, to try them out in any real way. I can understand that the base technology is something to follow closely, but I do not think that it is something that needs urgent action and there are real risks of fraud and theft and regulatory curtailment. I also am concerned about the poor quality of the advisers that have attached themselves to it. As I cautioned up front in this blog, I could have made quite a bit of money just by embracing bitcoins earlier in my life and I was a natural fit for the early adapters there. Unlike the self-called experts I see in the media these days, I know that I don’t know a lot of the details and I think it is not worth my time and money to learn more, but it is complicated and I could be missing something. I have a real edge in other investment and finance areas and I am choosing to spend my time there.

CFO Pay

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On August 9, 2016

In CFO, Leadership

One question I get pretty often from people starting in Finance as a career is how much does a CFO get paid, and how do you make sure you are getting enough.  In many ways, that is a very puzzling question to me.  In a US-listed public company (not a foreign private issuer), executive pay is public and normally can be found in the proxy statement that is filed annually.  So it is no secret what CFOs get paid, everything is laid out in their contract (material contract and a copy is filed with the SEC) plus broken down in some detail in the proxy statement.

These are my general rules on pay and they really apply to every position, not just CFO, but I will use CFO as my example.

No one will take care of your pay except for you and you will only get what you negotiate for.  Hoping that you’re doing a good job and that the pay will just be adjusted accordingly is a false hope.  You need to be your own advocate here.  Maybe your boss needs to carry it to the compensation committee.  Maybe the head of HR needs to go argue on your behalf with your boss.  Whatever the case, if you are not making sure that more pay is needed, chances are good that nothing special will happen.

The best and only clear time to negotiate is before you accept the job during the hiring process.  Once you are on board, it will become much harder.  You need to know what a fair price for the position is.  You need to know what you would accept to take the job.  You need to negotiate for that up front.  Some negotiation is not only expected, if you do not, it may hurt their perception of you as a good Finance leader as they may wonder what you will do as CFO.

Most companies are not interested in hiring a leader that is too mercenary and you run a risk of being too demanding and setting yourself up to fail from the very beginning.  This needs to balance with the point above about the best time to negotiate is when you are being hired.  It is my view that there is more to life than being paid cash and the opportunity to learn and to work with a good team is important.  I also do not get paid as much as some of my peers and their setting a higher bar up front never seemed to hurt them, so I might be wrong there.

There are a few immediate sources of what pay you should be expecting.  The first is the proxy statements of the hiring company and its peers.  Look at what the CFO you are replacing received.  Look at what peers or companies of similar size and complexity are getting paid.  That will set a baseline.  The second source is the recruiter that approached you (assuming that is how you heard of the opportunity).  You need to keep in mind that their client is the hiring company, but they also play a role in setting the right expectations with the company.  Don’t be afraid to be upfront with what you are making now, they deal with attracting talent as a living, they are used to that type of discussion.  If what you want is too much, they will tell you.  If you are asking for too little, then you did not do your homework and maybe lack some confidence.

Once you are set on the base salary, you need to make sure the bonus is appropriate.  The same two sources you used for salary are good for this as well.  You should not only focus on the base bonus, you need to understand when it will be paid and in what circumstances it will be larger than base.  My normal expectation is that by working hard, 80% of base bonus should be very achievable.  As I have worked in several turnarounds, there have been years when no bonus was paid.  Again, it might be somewhat of a failing in my views as I have always accepted the same targets as the other team members when I have started.  Quite often the company is having a bad year and that is why they are changing CFOs and that approach means zero bonus for me as that is what the existing team is getting.  It is not uncommon to negotiate for a set bonus for the first year.  In many cases you would earn a good one if you stayed where you are and part of recruitment is overcoming such obstacles, so the hiring company often will make you whole.

The final “pay” part is the equity you will receive.  This is a question of how much the initial amount is, what can you expect on an annual basis and will you receive stock options or restricted share units.  You certainly should try to be made whole for whatever you would give up to join the new company.  You probably cannot replace the vesting, but the value should be on the table for negotiation.  Annual grants are important.  Over time, your base pay and your bonus will help to let you pay your mortgage, pay for your kids to go to school and save for retirement, but it is unlikely to change your life.  Stock compensation can change your life.

The normal choice between RSU and Options is certainty versus upside.  You really cannot control the overall stock market and there always is a risk that you do well but the stock cannot perform well because of general market conditions.  In that case, RSU are much better as payment, even if smaller, is at least going to happen.  Sometimes you are not doing all that well but the market takes off and your stock moves with it.  In that case, Options end up much better.

In the long run, as a responsible CFO you should tend to prefer RSU as dilution is smaller and expenses are more certain and predictable.  For pay, if the company is stable and growing then RSU will give you certain return.  If you are doing a turnaround and you want the biggest pay you can get, then Options have the most possibility.

One smaller item to consider is retirement savings.  I am sure that you will save the most you can into the 401(k), so any matching is a plus.  You also need to understand if the plan is top heavy and what happens if executives cannot save via the plan.

The pay factors to consider do not end with salary, bonus and equity.  Pay attention to the complete package and the contract they are offering you.  Vacation time is important.  You do not want to have a seniority-based system where you start with one or two weeks like any other new employee and only increase the longer you are there.  Clauses like this tend to be boilerplate and the same for all new hires and you need to pay attention to it.

You also need to pay attention to the severance clauses.  In the USA, at will contracts are typical.  So you need some protection if you are let go without cause.  It takes a while to find a senior management job and you should negotiate a buffer.  Look at what the comparable are as in all other pay items, but 6 months is about as little as I would accept and one year is not unusual.  Change of control clauses are usually somewhat linked to severance clauses.  Make sure you understand what the standard equity programs give all participants if there is a change of control.  If your equity does not vest on change of control, then try to at least have it vest if you are let go as a result of a change of control.  If your company is being bought they probably do not need another CFO and you are likely to be let go.  So make sure you are protected here.

Make sure there is a clear “Good Reason” clause in your contract that would be triggered and your severance pay become due for several usual circumstances.  For example, a forced move over 50 miles because your place of employment is changing, a drop it title or responsibility or a drop in pay, all of these are typical “good reason” clauses and you should make sure that you are protected.

Your contract will probably contain many clauses restricting your ability to compete if you leave, stopping you from hiring co-workers, making anything invented while you are there company property and defining what is considered to be confidential information.  Many of these are boilerplate and in most employment contracts for the new employees of the company.  Make sure that the requests are reasonable.

Finally, look at miscellaneous items like travel policies, restrictions on you being a Board member at another company and other anti- “moonlighting” clauses.

You would be well served to have a lawyer, especially a lawyer experienced working with employment law and employment contracts review your contract before you sign.  Make sure you understand what you are being asked to sign and that it is worded properly so that you are protected.

That really is all the top level advice I have on CFO pay.  Knowing what the market price and standard terms and conditions are is the most important.  The rest will come down to your ability and just how attractive you really are to the company trying to hire you.

My Technology Life – An Update

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On August 2, 2016

In 3D Printing, CFO, Computer hardware, General, Hobbies, Leadership

I recently built myself a new computer after using the last one for almost 5 years.  My old computer was able to run all the programs I had without any real issues, but it was slowly getting more unstable over time, and the update to Windows 10 had been rough.

The Computer

This time I wanted to build a computer that could run the latest virtual reality headsets and I wanted to have something that again would last me quite a while.  I typically buy the second fastest consumer CPU that is available as the fastest is normally at a high premium in cost but with little extra speed, but the Intel 6700K had finally come down to suggested retail price.  I wanted the modern chipset that went with it so something on the Z170 chipset was what I looked for in a motherboard.  My timing was not that great for a video card in that both NVIDIA and AMD were about to release their latest generation, so I actually waited over a month after buying the rest of my components before fully setting the computer up.  The motherboard did have built in graphics and the CPU did as well, so I was able to test everything except for the new card.

I will make two observations.  The first is that I have always felt it important to be agnostic about brands when making choices on most of the components.  Years ago there was a great deal of variety in motherboards and how features were implemented on them.  Today, the two main CPU makers (Intel and AMD) release a new chipset with each new CPU generation and that chipset is very full featured.  I have almost always used Intel CPUs because for many years, they have been the best performing.  AMD often wins on the cost to performance basis, but it has been quite a while since they have had a chip that can compete for pure performance.  I did build an AMD-based computer a few computers ago because that generation they did have the best CPU.

CPUs are fairly quiet, but there often are techie “holy wars’ over video cards.  I admit to have fought a little in them back when 3DFX and their voodoo chips revolutionized 3D, but I got over it.  Now I just buy the card that I think does the best for me.  The two main graphics processor unit (GPU) providers are NVIDIA and AMD (they bought ATI years ago).  My last generation computer has an AMD video card (a 370) and that was based on AMD having better multi-monitor technology at the time as I like running 3 monitors.  There are edge cases where AMD has had better chips, but for the most part, NVIDIA has had the highest performing chips for a while.

Unlike CPUs, the price jump to the most powerful GPU to the second best is still enormous and unless you really are a power gamer or power user, there is little need to get the best GPU.  For the computer I just built, I ended up with an NVIDIA 1070 based video card (the board maker was MSI).  I had considered the AMD RX 480 as it was a lot less expensive, but the demand was so high that cards were hard to find and the custom cards had not come out yet.  So I went with the 1070.

I could write pages and pages on the latest and greatest differences between the board makers and the different CPU and GPU you could choose, but this blog entry will exist for a long time and tech sites are always much more current (I go to anandtech.com but ownership changes have made it less useful in the last year).  So I will give some more general observations.

The premium priced components in the consumer space are all aimed at gamers.  This tends to result in multi-color LED lights and a black (and usually red highlights) color scheme.  There actually is very little value add from what I can tell from my research for the extra price you pay.  There certainly is much less bang for the buck.  The video card I bought is branded as an MSI “gaming” card and it looks nice but does not really offer any performance improvements over non-gaming cards.

Motherboards are similar.  The Z170 chipset has plenty of solid boards that cost around $150 (can be found for less during sales).  You can spend $250 to $300 and just get a few extra bells and whistles that you may never use.

One final comment, if you build the computer yourself, be prepared to troubleshoot yourself and to have to refresh your knowledge.  I had a faulty power supply and it took me quite a while to track the problem down.  Google and technology forums are your friends here.

This is the system I ended up putting together:

Intel Skylake Core i7-6700K
– the fastest CPU currently available. Depending on luck, can be overclocked a fair amount
Cooler Master Hyper 212 EVO – CPU Cooler with 120 mm PWM Fan
– One of the bestselling coolers. Quite tall, was interesting to install
ASUS Z710 – AR
– all of the modern features of the chipset and none of the “gamer” bells and whistles that jack up the price. PCI-e sharing (which is common for the chipset) so might be a concern for dual GPU use but I plan on only using one GPU.
GPU – MSI Gamer NVIDIA GTX 1070.  As I mentioned, both the main GPU companies just released new cards and it is hard to find cards priced at regular retail prices.

G.SKILL TridentZ Series 16GB (2 x 8GB) 288-Pin DDR4 SDRAM DDR4 3733 (PC4 29800)
– this is actually somewhat of a waste. Super-fast RAM that I probably would not need and I could of gone down a few notches in speed and double the amount for the same price as I will not heavily overclock
CM Storm Scout 2 Advanced – Gaming Mid Tower Computer Case with Carrying Handle and Windowed Side Panel – Black
– This is an updated version of the case I have been using the past 5 years. Roomy and has a handle on top which comes in handy more often than not. Plenty of room for fans, and a good front panel for USB
Antec 750 Gamer power supply.  I originally had a corsair power supply but it was faulty.
– Should be way more power than I need, especially if I do not have 2 x GPU
SAMSUNG 950 PRO M.2 256GB PCI-Express 3.0 x4 NVMe Internal Solid State Drive (SSD)
– Very fast SSD (motherboard supported) that will be my boot drive and will have some applications on it
Mushkin Enhanced Reactor 2.5″ 256GB SATA III MLC Internal Solid State Drive (SSD)
– Secondary SSD for often accessed files and other applications
Seagate 3TB Desktop HDD SATA 6Gb/s 64MB Cache 3.5-Inch Internal Bare Drive
– Should be plenty of room, especially since I have a 16TB NAS
LG Black 16X BD-R 2X BD-RE 16X DVD+R 5X DVD-RAM 12X BD-ROM 4MB Cache SATA Blu-ray Burner
– I debated if I really needed an optical drive and finally decided to get one as I can see myself watching movies on the computer and I have a lot of Blueray disks (PS4 is my main player)
Razer BlackWidow Ultimate Stealth 2016 – Backlit Quiet Mechanical Gaming Keyboard with 10 Key Rollover
– Decided to try a mechanical keyboard. These have Razer designed mechanisms, not sure if as good as Cherry-MX switches. Quieter version.
Logitech G600MMO Gaming Mouse – Black
– Will move over from my existing computer. I do not use all the buttons and may look at another mouse

VR Headset

The latest technology that is just starting to go mainstream is Virtual Reality.  There are two main contenders for the headset market right now – the Oculus Rift (which is backed by Facebook) and the HTC Vive which has teamed up with Steam (owned by a company called Valve and the main marketplace to buy PC games online).

If I had to sum up the main differences between the two headsets, I would say that the HTC Vive comes with two controllers and can be used standing and moving (called room-scale) and sitting down while the Oculus Rift is mainly meant to be used sitting down and does not as of now come with VR controllers.  The Vive has a lot more content available for it now, but many programs are made for both headsets and there are not many non-game programs available.

I got to try out the Vive at uploadvr.com ‘ s offices in San Francisco when I was there for a meeting with a McGill University representative who wanted me to help in their entrepreneur program.  I had read that the room-scale made a big difference and when I tried it out I agreed.

The experience in both headsets is pretty good and you do really get a sense of immersion far beyond what looking at a screen will give you.  The Oculus Rift is about $600 and the HTC Vive is about $800, but the Vive comes with two controllers and two sensor boxes that enable the room scale VR.

I picked the HTC Vive as it has more software available today and because the built in ability to move around instead of just sitting down sold me on the system.  The actual graphics capability is about the same between the two controllers and both are just emerging, so the “best” choice may change rapidly.

I have only used the headset for a few days., so I will hold off on a detailed review, but I can tell you that the base experience lives up to the hype.

I am waiting to see what non-game uses there are for the headsets.  There is a fair bit of work being done to develop approaches and applications for the virtual world the headsets put you into that make it useful for non-games, but there are not that many real life examples yet.  I will be attending a meeting on that topic in a few weeks and will update and right a new blog after I have more information.

Getting the headset to work was somewhat of a struggle and the programs are all new and very much “early access”, so I hesitate to recommend it for everyone, but it has been quite fun so far.  One of my friends brought his young son over (son is around 10 years old) and the son was fascinated with the headset and wore it for hours.

3D Printing

As I mentioned in an earlier blog, 3D Printers are technology that is still not quite ready for mainstream use.  They still take a lot of fiddling with to get to work well and consistently and you need to be comfortable with at least some light mechanical work.  I recently bought another 3D printer, the Wanhao Duplicator 6.  It is over twice the price of the Wanhao Duplicator i3 I started with (and that is an excellent starter machine), but it is much more capable as well.  I will do an update just on the new printer and what I have learned since I bought my first one.  This update will include using a raspberry pi mini-computer to remotely control and monitor the printer.

The raspberry pi mini-computer part of my coming update will be extensive as well.  Quite remarkable what you get for around $50.

Why Bother?

This is a blog on being a CFO and I usually have Tuesdays are purer “CFO” topics and Thursdays are where my occasional other blogs show up.  So you may be wondering why I am writing on building a PC or VR headsets or 3D printers.

My reasons are quite simple – career growth and personal growth.  I live in the Silicon Valley area and there is a lot of interest in the technology around computers, VR and 3D Printers.  More and more, companies are looking for CFOs that are more than just the accounting and numbers person.  IF I don’t expand my mind and learn by doing in areas like this, then how can I be credible when I claim to be a good fit for a technology company CFO role?

I get personal satisfaction on learning new things, but with the competition out there today, I really think that you need to keep actively learning.  If you stop and rest on your laurels, you will be passed by.  I often have had staff ask me how I got to know our company’s products, and it is the same drive that makes me want to understand VR Headsets that made me dig into how electricity comes from a solar panel.

So try not to dismiss other people trying to learn and very importantly, encourage your staff to do so.

 

 

Basic Information Security

By

On July 26, 2016

In CFO

If you are a CFO, you will be carrying a lot of confidential information with you, you will have a lot in your office, and your email and messaging system will be full of material, non-public information. If you want to save yourself from embarrassing leaks, at least practice some very basic security measures.

The very first step you need to do is become aware of the fact that risk exists. You’re reading this blog entry, so you must care enough. I cannot cover every single possible example in a simple blog entry, but I will try and do at least a grand overview of the biggest holes and issues you may face. I will be broader than just IT, but almost everything we do today comes from some digital source.

Before I go into my review, it is impossible to fully secure a typical commercial establishment against very sophisticated resources. If you have drawn the attention of national spy agencies or very skilled criminal groups, then you will be under even greater threat. Encryption is not even the most reliable option as there is reasonable evidence that the algorithms at the heart of most publicly available encryption were designed and seeded in such a way that agencies like the NSA could break it. Just because you cannot reasonably expect to always be able to stop such threats does not mean you should not make it harder for the average threat to get through.

Physical security

Even if you are very modern and rely heavily on computers, you will generate a fair amount of paper. I personally also carry around a moleskin notebook (the small size) which I use to quickly jot down notes in meetings. All of this paper is a potential leak.

Close to earnings reports, you will almost for sure have financial statement drafts and drafts of your press release printed out. Not just you, your Controller and your consolidation staff, your Investor Relations staff and your auditors and lawyers probably have advance copies. You need to try and not make it trivial to get access to the information. This starts with controlling access to the paper.

Before you start feeling smug about the receptionist and the locks on your office doors, think a little more broadly. It is an almost certainty that cleaning staff and security staff have master keys to enter any office. Many of these are even outside contractors. You also are probably having meetings in your “secure” office during the day, sometimes with outside vendors. If you leave sensitive copies on your desk or just casually toss drafts into your regular garbage, you are exposing yourself to more risk than you should be.

The measures to take are simple. Unless you are working on the pages, at least keep them turned over. If you are throwing out a draft, shred it or put into into a controlled container that will be shredded. Lock papers away in your desk out of sight when you leave for the day. If you are traveling with a paper draft, then be very sure and paranoid about their location and do not leave them easily accessible in your hotel room.

One final area of physical security you should worry about is either reading them on a screen (or paper form) in public places. In particular, in an enclosed space such as an airport, on an airplane or a train station or on a train. Most of my travel is business travel and I tend to have lounge access and if I am not sitting in business class, then I am up front in the more comfortable coach seats. All around me are other businessmen and I can tell you from personal experience that it is very easy to read other people’s screens without even meaning to or making an effort to. The same goes to overhearing phone conversations, so many people talking on their phone use headsets and really have no idea just how loud their voice is (and my natural speaking voice is pretty loud). There are privacy films that can be used on laptop screens that greatly reduce the viewing angle and you can be cautious about how you tilt or otherwise position your screen (likely to be a tablet or phone as well these days). Keep your phone face down to turn off the message preview. Use code words for transactions.

Social engineering

The second big danger that your company will face from a determined attacker is what is called social engineering. Social engineering is an attack that focuses on what. Is often the weakest part of a company’s security – the employees. It is remarkable what someone who is confident and expresses themselves well can convince employees to do. A call into your admin from some one claiming to be from IT that needs access to your account to do testing or upgrades can result in your password being given out. In one of my recent jobs, I received several emails a month that claimed to be from my boss requesting that a wire transfer be sent. You would think that such an attempt would never work, but actually fraud of this nature is already costing companies billions of dollars.

I want you to think about that. A simple spoofed email is allowing criminals to steal billions of dollars from companies. This is not a sophisticated and highly technical virus or exploit, this is a simple plain test email requesting that money get sent. The same type of scam is done on a smaller scale targeting elders via a phone call claiming that a family member is in trouble and needs an urgent wire transfer, but a phone call is not even needed in some cases.

The only defense to this is training and awareness that it will be attempted. No one will fall for such a scam if they know it could happen and have their defenses engaged at all, so make sure your staff is aware. I would alert my Treasury team occasionally about the emails I was receiving and warn my boss as well. Our IT team tried to modify our spam filter to catch more of those emails, but they are not the easiest to screen out without catching too many other emails.

Remember that criminals know that a few people have access to earnings releases and other highly sensitive documents and that you are one of those people. Plan accordingly and keep your guard up. Do not give out your password. Don’t open attachments in email from people you do not know and make sure that even people you do know are not sending you executable files. All the hard work your IT team does in securing your system can be undone in an instant if employees open up attachments without thinking. In general, opening up emails on your phone or tablet instead of your laptop is a little safer, but smart phones can be compromised and it is not a sure thing. Even the iPhone with a curated App Store had malicious code inserted on a mass scale from programmers in China using unauthorized tools they were able to download faster than the official tools.

Passwords

Don’t use simple and easy to guess passwords and don’t write your passwords down where they are accessible. Make sure that your browser does not remember and autofill crucial passwords like those you use for banking.

In general, a phrase consisting of two words, at least one character in CAPS and a number and a special character makes your password much stronger and harder to break. It also makes it easier to memorize if you use a phrase. Try and change your passwords occasionally and don’t use facts like your birthday or family member names that can be easily researched online, especially in today’s open, social media filled world.

Let me say this again, don’t write your password down. If IT has a system of generating impossible to remember passwords under the mistaken assumption that nonsense characters are best, push back on that. All it leads to is post-it notes with the password written down and that allows the cleaning lady full access when no one else is in the building.

WIFI networks

When you travel, it is quite common to connect to hotel and other shared networks, like in airports. Everything you transmit is open and public. Most websites and email systems do encrypt passwords and other sensitive information, but many do not and not everything will be protected. Use a VPN (virtual private network) where you can. Otherwise, assume that what you share over the Internet can be read by any determined person on the network. Not that they need to as you are typing in plain sight and talking loudly on your cell phone.

Home router and home network

Have you ever updated the firmware on your home router? How about setting the default user ID and password to something else? The security cameras in your house, you realize that they often have mini-web servers embedded into them and they all have default user ID and passwords as well?

Maybe you’re just the CFO of a small company and it really does not matter, but maybe you’re not and it does matter. It usually is pretty trivial to find out where people live. Wifi does not stop at your house walls (or apartment walls) and if they can get onto your network you might as well be on a public network.

Same for the Network Attached Storage I suggested you buy in an earlier blog. They are all Linux based and quite a few have had massive security flaws. So all the documents you store there can be vulnerable, especially if you open it up so you can use it from outside your home.

Anti-virus software

I think that a good firewall (usually the router is the best line of defense for that) is important and not opening strange attachments is second on the list, but make sure that you have some defenses against virus attacks on your computer. Remember that you probably have kids and they may not understand the risks, especially when they are younger. So they can get their PC infected and since they are on your home network, you are at risk as well.

IT Policy and Awareness

As much as you might think that your IT team is on top of typical threats, it really depends. The more central control your IT department asserts, the less likely you are vulnerable to non-standard equipment but the more vulnerable you are to specific exploits that no one will have defenses against. As super restrictive policy will almost always result in individual employees rebelling and then your security becomes a factor of your least prepared employee.

IT is also especially vulnerable to social engineering and they control and know the master passwords and access onto your networks. If you are not running IT (as many CFO’s do), then make sure that security is discussed somewhat often at the leadership level.

Where to read more detailed information?

Budget an hour. Go here: https://www.us-cert.gov/ncas/tips and read the topics that interest you.

Oops, there was a leak

Consult your lawyers.  If material, non-public information was leaked, you probably have to do a press release under Reg FD.  If private employee of customer information was stolen, you probably have other serious disclosure obligations.

Mergers and Acquisitions – Part 3 – Afterwards

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On July 19, 2016

In CFO, Mergers and Acquisitions

Part 1 explained the reasons why to do an M&A transaction (https://mgpotter.com/mergers-and-acquisitions-part-1-why/). Part 2 was on how to do it (https://mgpotter.com/mergers-and-acquisitions-part-2-how/). This blog will discuss what to do after the deal has closed. Each step of the process has the potential to result in a bad M&A, but what you do afterwards can turn a good idea into a mediocre one.

The two most important goals post transaction are integration and synergy recognition. There are post deal closing details that also need some attention, but those are mainly just after effects of the deal and PSA and financing process. Poorly integrated acquisitions can drag results down for years and cause internal divisions and fights. Poor integration also can spill over to recognition of the synergies that were expected. It is hard to recover from a deal that should not have been done (failure in the Why? stage) or a deal where you paid too much for it or were saddled with a bad Purchase/Sales Agreement (failure in the How? Process), but you can make a bad situation worse by not executing well after the transaction closes.

After the deal closes, there is a whole flurry of mainly admin items that need to get completed and, in many deals, the deal team vanishes or disbands and the regular staff and processes need to take over. This can expose a flaw in the previous steps – if you do not coordinate with the mainstream business people, then they will get a transaction dumped on their laps without the right background and details and they will get it wrong. The deal team needs to have a clear responsibility to cleanly hand over the deal to the the business as part of their deliverables.

Once you own what was bought, you need to account for it in your books. GAAP gives you up to a year to correct the accounting based on better information, but it is expected you get it right the first time, or at least very close. You also need to tie the accounting process into any post closing adjustments based on the target balance sheet and the actual closing balance sheet. In doing the accounting, your reporting team will be reviewing the accounts that are coming over and their basis under GAAP. This should have been a due diligence topic up front, but a properly written PSA will help if you find errors after the deal closes.

If you ran a financing process to pay for the M&A transaction, there might be post closing deliverables and covenants that need to be reported on and met. This is common, and the deal and financing team needs to make sure there is a clean hand-off and that the expectations are well known and planned for.

Integration

You not only have to do the initial accounting for the acquisition, you will need to account for the new business on an on-going basis. If you are a public company, you can get up to one year before the new business you bought needs to be Sarbanes-Oxley compliant, but if the target was not already a public company and subject the the auditing and reporting requirements that come along with this, then you will need to make sure that the existing staff is large enough and technically proficient enough. Accounting and reporting is normally one of the leading functions in an integration process because of the immediate reporting needs, but if this is the only integration you have planned, you will have a failed transaction.
Integration

I joined a company earlier in my career that was the product of many acquisitions, and the sub-companies were also the products of previous acquisition strategies. While working in the audit group, it was easy to see failed integration all across the company. You could instantly tell which previous company the business unit belonged to because the chart of accounts retained the same numbering scheme and the same account names. Job titles varied based on what company the business used to belong to and the different brand and company names were still used and not in a coordinated way. Our pretty new CEO (who was excellent) received even greater accolades for cleaning that problem up and saved a lot of money and finally achieved synergies that had been expected for decades in some cases. Don’t let that happen to you as a result of your M&A process.

The two most obvious places to start integration is the senior management and the company name. If you do not touch either of them, you not only are sending a message that they are not part of you, you will also bear additional expenses for the infrastructure both represent. Most business acquisitions should be done with the plane of you placing one or more senior mangement staff into the newly acquired business to run it. The three key positions to consider for this are the CEO role, the CFO role and HR. Without one or more of these positions being rapidly replaced by staff of your company, you risk ending up with a separate culture and you increase the risk of an “us vs. them” split developing.

I generally suggest changing the company name as well. It is a very public and visible sign that things have changed and you do not risk confusion in the market place about what is happening with the company after the transaction. There may be product brand names that have value, especially if the transaction is moving you into a business or country/region that you have not been in before, but that is not a typical occurrence. This does not always have to be a one-way change, maybe your own company name needs refreshing and a major M&A transaction will provide an opportunity for a rebranding event, but having many names in the market can be confusing. Even if you keep a brand name active, the actual company name can be changed.

You need to normalize the position naming conventions and the bonus and other pay conventions as well. If you buy a smaller company, many of the employees that come over from the transaction will have very inflated titles compared to the reality in the new company. Incentives usually drive behavior and you need to make sure that the targets align with what the new, combined company should be working on. Obviously, changing titles and pay can be very emotional to the people effected, but emotions will be high anyways because of the acquisition.

Reducing staff will be a key synergy item and you should do it as quickly as possible after the transaction closes. The longer you wait the harder it is to do. If done at or just after the close of the transaction, you reduce the personal nature of the cuts and you get them behind you as soon as possible.

The integration should be planned in advance and there should be a team set up with people from your company and the acquired company. I have done this process with and without an outside consultant. In my experience, an outside consultant helps here as in can reduce some of the emotional focus away from the acquiring company cutting to it just being a process where both sides are listened to. In reality, the consultant works for who is paying for them, but a good one will add balance and experience from prior transactions that you may simply not have.

You need to drive the integration all the way through the systems and vendors used by both companies. It is inefficient to use two different ERP vendors for too long. You should look carefully at both ERP systems and pick the best one, not just default to the acquiring company’s system, but you need to make the decision quickly and get a plan moving and then execute. You need to consolidate insurance coverage, typical hotel and airline partners, auditors and tax advisors, all the standard spending. Their may be very big savings from raw material suppliers and this needs to be integrated ASAP. You start a race against a short clock in this process because you have a lot of momentum when a transaction closes and you risk normal business distractions if you wait too long.

Synergies

Synergies are expected cost reductions and additional revenue opportunities that come with the transaction. Turning these plans into reality can make the difference between a failed or lackluster transaction and a successful one. Like integration, speed matters and it should be planned in advance. I recommend that the person running the deal team not be the one to run the synergies planning as you need to execute quickly and getting the deal closed is typically too intense at the end and you could lose valuable weeks.

As I discussed in the integration section above, synergies mean reductions in staff and you should do that as quickly as possible. A well executed plan will have some happening when the transaction closes and the rest very quickly afterwards. You need to come in and let the people go in an efficient and respectful manner. Imagine that you were in the same position as they were. No one appreciates being kept in limbo and no one wants to be given false hope and then let go anyways once some task is done. It has been my experience that people are very accepting of an M&A transaction triggering a layoff as it is not personal. They also are accepting of short term assignments as part of the integration with separation at the end of the assignment.

You need to be very thorough and remove all the duplications you can as soon as possible. If you bought another public company, you need to streamline the extra admin cost that comes with being a public company. You also need to quickly review the management teams and staffing and reduce everything to one CxO for each function. Review everything and have clear goals for the savings you expect from operations efficiencies, including supply chain rationalization and economies of scale. If there are redundant factories, arrange the closing and consolidation to happen ASAP. Speed is important to capture the momentum that comes from closing the deal and there already should have been at least a preliminary plan before the deal closed.

There probably are a lot of synergies in the sales and marketing area. The trickiest one is any increased revenue you expect from the deal. If you expected to sell their products through your channels (or vice versa or even both ways), make sure this starts happening as soon as the deal closes. Marketing materials should be planned in advance and maybe even prepared in advance. The close of the M&A will create news in the marketplace and you need to take advantage of it right away. There usually is a fair amount of redundancy in the sales forces as well and this needs to be rationalized right away. If a customer will be transitioned from one sales person to another, it should happen quickly as to avoid confusion. Make sure the process does not automatically select the staff from your company. Ensure that the best sales person is kept.

IT systems are hard to switch over right when the transaction closes, but you should try and standardize quickly and have a process working to move to the new standard across all the company. I have been involved in several transactions where the systems in the acquisition were better than the ones in the acquiring company and the switch went that way. This is an area where an outside consultant doing an objective review can really help.

Part of capturing synergies is making sure the negatives of the merger that were identified in the valuation process do not happen. If there were risks identified, have people making sure that the risks do not turn into reality. Consolidate the new business into your risk management process. Review insurance needs and make sure that it is both adequate after the M&A transaction and that you do not duplicate insurance coverage.

You’ll need a lot of help from your HR function as eliminating duplication and realigning reporting is a core part of their function. They will have to do a lot of work in pay and benefits as well and there probably will be some recruiting that will be needed as unexpected resignations occur.

There is enough additional work in capturing synergies and integrating the new business that I usually suggest that you hire an outside consultant to help. The typical company does not have sufficient experience in this process and it is a short term (3-6 months) assignment. You need to make sure that you find a qualified consultant, and your accountants or lawyers might know of ones they have worked with in the past. You also gain some impartiality in the process which can help employees accept that the chance is logical versus being imposed by the acquiring company without fully considering the merits of what was acquired. Even help in keeping an aggressive schedule would be a big benefit if the outside consultant can deliver it.

At the end of this process, make sure you measure the results compared to your expectations and some synergies and integration will stretch over 2-3 years and you do need a process to follow there.

Here a few books that I have read that helped me in the past.

M&A Integration: How to Do it

Mergers and Acquisitions Integration Handbook

 

Mergers and Acquisitions – part 2 – How?

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On July 12, 2016

In CFO, Finance, Mergers and Acquisitions

This is part 2 of my three part M&A process overview. Part 1 is Why? and Part 3 is Afterwards. This blog will focus on how to actually do the M&A transaction and run the process. I will mainly discuss buying but will also have some discussion on selling as for every buyer there needs to be a seller, but there usually are more than one interested potential buyers so generally there are more people working buy processes than selling processes. I will assume at this point you have reached the end of the Why? stage and have concluded that the transaction makes sense and you want to actually move into execution mode. The level and intensity of internal effort will now jump. You probably also will need some external resources and this is where having a good relationship with your investment bankers will help. Typically you also use an external law firm as well to help with the Purchase/Sales Agreement unless you have either the right internal legal resource or a big enough team that they can handle the extra work. Remember that your Legal team can review a draft of the contract but they will need specific direction on what the transaction and business risks are to make sure you are protected. You will have several processes running at the same time.

The Why? step gave a basic value range, but the transaction step requires a lot more substantive analysis. You need to establish how you will pay for the transaction, so a financing process will start running. You need a business and legal due diligence process. You need to research the accounting implications of the proposed process. As the deal advances and becomes more certain, you need a team to start up to develop the integration and synergies realization plan. You will be running an intensive contract process with Legal leading it with the input of the business leaders. This is a lot of work and usually deadlines are pretty tight.

I can tell you right now that you need someone to quarterback the administrative part of your process that is good and can keep everyone on track to hit deadlines. There will be a lot of processes that all with have different due dates and lots and lots of meetings and reports due. I do not suggest that you try and run this all yourself. Much better to have someone specifically in charge of this. I have been fortunate to have had several excellent people that have done this for me on past deals (my last executive admin and my last Controller were both huge helps to me), and you need to make sure you have someone you can trust doing this.

Analysis process

This is the central process and the result is what you would be willing to pay for the acquisition. All the other processes feed into this central process and the timing is important as you eventually will hit a bid deadline and need to make a firm commitment. Valuation is almost always calculated in a discounted cash flow model with auxiliary EBITDA multiples as well. Usually before and after synergies and with a discount rate range to test the effect on changing assumptions there. It will end up being a large and complicated model and Excel models are easy to make a mistake in. The last deal that I lead, my boss found an error when he stepped through it while trying to understand the value drivers. Make sure you check your model carefully here. You will need to identify potential synergies that could result from the transaction and a plan to make sure they happen. I will discuss that further in part 3.

If you do not have a good internal model or if you have not run such a model before, then this is an excellent item to ask help from one of your bankers. If you have a good relationship, you do not have to formally bring them into the M&A process just for a model. If they start providing real valuation assistance and bidding strategy, then you probably should formally sign them on as an advisor. In my experience, bankers do not have the same detailed industry and business knowledge that you and the management team do, but they do know valuation metrics and what other deals have cleared at much better than you will. If they help in the modeling stage, but not enough to earn a fee and just as part of the relationship, then you owe them a favor. I strongly suggest that you use them in the financing or in another project and make sure that the banker does get paid. This actually can save money in the long run as you do not have to maintain as many staff and everyone on the other side will appreciate the two-way relationship.

Be careful with the Non-disclosure agreement that you are asked to sign as well. I usually push back on the no hiring clauses which are usually too long and be very careful that there are not clauses that attempt to limit your ability to compete. There usually are ridiculous data destruction rules as well. Your legal team will probably catch these issues but you should help them push back as well.

The data in your model should come from the target company and from you team very similar to how you would build up an internal forecast. Sometimes you are making an unsolicited offer and you need to build the model from public information and informed guesses but even then you should reach a point where the other side has opened up and is providing more detailed information. You will need to do scenario analysis where you flex factors like discount rates but also where you flex sales, costs and other assumptions like synergies. This process can help you build your plans for after the transaction and hopefully give you options to follow in case conditions change and you need to change with them to hit or beat your internal targets.

Due Diligence

One branch of the valuation process is due diligence. Although you can protect yourself somewhat in the PSA in the representations and warranties section, it is much better to discover problems before a deal closes than afterwards. As CFO, you will be running the financial and accounting due diligence (DD). You might include outside accountants to help if needed. This DD will concentrate on determining if the accounting policies used by the target are appropriate and diving into various asset classes and liabilities to see if you can find appropriate back-up to see f they are fairly stated. Normally you look at accounts receivable and inventories to make sure they are not overvalued and are real, look at the sales numbers reported to see if there is evidence that they actually happened and in the periods stated, and do a general review to make sure that liabilities are proper. Typically there is a working capital adjustment clause when you are buying a business that will adjust for any differences between the target balance sheet and the actual closing balance sheet, but this process is important anyways as issues here can call in question the basic integrity of the process itself.

One other area of intense focus for financial DD is a review of the current tax position with an emphasis on determining how aggressive they have been in the past and if there is undisclosed potential tax liabilities. This includes liabilities that could be triggered via a change in control.

Another important DD process is legal DD. Exactly what is checked depends on what the transaction is focussed on. For example, in a technology company, you would want to review the current state of patents and look for existing issues and potential issues. Very often a competitor will become more aggressive in asserting patents if they think it can damage a deal that would make a competing company stronger. You also need to carefully review existing employment contracts and if there is a history of employee actions. If you are buying a factory, you need to verify actual ownership. When buying land/development assets, you need to carefully review titles and items like mineral rights and operating permits. Make sure that any patent licenses or mineral rights easements are transferable if there is a change of control. If the asset or business is in a foreign jurisdiction, you need to make sure you understand what the local laws are and if the target is in compliance and if you would remain in compliance if you owned the target. If there is a lot of detail to be checked, you are almost always better off hiring an outside legal firm that specializes in such work. Legal DD can also check if there are any product liability issues that may effect valuation or that need documentation in the agreement.

Linked to the legal DD but its own speciality is environmental and safety DD. If there is land ownership or a factory that is rented, you need to verify that the current or past activities, including activities for past owners, have not created environmental issues. If a previous owner created groundwater contamination, you could end up being liable even if you are quite removed from the entity or person that caused the issue.

If you are buying a factory, then your operations and R&D group should review the asset being considered and give their report on it. This is important because they will have to integrate it into their supply chain and production plans and economies of scale are often a big source of expected synergies. They will also give you good input on the state of the buildings and machines and if there is a lot of additional investment needed (which will change the valuation). The R&D review can reveal under or over investment into R&D, both of which can impact future operations. It also can give an insight into the patent process, in particular how integrated the risk management process is to ensure that patents are not being violated and that reasonable efforts are routinely made to check that. There are many more areas that you could possibly have to run a due diligence process. If you have never run such a process before, try and search and find a checklist to help you.

Financing Process

You can pay for an M&A by cash, shares, assuming debt, or a combination of the three. You can raise the cash through issuing debt or shares, or you can use your own cash on hand. You can also use the cash in your target to help pay for the transaction. The only real difference between M&A related related financing and other financings is the potential time line as it might be compressed to fit a deal deadline. I will not go into too much detail here as various methods of financings are topics in and of themselves, but this is an area where including an investment bank early can give you a head start in getting this closed on time. If you are selling shares or issuing debt, expect the deal to be at least a little bit harder as the market will probably take advantage of the tight deadline and the additional risk to push for higher than the average terms you usually can issue at. Hopefully the reasons why you want to do the deal are compelling.

Closing the deal

Once you are advanced enough in your analysis that you feel that you are confident about the valuation of the target and that you still want it, you need to close the deal. If the target is running a process, there usually is a bid deadline and very often there are two bids. The first bid, early in the process, is a non-binding indicative offer. Eventually there will be the request to make a binding offer. The goal of the non-binding offer is to make the next round (bid higher) and not be too out of line with reality that you are not taken seriously. Once your offer is binding you should be granted exclusivity as soon as you are the “winner”. There is still negotiation to come.

As part of most sales of businesses, there will be a presentation and a question and answer session with the management. This is a chance to evaluate the team you are potentially acquiring, but they will be evaluating you as well. Everyone appreciates honesty. If you foresee that you will be doing lay-offs, including some or all of the management team, telling them that you will not be laying anyone off is counter-productive. They will not believe you and mistrust will be the result. You also need to make sure that only one person is running the “tough” part of the negotiations. I recommend that the manager that will be leading the business be as isolated as possible from being seen as the person that is the “bad cop”.

You want to pay the lowest price you can and still get the deal done (and never more than what the business is worth). That will mean presenting a case in negotiations that explains the lower valuation. It also means making sure the PSA has lots of protection in it for you as the acquirer and that presents as mistrusting the current team who will be assuring you everything is fine. If at all possible, you want them to be arguing for you in the process. I typically have been the deal closer, so that means I am the one that pushes hard with the target and internally to get it closed. Listen to your lawyers. You are paying them a good fee so why ignore their advice. I have been lucky to have a good lawyer on my side for most deals and if your lawyer is stronger, you will often end up with a better deal. Know what are the contract points and the valuation point at which you will walk away from the deal. Have the discipline to do that if needed. A good deal that becomes bad if your PSA does not protect you or if the price is too high cannot become a bad deal. If you can, you want a break fee if the other side walks away. You may have to get your own shareholders to approve and maybe the seller’s shareholders as well. Even if both management teams agree, the deal may not be closed quite yet. If everything goes well, you will close the deal and buy the asset. Congrats. Now the really hard work starts.

Selling an asset or business via M&A

Please think about all the due diligence I discussed above. Think about the presentations and models that are expected to be received. Usually you write the first draft of the purchase/sales agreement, so you need a good lawyer to lead the process. All sorts of different functions from the other side will be making inquiries and you will need support. You also may have to deal with the reality that your team will be facing lay-offs and will have a lot of uncertainty. You can set retention bonuses and deal closing bonuses to motivate people, but this will be a very hard process for you.

Here are some valuation books I have used in the past: Little Book on Valuation Valuation – Measuring and Managing the Value of Companies  

Mergers and Acquisitions – Part 1 – Why?

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On July 5, 2016

In CFO, Finance, Mergers and Acquisitions

Mergers & Acquisitions is a big topic, too big to cover in just one blog entry, so I will use the next three to give an overview of my views on the process. There are entire textbooks written on smaller parts of the process so my blogs will have to be, by definition, more top level. They will contain advice I have learned during my career actually considering and doing M&A.

Before an M&A transaction happens, you need to decide to do it. This phase of deciding if you want to do one is what I call the “why”” phase. You should be clear in the reasons and decision to do the transaction and there should be reasonable consensus within the senior management team. Some transactions require shareholder approval and you have to convincingly explain to them why it is a good idea.

The general reasons to do an M&A transaction is to save time or cost or both by buying from an external party instead of building it yourself. The best transactions are planned and executed as part of your over all strategic plan. Many are opportunistic and not part of your formal plan but become available and you decide to act on them. The opportunistic nature of many transactions means that you always need to be flexible and able to move quickly. This is why adequate staffing with the right people is important. If you have little to no ability to flex or change your work staff’s work plans, then you will find it almost impossible to take advantage of the good M&A opportunities that come your way.

A simple summary of the rule of this thinking is that your company should be more valuable after doing the M&A transaction than before it did it. You save cost or time or both. You get bigger and enjoy economies of scale or risk diversification or both. Or you get smaller and more focussed and can use what you were paid for the asset you sold to grow faster in the business you kept. In all ways, you need to increase shareholder value.

Opportunistic M&A is also a reason why it is hard to maintain good work/life balance as a CFO. If the transaction is significant, you probably will be leading it. M&A takes a lot of detailed effort and that will be on top of your other duties. You can and hopefully will delegate a lot of the work, but M&A is something where the little details can make or break a deal, so you will be spending time getting to know all the little details you can think of.

The reasons why you would do an M&A should be thought about in advance. Whether within your existing business or to go into a new business, you should have thought about what you want to do. You need to know the cost and timing of expansion in your existing business well as you will need to use that information when evaluating additional opportunities. The decision to enter into a new business needs even more thought in advance and an opportunist M&A will not give you enough time when it appears. Running the business always takes more time than you want it to, but you need to make time to think and discuss strategic options in advance with the other senior management and your own staff. If you have built the right team, your staff will be key in this forward thinking process. Of course, your peers in the senior management team will also be a good resource. Finance will bear a lot of the analysis burden when it comes to numbers and valuations, but the functional leaders will have to execute after any acquisition and they probably know the market better than your staff will.

A typical M&A transaction will cost more than doing it yourselves. Every once and a while this is not true, but my experience says that in any process, especially if competitive, you will pay a premium. Sometimes you have an advantage that the seller does not have in that you can deliver or complete or have a less expensive distribution system than they do, and that means they undervalue an asset compared to you. It still is likely to be cheaper if you do it yourself.

The cost advantage fades quickly when you are buying a product you already do not have or buying access to a market you have never been in before. Developing and marketing a new product can be quite expensive and you typically learn a lot of expensive lessons during development and crossing to manufacturing. Entering a new market is easy to mess up and even if you do succeed, it normally takes quite a long time to do it.

I can give three examples from my own past. If one of my former businesses sold a large laminate business as it was felt that we did not have a competitive advantage there and bought a sputtering target business. The company was already selling chemicals into fabs, and those chemicals interacted with aluminum on the wafers, but the sputtering target business was new. It was a large company and we could have learned the process to refine and cast the aluminum properly, but we would have had to win customers from scratch.

In another business I worked in, a semiconductor business, we looked at several different targets that would have moved us into a completely new area making products we already did not. It is a several year process to design, validate, tape out, validate again and then go into mass production. Most semiconductors today are part of an established system (PC, cell phones, automobiles, etc.) that all have standard operating systems that are used. You not only need to get the product right, you need to get the software right that allows your new product to work well and that is very difficult. The design cycles for cars and telecommunication infrastructure is quite slow and conservative, so breaking into those markets can be a long and expensive process.

Solar projects can take 2-3 years to develop and acquiring land and a spot on the list for interconnecting can also take years. We certainly could have developed projects for less cost than buying them (and in many cases we already had), but you cannot roll back the clock. If it takes years for others to develop something, you are unlikely to be able to do it in months. So balanced and well done project acquisition can be a very good strategy.

Another good reason to make acquisitions is if the market has rewarded you (or luckily bestowed upon you is often the reason) a superior and unsupportable valuation. Maybe you are one of the few public companies in your market and you have a public currency that others do not. If you do have this excessive valuation, you can execute a “roll-up” strategy and acquire companies that actually are accretive to you at your outsized valuation even though you are paying a fair market price. It is well known that such a roll-up strategy always eventually fails and the excessive valuation is lost, usually when you get too large or when your industry loses favor. However, until that happens, and it can take years, you can generate significant value for your shareholders. You need to make good acquisitions in a well disciplined manner, but it can work. When it stops working, you have gained significant size and scale and the normal fix while you are out of favor is cutting admin expenses and realizing more synergies. You may never get the same lofty valuation as in the past as Wall Street rarely makes the same mistake with the same company, but you probably would not be as large or high valued if you had not taken advantage of your circumstances.

Some bad reasons to do M&A (acquiring) are the need to get bigger or you will be acquired or because you have too much cash at low returns. Your job is to deliver shareholder value and forcing M&A just to be bigger and a harder target to acquire does not deliver value. You need to make an honest assessment and decide if spending your available resources (cash or dilution) will deliver more return than just being acquired at a premium. If you have too much cash, a dividend or share buyback is almost certainly better than bad M&A choices.

Another bad reason to do M&A is the thrill of the process. Some people just love doing deals and have trouble saying no to any deal that comes their way. You need to keep an open mind and not reject everything, but doing deals simply for the process and thrill of doing them is a bad reason and not responsible for shareholders.

Vertical M&A – buying your suppliers, can be very tricky. It is highly unlikely that your competitors will continue to buy from the supplier you buy. That needs to be factored into the reasoning of why you want to purchase a supplier. Buying a customer gets you closer to the end market for your products but it also puts you into competition with your other customers and also needs more careful consideration.

For most companies, early stage investments into technology ideas or start-up businesses is not a good idea. I know the returns that companies like Google and Facebook have delivered look tempting and if you have an active R&D group, you probably will be pitched new technology companies that are working on something new and exciting that can really help you. Keep an open mind and at least have your R&D head take a quick look, but these are bad ideas for several reasons. First, if you are being pitched these as part of a process and they had investors that are trying to get out, then the idea is probably not working out and they are not advertising why. There may be some value, but probably not. The other reason is that you probably are not an investment fund. If you get a chance to, try and meet a notable venture capital leader and talk to them. We always hear about the home runs but the reality is that for every huge success there are many that fail. An honest VC will tell you that they are better at selecting winners than average, but that they do invest in a lot of companies that do not work out and they lose much or all their investment. If they did not like the company, they would not have invested, so they obviously felt that there was a chance, but that chance does not come through in most cases. You are not an investment fund and the market rarely rewards you for a home run every once and a while that is not part of your core business.

I have been focusing on the active process where you buy (or merge with) an asset or business. However, M&A might be to make the decision to sell a product or business you own and divest. If this is well timed, and at a good value, you can receive much needed cash to grow the areas of your business that you believe. You have much more promise in. It is very common for a management team, especially a very successful team, to think they can fix any problem. This needs to be fought against just like the belief that you can buy and fix any business. On a regular basis you need to look at your products and decide if they are all worth continuing. If not, then a mature management team will consider selling the business as a viable choice.

M&A within your existing business is a more simple analysis. You should understand the risks and opportunities well, and the make vs. buy analysis should be more straightforward. The synergies will be more obvious and it will be easier to come to a fair value. M&A away from your existing business is much harder as you will not have the knowledge and experience to know as well as your existing business.

You need to be able to articulate the reasons for doing the transaction clearly with the risks and rewards simply explained. I find that the ability to simply but still accurately explain a transaction is a sign that it is well understood. Your explanation needs to consider the process and possible outcomes after an acquisition is done and what would be the consequences if you did not do it and a competitor did.

One final thought is that your initial evaluation process can benefit from a designated “devil’s advocate”. That would be someone who is assigned to argue against the transaction. Most leaders are optimistic as part of their basic personality and that sometimes leads to over eagerness and a desire to do something even if not doing anything is the better course. You can partially correct for that bias by building in a counter weight into the initial evaluation process. If the deal is good, someone strongly arguing not to do it should not stop it and will make the eventual reasoning on why to do it even stronger.

Share Buybacks

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On June 28, 2016

In Cash Flow, CFO, Investor Relations, Working With Investment Banks

Share buybacks are simple to explain. It is when the company buys (and hopefully cancels) shares that they have previously issued. The effect is to reduce shares outstanding and thus reduce dilution Andor creates additional demand for the stock while the buyback is in progress through the actual shares being purchased and potentially through a halo effect that the message that the company is buying shares can have on investor psychology and their desire to purchase shares.

The jury is always mixed on share repurchases. In general, they seem to happen more in good times when stock prices are high and seem to be greatly reduced when prices are low. There is no permanence to them. Unlike dividends, share buybacks are always announced as one time transactions with a budget and no promise that more will happen. This give management more flexibility but also gives no real promises to shareholders. Indeed, the actual buyback can be announced but never actually carried out. This is generally not by intent, sometimes there are maximum prices set and the stock moves above that price and nothing is transacted. But it is always possible that the maximum price was set with the intent that little to no stock would be purchased.

There is even a view that the last few years of stock market performance would have been flat without the demand caused by many large buyback programs. These programs also have been a source of supply for the debt markets as some companies borrow to repurchase shares. This makes some sense if much of your cash is overseas and repatriating the cash will cause a big tax bill. Plus the interest paid is tax deductible.

Before I discuss when and how I think you should do a stock buyback, there are plenty of times you should not. The market goes up and down and the same for all stocks. Eventually your stock will go down and if your stock has a fairly high beta, it may go down sharply. When that happens, there will be people that start demanding a buyback, often using the argument that if the company believes in itself, then it should show it by buying the stock. This is a terrible reason to do a buyback. Reacting to short term movements in your share price buy committing to a buyback does not show strength or belief in your company. If you did, you would be confident that the price will recover based on future results rewarding long term holders. Overreacting shows weakness, not strength.

I will be clear on my personal opinion. I think that buybacks have merit but are not often the best choice. I think for most growth or early stage companies they are pretty much always the wrong choice as normally you do not have excess cash and it is much better to spend your cash on internal growth rather than repurchasing shares.

As a general rule, if your share price is low for some reason and you have enough cash to consider a buyback, then first consider any convertible bonds you have outstanding. You might be able to retire debt at below the $1 face value of the bond (which should generate an income statement gain at the same time you are reducing debt) and reduce dilution at the same time. Bonds use the “if converted” method and often are dilutive even if not in the money.

Then, if you have cash on hand that exceeds what you can reasonably use to improve returns of the business and you are not sure it will be recurring well into the future (dividend might be better in that case), you can look at doing a buyback. You should look at the quality of suggestions on where to spend your cash, usually there are only so many good opportunities in front of you and if the quality drops too much and you are not willing to go outside of your existing business lines, then a buyback could make sense. A buyback can also help protect against activist investors. If you let too much cash pile up without doing anything with it, then you can attract activist attention and that is very distracting if it happens.

You will need Board approval to get a buyback done, so you will need to have good arguments prepared. Buybacks can be an emotional issue, so be prepared for some emotional pushback that is not connected to the raw numbers. You also will need a brokerage account and to negotiate the cost of the buy-out. Opening an account can take a little while because of the know your customer rules the banks need to follow. The cost to buy the shares should be pretty small, there are large market makers that do it for pennies on a share, but no real relationship benefit, or you can pay a little more and use one of your investment banks. Shop around a little, it can be much less expensive than you think.

Consult with your lawyers, but you typically cannot start a buyback if you have material, non-public information. That means that you need to commence it during an open window. You can set the share repurchase on autopilot as long as you do not touch it when your window is closed. Normally you do a formal plan where you instruct the broker to buy a certain amount at set prices and they execute. During an open window you can give individual instructions but a set program with pre-established prices is probably the best. Your lawyers can give you more specific advice, but if you do establish a formal plan so you can continue to buy in closed periods, then you should resist the temptation to tamper with it in open periods unless there is an absolutely compelling reason.

Almost every bank will have a specialized program that buys the stock based on volumes and prices being seen. Normally they will try and meet or beat the volume adjusted price every day. A good bank will give you market color and what sort of trading indications they are seeing during the day.

Typically you need to report on the progress of the share buyback on a quarterly basis. Probably no need to do a specific press release on the progress but you might have to formally announce that one is starting and when one ends. Normally you would set the period at one year at a set amount in total value you would repurchase and either announce it in its own press release or prominently in another press release like an earnings release. If you do a little searching on the Internet, it is easy to find statistics that show that actual repurchases typically trail announced and planned repurchases. They also tend to be more active in bull markets when stock prices are higher and less active in bear markets when stock prices are lower. That sometimes gets joked about in the press, but it makes a certain amount of sense. Bull and bear markets usually match pretty well with economic cycles. If you would only do a. Buyback when you felt you had excess cash and more was coming or available on the market, then it is highly likely that a company would start a buyback during a bull market and not start one during a bear market.

The publicity around the buyback often results in the company’s stock price going up, but this is very short lived in my experience. Any buyback would be a small percentage of the shares traded and it is more public relations than an addition of significant new demand for the stock.

My final point on share repurchase programs is that one reason often cited by companies is that they are doing the program to reduce dilution and the dilution often comes from their equity compensation plans. These same companies were ones that argued against expensing employee stock options because it did not cost the company cash.

Self Editing

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On June 21, 2016

In CFO, Leadership

I have two main forms of social media – Facebook and LinkedIn. Plus wechat, but my time in a China in the near future should be much more limited so I probably will not use it as much in the future. I link my blog entries in all three, two automatically and wechat via manual posting. Because I link my blog to LinkedIn, I try and keep it as professionally appropriate as I think is needed. That does not mean that I am afraid to talk about my hobbies and interests there, but I do limit political and social commentary posts.

It is becoming more and more common for future employers to check your social media. I am not incredibly fond of that, but I understand the reasoning. I also am looking for a new job now, so public image and presentation are important as I want a senior and very responsible position. That means that even if there is a temptation to more broadly broadcast my personal views, I am careful.

It started out with the very first blog I wrote in this site, where I said that I would avoid commenting on China. My reason there is not some abstract self-interest where bashing your hosts is bad manners and some countries can take it even more seriously and put your visa at risk. It isn’t even that solar projects can take a lot of government cooperation and talking badly about the country you want to do business in is bad for business. The reason is simple, I honestly feel that I do not understand the country enough to make a post that is informed. I can talk with confidence about doing business in many countries. I can talk about what happens with standard business processes as you cross country boundaries. I think that if I am going to write something here that my audience is going to spend the time to read, I need to offer something that is relevant and useful. As my mandarin is limited and I have only really spent time in the greater Shanghai and Shenzhen areas, I do not think I can effectively comment on the country.

The same thing applies to many subjects that I see other people discussing online. I see so many obviously misinformed comments on political, legal and business topics that I wonder why the people writing them can say it. Your professional reputation and your reputation with your friends is influenced and built by what you say, and posting online means it lasts forever. Off the cuff and obviously wrong statements cannot help.

One common error is see is some fact or story repeated to make some sort of point. You see the same picture or text over and over and you know it is wrong. A recent example for me was about a tip that Bill Gates and his daughter left where the daughter left a big tip and Bill left a small one with the punchline that she is the daughter of a very rich man but he is the son of a woodcutter. Anyone who cares about Bill Gates other than he founded and was CEO of Microsoft knows that his father was reasonably well off and that he was not a woodcutter. I see memes and stories like that continuously and 1 minute fact checking via Google or snopes.com would reveal the problem. Before I make such a post, I always check. You want to present yourself as a credible source of information.

Another issue is see is the posting about drug use or other illegal activities. I have it easier as I do not use drugs (without getting into the debate of alcohol and coffee and such which obviously can be considered to be drugs and I do drink them), but I am puzzled at to why anyone would want to advertise illegal activities that they do, especially on professional media like LinkedIn. The pot industry is starting to become legal in some states, and I can see the rationale why people in the industry would advertise it, but I see little upside otherwise and lots of potential downside. This only increases as you move up the ranks.

I made the choice a long time ago to not make my Facebook account my public face, especially for professional matters. So my actual Facebook friend list is small and almost all are actual friends or at least people that share an interest with me that I know personally. When I do want to post on a personal view, I do not post a blog entry, I post a Facebook entry. Now these can be shared by friends on my Facebook and some have super-wide distribution, so it does get broadcast, but it still is a more personal distribution method. I do not have particularly radical political or religious views and my moral center is certainly firmly in suburban middle class, so there is not much danger in even those views being spread, but I would not post them on LinkedIn or here as I automatically link posts in my blog to other social media and because this is a public and freely available site.

Even on Facebook, I think a little before I post something. An example is a post of a picture of a martini glass or a wine glass. I like martinis and I like wine with a meal and I will post a picture to go with a check-in when I go out. Some writers recommend keeping your social media media completely clean of any sign you drink at all and any sign that you go out. To take it to that extreme seems weird to me and I am not sure I would want to work somewhere that takes exception to employees having a normal social life. However, posting odes to ISIS and discussing overthrowing the government is something that would make me pause in a hiring decision. I would think these sorts of things are self obvious not to post, but people do it anyways.

Political views are always a hard area to discuss. Suppression of political views is counter to the spirit of democracy and I hesitate to argue that anyone should not express their views there. It is always a delicate balance, but even CEOs of large companies campaign for specific parties and candidates. I would say be moderate and reasonable in expression of political views and unless appropriate, keep them out of your business public face. The USA is split about 50/50 in political party support and you always risk alienating potential customers when you take a political stance. I would say for any business related so local media, you should treat it like a social gathering where you do not know the people and where normal etiquette dictates moderating discussions on politics as it is not socially acceptable because of the potential conflict it could cause. In your personal social media, I would only suggest that you take a careful look at what you are posting and make sure it reflects your views in a way that you intend to be public. A good rant may make you feel better, but if you consider yourself an advocate of a party or candidate, does it reflect well on them?

Religious views are similar. The social party rule applies. Some people are deeply religious and their faith is very important to them. I think expression of the views should be moderate in business settings as on average most people do not consider it an appropriate place to discuss religion. Personal social media should just be subject to the test before you post of does this post serve my God well and is it in line with His/Her teachings? If you really think yes, then you should feel secure in posting it.

Both politics and religion are very hard subjects. You can find many people saying not to post about it at all, even in your personal social media and I certainly see lots of scolding in social media when people bring it up. Our society will be a sad and bland one if we suppress and self edit such important things. As long as you feel your post is knowledgeable and in good spirit, I would not recommend not posting it. I would suggest that you should consider a private message versus a public posting and if that is more appropriate, but express your views if it is what you feel you must do, even if in public.

Sexist, racist, or overly sexual and graphic posts always will reflect badly on you. There certainly is room for people to make a living posting about these types of subjects, but an external blog site like this is probably the best place to talk about it, especially for business social media where it may not be appropriate at all in pretty much any circumstances. My reasoning is simple, readers need to make a choice and click a link to go read what you wrote and at that point the reader needs to take some responsibility. I think that sexism and racism belongs nowhere, but some people find it even in posts where you do not intend it. I try and write with gender neutral pronouns and business titles, but I slip up every once and a while.

Profile pictures should be appropriate in that they make you look good but are not overly sexualized. I guess if you are a lingerie or bathing suit model for a living or sell those products as your main business, then you can use different types of pictures in your business posts, but in general a vacation picture in a tight speedo is not the best way to advertise yourself for a CFO job. I personally hold that dumb comments addressed at “pretty” or “handsome” profile pictures are the fault of the people making them, not the account owner who puts up the profile picture and those responses are an example of bad decisions by the poster.

The world certainly is more complicated now because of social media and the global outreach it has, but the rules you should follow are really not that much different than the days before social media. Getting drunk at an office party and slurring your speech while kicking a puppy on stage was bad news before social media and it is still bad news. Do a little self editing before such a post is made.

I also see a potential backlash against increasingly invasive practices in screening candidates. If something is actually public already, then there may not be much right to complain, but requests that company representatives be added as “friends” or that private social media accounts be opened up is more than what I think is fair. And social media posts when you were 18 probably are not a good reflection of you at 40, so I see some small sense in the “right to be forgotten” laws that exist in Europe.

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