Startups, IPOs, acquisitions and takeovers, Peter Hodson has been through it all
Author of the article:
This week, I was a guest presenter for an MBA Entrepreneur Class at York University. When originally asked to present, I really didn’t know why. After all, I am just a stock guy. But then I realized that, from a corporate perspective at least, I have been through a lot in terms of types of companies I have worked at, transactions, transitions and challenges. So, suddenly I had a few more ideas to present to the class other than some of my favourite stock picks. For budding entrepreneurs, all will likely go through at least a few of these work/corporate transitions in their careers. Here are my thoughts on five corporate scenarios:
Being an employee
Most people, even the most-talented entrepreneurs, are going to start off working for someone else. In fact, having a bad ‘boss’ and doing things only a certain way is often the prime impetus for someone to quit and go the entrepreneur route instead. There are some pros to being an employee — nice benefit packages, paid vacation time, the ability to learn from others and so on — but at the end of the day, you are working for someone else. Everyone is replaceable. You are a salary man or woman, dependent on a boss and the company to keep your paycheque coming. I have worked for good companies and bad companies. I have worked for great bosses and horrible bosses. Making friends at a big company is the best part. Living with a bunch of office politics, and boring, useless meetings is the worst. The Lesson: If you want to be an entrepreneur, you can’t be an employee.
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I have been involved in two start-up companies, both very different. In 1997, I joined a start-up mutual fund company, Synergy. We started with $0 in assets to manage. We had a couple of key strengths. One, the initial founder, Joe Canavan, had done it all before at other companies. It was easy to join such a seasoned executive. Two, we had $13 million in capital, provided by a Canadian bank that owned part of the company. As far as start-ups go, Synergy had very good bones. Six years later, we managed more than $1.5 billion in assets, and the company was sold to CI Financial. In 2011, 5i Research was my other start-up, and current company. The genesis was quite different. I had to fund the entire start-up myself, and, for the first little while, I was the sole employee. There were some long hours and lots of stress, but hiring some very smart partners (thanks, Ryan) helped me get through the rough patch. We are not quite a giant conglomerate yet, but we continue to add staff and grow. The Lesson: With any start-up, look for lots of capital or lots of help. It’s pretty tough to succeed without these.
Going through an IPO
In 2008, the company I worked for went public. The IPO process was interesting, and I was involved in the road shows to investors. I was on the board of directors. I became a good salesperson that year, so much so that I never sold any shares in the company in its initial public offering. We went public at $100 per share (adjusted for a reverse split last year). Shares are now $47. Of course, going public two months before a global financial crisis wasn’t exactly good timing. But a public company is much different than a private company. Investors focus on three-month results, rather than a long-term strategy. It felt different after the IPO. Some employees were happy to have sold shares, some were miserable for not (the stock bottomed at $17). Some partners got rich, and left the company, or retired. Even myself, the chairman, was gone three years later. The company did not need capital at the time (IPO proceeds went to initial shareholders). While profitable, I can’t really say it was an enjoyable experience. The Lesson: Despite media hype, not all IPOs are great.
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Acquiring another company or asset
In 2011, just days after founding 5i Research, I bought Canadian MoneySaver magazine, a financial advice magazine that has been now publishing for 40 years. While with the 5i company start-up everything was new, I had now acquired a legacy company with an archaic website and old systems. While readers liked the magazine, the back office was a mess. I hired a consultant to evaluate possible changes. We counted 10 separate steps in order for a customer to buy a subscription to the time of fulfilment. We dropped this to one. We revamped the website at great cost. We acquired this giant computer filled with data, and the founding sellers said if it ever broke it would be “really bad.” We moved everything to the cloud. I really had no idea what I was doing at first. I had never owned a company before, nor published a magazine. I am happy I bought it, but boy it was tough. Shout out to my business partner Lana for getting me through those first two years. The Lesson: Acquisitions can be very difficult, don’t always work, and you’ll find tons of problems you never even expected. Get some help and make sure your acquisition price accounts for all of this.
In 2003, as noted above, my company Synergy Mutual Funds was acquired by CI Financial. It was a nice payday. But, only a handful of Synergy employees moved over to the new company. I was one of them. But I no longer worked with a lot of close friends and partners. CI was a great company and treated me very well, but it was different. Synergy had perhaps 80 people when it was sold, and CI had at least 700. There was bureaucracy — and less fun. We were no longer building and growing a company: it was already built. I lasted two years. Still, from CI’s perspective, the acquisition was a giant success. It got to retain most of the managed money, and margins went up as existing managers took over from departing managers like me. The Lesson: Acquisitions can work out very well, but there is a ‘people’ cost. Cultures have to match, and entrepreneurs may not stick around long.
Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. Peter is also Associate Portfolio Manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned).
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Essentially that would mean if a company paid tax at the lower Irish rate, then the US (or other countries) could top up that company’s tax in their jurisdiction to get it to the global minimum.
So if a US company had a presence in Ireland primarily for the tax advantage, that advantage would disappear.
This is a matter of urgency for the Biden administration because it is planning to raise corporate taxes at home and would prefer not to see more tax revenues leaking to other countries.
Peter Vale, tax partner with accounting firm Grant Thornton in Dublin, thinks a global minimum rate is now an inevitability.
“If you’d asked me six months ago I’d have been quite sceptical, there was a lot of opposition,” he said.
“But it’s now moving by the day and, with the US behind it with its plans, I think we’re going to arrive at some sort of global consensus.”
He said the key issue for Ireland becomes the level at which the rate is set.
“I don’t think 21% is where it will land, I suspect it will be somewhere in the teens.”
Other details will be important too: “Exactly how will you work out what the rate is a company is paying in Ireland and what does that mean in terms of any top up? The detail becomes pretty critical.”
The Biden proposals have reinvigorated work which is being led by the OECD (Organisation for Economic Co-operation and Development), an intergovernmental economic organisation.
It began a project known as Base Erosion and Profit Shifting (BEPS) in 2013, which aims to mitigate tax loopholes which currently allow companies to shift profits from higher tax countries to lower tax countries like Ireland.
‘Intention to target Ireland’
Perhaps ironically Ireland appears to have been a major beneficiary of some of the early outcomes of the BEPS project.
The country’s corporation tax receipts have soared from about €4bn (£3.5bn) in 2013 to around €12bn (£10.5bn) in 2020.
That is the principle that companies should declare their profits in the location where they have real operations or activities.
“Countries like Ireland have been a huge winner from BEPS mark one,” he said.
“The objective was to align profit with substance and we actually are one of the countries where these companies have substance, whether it be pharmaceuticals, computer chips, medical devices and the ICT companies.
“I think when countries in the G7 looked at this they thought ‘that’s not quite what we wanted’ – maybe the intention was to target countries like Ireland, not benefit them.”
When could we see an impact?
In the next round of BEPS, with the US on board, those other rich countries are more likely to get what they want at Ireland’s expense.
But even if President Biden can agree the reforms at home and abroad, how quickly would that have an impact in Ireland?
Mr Coffey thinks any negative effects would not be instant because tax is not everything.
“Are the ICT companies likely to head off around the world, scattering their headquarters to various different cities?” he said.
“There are benefits to being co-located. At least in the medium term we are not likely to see a huge shock.”
That is echoed by the IDA (Industrial Development Authority), the inward investment agency, which points to Ireland’s workforce and significant clusters of specialisation in areas like medical technology and pharmaceuticals.
The IDA also sees the Brexit angle, pointing out that Ireland, unlike its UK neighbour, is part of the EU’s single market.
In a statement, it said: “Ireland is at the heart of Europe. Ireland’s continued commitment to the EU is a core part of Ireland’s value proposition to foreign investors, offering a base to access the European Single Market and to grow their business.
“Ireland also benefits from free movement of people within the EU, giving businesses located in Ireland access to a European labour market.”
This week a government spokesman said: “Ireland is aware of the US proposals.
“We are constructively engaging in these discussions, and will consider any proposals carefully noting that political level discussions on these issues have not yet taken place with the 139 countries involved in this process.”
(Bloomberg) — Norway’s $1.3 trillion wealth fund has made its first investment in unlisted renewable-energy infrastructure since being given the go-ahead to move into the asset class.
The world’s biggest sovereign investment vehicle said on Wednesday it will buy 50% of the 752 megawatt Borssele 1 & 2 Offshore Wind Farm from Orsted A/S of Denmark. The deal is worth 1.375 billion euros, or about $1.6 billion, it said.
Norway’s wealth fund has been looking for such assets to purchase since getting a mandate to start buying in 2019. But as recently as January, Chief Executive Officer Nicolai Tangen said it was proving hard to find reasonably priced targets.
“We are excited to have made our first unlisted investment in renewable energy infrastructure, and we look forward to working alongside Orsted on delivering green energy to Dutch households,” Mie Holstad, chief real assets officer at the wealth fund, said in a statement.
The announcement coincided with a strategy update by the fund, in which it signaled it will apply a more active approach to its investment strategy. That includes a goal of becoming a global leader in sustainable investing.
Tangen, a former hedge-fund boss who’s been running the giant sovereign investment vehicle since September, has stepped up the Oslo-based fund’s reliance on external asset managers and made environmental, social and governance goals a cornerstone of his focus. He wants to rely more on technology, including artificial intelligence, and plans to expose his portfolio managers to the same kind of training regimens that help shape top athletes.
In Wednesday’s strategy update, the fund said it will “emphasize specific, delegated active strategies and have less emphasis on allocation or top-down positioning.”
As the world’s biggest stock investor, the Norwegian wealth fund’s “knowledge of our largest company investments helps us achieve the highest possible return after costs,” it said. “It improves risk management and enables us to fulfill our ownership role. We believe our active management improves our ability to be a responsible investor.”
The fund, which generated $123 billion in returns last year, used a previous strategy update to shift its equity exposure toward U.S. stocks and away from Europe. Much of last year’s performance was driven by the fund’s holdings of U.S. technology stocks.
The fund follows a benchmark that allocates about 70% to stocks and the rest to fixed income. It also invests in real estate and was recently given a mandate to start buying renewable infrastructure.
The sovereign wealth fund, managed by a unit of the central bank, was created in the 1990s to invest Norway’s oil and gas revenues abroad, initially to prevent the domestic economy from overheating. It owns about 1.5% of global stocks.
The fund said the goal is to become a global leader in responsible investment, partly by further integrating ESG data into its investment process.
Executives live daily with a daunting dual challenge. One part is the need to manage the business through steady-state operations and times of disruption. The other is to create value for shareholders through financial excellence and growth.
At the intersection of these two parts lies the digitalization of supply chain. Through digital transformation, supply chain leaders can begin to develop the capabilities that are already needed to manage disruption, as well as those that will help overcome known obstacles, such as data availability and quality. Layering on top of data is information and insight, which are critical to ensuring that those in supply chain are making the decisions that matter most to the business.
The operational opportunities are evident, so the rationale behind the investment is clear. However, that only solves one part of the executive’s dual challenge. Quantifying the value created through financial excellence has been more difficult, but recent research from Professor Morgan Swink of Texas Christian University now shows the correlation between investing in digital transformation and delivering financial success.
Kinaxis customers outperformed during the pandemic
Using quarterly financial statements for 48 publicly held, North American companies that use Kinaxis for their supply chain planning, Professor Swink conducted what is known as a difference in differences analysis for all of 2019 and the first three quarters of 2020. In that analysis, the 48 companies represented those who have already begun their digital transformation against industry averages for each respective vertical over the corresponding period. Furthermore, the analysis was performed as a pre/post event comparison based upon the declaration of COVID-19 as a global pandemic in Q1 2020.
“These data are very strong. I was quite surprised at the level of positivity in these findings,” Professor Swink said upon sharing his findings. The results were so impressive that among the initial six financial metrics compared, the group of 48 Kinaxis customers, representing the digitally transformed, outperformed their industry averages across the board.
The academically rigorous, statistically significant data shows that while industry averages showed declines after the pandemic declaration in return on assets (ROA), return on sales (ROS) and return on invested capital (ROIC), the Kinaxis users all delivered improvements when compared to the pre-pandemic performance. The largest gap occurred for return on sales, which acts as a measure of operational efficiency, where the Kinaxis group improved by more than 1.5%, while the industry declined by more than 0.5%, leading to an overall performance gap of more than 2%. Costs, as a percentage of revenue, also were an advantage for the group of 48 Kinaxis users as both costs of goods sold and sales, general and administrative costs decreased while industry averages either declined slightly or grew.
Translate supply chain success into the CFO’s main metrics
With an impressive array of data, like the research findings, it becomes critical that supply chain leaders be able to convey the right information to the right people. In the case of what matters most to CFO’s, Professor Swink says, “The two things that every CFO cares about are profit and growth. And from the CFOs perspective, they’re looking at ways to invest money to drive profit and growth.”
Therein lies a significant opportunity for supply chains because they have historically struggled with translating operational capabilities into financial success. This carries over to digital transformation, as well. In both cases, the benefits are typically stated in the terms of those desiring the investment, as opposed to the metrics of whomever is making the decision. As Professor Swink stated, “You need to learn what those metrics are and be able to position your proposal in that language just like the other people who are competing for those funds.”
Once the metrics are identified, begin to understand how operational capabilities work as input drivers for them. For example, increased visibility is highly desirable so that supply chains can sense disruptions as it is happening and respond immediately. That alone is a tremendous benefit and it can be tied to financial outcomes such as reduced inventory and cash buffers, improved capacity utilization and lower cost resolution of demand-supply mismatches.
Taking it a step further, the improvements in return on invested capital, and even return on assets, can then be tracked as digitally enabled capabilities are now linked to these financial performance measures. By doing so, the “why an investment is needed” aligns with what it means to the decision maker.
This creates a pivot point for supply chains as Professor Swink suggests that practitioners must be able “to relate structural choices, policies, technology investments, and training and labor investments to the kinds of KPIs that show up on income statements and balance sheets.” This is crucial because “if we really want to speak the language of the CFO we must think beyond those kind of specific operational metrics to think about how our choices affect these larger outcomes.”
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