Valuation in emerging markets

Procedures for estimating a company’s future cash flows discounted at a rate that reflects risk are the same everywhere. But in emerging markets, the risks are much greater.

McKinsey Quarterly
DECEMBER 2000 • Mimi James and Timothy M. Koller
As the economies of the world globalize and capital becomes more mobile, valuation is gaining importance in emerging markets—for privatization, joint ventures, mergers and acquisitions, restructuring, and just for the basic task of running businesses to create value. Yet valuation is much more difficult in these environments because buyers and sellers face greater risks and obstacles than they do in developed markets.
In recent years, nowhere have those risks and obstacles been more serious than in the emerging markets of East Asia. … In Indonesia, Malaysia, the Philippines, South Korea, and Thailand—the hardest-hit Asian economies—cross-border majority-owned M&A reached an annual average value of $12 billion in both 1998 and 1999, compared with $1 billion annually from 1994 to 1996.¹

Image via WikipediaYet little agreement has emerged among academics, investment bankers, and industry practitioners about how to conduct valuations in emerging markets. … Our preferred approach is to use discounted cash flows (DCFs) together with probability-weighted scenarios that model the risks a business faces.²

The basics of estimating a DCF value—that is, the future cash flows of a company discounted at a rate that reflects potential risk—are the same everyplace. We will therefore focus on how to incorporate into a valuation the extra level of risk that characterizes many emerging markets. …
Macroeconomic volatility is another minefield in Asia, where the financial collapse and subsequent recession generated a mountain of nonperforming bank loans. …

A simple risk premium isn’t enough

Image via WikipediaIn valuations based on discounted cash flows, two options are available for incorporating the additional risks of emerging markets. Those risks can be included either in the assessment of the actual cash flow (the numerator in a DCF calculation) or in an extra risk premium added to the discount rate (the denominator)—the rate used to calculate the present value of future cash flows. We believe that accounting for these risks in the cash flows through probability-weighted scenarios provides both a more solid analytical foundation and a more robust understanding of how value might (or might not) be created. Three practical arguments support our point of view.

First, investors can diversify most of the risks peculiar to emerging markets, such as expropriation, devaluation, and war—though not entirely, as the recent East Asian economic crisis demonstrated. Since finance theory is clear that the cost of capital—the discount rate—should reflect only nondiversifiable risk, diversifiable risk is better handled in the cash flows.³ Nonetheless, a recent survey showed that managers generally adjust for these risks by adding a risk premium to the discount rate.⁴ Unfortunately, this approach may result in a misleading valuation.
Second, many risks in a country are idiosyncratic: they don’t apply equally to all industries or even to all companies within an industry. The common approach to building additional risk into the discount rate involves adding to it a country risk premium equal to the difference between the interest rate on a local bond denominated in US dollars and a US government bond of similar maturity. But this method clearly doesn’t take into account the different risks that different industries face; …
Third, using the credit risk of a country as a proxy for the risk faced by corporations overlooks the fact that equity investments in a company can often be less risky than investments in government bonds. …
In principle, equity markets might be expected to factor in a sizable country risk measure when automatically valuing companies in emerging markets. But equity markets don’t really do so—at least not consistently. …
…(Exhibit 1). Although not definitive proof that no country risk premium is factored into the stock market valuations of companies in emerging markets, this finding clearly suggests that market prices for equities don’t take account of the commonly expected country risk premium. If these premiums were included in the cost of capital, the valuations would be 50 to 90 percent lower than the market values.

Incorporating risks in cash flows

Overall, our approach to valuation helps managers achieve a much better understanding of explicit risks and their effect on cash flows than does the simple country-risk-premium method.
Analyzing specific risks and their impact on value helps managers make better plans to mitigate them. …
To incorporate risks into cash flows properly, start by using macroeconomic factors to construct scenarios, because such factors affect the performance of industries and companies in emerging markets. Then align specific scenarios for companies and industries with those macroeconomic scenarios. … Since values in emerging markets are often more volatile, we recommend developing several scenarios.

Image via WikipediaThe major macroeconomic variables that have to be forecast are inflation rates, growth in the gross domestic product, foreign-exchange rates, and, often, interest rates. … When constructing a high-inflation scenario, be sure that foreign-exchange rates reflect inflation in the long run, because of purchasing-power parity.⁵ Next, determine how changes in macroeconomic variables drive each component of the cash flow. Cash flow items likely to be affected are revenue, expenses, working capital, capital spending, and debt instruments. These should then be linked in the model to the macroeconomic variables so that when the macroeconomic scenario changes, cash flow items adjust automatically.

…When constructing the model, make sure that the industry scenarios take the macroeconomic environment into consideration.
We used this approach in a 1998 outside-in valuation of Pão de Açúcar, a Brazilian retail-grocery chain. The forecasts were developed with the help of three macroeconomic scenarios published by an investment bank, Merrill Lynch (Exhibit 2). Our first scenario, or base case, assumed that Brazil would enact fiscal reforms and enjoy continued international support and that the country’s economy could therefore recover fairly quickly from the shock waves of the Asian economic crisis. … The second scenario assumed that Brazil’s economy would remain in recession for two years, with high interest rates and low GDP growth and inflation. The third scenario assumed a dramatic devaluation—which is what actually happened. In this third scenario, inflation would rise to 30 percent and the economy would shrink by 5 percent.

These three macroeconomic scenarios were then incorporated into the company’s cash flows and discounted at an industry-specific cost of capital. The cost of capital also had to be adjusted for Pão de Açúcar’s capital structure and for the difference between the Brazilian and US inflation rates. Next, each outcome was weighted for probability. Exhibit 3 shows the results of the three scenarios and the probability-weighted values. The base case received a probability of between 33 percent and 50 percent; the others were assigned lower probabilities based on our internal assessments. The DCF value range—a large one because of the uncertainties of the times—was about 223 percent to 135 percent of the base case.

The resulting value was $1.026 billion to $1.094 billion, which was within 10 percent of the company’s market value at the time. If we employ the alternative valuation method, using base-case cash flows but adjusting for additional risk by adding Brazil’s country risk premium to the discount rate, we find a value of $221 million—far below the market value.⁶
Using probability-weighted scenarios brings us much closer to market values and, we believe, to a more accurate view of a company’s true value. Moreover, these scenarios don’t just confirm the market’s valuation of companies; by pinpointing specific risks, they also help managers make the right decisions for those companies.

About the Authors

Mimi James is an alumnus of McKinsey’s New York office, where Tim Koller is a principal. This article is adapted from Tom Copeland, Tim Koller, and Jack Murrin, Valuation: Measuring and Managing the Value of Companies, third edition, New York: John Wiley & Sons, 2000 (updated to a 5th edition in July 2010, by Marc Goedhart, Tim Koller, and David Wessels).
The authors acknowledge the contributions of Cuong Do, Keiko Honda, Takeshi Ishiga, Jean-Marc Poullet, and Duncan Woods to this article.

Notes

¹Asian Development Outlook 2000, Asian Development Bank and Oxford University Press, p. 32.
²The use of probability-weighted scenarios constitutes an acknowledgment that forecasts of financial performance are at best educated guesses and that the forecaster can do no more than narrow the range of likely future performance levels. Developing scenarios involves creating a comprehensive set of assumptions about how the future may evolve and how it is likely to affect an industry’s profitability and financial performance. Each scenario then receives a weight reflecting the likelihood that it will actually occur. Managers base these estimates on both knowledge and instinct.
³Diversifiable risks are those that could potentially be eliminated by diversification because they are peculiar to a company. Nondiversifiable risks can’t be avoided, because they are derived from broader economic trends. Many practitioners use the capital asset-pricing model (CAPM), developed in the mid-1960s by John Lintner, William Sharpe, and Jack Treynor, to determine the cost of capital. In CAPM, only nondiversifiable risks are relevant. Diversifiable risks would not affect the expected rate of return.
⁴Tom Keck, Eric Levengood, and Al Longfield, "Using discounted cash flow analysis in an international setting: a survey of issues in modeling the cost of capital," Journal of Applied Corporate Finance, Volume 11, Number 3, fall 1998.
⁵The theory of purchasing-power parity states that exchange rates should adjust over time so that the prices of goods in any two countries are roughly equal. A Big Mac at McDonald’s, for instance, should cost roughly the same amount in both. In reality, purchasing-power parity holds true over long periods of time, but exchange rates can deviate from it by up to 20 or 30 percent for five to ten years.
⁶The country risk premium typically used at the time of the valuation (September 1998) was about 8 percent.

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The Future of Direct Mail Marketing: 5 Key Demographic Trends | Deliver Magazine

Deliver Magazine
February 28, 2011 | by Paula Andruss


Where’d John Doe go?
…Be prepared to see some major demographic shifts, says demographic trends analyst Peter Francese, chief among them the absence of the “average American.”
Francese, who consults for advertising agency Ogilvy & Mather, recently authored 2010 America, a report commissioned by Advertising Age that highlights some significant population changes the census will reveal.
Here are five things he says marketers need to know about today’s consumer:
1. There’s no longer an “average American.”

Image via Wikipedia…But I can predict with a high degree of certainty that the 2010 census will essentially put the last nail in the coffin of the “average American,” because he or she no longer exists.

2. We’re now a multisegmented nation and a multigenerational society.

Image via WikipediaIn our 10 largest cities and four states — California, Texas, New Mexico and Hawaii — no race or ethnicity is a majority of the population anymore. …

… The 2010 census will show that for the first time in American history, married couples will be a minority of U.S. households. … Now, married couples with children make up fewer than 21 percent of all households — or roughly one out of every five.
Also, the number of people who live alone is growing very rapidly; they’re now more than 27 percent of households.
The third dimension of complexity is that we are becoming a multigenerational society. … Multigenerational households and a multigenerational America means that older people (in their late 50s, 60s and 70s) have a bigger impact on what their children and grandchildren are doing and buying.
3. The multicultural shift is driven by immigration.
…  So a higher proportion of the younger population — the children and young adults — are African-American, Hispanic, Asian or multiracial. As the older population ages and more of them pass on, the younger generation becomes a greater share of the total population. Young adults and children are quite diverse, whereas older people are not. Eighty percent of Americans over the age of 65 are white non-Hispanic, but that’s true of less than 60 percent of children.
4. Don’t treat each generation or age segment as independent entities.
It’s essential to address the multidimensional nature of our society today, and more important than ever to know more precisely who your customers are. In-depth interviews and surveys are vital tools for more effective direct marketing. We can’t assume that just because somebody is 60 or 70 years old that all they’re going to want is a hearing aid or health insurance, and there’s no point in marketing anything else to him. …
5. Direct mail will continue to play a crucial role.
Direct mail reaches people in their home and it offers something in writing, in their own language, that is of specific interest. It’s the ideal way to really target a specific part of a population that has a need that is unique for that group. …
In all of these groups, thinking of direct mail as a primary means of communication within your specific and detailed set of customers, and giving it the priority it deserves, can be very successful.

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On the Inside, Looking Out

As CFOs gear up for growth, they are seeking targets that can help their companies innovate.

CFO Magazine

Sarah Johnson - CFO Magazine

March 1, 2011
After a long hiatus, companies are once again focusing on growth. But in an environment in which organic growth will be challenging and big deals may look too risky, many are taking an alternative path, exploring the acquisition of young businesses that can supply them with new talent, new technologies, and new products or services. Above all, today's dealmakers are looking to buy innovation.

Image via CrunchBaseBecause so many companies responded to the recession at least in part by downsizing research-and-development budgets and addressing short-term needs like liquidity, they are now "basically buying their R&D by buying companies they think have real potential to grow over the long term," says Mark Heesen, president of the National Venture Capital Association (NVCA).

…"For us to expect that we'll think up all the great ideas and develop them internally is a stretch," says Bruce Knooihuizen, CFO at computer-services firm Rackspace, which has acquired four start-ups in the past four years.
The idea of purchasing a market-ready new product or service has a particularly strong appeal, because it allows a company "to accelerate an R&D or product-diversification process that otherwise would take years on an organic basis," says Mat Wood, a partner in BDO USA's transaction advisory practice….
An Eye on the Little Guy
…There are several factors in buyers' favor in the market for early-stage businesses. One is that many development-stage companies have had time to gestate while waiting for M&A activity to pick up and are now ready for prime time. "From an acquirer's perspective, you've got well-trained people, developed technology, defensible patent positions, and companies becoming increasingly profitable or near-profitable," says Trevor Chaplick, a partner at law firm Proskauer Rose.

Small companies with hot technologies are also more open to being purchased rather than holding out for an initial public offering, given the challenging market for IPOs and the high bar for success as a new public company.
… It's still a buyer's market, although the distressed-firm markdown bin is not as full as it was 18 to 24 months ago.
Despite those advantages, CFOs are nonetheless moving more methodically, even on smaller transactions. …"We don't see folks rushing to the market with a checkbook to do an irrational transaction," says Steve Joiner, managing partner for the southeast M&A group at Deloitte.
Smaller, but Not Easier
…Despite their bite-sized nature, smaller deals come with challenges of their own. Less-sophisticated companies may have little-to-no revenue, unclear business agendas, and disorganized finances. They may have failed to protect their intellectual property. And they may have made concessions on agreements that will lead vendors or customers to expect new terms following a change in control.
… "The two things these companies get acquired for are things that CFOs tend to not be focused on," says Matthew Bartus, a partner at law firm Dorsey & Whitney who represents emerging growth companies. "These acquisitions are not about revenue or earnings; they're about the people and technologies." As a result, the long-term worth of venture-backed companies can be hard to determine.
Such deals can also easily fall apart. …
Jason Child, Groupon's CFO, says the company considers many things when deciding whether it should buy sites in certain regions or build new ones from scratch. "It depends on a combination of factors," he says. "How long would it take [to do the acquisition]? How closely aligned are they with our approach and our style?"
Child says one of the main issues that arises when a big company targets a smaller one is the delicate business of approaching and winning over entrepreneurs who are used to working independently. "Entrepreneurs are excited about building stuff," he says. "They are not excited about larger companies' reputation for having more processes, more constraints, and more bottlenecks."
… "When you're buying a company that's run by an entrepreneur, that person may be used to calling the shots and won't want to collaborate," says Jim Cohen, executive vice president of mergers and acquisitions at Consolidated Graphics, a commercial-printing company that frequently buys family-owned businesses.
… Inexperienced buyers often underestimate the difficulties of integrating smaller teams into their infrastructure, notes Bartus. "You can manage liabilities with escrow, but you can't address a situation where you acquire a team that won't work in the [new] organization," he says.
To keep a newly acquired staff interested, buyers might consider adding retention bonuses to earnout targets. M&A experts also suggest that buyers ensure a degree of autonomy for valued legacy employees, and recognize that those employees may expect more from the deal than a payout, however large. … "The business objectives and the personal objectives of the ownership and key managers are often intertwined," says Will Frame, managing director of Deloitte Corporate Finance.
Grab a Partner
To get a handle on the true worth of a start-up and minimize the risk of a mismatch, many corporate buyers rely on the practice of establishing partnerships with potential targets. …
Will 2011 see early-stage deal-making continue at the same pace? With caution continuing to dominate CFOs' outlook, a sudden return to giant deals seems unlikely. Yet according to the latest Duke University/CFO Magazine Global Business Outlook Survey, fully a third of the CFOs who responded plan to spend cash on acquisitions in 2011 — twice as many as plan to use cash for research and development.
So, while a strengthening economy and growing confidence may usher in some larger transactions, for now, small deals — especially if they lead to innovation and growth — are indeed beautiful.
Sarah Johnson is senior editor for strategy at CFO.

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Where There's Smoke, There's Fraud

Sarbanes-Oxley has done little to curb corporate malfeasance. Therefore, CFOs should implement a range of fraud-prevention measures.

CFO Magazine

Laton McCartney - CFO Magazine

March 1, 2011

Image via WikipediaAs a convicted felon, Sam E. Antar, the former CFO for the now-defunct consumer-electronics chain Crazy Eddie,says that despite the antifraud provisions of the Sarbanes-Oxley Act of 2002 and the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, it remains as easy today for bad guys, both internal and external, to loot corporate coffers as it was during the Enron and WorldCom days. "Nothing's changed," he says. "Wall Street analysts are just as gullible, internal controls remain weak, and the SEC is underfunded and, at best, ineffective. Madoff only got caught because the economy tanked."

… "There's a lot more employee fraud and embezzlement today then there was 10 years ago, and this past year there was much more than a year ago," says Steve Pedneault of Forensic Accounting Services. "People blame the economy, but much of the fraud and embezzlement that's coming to the surface now was in the works for 4 or 5 years before the recession hit."…

The most likely targets by industry are financial services, media, technology, manufacturing, and health care. Small and midsize companies are also more vulnerable. "Many of these organizations typically rely on a small accounting department, especially in today's economy," says Pedneault. They simply don't have the resources to catch fraudsters.
That challenge becomes all the more daunting when one considers the many varieties of fraud that exist. Aside from various forms of embezzlement and outright theft, and the growing risk of information theft (think hackers), two other kinds of corporate malfeasance have come to the fore in recent years: fraud in the business model and fraud in the business process.
The former is defined by a company selling illegal or worthless wares. "If the pharmaceutical industry sells alleged off-label drugs that have not been approved by the FDA, or the financial-services industry is offering worthless subprime mortgages, that can constitute business-model fraud," says Toby J. F. Bishop, director of the Deloitte Forensic Center for Deloitte Financial Advisory Services.
Fraud of the business-practice variety, Bishop explains, can range from corporations ignoring or turning a blind eye to environmental or safety laws to the ever-popular practice of engaging in "window dressing" at the end of the quarter.
An Action Plan
… "Most fraud today is uncovered by whistle-blowers, or by accident — a tip, a rogue piece of mail, or by happenstance," says Tracy L. Coenen, a forensic accountant and fraud investigator who heads up Sequence, a forensic accounting firm. …
As for what to do, while no one has yet come up with a silver bullet, experts point to seven useful steps that all companies can take:
1. Start at the top. "It's critical for both the board of directors and executive management to set the tone for the corporation and its operating units," says James Davidson, managing director at Avant Advisory Group and a certified fraud examiner. …[When] it comes to curtailing fraud, it really does matter, because without it, an "entire culture of workplace fraud" can take root, according to the Association of Certified Fraud Examiners (ACFE).
2. Educate employees. The ACFE also maintains that employee education is the foundation for preventing and detecting occupational fraud (defined as "the use of one's occupation for personal enrichment through the deliberate misuse or application of the employing organization's resources or assets"), because employees are a company's top fraud-detection resource. …

Image via CrunchBase3. Change the culture ASAP. After it was hit by a $550 million fine by the Securities and Exchange Commission last July for its role in the collateralized-debt-obligation debacle, Goldman Sachs, which has a reputation of functioning as a "black-box" organization, recently announced plans to change its culture. The investment-banking firm claims it will become more transparent and ensure its business processes put customer interests first. That's easier said than done, however. "It's difficult to bring about a far-reaching cultural change in well-established companies," says Quilty of BD Consulting and Investigations. "That's not true, however, for first-generation or even second-generation companies, where the employees have a stake in the company and are more motivated to protect it from fraud." …

4. Surprise! We're having an audit. Another effective, yet underutilized, tool in the fight against fraud — at least according to the ACFE — is surprise audits. … While surprise audits can be useful in detecting fraud, their most important benefit is in preventing fraud by creating a perception that it will be detected. Generally speaking, occupational-fraud perpetrators commit fraud only if they believe they will not get caught.
5. Check (and double-check) employee backgrounds. Due diligence is essential in evaluating the credentials and competence of new hires and becoming aware of any issues regarding personal integrity. … The same scrutiny should be applied to new and existing suppliers, customers, and business partners, Deloitte's Bishop says. … Finally, the ACFE recommends that after someone joins your staff, an evaluation of the new employee's compliance with company ethics and antifraud programs should be incorporated into his or her regular performance reviews.
6. Prepare a data-breach response plan. With information loss and data breaches now the most common form of fraud, according to Kroll, it's essential to establish a comprehensive response plan that will enable decisive action and prevent operational paralysis when a data breach occurs. …
7. Make sure the board of directors plays its role. "Corporate governance is the joint responsibility of both the board of directors and management," says Davidson of Avant Advisory Group. …
What Doesn't Work
...The ACFE maintains that audits are ineffective. … But the group did acknowledge that audits can be of value when they are combined with management reviews, job rotation, the creation of a code of conduct, surprise audits, and hotlines. …
Laton McCartney is a freelance writer based in New York.

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Just Whistle?

Image via WikipediaThere is one potential bright spot within the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding fraud prevention: the law contains provisions that generously reward whistle-blowers. According to Toby J. F. Bishop, director of the Deloitte Forensic Center for Deloitte Financial Advisory Services, the Securities and Exchange Commission has already set aside more than $400 million for that purpose. The act also provides strong protective measures, expressly prohibiting employers from retaliating against employee tipsters. …

 — L.McC.

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Smoother Sailing

A new breed of adviser is helping companies successfully navigate key capital markets.

CFO Magazine

Randy Myers - CFO Magazine

March 1, 2011
Thomas Bartlett was no stranger to the capital markets when he became CFO of Boston-based American Tower in April 2009. …
… So when Bartlett was called on just after arriving at American Tower to oversee a $300 million private placement of unsecured senior notes, he brought in a ringer to help out: Reuben Daniels, a veteran investment banker who two years ago co-founded EA Markets, an independent capital-markets advisory firm.
"I'd never done a high-yield deal, and I didn't have a lot of treasury experience in my new organization," Bartlett recalls. "So I brought in Reuben to help our treasurer work through the process of picking the banks and negotiating the fees."
It paid off. When the banks started talking about the fee structure, he says, Daniels immediately weighed in and described how it could be much lower. In the end, it was. "I know we saved money," Bartlett says.
This isn't how such negotiations usually get done. …
There are two problems with the standard go-it-alone approach, though. First, no matter how big or good the bank that is hired, it ultimately serves two masters: the issuer itself, and the institutional investors it must court to buy the issuer's stocks or bonds.
Second, the banks have far more knowledge about market conditions than their corporate clients do, and a greater appreciation for all the subtleties embedded in deal terms that can affect an issuer's costs and balance-sheet flexibility — from liquidity covenants on bond offerings to make-whole tables on convertible-debt transactions.
"The process of executing a transaction is a complex one, and very opaque for corporate issuers," says David Pritchard, another veteran capital-markets banker who recently helped launch a capital-markets advisory firm, Aequitas Advisors. "And there's some degree of intent behind that opacity in that banks, like any party in a financial transaction, like to be in a position where they have more information than the other guy."
Increasingly, however, companies are leveling the playing field by tapping a new breed of capital-markets adviser, like Reuben Daniels and David Pritchard, who have substantial investment-banking experience. They promise to represent an issuer's interests free of any potential conflict, and to help structure deals and underwriting syndicates in ways favorable to the issuer.

Image via WikipediaCompetitive, up to a Point
…"The investment bank is clearly in the position of having two customers at the same time in the same transaction," says attorney Daniel Berick, a partner at Squire, Sanders & Dempsey. "It's got a product it wants to sell to its buy-side customers, and it's also going to get a fee for arranging that sale from the issuer."

Corporations, Berick suggests, can easily lose sight of the bank's dual allegiance. … "I think it's human nature to assume, well, these guys are our guys, like our lawyers are our guys."
But they're not. Their role is more like that of a real estate agent selling someone's house on commission. Both agent and seller gain from a higher sale price, but their interests are not wholly aligned. The homeowner may want to hold out for the highest possible price no matter how long it takes, for example, while the agent may want a quick sale to generate a higher return on his investment of time and marketing dollars. …
"The first part of the process is extremely competitive," says Pritchard, … "An enormous amount of thinking and analysis goes into the creation of those pitch books, which reflect the best ideas the banks have for you as an issuer: … But often, as soon as that process is done and the corporate client selects an investment bank, the competitive dynamics of the process fall away — in most cases, almost entirely." …
Conflict-Free Expertise
Nonetheless, Pritchard says firms like his can bring greater transparency and deal experience to the process to help companies improve transactions' efficiency and pricing. …
Theoretically, a savvy CFO or treasurer knows all these tricks — as well as what kinds of deals investors are receptive to buying at the time the company goes to market, what sorts of covenants those investors are demanding, and what similar issuers are paying for similar transactions. In reality, few CFOs or treasurers are in the market enough to have that sort of insight, nor do they have staff they can dedicate to that space — no matter how big their employer is. …
"I've had CFOs who have been very good, but they don't have the time or the background to be experts in all areas," observes private-equity investor Vincent Wasik, a principal at MCG Global. … "But I always like to have a consigliere, so to speak, who can help me and my CFO make the right decisions."
"I spend a lot of my time with banks," adds Martin Geller, CEO of Geller & Co., a financial advisory firm that, among other things, provides interim CFO services for corporate clients. "But the world's gotten complicated. Even someone like me can't spend 100% of his time on this." …
"All That, and More
Bartlett says Daniels was helpful on his company's notes offering in ways that went beyond pricing, too. American Tower was just in the process of getting an investment-grade rating, he says, "and he helped us dissect the different products the banks were proposing we might use, and to get his advice on our overall financial policy, not just in terms of where our leverage should be, but also in terms of how much fixed-rate versus floating-rate debt we should have and how much cash we should have on the balance sheet." With Daniels, he says, he was able to "knock stuff around that I generally couldn't with a banker, not because they're not good people with good ideas but because I really wanted an objective view." …
To be sure, not every capital-raising transaction requires the services of an independent adviser. "If a public company that's been in the market a couple of times is issuing common stock, it's not hard to understand how it gets priced and that underwriting discounts are pretty much the same," says Berick of Squire, Sanders. "…
"A Cheap Date"
But companies undertaking more-complex transactions may benefit from having an independent adviser. …
While neither Daniels nor Pritchard will say exactly how much their firms charge, Pritchard notes that it is a fraction of what investment banks earn on a capital-markets transaction. Bartlett says the price of Daniels's help at American Tower was a relative bargain compared with the cost of building the same expertise in-house. "It's a very effective way to get an objective view of the world, and I don't need to build or create a tremendous treasury function within my own organization to get it," he says.
Wasik, too, says that rather than spend money on permanent staff, he'd prefer to keep an independent adviser on retainer. "That," he says, "is a cheap date."
Randy Myers is a contributing editor of CFO.

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Legal Liability: Little to None
Investment banks and their corporate clients have strong legal protections from lawsuits over debt and equity issuances.
Investment banks may cater to two sets of customers in capital-raising transactions, but from a legal standpoint securities attorneys say there's not much reason for them, or their corporate clients, to worry about conflict-of-interest liabilities.
For starters, most lawsuits alleging such conflicts on the part of investment banks have revolved around mergers and acquisitions, usually in the context of fairness opinions, notes Daniel Berick, a partner with law firm Squire, Sanders & Dempsey. …[Courts] have usually settled them on issues of fact particular to the individual transaction, or on the basis of the language of the engagement letter signed by the bank and its client.
By contrast, in a capital-raising context, "particularly for secondary offerings, companies generally don't sign an engagement letter with an underwriter to retain them as their agent and structure an offering for them," says Berick. "… So the investment-banking firm isn't acting as the agent of the issuer in quite the same way, in a legal sense, that it is when a company hires an investment bank to help it arrange an M&A transaction."
As for the liability of corporate officers and directors, if a lawsuit did claim that they entered into a poor deal, an important factor in their defense would likely be whether the transaction was consistent with a "pretty broad range" of what other bankers would have advised or offered in that situation, notes Alex Gendzier, a capital-markets partner with Jones Day. In that case, he says, they would likely have a strong defense based on the business judgment rule that governs many corporate decisions and presumes good faith in decision making, particularly if there is evidence that the parties did exercise good faith and performed reasonable due diligence.
Still, Gendzier notes, the law is always evolving, and any company or CFO that did use an independent adviser effectively could have a stronger defense if a deal were challenged in court.
That extra protection would make all the more sense, adds Berick, in the case of complex transactions.
"A plain-vanilla offering of securities sold at market price by a company that isn't in financial distress, has at least some experience as a capital-markets participant, and has a CFO who has been through the process a bunch of times doesn't create a lot of risk to the board or its executives from a fiduciary standpoint," Berick says. "But once you move away from that to an offering that's more complex — or if the board can't really tell itself with a straight face that the CFO is all over this stuff and knows exactly how it works — they might want to get some help." — R.M.

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