2014 Alexander Hamilton Awards

Treasury & Risk has announced its annual Alexander Hamilton Awards, named after the first United States Secretary of the Treasury. The awards  are given to companies that best improve working capital performance. For example, CoreLogic received the award for streamlining tax payments and improving the management of its cash balance. General Motors also received accolades for better pooling its cash balances. Honeywell's treasury department's award was for better financing subsidiaries in China. To listen to this year's winners describe their projects, you can follow this link to Treasury & Risk's webcast.

Google's Class C Stock

Google shareholders of record as of March 27 will be the recipients of a 2-for-1 stock split effective April 3rd. So, on April 3rd, we would expect that Google's stock price will drop by one-half as the number of shares outstanding doubles. What makes this stock split unusual is that instead of simply doubling the number of shares held by each shareholder, Google is issuing non-voting Class C stock that will be paid to shareholders. Google currently has dual voting shares of stock. The Class B shares, held by founders Larry Page and Sergey Brin, have 10 votes each and control 56 percent of the votes, while Class A shares have 1 vote each. There are two unusual concessions with this stock split that have arisen because of a shareholder lawsuit. First, Page and Brin would have to sell an equal number of Class B shares if they sell any of their Class C shares. Secondly, Google must reimburse shareholders if the price of the Class C shares diverges from the Class A shares during the first year. Often, dual class shares sell at different prices, with the difference in the share prices representing the value of a vote.

Finance Training

In good news for future finance professionals, a recent survey indicates that companies are becoming more proactive about training and retaining finance employees. Forty-five percent of the companies surveyed indicate that they are planning to make changes in training and development programs for the finance area. And 36 percent of companies plan to offer career path guidance from entry-level positions to management positions. Rotational assignments, in which employees move from treasury to operational duties, are increasing as well. A rotational system allows employees to enhance their career outside of the treasury department and gives a more holistic view of the company.

Going Bananas

Chiquita and Fyffes announced today that the companies plan to merge. Chiquita, which sells bananas primarily in the U.S., and Fyffes, which sells primarily in Europe, would control about 14 percent of world banana sales. The combined company will have annual revenues of $5 billion. While the companies feel that the ChiquitaFyffes will be the top banana, shareholders went bananas too. Chiquita shares jumped up about 10 percent, while Fyffes shares shot up about 40 percent. Although Chiquita has sales of $3 billion compared to Fyffes' €1.1 billion ($1.53 billion), Fyffes shareholders will own 49.3 percent of the combined company. The merger is expected to save ChiquitaFyffes about $40 million per year in pretax operating expenses.

An Essay On Market Efficiency

Back in October, the Nobel Prize in Economics was split by Eugene Fama, Robert Shiller and Lars Peter Hansen. As we noted, this award highlighted the divide between proponents of market efficiency and proponents of inefficiency. A recent article in Institutional Investor discusses some of the arguments for and against market efficiency. For those of you interested in market efficiency, the article presents a quick overview of market efficiency as well as policy implications concerning market efficiency, for example, "too big to fail" reduces market efficiency.

NASDAQ Opens Private Market

NASDAQ has opened the NASDAQ Private Market. The new market will allow for stock in privately held companies to be sold by the company and its employees. An advantage of this market is that it will give the company control over which employees can sell shares and how many shares they can sell. To be listed, a company must have funding of $30 million in the past two years, an enterprise value of at least $50 million, and annual net income of more than $750,000. The market will allow companies to disclose financial data, but according to the JOBS Act, the companies will not have to make forward-looking statements.

The Truth About Venture Financing

Our guest blogger this week is Dr. Jeff Cornwall. Dr. Cornwall served as President of the United States Associate of Small Business and Entrepreneurship (USASBE) in 2010, and was honored as the 2013 Entrepreneurship Educator of the Year by USASBE. His blog, The Entrepreneurial Mind, is part of the Forbes blog network and was named by that magazine as a "Best of the Web." It is also linked by The Wall Street Journal, Entrepreneur, Inc., and US News and World Report. Here, Dr. Cornwall discusses what a venture capitalist will look at before investing in a new venture.

Since banks tend to shy away from start-up businesses, most new ventures require some form of equity financing. Studies show that 85-90% of equity financing comes from the entrepreneur, family members, and/or friends. But if a new business needs more money than can be raised from the entrepreneur’s personal network, they have to look to outside equity investors, which include both individual investors (known as angel investors) and venture capital firms.

So what do these professional investors look for in a business when they make their investment decision?

We often hear that venture capitalists will put money in an "A" team with a "C" idea, but not an "A" idea with only a "C" team. That is, rather than investing in the next great idea to come along they invest in entrepreneurs who have a proven track record of success in previous deals. However, the truth is that you will need straight "A's" to get angel or venture capital money.

Certainly you need an "A" team. The investors need to know that the entrepreneurial team can deliver on the plan. The team's collective experience is the best predictor of future success. They would prefer that you have already have managed a start-up company from its inception through its growth. And, if it was financially successful, that is even better.

But, they also want an "A" business concept. It has to have market potential that is big -- I mean really big. To get the multiples of their investment that they expect, they need your business to have the clear potential to grow to many millions in sales with the probability of many millions in cash flow from profits. They also want to see a relatively benign competitive environment. Never say there is no competition, because then you look naive, but your plan should insulate you as much as possible from competitive threats, as that is the key to unimpeded growth.

They also want an "A" exit plan. They are not interested in investing in a business for the long term, even if it can generate strong profits. If they can't see a clear path to get all of the money they invested in the business plus a huge return within a few short years, it doesn't matter how good you are or your idea looks. The most common means to an exit is through an acquisition of the business. 

Finally, investors want "A" intellectual property protection. They don't want to invest in deals that cannot be protected. In today's global economy they will often look at your intellectual property protection both domestically and internationally.

So study hard and do your homework if you want outside equity financing, as you will need a perfect 4.0 grade point average to close the deal.