Deloitte’s Insights for CFOs provides financial executives a customized resource to help them address the strategic, operational and regulatory issues they face in managing their finance organizations and careers, with top-line digests, research, perspectives and technical analyses. Risk mitigation, be it financial or operational, is especially important for mid-market companies where volatility in pressure points can have an immediate, detrimental impact. Changing dynamics in China’s currency policy and market volatility are adding to uncertainty on the direction of the Renminbi (RMB), something CFOs of multinational companies operating in China should consider monitoring more closely.
The slow pace of regulatory reforms in the Shanghai Pilot Free Trade Zone (FTZ) has frustrated some multinational companies but Ken DeWoskin, senior advisor to the Chinese Services Group, Deloitte LLP, says the FTZs create an opportunity for companies to work directly with regulators to propose ideas to improve their operating environment in China.
Margin compression has become a growing issue for many multinational companies operating in mainland China.
With Focus on Top-line Growth, Mid-market CFOs Have Several Strategic OptionsReports of large companies’ huge cash reserves, easier financing, higher transaction leverage multiples and historically low interest rates have many mid-market companies focusing on the top line and considering M&A.
CFOs can help business owners determine which of the following strategies and the options within each strategy make sense for the company in the current business environment by evaluating their potential advantages and disadvantages.
A company may decide to hold steady, keeping the status quo altogether, or forming a strategic alliance that doesn’t impact the capital structure.
This approach calls for implementing the existing business plan to increase profitability, finance growth with cash from operations and bank debt and distribute excess cash to shareholders.
Potential Advantage: “This approach limits the amount of change the company needs to endure,” says Paul Warley, a managing director at Deloitte Corporate Finance LLC. Potential Disadvantages: Keeping the status quo may limit the amount of cash available for shareholder distribution, and the company could miss out on growth opportunities. Companies that choose to maintain their current capital structure may be able to use strategic alliances to move into new product lines and new markets without impacting their capital structure.
Potential Advantages: This approach allows for retention of shareholder control of equity and operational synergies, along with the potential to enhance competitive positioning and mitigate business risks.
Potential Disadvantages: There is potential for diversion of management attention from core business activities and control and cultural issues.
Companies may seek to pursue a recapitalization through the credit markets or with private equity. Potential Advantages: This can be a cost-efficient tool for creating shareholder wealth while providing the opportunity to participate in future growth.
Potential Advantages: Current shareholders retain a majority or minority interest depending on the strategy of the company, as well as the opportunity for future exit. Potential Advantages: Looking overseas may offer opportunity for higher top-line growth or margins from operating in lower cost environments, as well as competitive differentiation and access to higher-growth economies such as Brazil and China. Potential Disadvantages: Whether domestic or international, acquisitions can be time and capital intensive, diverting resources and people from daily activities, particularly in smaller companies that may not have the financial, legal and tax capacity of larger businesses. Disposition of the business through either a strategic or financial partner may be an enticing alternative to consider.
Potential Advantages: Strategic partners may value the company higher because of potential synergies and lower cost of capital, and may support organic growth opportunities previously inaccessible or deemed too risky. Potential Disadvantages: A financial partner may seek other ways to attribute value because they lack the opportunity for synergy benefits and may require a continued carried interest on the part of the selling shareholders, especially if existing management are shareholders. Whatever approach a mid-market company considers in order to realize the value of the enterprise, rigorous qualitative and quantitative analyses are essential.
By objectively evaluating these and other strategies in the context of their company, competitors, sector prospects and opportunities for value creation, “business owners and other company leaders are able to make better business decisions,” says Mr.
The number of respondents citing increasing revenue as the impetus for IT investment rose to 41% in the 2015 survey, up from 27% in 2014.
The alternative strategies available to mid-market businesses are discussed in Deloitte’s study Mid-market Perspectives: Evaluating Strategic Options—a Growing Imperative for the Middle Market. Shareholder concerns include their own financial needs and objectives, risk tolerance and level of interest in retaining financial and operational control of the company.
The new partner can also help drive operating improvements and synergies by bringing a wealth of experience from other portfolio companies.
Dealing with markets in which the business owners and managers are most familiar is another advantage, as is the opportunity for current owners to retain control and position the company for a potentially more valuable exit in the future.
The ongoing name and legacy of the company could be changed, especially if the partner thinks it has a preeminent brand. Mid-market company leaders can integrate operational and financial planning without having to make significant investments in new technology by establishing strong data governance and making better use of existing enterprise resource planning and other systems.
Yet, mid-market companies should consider the various strategies available to them before embarking on M&A to grow the top line, says Kevin McFarlane, managing director at Deloitte Corporate Finance LLC.
The study also lays out a framework executives can use to benchmark strategy options against their company’s needs and objectives and current business conditions. Integration costs, such as one-time expenses for severance charges and rationalization of redundant IT infrastructures, as well as duplicative geographic and facility footprints, are also a factor. In addition, collaborating with a strategic player may provide significant tax advantages depending on how the relationship is structured,” says Mr. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Employee considerations may include key talent recruitment and retention and the impact a deal might have on company culture and morale. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.
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