Fall 2009
733 CEOs Have Left Their Jobs So Far in 2009!!!
by Jim Gilreath
president‚ Gilreath Consultantcy
p 800-395-8771
e jim@gilreathsearch.com
www.gilreathsearch.com
So states the outplacement firm Challenger, Gray & Christmas. I wonder how many of these were very competent CEOs recruited away from their portfolio companies replacing their stock options for a more attractive risk/reward “Skin in the Game” stock purchase opportunity they could exercise immediately?
I’m curious how many of these CEOs were terminated by PE firms as bad hires? How did that CEO Candidate with the impressive resume and dynamic interviews who had such good “chemistry” with the hiring team be such a CEO bust?
Here are some thoughts on avoiding Wrong CEO hires:
Don’t hire someone to be CEO who has never before had full P&L experience with substantiated proven results.
Don’t hire a CEO to be a change agent unless you can verify they have successfully done so in the past.
What is your company’s mission? Be sure the shareholders agree on a unified vision for their portfolio company in the form of 1-3-5 year business plans and timetable for the new CEO to achieve targeted milestones; then be certain your new CEO shares 100% in that vision and timetable.
Hire a CEO to grow your business after verifying they have previously grown a profitable business similar to your own in terms of related markets, industries, customers and products.
Jim Gilreath
Gilreath Consultantcy
Gilreath Consultantcy has been providing “skin-in-the-game” CEO/CFO/VP level hiring assistance to private equity clients for 24 years. Our exhaustive due diligence candidate screening model is unsurpassed in the search industry for producing highly qualified investor executive hires.
Never hire a CEO to run a manufacturing business who has never successfully done so in the past.
In my experience career consultants and career turnaround specialists make lousy CEOs.
Remind yourself while conducting due diligence on any CEO candidate of that old Finnish saying “To trust is good, not to trust is better”.
Investing in Healthcare Even in This Environment—Concerns and Opportunities
by Thomas Forest Farb | president, Estabrook Ventures;
former president of Indevus Pharmaceuticals
p 781-839-7067 | e tfarb@estabrookventures.com
www.estabrookventures.com
Concern #1
AS A RESULT OF HEALTH CARE REFORM, THERE IS TOO MUCH RISK tO INVEST IN THIS SECTOR. Concerns about health care reform have kept many venture and private equity investors on the sidelines. I increasingly hear the words “I am not investing in healthcare” and they usually follow the words “because of health care reform.”
OPPORTUNITY: HEALTH CARE REFORM WILL HAPPEN, BUT IT IS NOT REALLY REFORM. There may be other reasons to not invest in healthcare, but in the majority of cases it should not be due to waiting for the results of health care reform.
Some of the reasons for this are as follows:
—It is not really “reform” of the system. It is incremental change focusing on a small portion of the health care system. The “HillBilly” initiatives of the early 1990’s proposed to fundamentally change 85% of the health care system. The current initiatives focus on changing 15% of the system and applying some bandages to the remainder.
—It is going to happen. If it does not happen this year it will happen over the next few years, and if not as one bill, as many separately filed bills. Passage may appear highly unlikely, but we are at the stage when we hear about the legislative points of greatest conflict.
—Reform’s main impact will be on timing of the inevitable. I see some acceleration or deceleration of trends that already exist and trends that most professional investors have recognized. The vast majority of the proposals have fairly small impacts on the trends already in place.
Thomas Forest Farb
president, Estabrook Ventures
Cost-cutting can make companies successful and profitable. Health care is still attractive for investment as it is one of the only industries that with great certainty will be bigger next year than this year and bigger the year after that, etc. So the good news is that portfolio companies may sell more units or more services.
Concern #2
COMPANIES ARE GOING TO PRODUCE LOWER PROFITS. The bad news—due to cost containment pressures all segments of health care will earn fewer profits on those revenues. Revenue per unit may decline and revenue may decline.
OPPORTUNITY: THERE ARE SEVERAL OPPORTUNITIES FOR COMPANIES TO GAIN A COMPETITIVE ADVANTAGE AND THRIVE IN THIS ENVIRONMENT BY CUTTING THEIR OWN COSTS.
Here are some examples:
—Cost-cutting can make companies successful and profitable. Health care is still attractive for investment as it is one of the only industries that with great certainty will be bigger next year than this year and bigger the year after that, etc. So the good news is that portfolio companies may sell more units or more services.
Companies in all segments of health care (drugs, services, devices, diagnostics and delivery) who aggressively reduce their own costs can succeed in this environment of cost containment. From my own experiences running and investing in health care companies in several of its segments, there may be some pushback from management. There is a widely held view among health care management that “I have bigger issues to focus on like the FDA or reimbursement”, or “I have good margins already.”
—Invest in companies that sell products that reduce other health care companies’ costs. For all segments of health care, throughout the continuum from research to product development to manufacturing (if relevant) to sales/marketing to distribution to service, there are opportunities to sell the health care industry products to decrease its costs.
Examples of attractive companies for investment are those selling products that increase efficiencies within drug companies via better animal models and cell lines, predictive pre-clinical methodologies, improved laboratory instruments and eSales/eMarketing. Manufacturing costs can be reduced by companies offering improvements in process control, new sterilization techniques, products to assist scale-up and improved analytical instruments.
For companies delivering health care (such as clinics, hospitals, ambulatory surgical centers), there is an increasing portion of reimbursement being tied to quality and successful outcomes. Thus, products that can help a provider anticipate quality problems in advance and prevent them will be greatly needed.
Concern #3
THERE ARE A NUMBER OF NEW AND EXCITING MEDICAL APPROACHES SUCH AS PERSONALIZED MEDICINE, BUT THEIR ADOPTION HAS BEEN SLOW.
OPPORTUNITY: PERSONALIZED MEDICINE WILL SUCCEED BECAUSE IT PROVIDES COST SAVINGS.
This approach will inevitably be widely adopted. Pharmaco-diagnostics that can predict responders to a drug therapy are one of the few product sets that can reduce development costs, reduce sales costs and reduce payor costs. Also, as comparative effectiveness research (CER) slowly ramps up, therapies targeted at sub populations will more successfully demonstrate positive results.
Here is the best analogy I can think of to explain why personalized medicine will succeed. There is the decades old joke about companies’ advertising budget that goes something like this—“Seventy-five percent of my advertising budget is a waste of money, I just don’t know which seventy-five percent!” There are now numerous examples of molecular diagnostics doing the incredible—telling us which 75% is wasted!
Other Opportunities
There are numerous other opportunities for investment in health care in areas including:
—Chronic Care—Therapies and services are needed for chronic diseases, which now account for more deaths than acute diseases;
—Decentralization of Care—Products and services are needed that allow for delivery of health care at a lower cost in a decentralized manner. For example, the number of reimbursed procedures provided by ambulatory surgical centers will increase. Health care will be delivered at a lower cost in community settings and in the home. Tele-health, point-of-care diagnostics and remote patient monitoring will be beneficiaries of this trend; and,
—Health care information technology—Electronic medical records ($30b proposed to be spent over approximately seven years) will create a platform for many products such as remote patient monitoring, evidence- based medicine, eVisits, data mining and connected health.
In conclusion, there is no need to wait for health care reform. It is happening and will happen. It is not changing the direction health care is headed significantly. It is incremental change, not true reform. None of the proposed legislation addresses the fragmented fee-for-service, multi-payor system consisting of the Veterans Health Administration, Medicare, Medicaid, employers and private payors.
The Advantages of a “Date-Certain” Mergers and Acquisition Process
by Steve Gerbsman | president, Gerbsman Partners
p 415-456-0628 | e Steve@GerbsmanPartners.com
www.gerbsmanpartners.com
Gerbsman Partners believes the best approach for maximizing enterprise value for under-performing and/or under-capitalized technology and life science companies and their Intellectual Property is a “date-certain” M&A process. This process has significant advantages of speed, cost and flexibility. Gerbsman Partners’ experience in utilizing a “date certain” M&A process has resulted in numerous transactions that have maximized value anywhere from 2–4 times what a normal M&A process would have generated for the IP and asset(s).
With a date-certain M&A process, the company’s board of directors hires a crisis management/ private investment banking firm (“advisor”) to wind down business operations in an orderly fashion and maximize value of the IP and tangible assets. The advisor works with the board and corporate management to:
1 Focus on the control, preservation and forecasting of CASH.
2 Develop a strategy/action plan and presentation to maximize value of the assets. Including drafting sales materials, preparing information “due diligence war-room”, assembling a list of all possible interested buyers for the IP and assets of the company and identifying and retaining key employees on a go-forward basis.
3 Stabilize and provide leadership, motivation and morale to all employees.
4 Communicate with the Board of Directors, senior management, sesnior lender, creditors, vendors and all stakeholders in interest.
Steve Gerbsman
president, Gerbsman Partners
A company in wind-down mode is a rapidly depreciating asset, with management, technical team, customer and creditor relations increasingly strained by fear, uncertainty and doubt.
The company’s attorney prepares very simple “as is, where is” asset-sale documents. (“as is, where is—no reps or warranties” agreements are very important as the board of directors, officers and investors typically do not want any additional exposure on the deal). The advisor then contacts and follows-up systematically with all potentially interested parties (to include customers, competitors, strategic partners, vendors and a proprietary distribution list of equity investors) and coordinates their interactions with company personnel, including arranging on-site visits.
Typical terms for a date certain M&A asset sale include no representations and warranties, a sales date typically two to four weeks from the point that sale materials are ready for distribution (based on available CASH), a significant cash deposit in the $100,000 range to bid and a strong preference for cash consideration and the ability to close the deal in 7 business days. Date certain M&A terms can be varied to suit needs unique to a given situation or corporation. For example, the board of directors may choose not to accept any bid or to allow parties to re-bid if there are multiple competitive bids and/or to accept an early bid.
The typical workflow timeline, from hiring an advisor to transaction close and receipt of consideration is four to six weeks, although such timing may be extended if circumstances warrant. Once the consideration is received, the restructuring/insolvency attorney then distributes the consideration to creditors and shareholders (if there is sufficient consideration to satisfy creditors) and takes all necessary steps to wind down the remaining corporate shell, typically with the CFO, including issuing W-2 and 1099 forms, filing final tax returns, shutting down a 401K program and dissolving the corporation etc.
The advantages of this approach include the following:
Speed
The entire process for a date certain M&A process can be concluded in 3 to 6 weeks. Creditors and investors receive their money quickly. The negative public relations impact on investors and board members of a drawn-out process is eliminated. If circumstances require, this timeline can be reduced to as little as two weeks, although a highly abbreviated response time will often impact the final value received during the asset auction.
Reduced Cash Requirements
Given the date certain M&A process compressed turnaround time, there is a significantly reduced requirement for investors to provide cash to support the company during such a process.
Value Maximized
A company in wind-down mode is a rapidly depreciating asset, with management, technical team, customer and creditor relations increasingly strained by fear, uncertainty and doubt. A quick process minimizes this strain and preserves enterprise value. In addition, the fact that an auction will occur on a specified date usually brings all truly interested and qualified parties to the table and quickly flushes out the tire-kickers. In our experience, this process tends to maximize the final value received.
Cost
Advisor fees consist of a retainer plus 10% or an agreed percentage of the sale proceeds. Legal fees are also minimized by the extremely simple deal terms. Fees, therefore, do not consume the entire value received for corporate assets.
Control
At all times, the board of directors retains complete control over the process. For example, the board of directors can modify the auction terms or even discontinue the auction at any point, thus preserving all options for as long as possible.
Public Relations
As the sale process is private, there is no public disclosure. Once closed, the transaction can be portrayed as a sale of the company with all sales terms kept confidential. Thus, for investors, the company can be listed in their portfolio as sold, not as having gone out of business.
Clean Exit
Once the auction is closed and the consideration is received and distributed, the advisor takes all remaining steps to effect an orderly shut-down of the remaining corporate entity. To this end the insolvency counsel then takes the lead on all orderly shutdown items.
Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in under-performing, under-capitalized and under-valued companies and their Intellectual Property. In the past 60 months, Gerbsman Partners has been involved in maximizing value for 47 Technology and Life Science companies and their Intellectual Property and has restructured/terminated over $750 million of real estate executory contracts and equipment lease/sub-debt obligations. Since inception, Gerbsman Partners has been involved in over $2.2 billion of financings, restructurings and M&A transactions.
Gerbsman Partners has offices and strategic alliances in North America, Europe and Israel.
We hope you found this information useful.
If you have questions or suggestions, send them to jim@gilreathsearch.com.
Call us toll-free at (800) 395-8771.
Gilreath Consultantcy, 8 College Rd., Concord, MA 01742
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