CFO Folklore – Page 2 – The Frustrated CFO

Rumor Has It… Trouble Is Brewing in Private-Equity World

The other day I had a meeting with some big shots from Citibank's commercial landing. Every single person at the table felt disappointed. On my side of the negotiations, everyone was shocked that the bank came up with some really sneaky changes to the Term Sheet we have originally accepted. Citibank's covert operatives were distressed to realize that their maneuvering didn't work on us and, moreover, we are absolutely ready to walk away from the deal.

Nobody was disgusted more than me, though: I've rejected other lending candidates in Citi's favor based on the conditions of that damn Term Sheet; I've spent so much time and effort making sure that the deal comes to conclusion and closes by June 15th; I've conducted so many detailed discussions with the bank officers; I've plied the Credit Risk Group with tons of information and provided elaborate answers to every single of their drilling questions – dammit, what a waste! I started getting up from the table, determined to say a cold goodbye ("Good day, sirs… I said, 'Good day'," or something like that) and leave everyone in the conference room to their own devices.

But the bank's team leader didn't want to give up. This seasoned warrior (whose bonus depends on the number of deals she closes) quickly swallowed the bitter pill of defeat and started deliberating the possibilities of remedying the unfortunate situation. By way of explaining and excusing their underhanded tactics, she embarked on a tale of pressure and oppression all national banks suffer from the Office of the Controller of the Currency (OCC) that, empowered by the US Treasury's mandate, tightened the regulatory screws on all commercial lenders operating in small and middle markets.

Ring-ding-ding! The government is making it more difficult for small and mid-size businesses to borrow operating funds? Tell me more!

I can only attribute her sudden loquacity to the awkwardness of the impasse we have reached, to the thickness of the room's air that required some sort of easement before our dialogue completely choked. Not only that she went into details of the new pre-lending qualification requirements for private businesses such as lower leverage (i.e. debt/equity) and higher fixed-coverage (EBIT + fixed costs/fixed costs + interest) ratios, but she also divulged some information bankers almost never discuss – she told us about a specific deal just killed by the bank's risk underwriters for the sake of compliance with the government's wishes.

It was the nature of the transaction in question that surprised me at first – a typical leveraged buyout (LBO) of a privately-held manufacturer, with a well-known private equity (PE) firm and a mezzanine lender already in place. Citi was expected to step in as an institutional lender covering 55% of the contractual purchase price. I might've been wrong, since I'm not exposed to M&A on daily basis, but I was under impression that banks are usually hungry for the high-yield rewards of such deals, especially considering the prominence of the PE behind it. The fact that this case was presented to us as an example of insufferable regulatory interference kind of confirmed my suspicion that Citi's bailing out was an unexpected turn of events for the bankers themselves.

So, did they get the explanation from their Risk partners? Yes, they did: The due diligence suggested that the deal had a high probability of a quick turnaround. In other words, it was expected that the PE firm would quickly flip the acquired company's stock for a nice profit leaving the company to deal with the loan repayments. Ok, but isn't that the nature of any private equity transaction, regardless of whether the ownership is sold fast or kept in-house for years? The loan repayments always come out of the company's operational cash flows. The liability is a part of their balance sheet. Hmm…

Anyway, the talkative tactics worked and we all decided to go back to our respective drawing boards instead of walking away from a very promising relationship. Good! But the story of the killed LBO kept gnawing at me.

Ok, on the surface, it may seem that the government is working hard on protecting taxpayers from a possibility of another bailout. But

Citigroup was one of the first bailees to repay the government ($51 billion) with the highest profit on the bailout list (additional $13.5 billion).
As we know, it wasn't the commercial lending, but the sub-prime mortgages and the securitization thereof that was at the core of the financial crisis and the subsequent bailout. That is why the government-sponsored Fannie Mae and Freddie Mac top the bailout chart with $187 billion of the received support between two of them.
Of the top 20 bailout recipients the one with the largest debt still outstanding since 2008 is General Motors (as of 05/29/2014, $11.5 billion is still due)- an automaker, a public company, a NYSE's Blue Chip.

Wait a minute, wait a minute! Private business vs. public company? These Treasury moves have nothing to do with the fiscal protection of the nation. It has to do with the government's continuous prevention of the stock-market crash and massive panic that will follow. Too scared to deal with the long overdue adjustment, it has been doing everything in its power to direct both public and corporate investments into the shares gambling of mythological proportions.

The private businesses and the private equity investors act against this insane agenda by laboring hard under the natural commercial formula of growing capital through realized profits generated by functional enterprises. To undercut these efforts, the proverbial "they" are willing to sabotage private businesses, which hoi poloi knows nothing about, in order to continue ballooning the stock market cancer, so that the general public with their Ameritrade accounts and 401(k) plans invested into "emerging" markets is kept at bay.

Well, I will not fold! I will get that Citi line! As hopeless as it may be in the long run, I take a great satisfaction in the fact that my daily work is essentially a part of the Fiscal Resistance.

CFO Folklore: Delusional Self-Involvement of Business Owners

As my readers know, years ago I've made a career choice of avoiding large corporations and their tall organizational structures. I prefer small and mid-size companies allowing opportunities of direct interactions with business owners – the very people responsible for recognizing one's efforts and allotting rewards. It's not for sissies, of course, because in this environment you cannot hide your incompetence or laziness in a mass of indistinguishable drones – you and your work are on the spot and in full view all the time.

Even for a highly skilled professional with a strong work ethic it's not easy to be constantly exposed to this very special breed of people - the entrepreneurial bosses, who, God bless them, unwittingly provide me with endless writing material. I guess it will be several years into my retirement (assuming I will live that long) before the urges to highlight this or that aspect of their psychology and behavior will ceise.

It's uncanny how many common characteristics are shared by private business owners. For example, all of them operate under the same delusion that employees care (or should care) about their companies just as much and exactly in the same way as they themselves do. It's especially amazing to me because most of them are pretty levelheaded and highly functional people, yet they insist on this deranged assumption that doesn't fit into any rational frame of thought.

For a business owner his company is his life's endeavor, his singular purpose, his channel of expression and fulfillment, his source of pride and wealth, his outlet of personal freedom. The owner/CEO's opinion overrides everybody else's; he is the only one with a full authority to direct the company's development in any direction (to a success or to a downfall); ultimately he holds all employment strings in his hands; he can say or do whatever he wants (within the limits of the law, of course); nobody watches his time, assesses his performance, addresses his shortcomings.

On the other hand, for an employee, no matter how dedicated, loyal, hard-working, conscientious, and highly positioned, a job is just a job – a line on a resume. It cannot possibly be anything else, because there is no such a thing as a job security anymore, no matter where you work. If the current employment ends, there most likely will be another one after. Nowadays, probably shifting down, but maybe shifting up - who knows? There must be something, or there will be oblivion. For many of us, a job is just a source of sustenance, not the means of self-satisfaction. And when it comes to personal freedom… I already wrote about it four years ago (Bill of Rights in Small-Business Environment ).

Clearly owners and their employees are conditioned to look at the business from different platforms. It is preposterous to assume equal attitudes from unequal parties. Yet, the faulty presumption persists and is manifested by various business owners quite frequently. I'm sure many of you have experienced it first-hand.

On the rare occasions, when opportunities to be frank present themselves, I try to explain to CEOs that their employees have their own individual life agendas: what's good for you, your business, and your pocket, Mr. Boss, is not necessarily all that important to them. Sometimes I even draw Maslow's Hierarchy of Needs: you see, I say, you cannot expect them to be proud of working in your wonderful growing company if they cannot make ends meet and feel overworked.

Agh, it's no use! Just the other week I was discussing (via email) with one of my clients, whose company made the 2013 Inc. 5000 list of the fastest growing companies in the nation, whether I should enter them into consideration this year as well. It's my assessment that the negative outcome (everyone was complaining about the endless solicitation calls from various service companies) outweighed the pleasurable, yet hard to measure, positive impact of the resulted publicity. He had no rebuttal to that particular argument. Instead, he replied to me with the following:

"The ranking is something about which we can all be proud, and which thereby directly affects the morale of our staff, who both see results of their hard work translated into an accolade and have the pleasure of working for a company that has been honored. I know I bathed in the warm glow of the company's recognition."

Of course he did! It's his company. He is rightfully entitled to tell about it every single person he meets. But can you believe the gall? They "have the pleasure…"! Seriously? Even the ones with $40K salaries and one-week-a-year vacations? Uh-uh, Mr. Boss, the pleasure is all yours.

Business-Lunch Scene Today: Cipriani Wall St.

For many years Cipriani restaurant at 55 Wall St. (aka Cipriani Club 55) has been a staple location for Financial District's lunchers with company-paid expense accounts: classy, convenient, prestigious, comfortable, and moderately tasty (not enough to distract you from a business conversation, yet sufficiently to leave you and your guests satisfied). And, of course, the drinkers can tease themselves here with famous Bellinis, that pre-war invention of Giuseppe Cipriani - a mix of Prosecco (the Italian answer to Champagne) and peach puree; the only coral-pink drink in a flute I've ever seen straight men drink.

Being tied up in Midtown offices for years and always insistent on people coming to my turf, I have not been at this Cipriani location for a while. Now, firmly based on Broad St., I am basically around the corner from the place. So, it was only natural that an institutional investor picked it for a lunch meeting with me.

I arrived first and had a chance to observe the scenery for several minutes without any distractions. So, this is what it's like here now? For a hot second I thought I was in a wrong restaurant. I remember the place being abuzz, full of men and a few women in Italian suits, their conversations merging into one low-volume background sound. Now, at 1 pm (the busiest of the lunch-time hours) the restaurant's occupancy is about 40%, which is not enough to blend the voices – you can clearly make out dialogues at different tables.

The most remarkable change, though, is in the contingent of patrons. While all suits in attendance were of the familiar ilk (well, maybe not all of Italian make anymore – my observation is that Brooks Brothers' off-the-rack outfits, now predominately made in China, are gaining more and more ground here), there were several tables occupied by new fixtures.

There were two (!) Russian tables. The largest round table in the middle of the restaurant was occupied by a mixed-gender group of New Russians: Rolexes, Cartier tchotchkes, Zegna (men) and Chanel (women) suits, skirts too tight and too short, hills too high, voices too loud, full bottles of drinks on the table. Several tables away from them, in a much quieter corner, were two Russian models: 6-feet tall with legs growing out of their armpits, long dirty-blond hair, indistinguishable faces with unnoticeable makeup, Roberto Cavalli jeans and blouses, marinated salmon and water on the table. Well, nowadays, these people are everywhere.

It was really another couple that surprised me: A young (at least by the contemporary standards - about 38) stay-at-home Dad with his 4-year-old daughter on his lap. Both of them were wearing high quality, expensive, but tastefully understated and casual clothes. Except that the girl's outfit and hair were somewhat disheveled, apparently from unyielding resistance to Dad's feeding attempts (hence the lap position – to prevent spontaneous running).

The truth is, though, I shouldn't have been surprised. This pair was here probably for the same reason the Russian models were: most likely they live nearby, in one of many Financial District's ex-office buildings, now converted by their owners into condos to increase occupancy and profits. They belong to the previously unimaginable in this area dog-walking crowd I try to get through every evening on my way home from the office.

Don't get me wrong, this is not about Cipriani's shrinking revenues. Who the fuck cares? I don't. These people have hotels and restaurants all over the world; they've soldered through tax evasion suits and who knows what else. Both Club 55 and Cipriani Grand Central are still prime choices for many non-profit, political, and commercial organizations hosting fundraisers and galas. And I hear that the wedding business is going strong.

But I view all these shifts and changes, largely unnoticed by others, as evidence supporting my strong opinion that we live in a new economic stage – the one that doesn't fit into Nobel-prize-winning formulas; the one that leads rational thinkers to pessimistic predictions of the future that's coming both to Main Street and Wall Street. Of course, we can pacify ourselves by saying that Cipriani is too outdated and stuffy; that the younger high-rollers prefer hipper places at nearby Peck Slip and other tiny waterfront streets. But surely that alone wouldn't account for the dramatically reduced attendance in this brand-name establishment.

A sober eye cannot help but track the obvious trend: the empty tables; the unoccupied offices; the converted buildings; the diminishing number of Italian suits on display. It illustrates only too well a poignant number recently featured in New York Magainzine's Approval Matrix: 46% of New Yorkers are barely making more than the poverty threshold. And it is pretty clear to me that, contrary to the popular opinion, 53.99% of the City's population don't make quite as much as they used to either. The remaining 0.01% (not 1%, you fools!) are in a position to never get affected by any economic changes. They can have Bellinis (and everything else) any time they want.

On Service Quality and Self-Worth: Unknown 500

There are smart people out there who always place their personal interests ahead of everything else. I wish I could be like that, but I'm not. In my life, other people and things end up claiming higher priorities than Me. I'm one of those schmucks who get overwhelmed by the sense of Responsibility, as in guilt (familial) and duty (professional), and push their private matters aside. I know, I know – at the end of the day by abating those feelings I essentially attend to my personal needs anyway, but that's a psycho-philosophical issue we can contemplate. In real time it feels as if I do everything for others and neglect myself.

That's why it takes me six months to get my ass to a dentist. And that's why I let a bunch of out-of-pocket medical expenses to accumulate before I'm pushed to the wall by the deadline to file for reimbursement from the Flexible Spending Account (FSA, aka use-it-or-loose-it pre-tax medical expense program). It's not just me either – two of my employees completely missed the cut-off dates for filing their claims, thus losing the portion of the wages they have been contributing to the FSA. Maybe my attitude robbed off on them. And that's too bad, because no job deserves such loyalty unless you work for yourself or someone dear to you.

But, as Bill Cosby would say after a 30-minute introduction, this is not what I was going to talk about. This should explain, however, why when I was filing my FSA claims online a couple of weeks ago I had to upload quite a few receipts (required as supporting evidence) covering pharmaceutical, medical, and dental co-payments.

Here is what happened. I entered all claims, uploaded scanned receipts, pressed the "Submit" button… and the system hanged. You know, one of those dead freezes when nothing moves no matter what you do. Okay! Not a big deal for someone who's been dealing with computers and the Internet, like, forever. Close the browser, open the browser, go back on the website, log in, retrieve the claims (thankfully saved), upload… Same shit!

Well, as you can imagine, entering all information item by item, scanning individual receipts, etc. took a "minute" already, so I wanted to resolve this bullshit ASAP. I located the tech support number and dialed it, cursing under my breath the Flex provider for not offering a dedicated debit card option instead of this cumbersome claim filing.

In the receiver a Steve answers. Like I said, I'm an experienced Internet user, so I go straight to the core issue, "Is there a limit on the number of documents a user can attach to a claim? Or maybe on the total size of attachments?" Tech support is not customer service and it's reasonable to expect that they will catch on your short-cut approach. Uh-uh! Not Steve! He asks, "What is the problem?" and I'm forced to explain the whole thing anyway.

He listens and says, "I've never heard about a size limit." (Note to all, only 1 out of 10 service people fully understands the system he supports.) "But I know what the problem is - you are having an Unknown 500."

Wait a minute, wait a minute: he knows that I'm having an unknown something? That sounds strange, doesn't it? But I keep my cool – I understand it's a system error: "What kind of error is it?" In return he asks (you cannot get a straight answer out of this guy no matter what!), "Do any of the files you are uploading have a '+' or a '-' in their names?" "No," I say, "they don't. I know that that's not allowed. In fact, one of the scans originally had dashes in the name, but I deliberately renamed it before the uploading." That was foolish of me to volunteer all that information. Because now he goes, "That doesn't matter, the system still knows that the dash was there."

Really, dude? I ask, "Are you telling me that this FSA processing site is capable of recognizing in MY computer that a file USED TO have dashes in its name?" He confirms, "Yes, that's correct." "Not the size of all the attachments, but the expunged name? Are you sure?" He confirms again. Okay, humor me: "So, how can I remedy this?" "Log out, shut down your computer, reboot, and then you should be able to upload your receipts," he advises.

Bill Cosby is definitely on my mind today, because it was him who said "as ridiculous as some things may sound, there come desperate times when you are ready to try anything." My rational mind did not believe for a single second that it would work, but it was a proposition of a quick fix and time is of the essence. So, after I'd hung up, I followed his suggestion.

Of course, it didn't work! What did you think? The guy pulled that tech recommendation out of his ass! Didn't even offer to stay on the line with me to see if it was going to work! Who does that? I'll tell you who: unqualified, unprofessional, poorly trained, half-asleep, semi-retarded bitches that pervade our lives.

The right thing to do at this point would be to delete the original claims and file them in two batches instead of one. Then call the tech support, find a supervisor (I noted Steve's full name)… But my time is more important, so instead I downloaded the entered info into a claim form, put it together with the receipts, and did what we used to do "back in the day": faxed everything over. You don't get a time-stamped system receipt that way, but it worked – I've got reimbursed in three days.

Meanwhile, the stupidity went unpunished. Oh, well, we let go of things like that on daily basis. What appalls me the most, though, is the audacity of this people! You are called "Support," for crying out loud! Someone in need calls you, you feed them some bullshit, hang up, and go on with your life? And you get paid for it? How do these people leave with themselves? How do they go to sleep at night? I have no clue. I know I never worked like that. I simply couldn't. But I bet it's much easier to be Steve. I'm sure he never pushes his personal interests aside.

Creative Marketing, or The Frustrated CFO Attends Louis XIII Legacy Experience

General public, constantly bombarded by advertising campaigns from TV screens, Internet sites, pages of periodicals, billboards, transportation exterior, etc. is rarely aware of the fine correlation between the commercials it is forced to absorb and the economic nature of the products being promoted to them. The majority of consumers don't realize that Mad Men, both real and fictional, are after the largest chunk of their disposable incomes – the money spent on what's known in the economic science as "normal" goods, i.e. every-day necessities with a moderate income elasticity of demand.

In plain words it means that when people's wealth increases, the demand for the normal goods increases at a slower than income rate. It's not like you are going to start using twice as much detergent if your salary doubles, but you may switch to a more expensive brand, which supposedly delivers cleaner and brighter clothes. And that's why commercial sequences look like the war of brands: Progressive vs. Geico aka Flo vs. Gekko; Advil vs. Alive, Post vs. Kellogg's, etc.

On the other hand, marketing for "inferior" goods (i.e. those for which demand decreases as income increases) is basically non-existent. It would be a waste of the advertising budget to promote items that sell themselves anyway because they are the cheapest in their product groups. For a store-brand quart of milk at 99 cents you don't even need too much color on the packaging. On the other hand, to sell a quart of the fancy Farmland Special Request Skim Plus Milk for $2.99 you need it to stand out on the shelf in its purple lettering and black cow spots.

What about even fancier, extraordinarily expensive items? The ones labeled by the economists as luxury goods, for which demand inexplicably increases more than proportionately when income rises? We don't see much advertisement for them either. Yes, from time to time De Beers injects a bit of its A Diamond Is Forever campaign into various media. And on a rare occasion you can catch on TV one of those sexist (targeted exclusively to men) Porsche commercials. If you are a tennis fan watching one of the Majors you get to see Roger Federer in a Rolex ad… rarely.

But, have you ever seen a broadcast spot for a $12,000 Chanel suit? A $350,000 Harry Winston diamond necklace? A 73-foot ocean yacht (about $1.3 mil)? A Bentley (average price $200,000)? Louis Roederer Cristal Rose 2005 ($600 a bottle)? How about a public notice for the upcoming Sotheby's Fine Art auction?

One may think, "Well, if I had this kind of money, I would've found those things." Who doesn't want a yacht with a polished mahogany stateroom? Or a rare car? Yet, it would be a mistake to think that these items don't require any form of marketing or that they are above competition. Yes, rappers drink and rhyme about Cristal, but according to many experts the champagne that can really blow your mind is Dom Perignon White Gold Jeroboam, which can demand an auction price of $40,000 per bottle. Imagine that you can afford it – how would you know about its existence? These products are exclusive rarities that occupy narrow niche markets. Hence, they call for innovative, targeted marketing tailored for creating brand awareness.

Enter Remy Martin Fine Champagne Cognac (est. 1724) and it's most privileged drink – Louis XIII cognac. Blended from 1200 eaux-de-vie aged from 40 to 100 years, in very special 300-year-old oak barrels hidden in a secret cellar in Grande Champagne region of Cognac, France, and, when deemed ready by the Cellar Master, bottled into proprietary Baccarat crystal decanters – this is as high-end as brandy can get and its price reflects it: a "regular" bottle goes for $3,000 and limited editions (such as Rare Cask or Black Pearl) can fetch anywhere between $22,000 and $44,000 per bottle. And I can personally vouch that it worth every penny. I mean, that shit will spoil you for life: you try it and you don't want to drink any other brown-colored grape liquor no more.

It was the fast-growing and hungry for new clients EastWest Bank who invited me to participate in the cognac's exclusive (20 people) degustation event jointly hosted by the bank and "the brand ambassador" (i.e. a good-looking English-speaking Remy Martin's representative) in a building in SoHo formerly owned by Charging Bull sculptor Arturo Di Modica and temporarily converted to accommodate the Louis XIII presentation. It was an installment in Remy Martin's marketing campaign called Louis XIII Legacy Experience, which has been on the World Tour for six years, rolling through the cities with major concentration of wealth – New York, Los Angeles, London, Dubai, etc.

This is how it works: In each location, the brand's representatives contact high-net-worth individuals, heads of private financial institutions, high-tech moguls, distributors of other luxury goods (Ferrari and Porsche dealerships are always targets), etc. and offer them an opportunity to host an exclusive event for their most important customers, prospective clients, business partners, or other wealthy friends. The price tag… NOTHING!

It's truly a marketing tool. What Remy Martin gets out of it is: 1.) The brand recognition through introduction of the drink to people who may never heard of it before; 2.) Additional entries in their contact list – one of the leggy hostesses meets you at the entrance with her iPad and asks you to share your business card and/or an email with Louis XIII; 3.) Spot orders of both "standard" and special-edition bottles of the famous drink - I know for a fact that before our event was over all Rare Cask and Black Pearl bottles on display were sold.

With no price tag attached, what does the Experience offers to guests?

The event starts with a gathering/mingling part. In our case, quite excellent Piper-Heidsieck champagne (with refills) was passed cocktail-style accompanied by extraordinary finger-food trays (I wish I knew who the caterers were), while people talk to each other, looked at the displays of special Louis XIII, and read leaflets about the silent auction of silkscreens and lithographs made in Andy Warhol's Factory, which lined the walls of the drawing hall (an NYC-specific added benefit).

After that you are taken to a screening room (red semi-circular couches) for a presentation of a film that tells the story of Remy Martin and its highest-priced product. Next, we were led to the underground level (a fortunate feature of this particular venue – it looks like a cellar with exposed brickwork and arches), where a surprise display was revealed: an actual 300-year-old barrel, previously used to age the cognac for 100 years and now retired due to its diminished quality.

Over this artifact a 750-ml bottle of Louis XIII de Remy Martin was opened and pored into the proprietary Baccarat glasses (if a group is larger and/or more valuable to the organizers, Le Jeroboam, 3-liters-full, is used). Warning you not to down your drink right away, the "ambassador" gives a mini lesson on the proper tasting of the dark-amber liquid. Let me relate the first bit: like with many other drinks, you start with the nose. The difference is that, instead of trying to squeeze as much of your face into the glass as you can, you experience your first nose of this incredible cognac at the stomach level. As a person with chronic respiratory aggravations, I was very doubtful - I didn't expect to smell anything. But let me tell you: the power and the complexity of that aroma… It will probably take me extra 100 words to describe it.

While recovering from the magic of swallowing the drink, you are invited to place an order for your own bottle of Louis XIII complemented by two glasses of the same type you are still holding in your hand. With that comes a special perk from the ambassador: if you order a bottle from him you get your initials engraved on the decanter.

I know that on some occasions the Legacy Experience rolls into a dinner, but for us that was it. Still, what an amazing adventure! Thank you, EastWest Bank! Everyone leaves feeling incredibly grateful to whoever invited them to participate in this memorable gathering.

Are you grasping the commercial meaning of this? This is genius! Nothing short of a double-impact marketing: Remy Martin broadens its brand awareness and sells some of its ultra-expensive booze, while the co-hosts, being the actual invitors, make a lasting impression and raise their customers' satisfaction.

In this predominately business crowd, one guest of a guest was an artist. And, of course, she was the one who has recognized the familiar traits in the creation of Louis XIII cognac: a single person, the Cellar Master (presently, Pierrette Trichet – the first female to hold the position), relying purely on her talent and experience, selects, blends, and combines eaux-de-vie to create a drinkable masterpiece - that's art. Well, it takes one to know one. All I can say is that bringing a luxury product to a proper audience is not a trivial task either and the Legacy Experience is as good as it gets.

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