Strategic Risk Management
Transaction Analysis and Assistance
Strategic Risk Management
- Finegan & Company worked with the finance and line professionals of a premier forest products company to make its financial planning processes more responsive, real-time, contingency aware, and relevant. The project was systems-intensive, involving both behavioral and economic modeling, as well as considerable use of computer-simulated forecasts (Monte Carlo analysis). The impetus for the project was to decide whether to preserve technological dominance in the fast-evolving market for engineered building products--given the high up-front costs of new capacity, propensity of competitors to over-invest, competitors' seeming willingness to cross-subsidize and endure pain, randomness in demand and timber prices, and volatility of end-product prices.
Real-World Contingency Planning Keeps Plywood Production On Track
Reprinted from Corporate Finance Review (January-February, 1999), pp. 7-14.
Our work was embraced by both line and staff officers, and became the basis for several M&A engagements (we evaluated and structured an offer to acquire the second-largest player in the industry segment, and coordinated the legal team's analysis of antitrust implications) and restructuring initiatives (we evaluated several value-adding divisive opportunities for the company, including the issuance of letter stock for its timber holdings).
- Finegan & Company helped the brokers, insurance underwriters and risk management personnel of a major domestic manufacturer design a powerful, user-friendly probabilistic model for simulating the impact of alternative risk management programs on conventional insurable risks. The model has been used to evaluate a broad array of conventional and holistic multi-year options, and has become the cornerstone of the company's risk management process,. The model surpasses in analytical breadth and power what any other company has developed to evaluate and manage insured risks on a systematic, probabilistic basis.
Click here to download a copy of the program's Help file, which provides a detailed description of the model's structure, capabilities and applications.
Finegan & Company helped integrate non-revenue performance metrics into the planning process of the largest manufacturer of railroad and mass transit switching systems. The project began as an executive-level training program to make senior management EVA ®-aware. Top-level probing and access led to representation of the company across the table from a global investment bank in the purchase and integration of 5 cross-owned European competitors. Issues included relative valuation, evaluation of consolidation benefits, cross-consideration, assistance with bank financing, and participation in due-diligence. Top-level probing also led to major work in reformulating pricing and billing recognition policies. We also assisted with consolidation of corporate functions into the company's operating divisions.
The principals of Finegan & Company helped a nationally branded manufacturer of local area network adapter cards acquire the LAN operations of a major storage technology business. The buyer's LAN operation was approximately one-third the size of the target, and was nearing technological obsolescence. Profits in its other business (semiconductors) were consistently negative. As a result, the company's stock price was at an all-time low of $4 per share, down from $12 just twelve months before.
The task was to find $75 million in cash without issuing undervalued equity, and without relying on seller financing. We did this at a time when traditional junk bond financing was nonexistent, and when institutional investors shunned all but investment grade private placements. By preparing a comprehensive and convincing analysis of the transaction's potential for production efficiencies and distribution overlap, we helped management secure straight-debt financing from two non-traditional intermediaries. The company traded as high as $27 per share within a year and retained us to manage its refinancing. We later assisted in two further acquisitions.
One of Finegan & Company's directors, Patrick Finegan, was retained in 1991 by Arthur Andersen on behalf of the Official Allocated Annuities Committee in the Executive Life proceeding to testify as to the fair market value of the company's fixed-income securities portfolio. The portfolio consisted of 722 debt issues having an aggregate par value of $7.6 billion. The majority of the bonds were depressed, illiquid junk bonds, and many were restructured or in default. Mr. Finegan was called to testify because of his extensive experience in helping corporate issuers of securities price bond offerings, evaluate when and how to redeem them, comprehend and price conversion features, and simulate how the bonds would be rated by the major rating agencies.
We valued the portfolio by computing the discounted present value of each issue's scheduled principal, interest and in-kind payments, applying a discount rate appropriate for each security, and adjusting for expected default losses. Discount rates were based on the risk class, term to maturity and industrial classification of each bond, plus the rate structure of U.S. Treasury bonds generally. The analysis required, inter alia, a command of option pricing techniques, the Capital Asset Pricing Model (CAPM), yield curve analysis, discounted cash flow analysis, and bond rating discriminant analysis, plus familiarity with a host of legislative and institutional factors affecting the market for fixed income securities.
F&C has also filed testimony on behalf of several property/casualty insurance companies in connection with their asserted rollback liability under California's Proposition 103.