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FINANCIAL STRATEGY FOR MIDDLE MARKET COMPANIES: a ROUNDTABLE DISCUSSION
Publication year - 2000
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2000.tb00018.x
Subject(s) - dividend , finance , shareholder value , shareholder , incentive , business , leveraged buyout , valuation (finance) , debt , stock market , economics , equity (law) , fiduciary , leverage (statistics) , private equity , market economy , corporate governance , philosophy , duty , theology , machine learning , political science , computer science , law , paleontology , horse , biology
Dennis Soter begins with the provocative observation that “U.S. companies, private as well as public, are systematically underleveraged,” and goes on to suggest that debt‐financed stock repurchases may help address the current valuation problems faced by many middle market companies (and by many larger firms in basic industries as well). Soter makes his case by presenting two case histories. In the first, Equifax, the Atlanta‐based provider of credit information services, combined a leveraged Dutch auction stock repurchase with a multi‐year series of open market repurchase programs and an EVA incentive plan to produce large increases in operating efficiency and shareholder value. In the second, FPL Group (the parent of Florida Power and Light) became the first profitable utility to cut its dividend, substituting a policy of ongoing stock repurchase for its 33% reduction in dividend payments. Following Soter, John Brehm, the CFO of IPALCO Enterprises (the parent of Indianapolis Power and Light), explains the rationale for his company's decision to become the first utility to do a leveraged recap (while also cutting its dividend by a third). As in the case of Equifax, IPALCO's dramatic change in capital structure (also combined with an EVA incentive plan) was associated with major operating improvements and a positive stock market response. But, of course, high leverage is not right for all companies. And, to reinforce that point, James Perry, CEO of Argosy Gaming, recounts his harrowing experience of having to raise new equity shortly after taking charge of his overleveraged company. By arranging an infusion of convertible preferred, Argosy was able not only to stave off bankruptcy, but to fund major new investment and engineer a remarkable turnaround of its operations. Finally, William Dutmers, Chairman of Knape & Vogt, a small midwestern manufacturing company, discusses the role of debt‐financed stock repurchases and an EVA management approach in his company's recent operating improvements.