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TREASURY OPPORTUNITIES IN STRATEGIC CASH FORECASTING

How can treasury cooperate with FP&A to strengthen the organization’s strategic forecasting processes? To start, by outlining how technology is changing the nature of cash flow forecasting as treasury gains more visibility over cash flows and positions. Explore the fundamentals of strategic cash forecasting, and how treasury can collaborate cross-functionally with FP&A and other finance teams to plan for their organizations’ futures, including new thinking around how to unify data with APIs and harness data through business and artificial intelligence tools.

You will see that the full potential for treasury is just being realized.

GUIDE HIGHLIGHTS

• The different types of cash flow forecasting models and methods.
• How cash flow forecasting has changed throughout the pandemic.
• Ways that treasury can cooperate with FP&A to strengthen strategic forecasting.
• Technologies and software and tools that can improve the cash flow forecasting process.

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WHAT ARE DEFERRED TAX LIABILITIES

The tax authorities may allow businesses to pay tax on lessor income than the income booked in the statement of comprehensive income, which leads to lower taxable profits. In our previous article titled “difference between accounting and taxable profits”, we established that the difference between accounting and taxable profits could be of permanent and temporary nature.

Moreover, we discussed that temporary differences, which create lower taxable profits in the current period, occur due to taxable temporary differences and ultimately, it creates deferred tax liabilities.

Deferred tax liabilities are the amounts of corporate taxes payables in future periods, and this arises due to the following factors:

• Taxable revenue is lower than accounting revenue due to taxable temporary differences.

• Taxable expenses are higher than accounting expenses due to taxable temporary differences.

The tax authorities may allow businesses to pay tax on lessor income than the income booked in the statement of comprehensive income, which leads to lower taxable profits. Like interest of Dh50,000 on fixed-term deposits accrued by the A Ltd which will be received at the end of the deposit term of five years. Tax authorities will not consider this accrued interest as an income while calculating taxable profits of the current period, and the taxable temporary difference will arise due to this interest income.

In the cases where taxable expenses are higher than the accounting expenses, the typical examples are prepayments, like three years rent of Dh120,000 paid in advance. In the accounting books, it will be amortised over three years at the rate of Dh40,000 per year, while tax authorities in various jurisdictions may follow a cash basis and can ask the registered business to treat full rental payment of Dh120,000 as allowable tax expense in the first year. So, in the current period, taxable expenses would be higher by Dh80,000 due to prepaid rent.

International Financial Reporting Standards [‘IFRS’) states that:

Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

Taxable temporary differences are: “temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled”.

Keeping in view the above definition of IFRS, in the aforesaid examples, the interest of Dh50,000, and rent of Dh80,000 are taxable temporary differences. The registered business will pay less tax in the current period due to these taxable temporary differences. These amounts will be considered in the future to ascertain the relevant period’s taxable profits.

With the few exceptions, IFRS states that deferred tax liability should be booked on taxable temporary differences.

“A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from:

(a) the initial recognition of goodwill; or

(b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)”.

Since taxable temporary differences are Dh130,000 [50,000+80,000], so the registered business will book deferred tax liability of Dh11,700 [130,000*9% (applicable corporate tax rate)].

The period in which taxable temporary differences are higher than deductible temporary differences, in that period tax expense would be higher than tax liability and the differential will be booked as deferred tax liability. The period in which deductible temporary differences are greater than taxable temporary differences, in that period tax expense would be lower than the tax liability, and the differential will be booked as deferred tax asset in the statement of financial position which we have discussed in our previous article.

The above understanding is based on the global practices and requirements of IFRS 12. Once the UAE government introduces corporate law, it will set a clear basis for corporate tax computation.

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thefintech.info

HOW TO OVERCOME FINANCIAL HARDSHIP AND WHO CAN HELP

Many people in Australia are currently facing financial hardship due to various natural disasters, the housing affordability crisis and rising interest rates. If you are currently suffering from financial hardship.

 there are multiple ways you can get help:

  • Speak to a financial counsellor – call the National Debt Hotline to talk about your options with a free financial counsellor.
  • Contact your bank – your bank can look at your individual circumstances and help you work out a plan.
  • Contact your insurance provider – they will have a range of options to help you.
  • Emotional support – if your financial situation is impacting your mental health, you can contact Beyond Blue on 1300 22 46 36.
  • Free legal advice – if you need legal help because of your financial situation, free advice is available from community legal centres and Legal Aid offices in each state and territory.

There is a “Way Forward” when it comes to debt

Way Forward is an Australian debt solutions charity who provide free debt advice and financial support to help those struggling with debt.

Way Forward is continually growing their member base – since January 2021, the organisation has welcomed eight new members, most recently: Credit Corp, Australia’s largest debt buyer and collector.

Way Forward currently has 15 members including Commonwealth Bank, ANZ Bank, HSBC and ING.

Way Forward’s communications manager, Laura Menninan says, “Way Forward expects a rise in the need for its free service in 2022. Having the backing of the industry is of critical importance to ensuring the service is well-equipped to help more Australians end the cycle of problem debt.”

Another approach – consolidation loans

Getting a consolidation loan can be a way to help you recover from financial difficulties.

A consolidation loan is a loan that combines your high interest rate loans and even credit card repayments into one loan at a lower repayment – meaning that you have one bill to pay each month instead of many.

It’s a type of debt relief because you are still paying off what you owe, but at a reduced rate. If you are consolidating a high interest credit card or even personal loan, chances are that with a debt consolidation loan, you’ll receive a lower interest rate.

If you’d like to consider a consolidation loan, we have a guide that will answer all of your additional questions.

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WHAT IS THE SWIFT SYSTEM: WHAT BUSINESSES NEED TO KNOW ABOUT THIS MESSAGING SYSTEM

Small businesses depend on financial intermediaries like banks to manage their money and facilitate wire transfers to pay their workers, suppliers, and manufacturers overseas. In turn, banks use SWIFT to process most of these cross-border payments between firms banked in different countries. This article lists what you need to know about the SWIFT messaging system.

SWIFT Stands For Society For Worldwide Interbank Financial Telecommunications

SWIFT stands for Society for Worldwide Interbank Financial Telecommunications and is the world’s leading provider of secure financial messaging services. The society was founded in 1973 by 239 banks from 15 countries to replace the old system, Telex, to better communicate instructions related to cross-border transfers.

Today, SWIFT’s messaging services are used by more than 11,000 financial institutions in more than 200 countries and territories worldwide, recording an average of 42 million FIN messages per day.

How Does The SWIFT System Work?

SWIFT is not a payment network that transfers money between banks, rather, it is a messaging network. SWIFT plays the role of a messenger as it passes secure messages between banks quickly and accurately.

Money is not moved in the physical sense; rather, it is transferred through a ledger entry in the form of double-entry accounting between banks. All banks in the SWIFT system have a code or number, made up of 8 to 11 characters, that identifies who they are. For example, OCBC SWIFT code is OCBCSGSG.

Continuing with our example, an OCBC customer wants to send money to a relative in the United States of America who has a banking account with Citibank (US). The local customer logins to OCBC’s platform and enters the overseas customer’s banking details like the bank account number, branch name and code. After that, OCBC will send a SWIFT message to Citibank (US), which will be verified and cleared by Citibank (US) and the overseas customer will get the amount credited into their account.

Senders of SWIFT messages can be confident that their messages will be acted upon, as the receiving party (banks) will be contractually liable if they fail to respond.

SWIFT Is A Cooperative Owned By 3,500 Shareholders And Is Overseen By The National Bank Of Belgium

SWIFT is a cooperative company under Belgium law and is owned and controlled by its approximately 3,500 shareholders financial institutions across the world.

SWIFT is overseen by the Central Banks of the G-10 countries and from major economies like the Reserve Bank of Australia, People’s Bank of China, and the Monetary Authority of Singapore to name a few including the European Central Bank and with its lead overseer being the National Bank of Belgium.

It acts as a neutral party to sanctions but compiles with the related European Union regulations as it is incorporated under Belgium law.

How Secure Is The SWIFT System?

Despite playing a critical role in the financial system of the world and its emphasis on security, SWIFT does not have a fool-proof network.

There have been a couple of notable incidences involving emerging banks, including a cyber-attack in 2015 on a SWIFT bank customer in Ecuador, in which hackers stole US $9 million, and another in 2016, when hackers stole US $81 million from Bangladesh’s Central Bank.

SWIFT’s authentication process is designed to check that a message’s sender and receiver are who they say they are. But if hackers gain control of the user’s credentials, SWIFT may not be able to detect the intrusion until it is too late.

After these incidences, SWIFT launched the Customer Service Security Programme (CSP) to promote robust security standards by introducing security-enhancing tools and increasing the scope and quality of cyber threat intelligence sharing.

There Are No Real Alternatives To SWIFT

Following Russia’s invasion of Crimea in 2014 and with threats of SWIFT sanctions, the Central Bank of Russia launched its own messaging system called the System for Transfer of Financial Messages or SPFS. However, it reportedly has only over 400 users, mostly domestic based banks and does not have the reach or coverage to break SWIFT’s dominance.

The People’s Bank of China also launched an alternative payments and communications system in 2015 called the Cross-Border Interbank Payment Systems or CIPS. It was part of China’s efforts to increase the global use of its yuan currency, especially amongst those involved in the Belt and Road initiative. According to the CIPS, about 1,190 financial institutions in 103 countries and regions are connected to the system. However, those numbers also pale in comparison to those of SWIFT.

The rise in the innovation of digital currencies and the underlying blockchain technology have been touted to break SWIFT’s dominance over cross-border payments. However, restrictive legislation and slow adoption by major financial institutions have not made this a viable alternative for now.

As such, SWIFT continues to play a key role in the world of finance and trade.

Need Financing Support During This Period?

SMEs can enjoy extra financing support of up to $3 million through the Temporary Bridging Loan Programme when you apply online with OCBC. Terms and conditions apply.

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HOW TO MAKE SENSE OF YOUR PAY STUB

Every so often, Jenny Redes gets a call from an employee who has recently discovered their pay stub. They typically have questions about what all the various numbers mean, and the human resources professional says that’s understandable.

“It’s a lot of information,” says Redes, a Society for Human Resource Management certified professional and human resources manager with manufacturer Custom Profile in Walker, Michigan.

Deciphering your pay stub is an important skill that ensures you are compensated properly and have the information you need to create a budget. Keep reading for a rundown of everything you may find on your pay stub and what it all means.

Does My Employer Have to Provide a Pay Stub?

First, it should be noted that there is no federal law requiring pay stubs be distributed to employees. “It does depend on which state (you’re) in,” says Erica Fine, director of human resources for law firm Shutts & Bowen LLP in Miami.

In a handful of states, such as Ohio and Georgia, there is no requirement for employers to provide workers with pay stubs or wage statements. However, the vast majority of states require employers to provide employees access to a pay stub, either electronically or as a physical copy. Eleven states require that a written or printed pay statements be provided.

To determine the legal requirements in your area, check with your state’s labor department or its equivalent agency.

Major Components of a Pay Stub

Regardless of its format, your pay statement may contain a mix of information required by state law and voluntary details included by your employer. Here’s a look at the most common information provided on pay stubs.

Wages

Not surprisingly, wages are a key piece of information found on pay stubs. Workers may find their hourly rate or salary along with their gross, taxable and net wage details. Pay statements may include both pay period and yield-to-date details.

While everything on your pay stub deserves your attention, be especially careful when reviewing wage information. “One of the most common errors that can occur with the payroll process is when an employee is paid at a higher or lower-than-normal rate of pay,” says Tim Speiss, partner in the personal wealth advisors practice for accounting firm EisnerAmper LLP.

Taxes

Tax withholdings are another mainstay on pay statements. For most employees, these will include federal, state and local income taxes as well as FICA tax for Medicare and Social Security.

It’s not uncommon for young employees to see the mention of Medicare on their pay stub and do a double take, according to Fine. “They … say, I don’t need Medicare,” she explains. However, Medicare and Social Security taxes are paid into the program to support those currently receiving benefits.

Workers also need to be aware that they may not pay taxes on everything they earn. “Taxable income is not the same as gross pay,” Redes says. That’s because some deductions – such as contributions to traditional 401(k) accounts – are made with pre-tax dollars. “(It) can be very confusing,” Redes notes.

When reviewing your pay stub, confirm the correct amounts are being withheld at each level. Pay especially close attention to local income tax if your business has multiple locations but a local tax is only assessed in certain areas.

Benefits

Many companies want their workers to know how much they pay on behalf of employees for perks such as insurance and retirement contributions. These expenses may be listed as separate line items. Workers may also find details such as their available paid time off.

Deductions

Pay stubs may also reflect deductions for items such as parking passes, voluntary insurance benefits and contributions to retirement plans and health savings accounts.

For the most part, these deductions cannot be taken unless you’ve authorized them, Fine says. That means that if you don’t recognize a certain expense, it’s time to call the human resources department to confirm what it’s for and whether you agreed to it.

Additional Information

Other items on your pay stub may be unique to your employer.

“There are things we put on ours that are important to our employees,” Redes says. That includes items such as an employee’s hire date and their attendance points. These items aren’t required by law, but companies include them since they are details many workers want to track.

Why You Should Review Your Pay Stub

So long as the amount deposited into your bank account each pay period seems right, you may wonder why it’s necessary to review your pay statement. Human resources and finance experts say there are at least three reasons to do so.

The first is to confirm that your pay rate, tax withholdings and deductions are correct. “Mistakes happen,” Redes says. And identifying and correcting those errors quickly is much easier than trying to fix a problem that has been left to linger, such as withholding the wrong tax amount for months.

Next, looking at your pay stub provides a way to better understand how government decisions, such as those about tax policy and mandatory benefits, affect workers. “When (you) go out and vote, these decisions may have a direct impact on (you),” Fine says.

Finally, pay stub information can be vital for proper budgeting. Without the information on your pay stub, you may make the mistake of planning expenses based on your hourly wage or base salary. “This is not actually the amount you have to live off,” Fine says. Instead, a significant amount of your income may get diverted to taxes and other deductions.

What’s more, your pay stub offers information that can be important to your long-term financial stability, Speiss says. He encourages people to consider how much they are setting aside for needs such as retirement and discuss with an investment advisor how to make the most of this money.

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IN AN OWNERSHIP CULTURE, PEOPLE SPEND MONEY LIKE IT’S THEIR OWN

When we talk about changing culture in an organization, it rarely starts with finance, but maybe it should. Why? Because finance has a significant impact — good or bad — on the culture of any organization. In an Executive Session at AFP 2021, Gary Bischoping, partner at Hellman & Friedman, and Greg Milano, founder and CEO of Fortuna Advisors  discussed in great detail how to make it good.

FIVE TRAITS OF OWNERSHIP CULTURES

In a traditional culture, you experience the following traits:

  1. Spend your budget or lose it.
  2. Hedge – smear resources around.
  3. Risk avoidance – even the good ones!
  4. Analysis paralysis/indecisiveness.
  5. Variances to plan and guidance.

In an ownership culture, it’s a little different:

  1. Spend money like it’s your own.
  2. Extreme prioritization.
  3. Willingness to fail.
  4. More doing and less talking.
  5. It’s about the long-term and the short-term.

In a traditional culture, you get a budget, and you spend it or lose it. There’s this mindset that it really doesn’t matter. I don’t need to treat the money like it’s my own; I just know that if I don’t spend it all, they’re going to give me a lower budget next year.

In an ownership culture, people spend money like it’s their own, and that leads to more discipline. And it leads to more willingness to invest in good things. Very often when something good pops up during the year, an owner will say yes, that’s great, let’s go do it. But in a traditional company, many, many people will say that’s not in my budget, let’s see if we can get it in the budget for next year. It slows down progress. It slows down entrepreneurism and innovation.

“In a typical company, people smear resources around scores of activities without really emphasizing the ones that create the most value,” said Greg Milano, founder and CEO of Fortuna Advisors. “It would be like telling Warren Buffet he has to buy the same amount of every stock instead of concentrating his money in the ones he thinks are going to go up.”

Extreme prioritization is when people figure out where the value is being created, and then focus the resources on those activities, like an owner would. Whereas in a traditional company, the mindset is all about risk avoidance. But there are risks worth taking.

In an ownership culture, where there is more of a willingness to experiment and sometimes fail, that’s where the breakthroughs and the innovation comes from. In a traditional company, we often see analysis paralysis — people are very indecisive. Management meets over and over again, and instead of making a decision, they come up with something else that some junior people need to study. In an ownership culture, there’s a lot less talking and a lot more doing.

Also, in traditional companies, there’s a variance to plan mindset rather than an emphasis on improvements. And it doesn’t matter if you plan higher, or you plan low. If you beat the plan, you know, you get paid well in most companies, and there’s this negotiation: I want a lot of profit; I want very little profit. I want to get my target as low as possible in an ownership culture. It’s much more about the long term. We’re willing to give up a little bit today to get something more in the future.

Fortuna Advisors has a measure that goes along with this called residual cash earnings. It’s like EBITDA minus tax, less a charge for the gross assets invested in the business. If you’re familiar with economic profiter EVA, it’s similar, except they don’t depreciate assets.

“The problem with EVA is when you buy a new asset, EVA crashes,” said Milano. “And then as that asset depreciates away, it gets better and better and better. So, what do people do? They stop buying assets and they sweat assets as long as they possibly can.”

The EVA led to a lot of under-investment in the business by having a similar measure without depreciation. Fortuna Advisors get a much better balance of investing in growth while having the discipline to produce margins and have capital productivity. This is a measure that can be used to make small decisions, big decisions, to evaluate acquisitions, develop business plans and, very importantly, measure performance and pay people. It’s such a complete measure that they never ever measure it against the business plan. “We always measure it against last year — when it goes up, it’s good; when it goes down, it’s bad,” said Milano.

RCE DRIVES TSR

When we look to the market, we see that the companies that are improving have above-median improvements in residual cash earnings (RCE); they have much stronger share price performance than companies with below-median improvements in RCE. And when you look at this by industry, you’ll find this measure actually relates to total shareholder return (TSR) better than EVA or traditional economic profit in every single industry. And so, the act of doing it on a cash flow basis instead of on an accrual basis is really important to value recognition.

Residual cash earnings is always measured against the previous year. “The only thing you need to calibrate to a particular company is the slope of the payout curve,” said Milano. “How fast do the payouts rise when RCE improves, and how fast do they decline when RCE declines.”

If you have a volatile business, you’ll want this payoff curve to be really flat so you’re not hitting the cap on the floor every year. If you have a really stable business with a low volatility of EBIDA, then you’ll want a steeper payoff curve so the bonuses aren’t always around one.

“This method eliminates probably 90% of the negotiation that goes on between competition, committees and management teams to set up comp plans,” said Milano. Once you’ve done this for a couple of years and everybody’s comfortable with it, it just rolls forward every year, whatever it was last year, that’s your target.

“When you present that to a comp committee, they often say, well, wait a minute. What do you mean our target is last year? Don’t we have some sort of an improvement? And then we explain, well, it already has the improvement baked in,” said Milano.

For RCE to be the same as last year, you need to improve EBIDA enough to cover an adequate return on whatever investment you make this year. If you invest more, your EBIDA target automatically rises. If you invest less, it doesn’t rise as much. So it does have an improvement goal built into it, but the improvement goal is driven by how much you invest. That’s where the ownership culture stems from.

Many companies have lofty forecasts for every investment they’re going to make. But if you approach it from an ownership culture, you explain to them that if the RCE doesn’t go up, you’re going to make less money. All of a sudden, they’re looking back at their forecast and trying to decide whether or not they believe their own forecast, because now they’re in the shoes of the investor. Not only are they going to destroy value for the investor, if they make a bad investment, it’s going to hurt them personally. If RCE goes down, they get less money. “And that’s how we get people to start treating the capital like it’s their own money,” said Milano. “The behavioral impact is significant.”

To get people to understand this requires a bit of change management. It involves a lot of training and communication. You can’t just change an incentive plan and all of a sudden everyone’s behavior changes — behaviors they’ve learned over 20 or 30 years. It requires a good training and education program to make it happen.

CASE STUDY: VARIAN MEDICAL SYSTEMS

Varian makes radiation therapy devices used in the treatment of cancer, along with the software and services that go along with it. When Bischoping initially got there, the industry was only growing 2-3%, but in the five years prior to that, the industry was growing at 8-9%.

“What was striking to me was the lack of reinvestment,” said Bischoping. R&D as a percentage of revenue was going down, and there were a lot of share buybacks that were happening. The overall rate of returns in the business were very high: 30% return on invested capital.

“So, when the CEO called me and said, I’d love to talk to you about joining the company, my basic premise was simple, which is to say, that’s fantastic, however, we need to reinvest in this business to get it to be innovative and drive growth over time,” said Bischoping. “And they said, that’s great, let’s do this, and I called Greg. I told him we’ve got a major ownership problem, we’ve got an incentive problem, and we’ve got a measurement problem.”

The company wanted to get their new technology out to patients to help cure cancer. That was the impetus, the cultural drive. This was Bischoping’s first CFO position with a public company. “I had committed to myself that, based on all the experiences I’d had, when I get in the chair, I was going to make sure we got the right measurement system in place.”

They decided to take R&D and treat it like an economic investment instead of an accounting expense. The CEO of product development and the board supported the plan, and it unlocked an amazing amount of innovation in the company. They started to see good ideas, and they also saw team members come forward with I shouldn’t be spending money on this, right? It simplified the measure and got people to focus on one metric: when it went up, it was good; when it went down, it was bad.

There was some training and education. “We had to do work on how to treat some of the nuances of the actual measure,” said Bischoping. “But I’m happy to say that after that they uncovered a gem that had been buried in the company.” It was an artificial intelligence software program Varian had been working on to accelerate treatment time and spend less time overall with patients on the bed. It had been underinvested in on a quarter over quarter basis to meet a quarterly earnings per share target. By bringing it forward, they accelerated the amount of R&D and brought what was a five-year roadmap down to about two years. Varian’s stock price took off, and performance went from 2-3% to organic growth of 8-9%.

“This willingness to fail is really important,” said Milano. “For most companies, as long as the spending’s in the budget, it doesn’t matter. You don’t get whacked. In this system, because you’re always measuring last year, if you stop spending on something bad, the RCE goes up and you make more money. So the impetus to weed out the bad things and reallocate those resources to things that are more productive goes up significantly.”

It should also be noted that the finance organization played a major role. Working with Fortuna Advisors to define the metric, they were involved in all of the communication and training of operators. They also worked through that extreme prioritization of what they were going to do and not do. And, every member of the executive leadership team that reported to the CEO had a finance business partner who was trained on all the details and could work through what the RCU would be.

CASE STUDY: TRANSOCEAN

About 15 years ago, from the end of 2002 to the end of 2007, the total shareholder return for Transocean, the offshore drilling contractors, was five times the market. Oil was doing well, but they were also investing in a lot of offshore, high-spec drilling rigs. In fact, they had the biggest fleet of high-spec drilling rigs in the world.

Three of the five years in that period management got an annual bonus of zero, one year they got 60% of target, and in only one year, did they get above target at 1.3 times. And the reason it happened was because it took them three years to build a rig, and they wouldn’t start building a rig until they had a five-year contract from one of the big oil companies.

So going into a year, they knew what rigs were supposed to come on the line, what the contracted revenue was, and all the costs to launch it — all the benefits got baked into the budget. The only downside risk came if there was a delay, or a cost overrun or penalties from the oil company because they were late.

“While this is an extreme example, it’s also a very common thing,” said Milano.

It was a good thing Transocean was as aggressive as they were in continuing to build those rigs when the incentive plan basically said stop doing that. If you stop building new rigs, you’ll have more certainty about what your budget is for the year, and you’ll get paid.

Unfortunately, they also had long-term incentives, which they made a lot of money on during the period, but the annual incentives, especially for the lower people in the organization, was a much bigger part of their pay than stock. And they were getting whacked every year. “This is a big problem — being able to let go and measure against the previous year and say, if you do achieve success, we are going to pay you,” said Milano.

WILLINGNESS TO PERFORM ACQUISITIONS

How willing are these companies to still engage in acquisitions under the comp plan? Let’s take a look back at an example from Varian.

After Varian launched the AI product and reallocated R&D resources, it was very clear that there were other opportunities for them to inorganically grow the company. There was a physics problem they were trying to solve regarding radiation treatment using a magnet and a laser that allows you to see and have real-time continuous visibility to where the radiation is going in someone’s body.

One of their competitors solved the problem and came out with a product that offered real-time visualization while radiation was being delivered. However, there was some debate over whether it was going to be simply a niche in the market for the academics to use because, with this device, it took 40 to 50 minutes to deliver treatment, whereas a traditional radiation therapy treatment takes seven to eight minutes. And they were getting varying degrees of effectiveness and efficacy because the visibility changed during the course of treatment. And, sometimes patients have comorbidity, which means they have a hard time breathing, so keeping them on a bed for 40 minutes is not a good idea.

The company’s stock price was trading at about 15 times revenue, and they were a high-flyer in the med-tech space. So, the question was whether or not Varian should buy them. And if so, what would you have to believe to make it a yes?

It was decided that when you broke it all down, was the price they would have to pay to get to a premium at which their board would approve it, was that product going to be more or less than 10% of the market? Varian put in their initial bid, and the company came back and said thanks, but no thanks.

Eventually Varian got to the point where they had to make a final offer. The chairman of the board and the CEO went into Bischoping’s office and asked for his thoughts.

Bischoping went to his whiteboard and worked through the residual cash earnings impact at below 10% of the market and at 10 to 20% of the market, and for the price that they would’ve had to pay, their revenue would have gone up. It would have been accretive growth rate, and their gross margins would’ve gone up. So they would have been accretive on an earnings per share basis within three years and earned above their cost capital in year four or five.

However, Bischoping advised against it. He told them that there was no case he could come up with, even at something like 20% of the market, where they could cover the amount they would be investing in this company. From a residual cash earnings perspective, they would have a continuous decline. So, they walked. “That was a pretty big moment,” said Bischoping.

Now, in the background, Varian had invested in this artificial intelligence device that was near real time and resulted in a patient being on the bed for seven minutes, not 40, with overall better outcomes that they could back with quantitative data. “We took an organic approach to solving that problem,” said Bischoping. “Not exactly as sexy as the real-time approach, but more patient-centric. And low and behold, if you look back today, that other product is still less than 10% of the market. So it turned out to be a pretty good idea to walk away from that one.”

At the same time, there was a near adjacent market called interventional oncology that used the same visualization techniques that Varian used in that artificial intelligence device, but they delivered the therapy by going in through different veins and different places in the body, with different immunotherapies you could deploy, rather than radiation.

Varian bought five companies over the four years that Bischoping was there and ended up being the number two or three player in interventional oncology. The company is still investing in that space today and is doing very well.

In more general terms, what Fortuna Advisors finds in its clients is more willingness to invest, whether it’s organic or acquisitive, but more discipline about what they invest in. Within some industries, they find that the size of the acquisition matters a lot to success. “These big blockbuster deals don’t always lead to the best share price performance for the buyer; they lead to really good share price performance for the seller,” said Milano.

It’s often the smaller deals where people are doing them regularly that they’re getting good at them. They know how to integrate them and how to exploit whatever it is that the new acquisition brings, whether it’s a distribution channel or a technology or product.

But the discipline we find around not just finding good companies, but finding good companies at the price you can afford. And, more importantly, the discipline to walk away when things don’t look good anymore. The mindset of, well, it’s a great company, and I would love to have it, but not at that price. That’s how we would all behave with our own money.

“It’s just like if you wanted to buy a house or a car, it might be a beautiful house or a beautiful car, but there’s some price at which it’s a good deal and some price at which you’d walk away,” said Milano. “And it’s just trying to instill that discipline in a more concrete way than we see in most companies.”

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