Tom Harding has held a number of senior Treasury department positions at several Fortune 500 companies and brings a wealth of knowledge and experience in wrestling with some of the most important corporate finance and capital structure issues of the day. He recently sat down with us to discuss his outlook on the prevailing topics facing Corporate America right now.
Question: A highly publicized debate in the corporate world in recent years has been on the merits of share repurchases. Some, such as Larry Fink, have argued that the increase in share repurchases has been a misallocation of capital which has come at the expense of long term investment. Others, including Warren Buffett, have been more supportive of shareholder returns and have viewed equity buybacks as highly practical in certain situations. How do you think about this topic, and more broadly what considerations do corporates have when prioritizing capital deployment?
Answer: Well nothing like starting me off with a tough question. As I sit here today, I can really relate a little more to the notion that there has been excessive pressure to return capital to shareholders. I have always tried to put significant analytical rigor around capital deployment decisions in order to have the right balance as well as priorities. The issue is one of timing where the public markets and more often activist investors really don’t allow management to maintain high cash positions that would otherwise be earmarked for growth and acquisition opportunities that are not readily visible today. The public markets and sell-side analyst community really grew accustomed to a pace of share repurchases that can be difficult to deviate from once they have been conditioned to receive a certain percentage of available free cash flow.
Q: Interesting. What other dynamics do you see from the public equity markets such as the need to meet the pressures of quarterly EPS guidance?
A: I have definitely been fascinated by the continued cycle of industry consolidation followed by break-ups which I believe is a result of how companies are being valued by the market. One of the biggest examples today is in the media sector where we have seen those that strive to have both content and distribution businesses versus others who have chosen to be more pure play.
Q: Building off this, how does capital deployment and overall strategy decisions influence capital structure decision making?
A: Well it really starts with the debt/equity mix and the ability to raise capital throughout the cycle. Access to the public debt markets even during times of stress is an important factor for larger companies. As a result, setting leverage at an appropriate level for the business while attaining investment grade ratings remain the typical guideposts.
Q: I know that the rating agencies have become a very critical constituency for corporates. How do you think about and manage rating agency relationships?
A: I always felt the key to the relationship was to treat them as company insiders. Therefore, making sure that they never get surprised by any corporate action or operating / earnings performance issue is critical. The key is steady dialogue with periodic deep dives on not only the high level strategy, but a willingness to share granular detail around how budgets are developing as well.
Q: This question may be a little self-serving, but in the vein of relationship management how do you think about banks?
A: Since I identified access to capital as the most critical building block for the capital structure of the company, it won’t come as a surprise that bank relationships are critical. For me, it’s all about relationships and the level of trust that is develops over time. It is during times of stress that these relationships are built and it has to be a two-way street. For example, standing with a bank and maintaining deposits with them and other various services when they were under pressure was paid back to my organization during our own times of stress and during the 2008 crisis when capital became more dear to banks.
Q: I would be remiss if I did not ask about the current changing political landscape. How much does a corporate modify capital deployment or strategic M&A when there is the type of uncertainty on issues like regulation and taxes?
A: I do think some organizations get “lost in worry” or suffer from a case of analysis followed by paralysis. Again, my philosophy has always been to avoid overcomplicating matters. Treasury and finance is there to serve the strategic business initiatives of the company. In business it can be easy to worry and sit and wait, but in my experience you can really lose out on good opportunities if you try to inhibit those who are charged with running the business. Don’t get me wrong, if I was at a company that had significant international cash balances that could be repatriated under this reform it would be a big factor in my decision making. Relatedly, if I had a large financing requirement I would be extremely thoughtful on the duration of my issuance given the potential for change in deductibility of interest expense.
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