SUSTAINABILITY OF PRIVATE COMPANIES EQUITY IN MODERN STATES

SUSTAINABILITY OF PRIVATE COMPANIES EQUITY IN MODERN STATES

(Section 3. The sustainable development of enterprises)

Author: Luca Scaini

-Polimoda – International Insititute for fashion design and marketing – Florence (Italy) via Curtatone 1 (50123) (2005-2012): Full Professor of International Marketing and Economics

-Free Thinker and Specialist in Behavioral Economics – Studio Scaini, Centro Direzionale J.Monaco, Via Empoli 33 – Riccione (RN) 47838 Italy (EU): CEO, Consultant

Abstract:

Accordingly with some theory (Krugman, 2006), we consider the possibility to suggest some fundrising method for small companies, that are considered too small for stock exchange processes, throughout the parallel exchange market like private bonds issuing (Dell’Occhio, Dall’Acqua, Etro, Ligresti, Rovetta, 2006). We are examinating pros and vs for such possibility in order to create a sustainable parallel financial market for innovative researching companies and brand investing companies (Beretta Zanoni, 2005). Most of such applications will result useful mostly during financial contraction and crisis periods, where it seems important to find alternative fund’s sources, beyond the bank traditional credit system. There is moreover a strong marketing aspect in placing companies values (both financial and economical) on financial markets (Kotler, Kartajaya, Young, 2004).

Literature:

D.Ariely (2008),  “Previdibilmente irrazionale – le forze nascoste che influenzano le nostre decisioni”,  Rizzoli, Bologna

A.Beretta Zanoni (2005), “Il valore delle risorse immateriali. Equilibrio economico aziendale, beni immateriali e risorse intangibili”, Bologna: Il Mulino

L.Conley (2009), “Obsessive Branding Disorder”, Public Affairs

Dell’Occhio, Dall’Acqua, Etro, Ligresti, Rovetta (2006), “Brand Italiani, sviluppo e finanziamento”, Milano: Egea

P. Kotler, H. Kartajaya, S.D. Young (2004), “Attracting Investors: A Marketing Approach to Finding Funds for Your Business”, Garland, TX, Trinity City Book

P.Kotler, F.Trias de Bes (2003), “Lateral Marketing: New Techniques for Finding breakthrough Ideas”, John Wiley & Sons Inc Print on

P.Krugman (2006), “International Economics: Theory and Policy” (with M. Obstfeld),  Addison Wesley, 7th Edition

G.Pellicelli (2010), “Il Marketing Internazionale”, Milano: Etas

A.Ries,  J.Trout (1981), “Positioning, The battle for your mind”, Warner Books - McGraw-Hill Inc., New York

J.Trout, S.Rivkin (1996), “The New Positioning: The latest on the worlds #1 business strategy”, McGraw Hill, New York

G.Zaltaman (2003), “How custumer think: Essential insights into the mind of the market” Harward Business School Press, Boston 2003

http://it.finance.yahoo.com/notizie/made-in-italy-crisi-fallite-circa-50mila-imprese-135146826.html

Body of Article

1.  Background Examination of Critical Aspects during last 5-years Financial crisis for small companies in Euro-Area

Due to last 5-years economic and (mostly) financial crisis, striking world-wide since 2008, the actual main problem for companies in facing the crisis resides in their low patrimonalization and equity and in the consequential need to find financial resources to fuel the business process. This problem is widely present and is striking mostly smaller companies, unable to access the main financial channels (bank, stock exchange markets) and with a low equity. Data shows that the number of euro-land small companies unable to survive is something like dramatic, or even catastrophic (allegendly the third euro-land economy will have its number of companies disappeared during last 5-years up to 48.800, nearly 1.000 per month (data: Cribis D&B and CIGA[1]).

Now: understood why, it is time to fix some possible solution.

2.     Alternative and Creative access to Fundrising and Value-Making

We can say that the profit of an enterprise comes from its ability to create value for the market (buyers), so as to generate a volume of revenues that allow coverage of all costs and provide a reasonable profit margin. It’s the main role of traditional marketing.

Moreover, for the success of a company buyers, retail and sales are not enough, and traditional marketing represents only one of the resoursces, or one of the possible ways and must be applied in some other creative way (Kotler, Kartajaya, Young, 2004; Kotler, Trias de Bes, 2003), like positioning of financial value (not only economic value) on the market for any sort of investor and in people’s perception (from a starting introductory topic by Ries, Trout, 1981; throughout Trut, Rivkin, 1996; to Zaltaman, 2003; under behavioural economics spots Ariely, 2008 and connecting with financials Conley, 2009).

Companies must be able to build some “value proposition” for potential investors, with the same effectiveness as for costumers. If companies have economic value (such as brand awareness) because they are able to generate economic (commercial, emotional) values for costumers, they must as well generate some adjunctive “cash flows” value  for investors in the near future, who must be put in condition to perceive the newly foundable financial value of companies themselves, even if –and more if!- they are small.

The “set of values” that companies intend to offer to market, or to place on it (as we refer the exact meaning of word “marketing”) must be built on something verifiable and contestable, not only on awareness and emotional brand values (surely important for branded companies, but switchable with other values for unbranded ones, Dell’Occhio et al., 2006).

We are stating the possibility of issuing some value-warranty to rise funds.

Mini-Bond (as we’ll see recently stated also in Italy), is an attractive alternative to bank lending for small and medium-sized enterprises and for enterprises with low equity or weak ration debt/ turnover (it is actually the majority of Italian companies and also spanish and widely present in France).

This chance, mostly underexistimated in comparison with stock exchange issuing, is going to resolve some lack of financial resources.

3.     Bonding Overview for Small Companies

This Mini-Bond issuing chance, stated like the private issuing of bonds for small and medium-sized enterprises (SMEs), are not publicly traded and must be guaranteed by the value and business performance (see chapter 4 for “an innovative review on business performances analysis for warranties release”).

Mini-Bond, such as corporate bonds, may represent nowadays an interesting alternative investment in the bond market: in fact, corporate bonds have seen, on average, earnings in excess of any Governmental Bond and offer many advantages over the stock market and commercial loans. Moreover Mini-Bond issuing may represent an interesting new opportunity for international investors and also for investment funds who see the opportunity to expand portfolio diversification strategy, and can be easily used as mean of trading with direct partners such as costumers or retailer or supplier of certain companies.

Now, it is seen as main problem the fact of releasing verifiable warranties for investors: under this point of view we refer now to the possibility, concrete and surely innovative, to use in a proper way the intangible immobilization for innovative research or brand and marketing investments, next to the releasing warranties system adopted now in euro-land.

4.     An Innovative Review on Business Performances Analysis for Warranties Release

It seems like being an innovating financial marketing tool for all companies investing in innovative researches and/or in marketing and branding strategies may adopt, and we strongly recommend it in times of crisis, a lateral system of equity. Prior example came from Coca Cola Inc., next to some more (Conley, 2009).

4.1 switching accountancy. It is well known that such expenses like marketing, advertising, branding, researches costs should be accounted as costs under different set of costs but could be also used, inscribed and accounted as intangiblites (intangible assets), like for know-how or brand acquisitions.

4.2 balance usability of intangible assets can be for balancing some strong loss (as in times of crisis), and is rather hard to be used in case of gain due to different taxation rules, at least for euro-land. It is sort of well know – rarely used formula.

4.3  actual method to compute the company value is represented by

n

Cash Flowst

                       

t=1

(1+k)t

W company = ∑

(stating it like formula to compute the value of a branded company)

4.4  suggestion to increase value for investing companies is to start from actual system to get a better and more proper and deeper evaluation of a branded or research-active company assets. Moving from:

W company = X (Asset) + Y (Growth)

we can pass throughout an introductive formula computing branding and research investing like intangible assets:

W company = X (Asset) + Z (Intangible Assets) + Y (Growth)

To get to a value-switch able to increase the importance of investments in growth more than some expected growth net of its expenses for sustain. So what if we could substitute the expected and unpredictable growth (in time of crisis, due to the form itself of market) with real and objective funds invested inside a company, for sustain some growth itself?

W company = X (Asset) + Z (Intangible Assets)

Armani would have been Armani itself, without Giorgio and its Eagle-Logo?

Apple would have be Apple itself without Steve and Apple-Logo?

Would have been both of them themselves without stylistic, material, trend, technologic researches that allowed them to become leaders?

Some example of this method, was already adopted seldomly and efficently worldwide, from David Bowie for fundrising to finance its tour or worldwide performances, to FIFA World Cup 2008 (Japan and South Korea) committee to fundrising resources from different private investors for organization, as well as for Olympic Games (Dell’Occhio et al, 2006; Pellicelli, 2010⁵)

5.     ADDENDA: The Italian Regulation as a possible international model for private bond issuing and Warranties Release of Mini and Private Bond in Euro-land (with cooperation of Dr. Teresa Vitartali)

Companies typically start issuing bonds only after listing in stock exchange markets, but during the last period of financial crisis we reported interesting news in Italian law that could be offered as a model for other economies. To make the entire project the Ministry of Economy has made use of a panel of experts in capital market of several banks including BNP Paribas, Banca Akros, UniCredit and Banca IMI, but also lawyers business law firms such as Allen & Overy. The group's objective to simplify the rule by deleting some posts but guaranteeing investors. On the one hand there is Article 2412 of the Civil Code, which prohibits only Italian companies, non-listed companies, the issuance of bonds for amounts in excess of twice the share capital and reserves. On the other, tax rules prohibit it to unlisted companies (1st, the interests of their bonds are not deductible; 2nd, their bonds are subject to withholding). In short: so far for companies that have never been on the Stock Exchange (virtually all) issue bonds was almost impossible.

Well, now, as defined in Recommendation 2003/361/EC unlisted can thus increase the possibility of recourse to the debt market through the issuance of short-term instruments (commercial paper) and medium-and long-term (bonds and subordinated bonds of participation). It is interesting bonds for small and medium-sized enterprises (SMEs), or Mini-Bond. SMEs account for the majority of the Italian economy and will be able to enter, with this measure, in the debt market. This is a good opportunity to find funding. The Mini Bond are a source of funding alternative to bank lending, which is available as long as the company complies with certain requirements: the assistance of a sponsor, the certification of the last budget and circulation of securities between investors. In addition, companies can deduct the interest, also enjoying certain tax exemptions typical of corporate bonds.

Article. 32 of Decree development, in force since June 26, at a time of difficulty for SMEs to access credit, allows companies not quoted on the stock exchange to raise capital for investment. The standard provides in detail the following conditions:

1.     The SMEs should be assisted by a sponsor, ie a financial intermediary with the task of assisting the issuance and placement of debt securities, the Mini Bond;

2.     The last budget of SMEs must be subject to statutory audit;

3.     Debt securities issued shall be placed with qualified investors, we have nothing to do with the offeree company;

4.     The movement of these debt securities may take place only between qualified investors.

Development Decree referes  this newly introduced possibility, stating that companies can issue commercial paper and bonds, if, in the absence of rating, they may follow the following requirements:

• Sponsor (banks, investment firms, asset management companies, harmonized management companies, SICAV and financial intermediaries entered in accordance with Article 107 of the Consolidated Law on Banking) that will support the issue and placement, and possibly follow the admission a listing of the securities. Sponsoring banks with headquarters outside the EU must be authorized to provide investment services in Italy.
• Latest audited by an auditor or auditing company registered in the register of auditors.
• Bills and bonds must be circulated only among qualified investors (art. 100 of Legislative Decree 24 February 1998, n. 58) as amended.

Tasks and Duties of the sponsor:

The sponsor has the obligation to maintain in the portfolio until maturity, a portion of the securities issued in the following manner:

• a share of not less than 5% of the value for emissions up to five million euro,
• in addition to the previous installment, a further 3% of the issue value in excess of five million euro, up to ten million euro,
• always more than the previous units, 2% of the issue value in excess of ten million euro.

The sponsor must also facilitate the liquidity of the securities for the duration of the release. In the event that the securities are not listed, the sponsor must make a periodic assessment of their value, at least quarterly. The sponsor must also ensure that they classify the category of issuer risk, taking into account the creditworthiness of the (normative reference: European Commission Communication 2008 / C 14/02 and subsequent amendments).

---

[1] http://it.finance.yahoo.com