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Ms. Tartalio is the Co-founder and Research Director for Enlight Research, a board advisory and research company. Prior to her role at Enlight, Ms. Tartalio was a management consultant with Clarkston Consulting, supporting Fortune 500 clients in the Consumer Products and Life Sciences... More
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  • Regional Banks And Alternative Competition

    By: Rachel Clausen

    Following the financial crisis and the rise of Ecommerce, regional banks are now facing new competition from a variety of banking alternatives. The main forms of competition are peer-to-peer lending, shadow banking, and increased instances of private companies offering banking services.

    Why are people turning away from traditional banking?

    A variety of factors are encouraging individuals to consider alternatives to traditional banking. Following the recession, many people distrusted the traditional system of banking. The ongoing economic slowdown has decreased demand across retail, commercial, corporate and investment banking. A mix of competition and market sluggishness is driving up the interest charged on loans and the number of loans offered by banks continues to be limited due to the credit crunch. The prolonged period of low interest rates following the recession is also pushing people towards new options.

    Peer-to-peer lending

    Peer-to-peer lending is an online service that matches borrowers and lenders via online auctions. The two largest lending sites in the US are Lending Club and Prosper. Oftentimes, these platforms are able to offer better rates than many commercial banks. Zopa, a British platform, offers 4.9% to lenders where most banks pay nothing and charges 5.6% on a personal loan, a competitive rate against most other banks. Compared to traditional banking, costs are low and as Ecommerce becomes more common, many more people are comfortable with carrying out transactions online. Awareness of the opportunities available through peer-to-peer lending is still relatively low but growing quickly. In Britain, the volume of loans is doubling every 6 months.

    As with most Ecommerce platforms, security is an important concern with peer-to-peer lending. Some critics worry that an ill-run platform could fail and take investor's money with it. Most platforms do not offer any form of insurance. Some offer provision funds that only attempt to compensate for loans that go bad with no guarantees.

    Shadow banking

    A "shadow bank" is any entity outside the regulated banking system that performs a core banking function. This broad definition also includes subsidiaries of larger banks that are not regulated by the FDIC or the Federal Reserve. These entities surfaced during the financial crisis and played a large role in turning mortgages into securities. Because shadow banks are outside the regulatory system, many had to withdraw from the markets because the worth of their long-term maturities became questionable during the crisis. These problems could have been isolated if the banks were regulated and controlled, but their unregulated operations led to a messy situation. Although shadow banks continue to operate successfully, they still pose a major risk. Most deal in raising short-term funds in money markets to buy assets with long-term maturities, making them alluring commodities. However, because they do not have the regulated capital requirements to reflect their risks, they may be further jeopardizing the financial market.

    Private companies offering banking services

    Many retail, technology and telecommunications firms are working to expand their banking and payment services. Using their expertise and customer base to find clients and expand business operations, many cash-rich Internet firms are beginning to offer loans to business customers. For example, Amazon announced a new program called Amazon Lending that would offer loans to online merchants who sell products on Amazon. The loans would be processed and repaid through the merchant's Amazon account. Wal-Mart recently followed suit with its own small business-lending program through Sam's Club.

    Additionally, large companies have been weighing in on other forms of Ecommerce. Google recently made a $125 million investment in Lending Club, a large peer-to-peer lending platform, by buying shares from existing investors. As Lending Club continues to grow, these two companies may work together on potential products.

    What can traditional banks do?

    While all of these new banking alternatives offer attractive options to consumers, traditional banks can still offer many advantages that their competitors cannot. From the largest company to the smallest peer-lender, these entities cannot offer the trust and customization that a regional bank can. Regional banks are well established, trustworthy, and regulated. They are also small enough to be flexible and responsive to their customers. Traditional banks should focus on emphasizing their trustworthiness and establishing dependable, long-term relationships with their customers to remain competitive.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Aug 17 11:21 AM | Link | Comment!
  • Reputation Risk: What Are They Saying About You?

    By: Jennifer Lunde

    Reputational risk is quickly emerging as a primary threat to a wide range of companies, regardless of purpose, industry, size, or structure. As defined by the US Federal Reserve, reputational risk is "…the potential that negative publicity regarding an institution's business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions." Reputational risk qualifies as one of the Federal Reserve System's six categories of safety and soundness and fiduciary risk and one of three categories of compliance risk.

    The development of a solid understanding and comprehensive mitigation strategy of reputational risk has become increasingly important in recent years. Four out of five executives participating in an Ace Group study believe that reputation is their company's most valuable asset. With this in mind, it's important to consider the significance and potential impact (both positive and negative) that reputation holds. Research has found that over half of surveyed shareholders are likely to believe positive information that comes from a generally favorable, trusted organization the first few times they hear it, while only 25% will believe negative information the first few times they hear about it. However, when the organization has a negative image or reputation, 57% of shareholders are likely to believe negative information the first or second time they hear it, but only 15% believe positive announcements about such companies. Furthermore, these social implications can be translated into monetary impacts; companies have found reputational problems to be the most costly in financial terms relative to a series of other risks. 28% of those who faced reputational problems described the financial impact as major as compared with 18% from the next leading cause of (loss of skills/talent). Thus, it's clear that reputational risk is a real threat that must be dealt with accordingly.

    Many companies/executives have realized potential threat of reputational risk; in a 2010 survey by Deloitte, 26% of those surveyed recognized reputational risk as having the most significant impact on business strategy, only behind brand and economic trends. In 2013, 40% believed it had the most significant impact (with business model, economic trends, and competition following behind). Two-thirds of executives attribute the rising concerns of reputational risk to the increased speed and global reach of social media and related networking technologies. It's expected that the threat of reputational risk will only continue to increase as new technologies emerge, global footprint and supply chains expand, and changes in the regulatory environment become more frequent.

    However, while many have realized this threat, there's a great deal of confusion surrounding management and mitigation of reputational risk. Only one in five executives think they effectively assess the external perceptions and reputations of their company, but are unsure of best practices/strategies for improvement. Nine out of ten executives agree that reputational risk is more difficult to manage than any other risk category; on a related note, 70% of companies believe that information and advice about managing reputational risk is not easily accessible.

    Understanding the how risk, reputational or otherwise, fits with the risk appetite and risk culture of a company is essential for generating a risk management plan. Risk appetite and risk culture both assess the approach to risk taken by a company. Risk appetite can be defined as the amount of risk a company is willing to take on in order to attain sufficient returns whereas risk culture is the way in which an organization understands and approaches risk on a more general level. Critical analysis and reflection of current practices will provide insight as to potential improvements in these areas.

    In order to develop and execute a successful reputational risk mitigation strategy, it's essential for the Board of Directors and C-suite executives to build, enforce, and manage a risk culture that is in alignment with the principles and strategies of the company. In a recent study, only 11% of respondents noted the involvement of the Board in determining and fueling the company's risk appetite, whereas 42% of respondents in a related study feel that the Board of Directors holds major responsibility for managing reputational risk of the company.

    Therefore, before any mitigation strategies can be implemented, the role of the board must be clearly defined and outlined within the company's organizational structure. Often, there's a miscommunication as to the Board's role in risk oversight versus risk management. This decision should be determined on an individual basis, but is one that needs to be made early on so that appropriate next steps can be taken.

    A number of potential strategies for strengthening risk culture and appetite as well as managing reputational risk are detailed below, regardless of who is implementing them (Board of Directors, Risk Committee, CEO, etc).

    Maintain timely communication and ensure transparency between shareholders, customers, board members, and employees. Open communication is key in sustaining a positive reputation and relationship with stakeholders.

    · Create awareness of risk management culture and apply to all business strategy aspects. As noted above, without a clear vision of the company's stance towards risk management, it will be difficult to generate and implement mitigation strategies effectively.

    · Establish a crisis management team in the event that there is an event that may negatively impact company/employee reputation.

    · Similarly, build an organizational structure that supports both risk management and risk oversight, whether both responsibilities fall to one party or different parties.

    · Continuously monitor company perceptions and reputation via continued communication with stakeholders and formal/informal surveying tactics. Awareness of reputational trends is crucial when making strategic and/or financial decisions.

    · Develop an outside-in perspective towards reputational risk, taking a more holistic approach to possible risks and opportunities and their potential relationships.

    · Learn from others' mistakes. Study reputational mishaps and understand the pitfalls of past risk management strategies to adjust accordingly.

    Even with these strategies, reputational risk is a threat that will never be completely eliminated. However, with continued assessment of risk culture and appetite and implementation of mitigation strategies, reputation can become a company's greatest tool for success.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Tags: economy
    Aug 14 7:03 AM | Link | Comment!
  • Inversion Deals Are Costing The U.S.
    Inversion Deals Are Costing the U.S.

    AuthorTyler Sparks

    The life sciences industry, particularly pharmaceuticals, is ripe with competition. Companies are constantly looking for ways to increase margins and reduce expenditures. One way that companies are now looking to accomplish this task is by structuring inversion deals through mergers and acquisitions. The U.S. stands to lose close to $20B in revenue from companies moving overseas.

    Inversion Deals

    An inversion deal is formulated by companies to bypass tax implications. An example can be found in recent mergers and acquisitions activity between US companies and overseas companies. Abbvie Inc. (ABBV) is in talks with Shire Plc (SHP) on a potential takeover purchase. Bloomberg reports that one of the main components of the purchase is an inversion deal, to cut AbbVie's tax rate to 13 percent from the current 22 percent just by moving its legal address from the U.S. to the U.K. made possible by acquiring Shire.

    The Wall Street Journal notes that some companies are now willing to pay a higher premium because the long term savings of a tax cut gives value, sometimes offering 50% more than the acquired companies are worth. This practice may eventually lead to inflated and overvalued price targets on companies that operate abroad, as well as potentially stricter regulations in multinational merger and acquisition activity. US policy makers are now threatening to change the laws that provide businesses with huge advantages.

    Recent Deals

    In the past few years, numerous deals have been made to re-incorporate companies abroad. Although there have been rumors of policy changes, companies are still going forward with deals but are careful to mitigate their risk.

    A recent merger between Salix Pharmaceuticals Ltd. (SLXP) and Cosmo Pharmaceuticals SpA (COPN) involves three patents for gastrointestinal drugs. Salix purchased these patents in the form of stock for a total of around $2.7B. This purchase ultimately allowed Salix to move to Ireland and lower its tax bill. A merger like this is beneficial to both companies. Salix gets substantial tax cuts while Cosmo gets to "leapfrog into the U.S. market without any incremental costs," as quoted by Friedrich von Bohlen, managing director of Dievini Hopp Biotech Holding GmbH, Cosmo's second-largest shareholder.

    This past June the medical device maker Medtronic Inc. (MDT) signed an agreement to purchase Irish based Covidien PLC (COV) for $42.9B. Medtronic has the intention of becoming an Irish company for tax cuts. However, Medtronic is protected by a clause "allowing it to walk away if the tax regime changes to remove those benefits." This shows how important the tax benefits are to companies. Medtronic is willing to completely change its M&A activity based solely on international tax policy.

    Another deal agreed upon in June was the merger of Canadian QLT Inc. (QLT) with Pennsylvania based Auxillium Pharmaceuticals (AUXL) allowing the company to take the lower Canadian tax rate. As explained earlier, the companies were concerned with the risk around the inversion and it became a point of contention between them. Similarly to Medtronic, Auxillium installed a clause lasting till October 31st allowing them to walk away from negotiations without facing any penalty if the laws are changed. If accepted, the deal should close by the year-end.

    Installing contract provisions is popular among companies to mitigate risk and please shareholders. When California based Applied Materials Inc. (AMAT) negotiated the purchase of Tokyo Electron Ltd. for $9.39B they made sure to include a provision keeping them safe from paying a $400M breakup fee if the tax benefits were somehow blocked. Executives spoke about how the companies would create a more "expansive knowledge base" by bringing together technologies and product. Although it mentioned the Netherlands would house the new company, it did not mention that its tax rate would be lowered to 17% from 22%.

    Moving Forward

    For companies that operate in different areas of the global market, a cheaper tax rate is appealing. For example, the US tax rate on corporations is 35%, compared to an Ireland corporate tax rate of 12.5%. Ireland is just one example, but there are numerous countries that have a better tax rate to offer companies. As mentioned, companies are looking to mergers and acquisitions to take advantaged of these tax rates. With this changing landscape long term implications are hard to foresee, but tax cuts could lead to more regulations, not just in tax law, but in all regulated aspects of the life sciences business.

    People are now calling for "economic patriotism," pushing the idea that companies should receive tax breaks to make staying in the United States competitive against other companies. Jacob Lew, U.S. Secretary of the Treasury, said this week, "Congress should enact legislation immediately." He argues that if the US doesn't cut tax rates soon, then the nation's global companies will just continue to move their headquarters-- saving the company millions in taxes. Consequently, it will cost the US government millions in tax revenue, money that the country desperately needs to keep our economy flowing.With more attention being put on tax legislation, it will be interesting to see how, and how soon, our national lawmakers react.

    Jul 18 9:25 AM | Link | Comment!
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