An open letter to the CFOs - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

An open letter to the CFOs

May 7, 2009

Dear CFOs, We very well know that quite a few of you who have helped your respective companies raise money through the FCCB route may be too busy trying to tie up financing so that the bonds could be redeemed. Indeed, the current financial crisis must have taken even the most meticulous of you by surprise. Never in your dreams would you have imagined that an economy that had been chugging along at record speed would in such a short span of time start stuttering. Even more shocking would have been the sudden disappearance of money that only some time back was yours for the taking by the bucketfuls. However, bygones are bygones. Precious little could be done about it. The focus from now on should be on cleaning up the mess and coming out of the current turbulence with minimum damage.

To be frank, even we were taken by surprise. When you guys lined up to raise funds through the FCCB route, we were all ears. After all, even we had to make the changes in our excel models. The entries were very simple. The FCCB money raised sits on the balance sheet as debt and after a couple of years, gets converted into equity. And since most of them carry hardly any interest charges annually, we didn't even bother about the interest expenses. The realization that the quasi debt instruments that FCCBs are could turn into real debt, involving repayment obligations did not even register on our minds.

Secondly, we did not carefully examine the purpose of the fund raising. While some of you, with directives from your ultra ambitious CEOs went on make expensive acquisitions with the money, others were a little more cautious and used it for brownfield/greenfield expansion. We do not have any problems with company making acquisitions. But when it is done in an environment where asset prices are hitting the roof and where balance sheets are being over leveraged, then it indeed calls for a great degree of caution. Those of you using the funds to expand capacities seem to be relatively better off. Because you guys are atleast building some asset on the ground, the cash flows from which could be used to repay the debt. But people using the money to make leveraged acquisitions are indeed flirting with danger. Acquisitions made at exorbitant valuations take that much longer to break even and if the economic scenario worsens the way it has done recently, recovery could be even further away. The end result? A precipitious decline in share prices, much to the chagrin of most of you.

If only you had known that the money that you are raising may not convert into equity and instead, remain as debt. Worse still, you may now have to dilute your equity to raise the necessary funds for repayment. Doing it in the current depressed environment will lead to bigger dilution of shareholder equity.

Here's hoping that you take these lessons to heart and do not repeat the mistake in the future. Always plan for the worst no matter how low the odds. As Mr. Warren Buffett points out that any number multiplied by zero is zero. A small mistake could wipe out a string of successes. As far as we are concerned, we have indeed taken the lessons by heart and hope to make them a part of our framework.

Best Regards,

Team Equitymaster

Equitymaster requests your view! Post a comment on "An open letter to the CFOs". Click here!


More Views on News

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

Sundaram Bluechip Fund: Will Hold the Stable Horses (Outside View)

Sep 18, 2020

PersonalFn briefly outlines the newly launched NFO note HSBC Corporate Bond Fund.

Wait! Don't Chase Smallcaps Now (Profit Hunter)

Sep 18, 2020

Let the markets take a breather before you jump in.

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

A Contrarian View on Whether You Should Load Up on Small Caps podcast (Views On News)

Sep 17, 2020

Rahul Shah discusses whether the SEBI circular is the perfect time to start investing in good quality small caps

More Views on News

Most Popular

Buffett Style Investing

A detailed peek into how Warren Buffett identifies the value of a stock, his concept of margin of safety and more.

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

I Recommended this Stock over Page Industries because it's Relevant to Doubling Your Income (Profit Hunter)

Sep 7, 2020

Things are not often what they seem in the market and how you can take advantage of this.

The NASDAQ Whale Could Harm Your Portfolio (Fast Profits Daily)

Sep 7, 2020

The discovery of Softbank pushing up prices on the NASDAQ will cause volatility in the market. Stay alert!

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 18, 2020 (Close)