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May Cablenomics Last month we discussed at a high level the mechanics of raising money for growth by borrowing or selling all or part of the business, a situation that also reduces the owners downside risk by taking in a partner, merging or taking equity and cash in a larger business. Alternatively, many of our clients have expressed the desire to grow through internally generated funds, retaining earnings in order to fund the increase in working capital needed to grow. The question then arises; just how much growth can be sustained through self-funding? We have often assisted clients in planning their working capital requirements. One common approach is to evaluate supplier credit as a source of funds. Contractors often open lines of credit at several suppliers. One reason for multiple supplier accounts is to ensure the availability of parts on a timely basis. Today’s "Internet speed" economy has placed high demands upon contractors and suppliers for speedy delivery and installation. Suppliers are challenged to keep their expenses low through "just in time" inventory while maintaining an acceptable level of customer service. The high rate of installations in this high growth economy often strains their ability to keep that balance and contractors are often told their parts are "on order". A strategy of using several suppliers gives the contractor an alternative source for parts they need in a hurry. Although, from a working capital standpoint, this can sometimes work against you. Sometimes, a multiple supplier strategy is used as a method of increasing access to supplier capital. The thought being similar to using several credit cards, but this is not always as optimum an approach as obtaining better supplier terms and conditions. To optimize supplier credit as a source of working capital through extended terms, good relationships with your suppliers are essential. We have worked on our client’s behalf to negotiate better terms with a single supplier in return for single or primary sourcing. This is a "strategic sourcing" strategy often employed by larger corporations. They seek to reduce the number of vendors they deal with, seeking better terms for credit, discounting, special stocking, delivery and payment from a single supplier in return for a much greater portion of their parts business. You have heard the advertisements for consolidating your personal credit card obligations into one low monthly payment and this is somewhat similar. In the final analysis, the amount of sustainable growth that can be funded internally, even with optimized supplier terms and borrowing, is limited by several factors. In theory, as long as your profits from increased sales and installations can cover the cost of increased parts and labor in open jobs, including the interest cost of borrowed working capital, you can maintain a profitable operation. This puts a limit on the rate of sustainable growth that can be calculated as follows: G (Sustainable Growth Rate) = (Sales/Assets) x (Net income/Sales) x (Assets/Debt) x (Debt/Equity) x (Retained earnings/Net income) This theory employs the important factors involved in maintaining a sustainable rate of growth without going to the equity markets: how well you succeed in generating sales for each dollar invested in assets; your profit margin on sales; the amount of debt leverage you employ and the amount of earnings you retain in the business. This can be simplified to G = (Retained earnings/Equity), which is, in effect, the rate at which you increase the equity in the business. Industry averages of internally financed sustainable growth for service-oriented industries with low capital investment requirements range as high as 23 – 25% for industries such as marketing and advertising. High capital-intensive industries such as oil refining have a low industry average of around 2% internally funded growth. A cabling contractor, closer to the service industry model and with short project cycles, could expect to find a high level of growth internally sustainable, but in today’s economy, the demands from current customers and other new opportunities are considerable. Some of Gerber and Company’s clients are growing at rates greater than 50% per year. Clients must either grow slower than this market, losing market share, or reduce the owner’s take out to the bare minimum in an effort to keep up with growing capital requirements. Which choice would you make - lose market share, severely reduce your takeout or look for an acquisition partner? Interestingly enough, several companies and investment firms are taking advantage of today’s high growth market and are increasing their acquisition efforts, especially with contractors/installers/integrators. Many of Gerber & Company, LLC’s clients are these firms, who are looking to become part of a larger entity to help them grow, withstand current profit pressures and cash flow issues or address national accounts, while simultaneously providing long-term upside with significantly less risk. If you are considering selling your firm and are interested in having an initial, exploratory meeting with Gerber & Company, LLC, then you should contact us at your earliest convenience. Ron Gerber, President of Gerber & Company, LLC can be reached at 212-707-0359 (phone) or via email at rgerber@gerbercompany.com. One of the key topics of interest in every field, especially ours, is the Internet and E-commerce. We have asked several manufacturers, distributors and integrators about their plans for e-commerce. Their response varies by their position in the supply chain, their use of distribution and marketing channels and their individual business strategies. We highlight the results of those interviews in this and future Cablenomics columns. Please remember however that Cabling Business Magazine and Gerber & Company, LLC cannot be held responsible for any printing errors. Readers should use this article for informative purposes alone. Any investment decisions should be made with the advice of a financial professional.
Stock Price Table
This month our stock tracking chart has grown to include the large PC consolidators; Ingram, Merisel and Techdata. Some of our readers and clients that have active layer and application solutions as part of their business offering have expressed an interest in this side of the industry. ANIXTER I was intrigued by a conversation I had with Jude Nosek and Robert Chelstowski of Anixter Labs about physical layer sources of errors. They emphasized the importance of the infrastructure builders in telecommunications, referring me to some recent test information available from Anixter Labs. Their test covered the impact of the physical layer in the efficiency and throughput of a network. Data errors from the cabling system can have a considerable impact, causing 50% of all network problems. This is an important message for end users and I have included the body of the Anixter press release in this section on industry happenings. SKOKIE, Ill.--(BUSINESS WIRE)--March 22, 2000--New testing methods developed at Anixter Levels Lab reveal that a computer network can be undermined by something as simple as a $5.00 patch cord. The new testing procedures measure a system's ability to transport actual data and, for the first time, provide a glimpse into how components such as HUBs, switches, NIC cards and cabling affect information as it travels through the network. The findings show that something as simple as a patch cord--the short cable that connects equipment such as PC's, modems and faxes to the cable in the walls--can corrupt an entire system while avoiding detection. Pete Lockhart, Anixter's Vice President of Technology and Product Design, says that slow response times and error messages are often identified as computer or software issues, causing unnecessary replacement of expensive equipment. ``Our tests show that 50% of all network problems are related to cabling systems, often, the real problem may be as simple as replacing a patch cord.'' Explained Lockhart. According to Lockhart, patch cords are inherently difficult to manufacture consistently and are difficult to test using traditional methods. Many users install their cords after the outlets and horizontal cabling have been tested, resulting in incompatible components. ``Any time your patch cords don't match the characteristics of the in-wall cabling and connections, your network performance will suffer,'' said Lockhart. To make sure the patch cord is compatible with a network system, Lockhart gave the following advice:
If you have any questions about your existing cabling system, or to receive a copy of the Anixter Levels Lab Report on patch cords, contact your local sales representative by calling 1-800-ANIXTER. Send written inquiries to 4711 Golf Road, Skokie, IL 60076-1278 or visit the web site at www.anixter.com. Tyco International Ltd. All the talk of e-commerce in past articles has focused on business-to-business. This announcement from Tyco is interesting in that it mixes business-to-business and business-to-consumer application. BOCA RATON, Fla., March 16 /PRNewswire/ -- ADT Security Services, Inc., a unit of Tyco International Ltd. (NYSE: TYC; LSE: TYI; BSX: TYC), today announced that it is now offering customized electronic security for homes and businesses through an innovative Web site: http://www.adt.com. The new ADT.com site delivers an information-rich environment for customers interested in protecting their property and assets while assuring their peace of mind. Offering access for both current and prospective customers, the new ADT Web site includes comprehensive information on security for the home, small business, commercial enterprises, and the federal government. ``As the leader in the electronic security industry, ADT is well-positioned to be the foremost resource on the Web for security services. With more than two million ADT customers, coupled with the fact that 39 million U.S. consumers used the Internet to shop last year, ADT must break new ground by utilizing this technology to communicate with customers and prospects,'' said ADT President Mike Snyder. ``The Internet is a key sales and service channel for us and provides a great opportunity to build our brand. ``Choosing the right security system is one of the most important decisions a homeowner or business owner can make,'' Snyder added. ``The goal of ADT.com is to make those decisions easier while providing another comfortable and convenient avenue for our customers to be connected with us. ``A growing number of people want the option of getting information and shopping on-line,'' Mr. Snyder continued. ``ADT intends to meet that demand more effectively and efficiently than anyone else in the security business. As such, we have committed considerable resources for achieving that goal including plans for dot.com television advertising.'' A unique feature on the site offers residential customers interested in purchasing a home security system the ability to order on-line by selecting the ADT Security Advisor prompt or by choosing from a variety of special offers. The ADT Security Advisor offers a comprehensive survey to help homeowners design a personalized security system that can fit their individual needs, ADT said, just as a sales consultant would during a visit. Using a secure site, the Security Advisor at ADT.com asks potential customers to enter information about the construction of their home, how many doors and windows they have and other specifics that can help ADT create a personal profile, identify security risks and then recommend the best system for each location. With the ADT Security Advisor, customers can select from the ADT Product Catalogue and add a variety of products and services to their systems. The new ADT.com Web site allows potential customers to check for special offers and guarantees and learn to operate their security systems through an on-line, interactive demonstration keypad. ``We view the World Wide Web as an integral part of ADT's sales and customer service strategy,'' Snyder added. Using ADT.com, current customers can contact ADT directly, review owner's manuals, use the on-line demonstration keypad to practice the operating functions of their systems and order additional components or upgrades. Also included are some answers to frequently asked questions which provide information on system operation, billing and monitoring. ``Because of its interactive capability, ADT.com will better connect us with our customers and they with us,'' Snyder concluded. ``So not only can we listen to their concerns and needs, but we will be better able to provide the highest level of customer service now and as this e-commerce service evolves.''
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