Corporate Finance-Based Relationship Management Part I

RMA Journal, The, Feb, 2001 by Michael St. J. Pimley

While the client is minding the store, who is minding the client's future needs? It's likely that competitors are invading turf with solutions the bank may well be able to offer itself. This is the first in a series of articles to address tactics to strengthen and broaden the customer relationship.

The Client

Jack Strong is contemplating the future of his firm. He is the 55-year-old chief executive and owner of a Midwest-based steel supplies company--Midwest Steel Services, Inc. (MSS). In the past 30 years, he has built MSS into a $50 million revenue company generating $6 million of earnings before interest, taxes, depreciation and amortization (EBITDA).

Over the years he has sold some of his original 100% share holding to enable certain key managers to co-invest in the business. His shareholding now represents 60% of the issued share capital, with 40% owned by the managers themselves. His offspring now summer graciously at Dad's expense on the beaches of Cape Cod. Yet MSS is part of an industry noted for cyclicality, maturity, and an overall "old economy" profile.

These are the circumstances under which Jack now ponders the alternatives before him at this stage in both his own professional career and the company's development.

The Bank

Midwest National Bank Corporation (MNB) has been MSS's principal commercial banker for the last 15 years. The relationship manager, Roseanne Morris, has known Jack since that beginning of the banking relationship and has provided many of the bank's commercial banking facilities to the company.

The bank provides a revolving line of credit for working capital needs; in addition, MNB and two regional competitor banks have provided a $10 million term. MNB also provides most of MSS's cash management support as well as letter-of-credit and bills of exchange through its Trade Services Group.

The Conversation

As Roseanne calls on Jack one day to discuss some of the major shifts in the economics of the steel industry in the U.S., ranging from tariff issues to the impact of the strengthening U.S. dollar vis-a-vis emerging markets' currencies, she learns of one of Jack's recent visitors.

He has been approached by a Chicago-based investment bank offering ideas on what investment banking alternatives he might consider with respect to his company. Ideas ranged from corporate restructuring to leveraged buyouts to selling the company to a strategic industrial competitor.

Jack's interest in the ideas are counterbalanced by his concerns that he had never met the young investment banker before. He also is concerned that all of the talk about transactions and doing deals was premature at this stage.

While he had genuinely been considering strategic alternatives, albeit in the vaguest of terms, it was the meeting with the investment banker that provoked him into formalizing his thoughts. It also caused him to realize that he would much prefer to explore his options with a respected commercial professional he has known and come to trust.

The Dilemma

More and more commercial bankers managing corporate customer relationships are today confronted with company profiles typified by MSS. The value of the much-needed services bankers have provided over the years suddenly pales against the prospects of a once-in-the-company's-lifetime investment banking transaction.

The initial reaction of most of us is to steer clear: "This sounds like an investment banking transaction and is not for us." But is that the appropriate response?

Many banks have developed their own in-house corporate finance capabilities by recruiting investment bankers from bulge bracket firms or regional brokerage houses. Alternatively, they have acquired and attempted to integrate regional investment banking and brokerage firms into their businesses. Yet such moves have often failed to capitalize on longstanding relationships with existing clients.

The principal reasons for this failure to leverage corporate relationships include:

* The constant pressure to do deals and sell investment banking products in order to legitimize the investment made.

* The incentive payment schemes demanded in the industry which in turn reinforce the emphasis on the quick sale.

As a result, many commercial bankers find themselves acting simply as "traffic cops" directing the client to the investment banking specialist. In so doing, they retain only the most superficial grasp of the issues at hand. Worse, without the continued involvement of the relationship manager, the newly arrived investment banker may well raise client expectations only to dash them later. This is the result of issues ranging from adverse market movements, to lack of institutional credit appetite, or simply failure to execute on the transaction.

The Opportunity

A more considered approach to challenges presented by such clients as Midwest Steel Services would be for commercial bankers like Roseanne Morris to realize that, when challenged by questions like Jack Strong's, her response can create a truly meaningful and value-added contribution both to the client and to her own bank. This role requires an in-depth knowledge of the client and the client's needs and a conversational, but by no means encyclopedic, grasp of the various strategies that the client could pursue.