Eat or be eaten when it comes to financial systems

Business enterprise vendor Oracle Corp. renewed its strategy of growth through large acquisitions late last week, with a $3.3 billion cash deal to buy Hyperion Solutions Corp., a leader in the fast-growth market for business performance management (BPM) and business intelligence (BI) systems.

Unlike Oracle’s earlier hostile takeover of rival PeopleSoft, the Hyperion acquisition—priced at $52 per share—was agreed to on friendly terms. The move signaled the wide technical gap best-of-breed BPM vendors like Hyperion and Cognos have established through specialized financial systems for planning, budgeting and forecasting purposes over larger enterprise resource planning (ERP) vendors like Oracle and SAP AG, which have attempted to duplicate their technology with their own modules. “This is a good fit for Oracle,” says Paul Hamerman, vice president of enterprise applications at Forrester Research. “They have not been successful in the financial business performance product category. They have a good transactional platform but not for planning and consolidation applications, and Hyperion is the market leader.” Hamerman estimates the BPM sector is growing at about 15% a year, compared with 6% for the ERP segment dominated by Oracle and SAP.

But the deal also highlights the threat that even large independent vendors are under as large ERP vendors add more functionality through acquisition or, in the case of SAP, partnerships. “It’s getting more and more difficult to operate as a standalone, niche vendor,” says Jim Shepherd, senior vice president at AMR Research. “Buyers want to buy single suites and standardize around large vendors.”

In a letter to customers on the day of the announcement, Hyperion president and CEO Godfrey R. Sullivan stressed that the Oracle purchase will provide important benefits to both sets of customers. “Coupled with Oracle’s BI tools and pre-packaged analytic applications, the combination redefines business intelligence and performance management by providing the first integrated, end-to-end enterprise performance management system that spans planning, consolidation, operational analytic applications, BI tools, reporting, and data integration, all on a unified BI platform.” He added that Hyperion has more than 12,000 customers worldwide, including 91 of the Fortune 100.

Oracle executives pointed to the fact that the deal will broaden the company’s reach into the customer base of its core rival, SAP. “Thousands of SAP customers rely on Hyperion as their financial consolidation, analysis and reporting system of record,” said Charles Phillips, president of Oracle, in the press release announcing the acquisition. “Oracle’s Hyperion software will be the lens through which SAP’s most important customers view and analyze their underlying SAP ERP data.”

Hyperion’s rivals also began making their own moves soon after the Oracle deal became public. Finance and BPM solution provider Cartesis announced a “change is best” offer for Hyperion customers willing to migrate to Cartesis, including a discount of up to 50% for editions that integrate with Microsoft SQL Server 2005 as their BI platform. A spokesman for larger rival Cognos said that there was “no decision yet” as to whether the company would offer discounts to Hyperion customers willing to switch. Such offers are common during software acquisitions, says Forrester’s Hamerman, but since the costs of switching systems tend to be high, they usually don’t spark mass movements. That may not apply to legacy customers of both Hyperion and Oracle with older versions of the financial solutions. “There’s an opportunity for competitors to take some of these legacy customers that face some fairly significant upgrade costs,” says Hamerman. A lot will depend on how Oracle prices upgrades for existing customers going forward. “That will be an interesting thing to watch,” says Hamerman.

Will the sun ever set on TRIA?

With yet another drop-dead date for the Terrorism Risk Insurance Act (TRIA) at the end of the year, Congress is once again directing its attention to the proverbial question of whether private insurance companies can shoulder the burden of providing companies coverage for terrorism-related risk—that is, without the government guarantee TRIA provides to pick up most of the damages in the case of an attack.

While the availability and affordability of terrorism risk insurance has improved since the terrorist attacks on September 11, 2001, most insurance experts agree that without the renewal of TRIA, insurers and reinsurers would exit the market. “Without TRIA as a backstop,” says Jill M. Dalton, managing director for the North American property practice at Marsh & McLennan Corp, “terrorism coverage will be in short supply and be prohibitively expensive.” Dalton notes that uncertainty over TRIA could be disruptive for the normal property renewal procurement process.

Dalton has cause for optimism. The Democrat-controlled Congress has made the extension of terrorism insurance a centerpiece of its legislative efforts, and in the first set of hearings in New York this week, Democrats basically heard what they wanted to hear—that the insurance backstop provided by TRIA is vitally necessary. For Democrats right now, it is a question of whether to make the legislation permanent or extend it seven to 10 years. But there is some question as to where the White House stands. Dalton says that a recent report from a presidential working group reviewing terrorism risk insurance failed to endorse the extension. The other threat is the possibility that senators from the Gulf States might try to add a natural catastrophe insurance plan onto TRIA. “If that gets added to it,” says Dalton, “that could kill TRIA because there’s not a lot of support for a national natural catastrophe plan.”

Weather Advisory: Hurricane hedging is approaching landfall

Everyone talks about the weather, but no one has ever been able to do anything about it—at least up until now. But with the launch of the Chicago Mercantile Exchange (CME)-Carvill Hurricane Index set for March 12, insurers and customers such as energy companies, utilities, state governments and others will be able to hedge their risk to weather catastrophes. CME-Carvill Hurricane futures and options contracts will trade on the CME and will allow insurers and companies, which were battered by Hurricanes Katrina and Rita in 2005, to transfer their risk onto the capital markets. The ReAdvisory group of Carvill America Inc., a reinsurer, developed the Carvill Hurricane Index; the index uses such factors as maximum wind velocity and size of storm to calculate the potential for damage. Futures and options contracts will be offered for five U.S. regions: the Gulf Coast, Florida, Southern Atlantic Coast, Northern Atlantic Coast and the Eastern U.S.

The hedges are already attracting interest, given their promise of greater efficiency and transparency. “It’s a great innovation, [and] particularly where you’re talking about the efficiency and transparency of the transaction, capital markets seem to me to be more efficient and transparent than the insurance industry,” says Brian W. Merkley, the risk financing manager for Salt Lake City-based Huntsman Corp., a $13.0 billion chemical company that has plants along the Gulf Coast. “I’m still trying to adjust claims from Hurricane Rita—from what I understand about how these hurricane options are going to work, we could have had our money the next day.” Merkley plans to compare the hedges to traditional insurance, and suspects that Huntsman may end up with a blended program that’s part hurricane hedge and part traditional insurance. “[Hurricane hedging] is certainly something that I’ve told my treasurer we’ll be looking at.”

But the hurricane hedges are only the leading front in the convergence of the insurance and capital markets. London-based inter-dealer broker ICAP PLC and insurance and reinsurance broker Jardine Lloyd Thompson Group PLC established a joint venture to broker derivatives and securities based on insurance risks. The joint venture is expected to begin trading insurance related derivatives in about six months. “What interests me is the innovation you’re seeing in the capital markets [on insurance related derivatives],” says Merkley.

FASB is kicking off phase two in its work on FAS 158

In late March or early April, the Financial Accounting Standards Board (FASB) is set to take up the thorny issue of measurement when it comes to including liabilities and assets from defined benefit (DB) plans and other post-employment benefits (OPEB) on corporate income statements as prescribed in FAS 158. According to John Steele, a senior consulting actuary in the retirement practice at Watson Wyatt Worldwide Inc., FASB will need to address four principal issues: 1) liability measurement; 2) profit and loss recognition; 3) classification of the pension expense; and 4) consolidation of pension liabilities on the balance sheet.

In the area of liability measurement, FASB will have to decide what are the obligations that need to be measured, what assumptions to use in measuring those obligations, and how to apply fair value principles in those liabilities. In P&L recognition, FASB will grapple with whether to keep or get rid of delayed cost recognition (smoothing) of pension expenses on the income statement.

Classification, notes Steele, will be a key area. Currently, the pieces that make up pension expenses are calculated and then netted, with the total amount going into the operating cost; classification would break apart the pension cost, likely putting part into operating costs, part into investing costs and part into financing costs. “If the volatility that is going to be added by marking the income statement to market is allocated to something that is a non-operating cost, then it kind of puts it into a safe place because operating costs are typically what equity analysts focus on,” says Steele. He adds that if FASB adopts that approach to classification, then the overall impact of the income statement changes is likely to be positive for many companies.

Finally, on the issue of consolidation, FASB will take up the question of whether to put pension benefit obligations (PBO) on the liability side of the balance sheet and fair value assets on the asset side. Currently the net of those two numbers appears on the balance sheet. While that proposed change might appear to be merely a cosmetic one, it changes the leverage when you’re thinking about such issues as debt-to-market cap, notes Steele. “It potentially forces people to think about the balance sheet differently,” says Steele.

Most observers believe that FASB’s deliberations will be slow and laborious and are likely to continue for years. And given the trend, in which companies are moving away from DB plans, Baruch College Zicklin School of Business professor Norman Strauss says: “It may be that FASB finishes its work on accounting for pension expenses in the income statement just in time for the last DB plan in America.”

Baxter International Inc. named Robert J. Hombach vice president and treasurer of the $9.8 billion medical device maker, which is based in Deerfield, Ill. Hombach, 40, replaces Robert M. Davis, who was named CFO in 2006. Most recently Hombach served as vice president of finance for Baxter International’s European operations.

Loblaw Companies Ltd. named William A. Wells CFO of the $23.8 billion food distributor and retailer, which is based in Brampton, Ont. Loblaw is Canada’s largest food distributor. Wells, 46, most recently served as CFO of Bunge Ltd., a $24.3 billion agribusiness and food company, which is headquartered in White Plains, N.Y. Prior to Bunge, Wells held senior finance positions at McDonald’s Corp., rising to chief executive of its dedicated finance company, System Capital Corp. Steve Smith, Loblaw’s executive director for financial control, resigned. Wells will assume the position on April 2.

Westlake Chemical Corp. promoted Steven Bender, its current vice president and treasurer, to vice president, CFO and treasurer of the $2.4 billion Houston petrochemical manufacturer. He replaces J. Danny Gibbons, who left the company to accept the position of CFO at W&T Offshore Inc. Bender, 50, has more than 28 years of experience in finance and treasury. Prior to joining Westlake, he was treasurer of Kellogg Brown and Root, a subsidiary of Halliburton Co.

Presstek Inc. named Jeffrey A. Cook senior vice president and CFO of the $274.1 million digital imaging manufacturer, which is based in Hudson, N.H. Cook, 52, served as a CFO and chief information officer of Kodak Polychrome Graphics from 2000 to 2005 and has 29 years of experience in finance positions, including 17 years at General Electric Co. Most recently he has worked in private equity. Cook replaces Moosa E. Moosa, who left Presstek to pursue other opportunities.

CF Industries Holdings Inc. named Randall W. Selgrad treasurer and assistant secretary of the $1.9 billion phosphate fertilizer producer, which is based in Long Grove, Ill. He succeeds Dennis W. Baker, who is retiring. Selgrad, 48, was assistant treasurer for Hospira Inc., a $2.6 billion specialty pharmaceutical and medical delivery company that was spun off from Abbott Laboratories Inc. in 2004.

USEC Inc. named Stephen S. Greene as treasurer of the $1.6 billion supplier of nuclear fuel, which is based in Bethesda, Md. He replaces John C. Barpoulis, who was named senior vice president and CFO. Prior to joining USEC, Greene was a vice president and executive director of Pace Global Energy Services in Fairfax, Va.

Apollo Group Inc. appointed Brian L. Swartz vice president, controller and chief accounting officer of the $2.3 billion for-profit higher education company, which is based in Phoenix. Swartz, 34, was with EaglePicher Inc. from 2002 to 2006, most recently as vice president and controller. Prior to that, he was at Arthur Andersen LLP from 1994 to 2002, where he had primary responsibilities for international audit and due diligence projects.

Newpark Resources Inc. named Joseph L. Gocke treasurer of the $555 million oil field services company, which is based in Metairie, La. Gocke, 48, served as treasurer of Weatherford International Ltd., an oil exploration company from 2003 to 2006. For the previous five years, Gocke served in management position at Aquila Inc., an energy company.

Strategic Hotels & Resorts Inc. promoted Ryan Bowie to vice president and treasurer of the $492.7 million Chicago real estate investment trust. Bowie, 29, previously served as assistant treasurer. He joined Strategic Hotels in 2003 as director of corporate finance and was instrumental in the company’s $4.5 billion equity and debt transactions. The position is a new one at the company.

Archer Daniels Midland Co. named Rene Brand senior group controller for the $36.6 billion food processor, which is based in Decatur, Ill. Brand will be responsible for the global accounting functions of the cocoa, protein specialties, ADM Industrial and Health & Nutrition division. He joined the company in 2000, serving as finance director and controller of the international cocoa operation in the Netherlands.

Is there a way to bulletproof Excel-based trading? NumeriX Inc., a producer of cross asset derivatives pricing software, thinks it has found a way through a new level of integration with spreadsheet management and control software developer ClusterSeven Inc. ClusterSeven works with NumeriX’s Excel add-in, a common technology used by traders to price and model financial products. When used together through new functionality, the two products allow customers to quickly and accurately price and execute financial products through an Excel interface, as well as view, manage, analyze and audit the activity and all changes to a particular pricing transaction in one place. “There is a need for corporations and financial institutions to manage pricing data in Excel,” says Ted Pendleton, vice president of business development at NumeriX. “This allows them to manage, view, audit and share that data.” The technology allows IT, compliance managers and business managers to view how deal pricing for a transaction changed over time, as well as providing an auditable pricing trail for compliance purposes.

Axentis takes some of the implementation pain away. Axentis Inc., a provider of governance, risk and compliance (GRC) solutions, released the Axentis Solution Manager, a tool that provides best practice configurations, business rules and project templates to quicken the process of implementation for customers and partners. The configurations, which include benchmarking tools, are based on company deployments. Solution Manager is made available through the Axentis Enterprise platform, on a software-as-a-service (SaaS) delivery basis. The new tool contains business rules, project-related information and best practice workflows.