I’m excited to share today’s guest column with you and hear your opinions. Jack T. Ciesielski, an accounting analyst and portfolio manager at R.G. Associates, explores the nuances behind the decades-old system of quarterly reporting by public companies.
Feel free to respond to this email and share your own opinions.
“Our markets thirst for high-quality, timely information regarding company performance and material corporate events. We recognize the importance of this information to well-functioning and fair capital markets. We also recognize the need for companies and investors to plan for the long term. Our rules should reflect these realities.”
Those are the remarks of Securities and Exchange Commission Chairman Jay Clayton at the kickoff for the Commission’s request for comment on the United States system for earnings releases and quarterly reports. The SEC was asked to study the decades-old system by President Donald Trump, after tweeting that a top business leader suggested that the U.S. should “stop quarterly earnings and go to a six-month system” to “make business (jobs) even better.”
Chairman Clayton surely has one thing right: markets thirst for high-quality, timely information. Yet it’s difficult to see how moving to less-frequent information slakes that thirst.
More at Stake than Meets the Eye
Private companies get a free ride from the public markets in a very important regard: they provide a reference point for valuations. Public company valuations are used in private company reporting to investors, and for exchanges of whole companies among private equity players. If more information makes public markets more effective at letting capital go to where it’s best served, the same information keeps private equity markets robust as well.
Ironically, the private markets need the public markets – while they simultaneously attract companies away from public listings. Eliminating public company quarterly reporting to make them more like private markets is a race to the bottom, and it may weaken both.
Quarterly Reporting vs. the Long Term
Private companies’ freedom from quarterly reporting is oversold. Managers of private companies often revel over their liberation as a perk of private equity ownership, yet private companies often internally report quarterly earnings. More likely, what they really don’t miss about quarterly reporting: doling out fair and equal guidance to Wall Street analysts.
Quarterly reporting gets a bad rap for causing short-term thinking. Luminaries such as super-lawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz have called for scrapping quarterly reporting to encourage long-term thinking. Automotive legend Bob Lutz, an executive at all three of Detroit’s Big Three, told an interviewer he wishes it would all go away — the quarterly earnings, the guidance, analyst reports, all of it. Hillary Clinton trashed “quarterly capitalism” during her 2016 presidential campaign. And Tesla CEO Elon Musk recently told employees the quarterly earnings cycle puts “enormous pressure on Tesla” and may distract the company from the long-term picture. But is quarterly reporting really the root of all evil?
It’s Corporate America’s intricate, non-stop guidance dance with Wall Street that makes the entire reporting process exhausting, and the quarterly reporting issue becomes conflated with the long-term issue needlessly. There is absolutely no SEC requirement to provide earnings guidance; companies make that choice.
Companies can immediately simplify their reporting by forgoing the election to provide earnings guidance. There is support in the business community for that idea. With the backing of the Business Roundtable, Jamie Dimon and Warren Buffett argued in a Wall Street Journal op-ed for abandoning quarterly earnings guidance – but not quarterly earnings reporting.
When Did Quarterly Reporting Become Burdensome?
The SEC mandated quarterly reporting in 1970, when many companies had already elected to do so because of exchange listing requirements. Without so much as electronic spreadsheets to help with the chore, companies were able to generate a 10-Q in 45 days after the quarter’s close. Even with a reporting window that’s now five days shorter (for large companies), it’s incredible that quarterly reporting has become so onerous. Today’s software and data processing capabilities are far superior to what CFOs were able to muster in 1970.
Companies point to added quarterly and annual disclosures as an added burden, but that information wasn’t added overnight. It arrived in increments, as companies engaged in increasingly complex business combinations, derivatives transactions, equity compensation plans, and tax strategies. New accounting and disclosure requirements arrived incrementally, not suddenly.
Obscuring Information Benefits No One
Business has evolved through increasingly complex transactions, and market participants need information about them to be “well-functioning and fair,” in the words of Chairman Clayton. Obscuring information from investor view by limiting reporting frequency does not reduce complexity; instead, it fosters misinformation and volatility, and can raise the cost of capital. Inside information, staying inside longer than three months, creates a larger window for compliance and legal departments to police, with attendant risks. None of this benefits the public markets.
Instead of working to limit earnings information, the SEC should call for companies to file their quarterly reports when they release their earnings, while keeping the same reporting deadlines. That would give investors information about a company’s performance and financial condition in a comprehensive package. Many companies do this, and the flexibility is already built into the reporting framework.
Our country’s entrepreneurs are smart enough to make groundbreaking scientific discoveries or devise brilliant delivery logistics — yet can’t figure out cost-effective solutions for dealing with reporting requirements despite powerful tools to help them. Removing reporting requirements is not the answer, especially if the darkness it creates makes for higher costs of capital. Companies should be careful of that they wish for — emulating private companies might not provide the result they want.
Housekeeping: Please send deals to email@example.com until Polina’s return from SXSW on Monday.
• Instawork, a San Francisco-based on-demand staffing app for gig workers and hospitality businesses, raised $10 million in funding. Benchmark led the round, and was joined by investors including Y Combinator, Tuesday Capital, Liquid2 and SV Angel.
• Bright Cellars, a data-driven wine discovery and curation platform, raised $8.5 million in Series A funding. Revolution Ventures led the round, and was joined by investors including CSA Partners.
• Hadean, a London-based cloud-first operating system, raise $10 million in funding. Draper Esprit led the round.
• Tasso Inc, a Seattle-based blood collection startup, raised $6.1 million in funding. Vertical Venture Partners led the round, and was joined by investors including Techstars and Cedars-Sinai.
• StrongBlock, a blockchain startup, raised $4 million in seed funding. Investors include Pangea Blockchain Fund and Copernicus Asset Management SA.
• Xapix, a San Francisco-based connected vehicle company, raised $2 million in seed funding. Investors include Speedinvest, Anthemis, and Felix Staeritz.
• GoJava, a Toronto-based sustainable office snacks provider, raised C$1 million in a second seed-stage funding. Crux Capital Corp. led the round, and was joined by Active Impact Investments.
• Milu Labs, a South Korean medical diagnostics company, raised an undisclosed amount. Magna Investment led the round.
PRIVATE EQUITY DEALS
• Advent is weighing a 1.8 billion euro ($2.03 billion) bid for Cerved, an Italian Italian credit information provider, the Financial Times reports citing sources.
• Olympus Partners acquired DS Smith’s plastics division for an enterprise value of $585 million. DS Smith is a U.K.-based packaging business.
• Blackstone acquired a minority stake in GI Partners, a San Francisco-based middle-market asset management firm. Financial terms weren’t disclosed.
• Weld North Education, which is backed by Silver Lake, acquired Assessment Technology Inc, a provider of educational measurement solutions. Financial terms weren’t disclosed.
• Protective Industrial Products Inc, a portfolio company of Audax Private Equity, acquired West Chester Protective Gear, a Cincinnati, Ohio-based maker of personal protective equipment. Financial terms weren’t disclosed.
• Trinity Private Equity Group made an investment in Falcon Structures, a maker of container-based structures. Financial terms weren’t disclosed.
• Active Day, a portfolio company of Audax Private Equity, acquired Club Horizons, a North Charleston, S.C.-based adult day care center. Financial terms weren’t disclosed.
• SFW Capital Partners invested in Greenshades Software, a Jacksonville, Florida, provides payroll tax and human capital management information and software solutions. Financial terms weren’t disclosed.
• Fullsteam, backed by Aquiline Capital Partners, acquired Euclid Technology, a Bethesda, Maryland-based based provider of association management services. Financial terms weren’t disclosed.
• Veritas Technologies acquired APTARE, a Campbell, Calif.-based software company that supports hybrid cloud storage and backup systems. Financial terms weren’t disclosed.
• Boeing (NYSE: BA) acquired ForeFlight, a provider of mobile and web-based aviation applications. Financial terms weren’t disclosed.
• DiscoverOrg acquired NeverBounce, a Cleveland, Ohio-based provider of email verification and list cleansing services. Financial terms weren’t disclosed.
• IPC, a financial IT vendor for secure communications and market surveillance, disclosed a strategic investment in GreenKey Technologies, a Chicago-based natural language processing platform.
• Tufin Software Technologies, an Israel-based enterprise software manager for network security policies, filed for a $100 million IPO. The firm posted revenue of $85 million in 2018 and loss of $4.4 million in 2018. Catalyst Private Equity Partners (26.4%) backs the firm. J.P. Morgan, Barclays, and Jefferies are underwriters. It plans to list on the NYSE as “TUFN.”
• ShockWave Medical, a Santa Clara, Calif.-seller cardiovascular disease treatments, raised $97 million in an offering of 5.7 million shares priced at $17, an upsized IPO above range. It posted revenue of $12.3 million and loss of $41.1 million in 2018. Sofinnova Capital (19.7% pre-offering), Venrock (10.4%), and Fidelity (9.9%) back the firm. Morgan Stanley and BofA Merrill Lynch are underwriters. It plans to list on the Nasdaq as “SWAV.”Read more.
• Apollo Global Management agreed to acquire Direct ChassisLink, a chassis rental and leasing company, from EQT Infrastructure. Reuters reports citing sources, that the deal is around $2.5 billion including debt.
• Carousel Capital acquired Process Barron, a Birmingham, Ala.-based provider of industrial process fans and material handling systems. The seller was The Sterling Group. Financial terms weren’t disclosed.
• Advance acquired Turnitin, an Oakland, Calif.-based provider of educational software. The sellers included Insight Venture Partners and GIC. Financial terms weren’t disclosed.
• Pacira Pharmaceuticals Inc agreed to acquire MyoScience, a medical tech company. Pacira will make an initial payment of $120 million with an additional $100 million contingent upon the fulfillment of certain milestones. MyoScience had raised approximately $134 million in funding from investors including Accuitive Medical Ventures, American Equities Overseas, DeNovo Ventures, Nexus Medical Partners, Valiance and Sobera Capital.
• AbleTo, Inc., a provider of virtual behavioral health care, acquired Joyable, a San Francisco-based app-based digital therapy company. Financial terms weren’t disclosed. Joyable had raised approximately $10 million in funding from investors including Thrive Capital and Harrison Metal.
• NTT Security Corporation agreed to acquire WhiteHat Security, an application security provider. Financial terms weren’t disclosed. WhiteHat Security had raised approximately $50 million in funding from investors including JMI Equity, Horizon Ventures, and Altos Ventures.
Platinum Equity agreed to acquire a majority stake in Grupo Ibérica de Congelados SA, a Vigo, Spain-based provides frozen seafood products. Sellers include Portobello Capital.
FIRMS + FUNDS
• Blackstone is likely to reach a $20 billion first close on its eighth buyout fund, Bloomberg reports citing sources.
• SoftBank Group, the Japanese conglomerate, launched a $5 billion tech fund focused on Latin America, the SoftBank Innovation Fund. Marcelo Claure will serve as CEO. SBG has committed an initial $2 billion to the fund.
• Quinbrook Infrastructure Partners, a Houston, Texas-based investment firm, raised more than $1.6 billion for its low carbon power fund.
• aMoon II, the Israeli healthcare venture fund, has raised $660 million from investors.
• HarbourVest Partners promoted five new managing directors: Rich Campbell, Minjun Chung, Edward Holdsworth, Craig MacDonald, and Laura Thaxter; as well as eight new principals and three senior vice presidents.