INDUSTRY FINANCE

SPECIALTY INVESTMENT BANKING

BUILDING A CULTURE OF INNOVATION

Companies that practice being first, better, or different are models of success

JIM FREEDMAN Managing Director Intrepid Investment Bankers LLC, a subsidiary of MUFG Union Bank Los Angeles, CA

The pace of innovation is accelerating faster than ever. Our Commercial & Consumer Technology team had a chance to see much of this innovation in action at the recent 2019 Consumer Electronics Show in Las Vegas. Innovation takes many forms, ranging from evolutionary to revolutionary. Countless evolutionary technologies were featured in the main exhibits—improved TVs, more immersive audio, new smart home technologies, new modes of charging, ways to protect and carry mobile devices, the latest gadgets, and more. However, what caught my attention were the revolutionary technologies—the latest in artificial intelligence, advanced robotics, driverless cars, and drone technology, plus the hundreds of early-stage companies that were featured. We began to think about how companies foster innovation in their enterprises and what common threads exist among these highly innovative companies. What actions or inactions are taken by key stakeholders to encourage company leaders and employees to take risks and think differently? What separates the innovators from the rest of the pack? Like most people searching for answers, we turned to Google. If you input the search term “most innovative companies,” more than 4.3 million results are returned. We decided to review Forbes’ “Top 100 Most Innovative” list and, of course, it was littered with obvious tech and internet titans like Tesla, Netflix, Amazon, Facebook, and Tencent (although Apple and Microsoft were notably absent, and Alphabet was way down on the list at No. 79). At the same time, numerous “old economy” companies such as Marriott, Visa, Anheuser-Busch

InBev, General Mills, and others were included as most innovative. What’s the link between these businesses? And how do middle-market companies emulate successful companies to stay at the forefront in their industries? Forbes uses the term the “innovation premium” as the core principle for their rankings. Innovation premium compares a company’s equity market capitalization to the net present value (NPV) of the estimated projected cash flows of its existing business lines. The greater the amount by which the market valuation exceeds the NPV of its inherent cash flows, the higher the innovation premium and the higher the position on the top 100 list. This analysis resonated with me. As an M&A advisor selling or raising capital for companies, we routinely see buyers ascribing widely varying valuations to the same company. Why is this? A company’s valuation must be linked to its cash flows but the ability to garner a premium valuation is only to be achieved when a prospective buyer believes that a company’s leadership and culture will enable it to out-innovate competitors in the future, or that such buyers will enhance a company’s cash flow or future prospects beyond what it could do alone. Leadership in innovation is often the differentiator between a market valuation multiple and an outlier premium multiple.

CSA - Freedman GARY RABISHAW Managing Director Intrepid Investment Bankers LLC, a subsidiary of MUFG Union Bank Los Angeles, CA

Jim Freedman is managing director of Intrepid Investment Bankers, a specialty investment bank that provides mergers and acquisitions, capital raising, and strategic advisory services to middle-market companies across various industry sectors. He has more than 35 years of investment banking and corporate finance experience and is an expert on the financial aspects of corporate strategy. Gary Rabishaw is a managing director at Intrepid and head of the Commercial & Consumer Technology practice. He has been involved in numerous domestic and cross-border transactions, including mergers and acquisitions, private equity capital raises, and financing for companies spanning the technology, consumer, industrial, healthcare, and business services sectors.

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C-SUITE ADVISORY

Be First, Better, or Different

The most successful innovators identify consumer trends before they happen—or disrupt existing trends and capitalize on opportunities better than their competitors. These companies provide a working environment that