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CFO Corner: Safeguard Scientifics’ Stephen Zarrilli

Sageworks
August 31, 2011
Read Time: 0 min

What was the biggest challenge your organization faced over the last 12 months, and how were you able to overcome it with financial leadership? The biggest challenge that Safeguard Scientifics faced was transforming our balance sheet. A little over a year ago, we had a substantial imbalance between the amount of cash on hand and the amount of outstanding debt obligations. In order for Safeguard to be a credible capital provider we needed to have a stronger balance sheet, and more importantly, we needed to have ample capital. So the goal was to ensure that available capital substantially exceeded aggregate debt obligations.

To achieve this goal, we first had to position some partner companies for acquisition. Advanced BioHealing, Avid Radiopharmaceuticals, Clarient and Portico Systems were successfully acquired by large international organizations, and these transactions generated significant cash for Safeguard.

The second piece of the strategy was to complete a debt restructuring transaction, which resulted in Safeguard refinancing a portion of our outstanding obligations into a new longer term structure. This structure permitted a better matching of future cash inflows with contractual future debt payments. We were also able to satisfy a portion of our obligations by taking advantage of the financial weakness in the marketplace. Since our debt is publicly traded, we repurchased some of the public debt at a fairly significant discount.The end result of these endeavors left us with a very strong debt to equity ratio of 1:8, versus a 1:2 relationship at year-end 2009. Now, we also have the capital we need to more aggressively pursue opportunities presented to Safeguard.

What has made your organization stand out and be successful financially? Safeguard has a very deliberate focus in the way that we deploy capital into certain segments of the market. We do not stray too far from that focus. Because of this focus, we have been able to apply our talents in a variety of direct and meaningful ways, resulting in substantial returns for Safeguard. Deploying capital into areas of the market where we have relevant industry knowledge and expertise is critical to our short- and long-term success.

What is the most important thing you’ve learned in your position? I have learned two very important things in my position ― flexibility and creativity. Flexibility is important because you are never going to be presented with a set of facts straight from a textbook. Before our partner companies were acquired, we did have not much capital to work with. As a result, we had to be very flexible in how we approached business activities. We had to slow down the pace of our deployments and manage our infrastructure differently.

Thinking through a variety of alternatives and being willing to take a path that may not have been the primary course of action directly leads to creative thinking and problem solving. Creativity is key to thinking about strategy and identifying how you are going to take advantage of a changing landscape or turn a challenge into an opportunity. For example, if you’d talked to the executives at Safeguard three years ago, I don’t think we would have even looked at refinancing our debt into a new public debt instrument as a way forward. But by sitting back and evaluating what was most important to the debt holder, we were able to come up with a structure that appealed to them, and allowed us to refinance a portion of that debt in a manner that was also beneficial to Safeguard.

How do you prepare for board meetings and what information is most important for you to present? At Safeguard, there is a set structure for the type of information our board desires. For us, the most important thing is to present to our board is a solid understanding of what is going on at our partner companies. Therefore, we have to make sure that we’ve taken enough time as a management team to understand a number of different elements associated with those companies from the standpoint of financial results, operational efficiencies, opportunities being presented to them or challenges faced. We also actively review their ability of meeting their goals financially and operationally. These items are evaluated quarterly with our board.

In addition to the details associated with our partner companies, I also take a lot of time working with our CEO, Peter Boni, to present a continual update and evolution around our strategy. We take a look at where we are today, where we want to be a year from now and how that translates five years from now. Every quarter, we actively review the progress against our strategy and ensure our management team and board are in sync with our progress. Consideration is then given to potential changes or tweaks needed to address a changing market place.

What advice do you have for other CFOs? Put yourself in a position to be thinking about your business strategically and proactively, rather than just tactically and reactively. CFOs tend to be more effective when they are thinking about the long-term strategy of their business and become a real partner in the operations. CFOs that are more strategic in their focus can be a more meaningful participant in the overall operation of the company and therefore much more valuable to their business.

It’s also important to balance optimism with pragmatism. You need to be pragmatic enough to realize that there are going to be speed bumps in the road. If there is another downturn like we saw back in 2008, ask the question now as to “what will it take to survive?” Can the company weather an economic downturn for 12, 24 or 36 months? Optimism plays a role when viewing challenges as opportunities. It really is a two-sided coin. When you get presented with a challenge, work with your colleagues to change the perspective of the situation from one of stress to one of opportunity.

 

Stephen T. Zarrilli: As Senior Vice President and Chief Financial Officer at Safeguard Scientifics, Steve leverages more than 25 years of strategic, financial and operational experience in raising capital, managing diverse organizations and developing innovative financial and corporate strategies–skill sets which greatly benefit Safeguard’s shareholders and partner companies. He has raised more than $200 million of growth capital through both venture sources and public offerings for a number of businesses, and launched two businesses during the last 15 years, one of which went public in 1999 and another which currently operates to serve middle market enterprises in strategy, capital development and operational management. Prior to joining Safeguard, Steve held a number of financial, operating and board roles in both venture-backed and publicly traded companies.

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Sageworks

Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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