LETTERS TO THE EDITOR

Paperwork reduction? What reduction?

Once again CF 7501, that venerable customs form that probably goes back to Alexander Hamilton's time, is being modified.

The history of the form, which was once the primary document to secure release of goods and simultaneously pay your duty, is now simply a repository of data.

So why modify it in this age of electronic and super-speed scrutiny? All of the data elements in the 7501 will already have been vetted by Customs and rest in their computers as well as those of the person making entry. I can only guess that the government wants the importer to retain paper records in the event of an audit or investigation. But the data elements haven't changed, so why rework the form, which will force the importers and/or their brokers to reprogram, especially since the 7501 is pretty rarely referred to? The current entry process obviates its use in a majority of instances.

The answer given is to comply with "Section 508e of the Americans With Disabilities Act." And, I suppose, to change the name from CF 7501 to CBP 7501.

An examination of the form shows that Customs has achieved its mission. The font on the new form is somewhat larger. But the tradeoff is a smaller space on the form to enter critical data, forcing Customs to say that the new form "is being produced as a single page form with a continuation sheet." We are also reminded that "CBP will continue to require multiple copies of the form at time of filing." So much for the paperless world.

And by the way, the new expanded form puts Customs in serious violation of the "Paperwork Reduction Act."

M. Sigmund Shapiro

Chairman

Samuel Shapiro & Co.

Baltimore

Be realistic about M&A valuations

I read with interest Mr. Ben Gordon's article on logistics acquisitions in your Oct. 3 Logistics Special Report. Mr. Gordon makes some interesting points about the current M&A environment in the logistics industry, which is indeed robust. As a strategic adviser and investment banker myself, however, I must quibble with the financial model he uses to illustrate his article.

One can take most of Mr. Gordon's assumptions for the hypothetical company "ABC Logistics" as given, even though ABC's ability to grow its revenue 10 percent per year while maintaining margins is not trivial. Mr. Gordon violates the laws of finance, however, when he suggests the company can use its "operating cash flow" (which I assume he equates with its EBITDA) to pay down the initial debt burden of $50 million by $10 million per year.

The problem, of course, is that without further injections of capital, a company can pay down debt only with free cash flow, which is after interest expense and income taxes. At an 8 percent cost of debt and a 35 percent tax rate, a quick back-of-envelope calculation shows that ABC would have only $3.9 million of free cash flow to pay down debt in the first year.

Assuming that free cash flow grows at the same rate as EBITDA, ABC would have around $25 million of debt outstanding at the end of year 5, not $0. But even this analysis assumes ABC can grow its revenue and profit for five years with no capital expenditures and no net new investment in working capital. Even in an asset-light environment such as logistics, these last two assumptions are unrealistic. What about technology spending?

One may also doubt Mr. Gordon's assertion that it would be easy for a relatively small, asset-light logistics company to find cost-effective debt finance at five times EBITDA, even in today's market. Finally, in my 15 years in the industry, I have yet to find a private equity buyer willing to bet on multiple expansion as part of its initial investment decision. There is no need to exaggerate the potential returns from the industry. Taking most of Mr. Gordon's assumptions but applying common-sense finance practice, an investor who put $30 million of equity into ABC Logistics would still earn a compound return of around 29 percent per year at a (still healthy) exit multiple of eight times EBITDA in year 5. This is certainly attractive enough to bring many private equity buyers to the negotiating table.

As Mr. Gordon correctly states, the buying interest for well-managed logistics companies is indeed quite strong. Potential sellers, however, need to brush the stars out of their eyes when it comes to valuation, or they will spend a lot of time and money and still come away disappointed. As with most things, it is always better to walk into a new situation with both eyes open and both feet on the ground.

Fred Larsen

Managing director

Henley Advisors LLC

New York

For the full story: Log In, Register for Free or Subscribe