Major Corporations Venture Into The World Of Cashless Deals
Barter, a form of trade that predates the invention of cash, has entered the corporate realm. It’s now a $9 billion a year industry and growing.
Unlike its ancient cousins, corporate barter requires lightning fast reflexes, wide-ranging financial expertise and nerves of steel.
“We’re a substitute for the vulture investor,” says Lance Lundberg, president of Stamford (CT)-based ICON International Inc.
ICON, which had $125 million in revenues last year, is a privately held company that specializes in resolving corporate finance problems through barter.
The field attracts “renaissance finance types” who can “mix and match” from a rapidly expanding universe of excess or impaired inventory—and “still make a profit,” explained Lundberg. The growth of corporate barter is a direct result of the unparalleled expansion of the U.S. economy.
As manufacturers and service providers scramble to keep pace with demand, they invariably make mistakes—they guess wrong about how many laptop computers they can sell in a given business cycle, how many hotel rooms they can rent on a particular holiday, or how much advertising space they can sell in a magazine.
“Because the economy is healthy, companies tend to over-project their sales. As a result, they’re sitting on a lot of excess inventory,” disclosed Peter Benassi, president of the Manhattan-based Corporate Barter Council, a trade group that polices the industry. “And because the economy is good, companies tend to want to advertise.”
Corporate barter can build a bridge between manufacturers with excess inventory and magazines, radio stations and television networks with unsold advertising.
The use of corporate barter can also make it possible for a downsized company to trade its vacant office space for hotel room credits, airline seats or even car rentals.
However, for a barter company to succeed, it must meet two criteria:
1) be acutely aware of market conditions;
2) be capable of accumulating, at a discount, the credits it will use to make its “purchases” at full market value.
Discreet Disposal Necessary
Richard Pippert is a senior vice president at Global Marketing Resources, a corporate firm with annual revenues of more than $70 million, located in New York.
“With corporate barter, our currency is hotel rooms, advertising, airline seats—what we refer to as perishable inventory,” Pippert noted.
For example, if a room in a hotel is vacant tonight, the hotel can’t make up for the vacancy by renting the room twice tomorrow night.
Using these “perishables” as currency, barter firms acquire excess goods and services that result from business errors. “Discreet disposal” is how the Greenwich resident pleasantly describes his work.
“Almost every inventory that a barter company sees has a problem associated with it,” he declared. “If it didn’t have a problem, we wouldn’t be looking at it.”
Paul Kauffman, a leasing broker at Cushman and Wakefield Inc. in Stamford, remembers a barter arrangement that helped Brown & Williamson Tobacco Corp. deal with an unattractive lease.
“It was in late 1995,” recalled Kauffman. “At that time, the Stamford market for office space was very weak. Vacancies were high, there was not much activity and the demand for space wasn’t great.”
But it was also a boom time for mergers and acquisitions. When Brown & Williamson, which is based in Kentucky, bought Stamford-based American Tobacco, one of the first things it did was close down that company’s corporate headquarters at Two Stamford Plaza.
Back in 1985, American Tobacco had signed a long-term lease for three full floors in the building totaling about 67,000 square feet of space.
The problem was this: In 1985, prime office space fetched twice what it would a decade later when the company was bought out. In the parlance of the real estate industry, the fair market value of the lease had fallen to 50% of the book value.
Brown & Williamson then hired Cushman & Wakefield to figure out the best way to dispose of its unwanted space. Cushman & Wakefield, in turn, arranged an agreement under which ICON would take control of the lease.
ICON, for its part, would provide Brown & Williamson with trade credits equal to the book value of the space—even though the market value of the space had fallen by half. ICON could do this because it had accumulated the credits at a discount.
Kauffman’s role was helping to decide whether Brown & Williamson would be better off subleasing the space at fair market value or working a barter deal with ICON.
After an agonizingly complicated series of computations and calculations, Brown & Williamson decided to go the barter route.
“The final verdict was that the trade credits had more value than in the sublease income,” Kauffman confirmed.
In this case, most of the credits offered by ICON were media credits—which meant that Brown & Williamson had to redesign its advertising campaign to get the maximum advantage from the credits.
ICON, which got control of the 67,000 square feet of office space, then hired Cushman & Wakefield to sublet it. “Even though Brown & Williamson still is technically liable for the space, the rent goes to ICON,” disclosed Kauffman.
A Barter Future?
Will corporate barter continue growing? New technology allows barter deals to be tracked with greater accuracy than in the past, offering a greater sense of security to the faint-hearted. But one of the industry’s biggest obstacles remains the inchoate fear of cash-free transactions.
“The most difficult part is that you need to believe that the barter credits are just another form of currency—because if you don’t, you won’t see the economic value,” claimed Marc Rabinowitz, Connecticut area director of entrepreneurial services at Ernst & Young LLP.
“The barter industry solves problems from two sides, sort of like a middle man,” continued Rabinowitz, whose firm provides audit, tax and consulting services to ICON. “They’ll take property, goods or services and find a home for them.”
Benassi, who is also president and CEO of Manhattan-based Media Resource International, sees more growth ahead for his industry. “In electronics, there’s so much change that products become obsolete as soon as they hit the market,” he declared. “It’s the same in fashion. Whatever doesn’t sell becomes a potential barter transaction.”
Lundberg sounds a cautionary note, however. As the scale of barter grows, the high-wire balancing act becomes all the more difficult. “If I’m trading a piece of real estate, with each jump up in terms of size I have to deliver more and more,” he noted.
If a cast-iron stomach is required to play the corporate barter game, that’s fine with him. “I would rather be where there’s a lot of creativity and not much competition,” claimed Lundberg.
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