Feedback from the Euroland Forum on small and mid caps

Some great entrepreneurs but some are in very cyclical businesses and the economic context is not helping them

Buybacks are still not done with a willingness to cancel them but always to finance M & A or incentivize management. There is still quite a lot of work to be done toward the education of management of small and mid-caps. Sometimes cancelling treasury shares which have been bought at a very low price should cancelled.

Some companies were not satisfied at all with their share price and their valuation. My counterpoint was that unfortunately on the small and mid-cap segment there has been an outflow which has been hitting hard the French small and mid cap funds. The small and mid cap segment depends a lot on inflows. Another point that I put forward was that in France, financial education is not good at all and we are not encouraging individuals to invest in shares (be it on a regular basis or for retirement). For another company, they thought they would be worth much more in the US. It is probably true but then again for this company the business is not that easy to understand and it seems that when a product works it was not the one that they were expecting. Their balance sheet is solid and they have lots of things going on.

One company asked me what should they do? I told them that if they think that the market is clearly undervaluing them then they should do a takeout offer and exit the market. They are priced at half of their tangible book value. As a counterpart, I would argue that this company is not showing a good enough recurring business (one offs, always something going on and it is difficult to see what their moat is). Balance sheet is solid and they are very stingy.

Clearly the economic context is not great in France as many companies told me that their clients were in a wait and see stance. The best entrepreneurs I saw were very transparent (telling me the things that were going wrong) and had rock solid balance sheets. They are really focused on thinking defense first and trying to be very opportunistic when some good deals come through (a competitor which is lacking cash). Focus on cash is strong and on how to make sure to always have a solid cash position. They also had a big discipline on the price to pay for an M&A opportunity (many said no to a deal as the price were nuts). Their patience should be rewarded…

I was really impressed by the quality of French entrepreneurs that are able to develop their business in a tough economical environment. And let us not forget the amount of rules, taxes they also have to face in France.

Sure some companies could do more buybacks to take advantage of their low valuations but clearly it is not in their DNA as they are entrepreneurs who have more a development and growth mind set.

Many were focused on making their business as recurring as possible and developing BU’s to reinforce this aspect.

Here is the recap of the different companies I met: