THE EQUITY S RESEARCH BY THE ITALIAN MEDIUM SIZED ENTERPRISES: PRIVATE EQUITY, AIM ITALIA MAC OR MTA?

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1 Università degli Studi di Urbino Carlo Bo DIPARTIMENTO DI ECONOMIA, SOCIETA, POLITICA SCUOLA DI ECONOMIA MASSIMO CIAMBOTTI, PAOLA DEMARTINI, FEDERICA PALAZZI THE EQUITY S RESEARCH BY THE ITALIAN MEDIUM SIZED ENTERPRISES: PRIVATE EQUITY, AIM ITALIA MAC OR MTA? Quaderni di Economia Aziendale Editrice Montefeltro 1

2 Abstract The goal of this research project is to verify which advantages and disadvantages are connected to different instruments to raise equity, through which Italian Medium Sized Enterprises (MSEs) could face the global recession, credit crunch, possible entrepreneurial succession and the international competitive challenge. The project s focus is on the necessary change in MSEs capital structure which should shift from a model based on the cash flow and bank debt to a model with higher equity, which will enable them to face the credit crunch and the entrepreneurial succession as well as adequately promote innovation. It has been used an objective and rationale approach based on the analysis of institutional web sites and on the information obtained during some explorative interviews with sector experts. Consequently, the research purpose is to build a theoretical framework, useful to compare three financial options (Private Equity, AIM Italia MAC, MTA), that are still little exploited by Italian firms. Sintesi Il progetto di ricerca si propone di verificare quali siano i vantaggi e gli svantaggi connessi ai molteplici strumenti di acquisizione del capitale di rischio attraverso il quale le Medie Imprese (MI) italiane potrebbero affrontare efficacemente la recessione globale, la restrizione creditizia, l eventuale successione imprenditoriale e la competizione internazionale. La ricerca focalizza l attenzione sulla necessità di modificare la struttura patrimoniale delle MI, la quale dovrebbe transitare da un modello basato sui flussi di cassa della gestione reddituale e sull indebitamento bancario ad un modello contraddistinto da un maggior livello di patrimonializzazione. È stato utilizzato un approccio oggettivo e razionale basato sull analisi di siti istituzionali e sulle informazioni raccolte durante alcune interviste esplorative con esperti del settore. L obiettivo della ricerca è di costruire un framework teorico utile a confrontare tre opzioni finanziarie (Private Equity, Aim Italia Mac, MTA) ancora scarsamente utilizzate dalle imprese italiane. Massimo Ciambotti is Full Professor of Planning and Management Control, Department of Economics, Society and Politics University of Urbino Carlo Bo. Paola Demartini is Full Professor of Management and Accounting, Department of Management Studies University of Rome TRE. Federica Palazzi is Ph.D. in Business Administration, Department of Economics, Society and Politics University of Urbino Carlo Bo. 2

3 Università degli Studi di Urbino Carlo Bo DIPARTIMENTO DI ECONOMIA, SOCIETA, POLITICA SCUOLA DI ECONOMIA THE EQUITY S RESEARCH BY THE ITALIAN MEDIUM-SIZED ENTERPRISES: PRIVATE EQUITY, AIM ITALIA-MAC OR MTA? MASSIMO CIAMBOTTI, PAOLA DEMARTINI, FEDERICA PALAZZI Quaderni di Economia Aziendale n. 17 Editrice Montefeltro 3

4 COMITATO SCIENTIFICO/SCIENTIFIC BOARD Francesca Maria Cesaroni Massimo Ciambotti Paola Demartini Fabio Giulio Grandis Mauro Paoloni SEGRETERIA DI REDAZIONE EDITORIALE/ EDITORIAL OFFICE Dipartimento di Economia, Società, Politica (DESP) Scuola di Economia/School of Economics Università degli Studi di Urbino Carlo Bo/University of Urbino Via Saffi, 42, URBINO (PU) - ITALY Tel Fax: I contributi pubblicati sono sottoposti a doppio referaggio/ Papers have been double-blind peer reviewed before final submission ISBN Copyright 2013 Editrice Montefeltro s.r.l., Urbino Disponibile in versione digitale curata dalla Editrice Montefeltro s.r.l. per conto del Dipartimento di Economia, Società, Politica e su richiesta in versione CD-rom. Stampato presso il Dipartimento nel mese di giugno 2013 e pubblicato sul sito del Dipartimento di Economia, Società, Politica (DESP) dell Università degli Studi di Urbino Carlo Bo Editrice Montefeltro s.r.l. Via Puccinotti, 23 Urbino Italy Tel. e fax Per la presente pubblicazione sono stati adempiuti gli obblighi previsti ai sensi della L n. 106, del D.P.R n. 352 e del DM MiBAC

5 I Quaderni di Economia Aziendale della Scuola di Economia di Urbino Quaderno n. 16 Francesca Maria Cesaroni, Annalisa Sentuti (2012) DONNE E IMPRESE FAMILIARI. QUALE RUOLO PER LE DONNE QUANDO IL LEADER E UN UOMO? Quaderno n. 15 Mara Del Baldo(2012) MISSION, GOVERNANCE AND ACCOUNTABILITY IN ITALIAN CSR- ORIENTED FAMILY FIRMS Quaderno n. 14 Eduardo Barbersi, Selena Aureli (2010) THE ROLE OF CHINESE SMES IN ITALIAN INDUSTRIAL DISTRICTS Quaderno n. 13 Selena Aureli, Paola Demartini (2010) INTERNATIONALIZATION OF CHINESE FIRMS IN EUROPE: THE ROLE OF CULTURAL DIFFERENCES IN THE FUNCTIONING OF A M&A IN THE AUTOMOTIVE INDUSTRY Quaderno n. 12 Mara Del Baldo (2006) LA GESTIONE MANAGERIALE DEL PATRIMONIO ARTISTICO E CULTURALE DELLA CHIESA. L ESPERIENZA DEI MUSEI DIOCESANI NELLE MARCHE Quaderno n. 11 S. Aureli - F.M. Cesaroni - P. Demartini - P. Paoloni SMES FINANCIAL MANAGEMENT INFORMATION AND WEBSITES Quaderno n. 10 Selena Aureli (2006) IMMIGRANT ENTREPRENEURS IN ITALY. DOES NATIONAL CULTURE MATTER? Quaderno n. 9 P. Demartini F. M. Cesaroni S. Aureli (2005) INTERNATIONALISATION AND FINANCIAL COMMUNICATION SKILLS FOR SMALL BUSINESSES 5

6 Quaderni di Economia Aziendale INFORMAZIONI GENERALI I Quaderni di Economia Aziendale sono pubblicati dalla Scuola di Economia dell Università degli Studi di Urbino Carlo Bo su iniziativa di alcuni docenti che insegnano o hanno insegnato l Economia Aziendale in questa Scuola. I contributi pubblicati sono sottoposti a doppio refe raggio. A partire dal numero n. 15 sono disponibili in versione digitale curata dalla Editrice Montefeltro s.r.l. per conto del Dipartimento di Economia, Società, Politica e su richiesta in versione CD-rom. Sono pubblicati sul sito della Scuola e del Dipartimento di Economia, Società, Politica (DESP) dell Università degli Studi di Urbino Carlo Bo. COMITATO SCIENTIFICO/SCIENTIFIC BOARD Francesca Maria Cesaroni Massimo Ciambotti Paola Demartini Fabio Giulio Grandis Mauro Paoloni SEGRETERIA DI REDAZIONE EDITORIALE/ EDITORIAL OFFICE Dipartimento di Economia, Società, Politica (DESP) Scuola di Economia/School of Economics Università degli Studi di Urbino Carlo Bo/University of Urbino Via Saffi, 42, URBINO (PU) - ITALY Tel Fax: Editrice Montefeltro s.r.l. Via Puccinotti, 23 Urbino Italy Tel. e fax URL 6

7 THE EQUITY S RESEARCH BY THE ITALIAN MEDIUM-SIZED ENTERPRISES: PRIVATE EQUITY, AIM ITALIA-MAC OR MTA? 1. Introduction 1 In the last decade medium-sized enterprises (MSEs) have become more visible in our economic system, which has traditionally been subdivided into small and large firms. The MSEs are difficult to define and have been called the Italian forth capitalism s enterprises (Colli, 2002). The Italian forth capitalism is different to public capitalism, which consists of firms controlled by the state, to the private capitalism of large companies and to the capitalism of the industrial district and small firms. There are several difficulties to overcome in order to evaluate corporate size because of the intrinsic open-endedness of the firm size s concept (Ciambotti, 1984, p. 96). A reference point for academics is the European Commission s definition which establishes the following quantitative standards to define the medium-sized manufacturing enterprise: there should be between employees, a turnover of not more than 50 million euro and total assets not exceeding 43 million euro. This definition, which only uses the quantitative standards, represents the starting point to examine the MSEs qualitative characteristics in depth. However, this firm type possesses its own historic identity: it was established during the 1930s, developed during Italy s economic boom years and consolidated during the 1970s. Today in Italy we have about 3,200 medium-sized enterprises (Mediobanca, Unioncamere, 2012) 2, located in the North-east, North-west and centre of Italy, which mainly 1 The paper is part of a common research project by the three authors. Ciambotti wrote par. 1, Demartini wrote par. 3 while Palazzi wrote par. 2, 4, 5, 6 and 7. 2 The data gathered in the 11 th edition of the annual survey carried out by Mediobanca and Unioncamere and published in the April 2012, covers the period The investigation regards the Italian manufacturing medium-sized enterprises in the form of a limited company, with a number of employees between , an annual turnover of million euro, excluding the companies controlled by large firms or foreign enterprises. 7

8 work in the made in Italy 3 sectors (62.1% of total turnover and 66.9% of total exports). The MSEs success is based on the capacity of interrelating the characteristics of both small and large firms, benefiting from the advantages of both types of firms (Varaldo et al., 2009, p. 148). These include the following elements: the combination of entrepreneurship and management; the made in Italy tradition combined with the structured research and innovation models; the preservation of the hard link with the industrial and district provenance along with the development of the international networks, opened both upstream and downstream; the increasing formalization and standardization of structures, procedures and processes developed in observance with maximum organizational flexibility; the internal market s defense effectively matched to the international positioning strategies and finally, the international process which has been particularly swift. The Italian MSEs are mainly family-run businesses (Colli, 2003; Gagliardi, 2004) and entrepreneurial/personal firms 4. The family business model predominates medium-sized enterprises worldwide (La Porta, Lopez-de-Silanes, Shleifer, 1999). The capital structure is deeply affected by the company structure in which the ownership is concentrated in the hands of the entrepreneur/family. The firm mainly uses the cash-flow produced by the corporate management and the short-term banking debts through traditional loans (Aguiari, Venanzi, 2007; Coltorti, 2007). Today this model of financing may be called into question because of three important events: the global recession, the entrepreneurial succession and fierce international competition. The global economic-financial crisis has troubled the whole globe since The advanced countries are suffering the heaviest consequences with an alarming unemployment rate, especially among young people, as well 3 The food industry, wood-working, furniture, tiles, metal products, machineries, equipment, electric domestic appliances, boats, motor-cycles, bicycles, sports products, textiles, the fashion industry (Fondazione Edison, 2005). 4 In the entrepreneurial firm, the ownership and the decision making power are in the hands of the entrepreneur whereas in the family business the ownership and control are shared among the members of one or more family units The entrepreneurial firm could be considered as a pre-family business: the wide diffusion of family businesses shows that the founder seeks to continue the enterprise through children or relatives (Marchini, 2000, ). 8

9 as a strong decrease in family consumption that has returned to levels typical of the 1990s. In addition enterprises have been brought to their knees by decreasing turnovers, difficult to collect trade credits and the credit crunch 5. «The entrepreneurial succession is a complex, dynamic and multiform process» (Cesaroni, 2011, p. 15) that regards an increasing number of firms. The monitoring unit AUB s report on the medium-sized and large family businesses shows that in Italy 46.3% of managers are more than 60 years old and 18.6% over 70. Finally, the challenges of international competition require higher international performances, which must be achieved first of all through innovation such as product innovation, process, organizational and trade innovation and so on. It needs to invest in the research and development expenses (R&S) in order to innovate and Italy is unfortunately in the last position with an expense equal to 1% of GDP (Gross Domestic Product) compared to 2% of the European Union (in Germany the research and development costs reached 3% of GDP) (Rossi, 2013). The goal of this research project is to verify which advantages and disadvantages are connected to different instruments to raise equity, through which the MSEs could face the global recession, credit crunch, possible entrepreneurial succession and the international competitive challenge. The project s focus is not on the MSEs capacity to find the solution to crisis, but is on the necessary change in MSEs capital structure which should shift from a model based on the cash-flow and bank debt to a model with higher equity, which will enable them to face the credit crunch and the entrepreneurial succession as well as adequately promote innovation. It has been decided to use an objective and rationale approach based on the analysis of institutional web-sites (www.aifi.it and and on the information obtained during some explorative interviews with sector experts. Consequently, the research purpose is to build a theoretical framework, useful to compare three financial options (Private Equity, AIM Italia-MAC, MTA), that are still 5 In the September-November quarter 2012 the firms loans decreased by 4% (-0.8% for family loans) because of the negative economic circumstances and the worsening of real estate market. The price money went up slightly to 3.6% (in November 2012 the gap between the financing medium costs to Italian and German firms was equal to 1.4%) because of the concerns over the increasing riskiness of financing operations (Banca d Italia, Eurosistema, January 2013). 9

10 little exploited by Italian firms, although there is a strong need to increase the capitalization in this crisis context. 2. Debt or equity: MSEs theory and practice 2.1. The financial theories Among the neoclassical financial theories developed starting from Modigliani&Miller s work (1958) about the optimal financial structure, the trade-off theory (Chen, Kim, 1979; Bradley, Jarrel, Kim, 1984; Kane, Marcus, McDonald, 1984), the agency theory (Jensen, Meckling, 1976) and the pecking order theory (Myers, Majluf, 1984) are the most referred to by academics to interpret the SMEs financial choices. Among these three, the pecking order theory is the most suitable to explain the MSEs capital structure (Venanzi, 2010, p. 133), in accordance with which the firms choose to finance, at first, resorting to internal resources and if such resources are insufficient, to external sources. The most important financial resource is the cash-flow produced by the corporate management. If the cash-flow is not sufficient to finance profitable investments, the enterprise resorts to debt and, in the last place, to equity. In public companies, the management s preference for internal sources is due to the desire for independence from both financial markets and the bank system. In the non-public companies, which are the majority of Italian MSEs, the entrepreneur doesn t accept external subjects in the corporate structure, because he wants to maintain the firm s control. Therefore the preference for inside resources could affect investment choices, leading to the inadequate use of the firm s economic potential, considering that the decision maker favors the projects which require lower financial resources. Furthermore, the preference for internal resources is also due to other explanations such as: communication problems between firm and market; the lack of predictability in the financial markets and the higher costs of external financing sources. Since the 1980s, together with the academics focus on the world s small and medium-sized enterprises, a new approach to finance has emerged, defined as the entrepreneurial approach. The entrepreneurial finance s studies focus on the entrepreneurial process (Colot, Michel, 1996; Gibson, 1992, 1993) and on individual preferences as factors that affect corporate finance such as the values, ambitions and goals of the entrepreneur, the risk propensity, the evaluation of opportunities and environmental threats 10

11 and aversion to outside control (Barton, Matthews, 1989; Hutchinson, 1995; Cressy, 1995; Merikas, Bruton, Vozikis, 1993; McMahon, Stanger, 1995; LeCornu, McMahon, Forsaith, Stanger, 1996; Cressy, Olofsson, 1997). Some recent theoretical contributions have highlighted different specific factors which affect the SMEs capital structure, for example the phase of economic cycle, the industrial sectors, the corporate size, the fiscal shield and national and firm-specific factors: Michaelas et al. (1999); Lopez- Gracia and Aybar-Arias (2000); Lopez-Gracia and Sogorb-Mira (2008); Hall, Hutchinson and Michaelas (2004); Psillaki and Daskalakis (2009); Bhaird and Lucey (2010); Venanzi (2010). Another current uses the firm life cycle as a model to analyze the SMEs financial structure, in order to prove that the financial needs and options change together with increasing corporate size (Berger, Udell, 1998; Gregory, Rutherford, Oswald, Gardiner, 2005; M. La Rocca, T. La Rocca, Cariola, 2011). Finally, the MSEs are mainly family-run businesses and the family institution exerts a critical role that affects all of the corporate decisions, including financial decisions thus defining a special financial logic (Romano, Tanewski, Smyrnios, 2000; Gallo, Vilaseca, 1996, 1998; Coleman, Carsky, 1999; Gallo, Tàpies, Cappuyns, 2004; Wu, Chua, Chrisman, 2007; Lopez-Gracia, Sanchez-Andujar, 2007; Morresi, 2009) 6. The international literature s review, dedicated to the definition of SMEs capital structure, inspires some important considerations. The SMEs are characterized by the strong presence of an entrepreneurial figure (represented by a single entrepreneur or an entrepreneurial group or one/more entrepreneurial families), whose values, motivations, goals, risk aversion, personality, preferences, work experiences and aversion to loss of control have a significant impact on the definition of corporate financial structure. Therefore the entrepreneur-person represents one of the most important explicative variables of the SMEs financial decisions The financial structure of the European medium-sized enterprises Now we propose the analysis of the European MSEs financial structure (Tab. 1). The comparative analysis highlights the existing differences 6 The financial theories dedicated to SMEs are analyzed in depth by Palazzi, 2012, chapter 3. 11

12 among several countries with regards to investment choices and financing decisions adopted by the manufacturing MSEs localized in Italy, Germany, France, Spain and Portugal in In 2010, capital is mainly invested in current assets with a percentage of 68 for France, 66 for Germany, 64 for Italy, 59 for Spain and 56 for Portugal. It is interesting in showing the difference in the current assets structure of the first three countries: in Italy, the main element is represented by the trade credits which amount to 33%, to follow in order of importance, the inventories equal to 18%; in Germany, the most relevant item is represented by the inventories that amount to 26%, followed by the other credits equal to 16% and the trade credits for 14%; in France, the most significant elements are the trade credits (24%) and the inventories (22%). The fixed assets are invested in tangible assets (30% Portugal, 29% Spain, 25% Italy and Germany, 22% France). To follow, the resources are allocated to financial assets (Portugal is at first place with 11% and Italy is in last place at 6%) and the residual resources are dedicated to intangible assets (4% Italy and France, 3% Portugal and Spain, 2% Germany). With regards to financial sources, the equity finances little more than onethird of invested capital, exactly 45% in Spain, 42% in France, 40% in Portugal, 39% in Germany and 35% in Italy. The remaining part is financed by debts, mainly short-term debts. In all five countries examined, the long-term debts represent the less used financial resource. In greater retail, the short-term debts are extensively used by Italy with an amount equal to 48%, followed by Portugal with 42%, Spain, France and Germany with 37%. In Italy, the most significant items among short-term debts are trade debts (23%) and bank loans (15%). Italy is the only country which massively resorts to trade debts and short-term bank debts to finance business. In the five countries, the MSEs operate with a well-balanced capital structure, in which the equity totally finances the fixed assets, and the short-term debts, together with long-term loans, finance the current assets. Compared to 2009, the MSEs financial structures do not show important changes. The only ones that deserve to be mentioned are the short-term bank debts which decrease lower than 1% and the trade debts which increase to around 0.5%. Undoubtedly, Italian MSEs show some important peculiarities: they have the lowest level of equity, although sufficient to cover the fixed assets. Current assets are characterized by two significant items that are the trade 12

13 credits and the inventories; the main financial sources are represented by the short-term bank loans and the trade debts. Tab. 1 The manufacturing MSEs capital structure in Italy, Germany, France, Spain, Portugal ( ) Balance sheet Italy 2009 Italy 2010 Germany 2009 Germany 2010 France 2009 France 2010 Spain 2009 Spain 2010 Portugal 2009 Portugal 2010 Intangible fixed assets Tangible fixed assets Financial fixed assets FIXED ASSETS Inventories Trade receivables Other receivables Deferred assets Other financial assets Cash and bank CURRENT ASSETS TOTAL ASSETS Capital, reserves and earnings Revaluations, adjustments on financial investment TOTAL EQUITY Provisions Bonds and similar Amounts owed to credit institutions Other financial creditors Other non financial creditors

14 NON CURRENT LIABILITIES Bonds and similar Amounts owed to credit institutions Other financial creditors Other non financial creditors Trade payables Payment received on account of orders Deferred liabilities CURRENT LIABILITIES TOTAL BALANCE SHEET * The firms with total turnover between 10 and 50 million euro are considered medium-sized enterprises. Source: processing on Bach Database , (05/03/2013). The details of Italian MSEs capital structure are partly attributable to some country-specific factors. Italian firms operate in the traditional and divided industrial sectors, with a low level of capital intensity. The Italian bank system has always been available to support the SMEs short-term debt policy (until the global crisis explosion). The fiscal system has for a long time favored the recourse to debt instead of equity, although in the last few years there has been an inversion. Moreover, the Italian financial system exhibits some anomalies related to instruments, intermediaries and markets to make the recourse to the public sector difficult in order to acquire financial resources (something else could change with the technical standards for implementation of the laws 134/2012 and 27/2012) 7. 7 The law 134/2012 ( Decreto Sviluppo ) and the law 27/2012 ( Decreto Cresci-Italia ) promote the diffusion of instruments called finance bill and mini-bond among nonlisted SMEs, reducing the fiscal and civil limits. The finance bill and mini-bond have to be issued and undersigned and circulate in favor of qualified investors. The two laws regard limited, cooperative and mutual insurance companies, non-listed, excluded banks and micro-enterprises (as defined by European Commission). 14

15 To sum up, the Italian MSEs cover the financial requirement by mainly using cash flow and short-term bank debts. They are unwilling to open equity to outside subjects because they fear losing control. The bank is without a doubt the first interlocutor (often the only one) to gather the financial resources by SMEs. Unfortunately however, the bank-firm relationship is considered to be of poor strategic value. The MSEs turn to numerous banks, without building a strong and collaborative relationship with credit institutions. However the MSE should transform its relationship with credit institutions according to a strategic perspective, by valuing the bank-firm relationship through informative transparency. Thus, the bank could become a strategic partner able to employ an effective power of control and to supply the adequate additional competences. The financial intermediary should become essential to accompany the enterprise towards opening equity to outside subjects in order to support growth strategies and allow the process of ownership replacement. Yet in Italy, the banks have mainly worked on the retail sector, neglecting corporate finance, venture capital and investment banking 8 (Calcagnini et al., 2005). Therefore, the evolution of the bank-firm relationship requires the qualitative development of the Italian financial intermediaries that should transform them into authentic partners, able to take advantage of all benefits resulting from the direct and long-lasting relationship between local bank and firm. In order to create the general conditions for a harmonious development of the Italian economy, even though there are improvement potentials both for Italian businesses and for financial intermediaries, it is useful to remember that the financial theories developed in the Anglo-Saxon literature and based on the centrality of stock exchange market, do not find validation in the Italian reality, which is characterized by some specificities. 3. Corporate finance in the Italian capitalism model The Italian and international literature, that analyses the role of the financial system in the firm growth process, is based on the principles 8 The retail segment works on the saving collection and the family financing. The corporate segment is devoted to finance businesses. The venture capital finances the start-up or the expansion process of firms. Finally, the investment banking works on the firm financing and on the investment operations. 15

16 developed by the evolutionist model approach and by the discontinuity model current, but they generate uncertainties and doubts. In accordance with the evolutionist models, the firm s growth and financial development processes are symmetrical and they are attached to the firm life cycle (Previati, 1988; Berger, Udell, 1998). During the firm evolutionist process, the role of the financial intermediaries varies and becomes more complex, and the financial sources change in order to react to the new needs imposed by the growth. The discontinuity models define two theories: the normal time theory and the discontinuity time theory. In the economic consistency phase (the normal time ), the financial structure imbalanced towards the bank debt could be effective anyway. In fact, the updated bank debt is able to support the business, functioning as equity. In the environmental or strategic turbulence phase (the discontinuity time ), the equity becomes important together with the financial intermediaries, in order to diversify the financial sources to support the growth or internationalization processes. We would like to highlight that the equity opening, suggested by the evolutionist model, is not compulsory for the growth of Italian firms. Some empirical research carried out on the Italian MSEs, demonstrated the existence of numerous successful enterprises which evolved covering the financial requirement with cash flow, traditional bank debt and trade debt. Some academics proposed a new model to explain this Italian capitalism, called personal capitalism (Bonomi, Rullani, 2005). It is not based either on the firm-market relationship, or on the firm-bank relationship (the market has to guarantee the efficient allocation of financial resources; the local bank has to support the firm s development). Tab. 2 The capitalism models and the corporate finance goals The economic system The corporate finance goals The main financial sources The market capitalism, based on the centrality of the financial market (Anglo-Saxon model) Bank capitalism (German model) To maximise the shareholders profit The finance has to guarantee the firm s growth, as an institution to defend. 16 Equity Debts from the main bank Personal capitalism (Italian The finance is instrumental to Debts from numerous banks,

17 model) Source: our elaboration. the entrepreneur s goals and projects cash flow and trade debts In the Italian personal capitalism, the decision maker plays a fundamental role, affecting all aspects of management. Seeing as the Italian entrepreneur has not the single objective of maximizing profit, but is driven by other goals such as the need for achievement, prestige and status, he considers financial decisions as instrumental to reaching personal objectives. Secondly, for a lot of entrepreneurs, the expectations of the local stakeholders (employees, trade partners, institutions, community), where the firm is located, are very important. Since independence and autonomy are the fundamental elements of the entrepreneurial action, it is clear that there is difficulty creating the consolidated and long-lasting relationships with a reference bank and the lack of interest towards the equity market, as the outside sponsor is a subject that controls the entrepreneur s choices and limits his discretional spaces. Now the question is if this model is able to persist and meet the new challenges of the economy and if the reduced ability to use the cash flow and the family capital accumulated during the Italian economic boom means that the need for equity to support innovative projects could push the more dynamic MSEs towards the equity market. 4. The corporate finance role in the Italian MSEs growth process The interesting study of Caselli (2005) investigates the existing relationship between the more dynamic MSEs growth and the financial intermediaries. The results call both the evolutionist model s principles and the discontinuity model s rules into doubt, observing the presence in Italy of excellent MSEs with poor finance. This mismatch is also confirmed by other empirical research: - Numerous successful firms have resorted to financial intermediaries in a residual way, not within a strategic perspective (Forestieri, Invernizzi, 1999); - Many excellent enterprises have expressed a low level of satisfaction with regards to financial intermediaries and the Italian financial system (ABI-Prometeia, 2000; Caselli, 2005); 17

18 - A lot of businesses develop using inside financial resources exclusively without having to resort to outside resources in Italy, France and Germany (Caselli, Gatti, 2004; Storey, 2003); - The propensity to quotation by the growing MSEs is scarce in Italy, but in France and Germany it is still lower (Bank of England, 2004; Urban, 2003). Caselli proposes an initial interpretative hypothesis in order to understand the existing distance between theory and practice, considering that different financial growth processes exist. In particular, he identifies two growth processes with different structures which predict dissimilar financial logics: a finance based growth process or a firm based growth process. The businesses whose financial management is consistent with the evolutionist logic (finance based) have the following characteristics: - They resort to specific financial instruments in order to satisfy the needs determined by the growth process or a structural discontinuity; - They create a trusted relationship with financial intermediaries and the financial system; - They have a complex capital structure, with diversified financial sources, not coming from the founder owner family; - Finally, in some cases, the financial function is highly formalized and autonomous in respect to directorate-general. On the other hand, the enterprises which conform to the model of excellent firms with poor finance (firm based) present the following specific features: - They have recourse to short-term bank debts, cash flow and equity provided by the owner family; - The relationship with banks is traditional. The enterprises turn to numerous banks, consolidating the relationship with only some of them and they reserve the right to easily change the intermediary; - The financial function dresses a marginal role inside the firm s organizational structure by supporting the directorate-general. In some cases, it is not well-identified and autonomous. To sum up, a unique development model for Italian MSEs does not exist. The factors to consider in order to understand and explain the reasons for choosing a finance based process or a firm based process are varied - some of them are objective and the other ones depend on the decision maker. For instance the financial requirement and covering times; the capital intensity 18

19 of sector; the nature and structure of current assets; the financial culture of founder and the entrepreneur s integration in the financial community. This differing financial approach is confirmed by a recent empirical research conducted by Palazzi (2012) in which two types of MSEs emerge: the autonomous gradual and harmonious developing MSEs and the autonomous fast developing MSEs. The autonomous gradual and harmonious developing MSEs, have undergone a growth and development process with the following characteristics: gradual, harmonious, systemic, without huge dimensional jumps or organizational disruption, with a use of the inside financial resources and short and long-term bank debts. These firms, with the passage of time, have created a balanced capital structure, characterized by equity which totally finance the fixed assets and by a low level of debts, thanks to a high cash flow hardly taken away from corporate purposes. The autonomous fast developing MSEs are fewer than the first type and they use the corporate finance as an instrument for growth. The growth is characterized by significant dimensional jumps and important organizational changes which happen quickly. The abundant financial resources, predominantly coming from the financial markets as both equity and debts, support the ambitious development projects, that the cash flow is unable to sustain in brief times. These are two alternative ways to finance development: the first (gradual and harmonious development) is more widespread and more coherent with the history of Italian capitalism; the second (quick development) is less widespread and seems to conform to Anglo-Saxon capitalist rules. 5. The equity market s role in the Italian MSEs growth process Considering that the covering traditional instruments of MSEs financial requirement (cash flow and bank debt) could no longer be adequate on a quality and quantity level to finance competitive growth (Massari, 2007), especially in this period of deep economic-financial crisis, we focus our attention on the instruments to raise equity: - The equity s opening to a Private Equity operator 9 ; 9 Instead of listing stocks on the regulated markets and offering them to the money saver public, it is possible to allocate the stocks to a specialized financial intermediary, who carries financial resources, professional experience and technical-managerial competences. The institutional investor is a temporary partner, whose goal is to realize a profit on the occasion of shareholding transfer (the private equity generally expect a profit equal to 25%- 19

20 - Listing on the AIM Italia MAC 10 ; - Listing on the MTA of Borsa Italiana 11. When a medium-sized enterprise faces the entrepreneurial succession process, it might need to resort to equity coming from outside subjects to the original entrepreneurial group, for example in the following cases: the search for partners who replace some minority shareholders who are no longer interested in the entrepreneurial project; the search for partners with managerial competencies to favor the qualitative and cultural development and the willingness to pay off the corporate business, in full or partially, because of a lack of successors. If the medium-sized enterprise would like to undergo a qualitative and quantitative development process, the equity could be an instrument that allows it to achieve its growth goals more easily and quickly. Furthermore 30%). The way out channels are three: the company quotation in the stock exchange market; the shareholding transfer to a industrial partner or another financial intermediary; the shareholding repurchase by the original entrepreneurial group. The purposes of private equity participation are numerous: in the start-up companies with high development potentialities (early stage financing); investments in businesses with outside or inside growth projects (expansion financing); investments to support the owner reallocation, paying off the old partners (replacement capital); to concentrate the ownership of a family business among few members of family (family buy-out); to allow managers and employees to acquire the ownership of firm in which they work (management buy-out; employee buy-out); investments in companies addressed to quotation (bridge finance) (www.aifi.it). 10 AIM Italia MAC is the Borsa Italiana market dedicated to Italian SMEs with high growth potential. The market was created on 1 st March 2012 through the merger of AIM Italia and MAC (Alternative Investment Market), with the view to rationalizing the offer of the markets dedicated to SMEs and proposing a single market conceived for Italy s more dynamic and competitive SMEs. AIM Italia is based on the one hand on a formula that leverages on the know-how obtained in the UK in over 15 years of experience on AIM and, on the other hand, on the specific needs of Italian entrepreneurial system. 11 MTA is the Italian Market where shares, convertible bonds, warrants and option rights are traded. It is dedicated to mid and large size companies that meet the best international standards. MTA supports companies in raising domestic and international financing from institutional and professional investors on the one hand and from retail investors on other, and it has always registered high liquidity performances. Companies are admitted to MTA on the basis of both formal and substantial requirements. Among the formal requirements, a capitalization of at least of 40 million and a free float of at least of 25% (35% in the case of STAR companies) are required. The substantial requirements also include having a sound and clear strategy, a good competitive advantage, a balanced financial structure, the management autonomy and all of the aspects which contribute to improving the company s ability to create value for the investors. 20

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