November 2012 Capital Matters Newsletter

Posted on November 21, 2012

 Will 2013 Witness a Mergers and Acquisitions Boom?

The market for mergers and acquisitions is highly cyclical. After more than 25 years in the business we have seen a lot of ups and downs. Certainly the last 5 years witnessed one of the sharpest declines we’ve witnessed.

Source: Pitchbook

However, recent developments lead us to believe that we could be quickly moving into a period of very rapid recovery that will take the M&A market to new highs both in terms of deal volume and valuations.

In our last newsletter we presented evidence that valuations for good middle-market companies have approached the heady levels seen in the mid 2000s.  Since then we have seen tangible evidence that transaction volume is increasing as well:

•    Axial Market is the leading transaction listing service for middle market M&A transactions.  Axial recently reported a very strong rise in new deal listings in for October 2012

Source: Axialmarket

•    Andrew Ross Sorkin recently publish an article in the New York Times entitled More Money Than They Know What To Do With indicating that the largest private equity firms are expected to become much more aggressive in bidding for mega deals to use their “dry powder” of committed, but unexpended investment funds.  Sorkin indicates that $200 billion of committed capital must be spent over the next twelve months or returned to investors.  As a result he reports that private equity deal volume jumped from $17.1 billion in Q2 2012 to $45 billion in Q3 and that purchase price multiples have jumped in 2012 to 10.6 times EBITDA from 10.3 times EBITDA in 2011.

•    In our own practice we have recently experienced a competitive aggressiveness reminiscent of 2005-2007 between private equity firms competing to buy a large building products distributor that suffered tremendously during the crash, but has recently … read the rest

Categories: Banking, Investment Banking, Mergers and Acquisitions, Middle Market, Monthly Newsletters, Private Equity

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The Bankers Are Way Ahead Of The Regulators

Posted on November 20, 2012

The Financial Stability Board (FSB), a global financial policy group comprised of regulators and central bankers, just released new information on the status of the “shadow banking” industry. First, the FSB reported that from 2002 through 2011 the shadow banking industry grew by $41 trillion. Second, the shadow banking industry now is estimated to have $67 trillion in assets.

Note, as of November 7, 2012, the Federal Reserve H.8 statistical release shows that the total assets of all commercial banks in the United States amounts to a little less than $13 trillion. Third, the United States has the largest amount of shadow banking assets in the world, about $23 trillion.

Note, the share of activity based in the United States “has decline from 44 percent in 2005 to 35 percent in 2011.” The eurozone has $22 trillion in assets while Great Britain has $9 trillion.

What is a shadow bank? Lord Adair Turner, the U.K. regulator that led the FSBs work stated, “If it looks like a bank and quacks like a bank, it has got to be subject to bank-like safe-guards.” So, shadow banking is like pornography, it is what is in the eye of the beholder … in this case the regulator. It looks, therefore, as if we are in for another major round of rules and regulation for the finance industry … worldwide!

Looking for a job? I have seen many, many references to the health industry as the place to be if you want to get employed over the next decade or so. Looks to me like we have another growth industry here! If you want to get employed in a good steady job for an extended period of time become a regulator of the financial industry. Sounds like there are going to be plenty of jobs available and … read the rest

Evolving Financial Institutions

Posted on November 20, 2012

So much of the world is in transition, why do people want the commercial banking industry to be what it was many years ago? This is just not going to happen.

As I have written many, many times, finance is information! We have seen, over the past fifty years or so how the advancements in information technology have contributed, for better or worse, to the innovations that have taken place in financial institutions and financial instruments.

Given the continuing advancements in the information technology field how can we not expect the financial field to continue to evolve? Check out all that is being done in mobile banking these days. At least in my area of the world I am seeing more and more advertisements about mobile banking and what it does for the customer.

And, this is just the ground level. More and more people you talk with and read about claim that they have only gone into a bank office once or twice in the past two or three years. And, the only reason they went into the bank was to complain about not receiving notifications from the bank that their interest rates were being dropped. If this is not enough, read David Wolman’s book, “The End of Money” (Da Capo Press, 2012).

But, who is going to even keep their money in a typical commercial bank? I don’t. I work with an institution that satisfies my banking needs and ties all my financial relationships together so that I can move seamlessly from one asset class to another almost instantaneously.

How about my mortgage? (Yes, I have one!) The commercial bank I know set me up with their affiliated mortgage that immediately sold the mortgage to Wells Fargo (WFC), which now just services the loan because it is owned by Fannie … read the rest