Is Industry 4.0 the New DotCom Boom?

Posted on April 3, 2017

Fear stalks the land.  The Robot Apocalypse is nigh, destined to steal our jobs and our future.  Worse yet the machines are made elsewhere (Germany, Japan, even China) and America is being left behind in the race for manufacturing prowess.

We’ve heard this story before.  In the late 1980s, the U. S. computer memory industry had been decimated by Japanese and Korean competition.  To the Cassandras, this meant that the U.S. had forever lost the global economic race and was destined to become a second-rate power.

Nothing could have been further from the truth.  The prerequisites for U.S. global dominance of the technology world were already in place.  Within a few years, U.S. prowess in personal computers, microprocessors, and digital networking would lead to a capital investment boom and a stock market bubble not experienced since the 1920s.  Stock market fluctuations notwithstanding, the global growth of the Internet has not abated since.

For all its impact, the Internet has touched only a relatively small portion of human existence, focused primarily on media, entertainment, telecom and more recently retailing and finance.  The larger world in which we live, the world of things and physical interactions has, until now, been only lightly touched.  But that is going to change – and change in a huge way.

Imagine Amazon on Steroids

The world of digital automation is at the same stage as the internet in 1993, when the Mosaic browser was introduced and we first discovered the wonders of the World Wide Web.  The technologies are in place for a boom that will transform the global economy and, in the process, create new opportunities for better jobs and better lives.  And once again the U.S. is asserting its leadership role in developing the critical technologies.

Today Amazon utilizes highly advanced predictive analytics and automation tools that plan … read the rest

IS THE M&A BUBBLE ABOUT TO POP?

Posted on April 20, 2015

(Originally Published on Axial Forum)

The answer may surprise you, but first a bit of background. There have been signs of financial bubbles throughout global markets: US price/earnings multiples are relatively high, the Chinese equity market is on a tear notwithstanding signs of an economic slowdown, M&A valuations remain near record levels and so on. But, that’s not the whole story.

What is a bubble anyway, you might ask? The simple answer is a bubble occurs when the price of an asset class is bid far beyond its real economic value, typically as a result of mass hysteria, delusion, or misinformation. Bubbles tend to last longer than rational investors anticipate, which is why most short sellers don’t wind up billionaires.

You don’t have to look hard to find recent examples of burst bubbles. Oil is down more than 50% from its 2014 peak. Its drop was even sharper in 2008-2009 when it dropped 65% from peak to trough. Gold, the sure fire inflation hedge, is down almost 40% from its 2011 peak and could still be in a downtrend. These were big events reflecting what has been called the end of the commodity super cycle. Yet both the global and U. S. economies continue to grow.

Many claim that the U. S. equity markets are in a bubble. Yet there is little evidence of any large-scale delusion that is typically associated with market highs. On an inflation-adjusted basis, the S&P 500 has only now returned to its peak level reached 15 years ago at the height of the Dot Com boom and the inflation-adjusted NASDAQ remains almost 28% below its 2000 peak.

While excess leverage can potentially cause future pain, I would argue that the current M&A leverage and resulting high valuations are a realistic response to the “new normal” of very low … read the rest

Categories: Economics, Federal Reserve, M&A, Mergers and Acquisitions, Private Equity, Valuation

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How Will the Market Drop Affect Middle-Market M&A?

Posted on October 16, 2014

We’ve previously reported that 2014 has witnessed a strong market with record valuations for many middle-market merger and acquisition transactions. This market strength has coincided with a powerful boom in public equity valuations as the S&P tripled from its 2009 lows. As the public equity market takes a breather, it’s time to consider the possible impact of a more significant equity market correction on middle-market M&A.

First, let’s take a look at the reality of the current situation – we are not in bear market territory for the overall market. That requires a 20% decline in value for the major Averages and as of this writing (October 14, 2014) we have only seen a drop of approximately 6%-7% in the broad market indices (S&P and Dow). For some specific sectors, however, this situation is not so sanguine. The energy sector, as measured by the XLE Energy Sector SPDR is now down more than 20%, offsetting gains in other sectors from the reduction in energy prices.

We certainly don’t have a crystal ball: while there is plenty of reason to believe that the current sell-off will continue for a while, we can make a good case that the market will move to new highs following the current sell-off. This has happened before; following the collapse of the Russian Ruble in 1998 and amid fears that one of the leading hedge funds of the era, Long Term Capital Management, would fail, the S&P suffered a precipitous 20+% drop from about 1200 to 950 in the summer of 1998.  Yet the market quickly recovered and over the following 19 months the S&P climbed approximately 60% to an all-time high of 1500 in March of 2000.  A similar trajectory today would show the S&P at 2500 and the Dow at 22,000 by the spring of 2016.

With that … read the rest

Categories: Business Acquisition, Business Sale, Economics, Investment Banking, M&A, Mergers, Mergers and Acquisitions, Middle Market

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Knowing When to Fold ‘Em

Posted on August 26, 2014

You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
Know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done

If you’re a Baby Boomer, you remember well hearing Kenny Rogers’ iconic hit, The Gambler.  If you’re like me, you’ve often wondered how Kenny’s advice might be applied to important business and investment decisions.  If you’re a business owner who has survived our generation’s version of the Great Depression, you need good counsel more than ever.

Perhaps you’re feeling pretty good about your prospects – business is improving and profits are as high as you’ve ever enjoyed.  Is now the time to go all in? Or is it time to cash your chips and leave the table for new faces?  The story below presents a dilemma faced by many business owners.  Names, industry identifiers and other client specific facts have been changed to protect confidentiality, but the dilemma described below is all too real and immediate for many business owners.

Our friend Frank Mayfield (not his real name) recently approached us with a dilemma.  Frank founded Limbtronics, a medical device manufacturer, thirty years ago to provide leading orthopedic doctors with specialized tools for performing innovative surgeries on damaged joints and ligaments.  Over time, he expanded into manufacturing surgical implants for complete joint replacements.  The business has been good to Frank and in 2013 Limbtronics had a record year with revenue of $28 million and pretax profits of more than $5 million.

Over the past fifteen years, Frank has seen several of his competitors acquired by global orthopedic giants such as Medtronic, Stryker, Smith and Nephew, and others.  He’s been approached a number of times, but never felt the time was … read the rest

Is This The Summer of 2007?

Posted on August 13, 2014

(Originally Published on Axial Forum)

The summer of 2007 was a great moment.  We were enjoying one of the strongest booms in both the debt and equity markets that any of us had experienced in our lifetimes.  Just the sort of markets we’ve been enjoying for the past year or so.  The leveraged lending markets have fully recovered from their low point following the market crash of 2008 and 2009 and volume reached a new high in 2013.  While market activity declined slightly in the first half of 2014 from the prior year, current activity levels remain very high.

The question of the day:  Are we, like Bill Murray in Groundhog Day, destined to endlessly repeat this cycle with limited ability to prevent a repeat of the disaster that befell us in 2008-2009.

We’ve just interviewed one of the world’s leading authorities on the private debt markets to help us better understand the current state of the debt markets and what this portends for the level of deal activity going forward.  Randy Schwimmer was a pioneer in developing middle market loan syndication markets in the 1980s, leading the effort for what is now J.P. Morgan and later BNP Paribas.  With a small group of partners he formed Churchill Financial in 2007.  They were successful in raising a $1.2 billion loan fund before the financial crash closed the markets and were left with more than $500 million of dry powder after the crash.  Leveraging this success, they were acquired by Carlyle in 2011 where they began building that firm’s private debt business.

Randy has now left Carlyle to restart his weekly publication covering the private debt markets, which is now called The Lead Left.  This has been a must read for years for anyone who wants to understand this arcane and somewhat opaque, … read the rest

A Whiff of Inflation – M&A Valuations Lead the Way

Posted on July 17, 2014

(Originally Published on Axial Forum)

Since the 1970s, many of us have feared the threat of inflation looming just around the corner. Within the past year, economists and central bankers have led us to believe the inflation dragon has been permanently relegated to a dark hole, never to rain fire on the kingdom of men. We’re told that deflation is the real threat and that governments can continually run large deficits without reawakening the dragon. Recently, reality has intervened, however, to remind us that economists and central bankers aren’t infallible. U. S. Core CPI and global consumer prices have taken a sharp turn upward.

While this rate of price increase will have profound implications for business owners if it continues, that’s a story for another day.

Our story here affects these entrepreneurs more directly. Inflation comes as no surprise to those of us in the M&A business. We have watched for some time as the M&A market reheated and deal valuations reached levels not seen since 2007 – the peak of the financial bubble. We now have strong confirmation that this trend is not reserved solely for the megadeals on CNBC.

 

For larger deals that confirmation comes from Pitchbook which reported last week that, for the first half of 2014, average deal valuations reached an all time high of 11.5 times EBITDA.

 

 Median EBITDA Multiples for Buyouts (H1 2014)
For smaller buyouts, the story is the same. Andy Greenberg, CEO of GF DATA®, is in a unique position to understand middle market M&A pricing trends. His company maintains a very comprehensive database of actual transaction values in the sub $250 million marketplace. In our recent interview, Andy shared his perspective confirming our belief that lower middle market M&A purchase multiples have reached historically high levels over the past 12 to 18
read the rest

Investing In An Age Of Transient Competitive Advantages

Posted on August 24, 2013

John Mason – Originally Published at Seeking Alpha – Reprinted with Authors Permission

In this article I will review the book “The End of Competitive Advantage,” by Rita Gunther McGrath, published by the Harvard Business Review Press in 2013.

I like to think of myself as a “value investor.” That is, I believe that I invest in quality companies that are underpriced. In terms of the quality of the organizations I like to invest in, I look for firms that have established a competitive advantage in their industries and are earning at least a 15% return on equity, after taxes. To judge the quality of management and its staying power, I look for those organizations that have a sustainable competitive advantage, defined as earning a 15% return on equity, after taxes, for a period of five to eight years. And, to capture the fact that a stock may be underpriced, I look for a low price/earnings ratio.

Other factors that have been important in my analysis are the industry share the company achieves and protects and the stability of this share over time. Of course, these are the quantitative factors and must be supplemented by other factors, such as an examination of management, industry make-up, and governmental factors that might contribute to firm performance.

Well, starting right here, Dr. McGrath starts to eat away at this picture. For one, she argues that industry boundaries are no longer that important. She argues that “arenas” are more crucial in the modern environment. The important thing in today’s world is that there are connections between “the outcomes that particular customers want (the jobs to be done)” and “the alternative ways those outcomes might be met” (page 10). Industry lines are not the determinants of what products one should be producing and what markets they should be sold … read the rest

What Does the Fed’s Prediction of Increasing Growth Mean for Business Owners?

Posted on July 2, 2013

  (Click on Picture to Watch Video)

Last month Chairman Bernanke spoke and the markets reacted by dropping more than 5% in a few days.  Clearly he must have shared some very bad news for business owners.

Actually not!  Coming into the year many observers thought that the federal budget sequester would put the economy at risk of stalling at best and dropping back into recession at worst.  Instead the Fed now foresees annual economic growth at 2-2.5% this year, moving to as much as 3.5% by 2015.  And it’s the private sector that’s carrying the load, not government programs.

Let me say that again.  The Fed now believes that growth is going to accelerate over the next several years.  As a result the economy may not need so much artificial stimulus (QE) going forward.  The economy is no longer digging a hole; we’re back to building a foundation of real economic growth.

What does this mean for the deal business and for private companies considering M&A or corporate finance transactions?  Bottom line: there is going to be much more demand for capital to fund growth.  Unless the banks step up to the plate, which we believe is unlikely, this capital must come from private lenders and equity providers.

The good news is that there is a great deal of financial market capital available to meet this need.  We just closed a mezzanine financing that gave us a good window into the market’s current appetite.  Over the past few years, major investors have made significant financial commitments to entities designed to fill the void left by banks which have abandoned their commercial lending franchise.  As a result today there are numerous private debt providers seeking opportunities to provide senior, hybrid and mezzanine capital to private companies.  Where equity capital is needed, private equity groups are … read the rest

Living in a Low Growth World

Posted on May 16, 2013

Michael Drury, Chief Economist, McVean Trading and Investments LLC – Reprinted with Author’s Permission

Perhaps the question we are asked most frequently is when things will get back to normal, meaning in most investors’ eyes the way they were before Lehman.  Unfortunately, our answer is “That bird has flown” and we are now dealing with, and will continue to deal with for many years, a very different environment.  The mainstay of that difference is a lack of trust between those that have money to invest and those that want to use it for risky undertakings, and, in particular, a lack of trust in the banking system that used to intermediate between these two groups.  The result is a glut of savings available to “safe” investments driving risk-free yields to very low levels.  However, the central banks, by buying bonds and manipulating long term interest rates lower, are introducing a significant risk of capital loss into even “risk-free” assets.  Investors are both moving and driven out the risk and yield curves, and returns on riskier investments are falling.  The decline in returns at the precise time many investors want to start spending investment income has pushed up prices for proven existing income flows.  Meanwhile, a combination of distrust and a reduced pool of money that will wait long periods before income is produced have generated fewer green-field investments in physical plant and equipment, resulting in a slower potential growth path for the economy.

We are neither monetarist nor Keynesian, but rather institutionalist and a storyteller.  We see the current situation as the culmination of a long path where growing reliance on banks and the central bank to maintain economic growth has run aground.  Both re-establishing trust and balance in the old system or building a new one will take time – likely many years … read the rest

Winds of Change: Banking

Posted on May 8, 2013

John Mason – Originally Published at Seeking Alpha – Reprinted with Authors Permission

Another Executive Leaves JPMorgan…” reads the headline of the business section in the New York Times. The question is, what is going on at JPMorgan Chase (JPM)?

The timing of this last leaving is raising questions. The latest major departure is Frank Bisignano, the co-chief operating officer. The questions are about the status of Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan, the “persistent executive turnover,” and the up-coming board meeting where a debate is raging about whether or not Mr. Dimon should hold both top positions.

To me, there are two reasons for the recent departure events. First, Mr. Dimon is in control and he does not like what has happened inside JPMorgan over the past two years or so, with “the London Whale” and other events that have tarnished the “bravo” image of Mr. Dimon and his bank. The activity going on inside the bank remind me of a “turnaround” operation!’

But, there is a second reason for the things that are going on. Mr. Dimon is moving JPMorgan into the future.

If this is true, then this whole effort is to move JPMorgan into the future in the face of the “hostile” regulatory environment that exists, in the face of the changes that information technology are forcing on the banking industry, and the changing nature of the financial industry.

If I were Mr. Dimon, my feeling would be that the current regulatory environment “sucks”!

Being John Mason, my feeing is that the current regulatory environment “sucks”!

In either case, the basic feeling is that I really don’t want to run a bank. I want to run something different.

Second, whatever is being done in the financial industry, the future of commercial banking…of finance … read the rest

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