Transformation: The Onrushing Digital Age Will Change Everything

Posted on December 15, 2014

The modern era has witnessed two great periods of transformation that radically changed the global economy and the very nature of human existence.  The Industrial Revolution of the 18th and 19th centuries and the shift to a postindustrial economy over the past fifty years are old news.  Today, the Global Economy is undergoing a third period of transformation into a new Digital Age that promises to be even more dramatic in its impact.  In this article, we will address some of the forces driving this change and provide our predictions as to which industries and economic sectors will be affected first.  For a video discussion of the topics covered in this email click here.

Manufacturing dominated the American economy for almost 100 years commencing in the late 1860s, but, beginning in the 1960s, manufacturing was rapidly eclipsed by a new services and trade based economy.  A quick look at the chart below demonstrates how overwhelming that trend has been. From 1850 to 2010, primary and secondary manufacturing in the United States dropped from approximately 80% of the US economic output to its current level closer to 20%. Tertiary industries, Clark’s name for what we would today call services, finance, retail, and distribution grew from approximately 17% of the economy in 1852, to 70% today, with the most important portion of this transition occurring since the 1960s.  While the Industrial Revolution took almost 150 years to fully play out, the shift to a services and trade based economy happened in less than half that time.

 Source: Wikipedia

We have now entered a new era that will impact most sectors of the global economy.  This new transition promises even more radical change.  We are only in the early innings, but this game will play out far more rapidly than its predecessors.  Driving this … read the rest

Categories: Banking, Business Survival, Financial Services, Healthcare, Industries, Technology

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Will a Robot Close Your Next Deal?

Posted on September 23, 2014

In the next ten years, technology will transform virtually every industry in the world.  There will be big winners and big losers. In order to stay competitive, middle market business owners must preempt these changes to their competitive positions and sustainability with smart timely action.  Just look at the newspaper publishing industry to see how dramatic the impact can be.

Is the middle market M&A industry exempt from the winds of change?  My partners would answer that this is a people business: nothing happens until someone makes a sale.  That’s clearly right.  Bringing the sale of entrepreneurial business to a successful close involves far more than numbers; human emotions often overrule financial logic.  An understanding of psychology is as essential to the success of an intermediary as auctioneering and financial analysis.

The role of the deal professional will not disappear.  Nevertheless, the way he or she applies professional skills to reach the ultimate goal of the transaction will be dramatically shaped by the technological revolution now underway in our industry.  The successful investment banking firm of the next decade should have access to resources unimaginable to today’s practitioners.  In addition to great people skills and financial knowledge, investment bankers will need to be adept at using numerous advanced technologies that will eliminate a great deal of drudgery and  that will also accelerate the speed of transaction processes.  In that hypercharged environment, the race may well go to the swiftest practitioners with access to the best of data and toolsets.

When I started my investment banking firm in 1985, the most advanced technology was my Compaq luggable (38 pound) computer and a magical program that enabled me to produce both written documents and spreadsheets from a single device.  Over time we added desktop computers, a Microsoft network and access to quarterly CD-ROMs with data about … read the rest

Categories: Adley Bowden, Banking, Financial Services, Investment Banking, M&A, Mergers and Acquisitions, Middle Market, Private Equity, SaaS, Uncategorized

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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

The Winds of Change Are Blowing

Posted on May 5, 2013

John Mason – Originally Published at Seeking Alpha – Reprinted with Author’s Permission

The world is changing. The world is changing because it must change. When the unemployment rate hits 27 percent, as it now stands in Spain, something more is going on than just a business cycle.

Unemployment is also above 27 percent in Greece. In Italy, the unemployment rate is close to 12 percent. In France, the unemployment rate is above 10 percent. The employment problems in these countries are not just cyclical, they are structural.

The same for the United States. Although the unemployment rate in the United States is under 8 percent, the startling figure concerning the U.S. labor market is that the labor participation rate has dropped below 64 percent, a figure not reached since the latter part of the 1970s when women were not as big a part of the workforce as they are now.

These structural forces are causing divisions between countries as the world tries to recover from the Great Recession and more. Angela Merkel, German Chancellor, “highlights eurozone divisions.” The unemployment rate in Germany is 5.4 percent.

But, as we know, the utilization of capital in the western world tends to be lower now, for this stage in the business cycle, that at any other time in the past fifty years. Western countries are not only not using the human capital that is available; it is not using the physical capital it possesses. The competitiveness of the eurozone is an issue that comes up over and over again.

Phillip Stephens writes in the Financial Times about The New Deal for Europe: More Reform, Less Austerity. “High unemployment in Europe is not just a reflection of recession. It often mirrors ossified labor markets that lock out young people and discourage investment and innovation.”

But … read the rest

Will a Superabundance of Capital Lead to an M&A Boom?

Posted on February 17, 2013

Authored by John Mason

“Bain & Company, the consultancy, forecasts a ‘superabundance of capital’ between now and 2020. In a recent report it argued that markets would be distorted by surpluses in Asian and Middle Eastern countries and private investment funds.

“It estimates that the world’s financial assets will outbalance its domestic product by ten to one – it will have $900 trillion of financial assets compared with $90 trillion of GDP – by 2020. The result will be a ‘world that is structurally awash in capital’ chasing few opportunities.

“‘Capital superabundance will increase the frequency, intensity, size and longevity of asset bubbles. The propensity for bubbles to form will be magnified as yield-hungry investors race to put capital into assets that show the potential to generate superior returns,’ the report concludes.”

These words from John Gapper appeared over the weekend in the Financial Times of London.

The signs of this possibility, according to Gapper, are two: first, the presence of lots and lots of cash on the balance sheets of corporations, hedge funds, and other financial interests; and second, the apparent movement in the buyout and acquisition market that reflects a growing belief among international investors that the US economy is stabilizing, the eurozone crisis has reached its final stages, and that elsewhere in the world economic recovery continues and capital flows are increasing. Apparently with these events, the desire to take on more risk has risen.

I have written for three years or so about the build up of cash on the balance sheets of corporations. Companies that never had issued long-term debt before took advantage of exceedingly low interest rates to increase their cache of money. The basic reasoning behind this buildup was that these financially sound firms would “make a killing” as the United States economy began to grow faster … read the rest

A Wonderful Life for Community Banks?

Posted on December 27, 2012

During the yearend holidays we reach out for the comfort of the familiar.  One of the best ways to do that is to revisit films with a seasonal focus such as White Christmas, Miracle on 34th Street and most particularly It’s a Wonderful Life.  Directed by Frank Capra and released December 20, 1946, the film, starring Jimmy Stewart and Donna Reed tells the story of a young man, George Bailey, who was plunged into a difficult and entirely unfair situation as a result of the actions of others beyond his control.  George is driven to a point of such deep despair that he is considering suicide.  He is saved by a guardian angel and the support of those for whom he has toiled unselfishly for years.  For decades the film has provided us with the assurance that, if we just do right by others, we will ultimately be redeemed.

Great film of course, but did you ever think about the underlying issues that forced George Bailey to consider jumping off a bridge?  Bailey begrudgingly inherited a community-oriented Building and Loan Association in the 1940’s when just before Christmas his Uncle lost over $8,000 on the way to make a deposit.  The regulators had just arrived at the Building and Loan and found the loss.  They promptly issued a warrant for George’s arrest.  Even though he was innocent George was so unwound by the actions of the regulators that he felt his life was at end.

Fast forward to 2012.  This time don’t look for a friendly angel to save a Jimmy Stewart style hero.  On December 4, 2009 the FDIC seized Buckhead Band and sold its assets to State Bank and Trust Company of Macon, Georgia which also assumed the liabilities of the Buckhead Bank.  On December 3, 2012, just one day … read the rest

Citigroup Changes Reflect Banking Industry in Transition

Posted on December 6, 2012

John M. Mason

Banking, in the past, has always been about people. Banking was built up around customer relationships and you had to have people to create customer relationships.

Bank of America (BAC) has about 275,000 employees; Wells Fargo (WFC) has some 265,000; JPMorgan Chase (JPM) has about 260,000; and Citigroup (C) also has around 260,000 employees.

Banks needed people to relate to their customers, to entertain their customers, to solve problems for their customers and to smile at their customers. People, we were told, were the “face” of the bank.

But, observers of the actions taken by Citigroup argue that this is only the first step, according to a piece in the Wall Street Journal, the “opening salvo in a wave of cutbacks, business sales and other moves that could reduce the company’s global reach.” In another article in the Journal it is argued that this move “had better not turn out to be the whole show. Citi still needs reinvention.”

Departments need to go. Subsidiaries need to go. And, so on and so forth. The bank needs to be structured for the twenty-first century.

I certainly agree that commercial banks need to restructure. And, I certainly agree that banks need to become less of a “people” business. But, this is all a part of the evolution of the banking industry.

Let me begin with a true story.

In 1972, I joined the faculty of the Finance Department of the Wharton School at the University of Pennsylvania. This department was one of the leaders in the “new wave” of financial research talking about “betas” and the “CAPM model” and other such exotic topics of the time.

My background was banking and there were no courses at the time at Wharton about the management or … 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

August 2012 – The Future of Small Business Financing

Posted on August 23, 2012

Everyone loves small business.

At least that’s what the politicians want you to believe.

The reality is different. Small business is under attack from every quarter. Government policies favor large banks and large multinational businesses. Credit is tight and the banks favor the larger borrowers. Increased regulations stifle innovation and protect large incumbents that can afford teams of lawyers and lobbyists.

What’s the little guy to do? Waiting for the politicians to change the system is wishful thinking. Smart business people find ways to prosper in every environment.


And the current environment is not great for small firms. The Federal Reserve Senior Loan Officer survey has recently confirmed what we have suspected for some time: banks have been more generous in easing underwriting requirements for larger companies than they have been for smaller companies. Paynet, which maintains data on 17 million small business loans, reports that lending conditions for small firms have deteriorated in recent months after two years of bounce back from the 2009 bottom.  For additional details go to the full article on Capital Matters.


Financial Market Risk
And there’s a risk that things could get a lot worse for businesses that don’t tie down their financing soon.  We just published an article on Seeking Alpha that has received a great deal of attention with more than 14,400 page views so far. Our thesis is that the Fed’s zero interest rate policy has led to a situation where longer term treasury bonds are trading at yield levels that provide a spread to inflation far below the historical norms. Markets eventually return to their mean and often overshoot it so there is growing risk in the longer term debt market. Our concern is two-fold. First, that individual investors need to be aware of the potential impact of this return to the mean … read the rest

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