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

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

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

A Swan Blacker Than The Darkest Night

Posted on August 18, 2012

Interest Rates Rise at 2652% Annualized Rate! That’s probably a headline you will not see in the Wall Street Journal and it’s certainly a bit over the top, but those are the facts. From July 18 to August 17, the interest rate on the two-year Treasury jumped from .22% to .29%. That’s a 32% one month increase and works out to an annual jump of 2652% if you compound the increase monthly. Just to be fair the ten-year rate “only” rose from 1.52% to 1.81% or about 19% over the same period. With the magic of compound interest that generates a far more benign 713% annualized rate rise.

If you haven’t already done the math, those growth rates would take you to a 43.8% annual interest rate on the two year a year from now and a 12.9% interest rate on the ten year at that point. Of course that is not going to happen. Most likely we’ve just seen a random fluctuation in an overbought market. The Fed has promised to keep interest rates low for an extended period after all.

We’ve been saying for some time that the seeds have been planted for a move into a period of stagflation comparable to what we saw from the mid-1960’s and the 1970’s. That move, which transformed the benign inflation of the 1950’s to a raging inferno by the end of the period, eventually took Treasury rates for the 10 year to unheard of levels of 15% by the end of the 1970’s. This resulted in a collapse of the bond market and the eventual failure of entire savings and loan industry in the United States in the 1980s.

The United States and most of the developed world have benefited tremendously over the past 30 years from a steady drop in long-term bond rates.… read the rest

Financial Innovation Aids Small Business Borrowers

Posted on August 15, 2012

The most recent Federal Reserve Senior Loan Officers Survey conducted at 64 large banks confirms what we have suspected. After a long period of tightening, loan standards have stabilized and for larger borrowers they have loosened slightly. The survey provides less hope for smaller borrowers, shown in red on the chart below.

(Click on Image to enlarge)

This confirms data we published previously showing that small business lending has entered into a choppy period in 2012 after seeing moderate improvement from the 2009 lows during 2010 and 2011. Things are only likely to get worse for smaller borrowers as their natural allies, the community banks, struggle with maturing underwater CRE (commercial real estate) loans, continued pressure from their regulators and rapid industry consolidation.

FDIC data shows that bank credit availability is likely deteriorating for many cash starved small businesses. From December 31, 2010 to March 31, 2012, C&I (commercial and industrial) loans at banks over $1 Billion, i.e. those that focus on lending to large multinationals and mid-sized domestic firms, grew approximately 20% from $1 Trillion to $1.2 Trillion. For banks under $1 Billion, i.e. those most focused on small business lending, C&I  loans actually dropped 6% during the period from $110 Billion to $103.5 Billion.

We increasingly see smaller firms struggle to obtain funding if they do not have adequate hard collateral (equipment, inventory or receivables) or if the owners don’t have personal assets to pledge to support the loans. If you are a small business with a capital need to support a growing business, you’re asking “what options do I have?” Recently some innovative non-bank financial services firms have stepped into the breach and are beginning to offer new forms of small business finance based not on specific collateral, balance sheets or income statements, but on a company’s proven ability to generate … read the rest

U. S. Small Businesses Heading Into Choppy Waters

Posted on August 9, 2012


Source: Paynet

Small business lending has grown steadily since the end of the recession.  The Thomson Reuters/PayNet index focuses on loans to borrowers with total indebtedness under $1 million.  In a related story it was reported that preliminary June data not reflected in the chart above shows a sharp 5% drop in small business lending.  The article paints a rather gloomy picture for small businesses and the economy as a whole.

PayNet President William Phelan explained, “Businesses and bankers should prepare for more slowdown. Now might be the time to consider adding capital. Credit supply is high and interest rates are incredibly low.” Phelan added “banks should strengthen credit quality to prepare for further slowdown. Stress Tests show that a full blown recession means small business failures could triple.”

According to Paynet the Thomson Reuters/PayNet Small Business Lending Index (SBLI) measures the volume of new commercial loans and leases to small businesses indexed so that January 2005 equals 100.  Because small businesses generally respond to changes in economic conditions more rapidly than larger businesses do, the SBLI serves as a leading indicator of the economy. The index is a highly correlated leading indicator of the GDP by 2 to 5 months.

There is some good news in the report.  Small businesses have been steadily improving their balance sheets since the beginning of the recession and loan delinquencies are at historically very low levels, with severe delinquencies much lower than 2005 the first year for which data is available.  However, the report goes on to say that small business investment rates are lower than in 2005 as companies pay down debt and build cash.  Banks are under-loaned with loan to deposit ratios of 60-70% and are competing hard for the few high quality loans that are available.  While businesses are being cautious in this difficult … read the rest

Will Business Owners Hit the Bid in 2012?

Posted on January 24, 2012

Over the years one of the best indicators of M&A activity has been what I call the Free Lunch Index. I live in Memphis, normally not a hotbed of middle market M&A activity.  That’s why my practice is national in scope.  When banks or private equity groups do come to town looking for deals, I often get a call for lunch, breakfast or coffee.

Since the crash in 2008 it’s been fairly lonely out here and I pretty much buy my own lunches. Starting this month, however, I’ve seen a marked pickup in calls and lunch invitations.  The word appears to be out among both the private equity groups and the financial institutions that now is the time to get back into the market and they’re actually spending money to look for deals.

Our experience at Focus indicates that business sale interest has increased strongly since yearend. Apparently we are not alone.  Cyprium Partners, a leading mezzanine financing specialist, recently completed a survey of 175 investment-banking firms throughout the U. S.  Among their findings, 44% of respondents reported more assignments signed or in the market than at a comparable time in 2010.  56% reported that new business pitches were up and less than 10% of the firms reported lower activity.  Bottom line the M&A business is improving and that’s consistent with our belief that the overall economy will surprise to the upside.

It’s no secret that the U. S. private equity industry has been in a depression over the past three years.

Source: Pitchbook

Private equity deal flow showed great promise this time last year, but fell precipitously by the end of 2011.  Interestingly, according to Capital IQ, global aggregate annual deal flow in terms of number of transactions has been far more stable while dollar values have fluctuated widely.

Year                          # of  … read the rest

Welcome to Capital Matters

Posted on January 2, 2011

Even the most casual observer of the current economic scene, knows that that there is something different about the way capital is being allocated in the American economy today.  Billie Holiday had it right in her classic, God Bless the Child, written in 1939 at the end of the Great Depression and updated for the Baby Boomer generation in 1968 with the great Blood Sweat and Tears version.

Them that’s got shall get
Them that’s not shall lose
So the Bible said and it still is news

Yes, the strong gets more
While the weak ones fade
Empty pockets don’t ever make the grade
Mama may have, Papa may have
But God bless the child that’s got his own.
.

A 2010 update could be speaking about the major multi-national corporations and big banks, which surely have their own and then some.  On the other hand “Main Street” private companies are more likely to relate to verse two, singing the blues refrain that “empty pockets don’t ever make the grade”.  Yet the data is irrefutable: jobs in America are created by small, growing firms, not by the corporate giants.  When the recovery comes, and it always does, where will the money come from to fund the growth of the companies that we’re counting to create the jobs?

To answer that question the Tough Times blog has moved to Capital Matters.  Here we will focus on the critical financial issues that face Main Street American business in this new decade as economic conditions slowly begin to improve: Where will the money come from to support renewed growth?  We will cover topics of current interest to business owners and their advisers with a focus on economics and finance as they impact private and entrepreneurial firms.  We will also dive deep to provide practical insight … read the rest

The Worst of Times – the Not So Worst of Times

Posted on June 26, 2009

The recently released Brookings Institution Metro Monitor confirms something I have thought for some time; the recession’s impact has been very different in the Central U. S., including Memphis, where I live.  Certainly unemployment is up, but there is no feeling of impending doom or of pervasive despair.

Fourteen of the strongest twenty metros in the report are in Texas, New Mexico, Oklahoma, Arkansas, Iowa or Kansas.  Memphis and its neighbor to the south, Jackson, MS, are in the second quintile.  Housing prices in Memphis were flat from Q1 2008 to Q1 2009 and they were actually up in many of the Texas markets.  “What’s going on here?” you might ask.  Certainly the regional focus on agriculture and energy, which remain relatively strong, doesn’t hurt, but I don’t think that’s the primary issue.  The mid-continent never enjoyed the full force of the Bubble to the extent experienced on the coasts, so we just didn’t have as far to fall.

This recession is proving to be a great leveler.  My guess it that this applies not just to states and regions, but to economic strata as well.  All that data which Robert Reich and others use to deplore a growing concentration of wealth at the top, has likely turned dramatically down over the past year as portfolio values have collapsed and outsized bonuses have become the bête noir of the American economy.  For the first time in my thirty-six year career, fear stalks the halls of the major law firms as hundreds, perhaps thousands of six figure associates and more than a few seven figure partners have been laid off by some of the largest and most prestigious law firms in America and similar impacts are being felt throughout the higher end of the economy.

Share Buttonread the rest

Categories: Business Survival, Economics, Uncategorized

Tags: Tags: , ,

Permalink | | Comments Off on The Worst of Times – the Not So Worst of Times

Next Page »