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An exclusive monthly news report for private company CEO's
February 15, 2005
Sign of the Times
Did You Know
Ask the Expert
Market Stats
Helpful Links
Quote of the Month:

"We have a crisis of leadership in this country. Where are all the Washingtons, the Jeffersons, and the Jacksons? I'll tell you where they are- they are playing playing professional football, baseball and basketball."

-anonymous


Sign of the Times

A monthly market commentary

“M&A Middle Market Activity in 2005”

The most often asked?question?put before me?these days is whether or not?this is a good time to sell a middle market company. It's no secret that there has been a signficant upturn in M&A activity in the past 4-5 months. Despite this and the economic recovery underway, many companies are still struggling, and for a variety of reasons. The most common theme is the increasingly competitive global environment.

In spite of this,?it very well may be the best opportunity since 2000 for a middle market company to enjoy some type of liquidity event, whether it's?some form of?recapitalization or outright acquisition. Let me explain why. For professional investors such as private equity groups there is: 1) low supply and high demand, 2) unattractive alternate investments, and 3) we're definitely in an economic upturn.

With respect to low supply and high demand, the middle market private equity sector is extremely active at the moment looking for workable deals. There is a pent up demand from the relative scarcity of available companies over the past few years. Companies that have suffered along with the economic consequences of the downturn have been reluctant to go to market. This has created a significant imbalance with the net result being that demand for quality companies is far exceeding the availabe supply. I only wish I could satisfy all the private equity groups that are contacting me looking for companies.

The lack of unattractive alternative investments is a powerful motivator. Government and municipal bonds are at historically low yields. Fixed income securities such as corporate and government bonds and bank instruments remain unattractive with the low interest rates.

Since 2000, the broad market for common stocks has performed erratically. While the Dow has recovered much of what was lost since 1999, it still leaves investors with very little to show in gains since that time. The Nasdaq has still only recovered less than 50% of its losses since 2000 with many saying it is overpriced based on earnings analyses.

These factors have pushed investors to the sidelines in the past couple of years with more and more money sitting idle. Strictly looking at this logically, it is creating additional pressure to redirect some of that money into other invesment vehicles. Middle Market companies with a solid business are the cream of the crop. They are in the process of getting the attention they deserve.

Increasingly, there is a general feeling we are in a economic upturn that will continue. The?debt market remains very attractive, with debt financing available at some of the lowest rates?in many years. The prime rate is sitting at 5.5%, slightly up?over the last several months, but still at historic lows since the mid 50's.?

With the economy moving forward, this is creating a powerful incentive for insitutional buyers to get on board now. This is pushing valuations higher as performance expectations over the next 6-7 years are factored into the equation.

All in all, we are fortunate to be operating in the world's largest economy. Certainly we face challenges moving ahead, but overall conditions are improving with companies posting increased revenues and higher operating incomes.



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Did You Know

“Let Them Eat Cake”

Marie Antoinette, the Austrian woman who married King Louis XVI was reportedly an airhead. Brought up in wealth and sheltered from the social reality, she had no notion of France's economic situation. When someone mentioned that her people did not even have bread to eat, which contrasted with the royal decadence, she apparently replied, "Let them eat cake." Do I have to think of everything?", she probably added.

However, some historians actually believe that Marie Antoinette never really said this, and that it was attributed to her opponents trying to mount a revolt (it is also believed that French philosopher Jean-Jacques Rousseau first wrote this phrase in his book Confessions). At any rate, the Queen was despised by her people for her aloofness and was beheaded during the French Revolution.



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Ask the Expert

“A Little Tongue In Cheek”

"If?an expert says it can't be done, get another expert."

"An expert is someone who knows a lot about the past."

"What's an expert? I read somewhere, that the more a man knows, the more he knows, he doesn't know. So I suppose one definition of an expert would be someone who doesn't admit out loud that he knows enough about a subject to know he doesn't really know how much."?

-Malcolm S. Forbes?



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Market Stats

“Middle Market CEO Succession Plans”

February 10th, 2005--In its survey of 364 CEO's of?fast growing, privately-held companies called the?Trendsetter?Barometer," PricewaterhouseCoopers found that 65% of the respondents said they planned to leave their company within 10 years. When asked about their exit plan, a majority of the respondents (51%) thought they would leave via a sale to another company. A measly 3% minority said they were counting on an IPO payoff. The survey's finding that CEO's have exit plans is hardly surprising: the fact that 43%?of the respondents said they had done little or no succession planning is.

"Like many of us, these CEO's have a sense of their desired future, but they are overloaded with managing for today and are short of time for developing comprehensive plans for tomorrow." said Mike Kennedy, leader of PricewaterhouseCooper's Personal Services practice.

"Unfortunately, unless a key event occurs such as a company being sold, important corporate/shareholder documents like the buy/sell agreement are often not reviewed on a periodic basis," he adds.



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Helpful Links

I love a tip about a really good website that was previously unknown to me. I was on a run with a friend in 1999 who told me about a search engine called Google. He was so enthusiastic about it that I did try it www.google.com and I was amazed by the search results. I remember telling other people about it and virtually no one had heard of it. I could surmise that a company named Google wasn?t exactly instilling a lot of confidence. It reminded me of first hearing about Yahoo www.yahoo.com  and having a negative predisposition. After all, what serious businessman hoping to develop a successful company would choose Yahoo as a name? As I am writing this, unless you are living on Mars, you know all about Google & Yahoo. Had I made the effort to invest in Google back in 1999 when they were looking for investors, I?d probably be writing this from my villa in St. Barts (too cold in the south of France right now) rather than my office in the financial district of San Francisco where it is currently raining. If anybody starts a company called Bozo, I?m definitely going to invest my wife?s life savings.

If you know of any websites that offer good M&A or financial insights info, or websites that are just plain useful, let me know and I will review them. I intend to let readers know about such websites in the hope of offering new and better information, particularly in how it is delivered.

Have you ever heard of Entreworld? www.entreworld.org . This is a great resource for entrepreneurs looking for anything from start up capital to exit planning down the road. All the articles are written by other entrepreneurs.

Although the New York Times www.nytimes.com isn?t exactly a new phenomenon, if you want great reporting on a variety of topics including business, sports, opinions and editorials, food and wine, travel, and the arts, look no further. If you really want to spoil yourself, order the print edition. Even if you never read it, your friends are sure to be impressed.



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