Friday, July 20, 2007

More from California Capital Marketplace

A few months ago, I attended the May breakfast meeting for the California Capital Marketplace, a monthly invitation only networking event limited to senior executives and professionals with at least 15 years of experience in areas including lending, investment banking, accounting, international trade and legal. Today's 45 attendees included at least 15 guests who previously had not attended one of the meetings. Always nice to have the chance to make new connections.

After the initial schmoozing and "elevator" speech introductions, the group moved onto a round table discussion - this month's topic being the flurry of financing and M&A deals in the marketplace and the underlying financial reasons for the uptick. Before I had to rush out, I heard the following...
  • Blame it on the baby boomers. With many boomers turning 65 faster than you can count, the number of owners seeking to transition out of businesses will only be increasing in the foreseeable future. In my opinion, this explains a longer term trend rather than the recent flurry, but it got the conversation going.

  • Go get your credit card, there's a sale on US businesses by oversees buyers. Why? While foreign countries have already established a comparative advantage for labor costs, those countries now are trying to gain control over the sales channel which we Yankees still dominate. With the exchange rates favoring the foreigners, it's now time to buy and buy quickly before the dollar gets stronger.

  • Here's the one I find most accurate - probably because I've written about it before. There's too much damn money chasing too few deals! One private equity source said that low interest rates and too much money has resulted in leveraged buyouts where the debt load is 6 to 7 times EBITDA cash flow. Just a few years ago, you could buy the company for 6 to 7 times EBITDA cash flow!

  • The capital markets may be getting ready to reverse course. I've increasingly noticed that on the heels of the sub-prime fallout, the market is seeing resistance to the high debt loads, covenant lite and thin spreads for the leveraged buyouts.

  • Finally, more and more middle market companies are going private to avoid the cost (dollars, time and aggravation) of implementing the Sarbanes-Oxley Act (commonly called Sox or Sarbox). With all the private equity and cheap debt available, why bother with public company status?

Unfortunately, I had to rush out to my next meeting. I'll share again from the next meeting in September.

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