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LEVERAGED CAPITAL NEWSLETTER Leveraged Capital, is a free monthly newsletter that presents growth and strategy issues effecting entrepreneurs and owners of small to medium size enterprises (SME's). Leveraged Capital is published and delivered electronically to subscribers. Your privacy is strictly respected and we do not share or sell subscriber email addresses to anyone outside of Graham Financial Corporation. If you enjoy what we present, please forward a copy of Leveraged Capital to clients and associates. They can subscribe to Leveraged Capital, by clicking on this link: http://www.GrahamFinancial.com/newsLetter.htm and filling out the quick form.
As fair warning, for any readers that may become squeamish about political correctness, I have consciously set out to be blatantly politically incorrect (PIC) twice in this year-end issue. What a year 2002 has been, from botox parties to perp walks; from bunker busters to a guy we all hope won't be back for long; from fears of pumping gas to fears about the future price of gas if said bunker busters are used in Iraq; from CEO's that we all put on pedestals (come on admit it) to $6,000 shower curtains(!!); from Bernie, Ken, Martha, and Dennis to a new meaning for golden handcuffs; from down markets to up markets to down markets to ....... just to mention a few. In Washington, George W. and staff had private meetings with Brian and Mila when our PM Jean hasn't even received (and most likely won't receive) an invite! I say Brian, we need you back, both here in Canada and in Washington (hint: PIC # 1). In Toronto, a move was made to rename the City Hall Christmas tree to the more politically correct "Holiday Tree"; thankfully such silliness was squashed by uncharacteristic Canadian outcry. Come on - last time I checked, this is Christmas and I 'm proud to say I celebrate because of Christ's birth (hint: PIC #2). Our lead article this month provides some refreshingly good news about the CFO mindset of mid-market manufacturers and the US economy in 2003. It's longer than our usual articles but is well worth the read as we head into the new year. On that note, may I wish you and your families many blessings during Christmas this year. May you also be blessed and be a blessing to others through your business dealings in the coming year. Much (long-term)
success to you, DPG.
14 Years of Exceptional Service Contact Nikki Barnett (416) 367 - 1055
In This Months Issue: (Click on the Article Title To Go To The Full Story.)
Quote Of The Month: Investment Hindsight:
There's no shortage of opinions about what the economy is going to look like in 2003. But, when it comes to forecasting the business climate, what could be a more reliable barometer than the view of middle-market companies? There are some 50,000 middle-market companies in the U.S. With annual revenue ranging between $25 million and $1 billion, this core business segment represents an estimated 25 percent of our nation's gross national product. Since many of these companies are in manufacturing and must plan production months in advance to meet customer demand, they're dependable predictors of the future state of business. Their expectations for 2003 are surprisingly favorable, according to our most recent survey. During the fourth quarter of 2002, 673 chief financial
officers (CFOs) of middle-market manufacturing companies were asked about their
view of the economy, prospects for revenue growth, financing requirements, plans
for mergers or acquisitions, and the state of their international operations. This
is the fifth consecutive year that Fleet Capital has commissioned this telephone
survey. Conducted by an independent research firm, the survey included
companies with SIC codes from 2000 to 3999. The most notable outcome of
this year's study is the number of times optimism hit record levels.
"CFOs clearly are not
stating that we are out-of-the-woods, but based on the trend over the survey's
five-year history, they believe the worst is over and now see light at the end
of the tunnel," says James
Connolly, Fleet Capital's president and chief executive officer. While
there's a myriad of data that contradicts this outlook, an equal amount supports
the CFOs' optimism. For instance: v
According to The
New York Times, annual productivity growth over the past four quarters
reached 5.3 percent, its highest in nearly two decades. v
New claims for
jobless benefits in October, as reported by the U.S. Labor Department, were at
their lowest level since July 2002. v
The Regional
Business Activity Index of the Philadelphia Fed—historically a good predictor
of manufacturing activity throughout the nation—rocketed from -13.1 in October
to +6.1 in November, its highest reading in several months. v
Following four
consecutive months of declines, The
Conference Board Index of Leading Indicators was flat in October, while six
of its 10 components showed improvement. v
Advertising
spending—typically one of the first discretionary expenses cut—grew 3.8
percent for the first three quarters of the year compared to the same period
last year, according to Nielsen Media Research. The ad industry has
been bleak since the middle of last year, and this change in course could
be significant. v
The Wilshire
5000 indicated that stock prices were up 20 percent between early October and
late November. "The fundamental groundwork is in place for a strong, sustainable expansion to kick in towards the middle of next year," says Wayne Ayers, chief economist for FleetBoston Financial and contributor to the Fleet Economist (.doc). "Key imbalances have been eliminated, productivity remains high, and inflation remains very low," he says. Revenue Growth Widely Expected.
Particularly
noteworthy: Sixty-one
percent said the state of the economy has not caused them to alter plans for
growth or expansion. Another 21 percent reported actually accelerating
their growth plans. Eighty-seven
percent reported that capital spending levels would remain stable or even
increase. (Exhibit #3—Capital Expenditures in Next Twelve Months).
Financing Requirements Reach
Record High.
Fifty-four percent anticipate that their cost of capital will rise in the coming year, compared to 28 percent a year ago. This suggests that the majority of CFOs believe rates have hit bottom, and consequently are budgeting cost of funds increases and potentially hedging interest rate risk. Credit Availability Not A Concern.
In addition, CFOs reported more favorable affiliations with their lenders when compared to a year ago. Forty-one percent said their relationship with their current lender has improved, versus 27 percent in the 2002 survey, while only five percent cited a deteriorating relationship. Middle-Market M&A
Activity Anticipated.
Part of this activity appears to
be driven by large corporations. In its November issue of Middle-Market
Gold Sheets, Loan
Pricing Corporation reported that a number of middle-market acquisitions are
occurring due to bankrupt and debt-laden large corporations shedding some of
their assets. In turn, these assets are being picked up by smaller
middle-market borrowers and private equity firms. The data also suggests that from
a pricing perspective, the time to buy is now because valuations are expected to
increase. Last year's survey showed a record low 17 percent of CFOs
believed the purchase price for companies in their industry, as a multiple of
EBITDA, would increase. This year the numbers look significantly different:
Forty-nine percent expect purchase prices to rise. Standard & Poor's
says it's already happening. According to S&P's Leveraged Commentary
and Data (LCD), the average purchase price of adjusted EBITDA for LBOs over $100
million is up compared to 2001, apparently marking the first increase since '97. This
suggests that business valuations reached a trough during 2002, and now are
inching upward toward levels seen two years ago. Growing Optimism in Global
Economy. So, what does it all mean?
Clearly, where we are today is very different from where we were when Fleet
Capital first conducted the middle-market survey in 1999. The Fed has
lowered rates 12 times, most recently a 50 basis points drop in November to 1.25
percent. Stocks hit record highs, only to see all of the gains erode. The
country entered a recession and continues to struggle toward recovery. We've
had the biggest bankruptcies in history and corporate malfeasance has become a
regular headline. All of these factors have had an enormous impact on the
business environment. Given all of that, it's refreshing to see our survey
respondents exude optimism for the year ahead. "It appears there's a unique window of opportunity
for those middle-market manufacturers that have streamlined their businesses
during the past year-and-a-half," says Connolly. "The economy is
poised for a turnaround, borrowing costs are at historic lows, and the credit
markets are more open than they were a year ago. Given these factors,
companies with solid management talent and the right capital structure in place
are in the driver seat."
Myles Cohen is
the Chief Marketing Officer, Fleet Capital Corporation. Fleet Capital--a
FleetBoston Financial Company--is one of the largest bank-owned asset-based
lenders in the country. Fleet Capital provides secured loans from $2
million to $500 million. Visit them on the web at www.fleetcapital.com
.
I used to think that leaders liked change and followers didn't. I had this idea that leaders were out on the edge and they had a machete and they were cutting a path through the jungles of life, and they were always out in the front leading change, and the followers were way back crossing their arms singing, "I Shall Not Be Moved." What I've learned is this--that leaders don't like change any more than followers unless it is their idea! Think about it for a moment--when change does not occur in an organization, it's never a follower's problem because followers do what followers do --followers follow. When change does not occur in the organization, it's because some of the leaders in that organization didn't like the change. And why don't leaders like the changes? Because they're always asking, "What's this going to do to me? How's this going to affect my turf?" And they say to themselves, "This could affect my turf. This could hurt me." Followers seldom stop change because they lack influence; leaders often stop change because they have influence. The potential for change in your organization increases with participation. What you want to do is involve as many people as you possibly can in the change process. In fact, successful people know how to get shared thinking in their arena. They not only have their thinking but they know how to bring people around and say, "What do you think about this?" A great idea just doesn't become a great idea. A great idea is a compounding effect of a lot of good ideas; it's out of the getting a lot of good ideas on the table that you get a great idea. The right kind of collaboration will drastically improve the quality of the ideas being shared. So the value of understanding shared thinking is that the more good people you bring into a room and get around the table, the higher your odds of getting great ideas. I do this exercise all the time: Every week, I put different groups of people around a table, depending on what I'm trying to accomplish, to get their ideas on the table. I don't, however, just open up the door and say, "Okay, what do you all think?" You don't want to do that because most people don't think. You don't want to say, "Everybody tell us what you think." Ninety percent of the people don't think at all. Ninety percent of the people just look for a line that's moving and get in it! So how do you know what kind of person to bring around the table? Listed below are ten kinds of people you want. 1. People whose greatest desire is the success of the idea. You don't want people around the table who want to see the idea fail. You have to have people around the table who are committed to the success of the idea. 2. People who can compound another person's thought. You want to bring people around the table who can take somebody else's thought and play off of it and tweak it and make it better. 3. People who emotionally can handle the changes of conversation. The creative conversation is going to go left and right, and up and down. It's an emotional roller coaster, and you want someone who won't let their feelings get in the way of progress. 4. People who appreciate strengths in others where they are weak. These are people who can complement one another. For example, where you've got one person who's a focus thinker and another person who's a creative thinker, they will have to be able to appreciate the input of the other. 5. People who recognize their place of value at the table. They know why they're there. If they don't, you will have a problem. 6. People who place what is best for them below what is best for the team. These people know to check their egos at the door. Subordinating your own agenda to what is best for everyone is always good. 7. People who can bring out the best thinking of those around them. When somebody comes up with a great thought, they can probe a little and say, "Come on, go a little bit deeper here. Talk to me a little bit more. Give me some more out of this." 8. People who possess maturity, experience and success in the issue being discussed. I want all three. I don't want maturity without success, I don't want experience without success, and I certainly don't want success without either. 9. People who take ownership and responsibility for the decisions that are made. They have the ability to come to the table and, after there is a shared concept and idea or thought that evolves around it, they can take ownership of it. 10. People who can leave the table with a "we" attitude and not a "me" attitude. Teamwork is essential to accomplishing great things. You always want people who are willing and able to grasp this concept on your team. Commit to getting these ten types of people around the table in a shared thinking meeting and watch the results!This article is used by
permission from Dr. John C. Maxwell's free monthly e-newsletter 'Leadership
Wired' available at www.MaximumImpact.com. Dr. John Maxwell, founder of Georgia based Injoy
Group and has cultivated an
extensive following amount the most highly respected business leaders around the
globe. He reaches more than 350,000
people a year through speaking engagements, and over a million more through his
resources such as Maximum Impact. John
is committed to developing leaders of excellence and integrity through his
philosophy that “everything rises
and falls on leadership”. Author
of more than 30 books, Maxwell’s titles include these best sellers:
The 21 Irrefutable Laws of Leadership, Failing Forward, and The 17
Indisputable Laws of Teamwork.
A CEO and her most trusted and reliable COO and CFO were stranded on a desert island. Suddenly a lamp appeared on the beach. When the COO picked it up a genie appeared, extremely thankful to have been released from his copper lamp and granted them each a wish. The CEO said the others should choose their wish first. The CFO went first, wanting to retire with $10 million in his bank account and before the other two could blink, he was gone. The COO went next, wanting to retire in Hawaii, never having to work another day in his life. The CEO went next and wanted to be taken back to her plant with her COO and CFO back at work with her. Moral of the story - make sure the boss gets her wish first. With thanks to Kerry Wilson.
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