Risk, Regulation, and the American Economy: Dialogue with a Professional Director

Ernie Godshalk is a professional director currently sitting on two public boards; a director of the National Association of Corporate Directors/New England, Ernie is well known to the local director community as a thoughtful commentator on board service.

His current view of the world economy is that it is recovering slowly but subject to substantial risks, and heading the list are the precarious nature of the Euro (I parenthetically note today’s report of further weakening in the Euro countries’ employment) and the international risks created by Iran and perhaps Pakistan.  In light of this view, I asked how a board should go about enterprise risk management.

Godshalk’s view is that, while his boards discuss risk virtually every meeting and care is given to identifying who is responsible for watching which risks, there are indeed some existential exposures which cannot be controlled by the company and consequently cannot really be monitored.

Ernie expressed concern as to the impact of any Euro failure on the highly leveraged Deutsche Bank, and rejected the view that a Euro failure in the long run would not represent a substantial risk for United States businesses.  Certainly, identifying non-European markets for the purchase of parts or the sale of goods, and the shortening of lead times, can mediate the Euro risk to some extent, but substantial risk will remain given the international nature of United States business.

What are the problems most plaguing our economy, aside from major geopolitical risks?  We discussed excessive US regulation; we further debated whether over-regulation was an annoyance and a marginal expense but not an ultimate depressor of United States business.  Godshalk noted two factors in the American environment that he thought were significant: first, our high tax rate and, second, our immigration policy.

Noting the internationalization of business in general, even domestic United States companies have substantial opportunity to relocate operations and profits overseas.  Higher United States tax rates drive that flight abroad.

Immigration is an oft-cited problem, as it has become difficult to obtain visa approval for persons with requisite skills to drive technology businesses.  Even more anomalously, I suggested that we are now bringing foreign students to the United States and transferring our own sophisticated technology to them and, then, refusing to allow them to stay; it is the forced exportation of our technological advantage.

Asked about the biggest problems in serving as a director these days, Godshalk noted two: first, failure of boards properly to address CEO succession; and, second, the inordinate time which boards must apply to risk assessment, say-on-pay, proxy solicitation and the like, which diverts the board from its strategic mission of “adding value” and making the company business better.

Finally, I asked Ernie about the current state of the M&A market.  From a strategic acquisition standpoint, he believes that good deals are available.  The strategic advantage should be in either technology or in sales (for example, efficiency in marketing multiple lines).  In response to the suggestion that an improving M&A market has caused an increase in EBITDA multiples, particularly for strategic acquirors, Ernie noted that there are many companies that are for sale, there is pent up sales demand, and many enterprises with VC and PE money remain well “behind plan” by reason of the recent business recession, and consequently are favorably priced.

The issue of over-regulation of United States business is and will remain a significant discussion.  Two days before our meeting, the Congress passed and sent to the President the JOBS Act, which rolls back some of the Dodd-Frank regulatory requirements at least for businesses that are now going public with sales less than $1,000,000,000 (which is not all of them, but surely most of them).  Now that the Federal Administration identifies relationship between regulation and employment, it is possible that bi-partisan efforts (so hard to achieve in so many areas) will nonetheless continue to address these issues of over-regulation which Godshalk believes drive companies abroad and waste director time in boardrooms.

Funding Bio– MassBio Conference doesn’t know how to do it

The Massachusetts Biotechnology Council’s program entitled “2012 Annual Meeting – the Business of Science” is underway, and the kick-off keynote speech and first panel spent a good deal of time exploring why the business approach to funding bio is not working so well.

Francis Collins is the Director of the National Institutes of Health and thus a major player in the business of bio; this year he will give out $25.7  billion to about 325,000 scientists.  His speech was sprinkled with insights and great factoids, but the bottom line is that bio is in financial trouble and he is driving NIH to help meet the issues.  Only about one in every six applicants gets funded these days, and the NIH budget has declined about 20% in buying power over the last decade even though the absolute number of dollars has increased.

Most telling: a 60-year longitudinal chart showing that over that period the number of successful drugs reaching market for each $1 billion of investment has fallen 100-fold.  Although expressing himself as optimistic, citing great advances in the genomic sphere which  will speed diagnosis and specific targeted treatment of cancer and other diseases, he conceded that bio contributes wealth (as well as wellness) to our nation, and that competition in China, India, Russia and now Europe is heating up.  He intends on Wednesday to make these points to the Senate in discussing NIH funding.

(I found myself seated at a table with a representative of the UK government, who listed the UK funds established in the last few months, with many hundreds of millions of pounds to invest in bio, including a 200,000,000 government fund;  you could almost feel the breath of John Bull down the necks of the attendees.)

How to fight for U.S. supremacy in bio?  Efficient use of genomic analysis to speed drug targeting and testing, a study of failed or seldom used drugs to see if they have different applications, effective use of iPS cells which can be differentiated and then studied specifically.  And, continued NIH funding, and an additional federal fund to supplement NIH and to target major needs such as Alzheimer’s.

The panel that followed was a bit more harsh in its analysis; moderated by Juan Enriquez, Managing Director of Excel Venture Management, the panel blamed the by-now usual suspects: the FDA, the non-economic models for drug development which turn off VC investment, the greater ease to acquire drugs as compared to spending 15 years developing and testing them.  Some compared drug companies today to Procter and Gamble: more interested in marketing than in science.

One panelist noted that it is worse than feared: not only do few drugs get approved, but only 3 in 10 which are approved ever earn enough money to provide a return on investment.  Drugs being proposed these days need have not only a scientific story but also a consideration as to pricing and reimbursement issues before investors will consider them.

Growth by acquisition cannot continue, as “pharma is running out of merger partners.”  The benefits of scale will no longer be available.  Schools bear blame also, by restricting doctors from serving on company boards or taking stock.

One final question hung over the room at the end: if drugs can come to market overseas for less money and in four years, what is the future of bio in the U.S.  (There being no ready response, the program moved on to simpler things, like the cure for cancer….)


This morning’s mail has upset a part of my world view.

Universities long have been accused of being bastions of populist, liberal thought; Northeastern elite universities (along with anomalous Berkeley, the Harvard of the West) have borne the brunt of this accusation.

Such was not my experience at Harvard Law School; during my attendance (decades ago) it was the bastion of pro-corporate thinking.  Corporations should be minimally regulated so as to return greatest profit to their sole relevant constituency: the shareholders.

My 7:44 AM email today from The Harvard Law School Shareholder Rights Project reports that that group, “a clinical program through which Harvard Law School faculty, staff and students assist public pension funds and charitable organizations to improve corporate governance at publicly traded companies in which they are shareowners,” has been working all year to force public companies to de-stagger their boards.

They have submitted proposals to over 80 of the S&P 500, and 42 (one third of the S&P 500 with staggered boards) have agreed to move to annual elections of the entire board.  The list includes Alcoa, BlackRock, Cigna, Lilly, McDonald’s and PPG.

Several aspects are fascinating.  Leave it to Harvard to apply some of its student outrage in the support of retirement funds who have invested in public companies; not exactly the poor huddled masses being dragged upwards by the power of the law.  Leave it to Harvard to take the training ground of the conservative corporate advisors and turn it towards the “democratization” of corporate governance.  Leave it to Harvard to undertake the remaking of concepts of corporate governance in a way that empowers shareholders whose interests may be short-term and inconsistent with long-term measured corporate growth.

It is not clear where they will turn next, but this kind of success is not going to do anything except further inspire Professor Bebchuck and his hearty band.  The shopping list of corporate democracy demands includes broad proxy access, greater ratchet on comp,  independent board chairs, and independent board majorities.

While no doubt entrenched boards beholden to management sometimes in the past led to failure to respond to favorable takeover bids and to over-compensation of top executives, the causes for these lapses are many and complex and cannot be made to disappear by granting greater power to shareholders.  The small shareholder is and will remain without power.  The larger shareholders have, and are legally entitled to, their own agendas; those agendas may be short term and short sighted and not consistent with healthy corporate growth or innovation.

Two lessons emerge: first, this initiative will ultimate fuel the M&A market; second, directors had better start listening more closely to Professor Bebchuck, whose message and flat presentation have not exactly made him the darling of the corporate speakers’ circuit around Boston.  He is single-handedly remaking corporate governance in America and he is doing it under many radar screens that ought to be picking up the incoming blips.

Directors and Company Founders

The March 13 breakfast meeting at National Association of Corporate Directors (New England) brought together two extremely successful business founders, together with veteran company director Ernie Godshalk, to examine the relationship between boards of directors and founders.

The two founders on the panel are atypical: each has  grown multi-billion dollar companies and has survived as both chair of the board and CEO of the enterprise.  That doesn’t mean they didn’t add executive strength below; it just means they were able successfully to stay in the saddle and have dynamic success.

Allen McKim is Chair, President and CEO of Clean Harbors, with 500 locations in the United States, Canada, Mexico and Puerto Rico and with international operations in many other places.  Josef von Rickenbach is Chairman and CEO of Parexel, a bio pharmaceutical services company.  Both companies were founded in the ‘80s and are publicly held.  Clean Harbors was founded with a loan against McKim’s house; von Rickenbach started in his basement and now has 12,000 employees.

In terms of corporate governance, their paths were diverse.  McKim with Clean Harbors had a close-knit board until the IPO; now there are nine independents and McKim.  Von Rickenbach had early VC investment, and said that this created a level of process and formality which stayed with the company.

What they both have in common is an ability to use the board as a tool.  Each noted that independent directors create a sounding board, and a learning experience, for the successful entrepreneur.

What circumstances lead to blow-outs between boards and founders?  Godshalk noted that the relationship between a founder and an independent board can be tense; the founder may even be asked to exclude himself from certain board discussions, while the founder is used to being on the top of the hierarchy.  Also, when a private equity firm becomes involved and gets board seats, the situation can become volatile because of the perhaps shorter patience of the investors.

McKim noted that his company hit a wall at around $90,000,000 in sales, and the board then guided him in finding outside management to grow the enterprise.  Von Rickenbach noted that he always treated the board as “his boss” but observed that it is necessary to be a good boss, to show up and to be prepared and to understand that a board is not hands-on with respect to execution.

While each entrepreneur remains as chairman, each board has a lead director in which substantial responsibility resides.  Each CEO indicated that he had staffed the board to track the direction of the business.  When Waste Management moved focus from the utilities industry to oil and gas, McKim added directors with knowledge in that field, and Parexel (which does a lot of work overseas) moved for geographic diversity.

A discussion of board-building, which actually has application to all boards whether or not the company is founder-run, developed several other themes:

*When asked about diversity generally, the panel noted that diversity of views of business and of science, not just gender or ethnic diversity, was desirable.

*Godshalk noted that building boards around business expertise as a company evolved tracked the desirable approach of building a board through creating a “skills matrix” and then looking for people who can fill those particular slots.

*The panel seemed to like the idea of sending a founder to serve on other boards, perhaps at larger companies, as part of the founder’s educational process.

*Suspicion of age limits and mandatory retirement was expressed; boards should retain people of merit whose board evaluations are strong, regardless of age.

*In conversation after the meeting, it was also noted (Bob Popeo from Mintz Levin) that age limits were on their way out; as companies have soured on the idea of their CEOs sitting on other boards, that role has fallen more and more to CEOs who have retired and therefore are older.

It’s Not Easy Being Green

Zaid Ashai invests money for Point Judith Capital, a private equity firm, and heads their Boston office.  On March 6th through 8th  , the Northeast Sustainable Energy Association held its Energy 12 Trade Show at the Seaport World Trade Center in Boston, and Zaid ran a seminar on the VC view of the building energy market.

Money seems to be flowing into the business of managing energy.  The companies that are getting funded address the demand side: energy efficiency, use, tracking, management.  The supply side is sluggish for investors and may well stay that way for the near term, given the low price of natural gas.  Thus, investment in wind, solar (even though solar companies were lavishly represented at the Trade Show), batteries and the like will encounter difficulties in attracting investment capital.

Point Judith looks to do Series A investments into the emerging markets, from the $500,000 to $3,000,0000 to $4,000,000 range.  What do they look for?  In order of priority: a management team with emotional self-intelligence and humility, a strong market, and thirdly the product.  Not surprisingly, they strongly recommend avoiding cold submissions to investors; it is common wisdom to try to be introduced to the money rather than simply tossing your business plan over the transom.

Energy is a regulated and structured market and consequently great care has to be given to the strategy of the business plan.  Are you going to compete with or try to partner with the big players?

Most interesting to me was the effort to apply information technology to the monitoring and management of the demand side of the energy market.  The goals are efficiency and low cost management of the energy supply.  With a tight economy, the business plan ought to aim to provide payback to customers in a shortened three year span rather than the traditional five year payback; customers also want a turnkey installation with a single installer, minimizing disruption and giving the customer “only one neck to ring.”

Energy management companies which are drawing financing not surprisingly seem to address the larger markets: office, retail, education institutions, lodging.  Of course it makes sense to offer energy management solutions to customers who have a lot of energy to manage.

Why don’t the energy suppliers, many of which are very large and sophisticated, enter into this market and blow away the emerging enterprises?  The thinking seems to be they are not fast enough or innovative enough to do this; software development in this area is being driven from the bottom up (as indeed in many other areas).

To the shock of some of the attendees, it was noted that business buyers in this marketplace don’t much care about being green (although they may say otherwise as a marketing tool); they want low cost and reliability, and investors want companies that drive that result.

The goal of United States energy policy is to provide 20% energy savings by the year 2050.  Point Judith Capital targets demand side management companies that will facilitate reaching that goal.  So while the Trade Show floor was flooded with portable toilets, triple pane windows, solar energy panel manufacturers and installers, and the like, the financial discussion was all about software solutions, and knowing when to shut down servers in data centers.  A brave new world.

(Disclosure: my lawfirm has represented Point Judith.)

MassChallenge and Entrepreneurship

Mass Challenge is a Boston-based accelerator that annually takes over one hundred emerging entrepreneurial companies through an intense mentoring program in order to build enterprises from the ground up.

Supported by private industry and the Commonwealth of Massachusetts, Mass Challenge works out of offices on the Boston waterfront.  Each year, between the 1st of March and (this year) April 11th, entrenpreneurs around the world can apply to be mentored here in Boston.  Application are available at ww.masschallenge.org.  Last year, 125 companies were selected from over 750 applicants; at least one principal from each selected company must be resident from July to September to participate in the four month accelerator program, and in October ten to twenty such companies will be awarded seed funding in the aggregate of $1,000,000.  (Disclosure: my law firm, Duane Morris, is this year, and each year has been, a Mass Challenge sponsor.)

I asked Akhil Nigam, a founding principal of Mass Challenge, to describe the niche he is attempting to fill.  Akhil is looking for teams with new ideas in any industry.  They hope to identify future high growth companies.  He characterizes the competition as a search for the very best new ideas, and for teams which can benefit (aside from access to capital resources) from the 300 or more mentors and from the peer-to-peer contact with other emerging companies.

Who wins the money?  Akhil believes that the winners share several characteristics:

  • A high impact idea.


  • Which is disruptive within a given industry.


  • Carried forward by a really good team which has the flexibility to react to feedback when the shaping force of the marketplace defines commercial strategy.

Mass Challenge is making a “bet” on people, not just on a pitch.  Can the people execute?

Mass Challenge is open to entrepreneurs from around the world, and it is “free;” Mass Challenge do not take equity and does not receive payment.  Akhil now is looking to promote the accelerator program in New York, London and perhaps Israel, but is planning for now to remain physically located on the Boston waterfront.

Beyond keeping American entrepreneurship pre-eminent, start-up companies drive American business and American employment, and put capital to work (the 2010 accelerator led to the raising of over $100,000,000 of capital and the creation of more than 500 jobs in its first year).  I inquired as to suggestions for fostering American entrepreneurship.  Certainly Mass Challenge cannot support all the disruptive ideas that will lead to high growth.  Akhil makes a societal argument: we need broad social and government efforts to support entrepreneurship, the coming together of communities to foster mentorship programs to help new ideas grow, and career options in entrepreneurship in the universities.

Government policy initiatives, perhaps through SBA or tax incentives, also are needed.  The growth of angel networks, and the possibility of “crowd funding” for start-ups, could be of help.  (This week Massachusetts Senator Scott Brown conducted a panel at Mass Challenge exploring crowd funding options.)

Akhil also noted that we are “in a different time and age” and start-ups need talented workers.  The government needs to step in with retraining programs to provide the kind of support for start-ups that will drive not just innovation but also commercial realization; this is a theme which echoes discussion at the Association for Corporate Growth’s Boston conference last week.

Made in the USA!


The stated theme of the recent meeting of the Association for Corporation Growth in Boston was to explore the prospects for a manufacturing resurgence in the United States, and a panel headed by MIT Professor Suzanne Berger took a pretty deep dive into that issue.

Noting that the U.S. contributes 19.4% of the world’s manufactured goods, a statistic that has remained stable for about twenty years (although the number of workers declines, we make up for it in productivity), the panel agreed that manufacturing in the United States is here to stay and indeed will see something of a resurgence.  U.S. manufacturing will take place where technology and innovation are important to production.  “Cheapest country” manufacture will continue to focus on the less technologically sophisticated products.  U.S. workers provide the greatest per-capita value-added to manufacture of any country in the world, exceeding that of Japan and other developed countries and blowing away the value added component of Chinese labor.

Manufacturing jobs are back; last month 50,000 U.S. manufacturing jobs were added and industry optimism is higher than in the last two years.

What are the drags?  A significant shortage of skilled labor, together with higher U.S. operating expenses for manufacturing even putting aside the cost of labor; it is at least 20% more expensive to manufacture in the United States than elsewhere, by reason of tax load and government regulation.

The capital providers on the panel thought there was no lack of capital to finance American production, but were worried on a couple of other fronts:

  • A foolish immigration policy that causes us to train engineers and others who can drive successful manufacture, and then making it impossible for them to stay in the United States.
  • A lack of an educational system designed to support development of the kinds of sophisticated factory labor that is required.

There are functional dynamics which drive United States manufacture.  There remains substantial distrust of the ability to protect intellectual property offshore.  This pushes low tech manufacturing offshore, or manufacture of technological products where the obsolescence is so rapid that having the technology knocked off is irrelevant (as the United States will continue to re-engineer and improve what is marketable in a given space).  Also, attenuated supply chains make it difficult to rely on production that spends six weeks on a ship coming from China, particularly when goods are destined either for the United States economy or the South American economy; as just in time gets shorter, the  attenuation and reliability of the supply chain becomes more vital (witness the disasters in Japan and the impact on U.S. business).

Perhaps the most interesting comment was related to the tax code.  Even the Obama program calls for the reduction only of corporate tax rates, but 70% of United States manufacturing is done by enterprises with flow-through tax treatment, which means that the individual tax rate is really the corporate tax rate for 70% of our domestic manufacture.  Does this matter?  Is this just a question of making sure that the rich owners of companies will have to pay their fair share of taxes?  The panel, which included one such owner, didn’t think so.  There seems to be at least anecdotal support for the proposition that lower tax rates for this population will cause greater investment in the growth of a company, and in the growth of the R&D function of a company.  Two-thirds of R&D in the United States is performed in manufacturing companies, and it is also thus essential that Congress pass a permanent R&D tax credit.

In addition to tax, immigration and education reforms, the panel noted that American manufacture would be improved by a more friendly attitude on the part of EPA and OSHA, a clear and liberal policy toward stem cell research, and the establishment of trade agreements that foster U.S. exports.

Is there an analogy between what has happened to agriculture and what has happened to manufacturing in the United States?  We have learned that 1% of the U.S. population can not only feed the United States but also create substantial exports of food stuffs.  We are a “category killer” when it comes to food.  Can American manufacturing become a “category killer” in the manufacture of technologically related goods?  The panel thinks yes.  The panel doesn’t think that a huge increase in the number of manufacturing jobs is a measure of United States manufacturing prowess.  The panel thinks that if we can get out of our own way, and educate and accept from overseas the necessary worker base, primacy of U.S. manufacturing will remain an economic fact in the world economy.

On Investing in the US

At the February 29th “Deal Makers” Boston conference sponsored by the Association for Corporate Growth (“ACG”), the spotlight was pretty much stolen by Dr. David Kelly of JP Morgan Funds, who gave a sweeping assessment of the American economy and (from his standpoint) how one ought to invest into it.

Introducing his summary by noting that too much attention is paid to forecasting (no one can know what is going to happen in a given year), the key to success is to find imbalances and invest in ways that will be profitable when balance is achieved.  His theory of investing is reliant on the proposition that there are no paradigm shifts; everything reverts to baseline, a proposition  that historically seems true,  and which also speaks to an investment strategy that neither times the market nor is upset by short term volatility.

Generally, Kelly expects 2012 to be better than 2011, which was net flat for equity markets.  He sees increases in consumer confidence, improvement in consumer balance sheets (measured by percentage of income used to service debt), slow but steady job growth, a rebound in housing and a vigorous year for automobile sales.

While keynote speakers always revel in statistics, some of the statistics are pretty startling:

  • The ratio of the price of a home to average income is historically very low, with the affordability index (impact of lowered price and low interest rates) showing that we are at the most propitious time to purchase housing since World War II (notwithstanding the foreclosure overhang).


  • New housing starts are magnitudes below standard, so notwithstanding the foreclosure overhang the available housing inventory will inevitability fall.


  • For the first time in forever, it costs more to rent living space than to buy it.


  • As the housing market improves, the value of homes will increase, bank reserves for loan losses will decrease, and banks will then be more willing to lend across the board.

In a tirade, Kelly challenged the proposition that there are no jobs.  In 2011, 48,400,000 hires took place in the United States, a rate of almost 1,000,000 jobs a week.  The job market is selective and competitive, however, and he noted that unemployment for any person who attended any amount of college was 4.1%, increasing to 8.7% for high school graduates, and upwards from there.

He predicts an increase in U.S. manufacturing, although since 1948 the percentage of work force jobs in manufacturing has fallen from 25% to 8.4%.  The fall seems to have stopped.  The United States still remains the major manufacturer in the world, through increases in productivity.  Our hourly labor costs are flat at least compared to other developing countries, in large measure because of weakness of unions.

There is great concern for the political stalemate concerning taxes.  Kelly predicts that the automatic spending cuts scheduled for 2013, if the President and Congress fail to enact new tax legislation before the end of 2012, will cause a recession because the cuts will take too much demand out of the economy.  He sees, however, that either a Republican or a Democratic win for the presidency will lead to a tax deal which will include tax increases in various areas.

Kelly was particularly critical of the Federal Reserve, believing that they are making things worse.  If the main problem with the U.S. economy is, as he believes, a lack of confidence and not a lack of liquidity, announcing in advance that several years of fixed interest rates are necessary because things look lousy is exactly the wrong message to send, and feeds into the “wait and see” attitude which in turn prevents companies from moving forward and banks from lending.  And indeed low interest rates make the business of lending so unattractive to banks that there is little incentive to lend.

He is bearish on bonds at this point, noting that the ten year Federal bond is now upside down, yielding 2% against core inflation rate of 2.3%.  Conversely he believes that stocks are still relatively inexpensive, with price to earnings ratios, even after the current rally, still a little bit below history.  He thinks we are all too deep into bonds and that bonds are not, at this time, a conservative move.

How to invest?  As he believes corporate profits will grow this year, stocks will remain cheap.  Large cap growth stocks are the cheapest.  Dividend yielding stocks look good to him, with dividends (a rarity) exceeding government bond yields.  He is not much scared of inflation, but notes that investments in commodities, even at a modest level, will counter-act any hit a portfolio may take from the inflation side.

If Israel decides to take out the Iranian nuclear capacity?  This may cause temporary volatility and some inflation, but he goes back to principles: time and diversity solve volatility issues, and inflation in the long run will stabilize and can be hedged.

M&A, Capital in the New England Mid-Market

This post continues an anecdotal review of the investment and M&A climate as the world does, or does not, emerge from the economic unpleasantness that started in 2008.

Kevin Dunn and Ed Pendergast are managing directors of Dunn Rush & Co., a successful Boston based mid-market investment bank serving the M&A, recap, ESOP, private placement, financial advisory services marketplace.  Their experience is basically agnostic as to industry sector.  Kevin previously was Vice Chair of the US division of Canaccord Adams and CEO of Boston based Adams, Harkness & Hill; Ed is an active director of public and private companies and past Vice Chair of the Greater Boston Chamber of Commerce and past President of the Mass Society of CPAs and the New England Chapter of the National Association of Corporate Directors.

Of course, statistics abound from all sources relative to the state of financial activity in the middle-market.  Dunn Rush statistics are consistent with those of other investment banks; number of deals and deal values in the mid-market, particularly transactions below $50,000,000, are recovering from 2009 levels, and multiples of EBITDA similarly are recovering.

There continues to be a marked, indeed an even increased, size premium in middle-market M&A, which is to say multiples for larger acquisitions are more robust than for smaller ones.  Dunn Rush attributes this growing size premium to the investment appetites of many private equity firms that seem to insist upon, and are willing to pay for, companies with an EBITDA of more than $10,000,000.  This leaves smaller deals with less price competition.  Although pricing generally is back to 2007 levels, the size premium similarly has returned to the 2007 range.

Their M&A in New England has not seen much impact from foreign buyers, and indeed on the sell side an approach to strategic buyers remains the norm.  However, the pressure for making sales has increased among clients.  Factors driving the urge to sell noted by Dunn Rush are the following:

  • Industry consolidation which makes competition by smaller companies more difficult.


  • Lack of available capital to expand.


  • Pent up demand, including age of owners (the sale of a business at lower recession multiples was less attractive and thus delayed).


  • Political and marketplace uncertainty.


  • Possible fear that capital gains rates will increase (although this is likely not a significant driver).

What companies are getting acquired in the New England marketplace?  Companies with cash flow are selling to financial buyers.  Strategic sales continue strong.

The PE funds are “like a commodity” in how they operate; there are many, all chasing the same type of deals, and all with lots of money to spend.  This bids up the EBITDA-strong targets.

Do certain sellers avoid private equity buyers?  The answer is yes, they don’t want to see their life’s work leveraged up to finance the acquisition, and their life’s work thereby possibly placed at risk.  Some sellers also still also want to protect their workforce.  All of this can be done but it comes at a cost, in terms of net price.

If a company in New England is looking for financing for growth, but not to sell out, what about the availability of capital?

Dunn Rush is not in the start-up market, which is a wholly different story involving venture capital, angels and the like.  (A future post will discuss some aspects of this market.)  Equity remains very difficult to raise.  There is a vigorous market in sub-debt with warrants, and also bank financing for worthy borrowers ($5,000,000 minimum generally applies).  The sub-debt market is strong with target yields of 18% or 20%, a mixed yield based upon the coupon plus the attached warrant.  This kind of financing is attractive from the lender standpoint because of the spread between cost of money and yield.

As for the banks, the mid-cap regional banks are easier to access than the giant national banks, and Dunn Rush says they have excellent access in this regard; the larger banks “have their own problems” which are well known and beyond the scope of this post.

Kevin and Ed are optimistic for both the US and the New England economy, and find that businesses are “doing fine this year” in the US.  This conclusion is generally consistent with my own observations, although early stage equity capital remains a big problem which is only partially being addressed by the angels moving up into, and PE firms moving down into, the VC space.

Investing in India: Trends and Observations

Recent investor focus has been on US, Europe and China.  India is (in part) an English-speaking country that is also the world’s second most populous.  What is the prognosis for investing in India, and for the Indian capital markets in general?

I asked Harshal J. Shah, President of Reliance Capital Ltd. and CEO of Reliance Group’s corporate venture capital business, to provide his views on the Indian economy.  Reliance Capital is listed on the Bombay Stock Exchange, is one of India’s largest non-banking finance companies with presence in asset management, life and general insurance, asset reconstruction, consumer and housing finance.  The VC firm is one of India’s largest and best-performing portfolios, with investments in the US, France and India and exits on NYSE and NASDAQ and several multi-billion dollar enterprises.

What do you see as the future of the volatile Indian stock markets?

With anticipated increased monetary flow, liquidity will permit greater growth for emerging companies.  Foreign capital also seems to prefer investments in India over China, although may await the election outcomes for the Legislatures in five key Indian States.  Assuming expected results, foreign interests should begin to participate, having missed part of the rally that started in January.

What was of interest to me was Shah’s caution concerning the Greek crisis and its impact on the EU; truly, the Euro is a global concern.  Additionally, Shah points to the high fiscal deficit, although the government is undertaking divestiture of companies and the auction of telecom spectrum to meet cash needs.  (As the deficit is 5.2% of GDP, I am forced to wonder about the US fiscal situation.)

Will US concerns about direct investment in India abate?

The policy of the government is to foster investment in India.  India being a democracy, its government must respond to populist pressure.  So there will be little resistance to investment in “new” industries (tech, media, financial services) but traditional industries that affect many people (retail, agriculture) will be harder for foreign investment to crack.  The government is trying; for example, when the government rolled back approval of 100% direct foreign ownership in multi-brand retail operations, it approved similar investments in single-brand retail.

Vodaphone issues.

I pointed out that India had attempted to tax the sale by Vodaphone in its acquisition of assets based in India,  causing a concern that a buyer of Indian assets located outside India could be taxed within India upon a sale of those assets to another non-Indian buyer.  Shah noted that the Indian Supreme Court recently had indeed ruled in favor of Vodaphone, and Shah thought that this was a permanent unambiguous decision that would clear the way for transactions being treated tax-wise as in the rest of the world.

Who is investing how much where—into India, out of India?

In the six months ending October, 2011, Shah noted that India invested $25M USD outside of India and that $20M USD were invested into India.  “In essence, India is becoming a net exporter of capital.”  Shah sees an acceleration of foreign direct investment in the future.  This money mostly comes from the US and Europe (hence, I assume, one source of concern over Greece), but some from the Middle East and a surprising amount from Japan.  China is also “becoming a banker to India as well, with its large cash reserves, and its ability to provide large amounts of supplier financing and project finance.”  He sees both Japan and China increasing their efforts, althought the US will continue to be India’s largest foreign investor, with smaller companies joining the parade of giant US companies (GE, IBM, Apple).

My personal view is that to characterize GE, IBM and Apple as US companies is an historical but not a currently functional statement, given our flat world, but surely if Shah is correct that smaller US players will invest in India then that would indeed be a true US direct investment trend.

Entrepreneurship is viewed in the US as the engine of economic growth.  How about India?

Shah sees dramatic growth in entrepreneurship.  The country churns out engineers and scientists, and the government must create a business environment to provide jobs for them.  There are impediments, however: regulations favor large companies, bureaucratic delays, finding and retaining talent, implementing IP protection, poor judicial system, “coalition politics,” availability of VC money, infrastructure.

That struck me as a formidable list, but then again anyone traveling to India on business can indeed see that the country is driving forward economically, in spite of such impediments.  India may not feel quite like Singapore, but it surely doesn’t seem to me to feel like it’s asleep.

And for Harshal, clearly, India is where the action is.