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At
the end of WWII, Europe and the U.S. diverged on
economic directions. Europeans favored state ownership
of key industries. The U.S. favored regulation and
stimulus, leaving the entrepreneurial spirit to direct
economic investments. This belief in the human spirit
has helped the U.S. become the world's greatest economic
power.
The
2001 terrorist attacks, stock bubble meltdown, corporate
scandals and the war in Iraq could have crippled any
economic power. But many argue that the U.S. acted
prudently and aggressively in its economic policy. In
particular, the White House and the Fed were both active
with energetic policy moves.
A
1-2 punch: The tax cuts of 2003 were not token tax cuts;
the 10-year, $350 billion tax cut is the third largest
in the nation's history. In particular, the reduction in
the capital gains tax from 25% to 15% makes it the
lowest capital gains tax rate in the nation's history.
 At
the same time, the country is feeling the effects of the
lowest interest rates in decades. The Fed's
interest-rate cuts in response to the above-mentioned
challenges have apparently paid off for the US economy.
Interest rates continued to ease in 2003 with the Fed
Prime Rate dropping 25 basis points, from 4.25% to 4.0%.
The easing of US monetary policy helped the economy to
weather a shallower recession and milder inflation than
most expected. The consequence of aggressive monetary
policy is moving past speculation
The
first gauge to bounce back was the U.S. stock market,
with the Dow Jones industrial average, S&P 500 and
NASDAQ up 17%, 20% and 46% respectively.
The
manufacturing sector grew at its fastest pace in 20
years in December 2003, with factory employment showing
a revival. The Institute for Supply Management's
manufacturing index rose to 66.2 in December from 62.8 a
month earlier. That's the fastest pace since December
1983. Economists expected 61.5, and readings above 50
indicate growth.
Through
the end of 2003, still wary, the venture capital
community remained guarded. Going forward however, the
venture capital industry expects to see a significant
increase in fundraising activity in 2004 according to
leaders at the National Venture Capital Association. In
terms of venture capital investment, the industry is
expected to continue at a pace of approximately $4
billion each quarter in 2004, with the possibility of a
slight increase as investor confidence returns.
The
percentages of first round deals will likely increase as
venture capitalists deploy the remainder of their most
recent funds. Investment in early stage companies may
see an increase as venture capitalists shift their
attention from existing portfolio companies to new
ventures. These companies will be the IPO candidates of
2008 - 2011.
Sectors
that will continue to be popular investment areas
include software, biotechnology, energy and
communications. Yet, most funds will be considerably
smaller in size than their predecessors, as venture
capitalists continue prudent and consistent long-term
investing.
And,
despite productivity improvements, jobs are coming back.
In the week ending Dec. 27, the figure for seasonally
adjusted initial job-loss claims was 339,000, a decrease
of 15,000 from the previous week's revised figure of
354,000. The 4-week moving average was 355,750, a
decrease of 6,500 from the previous week's revised
average of 362,250.
Despite
an up tick in the economy, a rising tide no longer
raises all boats - or at least not equally. Small
business owners should take stock of their current
health - financial, market and staffing - and act to
increase competitiveness and profitability. In a
different world with punishing U.S. insurance costs and
3 billion suddenly competitive low cost workers in
India, China and Russia, business owners must remember
the bromide: make it happen or wonder what happened.
One
strategy to maintain the strength of your business is an
acquisition. Unfortunately acquisitions have the bad rap
that most do not improve stake holder value. However,
properly done, acquisitions work quite well. To measure
the success of acquisition strategies in creating market
leadership, McKinsey published a study of 1,000 mainly
industrial US companies over a roughly two-decade period
ending in 1999. Of particular note was that this epoch
included the U.S. recession of 1990 - 1991.
The
study looked at companies that made acquisitions, and
divided the acquiring companies into market leaders who
remained market leaders (in the top quartile of their
industry), and market challengers who became market
leaders by moving into the top quartile. Success for
these companies came - in part - because both classes of
companies continued to make investments in acquisitions
through thick and thin.
The
then current market leaders made smaller, tactical
acquisitions for market consolidation while successful
challengers made larger, strategic acquisitions for
market position. Market leaders increased their
market-to-book value premium by 38 percent when compared
to peers. Market challengers increased their premium by
25 percent.
There
are other examples of success. For example, Wendy's and
McDonalds duked it out in the market using acquisitions:
McDonald's purchased the 180- store Mexican Chipotle
Mexican Grill and partnered with the Italian specialty
chain, Fazoli's. Wendy's countered by acquiring
the169-store Baja Fresh Mexican Grill. In the U.S. there
are over 2,000 Private Equity Groups continually
building businesses by purchasing and integrating groups
of related companies and achieving a 30 percent return
on their investment.
We
argue that growth is imperative for survival. For nearly
two decades, The BENTLEY Companies has been dedicated to
building business value through both planning and merger
and acquisition services. Whether you want to grow
internally or acquisitively, you should give us a call.
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