Category Archives: News

Irrational Ex-Uber-ance

Posted on by
Reply

In case you missed it, there has recently been some uber-interesting valuation discourse around the blogosphere regarding Uber, the company whose smart phone app connects drivers with those wanting rides. The buzz is about Uber’s pre-money valuation, $17 billion, implicit in its latest round of financing. It all seems, shall we say, a bit aggressive for a company with an estimated $300 million in annual revenue and little if any operating income.

Most prominently in the skeptics’ corner is Aswath Damodaran, a finance professor at NYU, who recently published a detailed analysis and valuation that trimmed the Uber valuation down by about 2/3rds to $5.9 billion.

Most prominently in the advocates’ corner is a Series A investor and current board member of the company named Bill Gurley. Gurley posits an eloquent defense that Damodaran’s numbers are off by a country mile factor of 25 times and that, as the latest group of investors has freely determined, the company is worth every penny of its $17 billion valuation if not more.

There’s tons of interesting stuff and debatable points in both of these analyses (the impending doom of the world’s “car ownership culture”?!?), but, to me, the heart of the issue is something both gentlemen are calling “disruption” aka category-killing. Effectively, Gurley says that Damodaran is missing the boat because he doesn’t understand that Uber is in the process of killing off multiple categories at once and, because of this, the TAM (Total Available Market) is bigger, by orders of magnitude, than Damodaran has considered. Check out this little historical I-told-you-so gem cited by Gurley:

“In 1980, McKinsey & Company was commissioned by AT&T (whose Bell Labs had invented cellular telephony) to forecast cell phone penetration in the U.S. by 2000. The consultant’s prediction, 900,000 subscribers, was less than 1% of the actual figure, 109 Million. Based on this legendary mistake, AT&T decided there was not much future to these toys. A decade later, to rejoin the cellular market, AT&T had to acquire McCaw Cellular for $12.6 Billion. By 2011, the number of subscribers worldwide had surpassed 5 Billion and cellular communication had become an unprecedented technological revolution.”

Damodaran, for his part, says the divergence between his narrative and Bill Gurley’s lies broadly in how their valuations address the “probable”, the “plausible”, and, for good measure, the “possible”.

So where do I stand on Uber’s valuation? I confess to a certain amount of fence-straddling in this particular situation. I know and expect that there are measures of both art and science in any valuation. I stand with Damodaran in trying to factually dissect and understand what is driving this frothy valuation. I stand with Gurley in promulgating huge, radical ideas that break down barriers and ultimately change the world. The verdict awaits.

Posted by: Mory Watkins

More On Overhang…

Posted on by
Reply

A couple weeks ago, I posted that the overhang of unsold private equity portfolio companies has never been higher in the history of the asset class. Today, I want to share more about the massive global private equity overhang, and its implications for corporate/strategic M&A.

First, a great graphic that essentially tells the whole PE story, globally, in one picture:

https://i0.wp.com/b-i.forbesimg.com/baininsights/files/2013/04/pe-report-forbes-52.gif (source)

  • The global overhang of private equity assets waiting to be sold is now approaching $2 trillion.
  • Three-quarters of the blockage is related to PE funds with a vintage between 2005 and 2008.
  • 90% of PE funds with a vintage between 2006 and 2008 have yet to return any capital to their LPs.

So there is an outsized supply of companies ready to be sold, to say the least.

But what about demand?

Market conditions are also converging for corporate buyers (the largest and most important channel for private equity exits) to drive strong demand:

  • As previously mentioned, corporate balance sheets are stronger than they’ve been in a long time. Cash balances are at all time highs.
  • External capital too is more than plentiful, and US markets, in particular, are awash. World financial assets are now nearly 10 times the value of the global output of all goods and services. Global capital has swollen past $600 trillion, tripling over the past two decades.
  • Public equity market gains, albeit chiefly in the US, are providing renewed appetite for growth, currency for deals, and a pathway for exits. The Dow and the S&P 500 have both regained pre-meltdown losses and have hit new all-time highs. If sustained, equity market gains will bode well for deal-making; increased M&A activity has always historically followed significant public market gains.

Important elements have thus aligned — flush balance sheets, cheap and available financing, and improved equities markets – to create real demand-side momentum.

Get ready for increased near term corporate/strategic deal-doing. I am confident that all the pieces are in place.

Posted by: Mory Watkins

Where’s The Incentive?

Posted on by
Reply

I’m always fascinated by methods employers use to incentivize their employees…

Did you hear that Goldman Sachs is considering retreating from Europe, given the Eurozone’s stance on enforcing bonus caps? Under the new bonus cap laws that were just approved, banks are most likely going to be banned from awarding bonuses in excess of salary. Exceptions can be made if shareholders agree, in which case the cap could be up to 200% of the salary.

Goldman President and COO Gary Cohn recently said, “We have to be thinking about moving. If we cannot attract the best people, that is a big hindrance to our business.”

He’s actually got a point…The US has a much higher bonus-to-salary ratio than Europe, and, in 2012, U.S. investment banker bonuses were 60% higher than those of their European counterparts. Also, European investment firms were responsible for only 23% of global investment banking revenue. Hard to see why Goldman would want to stay (or how they’d fairly incentivize an employee to live in Europe).

And while it’s odd to think of Goldman completely pulling out of Europe, it’s even more odd to consider that governments can now tell private industry how and how much they can pay their employees…?!?!?

Posted by: Mory Watkins

Overhang

Posted on by
1

Attention, corporate development executives: the overhang of unsold private equity portfolio companies has never been higher.

It’s true — private equity firms are sitting on the largest collection of unsold portfolio companies (“overhang”) in the history of the asset class…and the glut is enormous: an estimated 6,500 unsold portfolio companies as of year end, representing almost 70% of private equity firms’ total assets under management as of Sept. 30 of last year. That is the highest number of unsold portfolio companies ever recorded.

“The overhang that is not sufficiently talked about is not the overhang of capital, but the overhang of older portfolio companies and older funds that have not been sold and need to be sold. What ends up happening to this glut of unsold portfolio companies could have a big impact on the entire private equity industry. Firms can’t sell their portfolio companies because they are worth less than their original investment,” says Michael G. Fisch, president and CEO of American Securities LLC.

And PE firms can’t play the waiting game forever. GPs may gain slightly on the multiple by holding out for a better price, but it will also dilute the time-based math of the internal rate of return, a key factor for PE fund raising. A fine balance must be struck.

What will happen to all these private equity portfolio companies…will strategics step in to buy them? When will they get sold? Will the realized PE returns affect the size and viability of the private equity industry? Stay tuned…

Posted by: Mory Watkins; portions excerpted from a recent article in Pensions and Investing Magazine by Arleen Jacobius

When 3,678 Isn’t 5,000…

Posted on by
Reply

Did you know that now there are only about half as many publicly traded companies as there were in 2000? I didn’t.

The number of publicly traded companies always ebbs and flows, but the current number has fallen steadily since 2000. At 3,678, the number of companies available for the public to invest in is much closer to the all time low of 3,069 in February 1971 than to the all time high of 7,562 in July 1998. Granted, there are thousands of stocks traded on “Pink Sheets” and other lightly or unregulated markets, but the Wilshire 5000, which only includes those that trade on an exchange such as the New York Stock Exchange or Nasdaq, can’t even maintain enough companies to reach its namesake number of 5,000. There are now only 3,678 companies in the index, which is down by more than a third in a decade, and off by nearly half from its level in 2000.

But it’s not just a blip with the Wilshire 5000. The total number of listed securities trading on the Nasdaq OMX and NYSE Euronext exchanges was 4,916, according to the World Federation of Exchanges. The number of listed securities on these two critical exchanges has fallen every year since 2009 and is down 32% since 2000 and 39% from the recent peak in 1997.

Why is this? One of the main reasons cited is that corporate acquisitions have eliminated and absorbed scores upon scores of candidate companies. Even during the recession years of 2008 and 2009, 8,778 and 7,415 U.S. companies, respectively, were bought. Those figures have steadily increased to 10,108, 10,518 and 12,194 in 2010, 2011 and 2012, respectively, due to a combination of cheap acquisition debt and relatively lower acquisition multiples during the last three years.

Other hypotheses include the increasing expense/hassle of being public, the prevalence and domination of larger public companies, investor distrust of stocks, and involuntary delisting. There is little new supply of public companies either, of course, as the initial public offering market remains moribund.

No one can say for certain exactly why the number of tradable equities has fallen so precipitously, but the trend for fewer rather than more public companies should continue for the foreseeable future.

Posted by: Mory Watkins; excerpted, in part, from an article recently written by financial reporter Matt Krantz.

2013 Carve Out Survey

Posted on by
Reply

I just had a quick look at Deloitte’s annual divestiture survey. The survey polled 150 executives at mostly larger and public companies about their plans to either slim down or sell operations (a divestiture or carve-out was defined as the sale of a subsidiary or a portion of a company’s business, whether a plant or other facility, product line, business unit, or division).

From the corporate development perspective, the most informative finding from the survey is that corporate divestitures are now overwhelmingly more about strategy than survival. According to the survey, fully 81% of the executives (up from 68% in ’10) said that pruning non-core assets was part of their strategy and was not influenced (read: “dictated”) by either the need to raise capital or to divest non-performing assets. Said another way, responders now mostly view their divestiture plans as being strategically, rather than purely financially, motivated. This is good news, folks.

Is it then safe to say that this new corporate confidence is indicative of an economic recovery?  I don’t know if I’d go that far, but certainly stronger corporate balance sheets with cash reserves at an all time high have emboldened many of my fellow corp dev execs to believe that they control a bit more of their own destiny when it comes to divestitures.

To me, the other interesting corporate development finding from the survey is that private equity seems to have lost additional favor as buyers of corporate assets. Only 31% of respondents (down from 42% in 2010) said their companies “prefer” or “somewhat prefer” to deal with private equity buyers. The majority (59%) would prefer to sell to a domestic corporation, of course.

Why the relative knock on private equity? My guess is that the slowed rate of private equity activity during the same time period is responsible. There is currently over a trillion dollars of unused capital on the private equity sidelines and, although there is also now a palpable urgency to deploy this dry powder, out of the market means out of favor with sellers. Plain and simple.

You can find the full survey and report here.

Posted by: Mory Watkins

You Can Lead A Horse To Water…

Posted on by
Reply

Here’s something you don’t read every day in an S-1…

“Institutional Venture Partners IV, L.P. is compelling us to register the shares of Class A common stock offered hereby by exercising demand registration rights. While we intend to comply with our obligations under the Master Rights Agreement, our board of directors and executive officers believe that filing the registration statement of which this prospectus is a part and effecting an initial public offering of our Class A common stock are not in the best interests of Applied.”

Huh? I guess you can lead a horse to water, but you can’t make it drink.

This is buried in the Risk Factors section of an S-1 filed by medical device company Applied Medical Corporation, whose largest outside shareholder is Institutional Venture Partners. It seems that IVP is exercising its “demand rights”, where it can contractually obligate AMC to register its shares for a later sale to the general public. The notable thing here, of course, is that AMC, its board, and its management seemingly don’t want to go public…and that raises some very interesting questions. How do you do a roadshow with a company that publicly says, “But seriously, folks, we don’t think this a good idea.”

To be sure, you rarely (if ever?) see an investor force the demand registration issue so visibly against the will of the company. IVP says they and their institutional investors simply need to realize on this investment — quite a damning indictment of the pressure institutional investors are currently under to get liquid. But there’s certainly a lot more to it than that. How the company and its investor got to this point is a story within itself with, of course, all the assorted and sundry lawsuits too.

What I find most notable about this story from a corporate development perspective, however, is AMC’s overt aversion to going/being public. The hassles and costs of being public are well documented – a 2012 survey by E&Y shows that it adds over $2.5 million to the average company’s cost structure. AMC’s board and management clearly think that there’s more (ostensibly longer term) value in remaining private and, as implied by their CEO, continuing to groom the company for sale to a strategic buyer. Ironically, they’re now made to say this publicly.

In these types of situations, I normally say to understand the real story all you have to do is follow the money. Here, exceptionally, there are two diametrically opposed views on the best path to ROI, and the story is still evolving. I’ve never seen a rider-less horse be made to drink, but you never know…

Posted by: Mory Watkins

Middle Market M&A Activity Update

Posted on by
Reply

Today, a quick update on Middle Market (Enterprise Value less than $500M) M&A Activity…

First, the Private Equity Headlines:

  • PE is “leaner” these days, and Middle Market deal volume is lower (1,290 deals announced for LTM Q2 2012; low water mark was 798 in 2009 and high water mark was 1,506 in 2007);
  • From PE perspective, the story is lots of dry powder ($423B) + few good deals = high multiples (the average Enterprise Value/EBITDA multiple is now 8.2x compared to 5.4x in 2009);
  • Also contributing to the high multiples, strategics too have lots of dry powder (cash holdings for the non-financial S&P 500 = $1.2T)

Second, the overall Middle Market Headlines:

  • There were 7,150 deals done ($176B in value) in LTM Q2 2012; this is down 8% and 6%, respectively, from the same period in 2011.
  • Lackluster activity is somewhat surprising given amount of dry powder (both financial and strategic) and prospect of ’12 raise in capital gains.

I would only add that the PE figures above are consistent with the story from PE firms I’m in contact with.  Most are trying to maintain their discipline and believe that deal flow will not return and capital will continue to remain on the sidelines until macro economic confidence increases a bit more.

(The source for all of this information is Thomson Financial. You can find the full report here.)

Posted by: Mory Watkins