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New COO for Strothman and Company: Brad Plaschke, Esq.
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Strategic Advisory Services: You Found a Great Company to Buy or Merge With - What Can Go Wrong?
We have all been there. What seemed like a great idea at the time just doesn't seem to work out and in fact can be a disaster. Business owners spend a considerable amount of their time building brand, customer loyalty, and growing the business. When they are successful and want to accelerate the growth opportunities to merge or acquire appear. The opportunity may be with a company that appears to also be very strong or it might be with a weaker company that has what appears to be good bones but has fallen on hard times. In either case the synergies that can create leverage seem to be apparent and the combination just can't miss- or can it?
Too often we have seen business owners ignore the basic fundamental research and due diligence that they apply in hiring, buying or leasing a new piece of equipment, or rebidding a contractor. There are so many moving parts when combining business entities that not only can the price be significantly off but so can the elements underneath the surface. These elements can lead to colossal and systemic failure of the entire combination very quickly if something is missed. Every deal has a series of stages and nuances that require strong and experienced professionals to provide unemotional advice, counsel, and structure.
There are 6 basic stages in a merger or acquisition that are equally important. They are:
- Initial Meeting/Introduction- This is the stage where initial interest is raised. It may be the result of a random meeting, purposeful research into competitors, identification of a strategic need within your own company, or an introduction by a third party. During this stage a very high level set of activities take place to see if there is a level of interest that warrants a deeper exploration.
2. Pre-Diligence- This is stage where research begins. Gathering what you can independently to determine what type of business the potential acquisition or partner is engaged in, what type of reputation they have, who are the principals, suppliers, customers, etc. This stage also is about a deep dive into your own company to determine exactly what strategic needs and gaps you currently have. What are your company's strengths, weaknesses, opportunities, and threats?
3. Engagement - A deeper dive with the potential target or partner is now undertaken with non-disclosure documents being exchanged along with basic information that will help validate the potential combination. These conversations should touch on everything including operational processes, customers, revenues, profitability, market share, key people, business philosophy, and culture to name a few. The outcome should be a non-binding letter of intent that will frame out the basic structure of a deal. The LOI is designed to bring the critical deal points to the surface. Items such as general terms, form of purchase, due diligence timing and process, formula for valuation, confidentiality, exclusivity, contact process, and prospective close dates are among the items addressed.
4. Due Diligence - Once the LOI is signed the deep due diligence process begins. This is where the very hard questions get asked and information must be produced to back up the representations is required. An efficient process for collecting, storing and sharing information is critical. It requires the creation of a due diligence check list, establishing team leaders and counter party contacts, a time line and project plan, and determining the sequencing of diligence to address largest and most critical concerns first. Various due diligence processes may include inventory of human capital as well as operational processes and systems, a complete financial pro-forma including cash flow pre and post, balance sheet management and liabilities, market sensitivities and competitive landscapes, Benefit analysis and liability, HR analysis, technology systems integration and security analysis, GAP/SWOT, and customer indexing analysis. Site visits are critical. It requires effort and commitment to the process. Third party professionals to provide legal, accounting, financial analysis and modeling, and tax advice will be of paramount importance. This is where many deals fail as companies try to fit it in between their normal work and many issues are skimmed over or taken at face value. These can come back to bite later on.
5. Closing Stage a. Drafting of legal documents pertinent to closing
i. Purchase/Merger Agreement
ii. Operating Agreement
iii. Shareholder Agreement
b. Operational and employment agreements
c. Capital sourcing and structuring
d. Closing mechanics and logistics - payment process for assets and liabilities
6. Post-Acquisition Integration - Many fail due to lack of post-acquisition integration execution. The ability to integrate the combined entities is of paramount importance. Often times we see the work stop at the transaction closing stage when the real work required is in the post-acquisition stage. This is where cultural combination, leadership, systems integration, and missed items from due diligence come to the surface. The work done in this stage is as important if not more important than the work done in any of the other stages.
a. Internal communication b. Vendor and customer communication c. Project plan management for integration of i. Technology systems ii. HR iii. Payroll iv. Benefits v. Organizational hierarchy and management vi. Employee retention and reduction vii. Purchasing viii. Operational efficiencies ix. Financial integration
In the final analysis any of the 6 areas above could derail what should be a great combination and experience. It requires an objective and dedicated team to do the work. It is a full time job. Growth through acquisition or merger can be a tremendous way to grow the business successfully or it could be the quickest way to destroy the value of what has been built over decades. Price is only one of a multiple of factors that needs to be considered and a bad deal at any price is still too expensive. If you are thinking about a transaction or growing your company at a faster pace call us to discuss how we can help you to strategically execute and maximize value.
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Stock Market Volatility - Strothman Wealth Care
On 10/10, the market began the largest sell off since February. While a market drop makes us all nervous, understand that a sell off of 10% occurs on average every 357 days according to Deutsche Bank.
Key economic indicators are strong. The Leading Economic Indicator Index hit a new high last month, a measure that typically signals another year to 18 months of positive stock market returns. Unemployment is at its lowest level, 3.7%, since 1969. Inflation is low by historical measures. Price to earnings ratios are high, but if you take out the so-called FAANG stocks (Facebook, Amazon, Apple, Netfix and Google) they are in line with historic norms. Earnings season begins later this month and most analysts are predicting more "beats" than "misses".
So with all this optimism, why the sell off?
The recent interest rate activity pushed the 10 year Treasury note to 7 year highs at 3.25%. This impacts borrowing costs. When you couple this with the perceived obstacle of the U.S. trade war with China, nervousness can prevail. Keep in mind that interest rates are rising because we have a strong economy. That is the function of the Fed: to use interest rates to curb inflation and provide the system with a safer, stable monetary and financial system.
This nervousness sparked profit taking on the most highly appreciated sector: Tech. The aforementioned FAANG stocks were responsible for the majority of the S&P 500 index return year to date so naturally these stocks were ripe for profit taking. This prompted some of the computerized trading algorithms to trigger sell orders which exacerbated the plunge. Tech led the sell off, but energy and global stocks followed suit.
Typically during a sell off we see a "flight to quality". That quality is usually treasuries. As money flows into treasuries, yields decline. When yields decline, mortgage rates follow and nervousness subsides. Some sense of normalcy returns to the market. That did not happen on Wednesday. This spooked investors and prolonged the sell off into Thursday. We believe the markets are testing the lows, but that the markets will firm up in the coming days. At the time of writing this (Friday AM), the DOW is surging. The volatility may continue into next week or weeks, but we do not believe that this is the "correction".
Our focus is on your plan and its long term viability. The portfolios we have put together are designed to absorb less of the downturns and participate in most of the upswing over a market cycle. This type of portfolio construction makes your long term projections more predictable. We'd advise you stay the course, but do not hesitate to contact us with any questions or concerns.
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Will Billionaire Investor Ray Dalio Be Correct Again?
The majority of the mainstream financial media steers investors to news stories that have little bearing on intermediate and long-term returns. The stories often have a short-term focus, centering on the problem of the day and how it will impact the stock market. Many experts, including the legendary investor Ray Dalio, believe the average investor would be better served by ignoring daily news headlines and focusing on metrics with insight into where we are in the economic cycle.
Dalio's Start and Accomplishments
Born in Jackson Heights, Queens, Ray Dalio became hooked on investing at the age of 12, when he used $300 he saved from caddying and other jobs to invest in Northeast Airlines because of what he overheard on the golf course. Dalio later went on to graduate from Harvard Business School and trade commodity futures on Wall Street before starting his own investment management firm, Bridgewater Associates, in 1975. Today, Bridgewater is one of the largest hedge funds in the world, with more than $160 billion in assets under management. Dalio himself is personally estimated to be worth approximately $16 billion to $18 billion.
Investment Approach
Dalio employs an investment approach called "global macro," which means large-scale investing based on broad systematic factors. He studies market history, looking for events and causations that were previously thought to be impossible. He uses this historical perspective to anticipate changes in currencies, commodity prices and inflation. He also is a strong believer in understanding the psychological factors that influence markets and company management.
Past Prognostications
Dalio is perhaps best known for foreseeing the Great Recession of 2008-2009. Back in 2006, Bridgewater Associates figured out that the total debt service in the United States was exceeding income and that as a consequence, economic de-leveraging was inevitable. Then in 2007, Dalio saw the housing boom coming to an end and met with the Secretary of the Treasury to warn him that the big banks were in danger of becoming insolvent. As a result, the fund made significant investments in Treasury bonds, gold and the Japanese yen. Finally, in the spring of 2008, his fund pulled out of Lehman Brothers and Bear Stearns, a mere week before the latter failed.
What Does Dalio See Coming Now?
Recently, Dalio said he thought that the U.S. economy was in the seventh inning, and that now is the time to starting shifting to a more defensive position in the market. Why does he believe this? There are three main economic metrics that tie into this thesis.
The first is the NFIB Small Business Confidence index. Right now, small business confidence is at an all-time high. This suggests that small businesses are hiring, expanding and investing. These are all good things, but the fact that we are at an all-time high leads many to believe that we are also at the peak and the only place to go from here is down.
Two other metrics to consider are the ISM Manufacturing Index and the Conference Board Consumer Confidence Index; they are at 14 -year and 18-year highs, respectively. These metrics suggest that manufacturing and consumer confidence are also near peaks and indicate nearing the top of another economic cycle.
Conclusion
The simple fact that these three measures are at or near all-time highs doesn't mean that a recession is imminent. It does mean that the economy has a high probability of seeing growth slow before reversing. Essentially, Dalio is suggesting that we are not at the end of the cycle, but we are getting close. Unfortunately for investors, being too early is the same as being wrong - so there are no easy answers or we'd all be billionaires like him.
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Tax Reform 2.0
The House Republicans recently introduced legislation that, bundled together, is being referred to as Tax Reform 2.0. Expanding on the Tax Cuts and Jobs Act (TCJA), it's composed of three main bills that intend to address some of most criticized portions of the TCJA.
H.R. 6760
, Protecting Family and Small Business Tax Cuts Act of 2018
Currently, the TCJA tax cuts for individuals and small businesses expire in 2025, but this bill would make them permanent. The bill would also extend the lower 7.5 percent deduction floor for medical expenses through 2020; currently, this provision expires after 2018.Additionally, the bill attempts to clarify the increased child tax credit by making it explicit that a taxpayer identification number is needed to claim any non-child dependent. The estimated cost of these tax law changes is approximately $631 billion over 10 years.
H.R. 6757
, Family Savings Act of 2018
This bill aims to help families start saving earlier and save more by expanding options. For example, one of the new savings vehicles the bill is set to create is a
universal savings account allowing up to $2,500 in after-tax contributions per year, with tax-free withdrawals that can be made at any time for any reason. 529 plans also would be modified, expanding the definition of qualifying expenses and allowing up to $10,000 in distributions to be used for repayment of qualified education loans. The estimated cost of these tax law changes is approximately $21 billion over 10 years.
H.R. 6756,
American Innovation Act of 2018
H.R. 6756 aims to help
new businesses by expanding the current start-up and organizational costs deductions. Currently, start-up and organizational costs each qualify for a $5,000 deduction; this bill would allow a combined deduction of up to $20,000 for both.
Under the law as written currently, net operating loss carry-forwards, net operating losses, general business credit carry-forwards, and general business credits are eliminated or limited if there is an ownership change. H.R. 6756 would allow new businesses that have a change in ownership to claim these tax breaks the same as if no ownership change occurred.
The estimated cost of these tax law changes is approximately $5.4 billion over 10 years.
Conclusion
While the House Republicans believe they are being responsive to their constituents with these bills, the total cost for all three over the next 10 years exceeds $657 billion. With a federal deficit growing increasingly fast, it's not clear how the Senate will react to the bills now that all three bills have passed in the House.
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Phone App to Enhance Staff Productivity
Is your staff spending too much time in meetings and not enough time working independently? If so, you're not alone. Since 2008, the amount of time that firms spend in meetings has been increasing. It is now projected that organizations spend an average of 15 percent of company time in meetings.
It could be that meetings have become more prevalent because of all the bells and whistles that new technology has brought to the conference table. These advances include slick presentations with video and talking heads as well as interactive face time with offsite staff and clients. It's no wonder companies are investing in meeting technology.
However, technology that was meant to make workers more productive has, in many cases, just placed them in meetings for longer periods. Perhaps it's time to start using technology for more efficacious purposes.
Enter: Meeting apps. Instead of inviting loads of people to a meeting to get up to speed, how about just invite the folks necessary and record the meeting for all those who just need to be aware of what's going on. There are now phone apps that record a meeting and then transcribe the dialogue into meeting notes to be distributed after the fact.
One such example is an AI-powered app called Tetra, introduced in 2017 and continually being updated with new improvements. The key feature of the app is to eliminate the need for anyone to take notes, which enables participants to stay focused on the content being discussed. The app not only records the phone call, but also transcribes the call into a text document using deep learning and natural language processing (NLP).
A full transcription of the discussion is delivered within minutes after the call, complete with features that make it easy to search for specific terms in order to review exactly what was said. For example:
- Search for keywords across all conversations
- Listen to a specific piece of audio by tapping on those keywords
- Generate a call summary by manually tagging key moments during a call
- Save highlights and action items with a single tap
- Share notes with colleagues who are not present through the Tetra mobile or web app
How It Works
Tetra allocates a dedicated Tetra number to be used for all outgoing and incoming calls over Wi-Fi or 4G. Once each call is completed, the VoIP app generates notes a short time later.
Price
In terms of cost, the app offers an initial trial of 60 free minutes in the first month. Thereafter, the user signs up for a specific plan based on projected time.
- Plus - $9/month for a total of five hours of call time per month
- Pro - $29/month for a total of 10 hours of call time per month
- Business - $99/month for unlimited call time each month
Compliance
One common question regarding recorded phone calls is whether it is illegal. To legally comply with the issue, the Tetra app issues a default announcement to participants that the call is being recorded. The app offers the option for a user to disable this announcement as long as the plan subscriber agrees to ask for recording permission where necessary to stay compliant with local laws.
Also, Tetra utilizes industry standard encryption and Amazon Web Servers (AWS) to store data that's been collected. Note that the transcription function is generated automatically by artificial intelligence and no humans are involved, so all meeting content remains confidential.
The meeting recording market is starting to expand. There are currently numerous apps, such as Zoom, clark.ai, Scopist and NoNotes, that record calls and save them to a cloud for easy retrieval. However, the transcription service is relatively new and adds a striking dimension to enhance productivity - allowing more employees to keep working outside of meetings.
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6 Great Ways to Unplug and Feel Better
You've just lost your phone and you're in full-on panic mode. When you locate said electronic device, all is well. You heave a sigh of relief. All of this begs the question: Why and how have we become so dependent on our phones? Though doing without a phone entirely is probably not realistic or in some cases necessary, here are a few ways to ramp off your addiction - and why unplugging is so important for your overall well-being.
1. Don't Take Your Phone to Bed
Research shows that blue light from the phone screen makes it hard to fall asleep. Wayne Conn, a sleep coordinator at Texoma Medical Center, claims that it wakes up the brain and causes it to be overstimulated, much the way exercising before going to bed prevents our bodies from relaxing. Idea: Put the phone down two hours before you retire for the evening, maybe in another room. If you need to make a call, use a land line. When you do this, chances are you'll sleep better and wake up refreshed.
2. Let Go of FOMO
FOMO is the acronym for "fear of missing out". In fact, Larry Rosen, psychology professor and author of The Distracted Mind, told CNBC that most people check their phones every 15 minutes or less for fear of not being in the know about whatever local or world crisis might be in play. Truth is, if it's that important, you'll hear about it on TV, the radio or from a friend. Acquiescing to this phenomenon creates anxiety and interferes with your ability to focus. To avoid all this stress, let go and let live.
3. Set Alarms to Wean Yourself Off
Relegate your phone checking to certain times, which might be after work or after dinner. Next, set alarms on your phone during these times so that you can take one deep dive into your phone, respond to emails and comment on social media. Better still, Rosen suggests a radical idea: tell friends and family that you might not be responding to messages as quickly as you used to. Talk about liberating! No longer will you be a slave to the world.
4. Remove Distracting Apps from Your Phone
To avoid accidental time-sucks, remove apps that seem to lure you in and hold you hostage, such as social media sites and games. Instead, deploy apps for reading or learning a new language. If you really want to see who has had a new baby or been on a fabulous vacation, you can do it on your desk computer or laptop. The takeaway? Now when you're interacting with your phone, you'll be contributing to your mental health and personal growth, rather than taking away from it.
5. Rely More on Smart Speakers
Step away from the screen. Give your thumbs a rest. Use your voice to do the heavy lifting with smart speakers like the Amazon Echo or Google's Home Products. These blue light-free devices can answer virtually any question you have, as well as turn on music or a podcast. When you're not glued to your phone, you'll enjoy life a whole lot more.
6. Try Replacement Therapy
Finally, instead of reaching for your phone, pick up a book. Talk to your coworker, spouse or neighbor. If we're honest, human interactions are far more satisfying than a tiny rectangular screen.
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Potential Impacts of Midterm Elections
Next month, all 435 seats of the U.S. House of Representatives and 35 of the 100 seats in the Senate will be up for grabs in the midterm elections. Historically, congressional midterms have had much lower turnout than Presidential elections, but this year has a lot of issues at stake - not the least is the potential for in-depth Congressional investigations and the possible impeachment of a sitting president.
But putting all of that aside, let's take a look at how various scenarios could impact the investment markets.
Republicans Retain Control of Both Houses in Congress
This would likely lead to more social and economic policy changes in the future, such as further reduced taxes, stronger control of immigration and a new healthcare bill that reintroduces medical underwriting for pre-existing conditions. The coal industry, financial and consumer discretionary sectors also are poised to benefit.
Democrats Take Control of One Branch
Congress will be divided, which puts most legislation in gridlock. However, a stalemate offers stability and predictability, which the markets like, so it could serve to sustain the bull run. In addition, the one common ground on which Democrats and Republicans can agree is the need to bolster the nation's infrastructure, so there could be substantial investment in industrials, materials and utilities.
Regardless of how the power structure lands after midterms, it's worth noting that historically the midterms have yielded largely positive market performance. In fact, every midterm election year since the 1940s has yielded a positive return.
Risk Factors
In addition to potential changes in Washington, there are other factors to consider in today's economic environment. First, the threat of rising inflation coupled with ongoing low unemployment increases the chances of more interest rate hikes by the Federal Reserve Bank.
Subsequently, the rising value of the dollar could threaten the current positive environment for earnings. Should the United States experience a political crisis as a result of the midterm elections and/or the ongoing investigation into the 2016 presidential campaign, the markets could see a dramatic drop in consumer confidence.
One historical trend that is likely to continue this year is increased market volatility in the month leading up to the midterm elections, driven by political uncertainty. With this in mind, remember that temporary price declines provide an excellent opportunity for investors to expand portfolio positions for the future. Also remember that as we approach the year's end, it could be a good time to harvest gains and reposition assets for higher growth in 2019.
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