Lawyer Article

Although financial markets continue to be characterized by tight credit conditions, liquidity shortages, and declining investor confidence, this is the time when the best managers take advantage of the market turmoil by remaining calm and focusing on the long-term opportunities being presented. Here are a few we are seeing now:

Available Capital. "Cash is king" and if you have sufficient internal funding or access to capital now your opportunities are broad and deep looking forward. Focus now on securing capital and organizing your business finances to prepare for the coming opportunities.

Industry Consolidation. As credit access is being “de-levered” and over-capitalization in certain industries reduced, we will begin to see broad industry consolidations occur as over-levered and weakened competitors fall away. Financial institutions are only one example. For those companies with limited access to capital, they will be targets in the new landscape. Focus now on those weakened companies with strong strategic or product fits or with facilities and assets that are cheaper to buy than build under these new conditions.

Limited Competition. We are in a rare moment where there is very limited competition for deals, even those at extreme valuations. Unlike the last few years, a number of private equity firms have left the field because of the unavailability of debt leverage and internal portfolio company distress. And other strategic buyers are focusing on their core businesses. Industry consolidation will also reduce the number of potential competitors for deals. For those with access to capital, focus now on taking advantage of this window in the market by pursuing transactions that will generate limited competitive interest.

Severe Discounts to Intrinsic Value. Companies now have some of the lowest valuation multiples seen in the market in well over a decade, if not longer. Companies that have access to capital can buy a dollar’s worth of earnings for one of the largest discounts in some time. Focus now on industries and subgroups where valuations have suffered greatly and that provide compelling strategic opportunities for growth or consolidation of your business.

Distressed Sales of Good Assets. As the liquidity crunch continues and the economy potentially worsens, weaker companies will begin distressed sales of assets to raise capital, whether subsidiaries, divisions, product lines or facilities. Further, some companies will enter bankruptcy where further sales of assets at depressed prices could occur. Focus now on those weaker players who you envision may have such problems and reserve capital for these - and unexpected - market opportunities.

Strategic Investments. What worked for Warren Buffett, can work for you. Many companies and business ventures will continue to be looking for funding sources beyond traditional financial institutions as capital is constrained. Focus now on opportunities to invest in or provide funding for companies in strategic markets or as initial steps in a longer term plan for expansion or corporate control of a company or venture.

Foreign Investments. In particular, this may be a great time for minority investments in foreign enterprises as a way to get a “foot in the door” to that country’s market while discounts for foreign companies are extreme. For instance, high-growth markets such as China and India are far off their previous highs and valuations have come down substantially.

Business Expansion. With competitors weak, real estate terms becoming more favorable, and distressed sales of assets occurring, stronger companies now have an opportune time to expand geographically or with new product lines with less capital outlay. Focus now on ways to profitably expand into new markets and lay the groundwork for future growth.

Sales of Non-Core Assets. Tough financial conditions are always a good time to review your company and focus on its “core business”. Focus now on possible business segments or assets that are “non-core” based on the company’s forward strategy. Raise capital by conducting divestments before economic conditions potentially worsen.

Rise of Non-Bank Alternative Sources of Funding. While access to short and long-term financing of commercial transactions from traditional sources has suffered a decline world-wide, alternative sources of capital, such as private equity funds, large institutional and individual investors and some larger corporations, are emerging as alternative sources of liquidity despite the financial turmoil. If you are capital constrained, focus now on ways to access these alternative sources of funding and take advantage of market opportunities. If you have capital, consider ways that your company may become a source of profitable funding.

In sum, financial crises can be a good time to make important strategic gains – not merely focus on survival.

About the author
Gene A. Jones, Jr., is a corporate and securities attorney with Womble Carlyle Sandridge & Rice, PLLC, in Raleigh, N.C. He has extensive experience representing public and private companies in a wide variety of strategic transactions, including mergers & acquisitions, divestitures, private equity investments, joint ventures and strategic partnering.