As with you, I enjoy some good old fashioned schadenfreude moments every once in awhile. I hope these help you ring in the new year. Enjoy! (hat tip Michael N.)

CNNMoney.com’s 101 Dumbest Moments in Business 2007

Wishing you a happy, healthy, and safe new year!!!

I came across this article several days ago about the future of M&A activity (see Wall Street Sees 20% M&A Slump on Scarce LBO Credit). The article contends that M&A activity is likely to decline in 2008. Big shocker there! Many of us have been saying this for months, and it consistent with the views that I have expressed on this blog for about 6 months now (see here and here and here). The article claims:

LBO firms, responsible for half of this year’s 10 biggest purchases, now face financing costs that have more than doubled since June to the highest in four years… “It’s the end of an era for a while for the very large LBOs,” said Piero Novelli, 42, the London-based head of global M&A at UBS AG, Switzerland’s biggest bank… “There are more bankers chasing less transactions,” said Jimmy Elliott, 55, global head of mergers at JPMorgan in New York, who predicts acquisitions may slump as much as 30 percent. “There’s no evidence that there will be any large public-to-private transactions in the near and intermediate future.”… “The mega-LBO is dead,” said Tom Willett, 39, joint head of European takeovers at ABN Amro Holding NV in London.

But the slowdown will not just be limited to private equity deals. The credit crunch will inflict damage on strategic deals as well, as many firms will have difficulty raising capital to complete such deals. Moreover, if the stockmarket remains volatile, strategic deals that involve stock swaps will have difficulty getting completed as well. Parties to the transaction will not only have a tougher time agreeing upon an ex ante price, but it is much more challenging to peg an exchange ratio in a volatile market.

I find it somewhat interesting that executives from the major banks project only a 20% decline in overall M&A activity. The article explains:

The value of transactions may fall 20 percent from a record $3.9 trillion this year, executives at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Bank of America Corp. estimate.

Like Jimmy Elliott, I have trouble buying that 20% figure. For starters, M&A deals fell 33% in the 2nd half of 2007. What makes these executives believe that 2008 will be any better than 2H 2007? If anything, credit conditions have steadily deteriorated - they certainly have not gotten any better better. So for me, that 20% represents something of a best-case, a lower-bound, a drinking the kool-aid scenario. I would not be surprised to see M&A activity fall upwards of 35% in 2008 (maybe even as high as, …gasp, 40% as an upper-bound).

I don’t know where that 20% figure came from. It must have been generated out of the banks’ departments of optimism…

I have just decided to switch from Typepad to Wordpress for my blog. I’m hoping that this will create a more interactive experience with my personal website. I hope you enjoy the new look. I hope you’ll find it easier to use, and I hope you’ll visit frequently. Please be sure to update your links, and be sure to let me know what you think! I will back soon with posts on regularly scheduled topics.

I missed my regular post last week. Not for lack of desire, but unfortunately I was otherwise occupied. That’s right, I was called in to fulfill my obligation to the people of the State of New York. They found me, they caught me, and there were no more opportunities to postpone. So I begrudgingly went to the courthouse for jury duty.

Although this post is certainly off-topic given the focus of this blog, I had some observations that I’ll share with you.

1. Inefficiency abounds (at least insofar as the jury selection process is concerned) - I sat idle for several hours, only to be called into service as a prospective juror in a jury pool around noon. Once inside the courtroom, they allowed each individual to raise his or her objections to serving on that particular case (in private, one-on-one with the judge). Meanwhile, we waited. Then it was time for lunch. After lunch, they proceeded to interview half of the jury pool, while the other half was made to sit in the courtroom and wait, and wait, and wait (no reading, writing, or arithmetic allowed). When they got around to interview the second half of the potential jurors, it was time to break for the day. We then came back the next morning to be questioned by the attorneys. Not only was the actual jury selection process inefficient, but many of the selection processes are still done by hand. For example, they still put names into a giant bingo machine, spin it around, and call out jurors one by one when they decide who gets selected for a particular jury pool. In addition, everything inside the court is done by hand. They even had a real life stenographer. Haven’t stenography machines been digitized yet? Now don’t get me wrong, I believe in a fair process. I believe that defendants deserve a fair trial. So in that sense I’m in favor of inefficiency, at least to the extent that it improves quality. However, I’m not sure that in this case there were any quality benefits to that inefficiency. Expediency might have even produced a better outcome. To me, inefficiency without quality is like consistency without accuracy. Sure, a consistent process will give you the same outcome every time, …too bad it will be the wrong outcome every time too.

2. The defendant’s chances of having a "fair" trial have less to do with jury selection and more to do with the competency of the defense attorney - I’m extrapolating here from a sample of 1, but it was obvious that on the case I was assigned, the defense attorney was court appointed. Moreover, the defense attorney was incompetent. I’m sure those two things (court-appointed and incompetent) are not mutually inclusive. However, if the average quality of a court-appointed attorney bears any resemblance to that of the defense attorney on my case, then those defendants who cannot afford their own attorneys are in a world of hurt. I know this is nothing new, as people have been arguing for years that "fair" trials are reserved for the wealthy. But wow, to see it this up close and personal was sobering!

I was only left to think: Although they say the law is color-blind, …I’m fairly certain the law sees green.

I read an interesting article in the economist last week about the SAS corporation (see Doing Well by Being Rather Nice). SAS is an interesting organization, and Jim Goodnight is definitely an interesting fellow. But to be honest, many of the details did not strike me as new (especially considering the 60 Minutes segment on SAS from 2003). However, there was one quote from the article that got me thinking.

In response to a question about why SAS was not a publicly listed and traded company, Jim Goodnight responded:

We don’t have to deal with Sarbanes-Oxley or minority shareholders suing us every time we turn around, or 25-year-old Wall Street analysts telling us how to run our business…There are lots of advantages.

Many of us take for granted that being a public company provides some real advantages for firms. In fact, for many new businesses, going public seems to represent some sort of triumph - the nadir of their corporate existence.

But Jim raises some really interesting questions, so let’s weigh some of the benefits with some of the costs:

Benefits of going public have traditionally included:

1. Access to risk seeking capital
2. Access to large pools of money

In the old days, banks were rather small, dispersed, and risk averse. During the industrial revolution, firms needed access to large sums of cash to invest in capital equipment (heavy machinery). On the one hand, their financing needs could easily outstrip the ability of small local banks to provide them. On the other, banks were risk averse by nature and were not willing to put large sums of their own money at risk on inherently risky ventures. Therefore, going public (tapping into a large and dispersed public market) allowed firms access to the large sums of cash they needed to fund their businesses from investors who were willing to bear the risk.

3. A means for wealthy families to exit existing businesses

Families often have a lot of their wealth tied up in the firms that they found. Over time, it becomes risky for families to have their wealth tied up in just one investment (which may be quite illiquid); therefore, families will often take their firms public in order to be able to diversify their assets and realize some private gains from their firm. Also, 2nd and 3rd generations may take family companies public for tax purposes – e.g., to offset some of their inheritance tax burdens. For these reasons, it’s no surprise therefore that many of the largest U.S. public corporations are, or were at one time, family firms.

4. Prestige

At some point it became prestigious to be a public company. I’m not exactly sure when or why, but being public conferred some sort of status, allowing public firms to better attract managerial talent, and maybe even lower their cost of capital vis-a-vis private firms.

Although these were traditional benefits to public corporations, there are some who have argued that things have changed recently to make it not so attractive to be public anymore. For instance:

1. The rise of institutional investors - Previously, firms were generally limited to banks (or public markets) to raise capital. But now, cash is abundant and available from various sources - banks, pension funds, investment banks, hedge funds, private equity firms, insurance companies, sovereign wealth funds, etc. This makes it easier for firms of any kind to attract capital. Firms now often have institutions competing for their business. So if I can raise capital without having to be public, then what’s the benefit of being public?

2. The cost of compliance - It’s not cheap to be public. Everyone at this point is familiar with Sarbanes-Oxley and its impact on the costs of regulatory compliance, …especially with respect to section 404. It’s not only that, but in order to be public I need accountants, auditors, PR firms, investor relations staff, not to mention a group of senior managers that spends a good deal of time dealing with wall street, and their nosy analysts. Who needs such hassles anymore? As a shareholder, I’d rather have my managers spending time running the business rather than waste time trying to mollify wall street analysts.

3. The reputation costs associated with public scandals – After Enron, Worldcom, and the like, it has become clear to investors that the management of public firms may not be the stewards of the firm, and may not act in the and shareholders’ best interests. Events like these can’t help the prestige effect, and although the scandals have been limited to a few firms, there are some reputational spillovers to other public firms.

Taken together, if benefits #1, #2, and #4 (listed above) seem to be decreasing for the reasons described, we have to take a long hard look at whether or not it really makes sense for many firms to be public. Also, we have to wonder about the kinds of firms that are currently going public. Are they truly the best, most innovative firms, or is there some adverse selection problem going on in which the riskiest, marginally managed firms are electing to take their firms public?

Who knows, maybe the costs associated with going private (via de-listing or selling the firm) are keeping some public firms that would otherwise prefer to be private from doing so. Let’s not even go there…