Archive for the ‘Hanover Financial Services’ Category

Nascent Wine Company, Inc. (NCTW.OB), Announces the Appointment of Two New Board Members

Tuesday, August 21st, 2007

Nascent Wine Company, Inc. (NCTW.OB), the only nationwide distributor of imported food and beverage products in Mexico, announced today the appointment of James Buckman and Mitch Wolf to its Board of Directors.

James Buckman is the Vice Chairman of York Capital Management, and a member of York’s Senior Management Committee. Mr. Buckman is responsible for oversight of York’s private investments. Prior to joining York, Mr. Buckman worked at Cendant Corporation as a Senior Executive V.P. & General Counsel, and most recently served as Vice Chairman & Board Member.

Mitch Wolf is a Vice President of York Capital Management. Prior to joining York in 2006, Mr. Wolf worked at Oaktree Capital Management where he was a member of the Mezzanine Finance group. Previously, he worked at J.P. Morgan & Co. in the Private Equity Placements and Corporate Finance and Mergers and Acquisition groups.

Both individuals were proposed by York Capital Management.

Let us hear your thoughts: Nascent Wine Message Board

Investors are More Interested in use of Cash Flow

Tuesday, June 5th, 2007

Cash may be considered king in the corporate world, but just having lots of it doesn’t mean that a company will necessarily reign in investors’ eyes.

It turns out that history shows a significant correlation between how a company builds and uses its cash holdings and the future return of that company’s stock price. Investors tend to reward share buybacks, dividends and debt repayments, but are less enthusiastic about capital spending, research and development and acquisitions, at least one new study suggests.

Of course, investing in the business could help a company build for the future, which could eventually boost its stock price. That may very well be true in theory, but it might not hold up in practice.

All this is something to think about as companies move to spend some of the cash they’ve been hoarding amid uncertainty about the stock market and the economy. Companies in the Standard & Poor’s 500 stock index are now holding $618 billion in cash, just shy of the all-time high of $626 billion hit in December, according to S&P.

In fact, corporate liquid assets, which mostly consist of cash, now equal 22 percent of net sales, well above the average over the last half-century of 15.6 percent of net sales and not far from the record high set back in 1955, said Lord Abbett senior economic strategist Milton Ezrati.

But not all cash is created equal, in Wall Street’s eyes.

Investors generally place a higher value on cash that is derived from profitable operations rather than earned through some kind of capital financing deal, like a stock or debt offering. That’s the findings of a new Charles Schwab Corp. study tracking 3,200 U.S. companies over the last 20 years. It shows that the 20 percent of companies with the highest cash flow from operations outperformed the average stock by 4.6 percent in the subsequent year.

Take Goodyear Tire & Rubber Co., which had nearly $2 billion in cash on its books at the end of last year and said that its cash flow from operations went from a loss of $289 million in 2003 to a gain of $720 million in 2004. Goodyear’s stock is up about 40 percent from last fall and now trades around $13 a share.

The study also found Wall Street favors corporate actions that return cash to shareholders, who then have the option to invest the money as they wish.

Investors are less likely to trust corporate executives to invest the cash on their behalf — perhaps a residue of poor decisions in the past. Not too long ago, many investors who had paid a premium for telecom stocks watched their shares collapse despite massive capital expenditures that management promised would turn big profits.

The top 20 percent of companies making the largest capital expenditures saw their stocks decline on average by 7.7 percent in the year following their capital outlays vs. a 1.7 percent gain in the shares of the 20 percent of companies with the least amount of capital spending, the Schwab study found.

“Those making the heaviest investments tend not to get a return on those investments that exceed the costs of capital,” said Greg Forsythe, author of the study and senior vice president at Schwab Equity Ratings. “Investors may perceive these concentrated investments as increased risk.”

Contrast that with the 20 percent of companies with a decrease or small increase in shares outstanding — which could indicate the company undertook a stock buyback, something investors usually welcome. They saw a 4.9 percent increase in their stock price in the year following a low rise in outstanding shares, while the 20 percent of companies with the largest increase in shares outstanding saw an 8.8 percent decline, the study found.

While this study only tracked stock-price returns for a year following companies’ investment decisions, its findings often reflect trends for the longer term, Forsythe said.

Still, there are cases when history doesn’t repeat itself.

Consider Microsoft Corp. The world’s largest software company holds $34.5 billion in cash, according to S&P, even after paying out a one-time $3 dividend in December, which consumed about $32 billion of its cash late last year.

Despite an initial bump up on news of the upcoming dividend, Microsoft shares actually slipped as the mid-November deadline for ownership to be eligible for the payout neared. Since then, the stock is down about 15 percent to around $25 per share, without any specific problem driving it lower.

And investors have repeatedly rewarded Microsoft’s big expenditures on research and development over the years.

It seems that Microsoft investors are willing to give management a little latitude when it comes to cash — a view that shareholders from a broader spectrum of companies don’t necessarily share.

Building Better Boards

Thursday, May 31st, 2007

It’s common knowledge that the board of directors is the backbone and foundation of just about every business. An effective board of directors is an absolute necessity for larger corporations: they help keep management focused and insure that shareholders are protected. But many small companies should also look to create a board of directors, even if they don’t think they need one.

The building of an effective board requires management to think strategically and long term if it wants to eventually build a board of directors that is committed, effective and passionate about its mission. The first step in the process requires the company to analyze the capabilities and resources of the senior management team, identifying challenge areas in the business, and potential solutions, then use that knowledge to drive changes in procedures, communication protocols and in the board selection process.

The composition of a board is unique to every business, as are the individuals on the board. Management should be looking for specific talents for each board position. A fully functional, effective board should have members that bring a diversity of background and hands-on experience in business building, funding strategies, technology and some industry experience.

Everyone knows what it takes to run a successful business, especially a large and complex enterprise. Management obviously needs to have considerable power, but should never be allowed to operate in a vacuum. Power without accountability usually becomes destructive, and usually detrimental to the success of any business large or small. That’s where the role of the board can be effective.

Boards are an American tradition much like democracy. They bring a check and balance system and stability to a business. Boards can help steer new courses or spot trends and evaluate risks that can make or break a business. Boards can provide a road map and guidance for managers. Even more, a board can be a crucial component for survival for a company on life support, or one that’s floundering without direction.

The most pressing challenge for directors, in our current regulatory environment, is performance. To achieve the level of performance expected from them, directors need to be involved and engaged with management. They need to understand their purpose, responsibilities, and have timely access to information on the operations of business in order for them to establish manageable goals and objectives.

The boards of today take many shapes and sizes. There is the passive board, which limits its activities and participation with management. On the other end of the spectrum there is the operating board, which makes key decisions which management implements and that also fills in the gaps in management experience. Which type of board is right for your company is a factor of the size of the business, agenda and management style.

What should your priorities be when you organize a board?

 Start the selection process by picking candidates you can trust. Select people you know well, and that you can count on in a crisis.

 Don’t pick friends or neighbors. Directors should be qualified and competent at what they do. It’s difficult to ask a director to resign, so choose your directors wisely.

 Create diversity. A board should broaden your reach and your way of thinking. Add experienced and talented people to the board that the management team can draw on and access when needed.

 Seek out the best people. Many bankers, investors, customers and the press judge companies by their boards. So you may even need to hire a search firm to find the right directors. It’s worth the effort. A director’s talent should be your primary consideration.

 Be a good student. Creating and managing a board of directors is as much a science as it is an art. Look at other successful business as examples and learn about the politics and nuances of the board game before you make any definitive decisions.

 Look to the future. Every business should be arming itself with the special skills it needs to be competitive in a global economy. Plan for the future and add board members that bring with them the skills you need to manage your business today as well as tomorrow.

An ambitious board-building process is about building a culture within your organization whereby everyone is involved in the value creation process, not just innocent bystanders. Keep in mind that boards cannot easily change their culture, but as members learn to function as a team, board culture will change. The more board members are engaged and understand the company’s agenda the closer they are to becoming the best board possible for the given situation.

An effective board building process contributes not only to the overall performance of the business but also to member satisfaction. So choose your board members wisely, always remembering that the board is the team behind the scenes. A supporting cast and a support group for management.

What makes great boards great are people that can work together as a team with common goals and a defined purpose. As Warren Buffet said many years ago, “Show me a good board, and I’ll show you a good company.”

Accounting Firm Should Fit Your Business

Friday, May 25th, 2007

U.S. public companies are expected to spend about $1.5 billion in order to be in compliance with the Sarbanes-Oxley corporate governance law, according to the Securities and Exchange Commission. And certified public accountants will play a key role in the process. So choosing the right certified public accountant (CPA) for your business is something that shouldn’t be taken lightly. The survival and success of your business could depend on your selection.

With the changes to public Company reporting requirements and insurance costs for CPA firms rising by the day, the pool of qualified candidates is getting thinner by the minute, even with scores of CPA firms across the country to choose from. So it’s easy to see how difficult it might be to find the right one for your business.

Although there isn’t a formula that ensures a successful relationship with a reliable CPA firm, several criteria should be used when approaching the decision making process. Look into the history of the CPA firm you are considering. How long has it been in business? What trade association do they belong to? How successful has it and its clients been in the past? Don’t forget to ask for personal references to see if you personally know people or companies who may have used the firm in the past, and then ask if they have been satisfied with its services.

It is extremely important to establish a comfort level involving the history of your CPA firm. After all, its staff will be serving as your company’s trusted financial adviser. So confidence is crucial to a successful long-term relationship.

Take the time to visit the firm’s Web site, if they have one, and ask for their brochures. Depending on your company’s specific needs, you may want to select a CPA firm that specializes in a particular area or industry. For example, if your company owns a chain of family oriented restaurants, then you may want to select a firm that has a reputation for working with that industry.

Other important questions to ask might be: What percentage of the firm’s business is focused on public companies? What mechanisms do they use to stay informed of trends and developments in your industry and the changes occurring in the public reporting requirements? What are their human resources that will be made available to your firm?

Go the extra mile and take the extra time to find a CPA firm that specializes in your type of business.
No CPA firm is the perfect size for every business. You may feel more comfortable working with a sole practitioner who is more dedicated to your satisfaction, or you may prefer safety in numbers with an international accounting firm with thousands of CPAs on staff. Perhaps a size somewhere in between is best. Choose whatever size makes you the most comfortable.

As you narrow the field of candidates down to a manageable number, make sure you develop a thorough understanding of the CPA firm’s billing fees and procedures. Don’t take it for granted that they will bill you on an hourly basis. Most firms have a defined billing practice that may not fit your needs or that can be change to suit your requirements. Therefore, you should find out how the different firms bill before you make your final choice. Find out the firm’s rate and frequency of billing as well.

This information will help you get started down the right path, but like any other business decision, various influences play a major role in the decision making process. Although it sounds subjective, don’t pay attention to your instincts. Make your decision based upon the firm’s qualifications, not cost.

Personalities are important but keeping your company finely honed and in tune with these new reporting requirements is the only issue to be considered here. Of all your professional services, you should feel completely comfortable with your CPA firm and their abilities. “There has been a good deal of concern about the cost of internal controls,” stated William McDonough, chairman of the Public Company Accounting Oversight Board. “In my view, good internal controls are cost effective and, once put in place, more than justify the expense involved.”

The Process of Buying or Selling a Business

Thursday, May 24th, 2007

Technology based products are subject to more rapid change and obsolescence, particularly as product life cycles shrink at the equipment level and business becomes more global. Legacy designs do remain after decades of production, but are no longer ‘cash cows’ due to significant price erosion. In addition, core technologies are now practiced worldwide, life cycles are shorter, and competitive advantage comes more from cost leadership than through customer service. Customers are looking for suppliers who can do more, support them globally, and provide error-free products at a competitive price.

As a result of these and other factors effecting industry today such as deregulation, capital market intervention and developments in technology, many small businesses and large corporations are undergoing a process of transformation. Corporations are being forced to adapt quickly to survive, and managers are finding it increasingly difficult to decide which of a staggering array of options could strategically create the greatest value for their businesses.

In an effort to cope with these changes, companies are developing an internal operating system or framework that helps them make these strategic decisions effectively and enhance their capacity to think strategically and long term, develop sound business strategy, and effectively communicate that strategy to all of the participants involved in the value creation process.

Many private company managers have also come to the conclusion that it’s a timely and prudent business strategy to look at being acquired by a larger, properly capitalized strategic partner in order to remain competitive in this type of economic environment. This new strategic alliance could come from a business that’s publicly traded, or a privately held competitor with greater access to equity or debt capital, one that possesses enhanced advertising and marketing capabilities, and has capital intensive and expansive product engineering, sales and support capabilities. A strategic partner with these attributes could provide the seller with the opportunity to achieve significant top line sales growth, which in turn should provide bottom line profits for the acquiring company. Once acquired, the seller could continue to be involved in this highly profitable, vertically oriented niche business, and at the same time, be gracefully developing an exit strategy for the company’s shareholders.

Corporations, large and small, engaged in nearly $46 million dollars of M&A activity in July of 2003 alone. Through the first half of 2003, 6,803 merger proposals – friendly and unfriendly – have been announced worth a total of $367.3 billion.

Many of these mergers and acquisitions are being done primarily because corporate America needs to achieve immediate revenue enhancement with the perception of a reduction in operating costs. Properly structured, acquisitions can actually help a company increase its cash flows, net earnings and revenues. For industries in which mergers are used less frequently, acquisitions are made strictly for reasons of cost savings and by the need to create a critical mass operating environment for the acquiring company. Companies dependent upon technology make acquisitions in response to new technologies arriving into the marketplace and to enlarge distribution networks.

The following information is a brief description of the transaction process and some of the actual components of a successful transaction.

The Transaction Process

Acquisition Structure: Sometimes the buyer’s management team is knowledgeable and experienced with the acquisition process, and therefore works directly with the seller, providing them with the appropriate purchase documents, which would initially include a preliminary term sheet. Sometimes both groups need to rely on outside consultants to properly structure and close a deal, which always incorporates a combination of cash, debt and equity as the three main components of the transaction.

Depending upon the buyer’s and seller’s agreements, the exact percentages used from each of these resources would be determined very early in the transaction process. A seller’s preference is usually to be acquired in a cash or tax-free stock exchange. An all-cash transaction is extremely unusual and only occurs in situations in which all of the sellers are exiting the business at the close of the deal. Most deals include an equal percentage of all of these transaction components.

Just about every transaction begins with the valuation process: The valuation process is one of the first and most important steps taken in the process of acquiring a business. Typically, a professional business sales and acquisition specialist will work with the seller to uncover and evaluate all of the assets of a business which would be included in the sale. This review will most likely provide the assistance the seller needs to develop a strategy that “repositions” the business for its eventual sale.

By making sure that the financial statements are in order, the inventory numbers are close to accurate, and the plant and equipment are clean and operating, the business consultant helps put the business in the best light. The “positioning strategy” is obviously designed to make the seller look more attractive to a potential acquirer. The consultant and seller hope that this strategy will ensure them of an accurate, justifiable selling price for the business and help both the seller and buyer understand exactly what is for sale. It is during this initial valuation process that the seller will determine an approximate selling price for the business.

During this evaluation process the consultant and seller will typically create and eventually submit to the buyer a booklet called a “Confidential Memorandum.” With an aggressive ongoing acquisition program, a buyer could have multiple Confidential Memorandums under review at one time. Some of the information contained in the Confidential Memorandum will include profit/loss history, sales history, competition factors, description of facilities, customer/client definition, management review, marketing information and a list of suppliers.

Buyer Qualification: In all fairness to the seller, similar information should be available from the buyer during the initial acquisition discussion process. A buyer’s disclosure of their professional financial information insures their real interest in purchasing this type of business and also addresses the issue of the buyer’s financial ability to complete the transaction.

Negotiating Process: After the buyer and seller have reviewed each other’s Confidential Memorandums, a face-to-face meeting between the parties is usually arranged. It is at this time that more in-depth discussions about the potential purchase of the business take place. A successful buyer/seller introduction, dependent on the outcome, would be followed by a more in-depth due diligence on the buyer’s part.

Letter of Intent: After the initial due-diligence process has been completed, the buyer will most likely submit a Letter of Intent (LOI) to the seller. This document sets forth much of the same information covered in a Purchase Contract, only in much less detail. It outlines the means by which the buyer would like to purchase the business and provides an opening for further discussion.

The LOI describes the principle aspects of the deal including a breakdown of the price and terms, an indication as to whether this is a stock or asset sale (see Addendum One to this section), and a general outline of how a buyer anticipates the transaction will take place. Two binding provisions of the Letter of Intent are:

· The seller shall not sell the business to anyone else during negotiations with this buyer, and · If the sale should not go through, the buyer will not disclose any information about the seller to outsiders.

Unlike a contract, an LOI is non-binding. So when the seller, in writing, has agreed to the terms and conditions of the LOI, the buyer’s attorney will then move forward with the creation of a preliminary purchase contract. The seller typically has 72 hours in which to review the buyer’s contract and either accept, reject or make a counter offer. Any changes to the contract are first agreed to in discussions between the parties prior to their inclusion into a new contract.

Contract Offer: Business acquisition transactions use a purchase contract. The contract includes all of the details for the purchase of the business. Contacts for the purchase of a business are detailed and lengthy. Extra clauses, not typical to a standard purchase contract, are added to cover the unique aspects of each particular sale. Every asset for sale, every presentation made by either the buyer or the seller, as well as the allocation or payment structure for the businesses are covered in detail in the contract. When a contact is presented to the seller, it could be accompanied by an earnest money deposit or a Break-Up fee. The amount of the earnest money deposit can be any amount but is usually equal to approximately 5% of the total purchase price. Earnest money deposits should be in the form of a bank draft or certified check and should be held by an escrow agent or mutually agreed upon attorney for the project.

Escrow: When the contract is signed by both the buyer and seller, the closing attorney or escrow agent will be contacted and instructed to open an escrow account. Should something happen to void the sale, escrow monies are distributed according the contract language.

The closing attorney will proceed to create a closing document before the sale is completed. Once this contract is signed by both parties, a closing date can be scheduled, usually within two weeks. At closing, all checks are handled, deposits are covered, commissions are paid, prorated items, such as taxes and rents, are paid or monies are escrowed to cover those expenses at a later date. Finally, bills of sale should be prepared and promissory notes executed, if appropriate. This will typically be the end of the transaction process except for one last detail.

Consulting/Management Agreements: Any employment agreements, which have been established whereby the seller is to remain in a management capacity for a specified period of time or is to be retained as a consultant to the buyer, should be executed at this time.

TYPES OF SALES

ASSET SALE : In business sales and acquisitions, there are two types of sales: Asset Sales and Corporate or Stock Sales. When selling a sole proprietorship or a partnership, an asset sale applies. In an asset sale, the old owner of a business sells the assets of the business to the new owner. Intangible assets, such as goodwill, customer lists, excess earning power, and the like, as well as tangible assets, such as equipment, inventory and other hard assets, are valued and sold.

Cash, receivables, and liabilities are not generally included as part of an asset sale. The buyer steps into the business with a clean slate. There are no hidden liabilities, no debts other than those the new owner generates. In an asset sale, it is possible to attempt to structure the sale most beneficially to both buyer and seller for tax purposes, as well. The buyer can set up a new round of depreciation on depreciable assets and can amortize any Non-Compete Agreement included in the sale. The seller can design a payout schedule to avoid a large tax on recapture.

In an asset sale, the buyer and seller choose which assets will be sold. Goodwill, business grade name and other intangibles (like the Non-Compete Agreement) can be included, as well as all tangible assets necessary to the business, such as furniture, fixtures and equipment. Bulk Sales Transfer laws (discussed in Addendum Two) apply and must be either complied with or waived by the parties.

As asset sale limits liability to a new owner since the new owner only purchases other on-going enterprise value, and it is not usually subject to undisclosed liabilities previously incurred by the previous owner. Many buyers prefer to purchase the assets of a business instead of the stock.

CORPORATE SALE: A corporation can be sold in two fashions. The first is a stock sale, in which the current shareholders of the corporation sell the existing entity in total. The other is an asset sale, whereby the corporation sells its producing assets but not corporate stock.

In a Corporate Asset sale, the assets for sale are selected in much the same way as in a regular Asset sale. Goodwill, business trade name and other intangibles can be included, along with the standard hard assets (inventory, equipment, etc.). Bulk Sales Transfer laws apply.

In many respects, a stock sale is much simpler than an asset sale. A stock sale does not have to comply with Bulk Sales laws. It keeps existing contracts in place, maintains supplier relationships and other ongoing operational considerations.

In a stock sale, however, all of the corporation’s liabilities transfer with the sale, whether they are disclosed or not. The business is purchased “as is” without loss of existing contracts or clients but with some liability risks. If a Corporate sale is the best option when buying a business, buyers should seek professional advice to insure that they are protected as much as possible from undisclosed liabilities, litigation and so forth.

U.C.C. BULK TRANSFER ACT (C.R.S. 4-0-209): The Bulk Sales Transfer Act is designed to protect a company’s creditors by assuring that they are notified before the assets of a company are sold to keep sellers from defaulting on debts that may be secured by the company’s assets.

There are significant ramifications of this law, but, most important to remember, if the Act is not complied with and if, in fact, there are undisclosed creditors, those creditors could seek payment from a new owner or an enterprise even through the new owner was unaware of the previous owner’s debts. Creditors who are not notified of a company’s sale are given six months from the date they learn of the sale to demand payment for past debts.

There are two ways to handle the Bulk Sales requirements. The Act can be complied with or waived at the discretion of the buyer and seller.

To comply with the Bulk Sales Act, all creditors who might have a claim against the company must be informed that the business is going to be sold. Creditors have ten days following notification to inform the buyer and seller of any outstanding debts. Typically, those debts are then paid prior to closing to insure that the company is “free and clear” of debt for the new owner. Creditors may also use that ten-day notification period to protest the sale.

Compliance with the Act is time consuming. What’s more, compliance eliminates the confidentiality of the sale by making the transaction public information. If, for any reason, the intended transaction does not occur, obviously “the cat is out of the bag.” All of the company’s creditors know the business was for sale. This could damage a business owner’s standing with creditors.

Compliance with the Bulk Sales Act is intended to reduce the potential of a purchaser being subject to a previous owner’s creditor claims. Unfortunately, however, that protection is dependent of the willingness of the seller to disclose the names of all creditors for notification. The names of creditors can “slip by” and leave the buyer exposed to difficult future creditor problems.

To eliminate the time and concern generated by compliance with the Bulk Sales Transfer Act, the buyer and seller may elect to waive the Act. This is oftentimes the preferred approach. In waiving the Act, the selling party usually indemnifies the purchasing party for any undisclosed liabilities and grants the purchaser a right of offset against any funds owed by the seller should any undisclosed liabilities arise after the transaction is consummated. Indemnification means the seller agrees to reimburse any expense of undisclosed past debts to the new owner, and a right of offset means that the buyer may deduct any undisclosed past debts from amounts owed the seller on promissory notes.

Should a previously undisclosed debt come to light after the sale is closed, the seller would make arrangements to have the buyer pay the debt and then deduct that amount from the next month’s debt service payments on the business. If the seller is not carrying a purchase money note, usually a professional will recommend holding a portion of the purchase money in escrow to insure against any undisclosed liability.

If monies have not been escrowed at closing to cover any undisclosed debts, the seller would most probably simply pay the debt.

Although its not the definitive study on the process of buying or selling a business, this information should give at least a brief glimpse into the process.

Oil and Politics Really Don’t Mix

Wednesday, May 23rd, 2007

Whatever the twists and turns are in global politics, whatever the ebb of imperial power and the flow of national pride, one trend in the decades following World War II progressed in a straight and rapidly ascending line — the consumption of oil. If it can be said, in the abstract, that the sun energized the planet, it was oil that now powers its human population, both in its familiar forms as fuel and in the proliferation of new petrochemical products. — Daniel Yergin, 1992

Oil is the undisputed King, in a world preoccupied with the consumption of its natural resources. It is the basic fuel for growth, the foundation for industrial expansion and clearly the single most important strategic resource for the global economy, besides providing the physical base for the world’s largest commodity market.

Bridging the divide between politics and oil money is one of the most complex subjects on the face of the earth. The primary reason is that the oil trade covers a gamut of geopolitical issues, from oil exploration to investment to consumption, which are the three primary matters that stand out purely by virtue of their originality and their vast implications. But oil prices often behave in unexpected ways as market fundamentals interact with operational constraints, speculative pressures and political interests.

By some oil experts in the know, the “central paradox” of the oil business is as follows: consumers are racing through the high-cost oil (found in places like the United States) and avoiding the low-cost oil (produced in the Persian Gulf). Implicitly, everyone who invests in producing energy outside the Persian Gulf gambles that the Saudis, Kuwaitis, and others will not flood the market with huge amounts of inexpensive oil. If they did, their oil would drive everyone else’s oil company out of business. This situation makes oil prices inherently precarious, although the gamble is a good one for the Saudis, et al. They have little incentive to overturn the proverbial apple cart.

Petroleum geologists have thought for the past 50 years that global oil production would “peak” and begin its inevitable decline within a decade of the year 2000. Moreover, no renewable energy systems have the potential to generate more than a fraction of the power now being generated by fossil fuels. The alternative is the “soft landing” that many people hope for – a voluntary change to solar energy and green fuels, energy-conserving technologies, and less overall consumption. This is a utopian alternative that, as suggested above, will come about only if severe, prolonged hardship in industrial nations makes it attractive, and if economic growth and consumerism can be removed from the realm of ideology.

Unfortunately, America may soon lose the stability the founding fathers worked so hard to create partly because it is becoming wholly dependent upon inherently unstable (authoritarian) oil-producing Muslim nations. It happened twenty-five years ago when OPEC quadrupled world oil prices and plunged America into “stagflation.” Fortunately, the non-OPEC producers still had a HUGE unexploited oil cushion to fall back on and simply pumped central bankers out of their economic crisis.

The Organization of Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, in September 1960, to unify and coordinate members’ petroleum policies. OPEC members’ national oil ministers meet regularly to discuss prices and to set crude oil production quotas. By some estimates, the current eleven OPEC members account for almost 40% of world oil production and about two-thirds of the world’s proven oil reserves. OPEC members now include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

At its March 2000 meeting, OPEC set up a price band mechanism, triggered by the OPEC basket price, to respond to changes in world oil market conditions. According to the price band mechanism, OPEC basket prices above $28 per barrel for 20 consecutive trading days or below $22 per barrel for 10 consecutive trading days would result in production adjustments. This adjustment was originally automatic, but OPEC members changed this so that they could fine-tune production adjustments at their discretion. Since its inception, the informal price band mechanism has been activated only once. On October 31, 2000, OPEC activated the mechanism to increase aggregate OPEC production quotas by 500,000 barrels per day.
The OPEC basket price rose above $28 per barrel on December 2, 2003, and has traded above that level for over 100 consecutive trading days. However, the price band mechanism was not triggered, and there have been no announcements to date that it will be activated. The OPEC basket price averaged $28.10 per barrel in 2003, an increase of over 15% from the 2002 average of $24.36 per barrel. In 2001, the OPEC basket price averaged $23.12 per barrel.

From 1974 to 1978 world crude oil prices were relatively flat ranging from $12.21 per barrel to $13.55 per barrel. Events in Iran and Iraq led to another round of crude oil price increases in 1979 and 1980, when crude oil prices more than doubled from $14 in 1978 to $35 per barrel in 1981. From 1982 to 1985, OPEC attempted to set production quotas low enough to stabilize prices. These attempts met with repeated failure as various members of OPEC would produce beyond their quotas. Saudi Arabia linked their oil prices to the spot market for crude and by early 1986-increased production from two MMBPD to five MMBPD. Crude oil prices plummeted below $10 per barrel by mid-year.

Following the Gulf War, crude oil prices entered a steady decline until 1994 when inflation-adjusted prices attained their lowest level since 1973. The price cycle then turned around and headed back up. The United States economy was strong and the Asian Pacific region was booming. From 1990 to 1997, world oil consumption increased 6.2 million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of that gain and contributed to the price recovery that extended into 1997. http://www.wtrg.com/prices.htm

The prospects for oil prices diminishing significantly prior to the driving season now have weakened considerably, and there is a high likelihood of additional gasoline price increases through spring into the summer driving season. Even if unexpected significant refinery or pipeline disruptions are avoided, national monthly average gasoline prices are expected to be at record levels in nominal dollar terms, and the highest inflation-adjusted summer average since 1985. For 2004 as a whole, national regular gasoline pump prices are now expected to average around a $1.84 per gallon, 15 cents higher than many previous projections. About half of the increase reflects higher crude oil prices, with the remainder reflecting the impact of low inventories, robust demand, and uncertain availability of gasoline imports.

Two factors that could reduce the risk of sharply higher pump prices would be a more rapid decline rate for crude oil prices than currently expected and solid improvement in the availability of gasoline import volumes from those seen so far this year. As a side note, worldwide demand for oil is expected to rise through 2005, reaching approximately 82.2 million barrels per day, which is a 7.5 percent increase from 2003 levels. By the year 2010, the oil and gas industry will have to provide 43 million barrels per day just to meet projected demand.

The political problem with this scenario is that industry analysts predict that Muslim controlled countries will soon control virtually all of the world’s most significant oil reserves. The Middle East alone has 64 percent of the world’s proved oil reserves. In total, the Muslim nations around the world have roughly 73 percent of the total world’s proven oil reserves. Now that’s money in the oily bank account, and the Muslims hold the checkbook.

It may be just a matter of time before the political fallout from the recent events in Iraq and Afghanistan cause these Muslim-controlled countries to coordinate their efforts and solve their cash flow problems for decades to come. By 2010, Muslim nations could control 60 percent of the world’s oil production and, more importantly, 95 percent of the world’s oil exports. In short, the Muslim exporting nations have Western economies by the throat.

The United States, like many developed countries, is physically unable to produce enough oil domestically to keep their economies thriving and are subsequently forced to rely on imports. In 1998, the United States imported 53 percent of its oil needs, much of it from Muslim controlled sources. And this deficit is growing — and will continue to grow even with the recent push by the Bush administration to expedite an increase in U.S. oil production, which is coming up a day late and a dollar short, falling prey to political and environmental obstacles.

Readily available energy is the prerequisite for any economic activity and a rapidly growing economy must eventually consume more energy than it can buy. When America spends more-than-one unit of energy to produce enough goods and services to buy one unit of energy, it will be physically impossible to cover that deficit with money. Since neither capital nor labor can create energy, money in this environment becomes irrelevant. At that point, America’s economic machine is “out of gas.”

As we enter the Age of the Dwindling Hydrocarbons, our relationships with many of the world’s oil producing nations are going up in flames. Terrorism fears and political unrest around the world have further rattled the oil markets and China’s insatiable demand for oil is adding another straw to the camel’s back.

If oil prices continue their march skyward and remain high through the summer months, corporate earnings could be weakened, consumers’ confidence could be dampened and the issue could become a hot button in what looks to be a close election this fall.

A Dozen Reasons Why Businesses Fail

Tuesday, May 22nd, 2007

Question: Why do businesses fail? I hear 90 percent of businesses will not make it past five years.

Answer: The following statistics list why some businesses fail:

 

  • Eighty-two percent have poor cash flow management skills or poor understanding of cash flow.
  • Seventy-nine percent start out with too little money.
  • Seventy-eight percent lack a well-developed business plan, including insufficient research on the business before starting.
  • Seventy-seven percent fail to price properly Ñ they fail to include all necessary items when setting prices. Plus, they fail to point out what added value the company is brining to the table.
  • Seventy-three percent are overly optimistic about achievable sales, money required and about what needs to be done to be successful.
  • Seventy percent do not recognize what they donÕt do well and donÕt seek help in those areas.
  • Sixty-four percent minimize the importance of promoting the business properly.
  • Sixty-three percent have insufficient relevant and applicable business experience.
  • Fifty-eight percent have the inability to delegate properly _ micro-managing work given to others or over delegating and abdicating important management responsibilities.
  • Fifty-six percent hire the wrong people Ñ they tend to hire clones of themselves rather than people with complementary skills, or they hire only friends and relatives.
  • Fifty-five percent do not understand who their competition is or ignore the competition.
  • Forty-seven percent are too focused and reliant on one customer-client.

 

So what do you need to do? You need to get a workable plan you can follow. You can’t wing it and expect a big payoff when it’s time for you to leave the business. You need to change the way you think about doing business. You need to think differently if you are going to have a different fate then most businesses.

You need to stop viewing what you sell as a commodity. If you let what you sell become a commodity, you devalue it to the point that only the lowest price makes sense. A brand program should be designed to differentiate your product or service from all other products and services in the industry. If you do view what you are selling as a commodity, be sure you have the lowest price because that is the only way to make the sale.

You need to focus on adding customer value. This is key in doing business, and it is what customers expect. But the focus should be on what customers value (the inherent value), not what the business owner thinks is important.

You need to not overemphasize profits. There is nothing wrong with the word profit. It is what business is all about. Not surprisingly, most business owners and managers put making a profit as the reason for being in business. You should focus on establishing conditions that produce profits, such as creating and cultivating customers so that they believe that doing business with you is in their best interest.

Those who are convinced that they have made the right buying decision become loyal customers who buy because they believe in you and your company and not because of price. And customers who buy, produce what every business needs, profits. It all starts with investing in creating customers.

You need to stop constantly pushing sales. It sounds almost subversive to suggest that getting more sales can be a treacherous business objective. To take it a step further, pushing for sales generally leads to price-cutting and tarnishing the brand. It can produce short-term gain along with the long-term erosion of market credibility.

One example of this is of a business owner who approached a marketing firm about preparing a capabilities brochure. After asking a series of questions regarding the proposed use of the brochure, the intended audience and the overall marketing strategy, it was clear to the marketing firm that the client would see the brochure as a quick, simple solution to a highly complex issue, one that demanded careful thought, research, planning, execution and budget. Unfortunately, simple solutions are almost always a waste of time and money.

You need to lose the focus on price. Most of us make the assumption that the only thing that will grab the customer is the lowest price. More often than not, it is the salespeople who lead the customer to focus on price. If there is no value added, what is left for the customer to focus on? Price, of course. Or, if we assume that price is all that the customer cares about, then we fall into the price trap.

 

You need to stop adopting a just do it attitude. This is a good attitude to have to accomplish tasks; but “just do it” does not get it done. With this mindset, we launch lots of projects, programs and campaigns with great fanfare, but most end up with a whimper. The problem does not rest with the activities themselves. Failure is in the execution.

In summary, the one central theme when raising a successful business is to remember, the customers’ satisfaction should always be your primary focus. The customer is your boss.

Going Public Through A Reverse Merger

Monday, May 21st, 2007

The current economic environment has created a unique opportunity for small to midsize private companies. No longer do they have to look at the sale of their businesses as the only viable long-term exit strategy or ultimate liquidity event for their shareholders. Because of the current depressed valuations for legitimate operating public companies, private companies can gain access to the public markets by reverse merging their businesses into an existing, operating publicly traded Company, which can be accomplished at a fraction of the cost of a traditional public offering (IPO).

This commonly used method of going public, which is currently being utilized by small and mid cap companies on a regular basis (especially in the current economic environment), is accomplished when a private company merges with an operating public company. The public entity typically has minimal assets, undervalued operating entities and few or no liabilities. Upon the completion of the merger, the merged private company has gained control of the public entity, through the issuance of common stock, thereby effecting the reverse merger.

The public corporation is often called a “shell” because the original public company typically consists of nothing more than its corporate shell structure and shareholders, although many “shells” today are actually viable, operating businesses with considerable unrealized value. Upon the completion of the merger, the private company always obtains the majority of the shell’s stock, effecting a change of control.

The private company normally will change the name of the public corporation (often to reflect its own name) and will elect its own Board of Directors, which subsequently appoints new officers. The new public corporation will usually have a base of shareholders sufficient to meet the current shareholder requirement for admission to quotation on the NASDAQ Small Cap Market or on the OTC Bulletin Board.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. ” Warren Buffett

The most obvious advantage of attaining public trading status through a reverse merger is that it allows a private company to go public at a lower cost and with less stock dilution than through a traditional IPO. In an IPO, the process of going public and raising capital are combined. In a registered spin-off or reverse merger, these two functions are unbundled – so a company can go public, utilizing this program, without raising additional capital, therefore simplifying the entire process of becoming a publicly traded company.

The Private Company, which has now gone public, has taken the first step in the process of creating enhanced shareholder value by obtaining all of the benefits of a publicly traded security, which include:

Increased liquidity for the company’s shares and shareholders.

Potentially higher per-share prices and thus higher company valuations.

Greater access to the public capital markets.

Enhanced equity funding through secondary stock offerings.

The company’s stock can be used as a currency for acquisitions.

The ability to use stock incentive and option plans to attract and retain key employees.

 

Going public can also be an effective retirement strategy for business owners. By merging into an exiting public company, a private corporation can increase its real market value by three to five times, create considerable tax advantages for the owners (original founders,) and the newly created value can become part of an estate planning process, providing value not only for the founders, but for their family members during the years to come.

The benefits of going public through a reverse merger, as apposed to an IPO include:

The costs are significantly less than the costs required for an IPO.

The process takes considerably less time than that of an IPO.

It is less risky than an IPO, which may be withdrawn due to an unstable market conditions.

IPOs generally require greater attention from senior management.

An IPO requires a relatively long and stable earnings history with audited statements.

There is less dilution to the existing stockholders.

The process does not require an underwriter be located.

A higher valuation for your company is usually achieved much more quickly.

 

Once a company is taken public through a reverse merger the financial markets fold the following future prospects into the capital markets (stock price) for the newly public corporation:

The market value of a public company is often substantially higher than a private company with the same structure in the same industry.

Capital is easier to raise for public companies because the Company’s stock, being purchased by investors, has a readily tradable market value.

The trading price of the public company’s securities serves as a benchmark for the offer price of a subsequent public or private securities offering.

Acquisitions can be made with the stock since publicly traded stock is viewed as currency for mergers and acquisitions.

Registered stock and treasury shares can be issued as payment for contracted services.

 

Summary: For most people, liquidity and stock value appreciation would seem reason enough to be publicly owned, but there are other advantages that a private company can gain by becoming public through this method, some of which are more personal than business related. Please give us a call at Hanover Financial Services with your questions about this process to see if it’s right for your business. We have been providing public and private companies with consulting services in this specific area of business since 1984.

Al Gore’s Green America

Friday, May 18th, 2007

Because of the high cost of energy, more and more companies are finding creative ways to save money and operate their businesses while using less fossil fuels. And company managers are apparently looking very hard for those energy savings.

Last fall, some 30 percent of those surveyed by the Alliance to Save Energy said they had made energy management a critical part of their business plan. A third said that were undertaking major capital projects to cut energy costs. And a quarter said they were at least working on low-cost, one-time fixes to try to cut energy bills.

The potential savings could be huge. Industrial use accounts for about a third of energy consumed in the U.S., according to Energy Department estimates. By cutting back on just 20 percent of that consumption, American businesses could save close to $19 billion a year at 2004 energy prices, according to a recent report by the National Association of Manufacturers. About 30 percent of those savings can be achieved with no capital investment, the report said.

As the United States moves away from manufacturing into a service economy, more and more goods consumed in the U.S. are created with energy from other nations. Therefore we should be seeing a steady decline in U.S. oil consumption, but consumption continues to rise.

One of the major reasons for this is that the average fuel efficiency in 2004 was 6% less than 20 years ago for personal American-made autos and trucks. transportation accounts for 9,125,000 barrels per day or 383.3 million gallons of gasoline. So Transportation alone uses more oil than is produced collectively domestically. Transportation is actually the biggest user of energy worldwide at around 33% of the total. It’s also the fastest growing source of greenhouse gas emissions, the primary cause of climate change.

The marginal improvements in fuel economy and reductions in emissions has been heavily outweighed by the increase in the number of cars on the road and the average distances traveled. There are 600 million cars in the world today, a figure which is environmentally unsustainable. Yet this number is forecast to double within the next 15 to 20 years.

Going green is as much about economics as it is about saving the planet since America consumes 20.6 million barrels of oil per day and the rate of consumption is increasing by 2% yearly. We import 10,056,000 million barrels per day with an average cost per barrel of approximately $70.00, which means the daily cost to the U.S. government is a staggering $703,920,000. Annually that’s over two hundred billion tax payer dollars that’s being spent on oil imports.

Fifty years ago, America produced half the world’s oil and was a net exporter of oil, yet today the U.S. can’t produce even half its needs. U.S. crude oil production, although significant, only produces approximately 5.0 million barrels per day. Ironically, the U.S. actually exports a quarter of that or about 1.2 million barrels per day.

Reducing our consumption incrementally over the year by as little a 2% per year would save us billions of dollars annually and trillions of dollars over the next decade. That amount of reduction in fossil fuel usage would take a huge bite out of our budget deficits and create new green related industries that would flourish in this country.

High energy prices have already started to create new markets for companies that make and sell equipment and services that offer alternatives to fossil fuel. Investment in alternate energy is also getting a lift from a fresh round of government incentives and subsidies for both consumers and producers of alternative energy. Flexible fuel vehicles and gas-electric hybrids are among the highest profile targets for the government’s policy of encouraging conservation and alternative fuels.

“Conventional energy supplies are getting more expensive,” explains Ron Pernick, co-founder of the research firm Clean Edge. “Whether you look at natural gas, nuclear, or oil, they’ve been going up over time, not going down which is the inverse of renewable energies. We’re getting to a point where we’re able to compete in price so clean energy makes sense economically.”

Climate change is indisputably the single biggest environmental threat to mankind with significant global economic implications. And reliance on fossil fuels is simply an unsustainable economic model destined to change. Even if Al Gore is only partially correct in his assumptions, global economies can no longer reley on fossil fuels if they are to sustain economic growth.

The federal reserve may try to tinker with interest rates in an effort to stem domestic inflation, but in the long term it’s an insufficient and unproductive way to create a stable and sensible economy. Reducing our dependence on fossil fuels will eventually become the path of least resistance. In time green economics will become the economics of the real world ,and America could be at the forefront of that trend.

As green economist Paul Hawken writes, “Our social and environmental crises are not problems of management, but of design. We need a system overhaul.”

Reverse Mergers Can Fast-Forward Profits

Thursday, May 17th, 2007

A recent column painted reverse mergers with a broad, negative brush. Reverse mortgages offer a compelling way for young companies to come public. They are faster and more cost-effective than traditional, banker-backed IPOs.

This Sunday’s New York Times had an interesting article by Kurt Eichenwald on the topic of reverse mergers, but I have to take issue with his view.

A reverse merger is a way of taking a company public that skirts the Goldman Sachses (GS:NYSE) and Morgan Stanleys (MWD:NYSE) of the world. And, consistent with my articles on PIPEs, Dutch auctions, and SPACs, I am always in favor of any financial structuring that takes the power out of the larger banks and makes it more accessible to smaller companies and investors.

Eichenwald is the author of a best selling book about Enron that I highly recommend, but I can’t say the same about this article. Titled, “A Mini-Enron at Every Corner?” the column describes the case of two brothers who engineered a reverse merger that eventually went bankrupt. Along the way to bankruptcy, the brothers (it’s unclear if it was one or both ) engaged in various activities that may have skirted the law. The implication of this article, conflating the experience of this one event to all, is that all or most reverse mergers could quite possibly be cesspools of corruption and boiler-room activity.

Behind the Reverse Merger: A public company with no business operations acquires a private company with operations. The public company changes its name and management to that of the private company, and now the private company has become public. Many companies that have gone public through this route were, in fact, used by boiler rooms in pump-and-dump operations. But in my mind this is really no different than the blue-chip investment banks taking junk like Pets.com public and engaging in their own versions of the pump-and-dump scheme to drive up shares of the IPO. However, just like in the case of companies brought public by Goldman Sachs, there is the occasional quality company brought public through the reverse merger mechanism.

What are the advantages of a reverse merger as opposed to a traditional IPO? The company can avoid paying the exorbitant fees that the investment banks charge for an IPO, it’s faster (no roadshow, less SEC review of the filings), and it’s often easier for a smaller company to go public through a reverse merger than by attracting a larger investment bank. This was all particularly advantageous in 2001 when not only was the market cruising toward its eventual 2002 bottom, but investment banks were starting to come under scrutiny for questionable IPO practices. A reverse merger conveniently skips all of that. So why go public at all? The downside of a reverse merger is that if your business plan does not succeed and you fail to attract investor attention, it will be impossible to raise money again through the issuance of shares, and all your faults and failures will be on public display through SEC filings.

The upside is that it can provide potential liquidity to your early investors and you now have currency (your stock) with which to do acquisitions and potentially raise money through either secondaries or PIPE (private investment in public equity) offerings.

My own experience with the reverse merger process began in 1999 when I helped start a company, Vaultus, which provided wireless software to large enterprises. Typical for those times, we raised $30 million in a split second from the likes of CMGI (CMGI:Nasdaq), Investcorp, Henry Kravis and others. Then, early in 2001, we were exploring our options, and the option that seemed most likely to succeed was a reverse merger with a public shell.

In May 2001, we found ourselves a shell that had $10 million in cash in it but no operating assets. Previously, the shell had been the home of an Internet portal that itself had been a reverse merger several years earlier. The stock of the portal in 1999 had gone from $1 to $30 before reality set in, shares settled down between 20 and 40 cents, and management wound down the operations of the portal.

When debating the merits of whether or not to do a reverse merger, one of our board members posed the question, “But has a reverse merger ever worked before? Because I don’t want to base a decision on ‘this time things will be different.’ ”

With no solid answer to his question, we eventually passed on the opportunity only to watch the stock we were going to consummate our merger with do another deal and then proceed straight to over $5 a share on heavy volume, where it trades today.

We didn’t know the answer then, but now I do have the answer to the question of the Vaultus board member.

Armand Hammer brought his little company, Occidental Petroleum (OXY:NYSE), public in 1950 (after making millions selling pencils to postwar Russia) through a reverse merger.

Ted Turner took his billboard company public in 1970 when he merged into publicly traded, failed TV company Rice Broadcasting, changed the name of the new public entity to Turner Broadcasting, and took over the company.

Or Muriel Siebert, who took over the public furniture company, J. Michaels, in 1996, renamed it Siebert Financial (SIEB:Nasdaq), and the public company is now a financial services company. Other companies that have used the reverse merger vehicle to go public and then went on to fame and fortune include Waste Management (WMI:NYSE – commentary – research) and Blockbuster Video (BBI:NYSE), before it was acquired by Viacom (VIA.B:NYSE).

Arguably the most famous reverse merger is Berkshire Hathaway (BRK.A:NYSE), the old-school Maine textile manufacturer that was taken over by Warren Buffett when he bought the controlling interest in the company and then merged his insurance empire into it. The only thing he didn’t do was change the name.

To be fair, probably 90%-plus of reverse merged companies fail. But this is not because the process is bad but because, like with IPOs, or any area of life that touches the investing (read: gullible) public, there are those who abuse and take advantage of the system; I’ve written about some of these situations in prior columns in this space.

Like anything in investing — good, profitable, growing companies will eventually shine. The beauty of the reverse merger process is that diligent work can uncover these gems before the investing public is told about them by the larger banks.

Recent examples of successful reverse mergers include RAE Systems (RAE:Amex), which did a reverse merger in 2002 at approximately 20 cents a share and is now cruising between $2 and $3 after reaching a high of $9.50. And Intermix (MIX:Amex), which merged into Motorcyle Centers of America, a business with no operations, in 1999, went through several years of pain and below-$1 prices before emerging as a successful e-commerce player that currently trades at $5.70. Global Sources (GSOL:Nasdaq), a China-focused business-to-business play, reverse-merged with asset less shell Fairchild and now has a market cap of $250 million, $50 million in cash, no debt and $22 million in EBITDA.

Another recent example is CKX (CKXE:Nasdaq), formerly Sports Entertainment, which traded under the symbol of SPEA.ob. On Feb. 7, SPEA, a stock trading at the 5-10 cent level, announced a reverse merger with Elvis Presley Enterprises, which controlled all the rights to Elvis Presley’s estate. Since then they also announced a deal with the producers of American Idol. Now the stock is trading at $26.64 and has a $2 billion market cap.

The way to invest in reverse mergers is to find companies like the above that have been through the process but have not yet to be touched by the larger banks and hence receive no analyst coverage and very little media coverage. This allows the companies to grow and enhance their stature before the Street jumps on the stories. In other words, you can invest in legitimate, growing, perhaps even profitable companies that nobody knows about. But if they execute, the investment banks will come sniffing around when they smell the scent of M&A fees and secondary offerings. But for the moment, the untouched beauties may have room to rise.

Some Assembly Required

Wednesday, May 16th, 2007

The market for your product is larger than it has ever been. Your market encompasses the world. But, the promise of a worldwide market is always threatened by worldwide competition. While you are sleeping, there is a bright businessperson on the other side of the world-or maybe just next door-planning to capture your market share, or try to prevent you from even entering the market.

Lower costs can lead to lower prices; and with all other variables being equal, the lower price almost always wins. Companies need to examine their costs to identify savings that will allow them to lower their prices to protect or capture market share from your competition. The savings are there.

Companies must find the savings they need to compete and win in the market. Most often, a company’s cost of goods sold (COGS) expense is the largest expense item on the income statement. If you outsource your manufacturing, that puts the spotlight on your turnkey contract manufacturing partner.

Not too long ago, you wouldn’t think of letting your contract manufacturer purchase and provide raw materials to be assembled into your product. Back then, you would purchase, receive and stock raw materials and ship kits of those materials to your manufacturing partner for their value add-manufacturing. Somewhere along the line, however, contract manufacturers convinced you that they “buy better” than you. Once overhead expense and income taxes are deducted from their 17% gross profit, what remains for your contract manufacturer is a net profit of 1 to 5%. The question then is: Why does a contract manufacturer require you to buy their materials? And the answer is simple-to increase their revenue. With material content averaging 60% of unit cost1, your contract manufacturer will more than double their revenue by selling these materials to you.

As stated earlier, your contract manufacturer wants you to believe that he can “buy better” than you can. But can he? In reality, you are paying at least $1.00 for every $0.83 of material purchased by your contract manufacturer. If your annual contract manufacturing expense is $5 million, at a 60% material content, then $3 million is spent on materials. Your contract manufacturer keeps 17 cents from this $3 million, or $510,000.

On the flip side, if your company already has a purchasing and material management infrastructure, then you’ll reduce your COGS by 10.2% and can mark that $510,000 as savings. If you don’t have a purchasing and material management infrastructure, or if you have insufficient infrastructure to purchase materials, you will most likely have to give some of your savings back as you invest in infrastructure. But don’t worry, that cost won’t be anywhere near $510,000 to procure $2,490,000 of materials annually. Companies tend to give up even more when their contract manufacturer procures the materials.

Theresa Metty, Motorola’s senior vice president and chief procurement officer claims, “In the outsourced world, the normal procurement process is disrupted by a third party (contract manufacturer).” Metty adds, “…maintaining the supplier/OEM link is vital. If an OEM is distanced from a (material) supplier, the OEM might not get the benefit of a shared technology roadmap, early adoption of new technology or the ability to maintain a competitive price advantage.”2 All of these factors are vital to maintaining a competitive edge. Because nearly all material sellers are compensated for their efforts at the point of sale, when the point of sale is the contract manufacturer, there is little to no incentive for the material manufacturer and/or supplier to expend any effort supporting you, the OEM. Therefore, you lose critical visibility with the material suppliers. Furthermore, the intense pressure placed on your material suppliers by contract manufacturers looking to leverage their anemic net profit margins at the expense of your material pricing, causes even greater pain in the supply chain.

As a result of these concerns, Motorola has launched a process they call “price masking.” Under price masking, neither Motorola nor its materials suppliers share the company’s price information with contract manufacturers. Quentin Samelson, a Motorola executive who helped draft the program with Metty notes, “When we talk about this with suppliers, you can see them breathing a sigh of relief.”3 Price masking requires Motorola’s material suppliers to focus their attention and efforts on Motorola, and not the on contract manufacturer. Motorola understands that there is significant proprietary value in directly managing their material supply.

OEMs will need to force their contract manufacturers to make their profits on manufacturing, instead of on buying components. This will also push contract managers to compete in terms of their manufacturing efficiencies, and not on procurement margins.

Focus is the Key to a Sound PR Program

Tuesday, May 15th, 2007

It’s no secret that the new economic boom spoiled many technology companies and the numerous industries that supported them. As businesses raced to build their brands overnight, advertising, marketing, public relations firms and in-house professionals were given carte blanche to do as they pleased, regardless of cost or estimated return on investment.

In 2002 and throughout most of 2003, the world sang a different tune. Long gone were the prime-time ad campaigns, expansive trade show booths and bottomless marketing budgets. Surprisingly, despite the downturn, a large number of businesses have yet to retrofit their organizations to meet the challenges of the strained economy.

Doing more with less: Some companies initially made reactionary cuts to marketing, advertising and PR expenditures, and they’re now beginning to see how these reduced budgets negatively impacted sales, name recognition, brand value and credibility. Clearly, the focus will be on doing more with less.

Public relations, in particular, has been ripe for a renewed focus. During the boom, PR programs — like their marketing and advertising counterparts — were often big on costs and not as big on return. Fortunately, it’s possible for today’s businesses to reap the benefits of PR without buying the entire farm.

Five steps for a PR program success:

1. Stay Focused: More often than not, scaled-down PR programs live and die by a company’s ability to focus. As such, this initial stage is critical to the program’s long-term success and will require some “soul searching.” The process begins by taking everything that is already known about the company and using it as the framework from which strategy sessions will be conducted. Given budget limitations, PR professionals will be required to be more intelligent and efficient in their strategy planning meetings.

To accomplish this, the PR staff should engage the organization’s executives and thought leaders in a frank, yet focused discussion on strengths, weaknesses and opportunities. They must also ensure all decision-makers are a part of the meetings, and zero in on the most relevant and productive questions: · What does the company do best? · What is the organization’s compelling story? · Where do reality and external market perceptions about the business meet? · Who most influences the company’s target market? · To ensure long-term success, where does the business need to be in three months? Six months? A year?

By focusing on these questions, companies can quickly identify the strengths and opportunities used to build the platform on which all PR activities will stand.

2. Identify: Once the business has found its focus, public relations professionals must move forward by identifying the most relevant tactics and target audiences. When it comes to doing more with less, focused media relations generally makes the most sense. The trick here is to scale down this outreach to ensure precious time and budgets are not spent on contacts that yield no strategic value. During this phase, it is the PR practitioner’s job to determine which media outlets and influencers are best positioned to reach a company’s key audiences. Additionally, PR staff must consider which channels wield the most influence.

3. Build: Great PR results in momentum that builds on itself because of the strategies used to attack the market. A focused budget means spending more time than usual building relationships with fewer people. Remember, in the context of this model, it’s the quality of contacts that counts, not the quantity. Start with five editors and get to know them inside and out. Read all their articles, spot the trends and determine how a company’s strengths best fit into the editor’s scope. Most importantly, don’t waste the media’s time. In this model, building trusted relationships with key editors is as important as securing actual coverage. By focusing on the relationship aspect, PR professionals can help their organizations build momentum, leading to more “bang for the buck.” That is to say that the time spent on establishing rapport with select media will go a long way to ensure future success.

4. Remember: Business has always been about business. Somewhere along the way, the corporate world lost sight of this, as did the PR, marketing and advertising worlds. How will the dollars spent impact the bottom line? If that question can’t be answered, companies should keep the money in their pockets. PR, if done correctly, offers a tremendous opportunity to impact the bottom line in an extremely cost-effective way. Sales, recruiting, partnerships and funding are all heavily impacted by PR. 5. Elevate: The right senior people will yield the best value in PR, despite popular beliefs that PR can be delegated to less expensive junior personnel. Could that be why so many people are not happy with their PR programs? PR takes a broad skill set, strategic thinking and day-to-day, think-on-your-feet strategic execution that can only come from senior personnel.

Putting a public relations program second will only yield second-rate results. However, placing the proper importance on PR will most often produce exponential results. Budgets should be appropriate and adequate, PR professional choices should be taken seriously, and senior executives should give it proper attention and importance. Historically, businesses have been pleasantly surprised by what can be accomplished through this dedication.

Venture Capital – The New Paradigm

Monday, May 14th, 2007

CEOs looking for money these days are telling investors that they don’t want it all at once, they now want to raise money a little at a time, with each piece tied to predetermined milestones. By doing so, they believe they can keep the company focused on meeting goals and objectives in a timely fashion, which then supports and justifies the need for additional capital. Raising money in “tranches,” or stages pegged to specific milestones, is not a new strategy, but has become a popular way to raise money in a difficult economic environment.

Private capital investors, especially those burned by $100 million dot-com flameouts, are wary of entrepreneurs’ promises. Instead of pumping in funding in successive rounds spaced 18 to 24 months apart, with increasingly larger amounts each time, many investors are opting to divvy up their commitments into three or six-month tranches.

While management teams may not be exactly comfortable with the process, investors that support the tactic argue that it’s a handy way to make sure a company’s valuation continues to increase–slowly but surely–over time. Even in a punishing market, they say, investors are willing to push up the valuation if a business is progressing according to plan.

Dividing funding into several checks can also make a large funding commitment more palatable for investors that are flat-out leery of the overconfident swagger that a $20 million deposit can impart on a startup. “We like large commitments, but two or three tranches contingent on milestones can really focus management,” says Robert Gold, CEO and president of the late-stage investor Ridgewood Capital.

The concept does have its critics. Turnaround consultant Marty Pichinson, cofounder of the business advisory firm Sherwood Partners, warns against making a company’s management team beg for the additional funding. Although he believes in staged financing and the right of investors to set goals, he stresses that the capital must be available when needed.

More traditional venture investors prefer to set a longer runway–usually at least a year, to account for long sales cycles and market fluctuations–for a portfolio company to meet predefined objectives. “You should start with what the company can do, not with what the VCs can afford,” says Martin Gagen, CEO of U.S. operations at the 3i Group, a VC firm.

Mr. Gagen argues that the risk of a large up-front commitment is what pays off in the venture capital model. Venture investments are made with the aim of multiplying the original investment ten to 20 times when a company is sold or taken public. And a few big gambles that pay off is what makes it all worthwhile. But, Mr. Gagen adds, “10 to 20 times a couple million dollars is pretty much worthless for a big venture fund.”

Mr. Gagen and others say the first injection of funding–whether it’s a standard $10 million first round or a smaller tranche–should be enough to allow a company to fill any holes in the management team and finish a first product. Once that first round has been spent, says Mark Saul, general partner at the early-stage firm Foundation Capital, a company should not only have a beta product, but something that generates real customer feedback. More specific, shorter-term goals, many VCs maintain, can actually be more of a headache than anything else.

Funding that’s contingent on extremely specific targets can create uncomfortable dynamics between investors and their companies, according to Erik Lassila, managing director at Clearstone Venture Partners. “It may give management incentive to put the best face on company progress,” he says. He worries that companies might mask snags in sales and product development just to make sure the next injection of cash is forthcoming.

In the end, the decision of whether or not to dole out money in tranches is really a reflection of how investors choose to deal with the current rough financing market. Some private capital investors and VC groups are sticking with the established traditional model–putting all the money out there, up front, and risking it in support of a portfolio company–while others dish it out as slowly and carefully as possible. Entrepreneurs, meanwhile, will take it however they can get it.

Valuing a business as a buyer: Be careful

Friday, May 11th, 2007

You will find a variety of different organizations that sponsor valuation experts of all stripes. Some will have many capital letters after their names but may not yet have acquired substantial experience in the marketplace on a practical level.

Some will be able to deal with the numbers but will fail to explain what it is they’re doing or how they’re doing it. If you can’t understand the method they’ve used, the valuation will have little significance for you. And, don’t forget: You’re the person who counts.

Many people think the dollar value of the business is the keynote. The fact is that many people want a valuation, not because they want to sell the business but because they would like to know how the valuation works. In this way, they can figure out how to improve the business before they decide to sell, which, in the long term, will inevitably increase the price for which it will ultimately sell.

The basic concept of value consideration is an examination of the numbers. If you take the sales of a business and deduct essentially all the costs needed to achieve those sales, you will have, hopefully, a profit. Although it is clear that the profit represents the basic foundation of the business’ value, the real key is the risk that the purchase of the business represents to the buyer.

If the business depends on the relationship with the seller’s brother-in-law, the buyer is certainly vulnerable to that relationship not being maintained after the sale. The diversity of clientele, the number of customers on which the business depends, is a key to spreading the risk. The ability of the business to continue buying its raw materials or component parts is another key risk factor. If the source of the materials is likely to dry up or not be as readily available or be priced differently than the price previously paid, the risk to the buyer is great.

These are the kinds of risks that need to be examined, aside the valuation of the business based on profit alone. And what about the key personnel who may decide to leave the business immediately after the sale? Do you think the buyer would end up with a risk not anticipated? And what about the obsolescence of equipment or innovations in equipment not disclosed to the buyer? Is this yet another risk that might not be obvious to the buyer … but should it be?

It’s true that it may be less expensive to buy an existing business than to start a competitive business from scratch. Keep in mind, however, that whatever your experience in a given trade or industry, there are those who understand the risk factors in business generally much better than you. Don’t think that your industry experience will suffice as an examination of a business you intend to buy. Buying a business is a business of its own. It requires an understanding of business basics and the subtleties involved in the transfer of a business from one person to another. It is not necessarily complex but it is mired in details of all kinds, many of which the average business person has never dealt with.

It is not necessary or even appropriate to be concerned about your competition. The better word is to be aware of your competition. You need to know the product they sell or the service they offer if it is similar to your own. You need to know the price they charge and the values added to their product or service. This is the only way to know where you stand with your potential customers relative to the comparative price structure at which you offer your goods or services.

If you are offering less in terms of value, you might sell more by making your price more competitive. If you are offering more in terms of value, you might sell fewer but have a margin that allows you to prosper on that basis. If you’re offering the same value at the same price, you might depend on your location as the key to maintaining success in your marketplace.

Be careful that you understand these differences and that you are fully prepared to participate on a competitive level.

The Hidden World of Offshore Banking

Thursday, May 10th, 2007

Last year, the number of American millionaires fell by 100,000. Yet 200,000 new U.S. millionaires showed up overseas. Why? One answer may be that back in the1960s, the U.S. government encouraged American banks to set up branches in Caribbean hot-money centers and distant islands as an efficient means of attracting foreign money into the U.S. dollar. The initial aim was to help finance the Vietnam War by turning America into a new Switzerland for the world’s hot money. Instead this policy succeeded in turning these U.S. backed banks into a flight-capital center for third-world dictators, high net worth individuals, large and small corporations and Russian oligarchs.

What was once a relatively small and mysterious boutique industry 20 years ago has now grown into a full-blown international system of avoidance, enabling multinational corporations to evade taxes everywhere, including the United States. Over 60% of the world’s money now flows through offshore banking operations.

Most offshore investments are hidden away in remote locations, usually on small out-of-the-way islands in the Caribbean or small European states. Among the most popular are Nevis, the Bahamas, the Cayman Islands, the Channel Islands, the Isle of Man, Switzerland, Liechtenstein, and Luxembourg. But keep in mind that just because you have an account in one these places, it doesn’t mean that’s where your money is. It might just be around the corner or on the other side of the globe. The reality is, that individual and corporations are transferring their assets elsewhere because they have readily accessible safe havens to hide them in.

These permissive regulatory systems have evolved to a point that enables U.S. and European investors to shed taxes simply by hiring a lawyer to set up a boiler-plate office and finding an accounting firm willing to take its records at face value–which is good enough for the tax authorities to accept in these days of downsized fiscal operations.

To some tax experts, the resulting plunge in the ratio of corporate tax obligations to national income has been a contributing factor in America’s soaring federal budget deficit. Businesses — and especially the financial sector — establish offshore entities and adjust their transfer pricing (e.g. on sales of raw materials to refineries, and of refined or semi-manufactured products to their final distributors in the industrial nations) so as to take all or some of their profits in these tax-free enclaves.

So how would you like to have your company’s virtual office in the heart of Europe? Zurich, Switzerland could be your answer. For less than $1,000 USD, you can have your bank account statements, personal documents and all of your private mail forwarded to your virtual office in Zurich while your personal contact details are kept secure and private. Most offshore countries have information sharing agreements with various governments. Switzerland is one of the last countries maintaining bank privacy. In fact, Swiss Banks are obligated by Swiss law to keep any and all information about their clients strictly confidential

Swiss Banks offer their offshore customers a variety of services including access to international wire and SWIFT payments. You can easily deposit money orders and business/personal checks into your account whenever you want, twenty-four hours a days, seven days a week, via the Internet. And you can always take comfort in knowing that the Swiss National Bank has one of the highest reserves of gold bullion to back up its currency.

Due to advances in technology and telecommunications, offshore facilities became an integral and important part of the world’s financial system. They are used worldwide, twenty-four hours a day, 365 days a year, despite of the malicious stereotype maintained by the high-tax nations that low-tax offshore jurisdictions attract a disproportionate share of the world’s dirty money. The independent assessments of U.S. government agencies (the State Department, Internal Revenue Service, Central Intelligence Agency) confirm that offshore tax havens do not attract a disproportionate share of the world’s criminal loot. Indeed, the government agencies’ assessments indicate that dirty money is far more likely to be laundered in high-tax nations. It becomes obvious that the OECD’s and EU’s real agenda in their persecution of offshore tax havens is not the fight against money laundering but the fight against low taxes.

The common assumption supporting offshore banking is that as people gain wealth, they naturally want to protect it from political instability, unnecessary taxation, extravagant heirs and any other unwanted creditors. Offshore companies have become a viable way for individuals and corporations to achieve the level of protection they require and desire for their assets. Offshore IBC (International Business Company) have also been a useful accounting tool for the medium and small businesses during the past few decades.

The components of an offshore IBC are as follows: Offshore IBC is tax exempt on profits. Offshore IBCs cannot conduct any local business in the jurisdiction of incorporation. Offshore IBC can make local payments for government fees, registered agent services, legal or accountancy services (if any).

Typically used for investment purposes, IBCs are also utilized as a purchasing entity, to help individuals avoid property or an inheritance taxes, whereby the transfer of wealth to an offshore company would avoid undesirable consequences (e.g. time delays with probate, inheritance tax, saves legal fees). Individuals make common use of offshore companies to hold their investments such as stocks, bonds, and cash because there is no income tax on interest earned or capital gains. IBCs have been used to protect assets against possible litigations, unwanted creditors, former spouses, and for e-commerce businesses, where all of your profits will be tax free (no corporation/income taxes). The uses for an offshore company is actually only limited by the imagination of the individuals or business entities involved.

Laws against fraud, embezzlement and tax evasion have been on the books for centuries, although many of these poorly written laws have never been seriously enforced. Recently, the International Community has taken actions, which make IBCs more transparent, encouraging firms and individuals to disclose their offshore assets and pay their fair share of the tax burden.

Legally, you must file for your offshore assets. Accounts held by American citizens offshore must be recorded with the U.S. Treasury by filling out Form 90-22.1. The information contained in the actual report is up to you, but if you never legitimately document the account, you may find yourself with some auditing problems down the line. This is one of the obvious draw-backs to offshore investing; unless you register all of the assets held in your account with the US Treasury, you may be confessing to the authorities that you were attempting tax evasion, if and when you do get audited.

So keep in mind that offshore investing isn’t simply a chance to “hide” your money. It should only be used as an opportunity to diversify your assets across different regions and different currencies.

Bioterrorism On Our Door Step

Wednesday, May 9th, 2007

Bioterrorism On Our Doorstep: Bioterrorism has now been defined as the intentional use of a pathogen or biological product to cause harm to a human, animal, plant or other living organisms, to influence the conduct of government or to intimidate or coerce a civilian population.

Nearly forty newly emerging infectious diseases were identified during the thirty years between 1973 and 2003. And more may already be on their way to America. On February 16, 2006, a 44-year-old man presented to a hospital in Pennsylvania with respiratory symptoms including dry cough, shortness of breath, and general malaise and later tested positive for Bacillus anthracis, more commonly know as Anthrax.

He’s just one out of millions of people and goods that traverse the globe daily that could be dispersing microbial threats in their wake, usually without much notice. Living things get infected along the way, and the lag time before signs and symptoms appear can be days, weeks, or even months. This normal occurrence in our lives favors the emergence of new diseases and the re-emergence or increased severity of known diseases.

Meanwhile, the risk of bioterrorism has become a pressing national security issue. Taken together, these factors have stimulated calls for greater vigilance about microbial threats of public health significance showing up at our doorstep. Some of those calls have focused attention on the number, and more importantly the role of quarantine stations for human disease at our ports of entry.

The Secretary of the Department of Health and Human Services (DHHS) has statutory responsibility for preventing the introduction, transmission, and spread of communicable diseases from foreign countries into the United States and its possessions. The secretary develops and enforces regulations through the Center for Disease Control and Prevention (CDC). The CDC has authorized its Division of Global Migration and Quarantine (DGMQ) to carry out many of these regulations through a variety of activities, including the operation of quarantine stations at select ports of entry and the administration of regulations that govern the movement of people, animals, cargo, and conveyances into the United States. For example, DGMQ can detain, medically examine, or conditionally release individuals at U.S. ports of entry who are reasonably believed to be carrying a communicable disease of public health significance. Also, DGMQ and CDC can set policies to prevent certain animals that pose a public health threat from entering the country.

The CDC has quarantine stations at only a few of the 474 U.S. ports of entry. Unlike their namesakes, today’s quarantine stations are not stations per se, but rather small groups of CDC inspectors located at major U.S. airports. Their core mission remains similar to that of old: mitigate the risks to residents of the United States posed by infectious diseases of public health significance originating abroad. These quarantine station staff, their offices, and their patient isolation rooms are run by CDC’s DGMQ. The number of CDC facilities will be increased to 18 in FY 2005; still more will be added in FY 2006.

Each quarantine station is responsible for many ports of entry without a quarantine station located within a specific geographic area. For example, Hartsfield International Airport in Atlanta has jurisdiction over all ports in Georgia, Alabama, Arkansas, Louisiana, Oklahoma, Mississippi, North Carolina, South Carolina, and Tennessee.

The outbreak of SARS in 2002 dramatically demonstrated the need for strong, well-coordinated national and international systems for disease surveillance, detection, and response. Coupled with other microbial threats, SARS generated enough political will for the U.S. federal government to commit funding to biosecurity initiatives. A portion of the fiscal year 2004 budget appropriation went to DGMQ for the construction of three new CDC quarantine stations at U.S. ports of entry: Houston Intercontinental Airport; the Mexico–U.S. land border crossing in El Paso, Texas; and Dulles International Airport, located twenty six miles from Washington, D.C.

President George W. Bush proposed further expansion of the quarantine station system under the biosecurity umbrella of his fiscal 2005 budget request to Congress by calling for another 14 CDC quarantine stations at U.S. ports of entry. On December 8, 2004, Congress allocated $80 million to the Department of Health and Human Services, Office of the Secretary, to support and expand biosurveillance activities in fiscal year 2005 (U.S. Congress, 2004).

The Epidemic Intelligence Service (EIS) is the country’s critical epidemiology training service, combating the causes of major epidemics. Over the past 50 years, EIS officers have played pivotal roles in combating the root causes of major epidemics. The EIS was established in 1951 following the start of the Korean War as an early warning system against biological warfare and man-made epidemics. The program, composed of medical doctors, researchers, and scientists who serve in two-year assignments, today has expanded into a surveillance and response unit for all types of epidemics, including chronic disease and injuries. More recently, EIS officers have documented the obesity epidemic in the United States, helped states reduce tobacco use, and studied whether disease outbreaks were a result of bioterrorism.

The National Electronic Disease Surveillance System (NEDSS) is an initiative that promotes the use of data and information system standards to advance the development of efficient, integrated, and interoperable surveillance systems at federal, state and local levels. It is a major component of the Public Health Information Network (PHIN).Their mission statement is to detect disease outbreaks rapidly and to monitor the health of the nation. Facilitate the electronic transfer of appropriate information from clinical information systems in the health care system to public health departments. Reduce provider burden in the provision of information. Enhance both the timeliness and quality of information provided. Surveillance Systems collect and monitor data for disease trends and/or outbreaks so that public health personnel can protect the nation’s health.

How are avian, pandemic, and seasonal flu different? Avian flu is caused by avian influenza viruses, which occur naturally among birds. Pandemic flu is flu that causes a global outbreak, or pandemic, of serious illness that spreads easily from person to person. Currently there is no pandemic flu. Seasonal flu is a contagious respiratory illness caused by influenza viruses.

Statistics of Infectious Disease: Approximately one-third of Americans have been exposed to hepatitis A, and there are approximately 80,000 new hepatitis B infections each year. Tuberculosis strikes about 15,000 people annually and about 36,000 people per year in the US die from influenza.

There are approximately 900,000 people living in the U.S. with HIV or AIDS, and about 4 million people get chickenpox every year. Even though the measles vaccination is now available, nearly 90 cases of measles still occur annually, and whooping cough affects more than 7,000 people in the U.S. annually.

As a country, we can take steps to minimize our risk and exposure to infectious diseases, pandemics and bioteriorism by providing the public with ongoing educational programs, and by creating management plans that protect the public and health care providers from the most common diseases. But that’s just a tip pf the iceberg and may be too little too late because it’s not a matter of if, it’s only a matter of when will the bugs circling the globe will become a threat to our safety, your health and our national security

The Characteristics of a Stock Market Crash

Monday, May 7th, 2007

With essentially no change in the domestic economic environment or interest rates, the market seems to be marching up a wall of worry, posting new highs as political struggles wane, inflation seems tame and the air coming out of the housing market has slowed to a trickle.

So why worry about an impending precipitous decline in the stock market? Just compare the crash of 1987 and the “Bubble” of 2000 to the environment we’re in today, and the similarities are alarming.

There was no apparent change in the economic conditions between the spring of 1986 and fall of 1987, but when the bell rang on that fateful Monday in October, investors fled to the exits in droves. 1986 and 1987 were actually banner years for the stock market. Those years were an extension of an extremely powerful bull market that started in the summer of 1982. When the dust settled, that crash was the largest one-day stock market decline in history. The Dow lost 22.6% of its value, or $500 billion dollars, on October 19th, 1987.

Now rewind to the fall of 1999 and the spring of 2000. Surely, the remarkable market values assigned to Internet and related high-tech companies seemed inconsistent with rational valuation. But throughout the process of topping out, there were no visible signs of a weakening economy or storm clouds on the horizon.

From 1996 to 2000, the Nasdaq went from 600 to 5,000! By early 2000, reality started to sink in. Investors soon realized that the dot-com dream was really a “bubble”. Within months, the Nasdaq crashed from 5,000 to 2,000. Billions of dollars were lost, and panic selling ensued as investor losses went into the trillions of dollars. During this decline, the Nasdaq Composite actually lost 78% of its value as it fell from 5046.86 to 1114.11. The Dow Jones Industrial Average went from 11,800 to 7,300, losing 38 percent of its value in the process.

There is one thing that the bubble of 2000 has in common with current market conditions, and that’s the initial public offerings (IPO) market, which has seen a surge in interest by investors lately.

In the year 1999, there were 457 IPOs, most of which were Internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading.

Ironically, the initial public offering for Chipotle Mexican Grill (CMG) in February 2007 saw their shares jump from $22.00 to $44.00 in one day, making it the first time since 2000 that a U.S. IPO of more than $10 million had doubled so quickly.

There have been over 32 offerings priced since the beginning of 2007, which is up 14% from the same time last year, making 2007 look like the busiest year for new issues since before the tech crash.

And IPOs are performing well in the aftermarket. They returned an average of 18% in 2005 and 10% so far this year, according to Renaissance Capital in Greenwich, Conn., versus returns of just 5 percent and 1 percent, respectively, for the Standard & Poor’s 500-stock index. “The market is off to a very healthy start,” says Craig Farr, co-head of U.S. equity capital markets at Citigroup.

The percentage of profitless IPO companies fell from 80% during the tech boom to 40% during the bust, and has stayed there for a while. The average age of companies going public shot up from four years in 1999 to 15 in 2002, according to research by University of Florida finance professor Jay Ritter. Investors, in other words, gave money only to companies already demonstrating that they deserve it. The average age of companies going public slipped to 11 in 2005, and it’s now heading lower.

For a variety of reasons, share prices can be very volatile as a result of irrational responses and lofty expectations surrounding the direction of interest rates, the state of the economy, and the perception of risk.

As the Federal Reserve tries to micromanage the economy and inflation, the housing market is taking it on the chin but the economy is still growing, albeit at a moderate pace. Inflation seems to be under control and the markets are putting in new all time highs. Everything on the surface seems fine, just like it did in 1987 and again in 2000.

America and consumers were different animals back in the late eighties and nineties. The U.S. was still a manufacturing power house on a global scale, and workers wages were more in lock step with the economic realties of life in America.

Now the U.S. appears to be motoring along as a service economy, surviving off consumer spending, a massive amount of debt and not manufacturing. So what happens when the consumer can’t spend and housing prices decline and their home equity piggy bank dries up?

According to Wikipedia, the free encyclopedia, a stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.

Most market crashes are long, lasting over a year, and usually occur after a prolonged period of rising stock prices and economic optimism, a market where price to earnings ratios exceed long-term averages, and there’s extensive use of margin debt by investors. Ironically, six out of the top eleven crashes started in either September or November.

But fortunately for the buy and hold investors, stock market “bubbles” are the exception rather than the rule. Accepting inefficiencies in the markets and the “occasional mistake” is the necessary price of being involved in a flexible market system that usually does a very effective job of allocating capital to its most productive uses.

Precipitous declines in the market usually occur as natural phenomena, balancing out the irrational exuberances of investors with the realities of the fundamental values of the underlying businesses. It’s during that moment in time when the market temporarily fails in its role as an efficient allocator of capital.

Even if they all have the same tell-tale signs, stock market crashes are difficult to forecast. But if you pay attention and recognize the clues, prospering from a crash can be a realistic and rewarding proposition.

Is this market poised for a major decline in the near future? Only if history repeats itself.