Lenders Show Optimism

Lenders say that, spurred by other companies’ success as sellers, and fearing a tax hike, the fourth quarter of 2010 will provide dealmakers with a perhaps unprecedented M&A blizzard.

Mergers & Acquisitions news site

By JONATHAN MARINO

May 6, 2010

Lenders are anticipating a dealmaking flood to cap off an already-frothy 2010.

“I don’t think people realize the size of the wave of M&A that is out there,” said Leonard Tannenbaum, chief executive of Fifth Street Capital. “You may see the biggest fourth quarter [of dealmaking] in history; there is going to be a massive tax hike coming.”

Tannenbaum, speaking on a panel at ACG's InterGrowth conference in Miami, went on to predict that up to $500 billion of deals could unfold in just those three months alone. Others agreed. “We are seeing a flood of sellers,” said Stuart Aronson, vice president with GE Capital.

While the capital gains tax increase has been on the horizon for some time, … the dour markets forced many business owners to hold off. While their window is quickly shutting, the return of the debt markets will accommodate companies looking to sell.

2009’s first quarter saw a paltry $17 billion in new loan volume; this year, that number jumped 225% percent, to more than $55 billion. Still, that figure pales in comparison to every prior quarter—save last year’s.

Lenders are seeing more capital made available; healthy companies can secure high yield debt and even regional banks have gotten back into the act.

“There has been an enormous surge in asset-based lending,” Aronson said.

Five forces reshaping global economy

The core drivers of globalization are alive and well, but executives are still grappling with how to seize the opportunities of an interlinked world economy.

McKinsey Quarterly - Strategy

MAY 2010

An ongoing shift in global economic activity from developed to developing economies, accompanied by growth in the number of consumers in emerging markets, are the global developments that executives around the world view as the most important for business and the most positive for their own companies’ profits over the next five years. Executives also identify two other critical positive aspects of globalization: technologies that enable a free flow of information worldwide and, increasingly, global labor markets. These four trends, of the ten we asked about, also are the ones that the biggest share of respondents—around half—say their companies have taken active steps to address.

In this sixth annual survey asking executives about the forces shaping the world economy,¹ there is little change in how respondents view the importance of global trends compared with previous years—either for business in general or for their own companies’ profits (Exhibit 1). … Continued faith in the positive effects of globalization combined with a move away from short-term planning likely reflects rebounding optimism about global economic prospects and is consistent with the findings of other McKinsey surveys on the economy.²

In addition to our annual questions on individual global trends, this year’s survey explores for the first time five interconnected themes that highlight the opportunities and challenges faced by global economic integration itself and by companies seeking to profit from it: growth in emerging markets; labor productivity and talent management; the global flow of goods, information, and capital; natural-resource management; and the increasing role of governments.

The findings show that the global economy faces significant challenges as it continues to integrate. For example, the majority of respondents … expect increased overall volatility to become a permanent feature of the global economy, and another [one quarter] see sharply higher levels of volatility that will undermine the economy’s robustness. In addition, high levels of public debt are a headache in Europe and North America, where most executives fear the debt will have a negative impact on GDP growth.

There are specific corporate challenges too. Half of the respondents are only somewhat optimistic they will be able to find the right talent to meet their companies’ strategic goals. Likewise, only half of the executives reported that their companies have taken steps to address the shift in global economic activity from developed to developing economies—the force that is reshaping the global economy more than any other.

Growth and risk management in emerging markets

Emerging markets, with populations that are young and growing, will increasingly become not only the focus of rising consumption and production but also major providers of capital, talent, and innovation. This will make it imperative for most companies to succeed in emerging markets. …

To capture growth from emerging markets, the actions most often taken … are building a local presence, developing partnerships or joint ventures with local companies, recruiting talent from emerging markets, and developing new business models (Exhibit 2). …[Large] and public companies significantly outpace small and private ones in pursuing actions to capture emerging-market growth.

On risks faced by their companies in emerging markets, executives cite breach of intellectual property …, volatility of currency or exchange rates …, geopolitical instability …, and lower safety and quality standards … as the top four. …

Labor productivity and talent management

Low birth rates and graying workforces in most developed economies will make it hard for them to achieve steady growth unless they continue to make sizable gains in labor productivity. …

Nonetheless, developed and developing economies alike must become more innovative at sourcing talented employees, whether by tapping global labor markets or making better use of older workers. …

The greatest projected talent shortfalls are in three functions—management, R&D, and strategy—with significant variations between executives in different regions (Exhibit 3). Interestingly, executives in China are much more concerned about a shortage of management talent than they are about R&D specialists. For India, it is the reverse.

Companies are shifting their strategic planning from crisis mode to a more balanced consideration of short-term profitability and long-term strategic issues: one-third now focus equally on the short and long terms, compared with one-fifth in 2009.

When indicating where their companies will find the talent they need, executives most often cite talent from emerging markets to work there …, new talent entering developed labor markets …, and talent from developed markets deployed to emerging markets … . North American companies, … are counting more than all others on sourcing talent in developed economies … .This is consistent with the lower number of actions North American companies are taking to capture emerging-market growth.

Global flows of goods, information, and capital

Executives are generally optimistic that the relatively free flow of goods and capital … will survive the financial crisis and the economic downturn. However, few see much further progress occurring in the next five years, …

The free global flow of information has already resulted in radical pricing transparency and new networks of engaged consumers, and this probably is only the beginning. Disruptive changes in consumer behavior could have great impact on business over the next five years. Executives expect that the most powerful effects on their companies will be increased innovation, greater consumer awareness and knowledge, and increased product and service customization (Exhibit 4).

Natural-resource management

Executives’ concerns about the impact that increasing constraints on the supply or usage of natural resources will have on their companies’ profits appear to be subsiding despite the prominence of these issues in the public debate today. …

Energy and manufacturing continue to be outliers. Forty-five percent of manufacturing-sector executives expect negative effects on profits. Among energy executives, few are indifferent: 34 percent expect a negative impact, but a much larger share—59 percent—see a positive impact on profits.

… When executives select the actions their companies are taking to ensure access to the resources they need, the most common response is that they are conserving energy to reduce the need for natural resources (Exhibit 5).

The increasing role of governments

Executives in Europe and North America are haunted by the perception of crippling public-debt levels… In contrast, 45 percent of respondents in China and 24 percent in India expect that the level of public debt will have a “positive” impact or “no impact” in their home markets.

In a pattern consistent across nearly all regions, executives view government’s role in their companies’ home markets over the next five years somewhat differently … For instance, 64 percent of all respondents characterize the Chinese government as the principal actor in that country’s economy (Exhibit 6), compared with only 49 percent of respondents based in China.

Respondents were also asked whether government actions in the previous 12 to 18 months have increased the likelihood of companies to invest in certain countries. China scored highest, …. Smaller groups of respondents say the same for India …, Brazil …, and the United States … . Russia fares the worst, with only 9 percent saying their companies are “more likely” to invest there; …

Finally, only between 20 and 30 percent of executives say multilateral cooperation (governmental and nongovernmental) will be “very” or “extremely effective” in addressing the following big global issues: climate change, financial crises, free trade, nuclear proliferation, and terrorism. Respondents in North America hold out the dimmest hopes for success. Executives in emerging markets are much more optimistic about multilateral institutions’ ability to achieve progress on each of these issues.

Looking ahead

• Capturing the opportunities offered by growth in emerging markets … will require retooling existing business models and reconfiguring companies’ price/value equations.
• Managing the risks of that trend also will be crucial: respondents express a great deal of trepidation about geopolitical instability and market volatility in emerging markets, …
• Technology will continue to materially reshape consumer awareness, choice, and interactivity models, and companies should be striving to tap the power of technology to improve their competitive advantage.

About the Authors

The contributors to the development and analysis of this survey include Renée Dye, a consultant in McKinsey’s Atlanta office, and Elizabeth Stephenson, a principal in the Chicago office.

The authors would like to acknowledge the contributions of Ian Bremmer, president of Eurasia Group, to this analysis.

Notes

¹ The online survey, in the field in March 2010, generated responses from 1,416 executives around the world, representing the full range of industries, regions, functional specialties, and seniority.

² See, for example, “Economic Conditions Snapshot, April 2010: McKinsey Global Survey results,” mckinseyquarterly.com, April 2010.

Fast Track to Recovery

Post-recession success depends on tapping the informal aspects of an organization and avoiding the temptation to rely solely on formal systems, processes, and programs.

strategy + business magazine

by Jon Katzenbach and Zia Khan

Coming out of the worst recession of modern times will, for many companies, be more challenging than navigating the downturn itself. …

Two of the skills companies most need in this nascent phase of the economic turnaround are speed and adaptability. … Unfortunately, these are not strengths of the formal, rational organization, which is typified by analysis, strategies, structures, processes, and programs codified in charts, graphs, flowcharts, spreadsheets, and PowerPoint presentations. The capabilities most vital to recovery are actually embedded in the informal organization, which is emotional, highly interactive, and cross-organizational, and encompasses personal beliefs and values, peer relationships, consensus building, emerging ideas, social networks, and communities of common interest.

In most successful turnarounds and recoveries, informal activities accelerate behavior change and improved performance beyond what would have been possible through formal efforts alone. …

As critical as the informal, “soft” side of things is, it cannot become an end unto itself; it must be viewed as an approach or a tool for accelerating and enhancing hard results. In fact, when the informal and formal are in balance and aligned, the performance improvements and strategic advantages that accrue are tough to outpace. People feel emotionally satisfied when they are recognized for steps that lead to concrete goals. And concrete goals (as well as the steps that lead there) serve as motivating points for soft enablers such as sustained commitment, unleashed creativity, and collaboration across barriers. … Here are the five most salient challenges that companies can expect to face, and the potential impact of soft skills that management should consider.

1. Sustainable lower-cost operations. Recessionary cost cutting is typically aggressive and arbitrary, with little consideration of future needs. … Hence, recessionary cost cuts are mostly temporary and the costs come back quickly. Two aspects of the informal organization can help avoid this insidious “cost creep.”

• The informal organization is integrated across organizational boundaries; as a result, it can sustain lasting collaboration that is hard for competitors to match.
• Informally supported commitment lasts longer. Because of the emotional power of motivation, people feel good about, and take pride in, sustaining lower costs. For example, rather than implementing formal cost-cutting goals to trim US$50 million in expenses, Texas Commerce Bank reframed its objective to adopt a more energizing theme: eliminating whatever annoys bankers and drives customers crazy. …

2. Competitive advantage. Competitive advantage is most powerful when it is based on the few distinctive capabilities that a company can sustain over time, such as Southwest’s point-to-point travel system (its alternative to a hub-and-spoke network). To drive consistent company-wide skills — indeed, to derive a company’s identity and maintain an advantage over rivals from a set of company-wide skills — objectives must be consistent across the organization as well as from top to bottom. Both formal and informal mechanisms are needed to instill the operational focus into the company culture.

3. Breakthrough innovation. … A lot of companies can come up with an innovative, winning product or service once or twice, but the few that manage to do so routinely have mastered two critical capabilities: identifying and cultivating creatively gifted individuals, and nourishing informal networks. Ideally, gifted individuals are planted in parts of the organization where they can extend their interactions with people who can enrich their creative ideas as well as with people who can ensure that there will be appropriate support and buy-in. …

4. Superior customer service. Enterprises that excel at delighting their customers are masters of an institutional capability for customer empathy that goes well beyond the immediate sales transaction or customer interface. … Not surprisingly, they are able to command a premium price as well as maintain a virtually unassailable market position. …

5. Collaboration in a flattening world. Most enterprises today are facing some kind of new global reality — in their marketplace, in their operating model, or in their financial or human resources options. … We can no longer rely on formal mandates plus instinct and chance to make the critical connections — many of those connections are emotionally rather than rationally determined. Therefore, business today cries out for integration of the formal and informal.

No organization wants to merely survive. Unfortunately, as we are climbing out of the recession, many organizations appear to be stuck in survival mode. … More than ever, therefore, survivors need to cultivate a spirit that is not content to drag the workforce along in a quest for transformation in critical parts of the enterprise. Transformation can be achieved only if the informal organization is unearthed to energize and refocus cultural elements in positive ways: accelerating behavior change, promoting peer-to-peer interaction, and ensuring a positive emotional commitment to grow and win again. Just as it is important to have a vision that inspires ambitions beyond next year, it is critical to have an informal organization that supports, energizes, and challenges the formal. Both informal and formal dimensions are important influencers of behaviors that determine future performance and competitive position. We need the best of both worlds.

See “Leading Outside the Lines” by Jon Katzenbach and Zia Khan, s+b, Summer 2010.

Author PROFILES:

• Jon Katzenbach is a senior partner with Booz & Company, where he leads the Katzenbach Center in New York. A cofounder of Katzenbach Partners LLC, he is the author or coauthor of eight books, including Why Pride Matters More Than Money: The Power of the World’s Greatest Motivational Force (Crown Business, 2003).
• Zia Khan is vice president of strategy and evaluation at the Rockefeller Foundation in New York, and a senior fellow at the Katzenbach Center.

DoL Claims No Safe Harbor in Fiduciary Breach Case

PLANSPONSOR.com

May 6, 2010 (PLANSPONSOR.com) –

Secretary of Labor Hilda L. Solis has warned a federal appellate court that protections for plan participants could be harmed if it does not overturn a lower court ruling giving a directed trustee safe harbor protection against wrongdoing allegations.

Solis issued the warning in a friend of the court brief filed with the 6^th U.S. Circuit Court of Appeals in Tullis v. UMB Bank, in which Solis argued that the lower court misread the safe harbor clause in the Employee Retirement Income Security Act (ERISA). The 404(c) provision was never intended to remove all legal liability from a fiduciary against the impact of their own failures in carrying out their plan duties, Solis contended in the brief. …

Solis asserted that the 404(c) safe harbor defense applies only where a participant exercises control over his or her investments and the loss caused by imprudent conduct “results from” such exercise of control, which was not true in the current case.

Physicians David H. Tullis and Michael S. Mack participated in the Toledo Clinic Employees' 401(k) Profit Sharing Plan. In the early 1990s, Tullis and Mack chose William Davis of Continental Capital Corp. as their investment adviser (see Case Sensitive:Shield Law).

In 1999, the Securities and Exchange Commission (SEC) entered a temporary restraining order against Continental Capital because two of its brokers were engaged in fraudulent activities. Tullis and Mack alleged that the plan's trustee, UMB Bank, knew of this fraud, yet failed to inform them of it.

In 2001, UMB Bank filed a lawsuit against Davis and Continental Capital on behalf of the plan alleging that several investments made by David and Continental Capital were improper or simply never took place. Tullis and Mack asserted that UMB, even after filing the lawsuit, never informed them of the fraudulent activities.

Tullis alleged that as of February 2003, UMB had represented that his plan account was $724,561, when in fact it was only $142,269. Mack asserted that UMB represented that his account was valued at $1.6 million when it was worth only $420,794.

Also included in the DoL brief was an argument that the losses stemming from UMB's actions resulted from UMB's breaches of its ERISA fiduciary duties. …

The DoL brief is available at http://www.dol.gov/sol/media/briefs/tullis(A)-04-15-2010.htm.

Fred Schneyer editors@plansponsor.com

Momentum builds for annuities in 401(k) plans

Employee Benefit Adviser

By Lee Barney

April 1, 2010

More retirement think tanks are getting on board with the idea of including annuities in 401(k) plans, but so far, only a handful of large employers have this as an option.

“They are complicated,” explains Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “And [if] you hand over a bunch of your hard-earned cash and go out on the street and get hit by a bus, it’s gone.”

Furthermore, investors are afraid an insurance carrier could go out of business, and plan sponsors don’t like the administrative headache of switching annuity investments when workers change jobs, added Robyn Credico, a consultant with Towers Watson.

In addition, the Retirement Security Project at Brookings Institution recently spelled out a number of perceived problems with annuities among investors: “Annuities may not inspire confidence because they are not sufficiently transparent or simple to understand. Consumers find themselves mystified by annuities’ complex provisions and worry that insurance companies are pricing their products unfairly. Comparison shopping between annuities, let alone between annuities and lump-sum options, can be a lot more complicated than contrasting a Toyota to a Ford in an automobile showroom.”

Nonetheless, the Obama administration recently came out in favor of annuities, and the Department of Labor and Treasury Department are gathering information on the feasibility of including annuities in 401(k)s.

The 401(k)helpcenter.com, which serves plan sponsors, advocates the creation of a federal insurance fund similar to the FDIC to guarantee annuities.

Meanwhile, The Retirement Security Project recommends either automatic annuitization once workers reach age 45, with the right to opt out, or moving 50% of a worker’s savings into an annuity upon retirement. — By Lee Barney, editor-in-chief, Money Management Executive magazine.