Monday, January 19, 2009

Are Blasts from the Past Afoot?

Hyperbole to the contrary notwithstanding, the terrorist attacks on 9/11 did not change everything. Likewise, the Panic of 2008 will not change the fundamental facts of business. It may, however, dramatically change its face. In a topsy-turvy post-panic world your company’s biggest competitor might be a nimble newbie or a lucky small fry in just the right place at just the right time. The successful manager will know, as the Chinese do, that crisis spells opportunity as well as peril.

Some industries, like publishing, may be completely transformed in the next few years. Long on the ropes, newspapers and book publishers face dramatically declining revenues and a slew of new competitors, from bloggers to web videographers, free of traditional publishers’ costly overhead and antiquated distribution systems. Even college textbooks, long among the fattest of cash cows, may come under pressure from radical new business models like that of Flat World Knowledge, which claims it can make an adequate profit by giving textbooks away for free, online, without relying on advertising. Other long sagging and lagging industries, including construction, healthcare, higher education, and real estate, are also ripe for change.

The demise of the big investment banks has the potential to upend corporate finance, returning it to its roots. Startups may stay private longer and then go public via a direct public offering (or “OpenIPO”) facilitated by WR Hambrecht and Company instead of a traditional initial public offering underwritten by a bulge bracket investment bank. Direct public offerings were the norm in the United States before the Civil War and could become so again. Unlike intermediated IPOs where investment bankers set the selling price, modern DPOs use an auction process to discover the price at which all the offered shares will be purchased. The issuer is therefore never stuck holding unwanted shares and first day “pops” in the aftermarket are almost unheard of. DPOs are also considerably cheaper for issuers than IPOs.

Bond issuance and merger finance may also undergo major changes. Private placements have been an important part of corporate finance since the securities regulations of the Great Depression. In coming years they may become even more important because they will be easier for the remaining investment banks, small niche players called boutiques, to arrange than full blown public offerings. Boutiques will continue to offer M&A advice, but corporate law and accounting firms and commercial banks will certainly enter the vacuum created by the exit of the major investment banks.

For bank credit, smaller businesses may find it easier to turn to their local community banks or smaller regionals than to wait for the big boys’ balance sheets to improve. Community banks were largely untouched by the subprime mortgage mess and stand ready to lend to solid local businesses. Also, trade credit will probably make a comeback as businesses sitting on stashes of cash or with access to relatively cheap sources of external finance find it prudent to keep key suppliers or distributors afloat. As in the nineteenth century, credit may again cascade through the channels of trade, from the biggest, best, and oldest companies through their most important customers, clients, and suppliers to the small, weak, and new.

Insuring businesses against risks may also change in the next few years. Insurance companies did not take a direct hit from the subprime debacle – AIG failed due to risks taken at the holding company level, not because of losses at its operating companies. Nevertheless, the panic of 2008 clearly stressed many insurers already facing competition from new alternative risk transfer mechanisms (ARTM), including catastrophe and death bonds. Investors see much value in such bonds because they offer good returns that are not correlated with other financial markets, a clear virtue when almost everything else is down, as at present.

1 comment:

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