Masuda Funai Holds Third Executive Roundtable on Growth and Transformation in Today's Environment

Date: 11/23/2011
 Business Grop Update 11-23-2011

On November 3, 2011, Masuda Funai held its annual Executive Roundtable featuring a panel discussion focusing on growth and transformation. The event was held at the Eaglewood Resort in Itasca, Illinois. Moderated by Masuda Funai's President, Colin Hara, the event attracted executive-level decision makers in industries such as manufacturing, electronics, presses, auto parts, machine tools, metal processing, private equity, real estate development, and finance.

Panelists were Christopher DeMonte, Executive Director, Investor, J.P. Morgan Private Wealth Management; Michael Baisley, Co-Head of M&A, SMBC Nikko Securities America Inc.; Thomas McMenamin, Chairman and Principal, Masuda Funai; and Jennifer Watson, Principal and Business Group Vice-Chair, Masuda Funai.

Chris DeMonte started off the fascinating panel discussion to discuss the global business environment. Although he called the overall picture "bleak," he noted that the environment was also more volatile, which creates opportunities for investors. The U.S. GDP growth recently has been around 2.5%, which Chris noted is in line with the 20 year average of United States growth. However, this number must be tempered with the fact that the recent growth included federal government stimulus, either through direct government investment or the Federal Reserve Bank's increase in its balance sheet. In spite of these efforts, the United States has not seen a more typical "snap back" from the recession, making this recession different from previous ones.

Much of this is due to the credit crisis and general over indebtedness. From 1975 to 2000, the debt to income ratio average around 75%. In 2007, it reached 130%. It is now around 113%. In spite of this reduction, the ability to reduce the debt level quickly is limited by unemployment and underemployment. Chris noted that he does not see a "double dip" recession, but does see sluggish growth in the United States.

Chris also spoke about Europe which, at the time he spoke, had just announced a possible solution to its debt crisis including recapitalization of banks, voluntary write-downs of Greek debt, and avoiding the application of credit default swaps. Moreover, he noted that the solution may not cover Spain and Italy. He expects Europe to be in recession.

China remains a bright spot in the world economy, with growth at 9%. But the stock market in China has been declining. Nevertheless, Chris sees China as an opportunity, since the private sector represents only 33% of the economy compared to the United States' 70%. As China transitions into a more consumer-oriented economy, it will continue to enjoy good growth.

Other opportunities available to investors include large U.S. multi-nationals who have cash and are paying dividends and European multi-nationals also with cash. For more adventurous investors, European non-performing loans are higher risk but also have a higher potential return. Finally, some opportunities are available in mergers and acquisitions strategies, which are being used by hedge funds.

Michael Baisley then discussed the U.S. merger and acquisition market, with a focus on the middle market (i.e. transactions below $500 million). Mike saw a recovery in 2010 and 2011. There were considerable Japanese cross border acquisitions, but these were mostly larger transactions. He also is seeing higher multiples and higher leverage for acquisitions.

There are three buyer groups: private equity, strategic buyers, and others. Private equity firms in particular have excess capital which must be deployed to satisfy their investors. Multi-nationals are also potential acquirers as they are cash rich and experienced. He has not seen as many foreign buyers, although there is much discussion about potential foreign buyers.

Michael noted the challenge of marrying cultures, but also the issue of timing and speed. He noted that Japanese companies tend to be more relationship based, which can slow down the merger and acquisition process. On the other hand, U.S. acquirers usually move faster, so often he needs to explain to acquirers how important it is to move quickly. He also noted the decision making process in Japan can also slow down the acquisition process. Sometimes a hindrance is due diligence, in which the potential acquirer tries to identify every possible risk. As Michael put it, there is more concern about doing the wrong deal and less enthusiasm about finding the good deal.

Jennifer Watson discussed the integration of culture in mergers and acquisitions and other transactions. She noted the importance of looking at cultural integration in any transaction. The acquirer should look at the culture of the target as part of the due diligence process. She noted several areas in which the acquirer should review the target's culture. First, is there a culture of corporate compliance? Second, what are the values of the target as compared to the potential acquirer? Third, what team will be put together to integrate the two entities? (Jennifer noted that it may even be helpful to have an integration manager to assist in this process). What are the personalities on the team so that the team can build after the transaction is concluded? Jennifer concluded by noting that the importance of prompt communication within the merging entities. Delays could create uncertainty, which is particularly destructive for a target company with an uncertain future.

Thomas McMenamin concluded the panel discussion with a series of tips on crisis management. Tom noted that the speakers' topics could be compared to movie genres. Chris DeMonte's movie would be a documentary, focusing on the facts. Mike Baisley's movie would be a drama, with the uncertainty as to whether or not the parties are going to complete a transaction. Jennifer Watson's movie would be a love story, in which the parties try to create a lasting relationship. In contrast, Tom said his movie would be a horror movie, where executives and companies must deal with their worst nightmares.

No one wants to experience the types of things that he would be discussing, but they are inevitable in a business environment. So Tom had several tips for companies facing crisis situations. First, have a business continuation plan in place. He noted a client in Japan he had visited whose business continuation plan included food, blankets and generators. Second, designate a spokesperson in advance, which probably should not be the president of the company. The president will be engaged in maintaining the business, calling customers and reassuring employees and thus, the spokesperson should be someone who can take the time to tell the company's story. Third, if there is a parent company, there should be a contact person at the parent company who also keeps current on the status. Fourth, the company should focus on a positive narrative which is kept up to date. Fifth, a company should have offsite backup for all its systems. Sixth, a company should perform catastrophe drills from time to time to test its crisis management systems. Seventh, the company should get the lawyers involved earlier, rather than later. Lawyers can serve as a buffer between the client and the government regulators, who are often on site immediately after any crisis. Eighth, the company should engage a public relations firm to assist it in getting through the crisis with its image intact. Ninth, the company should communicate with its parent company to ensure consistency in telling the story. Tenth, the company should evaluate disclosures that may be required due to the crisis. Finally, the company should consider employee counseling. Even employees who may not have directly witnessed the crisis or catastrophe may be put in stressful situations and could require support.

While time did not permit all of the follow-up questions attendees had, attendees had several lively private discussions. It certainly seemed that attendees of the Executive Roundtable appeared to enjoy the opportunity to discuss these issues, and other issues they are confronting in their businesses, with their peers.

For more information about this or any other corporate law topic, please contact Stephen Proctor, Chair of the Business Group, at 847.734.8811 or via e-mail at sproctor@masudafunai.com.