Shaky Financial Times
Some news pundits have described our current dire economic circumstances – not literally, perhaps, but in similar tone – as if the Great Depression of the 1930s was paired with Europe’s suffering at the hands of the bubonic plague, plus an invasion of the Mongol Horde thrown in for good measure.  While few of us are riding high these days, nothing is ever as bleak the Wall Street Journal, Financial Times, or U.S. News & World Report makes it out to be.  Despite the seemingly never-ending stories of job layoffs, personal bankruptcies and home foreclosures, these can be exceptionally rewarding times for small business owners.

Darwin Was Right – About One Thing, Anyway
Although the theory Charles Darwin put forth regarding the extinction of species – he claimed it happened slowly over millennia – has been pretty much debunked by scientists identifying at least five Great Extinctions, each taking place quite suddenly, the scholarly evolutionist was correct about the survival of the fittest, at least as it concerns business.  In difficult financial times, money is tight at the consumer level.  People are especially tight-fisted when it comes to deciding where to spend their cash.  A company that trims unnecessary spending, provides superior customer service, refuses to cut back on product quality, and finds more efficient ways to operate, will stand to capture a solid share of the market.  Establishments that give off the stench of despair, alienate their employees, or continue to spend too much money on non-essentials, will probably fail to survive.  Make smart decisions and you will avoid becoming the modern-day equivalent of the dodo bird or the passenger pigeon.

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Saving the Economy

One of the toughest domestic tasks to face the Obama Administration during its first 100 days involved getting the U.S. economy back on track.  The federal stimulus package has a number of prime elements to it, each one a broad overview designed to repair what many people consider to be damaged fiscal policy.  These factors include:

• Create New Jobs
• Move toward a greener (more environmentally responsible) economy
• Improve the country’s infrastructure
• Improve all levels of education
• Offer greater assistance to the unemployed
• Provide tax relief for 95 percent of Americans
   

Frozen Assets

Major corporations, notably those in the financial and automotive sectors, have received billions of dollars of taxpayer money in the form of loans and outright gifts.  The credit crunch that resulted from the collapse of a number of banks has had a devastating effect on the ability of American small business to conduct, well, business.  These companies rely on short- and medium-term financing to do everything from providing payroll relief to offering bridge loans for ongoing operations to funding new construction or remodeling.  Because so many banks are loaded down with “toxic assets”—loans that are unlikely to ever get paid back—they have no way to free up capital to provide new loans to the companies that need them.

Proposing a Small-Business “Bailout”

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We will state the obvious for the year with a twist…not since the last major downturn in the early ‘80s have firms in the PC, CE industry had such an opportunity to:

• slash costs, downsize the workforce,  shrink to core (known) market opportunities
• evaluate product/product segment/customer ROI/opportunities; realign product/service investments based on long-range strategic plans

Do you see the differences?

Management in the first group of firms who focus on cut and retrench will circle the wagons to force short term results regardless of the long-range potential of the market segments.

Management in the second group will take the opportunity to reduce staffing back to core teams, evaluate and eliminate product lines and customers which have little or no long-term growth and strategically invest in product/service innovations that should prepare the companies for 2010 – 2012.

Industry executives are most certainly jealous of the support governments are providing to their local financial and auto industries.  The problem is it is impossible for them to admit that they have run out of ideas that will correct the situation!

The first quarter of 09 will be a period of slow, careful realignment as firms see how quickly the governmental cash infusions rekindle IT and consumer confidence.

The downturn in the first half of last quarter had a positive effect for the consumer because it forced management to significantly lower prices (and profit margins) to stimulate sales.  This assisted desktop/notebook computer, personal/home entertainment sales and…impacted profits. 

             
Reshaped, Refocused

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The financial industry got caught with its pants down.   The automotive industry got caught with its arrogance up.

The PC, CE, communications industry simply got caught between the two.

We feel the angst but the business is still fundamentally sound.  With the right course adjustments the industry will be in a better position to deliver solutions and satisfaction to global business and local consumers.

We aren’t polyannic about the state of the economy…or the industry. 

We don’t quite believe as President Reagan did in the mid ‘80’s that things are good and they’re getting better.

But fundamentally, the content industry did not have the sudden stop the financial and auto industries did starting six months ago. 

We’ve been in this industry for 20 plus (ok + +) years and we’ve been through the downturns.  But the industry always comes out the other side better, stronger, more aggressive.

Silicon Valley is both a specific location and a state of mind. 

The winners are not those who focus their attention on making millions for themselves (if they’re really lucky that’s a nice side effect). 

They aren’t those who cling to the rustbelt past.

They are the individuals who drive change – often very disruptive change – for the people who live on this orb and the planet itself!

At the recent 6Sight conference dinner our conversation naturally turned to the economy and one young lady noted her company had recently been acquired and that she wasn’t certain about her job but she noted…“that’s the way the Valley is.”

           
That Hurts

We’ve all seen our 401K shrink like a bad case of hemorrhoids. 

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If you’ve been paying any sort of attention to the news this week, you’ll probably be aware that the Chancellor released his pre-budget report on Monday. This report is likely to have a major impact on your business, whether or not you are VAT registered. 

I’ve outlined the main points below:

VAT From Monday 1st December, the VAT rate will go from 17.5% to 15% for at least a year. If you are VAT registered, you will need to use the new rate as of this date. HMRC have issued detailed guidance on this.

The new calculation for working out VAT is now 3/23.

CORPORATION TAX The Government is deferring for a year the planned increase to the small companies rate of corporation tax. The rate will remain at 21% for 2009-10.

EXTRA LENDING UK small businesses should also be able to benefit from around £4bn of lending from the European Investment Bank (EIB) between 2008 and 2011. Approximately £1bn of these funds should be available by the end of 2008. The Government will launch a new Small Business Finance Scheme to support up to £1bn of bank lending, together with another guarantee facility for up to £1bn of bank support to small exporters. It will also make available a £50m fund to convert businesses’ debt into equity.

TAX PAYMENTS Businesses in financial difficulty will be able to spread payment of their tax bills over an indefinite time period. A new Business Payment Support service has been launched to help businesses calculate over what period they need to spread their corporation tax, VAT, PAYE, income tax and national insurance contributions in order to remain profitable.

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No matter what side you were on, here are a few observations, affirmations and truths, post-election, with respect to selling:

1. Strategy and tactics are equally important. The purpose of executing tactics in a sales campaign is to drive a well-founded strategy. Tactics without a strategy is like playing darts with your eyes closed.
2. Message! Not messages, messages, messages. Decide what you are going to count on to win based upon research – a focused, objective assessment of the sales opportunity.
3. You can successfully change the ground rules even if you temporarily lose ground.
4. The understanding and leverage of political influence is crucial.
5. Messages must be clear, concise and compelling and paint the vision of a better situation for the buyer. One fumbled message can dilute the impact of a hundred perfect ones.
6. Logic and the facts aren’t the only things buyers consider.
7. Discipline rules. Seat-of-the-pants doesn’t.
8. Knowledge of your opponent’s plan to win is vital for devising and refining your own plan.
9. Direct and blatant “bad-mouthing-the-competition” doesn’t generally work.
10. Never underestimate the underdog.
11. Want to win? Look the part.
12. Tell the truth before your opponent exaggerates it.
13. Choose the right team. The salesperson is CEO of their own virtual sales corporation. Whom they choose to stand next to them and to advise them can make a big difference.
14. Whomever has momentum at the time of close generally wins. Its very difficult to build momentum just at the right time without a plan.
15. Embrace technology. It permeates pretty much everything most of us do.
16. Go broad and deep into the customer’s organization as appropriate. (Ideally effective marketing will have blazed the trail in advance.

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The media needs to report the facts, regardless how grim, about the economic troubles. But, the messages of doom-and-gloom tend to become self fulfilling prophecies. The trouble is that in order to get our economy back on track, ultimately what we need to address is a confidence issue and one is going to spend or lend if they are continually being terrorized by the media.

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“In a hurricane even a turkey can fly.”
Author Unknown

Not since l990 have we seen a downturn in the economy as we have in recent months.  The vision of a turnaround has been pushed out until at least next year and most indicators point to the bottom of our double-dip and mild improvements will begin.  We won’t begin to “feel better” until possibly the third or fourth quarter of next year.  While the downturn – okay recession – was tough in the early ‘90’s you have to go back to the early ‘80’s to see one that had the global scale as the one we’re experiencing today. 
The warning signs were there:

• sales were steadily declining
• prices were plummeting
• consumers (business and individuals) said they couldn’t afford products or services
• buyers became more cautious and searched for better values
• reports of layoffs, increased bankruptcies, wholesale corporate reorganization fill the business pages and business press
• the global loss in faith in financial institutions only added fuel to the fire

It is easy to blame the global financial position on the greed of management.  It is just as easy to lay the fault at Congress’ front door because of their self-paralysis.

              
Marginal Growth
The U.S. economy grew slightly more than a paltry one percent during the first two quarters.  Car/truck sales even with zero and creative financing are finding few buyers. Bigger, more powerful PCs sit on store shelves despite fire sale prices.

While market sectors may be off there are pockets of light.  For example:

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In America, the small business owner has been used to sitting on the sidelines and watching whilst the large corporations dominate all areas of industry. Many small business owners have gone out of business whilst others often struggle to survive. One of the reasons behind this was that the Bush administration tended to offer very little support, instead making tax cuts for the corporate world. With the election campaigns now in full swing, Barack Obama has pledged to help small businesses survive and enable to thrive in the coming years.

Obama has put a number of measures in his manifesto that could help small businesses to take root and grow in the world of business because he fully recognizes that they are the heart of the American economy. Small businesses provide valuable jobs and income to millions of Americans up and down the country and, were they to go out of business, could actually make the economic situation worse. In fact, in some quarters, financial experts are touting the possibility of a recession on the scale of the 1929 Depression. By keeping small businesses alive and healthy, it can strengthen the economy and give Americans everywhere a little security of peace of mind.

Tax Issues

Obama has pledged to help small businesses by putting a series of measures that may help them into place. For example, he has pledged to reduce the burden on the owners of small businesses that may struggle to make ends meet by providing them with a little tax relief. Every small business owner has to pay both employee and business owner taxes, but with the $500 tax credit per worker that Barack Obama is proposing the burden of those payments will lift somewhat.

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Who’s to blame for the current financial markets crisis? The simple answer is everybody!

When Mortgage Brokers and Bankers are pushing home loans like too much candy at the county fair, what can we expect but an upset stomach the next day? Worse, we see the sickness but continue in order to feed the gods of profit. So they are blame. So everybody blames the greedy bankers. And that’s true; however they’re not alone in this blame game.

For too long the average person has bought into the fallacy that, above all, he must own his own home. It’s become part of our collective psyche. We as individuals have to take responsibility for our decisions and actions. When we take out a mortgage that eats 70% of our income each month, the outcome is foretold. We cannot claim fiscal illiteracy.

The middlemen buying the mortgages and bundling them up for investments are out to make a profit above all, forget about risk, forget commonsense and forget about their responsibility to their clients all in the name of profit above all else. They’re to blame for not tempering their risk appetite with a healthy dose of prudence.

The investors are equally at fault for not understanding what they’re investing in. Here too we cannot claim fiscal illiteracy. A 3rd grader wouldn’t be reading “War & Peace”, nor would I, a confessed banker, understand an advanced book on quantum physics. So why are people diving into complicated investment schemes without truly understanding them or the associated risks?

The government is to blame for over-regulation in some areas and under-regulation in others. Pushing banks to issue home loans to the masses because that’s what looks good in the polls. Even going as far as creating huge institutions to guarantee home loans, allowing the “people” above all to own their own home.

It’s no wonder financial liquidity is drying up in the market.

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The biggest questions on the minds of Americans today are, What is going to happen to our economy?” “Will we have a depression?” “How can I survive?”

It has been my opinion for the past 10 years that we are long overdue for a full scale economic depression. But, it will be completely different from the depression predicted by my contemporaries.

We have already seen a stock market crash in 1987 bigger than the one that preceded the depression of the 1930s. – And, we have already had more bank and S&L failures (percentage wise) than back then, too.

The rate of bankruptcies has grown from tens of thousands to hundreds of thousands each year – now, over a million bankruptcies each year – with the biggest percentage of bankruptcies in the higher income brackets.

Employee lay-offs, plant closings, and business failures have increased exponentially over the past 5 years. And, for the first time in our history, the unemployment rate among white-collar executives is higher (percentage wise) than among blue-collar workers.

All of these facts lead me to sincerely believe that …

The Depression of the 1930s was a “Blue Collar” Depression
But …
The Next Depression will be a “White Collar” Depression

Simply because …

Our Economy Has Become Top Heavy

There are simply too many white-collar workers, bureaucrats, and unnecessary people doing unnecessary paper-shuffling busy work. They consume far more than they are capable of producing. – These are the people who will be out of work, on the bread lines, during the next depression … NOT the blue-collar workers.

As an illustration: Before I had money enough to pay someone to sweep the floors, I did it myself (still do; on occasion).

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John McCain, the Republican candidate for the 2008 Presidential Election, is a man on a mission. He has extremely strong views about all sorts of areas of American life, and the economy is no different. However, unlike his opponent in the election Barack Obama, very few people have any idea what measures he will put in place to boost the business economy, and the American economy in general, should he be elected in November. The business economy is an extremely important area of policy for whoever the next President is to be because recovery from the impact of the credit crunch and Bush’s economic policy is going to be extremely difficult.

McCain’s Business Economy History

McCain’s business economy history is a little ambivalent to say the very least. This is because he freely admits that his economic knowledge is not as good as it could be, and should be considering his election campaign is not in full swing. This has the potential to leave him open to the influence of his cabinet, which has the potential to take care of the corporate world over the small business owners that are already struggling.

However, McCain does seem to have very strong views on the subject, even if they do change over time. McCain initially fought to prevent President Bush’s tax cuts but has now proposed to cement them, thus cutting corporate taxes from 35% to 25%. This may be a direct result of the fact that a number of corporations have supported him throughout his campaign.

Economic Stance

What McCain lacks in business economy knowledge, he makes up for in conviction. He describes himself as a free-enterprise capitalist and appears to be committed to reviving the business economy for the good of the country.

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Business appeared to be booming for the top companies in all sectors during 2007 if the list of mergers and acquisitions is to be believed. The number of companies bought and sold was certainly impressive, with 42 FORTUNE 1,000 corporations exchanging hands. This number of corporation buyouts had not been reached since the year 2000.

2007 was a huge year for mergers and acquisitions around the world. In the US alone, it was the single biggest year since the turn of the millennium, suggesting that many corporations actually faced tougher competition from their rivals than they were able to cope with or, alternatively and much more likely, that they faced financial difficulties as consumer spending begin to falter in line with the American economy and the credit crunch took hold. These factors probably lowered the selling price of the individual corporations that were the subjects of mergers and acquisitions but would have also made them vulnerable to corporate takeovers by larger and more dominant companies within the individual industries.

The majority of mergers took place in the sector of finance, healthcare, technology and energy, with the latter two attracting higher average selling prices for individual businesses. Mergers and acquisitions also took place in the utilities, capital goods, consumer staples, basic materials and consumer cyclicals sectors but the levels of the final buyout prices were nowhere near the level of those in the former sectors. However, in terms of the number of mergers and acquisitions, it was the consumer cyclicals sector that saw the majority of the action!

The top 10 mergers and acquisitions are listed below for ease of reference. Out of the ten, there were only two acquired by private equity buyers. The rest were the acquisition of corporate takeovers. They are listed in order, from the highest to lowest:

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