US food imports from Greece and our Import Promotion Services

Imports from Greece amount to approximately $800mn of which one quarter is for food products (compared to $17 bn from all EU). Main imports from Greece are olives, aluminum products, tools/cutlery, minerals and iron. Apart from olives, other imported Greek food products are cheese, olive oil, fish and other processed fruit and vegetables. It is worth noting that despite Greece is the world’s third largest producer of extra virgin olive oil, it represents only around 2% of total US imports for this product, while Italian branded olive oils prevail. Most of imported Greek food products are consumed in the states of New York, New Jersey, Pennsylvania, where populous Greek-American communities also reside, and secondarily in Chicago, Connecticut, Massachusetts and California. Greece had a trade deficit of $310 mn with the US in 2010 (These figures are based on data of the U.S. Census Bureau’s, Foreign Trade Division).

The US food industry’s revenues are estimated at $ 1.1 trillion, split between retail stores and the service sector. Food sales have been negatively affected by the recession having been reduced in 2009 and only grew by 1% in 2010. However, specialty food products as well as organic foods have faired much better. Sales of biological products grew by 7% in 2010 reaching $26.7 billion. Specialty and gourmet food products sales were estimated at $70bn by NASFT. The popularity of gourmet and organic food in the US is expected to grow among high earners, food enthusiasts and health conscious consumers hence large supermarket are investing into these segments. Almost 10% of food consumed in the US is imported with a high percentage of that being in gourmet/specialty products.

The Mediterranean cuisine is quite popular in the US due to its health aspect. A recent success story has been the Greek style yogurt whose sales have grown exponentially. Most of the Greek style yogurt is now produced in the US from multinational, American and Greek companies.

As Greek producers are increasingly interested in export markets, and in this context we have also received various inquiries for product imports to the US, we would like to provide some basic information on import requirements and procedures. First of all, food producers have to be registered with the FDA and specify a US based agent in order for their products to be eligible for import to the US.

Once registered a foreign producer can access the US market either directly by establishing an import subsidiary or through a US import partner. Import partners are for the most part either import agent/brokers or import wholesalers. Import agents/brokers act as intermediaries that connect buyers and sellers without taking title of goods shipped. Once a contract has been reached the agent will be remunerated with a commission on the value of the contract or other arrangement while goods will be shipped directly to the US buyer who will also be liable for payment. When a US import wholesaler is involved then this company will take title of goods and the risk for selling the products to the US market by securing orders at retail level. The import wholesaler may be handling logistics through own resources (ie warehousing and chain management) or cooperating with third parties or delivering the products directly from the import port to its retail partners.

Finally, it is recommended that producers follow the US Good Manufacturing Procedures. Although not required it is considered advantageous to be certified under the HACCP/ISO22000 quality standards especially when it comes to high value added gourmet foods. Tariffs and quotas also apply to certain products (for that it is highly recommended to consult with US Customs and/or customs brokers before initialing an import). Special licenses are for example required for cheese, meat and alcoholic products. A diagram of import procedure is given below.

This is a small part of the information included in an extensive market research we carried out regarding the potential of transatlantic trade in the food sector. Please contact us if you would require further information or to purchase certain related publications such as:
• US economic outlook and imports data
–The state of the US economy and outlook (main statistics and commentary)
–US imports (top importers and imported items; imports by EU country)
• US Food Market
–Total size and trends
–Market segmentation (ie frozen food, prepared food, oils, sauces and condiments, cereals, pasta etc)
• Food Retail Channels (New York metropolitan area)
–Main retailers and profiles
–Benchmark and Financial analysis
• Business Regulatory Framework
–Business types and characteristics (C Corp, S Corp, LLC, Partnerships)
–Tax framework (taxes at federal and state level)
–Legal framework (liability protection, employment law, administrative requirements)
• Procedures for Food Imports to the US:
–Customs procedures, Import quotas and Tariffs
–FDA regulatory framework (for food products)

Additionally, capitalizing on our consulting experience in Europe and US we have now launched import promotion services in the US, for European exporters. We have developed a robust methodology to assist in the successful entry of products to export markets.

Our Import Promotion Methodology

We provide a large array of import promotion services to our clients:

• Go-to-Market Strategy
• Product/Business Plan Preparation
• Marketing Strategy
• Business Matchmaking
• Entrepreneur Coaching
• Capital Raising/Commercial Financing
• Company Establishment
• Business Process Outsourcing
• Cultural Orientation
• Public Relations
• Trade Finance
• Distribution Channel Planning
• Event Planning
• Corporate Branding

We also offer in cooperation with external experts:

• Tax Planning
• Company Formation
• Product Label Design
• Regulatory Framework Compliance
• Import Procedures Clearance.

Finally but not least, we also undertake imports through an affiliated company. We are mainly interested in gourmet products when it comes to the food market. Other sectors that we are interested in, in the context of import promotion or trade/investment facilitation are Business Process Outsourcing, Professional Services Outsourcing, Financial Services, Real Estate, Tourism, Energy and Green Technologies.

For a detailed analysis of our services and publications refer to For more information please contact Pete Chatziplis at

Εισαγωγές Ελληνικών Τροφίμων στις ΗΠΑ και οι Υπηρεσίες μας Προώθησης Εισαγωγών
(Μετάφραση του ανωτέρω στα Ελληνικά)

Οι εισαγωγές των ΗΠΑ από την Ελλάδα ανέρχονται σε περίπου $ 800 εκατ. το 2010 (πηγή από τα οποία το ένα τέταρτο είναι για είδη διατροφής (σε σύγκριση με $ 17 δισ. για όλη την ΕΕ). Κύριες εισαγωγές από την Ελλάδα είναι τρόφιμα (ελιές), προϊόντα αλουμινίου, διάφορα εργαλεία και μεταλλεύματα. Εκτός από τις ελιές, άλλα τρόφιμα που εισάγονται από την Ελλάδα είναι το τυρί, το ελαιόλαδο, τα ψάρια και διάφορα μεταποιημένα φρούτα και λαχανικά. Αξίζει να σημειωθεί ότι παρά την τρίτη θέση παγκοσμίως σε παραγωγή ελαιόλαδου που κατέχει η Ελλάδα, αντιπροσωπεύει πολύ μικρό ποσοστό, της τάξης 2%, του συνολικά εισαγόμενου στις ΗΠΑ ελαιόλαδου, ενώ ηγετική θέση καταλαμβάνουν προϊόντα ιταλικής επωνυμίας. Τα περισσότερα από τα εισαγόμενα Ελληνικά τρόφιμα καταναλώνονται στις πολιτείες της Νέας Υόρκης, Νέας Υέρσεης (New Jersey), Πενσυλβάνια, όπου υπάρχουν και σημαντικές κοινότητες Ελληνοαμερικάνων, και δευτερευόντως στο Σικάγο, Κονέκτικατ, Μασαχουσέτη και Καλιφόρνια. Η Ελλάδα είχε εμπορικό έλλειμμα της τάξης των $ 310 εκ. με τις ΗΠΑ το 2010. Τα στοιχεία αυτά βασίζονται σε δεδομένα της U.S. Census Bureau, Foreign Trade Division).

Τα έσοδα της βιομηχανία τροφίμων των ΗΠΑ εκτιμώνται σε $ 1.1 τρις, τα οποία επιμερίζονται σε λιανεμπόριο και υπηρεσίες σιτισμού. Οι πωλήσεις τροφίμων επηρεάστηκαν αρνητικά από την ύφεση με αποτέλεσμα να αυξηθούν μόνο κατά 1% το 2010. Ωστόσο, τα προϊόντα gourmet καθώς και τα βιολογικά τρόφιμα παρουσιάζουν πολύ καλές επιδόσεις. Τα βιολογικά προϊόντα σημείωσαν αύξηση πωλήσεων 7% το 2010 και έφθασαν τα $26,7 δις. Η αγορά ειδικών και gourmet προϊόντων διαμορφώθηκε σε $ 70 δις σύμφωνα με την NASFT. Η δημοτικότητα των gourmet και βιολογικών τροφίμων στις ΗΠΑ αναμένεται να αυξηθεί μεταξύ εκείνων των καταναλωτών που έχουν υψηλά εισοδήματα, είναι λάτρεις του φαγητού ή προσέχουν την υγεία τους. Ως εκ τούτου, τα μεγάλα σουπερμάρκετ επενδύουν σε αυτόν τον τομέα. Σχεδόν το 10% των τροφίμων που καταναλώνονται στις ΗΠΑ είναι εισαγόμενα με σημαντικό ποσοστό αυτών να είναι ειδικά/gourmet προϊόντα.

Η μεσογειακή κουζίνα είναι αρκετά δημοφιλής στις ΗΠΑ λόγω της υγιεινών χαρακτηριστικών της. Μια πρόσφατη επιτυχία των Ελληνικών τροφίμων είναι το γιαούρτι τύπου σακούλας (ΦΑΓΕ) οι πωλήσεις του οποίου έχουν αυξηθεί θεαματικά τα τελευταία χρόνια. Η αποδοχή του «ελληνικού τύπου» γιαουρτιού από το Αμερικανικό καταναλωτικό κοινό προσέλκυσε πολυεθνικές και αμερικανικές εταιρίες στην παραγωγή του στις ΗΠΑ οι οποίες πλέον ελέγχουν την συγκεκριμένη αγορά.

Δεδομένου ότι οι Έλληνες παραγωγοί ενδιαφέρονται όλο και περισσότερο για την εξαγωγή των προϊόντων τους, και σε αυτά τα πλαίσια είμαστε και εμείς αποδέκτες ερωτημάτων για την ανάληψη εισαγωγής ή διαμεσολάβησης στις ΗΠΑ, θα θέλαμε να παρέχουμε ορισμένες βασικές πληροφορίες σχετικά με τις απαιτήσεις εισαγωγής και τις διαδικασίες. Πρώτα απ’όλα οι παραγωγοί πρέπει να έχουν εγγραφεί με την Αμερικανική Υπηρεσία Τροφίμων (FDA) προκειμένου να επιτραπεί η εισαγωγή των προϊόντων τους ενώ παράλληλα θα πρέπει να καθορίσουν και έναν εκπρόσωπό τους στις ΗΠΑ.

Μετά την εγγραφή του ο παραγωγός μπορεί να διοχετεύσει το προϊόν του στην αγορά των ΗΠΑ είτε άμεσα με τη δημιουργία μιας θυγατρικής εισαγωγικής εταιρίας ή μέσω συνεργάτη-εισαγωγέα. Ο συνεργάτης αυτός μπορεί να δραστηριοποιείται είτε ως αντιπρόσωπος/πράκτορας (agent/broker) είτε ως χονδρέμπορος (wholesale importer). Οι αντιπρόσωποι/πράκτορες ενεργούν ως διαμεσολαβητές μεταξύ αγοραστών στις ΗΠΑ και των παραγωγών για την περαίωση μιας συναλλαγής, χωρίς να εισάγουν οι ίδιοι το προϊόν. Όταν μια σύμβαση έχει επιτευχθεί ο πράκτορας αμείβεται με προμήθεια επί της αξίας της συναλλαγής ή κάποιο άλλο τρόπο, ενώ τα εμπορεύματα αποστέλλονται απευθείας στον αγοραστή στις ΗΠΑ, ο οποίος είναι και υπεύθυνος για την πληρωμή τους. Όταν ένας χονδρέμπορος εμπλέκεται τότε η εν λόγω εταιρεία αγοράζει/εισάγει η ίδια τα προϊόντα και εν συνεχεία τα διακινεί στο δίκτυο αγοραστών της στις ΗΠΑ. Ο χονδρέμπορος μπορεί να διακινεί ο ίδιος τα προϊόντα μέσω ιδιόκτητης υποδομής (δηλ. αποθήκευση και μεταφορές) ή συνεργάζεται με τρίτους ή παραδίδει τα προϊόντων απευθείας από το λιμάνι ή αεροδρόμιο εισαγωγής στις αποθήκες των πελατών του.

Τέλος, συνιστάται όπως οι παραγωγοί ακολουθούν τις Αμερικανικές Πρακτικές Παραγωγής (US Good Manufacturing Procedures). Αν και δεν είναι αναγκαίο θεωρείται θετικό οι παραγωγοί να έχουν πιστοποιηθεί με τα πρότυπα HACCP/ISO22000 ώστε να υπάρχει διασφάλιση ποιότητας κάτι το οποίο είναι κρίσιμο ειδικά για gourmet τρόφιμα. Στα εισαγόμενα προϊόντα εφαρμόζονται δασμοί ενώ για ορισμένα ισχύουν και ποσοστώσεις (για αυτό συνίσταται η διερεύνηση με τις τελωνειακές αρχές των ΗΠΑ η/και με εκτελωνιστές προτού γίνει η εισαγωγή). Ειδικές άδειες εισαγωγής απαιτούνται παραδείγματος χάριν για προϊόντα όπως το τυρί, το κρέας και τα οινοπνευματώδη ποτά. Μια απεικόνιση της διαδικασίας εισαγωγής δίνεται στο παρακάτω διάγραμμα.

Αυτό είναι ένα μικρό μέρος των πληροφοριών που περιλαμβάνονται σε μια εκτεταμένη έρευνα αγοράς που κάναμε σχετικά με τις προοπτικές του εμπορίου μεταξύ Ελλάδας και ΗΠΑ στον τομέα των τροφίμων. Παρακαλούμε επικοινωνήστε μαζί μας αν θα απαιτούν περισσότερες πληροφορίες ή για την αγορά ορισμένων σχετικές δημοσιεύσεις, όπως:
• Αμερικανική οικονομία και Εισαγωγές στις ΗΠΑ
– Βασικά μεγέθη της αμερικανικής οικονομίας και προοπτικές
– Εισαγωγές στις ΗΠΑ (κύριες χώρες εισαγωγής και εισαγόμενα προϊόντα, εισαγωγές από χώρες της Ευρωπαϊκής Ένωσης
• Αγορά Τροφίμων των ΗΠΑ
– Συνολικό μέγεθος και τάσεις
– Επιμερισμός αγοράς σε κατηγορίες προϊόντων (δηλαδή κατεψυγμένα τρόφιμα, προπαρασκευασμένα τρόφιμα, έλαια, σάλτσες , δημητριακά, ζυμαρικά κλπ)
• Κανάλια Λιανικής Πώλησης Τροφίμων (στη μητροπολιτική περιοχή Νέας Υόρκης)
– Κύριες επιχειρήσεις λιανεμπορίου (ονόματα και προφίλ)
– Λειτουργικά και οικονομικά στοιχεία
• Ρυθμιστικό πλαίσιο λειτουργίας των επιχειρήσεων στις ΗΠΑ.
– Τύποι επιχειρήσεων και χαρακτηριστικά (C Corp, S Corp, LLC, Partnerships)
– Φορολογικό πλαίσιο (φόροι σε ομοσπονδιακό και πολιτειακό επίπεδο)
– Νομικό πλαίσιο (επιχειρηματική ευθύνη, εργατικό δίκαιο, λειτουργικές απαιτήσεις)
• Διαδικασίες Εισαγωγής Τροφίμων στις ΗΠΑ:
– Διαδικασίες εκτελωνισμού, ποσοστώσεις και εισαγωγικοί δασμοί
– Κανονισμοί της Αμερικανικής Υπηρεσίας Τροφίμων (FDA) για τα τρόφιμα

Παράλληλα, εκμεταλλευόμενοι την εμπειρία μας σε ΗΠΑ και Ελλάδα παρέχουμε και υπηρεσίες προώθησης εισαγωγών στις ΗΠΑ. Έχουμε αναπτύξει εκτενή σχετική μεθοδολογία η οποία παρουσιάζεται συνοπτικά στο παρακάτω σχήμα.

Η Μεθοδολογία μας για την Προώθηση Εισαγωγών

Το σύνολο των υπηρεσιών που καλύπτονται στο τομέα προώθησης εισαγωγών στις ΗΠΑ περιλαμβάνουν:

• Στρατηγική Πρόσβασης στην αγορά (Go-to-Market Strategy)
• Προετοιμασία Επιχειρηματικών Σχεδίων
• Επιχειρηματική Στρατηγική και Λειτουργία
• Στρατηγική Μάρκετινγκ
• Εύρεση Επιχειρηματικών Συνεταίρων
• Συμβουλευτική Υποστήριξη σε Συνεχή Βάση
• Άντληση κεφαλαίων
• Ανάπτυξη Εταιρειών
• Επιμόρφωση σε θέματα Επιχειρηματικής Κουλτούρας σε ΗΠΑ και ΕΕ
• Δημόσιες Σχέσεις
• Χρηματοδότηση Διεθνούς Εμπορίου
• Σχεδιασμός Καναλιών Διανομής
• Οργάνωση Εταιρικών Εκδηλώσεων
• Σχεδιασμός Εταιρικής/Προϊοντικής Εικόνας(Branding)

Οι παρακάτω υπηρεσίες προσφέρονται σε συνεργασία με εξωτερικούς συνεργάτες που ειδικεύονται στο συγκεκριμένο αντικείμενο αλλά και το εκάστοτε προφίλ πελατών (δηλαδή ανάλογα με την περίπτωση είτε σύμβουλοι μικρών επιχειρήσεων ή μεγάλων πολυεθνικών):

• Φορολογικός Σχεδιασμός
• Ίδρυση Εταιρείας
• Σχεδιασμός Ετικετών Προϊόντων
• Πληροφόρηση για το Κανονιστικό Πλαίσιο των ΗΠΑ
• Διαδικασίες εισαγωγών/εκτελωνισμού

Τέλος πολύ σημαντικό είναι ότι μπορούμε να αναλάβουμε επίσης και τις εισαγωγές μέσω συνδεδεμένης εταιρείας. Ενδιαφερόμαστε κυρίως για γκουρμέ προϊόντα όσον αφορά τον κλάδο τροφίμων. Άλλοι τομείς που μας ενδιαφέρουν, όσο αφορά τις απευθείας εισαγωγές ή την προώθηση των εισαγωγών και των επενδύσεων είναι η Εξωτερική Ανάθεση Επιχειρηματικών Λειτουργιών (Business Process Outsourcing), η Εξωτερική Ανάθεση Συμβουλευτικών Υπηρεσιών, οι Χρηματοοικονομικές Υπηρεσίες, η Ακίνητη Περιουσία, ο Τουρισμός, η Ενέργεια γενικώς αλλά και ειδικότερα η Εναλλακτική ενέργεια και τεχνολογίες Αειφόρου Ανάπτυξης.

Για μια λεπτομερή ανάλυση των υπηρεσιών και των εκδόσεών μας ανατρέξτε στο website μας . Για περισσότερες πληροφορίες παρακαλούμε επικοινωνήστε με τον Παναγιώτη Χατζηπλή στο email


Middle market cross-border M&As set to grow

Mergers & Acquisitions plummeted in the aftermath of the 2008 economic crisis; investor sentiment, consumer demand and most importantly financing was simply not there for deals to happen. However, as US corporate profits reached sixty year highs and global economies are growing, M&As are coming back with a bang. Investors regain their risk appetite; strategic investors feel the pressure to use their newfound riches to invest in future growth, either through acquiring technology or market share. Financial investors start flexing their muscles as new capital starts flowing in their funds. Earlier this year BC Partners raised 4 billion Euros ($5.6 billion) for a new fund, Apax is expected to raise around 11 billion Euros by the end of the year (Source: Reuters).

Market Outlook

Although the recent rebound however, global M&As are down 35% compared to the 2007-2008 highs, reaching $2.4 trillion in total value in 2010, according to Mergermarket data. M&A recovery is mainly fuelled by a rebound in the US and Europe, the largest markets, and continued growth in emerging economies.

Almost 60% of the activity took place in Europe and US; of that, middle market deals where $356 billion or around 25% according to Mergermarket data. According to Thompson Financial and Deloitte US Corporate Finance total middle market deals in the US only was $175 billion in 2010. A total of 7,100 transactions were completed with average size of around $80 million. We have no available data for middle market deals in emerging markets but should be high considering the companies’ size there. The following graph illustrates M&As by deal size in Europe and US over the last 7 years, which pretty much spans the latest economic cycle. Deal activity spiked in 2006-2007 fuelled by LBOs. As these are large deals, M&A activity was more prevalent in large cap companies although middle market deals increased as well. Another differentiating factor attached to LBOs and large deals is the high participation of financial buyers; in middle market on the other hand private equity participation is relatively lower, at 13% of all deals (Thompson data).

As economies start to recover there are definitely better days ahead for M&As and especially for the middle market that forms the backbone of most economies. According to CIT and 2010 US Census data, there are 106,000 middle size companies in the US employing 32 million people. Their total annual revenues of $6 trillion compare to $8.3 trillion of the S&P 500 companies. Their total capitalization is estimated at 60% of total U.S. equity market capitalization.

Mid size companies are increasingly expanding globally, tapping into opportunities overseas be it in production resources or demand for their products. According to Mergermarket, cross-border transactions accounted for 31% of all deals in the first half of 2010. In a 2007 survey performed by KPMG’s Global Enterprise Institute four out of ten middle size Colorado companies considered global expansion as integral to their growth strategy and the majority of them actively focused on expansion plans.

This post aims to illustrate the significance and global potential of the middle market M&A sector that often doesn’t attract that much of media coverage. It will also aim to touch upon some best practices to bring cross-border middle market deals to fruition.

Middle market segmentation

Before moving any further let’s make sure we are on the same page regarding definitions. So what really constitutes middle market?

By industry convention, at least in the US, middle market refers to those companies with revenues between mostly $10- 500m and as high as $1 billion at the upper end of the range. The market is divided into lower, middle and upper brackets, with different characteristics in terms of management style and organizational resources; by that we are referring to Robert Slee’s work on private capital markets and more specifically the Slee, Trottier paper on middle market segmentation. Mid market’s lower and middle bracket deals fetch between $10m to $500m as a broad guideline. Price considerations off course depend on case specifics and industry sector, i.e. small companies in basic industries might fetch lower prices than fast growing new economy companies where even low earning figures can produce disproportionately high valuations.

What’s important to note however is that the middle market definition should not be considered unambiguous around the world. Depending on local circumstances such as level of development and industry segmentation the middle market ranges can vary. Looking for example at the graph below the percentage of companies with less than 10 employees is much higher in OECD’s less developed economies pushing higher the middle market mark there compared to US; UK, Germany and other economies in later stages of development.

To our opinion what’s middle market depends on the “big-fish–little-pond” effect: the size of your pond is what really defines where you stand. What’s considered small or middle market in the US might be taken for big somewhere else, just as a large-size US shirt might be extra large somewhere else. What’s the implication of this? There’s a huge difference in terms of self-perception. Hung out with basketball players and you might feel mid size, lead the boy scouts and you might feel a giant. These differences in self-perception make a huge difference in psychology that warrants special attention when approaching a deal.

For example, a midsize company by US standards might be a regional champion in some other country, employing a large number of employees and generating significant wealth for the particular economy. The differences go beyond semantics; they are about management styles and importance in the local setting which all bear implications during the M&A negotiation phase and beyond. Place executives from these two different worlds on the same table and you realize that they don’t only speak different languages in terms of mother tongue or cultural background but also in terms of personal objectives, styles and aspirations. Failure to appreciate that early enough in an M&A process can lead to results that range from amusing to catastrophic.

Deal Drivers

As mentioned above mid market M&As are expected to recover and along with the global economy increasingly become cross-border. According to Mergermarket data, the total value of cross-border transactions rose by 60% in the first half of 2010 reaching 31% of global deal value. Total US outwards middle market deals reached $32.9 billion in 2010 of which 35% landed in Europe (Thompson Financial and Deloitte US Corporate Finance). Add to that the large deals and you end up with total transatlantic deals of $160 billion just to underline the size of the market opportunity that the Transatlantic Business Forum and our blog follow. Outside Europe, large increase in middle market outward M&A took place in Canada, Japan and India.

Alongside the interest from western world to the emerging markets, the Mergermarket data shows that increasingly emerging market companies are also becoming extrovert. Outbound deal activity from the emerging markets rose 318% by value and 111% by deal count in the first half of 2010. According to the U.S. Census Bureau, U.S. companies with a value of $260 billion were acquired or established by non-U.S. owners in 2008 up fourfold from 2003 levels; it is expected that his trend will persist (Source: The Deal: The middle market goes global). There are various reasons for the increase of cross-border transactions. Below we attempt to highlight some of them without aiming to make this list all-inclusive.

• Stage of development: there’s increasing integration across global economies; there’s no denial to that. Globalization allows developed world companies to take advantage of growth prospects in emerging markets as well the later of consumer strength in the former. These opportunities arise from lower but rising GDP per capital levels and lower labor costs in the emerging world (see graph below taken from our recent post about stimulating investment in Europe’s periphery). The latter is a driver for outsourcing, however we would argue that this only cannot be a long term investment criteria as the cost advantage will most probably be sustainable over a specific period. For example there are concerns that although China’s immense production capability, costs there start to grow too.

• Modernization: Developing economies are in the process of modernization; they often start from low value added processes and hopefully move towards higher value added products and higher GDP levels. In this context the large number of promising middle size companies need to retool, upgrade processes to remain competitive as trade barriers fall or labor costs increase. That is crucial in order to preserve their role within local communities. In this context they may welcome foreign input.

• Horizontal expansion: M&As for middle size companies provide a way to grow quickly and break into the large company bracket thus enjoying economies of scale in production, marketing or finance. This growth can be achieved faster and with less risk when existing strengths and products can be leveraged across different regions. Off course this assumes that existing products and know-how can be easily adjusted to foreign environments. In comparison, further penetrating their local niches or even moving into new ones might be too challenging.

• Restructuring/bottom fishing. According to the Transatlantic Restructuring Outlook report published by Debtwire in association with Merrill DataSite it is expected that activity in this area will increase in 2011. Restructuring drivers for North America will be corporate sector distress while in Southern Europe solvency concerns resulting from the sovereign debt crises especially in financial services. Financial distress in Europe’s periphery is a highly publicized problem these days. Additionally Central and Eastern Europe will continue to promote inward investment and modernization. There, as well as in Southern Europe the highest percentage of suitors will be strategic buyers as they could quickly gain market share through a distress sale. But then again, private equity activity has relatively slowed down in Europe.

• Unavailability of capital or of investment options. Companies in developing economies, especially the middle market ones, are usually plagued by difficulty in accessing capital to finance their growth. On the other hand there’s significant accumulated capital and financial know-how in developed countries with limited investment options locally. We believe that this creates significant inefficiencies in capital allocation. Probably for this reason large US banks are looking into assisting middle market companies in their overseas quests leveraging strong capital base and global network (Source: article). On the other side an acquisition in a developed country can provide an emerging economy company access to capital and sophisticated financial products be it through stock market, private equity or bank loans. In this context some companies have pursued reverse mergers to list in the US.

• Access to capital and know-how: According to a UNDP’s report (“Unleashing Entrepreneurship: Making Business Work For The Poor”, UNDP 2004) private sector in emerging economies face certain limitation as it has to operate in corrupted and bureaucratic environments with ill-directed macroeconomic policies and poor infrastructures. According to the report: “even with strong macroeconomic and institutional foundations, three additional factors are indispensable for entrepreneurship and the private sector to flourish in an economy: a level playing field, access to finance, and knowledge and skills”. Entering a developed economy can provide much needed access to advanced technology and know-how.

• Access to natural resources: there’s increasing competition for commodities in a growing global economies. Access to commodities is critical for sustainable growth so we are observing increased interest for investment in natural resources in Africa and elsewhere.

• FX/capital gains: as the US is following a weak dollar policy (low interest rates alleviate the housing market crisis) while emerging economies’ currencies and consumer demand are growing (for example in Brazil, China) there’s a benefit for US companies expanding and investing overseas. We would be critical of investing driven by capital or FX gains only; as this could be speculative and not related to core business. On the other hand there are certainly business owners that may consider building wealth through capital gains (related articles on demand for US manufacturers and capital flows to emerging markets).

• Prestige: operating in a developed economy or in an emerging economy can also enhance some companies’ image. We had to resist the temptation of excluding this reason as it might seem a bit superficial but we think that it is at least in the back of some buyers mind. For example a company can be considered as having growth potential when expanding its global reach and entering an emerging economy while a developing world company can be perceived as playing on another league when operating in a developed country.

Success factors for Middle Markets M&As

Succeeding in executing an M&A doesn’t come easy. The right target should be selected, the one that fits in terms of competencies and management culture, the right price and financing should be negotiated and finally the company can be integrated in a way that resources and time is not wasted. This is not easy; actually a large number of M&As do fail. For a middle market company to succeed in a cross-border transaction or even in a simple cooperation it should select competent advisors and invest on training its management team to deal with issues related to strategic management and international finance in order to fine tune use of capital and maximize shareholder value. Management should also become aware of foreign economies and cultures and walk in negotiations without prejudices or assumptions based on own experiences.

M&A advisors should master a large array of topics in finance, legal, tax and operational matters. This is highly specialized knowledge; therefore a team is necessary with discreet roles. As this is not already enough cross-border M&A advisors should be knowledgeable in both regions to be able to bridge differences in economic circumstances, regulations and cultures. Throw in special regulations associated with foreign investment such as FCPA (Foreign Corrupt Practices Act) and the typical middle market company has enough red tape on its plate to be overwhelmed.

Middle market companies that lack the human capital resources of their larger competitors require increased support during M&As. Apart from that however, planning and executing an M&A can turn out to be a very useful self-evaluation exercise. Working on M&As external advisors bring in valuable technical background and experience from other sectors and transactions playing thus a valuable cross-insemination role. By examining acquisition options companies can evaluate their own competencies and strategy. By valuing acquisition targets they can gain insights on their own cost of capital and value creation record. Thus an M&A can have multiple benefits in shaping up a company in its quest to grow and become more competitive.

The problem with middle market companies is that they don’t reach out to external consultants that often. Cost can be a reason as smaller companies are usually tight with their money, disbelief can be another. On the other hand there’s a limited supply of knowledgeable consultants for middle size companies. Advisors in this market should possess knowledge that is directly applicable to companies of this segment and ability to engage and communicate it. Problem is that much of business literature is created by business schools or consultancies with largely, blue chip companies in mind. Capabilities, objectives and resources of large listed companies usually vary considerably for those of middle market private companies. On the other hand middle sized companies may be underserved by consultants with limited technical background largely depending on empirical knowledge. The ideal solution can be somewhere in the middle where advisors have the right education but also experience in dealing with middle market companies so that they are able to select and apply the most suitable tools for the case in hand.

On the cost side there’s little that can be done for investing on quality. A problem with middle market deals, especially those on the lower range, is that their small size often makes it uneconomical for advisors to work on them on a contingent basis. Work required for large or middle size deals doesn’t vary that much in terms of effort and time; however commission based compensation does. We believe that a solution to that can be provided by technological breakthroughs that make certain processes more efficient. For example advisors increasingly are able to source buyers or targets through online M&A platforms such as MergerID, AxialMarket or others. These platforms can provide liquidity and transparency to private markets, saving the effort in market screening and follow up that bites into transaction fees. We, in the Transatlantic Business Forum are great supporters of the online liquidity platforms (private company exchanges) and follow developments on a continuous basis (if interested further you can read our recent post about main competitors here as well as our presentation on the market ).

For all the above reasons we are very optimistic of middle market prospects both at national level but increasingly cross-border as well. However success is very much depended on getting the right advice.


The Transatlantic Business Forum is a portal, online community of professionals and consulting firm that aims to facilitate discussions on international business and especially between Europe and the Americas and promote and facilitate opportunities for cross border capital flows be it Mergers & Acquisitions, Partnerships or Trade. Contact at:

Private Company Exchanges: $10 billion market but one size doesn’t fit all

Had a great opportunity to listen first hand from Barry Silbert, CEO of Secondmarket, Peter Lehrman, CEO of AxialMarket and Daniel Confino, Founder of MergerID about market trends and different approaches among private company exchanges so thought of sharing. The discussion was organized by the Harvard Business School alumni of New York and held at KPMG’s New York offices (Innovation in Private Company Liquidity, April 4, 2011). Dan Burstein, Managing Partner of Millennium Technology Value Partners and David Weild, former Vice Chairman of NASDAQ also participated.

Private company exchanges (PCEs or online liquidity pools as we like to refer to them) may not have yet gained broad awareness or widespread adoption but they are making headlines by facilitating trading in hot, not listed stocks like Facebook, Twitter, Linkedin, Groupon or Zynga. It is by trading on SecondMarket, that Facebook’s implied valuation skyrocketed to $5obn. As these transactions have lately attracted SEC’s attention and Warren Buffet’s cautionary comments, let’s emphasize that valuations in these platforms are set by demand and supply among sophisticated investors; so it’s a “big boys” game in arm’s length transactions. It is believed that Facebook and some other hot private companies’ stocks have achieved such dispersion and active secondary trading that the line between what’s considered private or public is in essence blurred.

Apart from blocks of stocks, whole companies can as well change hands on these platforms. These “control transactions” aim to create liquidity for business owners and assist their advisors in consummating transactions. As exchange listings might be too cumbersome due to increased regulation and overhead or traditional offline M&As processes might be lengthy and costly, these exchanges create considerable efficiencies. This function is especially useful to middle market where is more difficult to attract buyer attention. More interestingly, they create opportunities for cross-border transactions, linking across global economies. For example, a US company that wants to enter the Polish market can easily research willing sellers there and make initial contacts. On the same time the Polish company can seek strategic buyers or investors around the world. That may erase inefficiencies that exist due to the fact that capital and investment opportunities usually reside in different locations these days. Capital has mainly accumulated in developed countries and opportunities arise in emerging with limited knowledge overlap between the two. This discrepancy in capital supply and demand create inefficiencies that may lead to misallocation of capital, value destruction and wasted resources; simply some capital is not put in use in the best way and companies on the other site may have to bear too high cost of capital and select projects with higher risk profiles to survive.

Benefits provided by this new technology doesn’t come without problems however Many investors or advisors, especially the “old school” often used to make deals face to face in golf clubs through long standing relationships, express disbelief. Some are worried that technology might take away businesses; some are turned away by dubious market participants. There’s some merit in that; quality of input is sometimes questionable. There are cases of buyers or sellers making false presentation of their abilities much like in a “push marketing” fashion; sometimes their intentions are not that innocent. Platforms are making efforts to remedy this by screening participants and providing research. In our opinion however, this poses a dilemma: should companies strengthen controls and by that increase operating costs, transaction fees and unintentionally drive away even legitimate liquidity or rate participants based on performance and simply caution buyers that some homework is required on their site? In the end, that’s part of the value brought on the table by knowledgeable advisors. We support the second option; see our views on operating models here.

As mentioned at the discussion, PCE adoption is increasing. Their establishment is pretty much a wish come true for many buyers, sellers and advisors spending immense amount of time and energy to communicate market opportunities. After all, we are living in a viral world; once an operating model proves itself it can grow quickly. According to the panel, it is estimated that PCEs is a promising market of $10bn. We would place the medium term target much higher. Another interesting point is that not all platforms are the same. Much like stock exchanges and darkpools, PCEs have different operating models and target different clientele. SecondMarket’s model focuses on pre-IPO stock while AxialMarket and MergerID are mainly geared towards control transactions and the middle market.

SecondMarket (formerly Restricted Stock Partners) was founded by Barry Silbert in 2004 to offer liquidity for restricted securities in public companies. Barry mentioned in an interview that had own experience in that from when working at Hoolihan Lockey and had to find buyers for parts of bankrupt Enron. SecondMarket gradually introduced trading for auction-rate securities, bankruptcy claims, limited partnership interests, structured products (MBS, CDOs, ABS), whole loans, private company stock, and government IOUs. Private stock was added two years ago. Trading is mainly geared towards pre-IPO companies and their employees on the supply side and venture capitals and high net worth individuals on the buy side. It has attracted much publicity and fame through trading stocks such as Facebook, Groupon and Linkedin.

SecondMarket surpassed a half-billion dollars in private company transactions since this market was launched in April 2009. In fourth quarter of 2010 transaction fees more than doubled compared to the previous quarter, to all times high (probably helped by the Facebook stock that accounted for around 40% of volume). At the same time market participants rose to 35,000 compared to little more than 5,000 a year ago. Companies with stock trading at SecondMarket, can control trading terms. It comes at no cost to them but sellers have to pay a 3-5% fee on transactions. According to Barry Silbert the differentiating factor between stocks traded at SecondMarket and traditional stock exchanges will at some point simply be the platform used. The companies would then choose the venue that better suits their needs. That’s interesting; after darkpools, stock exchanges may also see business taken away by PCEs in the future.

SecondMarket has already gained market recognition. It was named 2011 Technology Pioneer by the World Economic Forum and one of the “Top Fifty Tech Startups You Should Know” by BusinessWeek. Fast Company recognized it as one of eight startups “brimming with hope” for the financial industry. AlwaysOn Media named it as the overall winner of the “Global 250” list of the top private companies in the world.

AxialMarket (formerly Cathedral Partners) is focused on middle market control transactions basically catering to business owners. It was founded by Peter Lehrman with background in the Gerson Lehrman Group, the online community for on-demand consulting services. Peter is passionate for high tech B2B marketplaces, even where many thought they couldn’t exist. Probably that drove him to establish AxialMarket in 2007; outstanding foresight admittedly.

Since AxialMarket’s inception, over 3,000 privately held companies were sold through it. In the first quarter of 2011 over 500 opportunities, a 12% increase, with over $7billion in revenue and $800M in EBITDA were delivered via AxialMarket. Its platform includes over 1,200 qualified M&A advisors and private business owners. Apart from enabling transactions it also offers proactive research over targets and industries. AxialMarket follows a mixed subscription and transaction model. Most of transactions are concentrated in North America. It has strong presence in the US private equity industry.

MergerID is part of the Pearson/Financial Times group. It was founded by Dan Confino, a seasoned international M&A lawyer now based in London. MergerID leverages a strong global footprint and market insights to provide value added M&A information to its members. After all, Mergermarket a leading information platform for the M&A market, is also part of the FT group. MergerID focuses more on the CFO community and the middle market. It has adopted a membership model charging no commission on deals executed. In the first year of its operation (was launched in September 2009), over 25,000 matches between buyers and sellers have been recorded. Its platform includes more than 1,300 companies in 65 countries that is present.

According to Jonathan Goor, Managing Director of MergerID: “Through MergerID, users can effortlessly access a global audience. The interest in all the BRIC and aspirant BRIC countries as well as in the Middle East and Africa has been fantastic so far…” According to Mergermarket data, the total value of cross-border transactions rose by 60% in first half of 2010 reaching 31% of global deal value. Alongside the interest from western world to the BRICs, Mergermarket data shows that emerging market companies are also increasingly acquiring abroad. Outbound deal activity from the emerging markets has risen 318% by value and 111% by deal count in the first half of 2010.

The above platforms are not the only ones, however they are the early market participants and among the most popular. Many more new competitors have started to appear and raise capital (see our post on that here). Hopefully competition will increase product awareness and liquidity for private transactions. After all maybe PCEs are the best platform for investors and companies especially in middle market: in a stock market plagued by short-termism, analyst pressure, where average stock holding period has fallen to 6-7 months and high frequency trading accounts for as much as 70% of trading, PCEs can be a more suitable venue for some companies and long term investors (even though the motives for investing in facebook stock might be speculative..).

Will be interesting to see at some point research on the cost of capital for companies trading in PCEs versus that for listed companies (especially those not actively trading and not followed by many analysts). And one more topic to research: valuations and volatility of private equity investments based on data from PCE trading; we bet that portfolio managers, wealth advisors and accountants would love to see that.

The Transatlantic Business Forum is a portal, online community of professionals and consulting firm that aims to facilitate discussions on international business and especially between Europe and the Americas and promote and facilitate opportunities for cross border capital flows be it Mergers & Acquisitions, Partnerships or Trade. Contact at:

European Competitiveness Pact: A breakthrough or a Red Ocean doom?

The European Competitiveness Pact is the latest proposal raising havoc among European Union members. Spearheaded by Germany and France it has been portrayed as a remedy to problems behind EU periphery’s debt crisis but also as precondition to much needed easing of their bailout terms in what has been bluntly dubbed as the “Grand Bargain”.

Sounds like euphemism in a way: what should have been an ambitious plan to push forward development and growth across European Union, it is mainly limited to restrictive fiscal policy, let alone promoted as a restrictive, punitive deal that causes public resentment. Furthermore, the introduction of a common policy apart from taking away power from national governments, a sensitive issue, risks creating uniformity across EU member states to the extent that doesn’t exist even in the US. This may increase correlation among European economies and take away a useful internal decoupling mechanism.

A. Decoding the ‘Great Bargain”

According to the original document circulated (and its unofficial translation), the Competitiveness Pact aims at achieving:
1 price competitiveness (eg, stability of real labor cost, realigning labor cost according to development of productivity);
2. Stability of public finance (explicit and implicit public debt);
3. Minimum rate for investments in research, development, education and infrastructure of x% of gross domestic product (value to be decided).

Going deeper into specific measures, the Pact proposes:
1. Abolition of wage/salary indexation systems;
2. Mutually recognize education diplomas and vocational qualifications for the promotion of mobility of workers in Europe;
3. Create a common basis for corporate income tax;
4. Connect pension system to demographic developments (ie, average age of retirement);
5. Oblige member states to commit to tight debt control through clauses in their constitutions;
6. Establish a national crisis management regime for banks.

Much can be said about each one of these metrics, the culprits targeted and their potential effectiveness. The common corporate tax basis for example is directed to Ireland’s low corporate tax rate (Irish claim is key to their growth), wage indexation is practiced in Portugal, Belgium, Greece as is lose fiscal policy and high indebtedness (but then again not only by them).

Trying to decode motivations behind the Pact one can appreciate Germany’s concern over allowing certain economies to roll back into the same crisis and require further bailouts in the future (much discussion has been done on moral hazard these days). On the other hand one should also be critical of these measures’ results and effectiveness.

In this posting we’ll focus on wage levels; after all deficits, public debt, social security and taxes are all related and have reached their limitations in several countries. Analyzing the labor cost we will address certain misconceptions and through that show why this Pact might be missing the mark in raising competitiveness where needed.

B. Labor Cost and Productivity across Europe: Myths and Reality

Comparing labor costs across Europe and other developed countries it’s clear that wages in the European South are much lower, both on gross and net basis.

Another interesting finding is that divergence between the Northern and Southern Europe figures is much higher on gross salary basis than on GDP per capita or net salary figures. This could be due to higher salary deductions in Northern Europe as well as higher levels of self-employment or unreported economic activity in the South. Even in the case of potential tax and social security contribution evasion the solution can’t only be lowering labor cost but rather taking corrective actions where needed, to boost state income and reduce liabilities over a period of time.

Wage level is not the main parameter affecting competitiveness; equally important is what’s produced with this labor cost. Looking at labor productivity across Europe, US and Asia we can see that Southern Europeans are working more hours than their Northern counterparts; contrary to stereotypes and prejudices repeated on various occasions. At the same time however they produce much less of what produced in Northern Europe in terms of output value (GDP per hour worked). Productivity is probably even lower from official figures if illegal labor is taken into the equation.

Low productivity can be attributed to inefficient production methods, low value added products, as well as restrictive legislation and other structural problems. Looking at the Greek economy for example, it is being characterized by services while Germany’s by high value added/export oriented technology sector. Greece is also suffering by a non-conducive to businesses legal framework and economic environment, as international rankings show. What’s the reason for that is a separate discussion, but it’s not a labor cost problem.

A straightforward expression of lower competitiveness can be found in the South’s much lower R&D expenditure. Undoubtedly these are economies that are coming from different starting points and move with different speeds. In the absence of no intervention these differences will persist in the future.

To be fair, the European Union has been trying for years to promote economic development across its members. The 2000 “Lisbon Strategy for Growth and Jobs” called for increase in innovation and employment over a ten year period. A minimum 3% R&D expense target across all Europe was set then which was not finally attained even by highly developed economies. The program also didn’t reach its employment targets. Some reasons for that was the difficulty in steering centrally planned policies through national governments and politicians that may have different priorities or capabilities.

Maybe the reason of this failure lies in the root of the European economic system that favors public investment and crowds out private investment discouraging this way productivity gains; the usual objection to Keynesian policies.

This phenomenon can be more evident in countries that are trying to catch up and usually lack a robust private sector: investment might end up in public projects of questionable utility that although may help in increasing wages and GDP, they don’t contribute in raising competitiveness and promoting long term sustainable development and growth.

In any case R&D investment, on its own, is not a panacea. To be effective it requires the existence of research infrastructure, know-how and a sizeable pool of R&D personnel, otherwise it will be money thrown out of the window raising more excuses against good intentions. Moreover it requires the existence of a business environment that will nurture innovation which cannot happen in economies that lack respective infrastructures. Researchers cannot produce in vacuum; students won’t be inspired without real life stimulus, role models and most importantly opportunities to work and grow professionally. Automobile research for example makes sense when carried out close to an established production base where scientists can have immediate access to automobile production, testing facilities and specialists to exchange views on a frequent basis. Marshal plan worked where there was an infrastructure to leverage; on the other hand, much higher foreign aid has failed elsewhere. Apart from technical infrastructure the financing capability should be there as well: next to Silicon Valley’s vibrant startup community stands a robust venture capital sector capable to lend a helping hand.

Finally, under current dire fiscal conditions in Europe’s debt-ridden periphery it is probably difficult to allocate 3% of GDP to R&D. Even if this is possible, R&D as a percentage of GDP might result in a meaningless number in absolute terms once applied over an already low GDP number. Three percent of a low GDP economy, might not yield the same results as three percent of a much larger GDP economy. It might simply not be sufficient for meaningful research to be carried out these days, especially when a low productivity country is struggling to catch up. For example it may be required to pay comparatively higher salaries to attract researchers to relocate there. Mutual recognition of diplomas that is proposed under the Pact can increase mobility but the real factor for that is employment opportunities; human capital will flow to where opportunity lies, causing underdeveloped regions a “brain drain”).

C. Management Perspective: Competitiveness Pact as a Red Ocean Doom

Going back to the Pact: what is then trying to achieve when it comes to labor cost?

In a typical European state run economy the public sector sets the stage for salary levels; these salaries may be even higher than those in the private sector due to collective bargaining or other inefficiencies. The consequence is that there’s limited propensity for people to “go the extra mile” once there’s secured and descent income in the public sector. That results in an inefficient, marginal private sector that is unable to compete internationally and lead countries out of the crisis. Since the corporate sector is not competent enough to productively invest in R&D; the government should again step in to support such efforts; a vicious cycle.

By lowering salary levels we are simply continuing to produce the same albeit at lower cost. Sounds like a typical Porter’s Cost Leadership strategy for those familiar with management literature; or referring to a newer terminology a “Red Ocean” doom. When applying this strategy the objective is to outperform the rivals in capturing a larger share of an existing market; in which case competition turns bloody.

That brings to mind a movie quote; it always does. As a manager that I respect used to say: movies have in them anything you need to know. Even if not, still a quote helps in making a point. So here’s what “Larry the Liquidator” from the “Other People’s Money” movie said at a proxy fight over an underperforming company:
And you know the surest way to go broke? Keep getting an increasing share of a shrinking market. Down the tubes. Slow but sure.
You know, at one time there must’ve been dozens of companies makin’ buggy whips. And I’ll bet the last company around was the one that made the best goddamn buggy whip you ever saw. Now how would you have liked to have been a stockholder in that company?

Then you might wonder what market is European periphery competing in? Without getting into detail, economies are not that extrovert, they are more into services. In whatever they produce there are other countries that have far lower cost structures and will continue to do so for the foreseeable future. In the absence of higher value added output the proposed Competitiveness Pact seems like an attempt to perpetrate the same model in the South albeit at lower cost; a losing strategy not to mention the social and wider economy consequences of that. Even China has recently outlined plans to move from low cost production to high technology and new energy. US has made that shift long time ago with clear indications that the workforce should be retooled and education geared towards science and technology.

So is this Competitiveness Pact simply a damage control exercise? ie solidifying a Euro nanny-state where the periphery will be at perpetual life support/lower gear compared to developed EU states?

There can be another explanation right out of the Austrian School of Economics though: by lowering wages and increase unemployment through structural reforms a creative disruption might be created that will force unleash the economy’s potential to grow out of the crisis. Based on the above, this sounds like a risky strategy if not wishful thinking. Societies can’t jump start or adjust to new circumstances quickly; it would have been nice but can’t redeploy the workforce in new sectors. As the saying goes: “can’t teach an old dog new tricks”. Have to invest in education and transition over time to avoid social crises.

D. So where’s the solution? The Blue Ocean?

There are various ways to represent risk created by debt. Leverage can be quantified by the ratio of debt to GDP or debt to national wealth (problem is that the latter is difficult to measure). On the other hand the risk of debt servicing (liquidity risk) can be represented by the interest expense to total income. A country might be highly leveraged but at the same time might have significant property or ability to increase income (increasing taxes or curbing tax evasion being one).

The most commonly used leverage ratio of debt to GDP (solvency ratio), can be reduced by reducing the nominator (debt) or increasing the denominator (GDP). Ruling out bankruptcy as a solution, which wouldn’t benefit anybody (bondholders, Eurozone countries or global markets, even recently US expressed their concern over that), public debt can be reduced over time by cutting down deficits, restructuring the debt to lower interest expense or buying back some or spin it off through privatizations. Austerity can have its limitations though: after two years of austerity that caused the economy to contract, Ireland saw its deficit to increase and is realizing its bailout program might be unworkable. It now aims to renegotiate terms. Same might happen elsewhere.

Leverage can on the other hand be reduced by increasing GDP. Growth is of paramount importance not only to decrease that risk but also to ensure long term prosperity and competitiveness in today’s globalized economy. In other words, instead of a Cost Leadership strategy that would aim to reduce debt (ie the ratio’s denominator) the solution could be growing out of the crisis (increasing GDP, the nominator) by diversifying into new markets and high value added products. These new opportunities are called Blue Oceans under the respective strategy model.

To enable such transformation it would first be useful to remedy structural problems to provide the necessary breathing room for the private sector to flourish. Then the question would come to which industries to invest in? Looking at R&D expenditure around the world it seems that EU is investing proportionately more on pharmaceuticals, automobiles, aerospace, chemicals and communications. This is not coincidental; there are many dominant companies in these sectors, mainly in Northern Europe. On the other hand the US invests proportionately more on technology and software.

Europe’s periphery, apart from Spain, lacks to a large extent heavy industry. Therefore it would be wise to invest in less capital intensive industries such as software or niche technologies, even services (why not some outsourcing as well; there can be opportunities in certain niches). Ireland is following this path. Green technology is another sector that can be developed which brings the additional benefit of reducing imports.

Finally, going back to the decoupling argument, this investment could also have a positive effect elsewhere: considering the high growth and overheating of the German economy it could be possible to transfer certain production and research to the South and provide employment opportunities for scientists and professionals there.


Moody’s downgrades Greek debt; says it’s speculative.. Really?

Moody’s today downgraded Greece’s debt by three notches down to Ba1, lower than Egypt’s. Pretty much beating a dead horse. Greece is mostly out of debt markets and will remain like that for a year or so until internal structural reforms take shape. EU periphery’s debt has thus become a mostly internal EU issue. Political rhetoric apart, EU is probably holding a tough stance to keep pressure on reforms. Greece for example has introduced all requested reforms but now has to leave time to sit in; while also increase tax revenues at least from unreported activity (Greece has high self employment rates and that’s not straightforward to tax).

EFSF’s chief Regling recently stated that Greece’s plan implementation is going well and that Portugal and Spain seem safe for now. Same point made by IMF’s European chief Antonio Borges on the back of Moody’s downgrade. There’s certainly room to maneuver when it comes to fiscal policy within the periphery, as well as ability to support from EU’s core. A default wouldn’t benefit anyone since European banks hold much of periphery’s debt. If EU wants to provide support through the EFSF or ECB, it certainly can. So this downgrade or subsequent market speculation might not make a difference. Internal reforms are policy measures that with solvency risk out of the picture, their resolution is going to drag for some time. Seems like a long trade for shorts; do they have the time for that? On the other hand seems that shorts have moved to the US$ in light of ECB’s interest rate hike.

There can be an alternative reading to this downgrade though (which by the way happened just days before EU’s leadership meeting and the day before Greece was supposed to tap into markets for a 6month T-bill issue). Could this just be another act in the clash between the EU and rating agencies? EU is skeptical of their ratings and have placed them under supervision (from the European Securities and Markets Authority) so this might be some power struggle play unfolding. Credit ratings seem to place themselves on the buyers’ side; is this some market strategy shift at least on the sovereign debt sector? Due to this timing it will also be interesting to see whether ECB will step in support Greece’s issue as probably did with Portugal.

And by the way, was anybody waiting for Moody’s to call Greece’s debt speculative just now? Following the crisis, rating agencies are under fire on all fronts. It’s only opinions they say they are expressing. Thank you, we have ours too (and as history showed any sophisticated investor should better have their own going forward too).

PS. Stay tuned for additional commentary on why fiscal policy on its own is not sufficient to take Europe’s periphery out of the crisis and why growth policies are urgently needed.

Related links:

Private stock exchanges update: Capital starts flocking in; great potential for this disruptive technology

Private stock exchanges is a popular topic for this blog (after all we have as well put together a business pitch for a platform as early as 2009; scroll to the end of the post for the link). We can’t help but revisit the topic as this new disruptive technology starts to gain acceptance, something that will rapidly revolutionize financial markets (and generate some good profit for their users and shareholders….). A long awaited useful tool for investment professionals this technology’s introduction hasn’t been easy and still has ways to go.

One of the earlier platforms, Secondmarket, was developed by a young M&A professional facing a common frustrating feeling among investment bankers that try to shop around large amounts of illiquid investments. It is however the trading of private stocks such as those of facebook that helped attract attention to Secondmarket as well as Sharepost; one more sign of business catching up with technologies in unintended ways. And this way, trading platforms started to become a way for private investors to tap into promising returns, once only accessible to private equities and bank clients through private placements. This has recently led SEC to investigate the valuation of securities in these placements to avoid conflicts of interest; one more indication of those platforms’ increased popularity. Other market participants such as MergerID (part of the Mergermarket/Pearson(FT) group) and Axial Market stay focused on outright sale of whole companies.

Market participants are increasing almost by the day and start attracting investor attention. GATE Technologies recently raised $3.6m of new funding from private investors. Xpert Financial, who raised $3m from famous venture capitalist Tim Draper in 2009, offers an SEC approved electronic platform for secondary offerings similar to Nasdaq. More competitors will probably appear as the market will follow the usual pattern of early product introduction: many early adopters vying to penetrate the market followed by consolidation around the fittest. At this point there’s room for all, as long as they have the necessary funding to reach sustainable operations. Existing platforms operate under different execution/membership models and focus in different markets allowing a choice of service to users, much as darkpools do in the traditional exchanges’ space.

What will be the critical success factor to our opinion is the ability to secure liquidity from both buyers and sellers, through aggressive business development and proactive communication of opportunities. System integrity and credibility is another important parameter which will develop as users and regulators become more familiar with the technology. At this point why wouldn’t regulators some day oblige financiers to execute deals through this platforms rather than offline if they are able to secure sufficient liquidity and better execution terms there (along the lines of the MiFID/Best Execution guidelines) further driving their adoption and trading proceeds?

Apart from trading in promising private company stock; there’s a compelling efficiency rational giving birth to such exchanges. Instead of wasting much of a banker’s time on market screening, cold calling, correspondence, etc, using an online tool one can minimize logistics and focus on the higher value parts of a deal (i.e. negotiating and deal structuring); keeping thus fees low and profits high. This way many more middle market deals will get done; even if don’t look that promising at first sight. There couldn’t be a better timing for this product due to capital demand from startups and mid size companies that need to grow out of the recession at the same time that are underserved by the banking system in the aftermath of the financial crisis.

Other product drivers are: increased familiarization with online trading/platforms (darkpools/online trading have changed the market landscape for traditional exchanges/brokers), increased use of social networking especially by the younger generation of professionals, globalization (in today’s world, sources and users of capital increasingly don’t reside at the same location) as well as increasing numbers of high net worth and knowledgeable investors. The latter can now bypass intermediaries through these platforms directly investing on targets. This can as well revolutionize wealth management. An interesting twist to that are platforms specializing in social investing/giving. These platforms can benefit the sizeable, at least in the US, nonprofit sector but also cure some inefficiencies and credibility problems there. Such example is the GATE Impact platform which is supported by Prudential’s Social Investments program.

Finally, but very importantly, this new technology can serve a great good to financial markets as it will increase transparency over private market transactions and provide a point or reference for finance professionals and regulators to value illiquid investments; a malady behind the latest financial crisis.

We will be following news with excitement and look forward to exponential growth for this product as well as M&A activity, especially in middle market.

You can see our views on the topic as well as the business case for one such trading platform in a presentation/business pitch we prepared as early as 2009:

The European debt crisis as a foreign exchange control mechanism!

What has long been discussed as a rather cynical point of view among many, it was recently openly admitted by Germany’s Finance minister Wolfgang Schaeuble at an interview to the Focus magazine. There Mr Schaeuble mentioned that Greece’s exit from the Euro would lead to Euro appreciation and eventually hurt German exports. Despite of public and political concerns in Northern Europe, Euro’s relative weakness benefits Germany’s exports and strong rebound. At the same time healthy European economies can take their dividend from lending to the periphery for a markup through the EFSF/ESM facilities.

Mr Schaeuble is among the European politicians with the more sound positions regarding the European currency and governance, expressed throughout the crisis. He underlined long ago the need for a common fiscal policy to support the Euro, something which is challenging under EU members’ current governance regimes. It is long overdue though and would have averted excesses in certain countries should it have been in place or if effective supervision was exercised by EU mechanisms. Maybe a crisis was needed to bring about this change. Now a much needed support to debt ridden countries through debt buyback and rescheduling using the EFSF or ESM facilities could only be given the go-ahead pending acceptance of the proposed European Competitiveness Pact; what has bluntly been called by EU officers the “Great Bargain”.

We will revisit the European Competitiveness Pact as more information become available. At this point it seems however that fiscal measures included there cannot alone solve EU periphery’s developmental problems. More far reaching structural reforms and investment in innovation is needed for that. Maybe this will be the next centrally designed policy plan to be introduced on the back of a future crisis, once fiscal policy has run its limitations and can’t respond to employment/growth needs.

Or, are we aiming for a Euro nanny-state where the periphery will be in perpetual life support/lower gear compared to developed EU states?

Related articles:

EFSF and country bailouts: the European TARP or something more?

The EFSF (European Financial Stability Facility) is a special purpose vehicle that was created last year in order to provide support to troubled European economies. EFSF can issue loans backed by EU country guarantees and IMF loans. A maximum of €750 billion can be raised under the current agreement although much less will in order to keep its AAA rating.

EFSF’s creation was shadowed by market turmoil and public unrest. However, half a year later, it starts to show how an important tool can be for the European Union. According to its operating guidelines EFSF can provide loans to eurozone countries, recapitalize banks or buy sovereign debt. In EFSF’s first band issue as part of the EU/IMF financial support package agreed for Ireland €5 billion were raised at 2.89% which will be loaned out to 5.8%. Not that bad deal after all for the Eurozone. And in the meantime the whole crisis devalues the Euro much to the benefit of the export-driven European nations. No much doubt that the facility can be increased if need to take more economies under its wings. Although this European “bailouts” seem to face some political headwinds they make economic sense. On the other hand isn’t the EFSF effectively becoming the financing arm in the course of shaping a rather “invisible” common European economic policy? Countries that request support have to align their policies under IMF/EFSF guidance; the ones coming under the EFSF being probably are the ones that have lost their credibility. To take it a step further, isn’t the latest bond issue a type of Eurobond that so much discussion have been made about lately? Eurobonds may be some years away; in the meantime Germany and other healthy economies are keeping their financing ability and rating intact.

But let’s go back to the economic consequences from EFSF’s actions. In the European setting, buying back government debt, the “toxic assets” behind the European crisis, pretty much means recapitalizing the banks. European banks hold much of the European debt; they mostly had to, under the European economic model. That’s the case with the Greek debt held by large European banks and all of Greek banks. Restructuring Greek debt to 50% of face value, as current market valuations imply, would decimate the Greek banking system requiring massive recapitalization for its size to satisfy capital adequacy guidelines. One objection here would be that Greek banks hold most of the debt in their investment portfolios i.e. at book values so they might seem indifferent towards a buyback in the wake of having to take losses. Even so though, the main problem is that their market capitalization has evaporated during the crisis as well as their funding capability. In this way the EFSS buyback can free up capital to finance economic growth and push back the “toxic asset” issue: effectively growing Europe’s way out of the crisis. Isn’t this what TARP meant to do?

I guess the main issue would be the timing of such buyback and be the haircut. Probably this couldn’t happen earlier than market reforms have been implemented. In the case of Greece this will happen after the first half of 2011. As regards to the haircut, certainly this should be lower than the 50% markets imply for Greece. Probably, somewhere in the 25% range, considering recent rumors and the target effective government borrowing after refinancing at lower rates (discussions are for 25% discount on 15-20% of debt outstanding). Some might say that this would still maintain a high, not manageable, debt level for Greece. However should it starts growing again with a sound plan, which should be the main concern., and manage to get its finances in order by reducing useless, unproductive spending and get tax income finally flowing in, then, it will be able to serve interest payments. For those in doubt mind that this time the whole process is administered by the IMF/EU. As regards to the debt/GDP ratio this is only an indicator; it’s probably more useful to focus on the interest/GDP indicators. Furthermore one has to consider the country’s true wealth, what that actually should be for Greece considering its stealth economy? In the end Greece was surviving with 100% debt/GDP for years as did Italy or Belgium without raising concerns.

On the other hand: maxing up your credit card makes you more conservative as a buyer or at least limits your options….. So not bad as a self-restraining measure. This will be a good lesson; but will need some time to sit in with the people.

After all: Every cloud has a silver lining or from another view “You never want a serious crisis to go to waste”. I see the European stockmarkets, especially those of the PIGS to move lately. Would they know something?

The US recovery, the European debt Crisis and Gordon Gekko; still to the point

Ok, this post has a light tone; as much as one can observe the economy this way.

First about the European debt crisis: Portugal and Spain are coming into the spotlight. Most probably will be the next ones to seek IMF/EFSF support. That’s if the ECB or somebody else comes to aid. They will do so if there’s significant confidence over their policies; the jury is still out on that. That apart, everything looks like the Greek story all over again; one year later. The only difference is that while Portugal’s and Greece’s problems have the same culprit in their public sector, Spain’s problems come from the banking sector. If the same story is repeated, it should go like this: once government liquidity dries out the macro funds will attack driving up spreads. Why? Just think of Bud Fox asking Gordon Gekko why he had to break apart his father’s company:

Bud Fox: Why do you need to wreck this company?
Gordon Gekko: Because it’s WRECKABLE, all right?

Simple. Hopefully something good will come out of all this in a more coordinated EU economic policy.

Now coming to the US recovery: after all the drama about the double dip recession the economy seems to recover. Unemployment and real estate prices apart, the stockmarket and corporate profits are doing well, very well indeed. We are at the point that companies disappoint even when they hit the higher profitability in a decade as was the case with Ford recently. “Buy the rumors and sell the news” at its best. It seems that the FED has averted a prolonged crisis. However, I don’t think that quantitative easing will help reduce unemployment, at least not directly, as it used to happen in the past when lower rates could spur labor intensive investment. Times have changed and in a global economy unemployment is more of a structural problem that has to be dealt from market participants (in the absence of government interference). On the positive side though, I believe that FED’s strategy is rather forcing investors to flee risk free assets and invest in equities in order to counter future inflationary pressures. This will improve consumer feeling because of their inflated nests and also remedy the banking sector’s maladies by inflating real estate prices to catch up with historical costs.

Going back to the crisis though, what would Gordon say about where we are standing now?

Bud Fox: How much is enough?
Gordon Gekko: It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another.

In other words: money was not lost; just transferred. Now has to go back to work. Won’t be surprised to see the Dow hit 2007-2008 levels by the end of the year. Sad to see the unemployment persist though and not being tackled. It seems as a social issue rather an economic one anymore.

P.S. Talking about Gordon Gekko my thoughts and wishes go to Michael Douglas. Wish him well. Great actor.

US December jobs report: lower than expectations, yet again good news; turning point with a twist..

The US private sector added 113,000 jobs in December according to the Department of Labor; 297,000 according to ADP.  Seasonality might be the reason for the disparity; I believe that the two numbers will converge as seasonal adjustments kick in during the next months.  The focal point should be that unemployment decreased to 9.4%, the lowest since May 2009 (which I believe was the point in time that US economy adjusted to the post-crisis level of economic activity).  Therefore, at this point the economy has to deal with structural unemployment created from jobs lost in specific sectors over the years that found a way to materialize during the crisis.  Unfortunately most of these are not coming back, and unfortunately the long term unemployed are not going to get back to work easily.  So it’s not myopic to focus on the unemployment rate.  Since employers won’t hire somebody who is long term unemployed or in a diminished job sector, that means that for the ones with a job things are getting better.  This will lead to salary and price inflation and progressively erase negative mortgage values and low real estate prices (all right I’m not forgetting lower consumption and consumer credit due to unemployment but even if some people get back to work the benefit would be marginal considering their probably reduced wages or low spending).  At the same time long term unemployed will have to be supported by the state increasing federal spending and deficits, hence more inflation.  Well, this is not going to be good news for the high net worth individuals but one can’t have it all.  Probably this is the milder way out of the crisis; without seemingly taking tough decisions.  One however can’t help but ponder over the long term unemployment issue.  As the economy seems to be doing pretty well without them as indicated by corporate profits and the stockmarket; this probably turns to be more of a social issue.  Europe is able to function pretty well with 10% or even higher levels of employment.  However Europe operates under a much different social and economic model that allows this type of phenomena.  Also wanted to note the fallacy of trying to address current economic problems with recipes of the past when markets were not globalized.  Right now lower interest or tax rates won’t necessarily lead to investment in the US because for a global firm it might be advantageous to do so somewhere else.  The jury is still out on how economies will adjust over these circumstances but for the time being let’s stay with the positive note on the latest jobs report.