Headquartered in San Francisco, the firm’s goal is to provide the very highest quality investment banking and financial advisory services to the often-underserved middle-market composed of privately held firms with annual revenues of $20 million to $250 million. As two of the most respected and experienced middle-market focused investment bankers in Northern California, Barnard and Montague have a combined 55 years of experience managing, investing in, lending to, and advising middle-market companies. 

“The mission of the firm is not to be merely transaction oriented, but to develop a trusted advisor relationship with our clients,” stated Biff Barnard. “Our objective is to build a firm with the superior talent and depth of resources necessary to meet the growth or liquidity needs of our clients as they deal with ever-changing market conditions. We also seek to further implement the ‘best practices’ from our prior firms, enabling Barnard/Montague to consistently exceed our clients’ requirements and expectations.”

“Biff and I have been friendly competitors with a great deal of mutual respect for many years,” added Montague. “Forming Barnard/Montague Capital Advisors brings together our deep knowledge of capital sources from across the nation as well as our long-term relationships with bankers, attorneys, accountants, wealth mangers, and other advisors to middle-market companies throughout the Western U.S. Our combined track record of successfully raising capital and closing M&A transactions demonstrates our abilities to creatively and professionally solve the capital needs of our client companies.”

In these difficult economic times when it is problematic to access capital for growth, acquisitions, recapitalizations, or to achieve partial or full liquidity, it is increasingly important for owners and managers of middle-market companies to have skilled advisors who know the private capital markets as well as Barnard and Montague. 

Biff Barnard has 30 years of experience investing in, lending to, and advising small- and middle-market companies. Most recently, Barnard was a partner of Wood Warren & Co., a middle-market focused advisory firm. Previously he was Managing Director of Caltius Capital Management, a private equity and subordinated debt fund; Senior Vice President of Allied Capital Corporation, a publicly held equity and subordinated debt fund; Chairman, CEO, and President of First Capital Corporation, a company he founded that became one of the most active small business lending companies in the nation; and one of the founding operating partners of the Rusty Scupper restaurant chain. Barnard served on the Advisory Council of the San Francisco Federal Reserve Bank, as its Vice Chairman and then Chairman. He is Past-President of the San Francisco Chapter of the Association for Corporate Growth (ACG) and has served on the Board of Directors of ACG-Global. He currently serves on the board of advisors of TS Restaurants and is a member of the President’s Council of the United Religions Initiative. Barnard received a B.A. from Stanford University.

Jeanne Montague has over 25 years of experience in corporate finance, including mergers, acquisitions, and divestitures, as well as private placements of debt and equity capital. She founded Montague Partners and co-founded Comann & Montague, both with nationwide middle-market-focused mergers and acquisition practices. Montague was a Senior Manager in the Corporate Finance practice of Price Waterhouse; CFO and Director of Chemoil Corporation, a $3-billion oil trading company; and worked for Bank of America in corporate lending as well as financing leveraged buyouts nationwide. Montague has been a guest lecturer at the Stanford University Graduate School of Business and a speaker at Practicing Law Institute forums, Commercial Finance Association, ACG, and the Women in Leadership Program at the University of California’s Haas School of Business. She received a B.A. in Political Science from Connecticut College and an M.B.A. in Finance from the Columbia University Graduate School of Business. 

For more information, please visit our web site:
www.BarnardMontague.com

Or contact us:

Bailey S. “Biff” Barnard, Sr.
925-386-6171
bbarnard@barnardmontague.com

Jeanne Montague
415-928-2183
jmontague@barnardmontague.com

Month	Positive	Neutral	Negative	Total Headlines
March	18/26%	6/9%	45/65%	69
April	40/32%	13/10%	71/51%	124
May	50/23%	37/17%	131/60%	218
June	50/40%	15/12%	61/48%	126
July	76/35%	26/12%	113/53%	215
August	31/42%	11/15%	31/42%	73
September	49/38%	9/7%	72/55%	130
October	94/49%	16/8%	81/42%	191

There were reports early last week of unemployment in California increasing to 12.2% and “underemployment” increased to 20+%. There are reports, too, of an increase in mortgage defaults in even the more expensive homes in the SF Bay Area as a result of the un- and underemployment problems. There are still problems ahead with commercial real estate as well as term business and industrial loans made over the past 2-5 years as they come due.

In the last 30 to 45 days, we have been getting an increasing number of calls from business owners about the need to revisit capital structure in light of the continued uncertainty in the market – how to replace debt coming due or lines of credit that are being reduced by the bank and consideration of recapitalizing the business possibly with subordinated debt and/or equity.

While our WSJ Headline Economic Gauge is finally showing some encouraging signs, we believe there are still bumpy times ahead. Middle market business owners have to continue to be cautious as they plan for the next several years.  They will not be able to manage their businesses the same way they have in the past and they will not be able to rely solely on their banks for capital. We think this is the time for business owners to consider engaging outside management consultants to help enable them to manage through the more difficult times we believe are still ahead. It is also a time to consider capital outside of your bank to make sure your company is capitalized properly to sustain the business until the economy does improve, which we believe will not be for several more years.

We at Barnard/Montague would welcome the opportunity to help find the resources right for your company or your clients’ companies.

 

Public equities are certainly improving – whether that improvement is sustainable is debatable.  Pronouncements from many of our political leaders would lead us to believe that the economy is improving but usually with the caveat that it will be a slow, bumpy recovery. Worried about whether or not he will stay employed, the consumer is more focused on saving or paying down debt than spending and many middle-market companies are finding that obtaining financing is a challenge and they are still struggling to see much growth in revenues.

So, what does our WSJ Headline Economic Gauge tell us?  For this update, we have tallied the Friday WSJ Edition Headlines and reported them by monthly totals – 7 months from March (partial month) through September. While the positive headlines are increasing, the negatives still outnumber the positives with only 4 of the 26 weeks we have tracked showing more positive headlines than negative and with the best monthly results a tie at 42%/42% for August (only 2 weeks in August were totaled as I was on vacation and happily away from all this…).

                                                

Month	Positive	Neutral	Negative	Total Headlines
March	18/26%	6/9%	45/65%	69
April	40/32%	13/10%	71/51%	124
May	50/23%	37/17%	131/60%	218
June	50/40%	15/12%	61/48%	126
July	76/35%	26/12%	113/53%	215
August	31/42%	11/15%	31/42%	73
September	49/38%	9/7%	72/55%	130

                                                

There are signs of improvement but there are still not just bumps in the road but many hurdles middle-market company owners will have to jump over or run through in order to survive the more difficult times I believe are still ahead. In these continuing challenging times, managing companies the way they have been managed in the past is no longer going to work. It is a different business world – business and real estate valuations are lower, business owners seeking capital for liquidity and/or to support their growth and working capital needs are finding a dearth of alternatives, and neither consumers nor businesses are spending. Further, as the economy begins to improve, under-capitalized businesses will likely have to forgo the unique growth opportunities an economic recovery often presents. While I do believe that the adjustments going on - working through the excesses developed over the past 15 years - will produce an economy that will be more rational and sustainable, getting from here to there will be tough and will simply take time.

There are a number of resources available to help business owners take a fresh look at how their companies are run: good quality management consultants can provide new ideas to deal with the issues business owners are facing today; boards of directors or advisors including members outside the business can add an impartial perspective to the business operations, and can help strengthen corporate governance and financial reporting; private equity and subordinated debt funds can provide capital to help companies sustain themselves and even grow; and investment banking firms can help determine the best capital source and structure to accomplish the business owners’ objectives and lead them through a capital raising process.

                                                

Our January ‘09 blog entry introduced the concept of what the financial community calls recapitalizations – a financing mechanism that enables business owners to take some money out of the business thus diversifying personal assets, to take on a financial partner who can help sustain the business through what I believe are the more difficult times still ahead, and possibly to provide capital for acquisitions of weaker competitors, all to enable the company to come out of this recession larger and stronger and in a better position to sell at a higher valuation as the economy improves. Recapitalization financing can also be used to replace expiring senior debt.

Many of our middle-market company clients and their advisors responded to the recapitalization concept presented in January with the polite acknowledgement that it was interesting but with the decision to wait for “a quarter or two” until the economy improved and then consider going to market to sell the company at higher valuations. Well, three quarters have almost now passed since then, the economy continues to slide, and middle-market company valuations are still heading lower. According to a recent W.Y. Campbell & Company report, real GDP declined at a 1% annual rate during Q2 ’09, a reduced decline from Q1 ’09. And according to the same W.Y. Campbell report middle-market transaction multiples fell in Q2 ’09 to 4.9x EBITDA down from 5.7x EBITDA in Q1 ’09 and from 7.2x EBITDA for all of 2008.

All signs point to bank debt being increasingly expensive and difficult to obtain. Many business term loans put in place over the past 3 to 4 years are coming due and business owners will be hard pressed to replace those loans with similarly structured bank debt. Notwithstanding the money many banks have received from federal government stimulus and economic recovery programs, banks are struggling, with the Wall Street Journal reporting that there are 416 banks on the FDIC’s At-Risk List (WSJ, August 28, 2009). The WSJ article reported that in Q2 ’09 defaults on commercial and industrial loans more than doubled from a year earlier; credit-card losses climbed to a record 9.95%; banks are sitting on $332 billion of loans more than 90 days past due, the highest level since the FDIC started collecting the data 26 years ago; banks are holding more than $34 billion in repossessed real estate; and even as banks modify billions of dollars of mortgages, their pools of foreclosed properties keep growing, for Q2 ’09 up 12% from Q1 ’09 and up 72% form the previous year – the highest level since 1993.

On top of all this, some predict that the core unemployment rate will reach 12% or 13% and the federal government’s uncontrolled fiscal policy threatens the sustainability of any potential recovery with higher inflation and the devaluation of the dollar. None of this gives any indication that the middle-market business environment is improving or that bank debt will become more available in the near term or until the banks work through these growing problems.

On the positive side, private equity and subordinated debt funds are still flush with capital, some estimate about $600+ billion. However, the lack of leveraged financing and discounted multiples applied to deteriorating earnings has expanded the gap between buyer and seller valuation expectations making buyouts all but impossible. As a result of the dearth of buyouts occurring in the middle-market, those investors are more creative and flexible than I have seen them in the past in order to invest their funds. They are willing to provide capital for both majority AND minority recapitalizations, enabling business owners to maintain both operating and financial control. Private equity and sub debt funds invest in management teams; their business model is not to run businesses. And the good fund investors add value beyond the capital they provide, helping improve corporate governance and financial reporting, opening new distribution channels, assisting with acquisitions, etc., all to help create value for the company, investors and business owners.

At Barnard/Montague we understand the issues middle-market business owners face and we know the private capital markets – the investors and lenders to private, middle-market companies. We would welcome the opportunity to assist analyzing the financing alternatives, to undertake a process to find the right investor or lender, and to facilitate transactions that will help middle-market companies survive and thrive in these challenging times.

The objective of our blog is to summarize how what is going on in the economy impacts middle-market companies based upon information from the media and government, what I learn talking with owners of middle-market companies, with middle-market focused private equity firms, subordinated debt and other lenders as well as with other advisors to middle-market companies.

Since our last entry (March 23, 2009) when we asked, “When will the economy turn around?” and introduced our WSJ Headline Economic Activity Gauge, I have been struggling to come up with an update that would be positive or encouraging. We are reading comments like, “unemployment is rising less rapidly” or “retail sales have stopped getting worse” and also “economic indicators should begin to rise from depressed levels to merely weak levels” or “the recovery will feel more like a recession” – none of which are particularly encouraging. A recent piece by BNP Paribas summarized the current situation well saying, “Most of the hard data is quite mixed: the most compelling insight is that the declines are moderating…Even if most sectors have stopped declining [or more accurately are falling less rapidly] the economy will probably remain in recession for many more months and then recover quite slowly.”

From what I am hearing, it seems that residential real estate may not yet have hit bottom, retail sales are still falling with the prospect of many more retail storefronts closing – as many as 300,000 more!, commercial mortgage defaults are just beginning, and credit card defaults and delinquencies are rising. Adding to the fears of increasing problems for retailers, of unemployment and of commercial mortgage defaults, the May 22 WSJ reported that for the 12 month period ended March 31, “the U.S. shopping malls collectively posted a 6.5% decline in tenants’ same store sales”. The article continued, “This time around, because of the dramatic changes in consumer spending practices, we’re very likely to see more malls in the death spiral than we’ve ever seen before,” and the article summarizes, “The [shopping mall] industry’s woes are worsening...For towns and cities that are home to dying malls, the fallout can be devastating. Malls hire hundreds of workers and are significant contributors to the local tax base” - all pointing to continued increasing economic problems particularly in unemployment, which some are saying may get as high as 13% and when taking into consideration the underemployed may exceed 15%.

In terms of merger and acquisition activity in the middle-market, according to D.A. Davidson’s Q1 2009 issue of The Dealmaker, “Middle-market M&A transactions have declined significantly over the past three quarters… Deal volume and the number of transactions are down 76.3% and 70.9% respectively over Q4 2007 peak activity”. And addressing valuations for those transactions, the D.A. Davidson report continues, “Middle-market M&A multiples declined to 5.0x EBITDA in 2009 - down 37.5% over Q3 2007 peak valuations”.
Since we introduced the WSJ Headline Economic Activity Gauge with the Friday, March 20 Edition, we have categorized the headlines of each Friday’s Edition through May 22 for a total of ten. Here is the summary:

Month	Positive	Neutral	Negative	Total Headlines
March 20	6/19%	3/10%	22/71%	31
March 37	12/32%	3/8%	23/61%	38
April 3	10/23%	2/7%	15/562%	27
April 10	7/23%	5/16%	19/61%	31
April 17	15/42%	0/0%	21/58%	36
April 24	8/27%	6/20%	15/53%	30
May 1	7/21%	3/9%	23/70%	33
May 8	7/17%	9/22%	25/61%	41
May 15	7/16%	11/24%	2760%	45
May 22	15/31%	7/14%	27/55%	49

So, what do we take from all this and what is the impact for middle-market companies? At least from this gauge, negative headlines still far outnumber positive ones which would indicate that we still have a ways to go before there are signs of a turnaround, unless the "positives" from May 22 are the beginning of a trend. Taking all this into consideration, I don’t think middle-market company valuations will get back even to today’s levels for 3-4 years. As a result, except in situations where a company must sell for one reason or another, as this weak economy persists, we are recommending that our clients consider recapitalizing the business as an alternative to a sale at this time.

With the dearth of opportunities to acquire good companies at valuations agreeable to buyers and sellers, private equity and subordinated debt funds still have literally billions of dollars to invest in middle-market companies to help them grow, to facilitate acquisitions, to buy out a partner or to recapitalize the company. A recapitalization enables the business owners to take some money “off the table” – to diversify personal assets, to have a strong financial partner to help get the company though what may be a long and difficult time and possibly to facilitate acquisitions of weaker competitors so that the company can be larger and stronger as the economy does turn around. We think a recapitalization is well worth consideration. In the mean time, hunker down and stay tuned…

And while private equity funds are still flush with capital to invest in or acquire companies, private equity can be expensive, usually requiring shareholders to relinquish significant ownership and control. However, subordinated debt provided by specialized funds is an alternative that may well help companies and shareholders accomplish their financing objectives. By utilizing subordinated debt to recapitalize the business, shareholders can take a dividend to diversify a portion of personal wealth yet retain control of the company and still benefit from its future growth. Subordinated debt can also be used to buyout shareholders or to finance acquisitions or growth.

Subordinated debt fits between senior debt and equity in the capital structure and has characteristics of each. Like senior debt, subordinated debt has a principal obligation in the form of an interest-bearing note that must be repaid by a specified maturity date and it is usually interest-only for a term of from five to seven years with the principal balance due at the end of the term of the loan. Subordinated debt typically has an equity feature structured as warrants, or is convertible to preferred or common stock to align the subordinated debt investor’s long-term goals with those of the borrower. Utilizing subordinated debt generally results in minimal ownership dilution and subordinated debt providers usually do not seek board of directors’ representation enabling the business shareholders to maintain operational control.

Please contact us at Barnard/Montague if you would like to learn more about subordinated debt or if we can be of assistance in exploring the financing alternatives available to enable middle-market company owners to achieve their objectives.

I know how to tell with certainty when it is turning; I call it the Wall Street Journal Headline Economic Activity Gauge. But before I explain how it works, I want to talk a bit about what we hear from our government as well as from “Main Street” that banks are not lending and, until they do so, our economy won’t turn around.

At least here in Northern California banks and many commercial finance companies, insurance company and other non-bank lenders ARE lending – though thoughtfully and cautiously as they should be in an uncertain economy. A reasonable amount of debt is available for well run middle-market companies that are maintaining stable revenues and profit margins.

As I see it, availability of credit for middle-market companies is not the gating factor hampering the growth of the economy and creating jobs. The main issues are the lack of demand for consumer products or services as the consumer is hunkered down hoping not to lose his job and the hesitancy on the part of companies to take on anything but the least amount of debt possible, delaying building inventories, acquiring new equipment or other growth financings.

Not withstanding all the trillions of our tax dollars the Federal Government throws at it, the economy will not turn around until we have worked through the excess of the recent past – way too much residential and commercial real estate, way too many retail stores providing products that we can no longer afford, way too many models of automobiles that use too much gas and way too many auto dealerships that try to sell us those cars. Only then will consumers start buying again and will businesses start seeing demand for their products and services and have comfort in borrowing to grow to meet that demand.

And, “so,” you ask, “when will that happen?” And my answer is, “look to the WSJ Headline Economic Activity Gauge.” Simply put, count the number of WSJ business article headlines that are positive, neutral and negative in each edition. When the balance changes from negative to positive, you can bet the economy is improving. Take for example the Pacific Coast Edition of Friday, March 20, 2009. Here is how the headlines breakdown:

Positive (6)
1. Hermes Posts Higher Sales, Profit
2. Wal-Mart Increases Employee Bonuses
3. Corning Sees Pickup in LCD Demand
4. Chinese Mobile Firm Lifts Profit
5. Alibaba.com to Raise its Spending on Staff
6. Cheers for Fed Action Echo Across Atlantic

Neutral (3)
1. Cost Cutting Boosts 3Com to Profitability
2. Lennar to Buy Back Land at Discount
3. GE Says Finance Unit Won’t Need Capital Injection (While Loan Losses Mount with Higher Unemployment, Worst-Case Scenario Would be Break-Even Results)

Negative (22)
1. Travel Spending Sinks Sharply
2. House Passes 90% Bonus Tax Bill; Hit Would Affect Major Banks
3. Wall Street Shudders as Lawmakers Take Aim at Pay
4. Downturn Heightens China-India Tension on Trade
5. UK Public-Sector Debt Soars as Crisis Deepens
6. Risks Emerge in Greece’s Cornerstone Industries
7. Single Industry Towns Wonder How Much Stimulus Will Help
8. U.S. Offers $5 billion to Car Suppliers
9. As Net Sinks, FedEx Seeks Signs of Stability
10. EU Steelmakers Project Losses
11. BAA (Ltd.) Must Sell 3 UK Airports
12. Barnes & Noble Falters
13. Crocs Seeks to Extend Debt Deadline
14. [Greenbrier Hotel] Resort Seeks Chapter 11
15. Eddie Bauer Filing Raises Doubt About its Viability
16. Blockbuster Creditors Pact is Reached; Quarterly Loss Reported
17. Gehry Manhattan Project Faces Market Pressures
18. Palm Battles Slowing Sales
19. Ticketmaster Posts Loss of $1.07 Billion
20. Fed Skeptics Punish Stocks, Dollar
21. China’s Shenzhen Development Bank Profit Drops 77% for Year
22. France’s Iliad (broadband provider) Net Profit Falls 33%

Maybe not terribly scientific. I may not have gotten all of the articles and may have put some into the wrong category. But you get the point. We still have a ways to go before things improve. But don’t blame the banks for not aggressively lending in this environment. That’s how we got in to this mess in the first place.

Additionally, during the week of January 19, I had the opportunity to attend several “economic forecasts” presented by a number of well respected economists. What follows is a summary of what I am hearing as it pertains to valuations of middle-market companies.

The overriding issue is that the decreasing availability of credit and the ever increasing cost of capital have forced valuations down over the past few years. The market has seen a significant decline in total leverage used in deals, driven in large part by the decline in senior debt availability. The net result is that institutional investors/private equity funds are now required to invest more equity to complete transactions. However, it is important to understand that even in this uncertain economic environment private equity investors and strategic buyers are interested in investing in or acquiring good quality companies with revenues and earnings remaining steady or growing; that “supply and demand” has kept the valuation of such companies at a premium to today’s market; and that there is debt financing available for the acquisition of middle-market companies - generally from regional banks - though in smaller amounts and at higher rates than 12 – 18 months ago.

However, if owners considering selling their companies are expecting to achieve the same valuation they might have 18 or 24 months ago, it simply won’t happen. Values at that time were inflated as a result of the investors’ ability to put probably too much debt on companies’ balance sheets; there was a sense that the economy was going to continue to grow for the foreseeable future. That bubble burst; debt is now almost impossible to obtain; we are in a recession that may last for another 12-18 months; and investors will not pay today the premium of 18 months ago even for good quality companies. And, based upon what I am hearing, those kinds of values may not be seen for 5 to 6 years.

While little of what follows points to anything that is unprecedented, it is clear that there will be economic challenges for some time. Fortunately, our government and governments around the world are taking swift and aggressive action that should help quell the market’s fear and allow the world economies to rebound. However, that turnaround and recovery will take time.

With that in mind, the question that should be asked is, “In order to maximize my company’s valuation, should I sell now or wait until the economy improves?”

In order to answer that question, there are a number of issues that need to be addressed not the least of which are, “How long will this recession last and how deep will it go?” Below is a summary of what we are hearing that would lead some to conclude that it may be a wait of 3-4 years or more before valuations get back even to today’s levels.

Commercial Banks
• Banks have written down about $1.0 trillion in loans on their books to date
  with at least another $1.0 trillion to go.
• Banks cannot raise new capital from public markets as their stock prices
  have fallen precipitously.
• Banks are not and probably should not be aggressively lending in this
  difficult economy.
• Loans being made today are usually to existing borrowers, at low advance
  rates and at higher costs.
• Not withstanding the money government is pouring into lending institutions,
  credit will continue to be tight for the foreseeable future.
• Corporate borrowing rates even for good quality companies will continue to
  rise at least through ’09.

Households
• Household balance sheets (home values, personal investment portfolios,
  401k accounts, etc.) have lost somewhere between $7 trillion to $10 trillion
  since the peak.
• People are concerned about keeping their jobs so are paying down debt,
  trying to save and are not spending.

Real Estate
• Residential real estate values still have to fall another 15% to 20% to get to
  a sustainable level.
• It is estimated that there is an inventory of about 3 million homes for sale
  nationally, about 1 million above a normal level (John Shoven, Economics
  Professor, Stanford University).
• The Wall Street Journal on January 23, 2009, reported that home
  construction is at a record slow pace and that “a drop-off in permits for
  future projects suggests the declines will continue”.
• Commercial real estate is “the next shoe to fall”; commercial mortgage
  defaults are on the rise.

Auto Industry
• Inventories are rising; sales are falling.
• It is projected that domestic sales for ’09 will be less than 10 million units,
  which is below the level at which manufacturers can generate a profit.

States/Municipalities
• Tax revenue is falling.
• Particularly in California as a result of Proposition 13 (the 1978 voter
  initiative that caps property taxes) with residential real estate values at
  record low and still falling – down from 50% to 75% at the peak, property
  tax revenue will be significantly lower than what it has been and will not
  increase until ‘12-‘13 and then at only about 1% per year (SF Chronicle,
  January 25, 2009).
• There are no good places to make meaningful budget cuts.

Unemployment
• California unemployment rate hit 9.3% in December ’08, a jump from 8.4%
  in November (SF Chronicle, January 24, 2009).
• It is feared that California’s unemployment rate has not hit bottom with most
  sectors of the state economy still losing jobs (SF Chronicle, January 24,
  2009).

Retail
• It has been estimated that approximately 150,000 retail stores have shut
  down nationally in ‘08
• It has been estimated that another approximately 300,000 retail stores will
  shut down in ’09 through ‘10.

Public Equities
• On a global basis, the value of public equities has dropped by over $30
  billion (Goldman Sachs January 2009 Report for Private Wealth
  Management Clients). • Look at a sampling of worrisome headlines from a
  single recent Wall Street Journal of January 23, 2009:
  – “Chrysler, Fiat Show Signs of Mounting Trouble”   – “Microsoft, Too, Is
       Hurt by Recession”
  – “Google Net Hit by Charge”
  – “Sony Plans Deeper Cutbacks”
  – “Huntsman to Cut Jobs and Close British Plant”
  – “Hyundai Net Drops 28%”
  – “AMD Posts Hefty Loss as Chip Sales Fall”
  – “Nokia Forecasts Weaker Demand”
  – “TSMC Warns of Red Ink for Quarter”
  – “Samsung, LG Electronics Post Losses”
  – “Resorts Atlantic City Faces Foreclosure Threat”
  – … and is seems to go on and on.
• With corporate profits continuing to fall, it seems that few domestic or foreign
  investors will want to buy equities until it is clear that we have hit bottom.

Exports
• 50% of credit derivatives were bought by non-US investors leading to
  weakening economies around the world.
• Falling consumer spending around the world is reducing the US’s ability to
  export – exports were the strength in our economy until late ’08.

Eurozone
• The economy is slowing rapidly and many forecast the worst recession
  since the end - Very few companies are hiring BUT by law they cannot lay
  people off.
• As a result, economic problems there will be longer and deeper than in US.
• Industrial output is off with consumer spending decreasing significantly in the
  Eurozone and in Eastern Europe.

China
• Industrial production is declining rapidly.
• Until recently GDP growth has been at a 13% level.
• It is now projected that growth for ‘09 will not exceed 7%.
• BUT below 8% China cannot support the job demand created by population
  growth.
• As a result, unemployment will rise dramatically which will significantly
  dampen consumer spending and demand for imports.

Conclusion
• Adding all this up, many are forecasting:
  – Negative US GDP growth throughout most if not all of ’09 or well into ’10;
  – Return to positive growth in late ’10 or early ’11;
  – Slow recovery with “crippling” budget deficits into ’12 and ‘13.

Again, if a business owner is considering a sale or a recapitalization, these conclusions would suggest doing so as soon as possible as the wait for valuations to return to current levels could be 3-4 years.

If we at Barnard/Montague can be of assistance to you or your clients in determining how all this impacts them, please contact me at 925-386-6171.

Luncheon for the past 15 years and is always well received. More about what he is thinking can be found on his web site at www.nextupresearch.com.

One of his opening comments was very insightful, “The past is no longer a prologue to the future”, and meaning that things are changing so rapidly and so drastically that we cannot rely on what we did in the past to be successful in the future. With that in mind, he talked about industries to watch and what he calls “MegaTrends”.

The industries he likes are: consumer products, healthcare services, technology, media and anything green. I would add infrastructure to his list – bridges, dams, highways, waste water and drinking water transport as well as internet and broadband expansion and everything in between.

The MegaTrends he is watching are: globalization, the internet (currently only 20% worldwide penetration!), outsourcing, demographics (the aging population as people are living longer), branded products, the convergence of technology into smaller devices (the iPhone is just the beginning!), consolidation, knowledge economy – education, and again, anything green (alternative energy, green-living, etc.) or “blue” (anything to do with water).

The weakening worldwide economy may override or at least slow investment in these areas but as the economy does improve, these sure are areas of opportunity.

To better understand these MegaTrends that Michael is talking about, let me suggest several books:
Thomas Friedman’s The World is Flat and Hot, Flat and Crowded: Why We Need a Green Revolution.
Fareed Zakaria’s The Post-American World.

Let me know your thoughts at bbarnard@BarnardMontague.com or comment on our blog.