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Archive for February 25th, 2022

The Black Swan Pushes Events to the Tipping Point-Maximizing Enterprise Value in Crisis times
This article was published by Steven R. Gerbsman and Robert Tillman in previous years and has significant relevance today due to the Russia/Ukraine situation, inflation and Covid.

Please read, enjoy and “be prepared”.Best regards,  Steve Gerbsman and Bob Tillman (Bob is an Member of Gerbsman Partners Board of Intellectual Capital, an Investor and Entreperneur).

We are currently in one of the most challenging times in our country’s history. The stock market had hit at all-time highs and now suffers from higher interest rates, inflation and world political turmoil. There are, of course, many other worrisome trends: terrorism, excessive government spending, trade deficits, high oil prices, immigration and over the longer term, such issues as an aging population and (possibly) global warming. Although problems and worries always exist, in historical terms, these are times of challenges.

The big questions for us as specialists in maximizing enterprise value are:

When will the Black Swan and Tipping Point issues end?

It will eventually end of course. Even fundamentally healthy economies experience frequent and often violent corrections. The current world economy has evolved in many ways over the past decade. All large businesses are international. The primary economies of the world are very tightly linked together. Money is far more liquid and moves around the world with far less “friction” than it did in the past. The pace of technical change continues to increase. Nevertheless, we do not believe that the laws of history, and especially, the laws of human nature, have been repealed.

As always, “The more things change, the more that they remain the same.”

Unfortunately, no one knows the answer to this question. In historical terms, the current economic expansion has continued for a very long time and has survived numerous shocks, including war, a doubling of energy prices, natural disasters and localized economic downturns, such as the bursting of the sub-prime mortgage bubble. The markets are now “ripe” for a downturn. On the other hand, inherently unstable situations often persist for far longer than anyone could believe possible. During the 2000 Internet bubble, it seemed to us for quite some that the old rules of business no longer applied and that 25 year-old CEOs knew something us old guys did not know. When the crash occurred, we were relieved to find out that we were not so obsolete after all.

We did, however, underestimate the staying power of technically insolvent companies with broken or non-existent business models. Many of these companies had significant cash on the balance sheet (offset, of course, by significant liabilities) and investors who continued to infuse more cash far beyond the point of reason. Today, there exist immense pools of uncommitted cash, much of it in the hands of entities, such as private equity funds and hedge funds that are subject to minim al regulatory scrutiny and whose operations are obscured from the public view. In addition, the weakness of the dollar against both the Euro and the Pound Sterling makes U.S. assets a relative bargain. These factors tend to mitigate against an economic downturn. For how much longer they will continue to do so we do not know (and if we did know, we would certainly would not tell).

How will it end?

Fast, hard and unexpectedly. Three books shed a great deal of light on the process:The first book, The Tipping Point by Malcolm Gladwell describes how human behavior causes events to cascade rapidly once a certain critical mass (the “Tipping Point”) has been achieved. Examples in the business world include periodic economic ?panics? and the spread of certain technologies and products, such as personal computers, iPods, cell phones, etc. It is very difficult to predict in advance when the ?tipping point? in any situation will be reached, but history has shown that, once it has been reached, events proceed very quickly.

The second book, The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb describes how highly improbable, and hence unpredictable, events periodically create massive change. The title of the book derives from the observation that the existence of even a single black swan disproves the assertion that all swans are white. Historical examples include the Fall of France at the beginning of World War II, the rise of the Internet and 9/11.

The third book, “The Sun Also Rises” by Ernest Hemingway describes the character Mike Campbell and discusses his money troubles where he responded with a vivid description embracing self-contradiction.  “How did you go bankrupt”, Bill asked.  “Two Ways”, Mike said.  “Gradually and then Suddenly”.  “What brought this on?”.  “Friends,” Mike said.  “I had a lot of friends.  False friends.  Then I had creditors, too.  Probably had more creditors than anybody in England.”

There are many obvious candidates for a “black swan” event that pushes the world economy over “the tipping point” into a downturn – a war with Iran, Russian, Korea and/or China over Taiwan, a nuclear terrorist attack or the coninutaion of the Covid epidemic, but generally, it is what you do not see that gets you. We are fundamentally optimists about the long-term prospects of the world economy. In many highly measurable ways, the world really is improving, driven by technological innovation, a lowering of barriers to trade and increasing economic integration. Nevertheless, we are old enough to have lived through many “bumps” along the road and know that such discontinuities will always occur. We believe that we will see a significant economic event sometime over the next 6-18 months, either localized to a particular sector or geographic region or globally.

Gerbsman Partners Advice?

Before such an event occurs:

As a board member, investor, senior lender or stakeholder:

1. Implement tight cash flow, receivables and inventory reporting so that you are alerted to problems early.

2. Focus on the control, preservation and forecasting of CASH on a weekly, monthly and quarterly basis.

3. Require “bottoms up” forecasting for all aspects of revenue and expense. Have the CEO and CFO defend ALL numbers.

4. Hold the CEO responsible and accountable for Performance. If you are off the business plan/forecast, re-forecast based on the reality of “what is” today.

5. Communicate frequently with all parties at interest. Check that the CEO is providing leadership, motivation and morale to the management team and employees.

6. Review all companies in your portfolio. Identify and define action plans to fix weaknesses now.

7. Utilize professional resources to assist in maximizing enterprise value, when appropriate.

When such an event occurs:

1. Face up to reality and act quickly. When things are going bad, waiting seldom improves them. We have never seen a board of directors act too quickly when faced with a crisis. We have all too frequently seen a board act slowly or not at all.

2. Call for assistance early. The earlier professionals can get involved in the process, the better the potential outcome in maximizing enterprise value. Many times boards request assistance only after a company has run out of cash. Many more options exist to maximize enterprise value if a company has some running room.

About Gerbsman Partners 

Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in underperforming, undercapitalized and undervalued companies and their intellectual properties. Since 2001, Gerbsman Partners has successfully maximized the values of 115 companies in a wide and diverse spectrum of industries, ranging from technology, medical device/life science, digital marketing to cyber security, to name only a few.*

In the process, GP has successfully restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations, and has assisted in over $2.3 billion of financings, restructurings and M&A transactions.* 

Gerbsman Partners has offices and strategic alliances in San Francisco, Orange County, Boston, New York, Washington DC, McLean, VA, Europe and Israel. *

For further information on Gerbsman Partners expertise and industry experience, please request our company profile here  

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