KUHN CAPITAL Monday, March 19, 2018
Dispatches from the front

Whither Goest Now, Greenspan?

New & Improved
As a new President takes office, we also seem to be getting a new Greenspan. After years of interest rate and tax hikes, we are now witnessing his remarkably rapid transformation into a rate- and tax-lowering machine. He’s become at one with the Bush Administration.

Of course we never really ever understood Greenspan’s rationale for rate and tax hikes anyway. Not since Jimmy Carter’s spectacular mismanagement of the economy decades ago have we stayed up nights worrying about inflation. We also admit to being unenthusiastic about paying record taxes until the towering national debt is some day, maybe, extinguished once and for all. Somehow this country has managed to create more wealth than anywhere else despite all that debt. And, speaking of the "Wealth Effect", we thought that was what America was famous for, so how could such a thing be bad news, much less something to suppress, as Greenspan has us believe?

"Time to Move On"
But that was then. Now Greenspan is seen supporting the commonsense notion that most Americans have held for months, even years: relax interest rates and let us keep more of what we earn. However, in his welcome transformation, Greenspan has forever lost his Gnome-of-Zurich aura for us. We used to console ourselves that — as bitter as his medicine may have been to take — somehow it was for our own good; and that it was so hard to understand because it was the product of some arcane academic calculation by lab-coated econometricians.

Today, with his embrace of the Bush agenda, Greenspan looks like just another politician watching which way the wind blows. We have enough of those already, though Greenspan is a special sort of politician indeed: he exerts enormous influence over the world’s greatest economy; the public did not choose him for this awesome responsibility; and he reports, officially, to no one. So we’re keeping our fingers crossed that our highest elected leader can commmunicate to him what the people want, and that he will listen.

What All This Means to IT M&A
Despite our obvious misgivings about Greenspan’s outsized role in the economy, the M&A business remains strong. That’s because while most public tech stocks are of course much less valuable today, the value of most sellers’ currency has dropped even more. In exchange for lower value we have higher transaction volume. In other words, welcome to a buyer’s market driven by the implacable forces of consolidation and scarcity of capital.

That is:

  • Sellers, usually smaller than buyers, are having a hard time finding external cash, forcing them to take a long, realistic look at the independent road ahead. One source of cash, VC’s, no longer able to relish the prospect of an immediate IPO exit, have packed up their briefcases and moved on. Banks, never very comfortable with technology growth plays, see recession on the horizon and are sitting this one out.

  • Before this recent slowdown. segments of the IT industry had already begun consolidating in a search for marketing and adminintrative overhead economies of scale. But now we are seeing two new scale drivers emerge as well — the high fixed cost of building a comprehensive suite of integrated services, and the resources to attract outstanding tech talent, something that even out-of-favor public companies are finding hard to achieve. Underwater stock options lose their charms fast.

  • Of course, while many sellers may see lower valuations (especially those who should act now but instead delay, hoping for relief), the market will always reward handsomely the seller who finds a strategic buyer. As it happens, we pride ourselves on having the right mix of analytic insight, bias to action and creativity to find that high-value buyer.
    But a word to the wise: if sell you should, sooner is better than later. These trends do not favor the starving marathoner.

    Ryan Kuhn

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