Smart Business Aspire Conference: A day for dealmakers

There’s no doubt about it — Northeast Ohio is a dealmaking town. Tracing its roots back to the days of John D. Rockefeller, the region’s legacy of big industry, banking and venture capital continues to this day.

In a nod to the past — and as we look forward to the future — on May 18, 2016, Smart Business will present the inaugural ASPIRE Conference in Cleveland, Ohio. We’ll bring together entrepreneurs, business owners, and top leaders with deal-makers, investors and advisers for a daylong conference to discuss issues in the M&A and business investment world. Together, we’ll aspire to make Northeast Ohio a stronger business region.

Smart-Business-Aspire-Conference-2016

The Cleveland ASPIRE Conference features keynote presentations from successful entrepreneur Nicholas Howley, founder and CEO of TransDigm, and savvy financial business leader Walter Bettinger, president and CEO of Charles Schwab. Both will share lessons learned.

This will be a different kind conference than Northeast Ohio has previously seen as the entire dealmaking community has come together to bring ASPIRE to life. It will present exciting keynote speakers, informative breakout sessions, and opportunities throughout the day to network while focusing on four key areas that any entrepreneur thinking about jumping into the M&A or dealmaking world needs to understand:

  • Buying a business: Do you know what it takes to effectively buy a business? Have you thought about valuations, the importance of a strong management team, and why market share and competitive differentiation matters? You’ll hear from experts and business leaders who have grown through acquisition.
  • Selling a business: When is a good time to sell? Do you understand how private equity values your business? Have you made those critical checklists of what to prepare? You’ll learn from entrepreneurs who have divested assets or sold their company and the experts who have helped them.
  • Raising capital: Where does the money come from? We’ll discuss ways to finance your business — from friends and family to angel investors and early-round finance, we’ll explore options such as bank financing, venture capital and private equity. You’ll hear from those who have raised capital and others who have provided it.
  • Liquidity events: What happens once you’ve taken money off the table? We’ll dive deep into the subject and discuss how to spark these all-important events, plus what comes next after the deal is done.

Join us at the ASPIRE Conference. Learn more or register for the May 18 event today at www.regonline.com/aspire2016.

Don’t confuse doing the right thing with knowing the right thing to do

Michael Feuer

Companies typically want to do what’s right for those they serve. Key priorities should be customers, investors, employees and the communities in which the company is located — but not necessarily always in this order. The dilemma, however, is that many times short-term decisions can prove to be long-term problems that cause more pain than the initial gain.

It’s difficult to make all constituents happy every time. As a result, management must prioritize decisions with a clear understanding that each action has ramifications, which could manifest themselves in the short, intermediate or long term. Seldom does a single decision serve all of the same timelines. There are no easy answers and anyone who has spent even a short amount of time running a business has already learned this fact of life. So what’s a leader to do?

It’s a sure bet that investors want a better return, employees want more money and benefits, and customers want better quality products, higher levels of service and, oh yes, lower prices. This simply all goes with the territory and is a part of the game. The problem can be that, most times, it’s hard to give without taking something away from someone else. Here are a couple of examples.

Take the case of deciding to improve employee compensation packages. Ask the auto companies what happened when they added a multitude of perks over the years, as demanded by the unions? The auto titans thought they didn’t have much choice, lest they run the risk of alienating their gigantic workforces. History has shown us the ramifications of their actions as the majority of these manufacturers came close to going belly up, which would have resulted in huge job losses and an economic tsunami.

Basic math caused the problems. The prices charged for cars could not cover all of the legacy costs that accrued over the years, much like barnacles building up on the bottom of a ship to the point where the ship could sink from the weight. Hindsight is 20/20, and, of course, the auto companies should have been more circumspect about creating benefit packages that could not be sustained. Yes, the employees received an increase to their standard of living for a time anyway, but at the end of the day, a company cannot spend more than it takes in and stay in business for long.

Investors in public companies can present a different set of problems because they can have divergent objectives. There are the buy-and-hold investors, albeit a shrinking breed, who understand that for a company to have long-term success, it must invest in the present to build for the future. The term “immediate gratification” is not in their lexicon; they’re in it for the long haul. Another type of investor might know or care little about a company’s future, other than whether its earnings per share beat Wall Street estimates. These investors buy low and sell high, sometimes flipping the stock in hours or days. And, actually, both types are doing what’s right for them. The issue becomes how to serve the needs and goals of both groups. When a company effectively articulates its strategy, it tends to attract the right type of investors who are buying in for the right reason. This will avoid enticing the wrong investors who turn hostile because they want something that the company won’t deliver.

When interviewing and before hiring employees, it is imperative that candidates know where the company wants to go and how it plans to get there. Many times, this means telling the prospective newbie that the short-term compensation and benefits may not be as good as the competitors’ down the street, but in the longer term, the company anticipates being able to significantly enhance employee packages, with the objective of eventually outmatching the best payers because of the investments in equipment being made today.

The key to satisfying employees (present and prospective), investors, et al, is communicating the types of decisions a company will make over a specific period of time. Communication from the get-go is integral to the rules of engagement and can alleviate huge problems that can otherwise lead to dissatisfaction.

Knowing what is right for your company, based on your stated plan that has been well-communicated, will help ensure that you do the right thing, at the right time, for the right reasons.

Michael Feuer co-founded OfficeMax in 1988, starting with one store and $20,000 of his own money. During a 16-year span, Feuer, as CEO, grew the company to almost 1,000 stores worldwide with annual sales of approximately $5 billion before selling this retail giant for almost $1.5 billion in December 2003. In 2010, Feuer launched another retail concept, Max-Wellness, a first of its kind chain featuring more than 7,000 products for head-to-toe care. Feuer serves on a number of corporate and philanthropic boards and is a frequent speaker on business, marketing and building entrepreneurial enterprises. Reach him with comments at [email protected]

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How investors should approach today’s volatile markets

John Micklitsch, Director of Wealth Management, Ancora Advisors LLC

Volatility in the marketplace can have a significant impact on investors’ accounts and psychology.

But while many people think of volatility as a negative, there is an upside, says John Micklitsch, CFA, director of wealth management at Ancora Advisors LLC.

“For those who are still accumulating and investing in the market on a regular basis, volatility to the downside can create buying opportunities and the ability to buy shares on weakness,” says Micklitsch. “However, if you’re at a point in your life where you’re done adding to your account, volatility can be very frustrating and emotionally challenging.”

Smart Business spoke with Micklitsch about why the markets are so volatile right now and how to approach the market in this environment.

What is volatility?

Like everything there is a technical and a practical definition of volatility. To most people, however, volatility is a change in the value of their investment accounts from one measurable period to the next. Generally speaking, volatility is associated with risk.

Why are today’s markets so volatile?

It goes back to the globalization of the world economy. It used to be that what happened in a small country such as Greece, stayed in Greece. But today, everything is linked. Financial institutions hold sovereign bonds to facilitate worldwide trade and then hedge positions with other global financial institutions and incur counterparty risk. Corporations generate earnings from all over the world and now investors can trade in just about any market with the click of a mouse or tap of a smartphone. It’s all linked and it is in our face all the time with the 24 hour news cycle. For a long time, globalization has been a good thing, but lately it seems we are only as strong as the weakest link. Add in the uneasiness associated with huge, unresolved global debt levels and you can begin to see why markets have been so volatile.

Is volatility the new normal for investors?

Volatility in many ways, is the norm for now. We are in a period of relatively low returns in both the equity and fixed income markets due to sluggish economies. Buy and hold investors are frustrated. As a result there is tremendous pressure on managers to generate returns for clients with many now resorting to trading in an attempt to generate returns. There are inverse and leveraged vehicles that allow investors to turn risk ‘on’ and ‘off’ in their portfolio throughout virtually every minute of the day. Until we get sustained improvement in the economy this in and out activity is going to be the norm. The IRS and brokers will be happy, but it is less clear how investors will fair.

How should investors approach a volatile market?

The best way to approach today’s volatility, like anything, is to have a plan. Every investor should know how much of their portfolio they want to have in a given asset class and the potential volatility of their overall asset allocation. Then, when volatility soars they can dial into that plan to see just how much their actual allocations have deviated from their target percentages and whether reallocating or rebalancing is necessary. By having that plan in place, a touchstone if you will, investors are more likely to stay the course, as opposed to falling into that ‘just sell everything’ mentality. We think it is best to work with a financial professional to create long-term targets that are appropriate for your risk tolerance and your stage in life because they have the tools to help you model risk.

How often should that plan be reviewed?

The plan should be a living, breathing reflection of your goals and objectives at any particular moment in time. You should work closely with your advisers to update them on your changing risk profile and needs. If your risk profile changes and it is not reflected in your investment allocation, your portfolio might be more volatile than is appropriate. That could lead to making poor decisions at a market cycle bottom or in a period of particularly high volatility. Taking a few minutes to regularly review your plan can reassure you just enough to avoid making a 100 percent move to the sidelines, because then the challenge becomes deciding when to get back in, an error that could compound the situation.

What advice would you give to investors in this market?

There is a tendency for people to find safety and security in a stock market characterized by high prices. Although it is counterintuitive, the lower the stock market goes the safer it becomes from a margin of safety standpoint.

To reverse that basic decision-making apparatus and embrace lower prices is really the key to long term investing success. The only time volatility is not something to take advantage of is when you are done accumulating shares. At that point in life, you should probably have a more conservatively positioned portfolio that is not as highly impacted by market swings. All of this can seem overwhelming, which is why it is important to work with a professional adviser who can help you plan for and manage volatility in your portfolio.

John Micklitsch, CFA, is the director of wealth management, as well as an Investment Advisor representative, of Ancora Advisors LLC, an SEC Registered Investment Advisor. Reach him at (216) 593-5074 or [email protected]

Insights Wealth Management & Investments is brought to you by Ancora

Schapiro: SEC probes JPMorgan risk model disclosure

WASHINGTON, Tue Jun 19, 2012 – Securities regulators are investigating whether JPMorgan Chase & Co. misled investors in its April earnings statement by failing to disclose a change in how it measured risk, Securities and Exchange Commission Chairman Mary Schapiro said on Tuesday.

“Part of what we are investigating is the extent of that disclosure and whether it was adequate, among other things,” Schapiro told lawmakers during a House Financial Services hearing.

Schapiro’s comments were the first time she said explicitly that the SEC is focusing on what the bank disclosed and what Chief Executive Jamie Dimon said on April 13 after news reports about rising risk at the bank’s Chief Investment Office, which turned out to have lost at least $2 billion trading credit derivatives.

By omitting any mention of model change from its earnings release in April, the bank disguised a spike in the riskiness of a particular trading portfolio by cutting in half its value-at-risk number.

Tuesday was the second time that U.S. financial regulators, as well as Dimon, have appeared before lawmakers to answer questions about the failed hedging strategy.

Schapiro said on Tuesday that although companies are not required to disclose such a model changes in their earnings releases, other SEC rules still require such statements to be truthful and complete.

The agency is looking at the disclosure in light of the fact that it came at the same time that Dimon called reports about heightened risk at the CIO office a “tempest in a teapot,” Schapiro said.

SEC says Miami hedge fund Quantek misled investors

NEW YORK, Tue May 29, 2012 – Securities regulators accused two hedge fund managers in Miami of lying to investors about whether they had put any of their own money into a fund they were managing, according to court papers filed on Tuesday.

The Securities and Exchange Commission announced a settlement with Javier Guerra and Ralph Patino, two managers of Quantek Asset Management. The SEC said Guerra and Patino assured institutional investors that they had “skin in the game” and had put their own money into the fund. But regulators said that was not the case.

The SEC also said Quantek misled investors about loans it made to entities related to Guerra, who was the lead principal of Quantek until he resigned last October.

Guerra and Patino settled without admitting or denying wrongdoing and agreed to pay a total of $3.1 million in disgorgement and penalties.

Both men have been barred from associating with or working for registered financial firms, Guerra for five years and Patino, who was the director of operations at Quantek, for one year.

“We’re pleased to put the matter behind us and to have resolved the matter,” said Patino’s lawyer, Stanley Wakshlag, an attorney at Kenny Nachwalter in Miami.

Zynga shareholders to sell 43 million shares

SAN FRANCISCO, Fri Mar 23, 2012 – Zynga Inc. shareholders will sell Class A shares worth about $591 million, with founder and CEO Mark Pincus alone set to reap about $227 million based on Thursday’s closing price.

Shareholders will sell a total of 43 million shares in the online game maker, including 16.5 million from Pincus, the company said in a regulatory filing on Friday.

Private equity firms Kleiner Perkins Caufield & Byers and Union Square Ventures are among the selling stockholders.

Zynga waived a lock-up arrangement to facilitate the offering. Investors are typically expected to wait about six months after an initial public offering to sell their shares.

Pincus will have 35.9 percent of the voting shares after the sale, down from 36.5 percent now.

Zynga has three classes of stock. Class A shares carry one vote each, Class B seven votes and Class C 70 votes.

Zynga which is trying to minimize its dependence on Facebook, announced its biggest-ever acquisition on Wednesday, buying OMGPOP, maker of the popular game “Draw Something.

The company said it paid $180 million for OMGPOP.

Morgan Stanley and Goldman Sachs are the lead underwriters for the offering.

Zynga shares, which have risen 33 percent since the company went public in December, closed at $13.76 on Thursday.

WebMD scraps sale talks, warns of weak 2012 as drug makers pull back

NEW YORK ― Popular health information website WebMD Health Corp. took itself off the auction block and warned investors of lower 2012 profits as its advertisers in the drug industry pull back on spending.

Shares of WebMD, in which activist investor Carl Icahn owns a nearly 10 percent stake, tumbled 29 percent on the news.

WebMD, which had a market value of just over $2 billion as of Monday, also said on Tuesday that its chief executive, Wayne Gattinella, had resigned. Anthony Vuolo, currently chief financial officer and chief operating officer, will serve as interim CEO.

WebMD is one of the best-known websites for consumers seeking health information on everything from allergies to cancer to better eating habits.

The company relies on advertising from drugmakers, who are now trying to curb expenses as they face generic competition to many of their top-selling medicines. WebMD said large advertisers are also facing more competition on their portfolios of consumer products.

“They were growing 20 percent. Now they’re going through a rough patch where revenue is actually declining,” Cowen & Co analyst Kevin Kopelman said. “This isn’t a going concern problem. This is a very strong company with an incredible brand in the U.S. and a huge user base, and they’re generating a lot of money.”

To some extent, WebMD’s status as a premium online brand, and the high advertising rates that it can charge, are forcing more cost-conscious advertisers to look twice at their spending on the site, he said.

A more difficult regulatory environment has also made it tougher for drugmakers to launch new ad programs, Kopelman said, compounding the problems for WebMD.

While a number of new medicines have received U.S. Food and Drug Administration approval for sale in the United States, WebMD said it does not expect advertising behind those drugs to pick up significantly this year.

WebMD is also grappling with competition from myriad other websites that offer health tips and information on illnesses.

WebMD Chairman Martin Wygod said he expects drugmakers, who have been among the biggest advertisers on more expensive media like television, will eventually recognize the value of using outlets online.

“I believe that the pressures facing the pharmaceutical industry will ultimately prove to be the strong catalyst for a meaningful shift by them to digital marketing solutions,” Wygod, who holds a nearly 2 percent stake, said in a statement. “WebMD offers a cost-effective, efficient and highly measurable alternative to traditional detailing to physicians and mass media to consumers.”

For 2012, the company expects revenue to fall between 2 percent and 8 percent, and it expects increased competition in its consumer products market.

S&P downgrade proves absurd as investors prefer assets in U.S.

NEW YORK ― Four months after Standard & Poor’s stripped the U.S. of its AAA credit rating and said the world’s biggest economy was no longer the safest of borrowers, dollar-denominated financial assets are doing nothing but appreciating.

Government bonds have returned 4.4 percent, the dollar has gained 7.6 percent relative to a basket of currencies, and the S&P 500 Index of stocks has rallied 1.7 percent since the U.S. was cut to AA+ from AAA on Aug. 5. The cost for the nation to borrow has fallen to record lows since S&P said the U.S. was no longer risk-free, with the average monthly yield in November on 10-year notes below 2 percent for the first time since 1950.xxDemand for American assets is increasing as consumer confidence, manufacturing and employment show the U.S. is strengthening as Europe struggles to save its currency union and the developed world weakens. U.S. gross domestic product will expand 2.19 percent next year, compared with 1.55 percent for the Group of 10 nations, Bloomberg surveys of economists show.

“The U.S. is our favorite market,” Hiromasa Nakamura, a bond investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of about $42 billion, said in a telephone interview. “The level of debt is high but I think they will deal with it,” he said. “Financial dislocations are continuing and investor money is flowing to the reserve currency, the U.S. dollar.”

When it lowered the U.S. rating, S&P, the world’s largest provider of credit analysis, said the failure up to then of Democrats and Republicans to agree on budget cuts made the U.S. less creditworthy, downplaying the country’s ability — unlike individual European nations — to print as much money as it needs to pay its debts. Congress cleared a $1 trillion spending bill on Dec. 17 that lawmakers called a bipartisan compromise.

“It is the ability to print one’s own currency to pay government bond investors back under any circumstances that makes a government bond a government bond, i.e. a (credit) risk- free asset for hold-to-maturity investors,” Elga Bartsch, the chief European economist at Morgan Stanley in London, said in a report this month to clients.

Investors have looked past S&P’s warning even as government borrowing surpasses $15 trillion for the first time and the budget deficit exceeds $1 trillion for a third year.

California’s prison needs to attract investors; idea needs traction

SAN FRANCISCO ― The Golden State may be ushering in a golden era for investing in jails.

California’s prisons “realignment” begins this month with counties taking charge of low-level felons to help unclog state prisons, which are under court order to ease overcrowding.

Thinning the most populous U.S. state’s prison population involves setting free 30,000 inmates. That will require county sheriffs and probation officers to manage many who run afoul of the law, along with nonviolent offenders.

But California’s cash-strapped government has not cemented funds for its realignment program for the long haul. It has state money only through this fiscal year, raising the prospect of an unfunded mandate that worsens crowding in local jails.

“We’re estimating about 1,200 individuals will be released to San Diego County in the first year,” said Don Steuer, chief financial officer for San Diego County. “By the end of the second-year implementation, we’re looking at between 2,000 and 4,000.”

But as for permanent funds, “We don’t see it right now,” Steuer said. “It just adds to the uncertainty.”

Money for adding space for more felons locally will be critical for public safety, said Assemblyman Anthony Portantino: “It’s going to lead to the early release of inmates without any infrastructure to deal with it.”

Counties do have some funds available for adding correctional facilities, but not much, said Nick Warner of the Sacramento, California advocacy firm Warner & Pank Llc.

“There is $650 million in unused bond authority that will be available to counties,” said Warner, who represents the California sheriffs’ association. “But it’s probably only going to cover a sliver of the statewide need.”

That opens the door to counties selling additional bonds on their own, said Michael Harling of Dallas-based investment bank Municipal Capital Markets Group Inc, which has done about 60 financing deals over the last decade for correctional projects.

Selling bonds to build out jails and treatment centers may, however, be easier said than done because local voters may balk at taking on debt to boost spending on felons.

“Financing for schools or parks is more emotionally appealing,” said Steven Frates of the Davenport Institute at Pepperdine University’s School of Public Policy.

Buddy Johns of CGL Capital Solutions Llc aims to put into play a third option: Bypass the bond market and let investors build jails that counties can lease and eventually take over.

“We’re trying to simplify it for speed purposes,” said Johns, president of the Scottsdale, Arizona-based sister company to corrections facilities planner Carter Goble Lee.

Johns’s idea may raise eyebrows in California, where so-called public-private partnerships allowing investors to build public infrastructure have not gained much traction.

However, local governments’ financial woes may prompt a new look at the tie-ups, which Johns aims to promote with a team of architecture, engineering, construction, law and consulting firms.

Their effort will not include proposals for private management of correctional facilities, which would guarantee a bitter political fight with unionized guards.

“We’re not suggesting that the private sector take over any management services,” Johns said. “I want to stay out of politics. All I want to do is a good financing model for what they need.”

Johns has lined up investors, who expect returns on leases slightly higher than returns on county general obligation debt. The group also aims to impress counties with offers to maintain facilities it builds and to take on their project risks.

“If we think it’s going to be an $80 million jail and it turns out to be a $95 million project, that’s our problem,” Johns said.

Investors should approach Pandora IPO cautiously

NEW YORK – Investors eager to rush in on Pandora Media Inc.’s Wednesday stock listing may want to take a moment to figure out how the Internet radio service will make money in the years ahead.

Pandora shares will start trading in the wake of a spate of initial public offerings for Internet companies that have seen soaring valuations.

Oakland, Calif.-based Pandora priced its IPO late Tuesday at $16 a share, above its recently raised range of $10 to $12 a share, giving it a $2.6 billion valuation.

But at least one set of Wall Street analysts are skeptical if the largely advertising-supported Internet radio service can bring in the dollars to justify its price tag.

“It’s not that we think Pandora won’t be profitable; we don’t think that profits will be enough to justify the valuation,” said Richard Greenfield, an analyst at BTIG Equity Research.

Greenfield added that the IPO would be “more compelling” at a range between $4 and $5 a share.

The fear is that as more users start listening to Pandora on mobile devices rather than on traditional computers, the shift from online ads to less lucrative mobile audio ads might eat into advertising revenue. The problem is likely to grow as the number of listeners turning in on mobile devices increases.

The proportion of hours of Pandora music streaming to mobile devices rose to 60 percent last quarter from 4.6 percent in 2009, according to a Pandora filing.

The company said its advertising revenue last year was $119 million, 87 percent of total revenue. The rest came from subscribers who pay a premium for ad-free listening and other perks.

Pandora’s filing disclosed that “we have not been able to generate revenue from our advertising products delivered to mobile devices as effectively as we have for our advertising products served on traditional computers.”

Pandora’s filing noted that audio and video advertising products better suited for mobile devices have not been as widely accepted by advertisers as traditional display ads.

Also a worry: royalty costs are set to rise in the next four years as its number of listeners grow.

One advertising executive acknowledged the drawbacks of mobile advertising.

“Online, Pandora can build a bigger brand experience by, for instance, featuring a banner message that takes over the entire screen,” said Sal Candela, director of mobile strategy for media agency PHD. “There isn’t the opportunity to do that on a Smartphone screen because of limited real estate.”

Candela, who has developed ad campaigns for clients on Pandora, said that mobile ads have their benefits, though — for example they can be tailored to consumers’ locations at a given moment.

But advertisers have only started to embrace mobile platforms as in the past year, said Candela. He added that mobile ad campaigns are harder to implement because the mobile market is cluttered with different devices.