PhillyDeals: Investors and dealmakers say business will be slow for years

The Philadelphia Inquirer

By Joseph N. DiStefano

October 28, 2011

U.S. hiring, business, and investment will stay slow for years. That’s what people who ought to know – about 1,200 private-company investors and deal-makers who packed the Association for Corporate Growth’s yearly conclave – were telling one another at the Convention Center last week.

“The big internal debate in our firm is whether the malaise is going to go on for five to seven years, or seven to 10,” Mike Conaton, New York-based managing partner at private-equity firm Cyprium Partners, said. Either way, “a longtime.”

American investment funds have plenty of money, he added. “There’s a terrific overhang of capital,” Conaton said, so much that companies in some industries are selling for more than sales, growth, or profit numbers justify.

And financing is cheap, if your credit’s solid. The old Philly banks are gone, but lenders such as Susquehanna Bank, Tristate Capital Bank, Sovereign Bank, TD Bank, and M&T Bank Corp. “are very active” for business borrowers, said Graeme Frazier, president of Private Capital Research here.

For these capitalists, it’s not the supply of money that’s out of whack. It’s demand for what business sells.

Individual business owners don’t want to risk expanding, when nobody else is. “Folks are a lot more cautious these days than they were three or four years ago,” said Michael E. Jacoby, senior managing director at turnaround consultant Phoenix Management’s Philadelphia office.

The job cuts are mostly behind us, but hiring hasn’t recovered, Jacoby said: “It’s become much less a problem of cost reduction. Now, people are focusing on revenues. How do we grow these organizations? Where are we going to find new customers, new sales channels, new value to add? That’s the challenge.”

Nobody was praising President Obama’s banking or health-care laws. But I didn’t hear attendees blame the slump on them, either, or predict that all will be well next time a Republican wins the White House. I did hear calls for a simpler tax code and more liberal immigration laws for skilled foreign workers, so they build our economy, instead of going home to our rivals like India and China.

How do these guys (they’re mostly guys) cope with slow times? They are looking forward to waves of business sales and takeovers, as firms that can’t figure out how to grow themselves sell to investors who in turn hope to squeeze profits by mashing two operations together, closing a headquarters, cutting costs a little more, and waiting for recovery.

Some of the day’s official speakers, including Jeffrey Garten, ex-aide to President Bill Clinton and Yale University management professor, said there were still growth fields. Anything, he said, that helps “simplify products and get prices down.” Smartphone apps. Automation. Services for fast-growing cities in India, China, Latin America.

Any more advice for the kids who’ll be joining the labor force before happy days are here again?

“Learn Mandarin,” offered Conaton. “And Spanish.”

Realist?

I didn’t hear all the speakers on the official program. I didn’t have to, with veteran Philadelphia publicist Anne Buchanan messaging their words from the rooms where she attended.

Gen. Michael Hayden, President George W. Bush’s last Central Intelligence Agency director, warned that spies like him always make people depressed, because they’re realists – as opposed to the “policy guys,” who are optimists, and see the world as it ought to be, not as it is.

So, general, whom should we fear? Iran is on a “dark trajectory,” Hayden said. Mexico is “hot,” as in drug-mob gunfire. “Chinese Internet is much more secure than ours,” partly because China doesn’t have to contend with privacy puritans and their lawyers.

There is also less-bad news: Russia is a “declining power,” though their loss might not be our gain.

And unknowns: In the “war on terrorism,” the “deep fight” is to reduce “the production rate of those who want to do us harm.”

The one thing this Congress seems to agree on – cutting the military budget – means, to Hayden, that we’ll be less safe. Though nobody seems to have asked him for a cost-benefit analysis on whether the wars in Afghanistan and Iraq have been protecting us, or “producing” more terrorists.

Hayden compared the terrorism fight to a fatal game of soccer: “No matter how good our goalie is, the ball is eventually going to end up in our goal.”

To wash that down, a bit of manager-speak: “None of these are problems to be solved,” Hayden said. “They are conditions to be managed.” By government-funded security contractors, no doubt. One of the few growth sectors.

Ingenious

Ben Stein, the commentator and college lecturer, former speechwriter for President Richard Nixon and sometime Comcast pitchman, echoed Warren Buffett’s call for “ingenious managers” to help companies out of the slump.

Stein also sounded what may have been the most realistic note of all: “It’s hard to see how we’re going to get out of this. But increased taxes are, unfortunately, going to be part of the solution.”