What Does This All Mean to Me, Al Franken?

Some of us older folks remember the early days of the NBC comedy show Saturday Night Live. A very clever guy (now running as a Democrat for the US Senate), Al Franken, used to do a sketch talking about problems in the world and then saying, “But what really matters is what this means to me, Al Franken.” During the me-decade of the 1980s, this really rang true. Very funny stuff no matter what you think of his politics or the fact that he “secretly” helped SNL recently write a sketch lambasting Republican nominee John McCain.

Let’s replace Al Franken with smallcap, microcap and middle market deal worlds. What does all the financial turmoil in these last few weeks mean to us? And why listen to me about this stuff anyway? I am not an economist, finance whiz, politician (my partners might disagree), prognosticator, pundit or strategist. I’m just a guy doing deals in the trenches and out building my business relationships, my Wharton degree in tow.

Well, you’re here so I’ll give you my thoughts anyway. Here’s what I see. First, deals in our world, for now, seem to be getting done. Some are changing deal structures to be smaller deals, at lower valuations, with more investor-protective securities. The middle market and PIPE investment banks seem to be OK. They are finding money for deals. I am still getting calls on a regular basis from companies desiring to be public, and the deals are indeed moving forward. In our RM world, there also appears to still be a strong appetite for Chinese companies to go public here. The current challenges in the SPAC world pre-date these issues, and that is for another day to discuss.

In the end, both PIPEs and reverse mergers (and other IPO alternatives) tend to be fairly non-cyclical. During the worst of the early 2000s, when the IPO market was dead and the stock market in very negative territory, we were actively taking companies public through reverse mergers. That appears to be remaining true in this bear market. The reason is that current market conditions are not that important when pursuing a reverse merger or self-filing. You are thinking more 6, 12 or even 18 months down the road and hoping market conditions will be attractive at that time. Investors with that longer-term perspective are prepared to invest regardless of today’s market.

The middle market M&A world, of which I am also a part, is beginning to take its hit as well. The larger M&A deals went away about a year ago, and now the middle market is finding it harder to get deals done, but if they are, multiples and such are noticeably lower. The “strategic” buyers are still active and finding attractive valuations, whereas the “financial” buyers less so for now. Not great for M&A guys, but this also means some companies looking for an exit are more interested in going public through a reverse merger or other IPO alternative. And yes I am also getting those calls.

The New York Times wrote today about who wins in the proposed bailout and sudden increase in regulatory oversight of the financial world. Two key winners, they say: private equity and hedge funds. This is good news for our world, as these still largely unregulated pools of money will continue to be available for PIPE financings that drive many RM deals. Hedge funds now have to report when they short stocks, but most PIPE players are not actively doing that anymore, or if they are they are not concerned about reporting.

Thus, as the largest investment banks move to more conservative play by becoming banks, the middle and lower middle market investment banks may well have the opportunity to be involved in larger, exciting but somewhat risky transactions that the larger banks now must shun.

Despite what some say, this is not entirely unprecedented. Some even older than me say this is very similar to 1970. I do remember the market crash of 1987, when the market dropped 20% in two days (much worse than this rapid decline). I was a young lawyer and my officemate at the time, an active investor, came in calmly after the two-day drop and started buying stocks like crazy. Of course he was right as the market returned to its pre-crash levels within six months.

A former Treasury Secretary on the Today show the other day said, “Don’t unbuckle your seat belts yet.” And he is right. But as tough as things seem, (1) they may not be as bad for us, (2) some of the developments may actually help us, and (3) this too shall pass. There is one thing we know for sure. The stock market goes down, and then up. And investments in equities always outperform other traditional investments over any 10-year period. Your proof: I have not sold a single stock since this all started, except one that actually has been going up.

What I’m not sure about is what this all actually means to now Senate candidate Al Franken.

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