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Four Reasons Jan/San Distributors Can Expect Depreciating Market Values

By George Spilka
No business owner wants to hear it, but the United States is likely to be faced with a catastrophic economic and financial scenario sometime during the second half of the decade. The economic conditions this collapse creates are likely to remain for an extended period of time, much longer than from the Great Recession.

The next three years have an optimistic outlook and represent the best time to sell your company (as stated in a previous article). However, after 2014, the forecasted collapse and its resulting poor economic conditions will have a significant, damaging impact on the market value of U.S. companies.

When it happens, it will start suddenly and unexpectedly, just like in 2008. The public will express shock and amazement as they did then.

Negative events always occur unexpectedly because it is not in the major financial firm’s self-interest to forecast catastrophic economic or financial market conditions; it would severely impact their business. And, as we all know, the major financial firms think first and foremost of their self-interest.

Unfortunately, the disaster's impact will probably exceed any business collapse since the Great Depression.

Here are four reasons why jan/san distributors can expect a poor outlook on the value of their companies:

1. European Market. Although the European economy and financial mess has not been in the news as much during the past few weeks, the problem is far from receding. The European Union (EU) is basically dysfunctional in this situation due to its structure. There are too many countries that have to make decisions that then must be sold to their own disparate domestic constituencies. This negates the dramatic action necessary to begin extracting many of these countries, such as, Greece, Spain and Portugal from their disastrous situations.

It appears the EU is trying to defer the problem basically hoping it will go away or they will discover a painless solution to it. However, that is not going to happen. The European banks are also in a very weakened condition. This will impact the world economy, as these banks have financial relationships with the world’s major financial institutions.

2. U.S. Economy. The combination of problems the United States faces, including its huge budget deficit, the economic stimulus still required to get the economy back in a self-sustaining mode, the disparity of income between the “haves” and “have-nots” and the gridlock between the warring political parties, creates a situation that becomes an almost intractable problem.

The United States must find a way to bring its deficit under control over the next three years without doing anything precipitous that would push the economy back into a recession. This will be very difficult with our currently gridlocked dysfunctional political system. If these problems are not solved promptly, the country’s economy and financial markets will be in very precarious shape.

3. Emerging Markets. The emerging markets have driven the world’s economy for more than a decade. However, current problems and others on the horizon will diminish the positive impact of the emerging markets on the global economy.

The growth in China has slowed. In addition, the four major banks are all state-owned. They have been propping-up many failing state-owned companies. In turn, these banks have been supported by the national government.

Correspondingly, the Chinese financial system is not as healthy as it appears to be. The slowdown in China’s growth will have a substantial negative effect on all countries, but especially the resource-exporting ones. Brazil will be one of the most affected, as China is its major trading partner. This coupled with Brazil’s uncompetitive and dying industrial sector could cause a major slowdown in Brazil. India is now facing its highest unemployment rate since 1983, its lowest growth rate in two years and an ineffective and corrupt government incapable of solving the country’s fundamental problems.

Overall, the emerging markets are not going to be the world’s growth engine they used to be. This could have a major impact on the developed world’s economies.

4. Geopolitical Hot Spots. There are numerous geopolitical hot spots. The major ones are in the Middle East, including Iran with its threat of nuclear weapons. This is exacerbated by the potential of an armed conflict between Israel and Iran. There is also the nuclear threat in North Korea that now has a 27 year old, possibly unstable leader leading its charge for nuclear weapons.

As you look at the many significant negative things facing the world, it is very unlikely that enough of these problems can be avoided to avert a dramatic, negative impact on the acquisition and financial markets.

George Spilka is president of George Spilka and Associates, a national investment banking firm, which he founded in 1978 that advises middle market clients through the entire acquisition process, and also in preparing a company for sale.  Their client base has included a diverse group of distribution, manufacturing and service companies.  You can contact him by email at spilka@georgespilka.com or by calling 412-486-8189. Please go to www.georgespilka.com to learn more about the firm.

posted on: 6/11/2012







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