The Midwest: A New Technological Frontier

As reported in TechCrunch, the Midwest is no longer just a flyover space for high tech proprietors and investors flying between Silicon Valley and New York city. The Midwest has become a bastion for high tech startups in addition to the regions more traditional manufacturing entrepreneurship. Mark Kvamme, a co-founder of the Midwest’s largest — and most recent — venture investment firm, Drive Capital, recently said that, “In the last five years there have been 52 companies [from the Midwest] that have either gone public or been acquired for north of $1 billion." Recently, Sprint invited a group of 10 mobile-health related startups to its accelerator program based in Kansas City. Earlier in March, the Digital Sandbox KC released information stating that it had raised $7 million in follow-on funding for graduates of its accelerator program. Regardless of previous geographical prejudices, the Midwest is now a must visit for tech investors looking for the next big thing. Kansas City continues to lead by example through amazing entrepreneurship programs like Google's Fiberhood and the Kauffmann Foundation's numerous initiatives. Read the entire story from TechCrunch here.

E-commerce Competition Intensifies: Megadeal between Google and eBay on the Horizon?

As reported by the San Jose Mercury News, Carl Icahn is at it again. One of the world's most active investors, Icahn is pressuring eBay to spin off its PayPal segment in a move that is intended to unlock value for current eBay shareholders. However, one analyst from Baird Equity Research seems to have a different idea, which he revealed in an investment note released on Monday. Baird analyst Colin Sebastian recently wrote that a merger could be "a possible 'best of both worlds' opportunity" that would accomplish Icahn's goals while allowing Google to shore up a struggling division. He continued to explain that, "we believe acquiring eBay/PayPal would be one way for Google to secure quickly a strong leadership position in commerce and payments, and likewise, could represent a better strategic option than alternatives proposed for eBay," The deal would certainly create a giant in the e-commerce space, with eBay potentially adding $75 billion to Google's already mammoth $400+ billion capitalization. Read the entire article here.

CCCA Economic Dashboard: March 14th, 2014

Below is the CCCA economic dashboard as of March 14th, 2014. Click here to view a larger image.

Larger Players Squeeze Mid Market PE Firms

As reported in the Wall Street Journal, it is a difficult time to be a mid-market private-equity firm. Larger competitors, a seller's market and high valuations are combining to create a difficult atmosphere for smaller firms. “We have been getting blown out of the water on bids. Everything is going to auction, that wasn’t the case 10, even five years ago.” said Stratton Heath, partner at Oak Hill Capital Partners, this past Friday. Traditionally, PE firms could come in and make a bid that was persuasive enough for a company to not need to consider an auction process, but sellers are becoming more and more selective.  This also could lead to buyer's remorse; if you're paying top dollar to win a bidding war for a middle market firm, you'd better be right. Read the entire article here.

Middle Market M&A: Ready to Increase?

Fox business reports that mid-sized businesses are poised to grow this year according to data compiled by the National Center for the Middle Market.  The middle market M&A conditions index climbed to 57.9. Any reading over 50 indicates an expansion in M&A business. As reported in CCCA's February Middle Market M&A Report, deal makers reported a spike in early stage deal flow, which also bodes well for mid-market M&A activity. Read the entire article here.

Buffett Hints at More Mega Deals, Admits Failures

Warren Buffett's annual letters to Berkshire shareholders are somewhat legendary in the investing world. He leverages quaint anecdotes to simplify an amazing wealth of knowledge about fundamental investing in a way that is easy to consume for the average investor. This year, Buffett covered a variety of topics, but two key points included hinting at additional mega deals and admitting a misstep in the energy sector. As reported in DealBook and stated by Buffett in the letter, in order to keep growing at a consistent pace, Berkshire will need to consistently make large, successful investments. Last year, Berkshire did just that with Heinz and NV Energy. Buffett said in the letter that, “with the Heinz purchase... we created a partnership template that may be used by Berkshire in future acquisitions of size.” This most likely referred to a structure where Mr. Buffett partnered on the massive acquisition with 3G Capital, an investment firm led by Mr. Buffett’s good friend Jorge Paulo Lemann.  Additionally, Berkshire’s energy subsidiary, MidAmerican Energy, bought NV Energy for $5.6 billion last year and most expect acquisitions for MidAmerican to continue. A strong stock market and improving earnings combined to help Berkshire reach record profits of $19.5 billion in 2013, which represents a 32% increase on 2012.  However, all was not rosy for the Omaha Oracle, as he admitted in the letter that Berkshire had taken an $873 million loss on the $2 billion in debt that had been provided to Texas energy company Energy Future Holdings. Mr. Buffett said in the letter that he anticipated the company would go bankrupt this year unless natural gas prices rose contrary to energy market expectations.  In typical Buffett fashion, he acknowledged that he had not consulted his longtime investment partner, Charles T. Munger, before taking on the debt and said in the letter, “Next time I’ll call Charlie." Read the Annual Letter to Berkshire Hathaway shareholders here.

Sequoia Funds Mobile Marketing Automation App Kahuna

After hitting it big with WhatsApp, Sequoia announced $11 million in Series A funding for Kahuna, a startup that helps marketers test and automate their push notifications. Kahuna is only a few months old, launching in the Fall of 2013. Its customers now include Yahoo!, QuizUp (another Sequoia portfolio investment), 1-800 Flowers and more. Deal makers will be keeping a close eye on Sequoia after they hit it big with WhatsApp. Do they have the perfect formula for choosing start up apps?  Probably not.  Although their team is undoubtedly talented, there are too many factors that go into the success or failure of young companies such as Kahuna to make batting 1.000 a reality. However, another Sequoia holding called QuizUp has taken the world of trivia by storm, creating an addictive, simple, 1-on-1 trivia game where people from across the world can battle wits via their mobile device in selected categories that vary from math to video games from the 90s.  It is an incredibly addictive game.. so maybe Sequoia is on to something. Click here to read the original article.

CCCA Economic Dashboard: February 21st, 2014

Below is the CCCA economic dashboard as of February 21st, 2014. Click here to view a larger image.

Blackrock: Political Polarization Creating Lack of Consumer Confidence

Pretty regularly here at the CC Capital Advisors blog, we ask the question: "Why have the markets failed to rebound as fundamentals improve, equity markets rally and an abundance of capital sits idle in a low income environment?" As we wrote previously, healthcare had a tough time in 2013 due to the Affordable Care Act casting a shadow of uncertainty over the market. Russ Koesterich, Chief Investment Strategist at Blackrock recently released a paper that postulates that political uncertainty extends beyond healthcare to tax code, regulatory issues and more. Russ explains that the budget deal has removed the risk of another government shutdown, but continued uncertainty about the ACA and partisan gridlock are making consumers and businesses alike uneasy. According to the figure below, party polarization is at its worst point in fifty years. This graph measures the difference in voting patterns between the Democrat and Republican members of Congress. As you can see, the gap is widening, not narrowing.   So, what does this mean for the wider deal market? First, the uncertainty of the political situation is most likely impacting more than just the health care industry. When a government is unable to govern properly, there is a resulting lack of confidence in that market. This is generally seen in emerging markets, where a sovereign government may make investment difficult or risky, but can also take place in developed countries. Secondly, it will be interesting to see just how good the fundamentals and market opportunities need to be to overcome this lack of faith in the political system. At some point, one would expect deal makers to take advantage of opportunities even if they lack faith in the broader political situation; this will only happen when the reward outweighs the associated risk. Finally, Russ concludes that if there are any sort of "surprises" of the positive sort from Washington, we could see pent up deal demand released into the market place. Of course, that would require a miracle in the form of Congress getting their act together. Read the entire report from Blackrock here.

Actavis to Acquire Forest Laboratories for $25 Billion

Today, Actavis announced that they have entered into a definitive agreement to acquire Forest Laboratories. Forest is based in New York, NY, but has Midwest operations in Earth City, MO. The purchase price of $25 billion represents a 25% premium over Forest's stock price. The merger is expected to generate double digit accretion in 2015 and 2016, with approximately $1 billion in synergies to be realized within the first three years. If successfully completed, the merger would combine a generic juggernaut in Actavis with a leading name brand producer in Forest. If the transaction closes, the combined entity would have projected revenues of more than $15 billion in 2015, with strong free cash flows in excess of $4 billion. As 2014 rolls on, several interesting deals are coming to light. The Actavis-Forest merger announcement comes on the heels of a potential business combination of Comcast and Time Warner, which is estimated at ~$45 billion in value. Hopefully, these large deals will spur the lower middle and middle markets to follow suit, although the glut of megadeals in 2013 did not seem to have that impact. Read the full press release from Actavis here.

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