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ISIS, Russia, San Bernardino, and M&A

Jan 7, 2016

ISIS, Russia, San Bernardino, and M&A

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Earlier this week, to start the New Year, I was privileged to attend a breakfast discussion led by Bo Cutter, Senior Fellow of the Roosevelt Institute; formerly a member of President Clinton’s National Economic Council, President Carter’s Executive Director for Budget, and Chief Economist at Warburg Pincus. Cutter asked another guest to speak, Frank Wisner. Among other things, Mr. Wisner was the U.S. Ambassador to Egypt, Philippines and India; a former Undersecretary of State; and a former Undersecretary of Defense. He served in the administrations of Presidents Reagan, Carter, George HW Bush, and Clinton. In 2011, President Obama asked Wisner to help with Egypt. These two know a bit about the world. And there were a number of other interesting knowledgeable people in the room who contributed to the discussion, including John Lipsky who served as First Deputy Managing Director of the International Monetary Fund.

The advertised topic of conversation was the Middle East Crisis – and there were interesting insights on the factions and conflicting motivations within Saudi Arabia, Syria, Iran, Iraq, Turkey, Afghanistan, Egypt, Libya, Pakistan, Yemen, etc.; the limitations and role for Russia in the Middle East; implications for the global price of oil; the ongoing Israeli-Palestinian situation; and the motivations, capabilities, limits, and religious underpinnings of ISIS – or “Daesh”, as it is increasingly referred to. It was, overall, interesting, enlightening, and provided a much more optimistic view of the present and the future than I expected. There seemed to be real conviction that that the U.S. and other western countries are doing much more to stabilize the region than they are getting credit for; that a fair number of refugees are being successfully assimilated into western countries; and that the effect of radicals in Europe and the U.S. is less consequential than we see on TV and can be managed. There was some praise for the diplomats of many nations who helped forge a consensus on dealing with Iran’s nuclear capabilities and others who may yet forge a consensus on the future of Assad and Syria. At the same time, it was noted that nearly half of the population of Syria is no longer living where they once did (and half of them are out of Syria, most stranded with no clear next place to go). It was noted that virtually all other priorities fade in importance without rule of law, without stability, without parents having confidence in the safety and security of their kids, and without people having a way to feed their families. Without peace and stability we too would become refugees.

At the breakfast, someone noted that this is one situation that can no longer be contained geographically. Pandora’s Box has been opened. Many of the countries in the region will not be reverting to anything like the status quo ante – ever; most of the refugees are never going back. We need to deal with it.

It didn’t take long for the conversation to move beyond the Middle East to the broader potential impact of Middle East instability on Europe and the U.S. It was about more than refugees and oil prices. The message was clear – we live in an interconnected world and what is happening in Iraq, Afghanistan, Syria, Libya, Pakistan, Tunisia, et al is directly related to what happened in Paris and San Bernardino. We need to acknowledge and deal with that too.

So – you may ask – what does any of this have to do with investment banking and our business of helping people in the U.S., Europe and Asia buy or sell information technology companies? More than you may think…

We’re not concerned with political instability in the West at anything like the level of the Middle East. Compared to that part of the world even our most radical politicians seem totally sane. Nor are we worried about an end to rule of law in the West. We’re safe. In spite of Paris, San Bernardino, and other attacks by radicals (including those by Nigeria’s Boko Haram) confidence in the West’s ability to manage – and thrive – remains high. Oil prices are not only low but, in the judgment of some, likely to remain low for some time. The same is true with inflation and interest rates. For all the publicity, far fewer people in the world have come to harm from terrorists than have been harmed by petty thieves; and very few from refugees. Many businesses in the West continue to see record profits.

But acquiring a company (or investing in one) also requires that the decision makers be willing to take risks. They must be ready to trade the certainty of cash, equity or debt capacity for the uncertain promise of what they hope to reap tomorrow. The more confident they are in their own future as well as that of the target, the more willing they are to take that risk. Sellers of course de risk. They give up the potential of future gains for the certainty of payment now. The more uncertain they are about the future the more willing they are to sell – but the more uncertainty there is in that future – the less willing investors and acquirers are to make the trade.

The group at breakfast didn’t seem too worried about a rise in uncertainty in the West driven by the crises in the Middle East. Daesh’s real capabilities to reach out to us are real, but more limited than the breathless press sometimes would have us fear. The group seemed confident that much more is going on behind the scenes than we may understand and that eventually a greater level of stability will return to the region. It will not be quick, but they seemed confident that diplomacy is making real progress in the region. I can only hope that they are right – for all of our sakes. Global m&a in the West was at an all-time high last year and that’s a good sign – along with rising employment rates, increasing wages and improved healthcare outcomes. Our m&a pipeline continues to be strong. We see no near-term clouds on the horizon. The discussion earlier this week just reminded me that we are all interconnected and that the best way for us to have a happy new year, this year and next, is for our global neighbors to have one too.

Best wishes to all of you for a happy, healthy, peaceful and prosperous New Year.


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