Is the Blog Replacing the Tombstone?
(Why Would Investment Bankers Embrace Social Media During a Downturn?)
By Brad Fleisher, Managing Director, Focus Enterprises
The recession has hit nearly all industries across the economy and investment banking, leading the pack, has certainly not escaped the grief. What used to be the largest and most profitable group of investment banks on Wall Street, commonly referred to as the bulge bracket, is now the busted bracket, consisting of just two bank holding companies - Goldman Sachs and Morgan Stanley.
Although the consensus among mainstream economists is that we’re in the trough and will see positive growth in Q1-2009, albeit probably mild, M&A (a lagging indicator) is still weak because of ongoing discrepancies in middle market valuations Buyers are fishing for distressed deals, and sellers still have the misconception that an offer should start at 8x EBITDA (and be increased for average performance) rather than 5x, which is the long-term, broad economy historical average.
Taking a page from Rahm Emanuel’s book, and not wanting to waste a good crisis, a few partners and I took advantage of the slow down to re-think and execute a new business strategy. We’re seeking to capitalize on three long term trends in the economy.
Social Media Marketing v. Traditional Media Marketing. While there is still no more effective way to reach 90 million potential customers in 30 seconds than through a Super Bowl advertisement, there is no better way to communicate an esoteric point on intellectual property valuation to 140 professionals who are seeking this information than through LinkedIn, Facebook or Twitter. You don’t have to “tweet” every hour to take advantage of social networks. And the trend has just begun. Social networks are becoming platforms to distribute customized services to highly fragmented communities rather than just a vehicle for information exchange.
Applying these trends to investment banking, the hypothesis for our practice group at Focus is that we can build our brand and grow our business quicker by leveraging the Internet and social media than through placing traditional tombstone advertisements in industry magazines and attending industry and networking meetings.
That’s why, earlier this year we launched Intangible Insights (www.intangibleinsights.com), which is our online Community of Practice where we blog, podcast, conduct surveys, publish research, and otherwise communicate with and expand our target market. We’re even discussing strategies for streaming video to micro-niche audiences through a branded Internet TV channel, which may be a number of years out, but is certainly on its way.
Intangible v. Tangible Assets. There currently is an enthusiastic debate within the Intangible Asset professional community whether intangible assets compose “upwards of 80% of listed companies’ values” (according to a Brookings Institute report), or just under 50%. For us, the point is this: Intangible property accounts for a significant amount of a company’s valuation.
This is a long term trend, if not a permanent change,that will accelerate in the post-recession economy as developing countries use labor advantages and decreasing communication costs to offshore commoditized tasks, both manufacturing and informational. In order to compete, the U.S. will have to enhance its intangible asset capabilities through R&D, workforce productivity, distribution networks, and stretch its tangible resources, which will further diminish the reliance and value of hard assets
Intangible assets compose the largest share of value, by far, in Internet-reliant companies. Of course, there is significant value in the intellectual property assets of the knowledge economy company — the patents, copyrights trademarks, and trade secrets — but the real value resides at the next layer, in the methodologies that convert the intangible assets into revenue — culturally-ingrained process to attract and retain talent, strategic measurement and execution processes, brands, databases, social networks. Our group is working on a valuation rating system for these intangible assets so our clients can better understand the intrinsic value of their company and their acquisition targets. Just identifying and analyzing these assets, not to mention exploiting them, will help our clients with post-transaction integration plans or accelerated growth, which is the arbiter of a successful corporate transaction.
Generalist vs. Specialist. Since its inception in 1982, FOCUS Bankers has been a middle market, generalist investment bank and has long debated the generalist v. specialist strategy. There are benefits and drawbacks to each, but it’s difficult to toe the middle line. During my five year tenure at the firm, I’ve worked on deals in industries ranging from highly-engineered manufactured products, transportation and logistics, and electronic parts distribution to the information industries, including software, Internet, IT, and digital media, which is where most of my career experience has been.
The recession gave us the opportunity to transition into one carefully defined market: the Internet-Reliant Industry with a focus on intangible assets, and start a practice group within the firm. The key was to define the space large enough to have an active and growing marketplace, but small enough to have end-to-end domain expertise. That it’s highly dynamic, indispensable to information industries, full of cutting-edge growth opportunities, and just a lot of fun, doesn’t hurt our commitment.
The silver lining in this recession for us is that we took the opportunity for introspection and execution. Our strategy is fluid, but our practice group has staked its future on these trends, which we believe will shape future markets and US competitiveness.
About Brad Fleisher
Brad Fleisher is a Managing Director at FOCUS Investment Banking in Washington, DC and publisher of Intangible Insights. Brad is an experienced investment banker, entrepreneur and attorney with over 15 years M&A, corporate finance, and business development and advisory experience in the Internet, software & information technology, media, and education industries. Contact Brad at Brad.Fleisher@focusbankers.com.