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Crisis on Wall Street: Industry Gauges Impact On Retailing and M&A

It's ugly out there in financial markets — and that's likely to have an impact on everything from retailers' bottom lines to luxury goods initial...

It’s ugly out there in financial markets — and that’s likely to have an impact on everything from retailers’ bottom lines to luxury goods initial public offerings.

The meltdown at Bear Stearns was the latest wobble to hit the American and global economy, even as the Federal Reserve Board moved to facilitate a takeover of the troubled investment bank — which had several holdings in retail and apparel — by J.P. Morgan Chase.

While Asian stock markets opened sharply lower on Monday, Wall Street eventually shook off its panic to close slightly up. The Dow Jones Industrial Average closed up 0.2 percent at 11,972.25, after being down more than 200 points. The S&P Retail Index lost over 3 percent in afternoon activity before rallying slightly to close down 1.7 percent to 362.58. The broader S&P 500 fell 0.9 percent to 1,276.60.

The biggest concern is what long-term impact the Bear Stearns incident will have. Although many observers shrugged it off, saying markets will eventually recover and mergers and acquisitions will continue to be done, several expressed concern that the aftershocks will continue to destabilize the economy.

“As long as people have jobs, they have disposable income, and as long as they have disposable income, they spend,” said Craig Johnson, president, Customer Growth Partners.

Treasury Secretary Henry Paulson Jr. declined to say whether the economy is currently in a recession on Sunday on ABC’s “This Week with George Stephanopoulos,” but he said the administration believes the economic stimulus package signed by President Bush will strengthen the faltering economy and create 500,000 to 600,000 new jobs this year.

However, economists and investment firm executives were not as ebullient about the stimulus package and overall impact on consumer spending and confidence.

“If we were to get another $1 a gallon [hike] at the pump, that would completely offset the stimulus package,” said Scott Hoyt, director of consumer economics at Moody’s Economy.com.

Paul Nolte, director of investments at Hinsdale Associates, a boutique investment firm in Chicago, said consumer spending and confidence will remain weak for the foreseeable future.

“Retailers have been suffering to this point,” Nolte said. “Their stock prices have been suffering for almost a year and there will be more of the same for awhile, at least until we get halfway through whatever recession this currently is.”

Robert H. Parks, professor of finance at Pace University’s Lubin School of Business in New York and a former Wall Street economist, isn’t so sure the current crisis will resolve itself quickly. “The credit markets will kill the fashion and retail industry. I am anticipating a systemic financial meltdown across the United States….Liquidity has evaporated. Hedge funds, banks, and private equity won’t touch anything that looks like a risky move.”

If the overhang from the subprime debacle could take longer to unwind, there’s a chance that the global markets could see some impact as well, possibly pushing back planned IPOs by fashion firms until the markets stabilize. So far, it seems too early to tell whether the proposed IPOs by firms such as Ferragamo and Prada will proceed as planned.

“The Ferragamo Group is proceeding in the preparation of its IPO and any problematic issues linked to the markets will be faced at the due moment,” said a company spokeswoman.

“It’s obvious that no one is pleased with these jolts, which companies obviously observe and evaluate, but Prada still has time to make a decision and things can get better,” said one source. A Prada spokesman said “there is no update and a decision will be taken in due course.”

Still, the omens aren’t good. A Banca Intesa analyst said, “Generally speaking, the market is worth half what is was worth last June. Any company that wants to go public has to be in line and be aware that it will have to sell at half its price or seek heftier capital increases compared to six months ago.”

But executives said the credit environment is still OK for now for fashion companies hoping to get deals done.

“I don’t think the Bear Stearns panic will have a direct effect on fashion companies….We are business as usual and are very busy right now. There are people still expanding, and we are helping our clients with their expansion plans,” said Michael Stanley, executive vice president of factoring firm Rosenthal & Rosenthal.

“I am tired of reading bad news. It will go away soon,” he concluded.

Still, there are those who aren’t quite so sanguine. Bear Stearns Merchant Banking is an affiliated company of Bear Stearns, although it is independently owned and capitalized, according to a spokeswoman. BSMB has a 40 percent stake in Stuart Weitzman and still owns a stake in New York & Co., which it took public. She emphasized that BSMB doesn’t foresee any impact on its day-to-day operations from the acquisition by J.P. Morgan Chase, but that it is still too early to comment on future plans.

Meanwhile, its investment focus is still the same, and there is nothing in the proposed merger, which is still subject to shareholder approval, that would stop BSMB from investing in an apparel company if it meets the requisite criteria, she added.

“The Bear Stearns announcement was a real shock to all of us. We were talking about it all day and people here feel like they are living a big ‘moment’ in history….We don’t know whether our bank will be the next to take a direct hit or suffer collateral damage from the credit crunch,” said a Paris-based equities analyst.

A London-based retail consultant said of the global credit crunch, “The banks still want to lend money. There is no doubt about that. But right now there seems to be more liquidity for small- and medium-sized transactions because there is less risk involved.”

Lawyers who work on the mergers and acquisitions front have noted the liquidity patterns.

Allan Duboff, partner with Loeb & Loeb LLP, said leverage and price multiples have been dropping, which means fewer deals are getting done because sellers can’t get the prices they want and buyers are more cautious, he said. Some sellers may sit on the sidelines until they can get the prices they want down the road, but a good company is still a good company and middle-market deals will still happen, he said.

Monte Engler, chair of Phillips Nizer’s corporate law department said, “In the luxury field, I am seeing the people with the money, the investors, still wanting the deals but perhaps thinking that the sellers or the companies seeking money are more anxious to get it.”

James Abbott, partner at Wall Street law firm Seward & Kissel LLP, said businesses that potentially are going to be sold for $50 million or $100 million in the middle-market range are still going to get done.

“Deals may take a little bit longer as investors and sellers get squeamish due to continued market disruption but more due diligence smooths the way,” Abbott said.

Gilbert Harrison, chairman of investment banking firm Financo Inc. noted that the freeze-out on the financial side might represent an opportunity for companies that already have an open line of credit or cash and are looking to make strategic combinations.

“We’re working with strategic players that have been basically out of the market for a while because they couldn’t compete,” said Harrison. “This is a real opportunity for these people.”

Andrew Jassin, managing director of the Jassin-O’Rourke Group, a fashion consultancy, said, “The banks, the factors, the insurance companies, which have invested in intellectual property, are going to be taking a hard look at the value of the underlying credit,” said Jassin. “They’re going to be looking at the collateral values of who they lend to much more closely.”

“Five years ago or so, it always was something that the banks were looking for as collateral, but it was more of a check the box versus something that they were doing due diligence on,” said Mike Lasinski, managing director at Ocean Tomo, an intellectual capital merchant bank. “You see a lot more due diligence of these assets.”

Laurence C. Leeds Jr., chairman of Buckingham Capital Management, observed: “Our consumers and all our companies depend to some degree on credit and anything that damages the psychological underpinning of credit is bad for our industry.”

Amid all the doom and gloom, though, retail stocks are among the first to reach for the silver lining.

“Historically, apparel and retail stocks have been very early cycle stocks,” said Leeds. “They start to go up when things look the worst and in the last five recessions have started to rise dramatically when unemployment begins to get severe. They don’t wait for things to get better to go up.”