With the distressed financial sector, we have recently seen big M&A deals such as the Wells Fargo acquisition of Wachovia. With capital running out quickly and feeling intense pressure from federal regulators and investors, Wachovia was forced to sell itself rather than follow the path of someone like Citibank or Bear Strearns. This situation is not unique to Wachovia and we should expect to see more consolidation within the financial sector.

“Acquisitions and divestitures will remain an important consideration for market-leading companies as they navigate the current economy,” said Jeffery Weirens, a principal with Deloitte Consulting LLP. “One thing is certain, now is the time to be evaluating the organization’s overall portfolio and assessing the corresponding acquisition and divestiture strategy because the longer a company sits on the sidelines during the downturn, the further it will likely lag behind during the recovery.”

And while the current landscape will provide for many good acquisition targets because of cheap valuations, companies needing to raise capital may also be presented with opportunities to strategically divest of business segments that can unlock value for the firm.  The deals can definitely go both ways and can help those acquiring or divesting stabilize their balance sheets and maximize shareholder return over the long term.

While M&A activity may not reach levels of the past few years, acquisitions and divestitures may be just what our economy needs to improve efficiency and help businesses return to profitability. Corporate Finance directors should not let a good opportunity slip through the cracks even though the economy would suggest to sit tight and not do deals.

Now a cross section of democrat and republican law makers – in particular John Kerry, Charles Schumer, and Olympia Snowe – are calling on Treasury Secretary Henry Paulson to start opening up bailout bucks for small business owners.

Those championing the small business cause are warning Paulsen that neglecting the main street sector will cost the economy in terms of employment and bankruptcy.  An influx of cash flow to small businesses would be an immediate relief since government-backed SBA loan programs are currently frozen.

To further push Paulsen’s hand, Schumer has introduced the 10 Steps for a Main Street Economic Recovery Act which strengthens the Treasury’s authority to purchase SBA backed securities in the secondary market. The key leaders in this cause, Schumer, Kerry, and Snowe, are making a public appeal in their quest to clear obstacles and excuses in securing small business relief.

Small businesses in particular have been paralyzed without a constant source of liquid capital which is a must for everything from paying the power bill to meeting payroll for the next project or product.  With the slow down of the economy, small businesses have watched reserves evaporate and are finding themselves in dangerous territory.  Without lines of credit and loan options, there is simply no money, no reserve, and no other division of the business to carry the load to keep the ship afloat.

Through TARP, the Department of Treasury could purchase government loans and be a much needed shot in the arm for the SBA loan program. This would provide the hard cash need by small business owners to weather the current economic climate or at the least buy time to get out before having to declare bankruptcy.

Not that the bailout money would completely stop the bleeding that has been strangling GMAC who lost $2.5 billion in the third quarter, and $7.9 billion in the past five quarters of its year and a half losing streak, but it would give a much need cash influx to try and survive the current market plunge.

Although GMAC promises the bailout money would be used strictly for the fortification of GMAC, and that GM will not be party to the funds, it is understood that indirectly GM will inevitably benefit from the funds because for one thing, they still own 49 percent of the financial firm after a majority sell-out to a private firm two years ago. 

For another thing, it would be a shot in the arm for would be car buyers and dealers who have had their hands tied by strict lending guidelines that allowed only buyers with excellent credit scores of 700 or better to qualify for financing.  GMAC’s bounty would subsequently help GM by making more funds available for loans.

Still bail out money or not, it might not be enough to salvage GMAC who is struggling on multiple financial fronts due to investments not only in the automotive industry but a huge chunk of mortgage financing.  Their mortgage lending and insurance accounted for more than half of its income over the past few years. GMAC’s investments in this area have gone belly up as well with the bursting of the housing market bubble.

This is not exactly the best time to be looking for work in financial services, investment banking, accounting, and many other sectors of the economy. Because of the lackluster performance of firms in these sectors, it will be very difficult for many college graduates to find employment not only in their respective fields, but may struggle to find meaningful employment in any sector of the economy right now. We are seeing the unemployment rates rise and this does not bode well for those entering the job market.

Unfortunately, statistics show that most college graduates are graduating with higher and higher levels of student loan debt. Additionally, most college graduates are now graduating with student credit card debt. It has been easy for many college students to rack up significant debt because of the easy access to money. However, as with the rest of the economy, the credit for college students is starting to tighten up as well.

In summary, the environment is a difficult one for college graduates entering the workforce and seeking employment in finance and investment banking. With the fundamental problems existing in our macro economy, it may be many months or even years before the job climate significantly improves for job seekers.

The average person may not understand the debits and credits behind the balance sheet, but it is essential for financial managers to not only understand how the numbers on the balance sheet are derived, but also what those numbers mean. The balance sheet provides the financial manager with the balances of asset, liability and equity accounts as of a specific point in time. As it states, the balance sheet must be in balance. Specifically, a firm’s assets will always be equal to the total of the firm’s liabilities and equity. From an accountant’s perspective, asset accounts generally carry a debit balance, while liability and equity accounts carry credit balances.

The real key to using the balance sheet as a tool for making decisions is to understand the changes on the balance sheet from period to another. A good financial manager will analyze what caused the changes on the balance sheet. Do the changes on the balance sheet indicate a positive or negative financial direction for the firm? It is necessary for any CFO or financial manager to analyze the balance sheet, ask the appropriate questions about specific account balances, and to appropriately use the balance sheet a tool for making sound financial decisions for the firm.

Morgan Stanley has recently secured a deal with Japanese commercial banking giant Mitsubishi UFJ Financial Group to pump capital into the investment banking firm. In exchange for $9 Billion, Mitsubishi will receive a 21% stake in Morgan Stanley. Mitsubishi is paying on average $29 per share as compared to last weeks closing price of $24.75 per share. Although Mitsubishi is paying a premium, they view this investment as an opportunity to expand their reach into the U.S. banking system, and to create significant shareholder wealth as they are betting on a solid future for Morgan Stanley.

Another step that Morgan Stanley is taking to shore up their future is to convert from strictly an invesment bank to a bank holding company, which is the same step taken by Goldman Sachs. By making this business model change, Morgan Stanley will be subject to more oversight and regulation from the Federal Reserve, but will also have access to the Fed’s lending programs.

Although you can never be sure, it appears that Morgan Stanley is taking the necessary steps to firm up their financial footing and to build on their established franchise and future potential. Morgan Stanley finds themselves in a position of being able to emerge as the premier investment banking institution in the world of corporate finance.

To understand naked shorting you first need to understand what traditional short selling is. Short selling is a way for an investor to take a negative position in a company’s stock, meaning that the investor believes that the value of a company’s stock will decrease in value over a specific period of time. In a short sale, the seller “borrows” shares of stock from someone who currently owns shares of the respective company with a promise to return the same number of shares at a future date, usually upon demand from the lender. The third party who lends their stock to the seller/borrower is usually an prime broker or bank. The seller/borrower immediately sells the shares of stock on the open market. As the date arrives that the seller/borrower must return the “borrowed” shares, the seller/borrower purchases shares of stock to return them to the third party who lent the shares to the seller.

An example of a short sale would be as follows:

John Doe finds a bank or broker that will lend him 1,000 shares of Washington Mutual stock (WM: NYSE) that he immediately sells on the open market for $3.00 per share, or a total of $3,000. One week later, John Doe buys 1,000 shares of Washington Mutual for $2.25 per share, or a total of $2,250. John Doe returns the 1,000 shares of Washington Mutual to the bank or institution that lent him the shares. John Doe recognizes a $750 gain on the short sale transaction.

The difference between a traditional short sale and naked shorting is that the seller/borrower does not have any borrowed stock that he is selling. The SEC recently cracked down on the practice of naked shorting and has stated that they will enforce the rules relating to short sales, thus effectively banning the practice of naked short selling. “Regulation SHO” was enacted in 2005 to curb the practice of naked shorting, requiring that broker-dealers have grounds to believe that shares will be available for a given stock transaction, and requiring that delivery take place within a limited time period.

Naked short selling have been blamed for contributing to the crisis on Wall Street and effectively causing the demise of financial giant Lehman Brothers. The concern by many on Wall Street and in Washington is that naked shorting will continue to artificially manipulate the market and place undue pressure on struggling financial firms.

The CFO, or Chief Financial Officer, is the financial manager of a corporation. The CFO generally also holds the title of Vice President of Finance and reports directly to either the Chief Executive officer or Chief Operations Officer, whomever is serving as President of the corporation. In his or her capacity, the CFO is responsible for the corporation’s long-term investments, determining an appropriate level of capital investment in plant and equipment, obtaining financing for the corporation, and managing the daily financial activities of the entity.

The CFO generally has a Treasurer and Controller that assist in seeing the CFO’s responsibilities out. The treasurer oversees the cash management, credit management, capital expenditures and financial planning. the Controller oversees the tax manager, cost accounting manager, financial accounting manager, and the data processing manager. Collectively, the CFO and the financial management team handle the firm’s capital budgeting and capital structure decisions. Ultimately, the CFO, along with the rest of the corporate management team, work for the shareholders of the corporation and make decisions to maximize the shareholders’ value in the company.

The Big 4 are poised to capture a large part of the mid-market transactions that are traditionally too small for the large invesment banking firms, yet too large for smaller boutique firms to handle properly. All of these firms are capable of assisting clients with sales, divestitures, mergers, acquisitions, joint ventures, raising equity capital, raising debt capital, capital restructuring, and corporate development services. Additionally, with these firms having expertise in accounting, tax and advisory services, coupled with their international presence, position them well to respond to global demand for investment banking services.

As was recently reported in the news, Deloitte, my former employer, has recently created a corporate finance division in the Middle East to keep up with demand for corporate finance services from the oil rich businesses in that region of the world. Deloitte stated that it is setting up this venture in Dubai in order to capitalize on the investment boom in the Middle East.

With the expertise and global reach of the Big 4 international accounting firms, they are moving forward in capturing an even larger share of the financial services industry through their corporate finance and investment banking services.

In this blog I will attempt to analyze and comment on the latest news in the world of finance, as well as other current events affecting general business and the economy. Although I am no expert, I do feel that I have some knowledge myself after earning bachelor and master degrees in accounting and spending nearly 10 years in the corporate finance and accounting industries.

Feel free to check back as often as you like and see what I have to say on the current happenings in the world of finance and business.