PhillyDeals: Time to give up the fantasies and face facts

For a little while in early May, there were signs American business was in recovery.

The Treasury Department said big banks weren't going to blow up, after all. Stocks rose, erasing winter's slide, if not last year's steep losses.

The government warmed the climate enough so Bank of America Corp., Wells Fargo & Co., and other troubled lenders could run out and raise cash from private investors, reviving capital markets and giving taxpayers a break.

But now that the thirsty banks have topped their tanks, Treasury Secretary Timothy Geithner warned last week that "unemployment is going to keep increasing for a while. And it's not going to feel better for a long time for millions of Americans."

The dollar is down, oil and import prices are up, the federal deficit is huge, and Americans still owe billions on homes, offices, and shopping centers that aren't worth what we paid for them.

Part of the reason sales and hiring are so slow, and the worst is likely still to come, is the hope still held by many affluent Americans, fed by volatile share prices and temporary bursts of good news, that easy-money good times aren't really over, that prices for all kinds of assets will somehow magically reinflate without a lot more painful write-downs.

As economist Ed Yardeni noted in a letter to clients last week, "the recent action [in markets] is reminiscent of the global economic boom from 2003 through mid-2007."

He means, it gave optimists more reason to postpone reality.

Big companies with billions to invest - there still are some - say they're holding off because of unrealistic expectations by sellers.

This month, Google Inc. chief executive officer Eric Schmidt and SunGard Data Systems Inc. boss Cristobal Conde have told me they're passing up acquisitions because owners are still demanding mid-2000s prices. They're confident those assets will be cheaper soon. They're betting against a quick recovery.

A $900 million investment late last week by steel-turned- financial tycoon Wilbur Ross, Blackstone Partners, and other private investors in Florida's failing, $8-billion-asset BankUnited Financial Corp. is the kind of bargain-basement deal that establishes a new, lower price level for troubled assets, allowing stricken companies to reorganize and try to grow again.

Philadelphians who make deals for a living are urging clients to accept the reality of lower values for companies, investments, and other property so business can start moving again, painful as the adjustment will be.

"Everyone's in their shell. They've circled the wagons. They're in this protectionist mind-set," said Donald DiCarlo, managing director at Wilmington Trust Wealth Management's Villanova office.

Despite the "short-term rally," there are signs the grimmer reality is sinking in, said Philadelphia lawyer Brian Doerner, chairman of the business and finance department at Ballard, Spahr, Andrews & Ingersoll L.L.P. The firm has lately closed financings for big corporate clients such as Peco Energy Co., Sunoco Inc., and J.P. Morgan Securities Inc., plus local and family-owned firms. But overall, business is down.

But accepting reality will just make things worse, in the short run: "When the logjam in mergers and acquisitions comes free, and sellers do get back in the market and we start seeing deals, I'm sure that will result in a further ripple of layoffs as companies are bought," Doerner said. "That always happens."

"It takes two or three times as long to get a deal done these days than a year or two ago," said John Nowaczyk of private-equity investor Milestone Partners Management Co. L.P., of St. Davids, whose recent deals range from software dealers to coal mines.

"People have to get tired of waiting. They'll say, 'OK, I can't sell my company for eight times earnings [minus finance costs]. I'm going to sell for six times and invest it in the stock market and do as well as my buddy has been doing in it lately.' Maybe even at 41/2 times earnings.

"I'm hoping the attitude will have fully readjusted by the end of the year, and we'll get to a place where there's enough realism by sellers that we can get some deals done."

Private-equity firms that raised millions at the peak of the recent boom also feel pressure to finish investing it before clients start demanding cash back, said Tom Bonney, founder and managing director of Philadelphia-based investor adviser CMF Associates L.L.C.