Volume 16, No. 7 July 2022
Participating as industry experts in pulp and paper financing and M & A deals around the world for nearly four decades, we continue to see the same mistakes made over and over. This newsletter is designed to help you avoid costly mistakes we have seen others make. We will be giving you one or two points each month to help improve your performance.
 
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Interest Rates


There aren't many around who remember the interest rates of the 1970's and the devastating effects they had on industry. Inflation is one thing, the cost of borrowing money is another. Being an old timer who turned 30 in 1980, I remember these times clearly.

This was a time, 1980, when you could walk into a savings and loan and see CD rates advertised at 18 to 19%. Imagine what lenders were charging to borrow money.

These conditions caused a number of abnormal actions in industry.

  1. Nearly all capital projects stopped or were cancelled. Only essential maintenance related capital projects continued or were funded.
  2. Manufacturing inventories (both inputs and outputs) were reduced to dangerous levels, with high risks of running out of materials needed to continue operations.
  3. Customers got religion about "just in time" and tried to push inventories of their inputs back on their suppliers, who were equally resistant to maintain these.
  4. Acquisitions and expansions were brought to a screeching stop except in the rare case of an all stock deal.
  5. Cost of personnel was rising fairly rapidly but somewhat mitigated by a high unemployment rate.
  6. Cash was king, but companies holding lots of cash were investing it in financial instruments, not their businesses, because they could earn higher returns there.
  7. Equipment suppliers ran out of work in their shops. Ones that were credit worthy and who could find credit worthy customers operated on a "buy now, pay later" approach. This led to some real disasters and forced mergers.

Bottom line--abnormal conditions prevailed. We found out who had the exceptional management skills to navigate such treacherous waters.

Of course, the question today is, "Are we there yet?" No, not yet, but my observations are that those pulling the levers at the Fed and in government may be capable of even more fumbling than the suspects of the 1970's.


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If you have a casual question or a major deal, call me on my personal cell phone - 404-822-3412 or email me at jthompson@taii.com or jim.thompson@ipulpmedia.com. We are here to help.

 
Sincerely,