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Consolidation Of America's Small Businesses Continues

Although the huge billion-dollar business transactions get most of the ink in today's press, there's another powerful phenomenon taking place. And it's altering the face of the business community.

This powerful parallel force is quietly changing many obscure businesses. The ones that have traditionally been dominated by the hard-working, "mom and pop" operators.

Industrious entrepreneurs are creating change in the marketplace—by busily setting out to create a big company through a "rolling up" of dozens of little firms into a larger entity. One with the size to create efficiencies and wield marketing power.

There is a growing cadre of consolidators—ambitious aggregators whose aim is to bring professionalism to businesses, where managing has been almost an after thought.

How widespread is the consolidation of America's small independent businesses? There were more than 10,000 transactions completed for at least $1 million in 1998.

Interestingly, most of this enormous activity is a form of barter, in that these deals are done by issuing shareholders common stock in a tax-free pooling-of-interests' mergers. Simply stated, it's, "I'll trade you part of my company for yours."

These efforts are a reflection of what's happening around the country as small, mostly family-run, outfits are increasingly becoming the acquisition targets of an army of publicly-traded companies. Whose intent is consolidating various, specifically-targeted industries.

These business categories include funeral homes, uniform-rental concerns, billboard-advertisement operations, heating and air-conditioning service shops, athletic clubs, collection companies, nursing homes, laundromats, pet-supply stores, and video stores.

Consolidations have been a very profitable bet on Wall Street. Montgomery Securities "consolidation index" of more than thirty consolidation companies, that have gone public in the last five years, has climbed 185%.

And for good reason. Successful consolidator companies get an almost instant earnings boost by using their own highly-valued stock* (perhaps with a price-to-earnings ratio of twenty or more) to acquire a company at a price equal to five or six times its cash flow. Turning five times earnings into twenty times earnings is incredible leverage!

Using a formula that requires fewer of the higher-priced shares to make the purchase (which quickly increases the consolidators own earnings) makes the acquisitions an inexpensive proposition.

This strategy, in conjunction with utilizing selective bartering efforts for needed products and services within the new larger operation, promises to bring even greater earnings to the company's bottomline. And it transposes into a greater market valuation.

So once again, we see the obvious merits of bartering. Although on the surface it may not be apparent—YET—to all of mainstream America!

* A roaring stock market has given acquiring companies an even more valuable currency—their own shares—with which to pay for acquisitions.

Human Capital Grabbing Bigger Share At Financial Capital's Expense

In 1988 only 1% of companies offered stock options to their employees...in 1998 35% did.