 |
 |
 |
 |
 |
 |
 |
 |
 |
|
|
|
|
|
|
|
|
|
|
|||
 |
|||
Private Company Capital Newsletter
HOW BABY BOOMER RETIREMENT MAY NEGATIVELY AFFECT YOUR COMPANY’S VALUATIONBaby Boomers have affected the U.S. economy during every stage of their lives because of their prominence and large numbers, and they may have the biggest impact of all when they retire. Nothing is certain, but the demographics of Baby Boomer retirement could play a major role in shaping the stock market and merger and acquisition activity over the next 10 years. If you are an investor, knowing the basic facts will help you make decisions about the future. The SituationRoughly 77 million Baby Boomers were born between 1947 and 1964. In comparison, there are only 60 million members of Generation X born between 1965 and 1980. When Baby Boomers moved into their peak spending and investing years in the 1980s and 1990s, the stock market grew. Mutual funds assets went from less than $48 billion in 1970 to $6.9 trillion in 2000, according to the Investment Company Institute. If you believe that the market’s growth was related to Baby Boomer spending and retirement savings, you cannot ignore the next stage. In approximately 10 years, the first wave of Baby Boomers will turn 65. If they follow the patterns of previous generations, they will start cashing in their stocks and selling their businesses. As any economics student knows, lower demand produces lower prices. Because of their large numbers, the retirement of Baby Boomers forecasts a wave of corporate assets changing hands through private company re-capitalizations and divestitures. We estimate that they own 90,000 businesses that will be transferred between 2005 and 2029. See the chart below to view the strong correlation between baby boomers turning 50 and merger and acquisition activity. Cause for Concern?Some academic researchers and stock analysts believe that Baby Boomer retirement may have a negative affect on company valuations. University of Pennsylvania professor Andrew Abel feels there is some cause for concern. “A few people have developed models in which a baby boom generated an increase in stock prices. If you take these models and look at the increasing stock prices when the Baby Boomers are middle aged, then carry them forward and look to see what happens to stock prices when those Boomers are retired, stock prices fall,” he said. While this may seem alarming, the majority of investment professionals feel that Baby Boomer retirement will have a negative affect, but it may only be minor. There are few mitigating issues that may help balance the flood of sellers: Other Generations – It seems that generation X are savers to a larger extent than Baby Boomers. There is a greater participation in the stock market because of 401Ks, which put a lot of money into investments automatically. Plus, the merger and acquisition markets are becoming more and more liquid, through increased financial sponsors and information technology. The hope is that greater participation and liquidity may help to offset pricing pressure from Baby Boomers selling their companies and stocks. Untraditional Retirement – Baby Boomers may be less likely to take a full-time retirement than previous generations. Many Boomers are working in part-time jobs based on their passions rather than a paycheck. Those people aren’t going to suddenly sell their holdings as they envision a long future.
International Factors – Several local professionals pointed out that international investors and immigrants can play a major role. Foreign investors are major players in the U.S. stock market and are becoming increasing active buyers of U.S. companies. They may help make up for the activities of U.S. Baby Boomers.
So where does that leave us? Since no one can predict the future, a broad view is important. You should be prepared for any outcome. No one knows what will happen, even investment professionals. It is important to have balance in your net worth to prepare for any situation. If a substantial portion of your wealth is tied to a single business, or just public equities or real estate, you may want to consider diversification. [ Home | Our Firm | Services | Past Transactions | Research and Resources | Contact Us ] Brereton, Hanley and Company, Inc. Spear Tower One Market Plaza - Suite 3600 San Francisco, Ca. 94105-1120 Phone: (408) 938-9255 Fax: (408) 938-9259 |
|||
