Small Business Owners’ Optimism Reaches A 22-Year High

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It isn’t spring just yet, but there’s a lot of optimism about renewed beginnings in the air. Markets are doing well, with the S&P 500 and Nasdaq posting their best February since 2015, and the Dow with its best performance since 2021. Inflation may be moderating. According to the personal consumption expenditures index, a key inflation indicator watched closely by the Federal Reserve, Americans spent 2.4% more this January than in January 2023, which is the lowest reading on this scale since March 2021.

And business leaders are getting more confident. PNC’s semi-annual survey of small and mid-sized businesses found that 55% of these business owners are highly optimistic about the national economy, up from 26% who felt that way a year ago. Nearly eight in 10 (79%) said they are highly optimistic about the prospects for their own businesses. This marks a 22-year high in business owner optimism, and shows diminished concern of an impending recession.

From this data alone, it would be easy to surmise that the economy is out of the woods, so to speak. However, some of the underlying factors have not changed. While tech stocks have rallied—largely buoyed by their AI divisions—and some major retailers have continued to be successful, interest rates haven’t shifted just yet. In his story about PNC’s report on businesses, Forbes senior contributor Rohit Arora addressed some of the risks PNC Chief Economist Gus Faucher identified.

“PNC expects near-term economic growth and we will be looking closely at employment data, inflation and when and how the Federal Reserve makes decisions around interest rates,” Faucher said.

The Federal Reserve Board meets later this month to look at interest rates, and could potentially adjust them if inflation is slowing. But there are other factors to consider, including inflation as measured by the consumer price index, jobless rates and what is happening with the markets, since quite a lot can change in a matter of weeks. However, if small business owners are any guide, and if their predictions can translate into policy, rate cuts may be on their way soon. Only 47% of those surveyed expect to increase prices in the next six months (and a plurality of those who do are anticipating a 1% to 2% increase), and one in five is looking to increase its full-time workforce. Considering that small businesses represent 99% of the enterprises in the U.S., contribute 44% of the GDP, employ half of the U.S.’s private workforce, and receive 30% of all purchases, things just may be getting better.

As the economy improves, the M&A market is heating up. Mieke Van Oostende, a senior partner at McKinsey who is the co-leader of the firm’s M&A work, spoke to me about what to expect in the rest of the year as far as M&A, and what executives should do if they’re looking to be involved in a transaction. Excerpts from our conversation are later in this newsletter.

BIG MOVES

Macy’s new CEO Tony Spring unveiled the retailer’s “bold new chapter” last week: Closing 150 stores and expanding its Bloomingdale’s and Bluemercury chains. This figure represents about a third of Macy’s U.S. stores, and about 50 of them will close by the end of the current fiscal year. Luxury brands will become a company priority, with at least 30 new Bluemercury stores and about 15 new Bloomingdale’s stores opening by 2026. Spring said this action “challenges the status quo to create a more modern Macy’s, Inc.” and will reinvigorate customer relationships through “improved shopping experiences, relevant assortments and compelling value.”

Consumers are no longer as interested in shopping at large department stores, which saw their year-over-year retail sales drop 3.3%, according to an analysis of data by Forbes senior contributor Shelley E. Kohan. Will shuttering non-performing stores and concentrating on smaller, targeted luxury locations work? It could, as long as the company stays front-of-mind for consumers. The Wall Street Journal pointed out that former retail behemoths including Sears and Lord & Taylor have closed so many locations they’re no longer seen as relevant.

ARTIFICIAL INTELLIGENCE

OpenAI is coming under the microscope, but more for its policies than its generative AI functions. Last week, departed OpenAI cofounder Elon Musk sued the company he’d helped form in 2015 with Sam Altman and Greg Brockman. Musk said OpenAI was started as an idea to be a non-profit organization with the goal of developing AI “for the benefit of humanity,” releasing open-source work that is free for anyone to use.

Since then, Musk says in the lawsuit, OpenAI has changed its focus to profits. Microsoft has invested in OpenAI and is partnering with the company, and the lawsuit accuses OpenAI’s technology of being “closed-source primarily to serve the proprietary commercial interests of Microsoft.” Musk stepped away from OpenAI in 2018, but court documents indicate he was financially involved through late 2020. His lawsuit asks for the court to require OpenAI’s research and technology to be available to the public, and not able to financially benefit the company or Microsoft. He also asks for restitution for funds OpenAI received while operating under a profits-first model. OpenAI and Microsoft did not immediately respond to Forbes’ request for comment.

The Securities and Exchange Commission is also investigating OpenAI, looking into whether it misled investors, the Wall Street Journal first reported. The probe was triggered by the drama late last year of Altman’s unexpected firing, following resignations from several at the company, and a reconstituted board rehiring Altman. The board that booted Altman said that he had not been “consistently candid” in his communications. It’s not clear what the SEC might be looking for, however OpenAI has continued to increase its value. Last month, the company signed a deal for an existing share sale under a tender offer to let employees cash out their shares. Following this agreement, OpenAI is valued at $80 billion or more, reported the New York Times.

PEOPLE + PROFILES

After W.K. Kellogg CEO Gary Pilnick talked up the trend of cost-conscious families choosing cereal for dinner in a CNBC interview last week, the company has faced backlash. Pilnick said the trend is a theme of an advertising campaign for the company’s cereals, including Corn Flakes, Frosted Flakes and Froot Loops. But, reports Forbes senior contributor Edward Segal, the statement has been criticized as out-of-touch, flouting nutritional guidelines and unsympathetic to consumers struggling with inflation. “It’s a serious issue for families and a huge mistake by [W.K.] Kellogg’s CEO Gary Pilnick to even suggest this idea,” John Goodman of John Goodman PR told Segal in an email. “And if the goal was to get some quick media coverage by floating the idea of cereal for dinner, it backfired. The price of that media coverage was a terrible hit for Kellogg’s image, and it received the negative backlash it so deserved.”

TOMORROW’S TRENDS

McKinsey’s Mieke Van Oostende On The M&A Outlook For 2024

The global uncertainty, fragile economy and high interest rates of 2023 made it a slow year for M&A, with activity down 16% compared to 2022. But McKinsey Senior Partner Mieke Van Oostende says those conditions are changing. Companies—and financial firms—are poised to use their cash toward smart expansion, and Van Oostende wrote in a recent report that 2024 is expected to have much more M&A activity. I talked to her about the outlook for deals this year and how executives can prepare. This transcript has been edited for length, clarity and continuity.

Much of the M&A activity in 2023 came from corporate investors. Will that continue this year, or will financial firms and private equity play a bigger role?

Van Oostende: Corporate investors look at an investment from a different perspective. Yes, they also have a business case, but they can leverage different levers compared to financial investors. Corporate investors very often have combination synergies, transformational synergies. They do [these things] very often because of a strategic op-sec objective. They want to solidify, they want to invest in a capability which is crucial to enable their business. They want to acquire talent, which, honestly, is not easy to find.

…Financial investors [are] much more [about] what is the return I can get out of an investment. It needs to be almost standalone improvements I get out of the investment. Of course the business case or the NPV becomes more difficult the moment your interest rates go up again. The bar, in terms of realizing return out of your investments, also goes up significantly—combined with the fact that a lot of investors were used to a pretty high return from 2018 to 2023, and maybe they have been a bit spoiled.

The reason we believe it will continue to come back is that financial investors sit on a lot of undeployed capital. At some moment in time, they will need to do something with it. Either you give it back to your shareholders or investors or you do something with it. A lot of the investments which have been done six, eight years ago, they are asked to divest them again because the investors want to do something else with that money, and they are willing in some cases to accept a slightly lower return on their investment.

There were many divestitures that took place last year. Are you expecting that to continue this year?

We do anticipate a further increase. …I think that the fact that you have higher interest rates makes companies need to have a much closer look at the assets in their portfolios. They’re having to reflect on, ‘Am I still the natural owner of a certain company? Can I truly make a return out of it or not?’ And then decide either I scale or divest.

Even when the economy was more uncertain, there was still some M&A going on. What are some of the things the companies that continued to make acquisitions did?

Programmatic acquirers do not only invest in the good times, but they also invest in the “bad times,” so they truly take the cycle view. …They have a very conscious M&A strategy. …You would be surprised how many companies do an acquisition because something becomes available and people think, ‘Ah! That may be interesting,’ combined with low interest rates. I think much more acquisitions have been done not out of good luck, but a bit more random.

What successful acquirers do [is] they say, ‘This is my corporate strategy. These are the capabilities I need to build. For these capabilities, I will [build them] organically, and for these capabilities, I need to do it inorganically.’ Then I start to look at the potential companies, irrespective if they are available. Then I enter into a dialogue.

We see these successful acquirers taking much more [of a] full potential view. They do not only look at combinational cost synergies, …but they also look very strongly at revenue synergies and they are really there to put targets on it. They also look at what we would call transformational synergies: What can we now do together which you could not each individually not do before. For instance, you can now reach a different client segment because you have more capital behind you and you can invest more. Or if you have a certain budget of R&D, when you put two and two together, you have in relative terms more money available.

We also see that they pay higher multiples, partly driven by the fact that on average, the successful acquirers buy more growth companies for adjacencies, but also because they know how to get more value out of an acquisition.

What kind of advice would you give to executives who are looking to make acquisitions this year?

For those companies who want to acquire, first of all, I would say inorganic growth is a critical element and component of your growth strategy. …Second, we see that …multiple acquisitions a year, which represent a meaningful value of your company …makes sense in terms of creating excess [total shareholder return]. The third element is …make sure that you have a very conscious M&A strategy, and make sure that you have internal conviction in your organization around that. …The fourth one, where I believe there’s still quite a lot of work to be done, is on the execution of a deal. …You need to integrate it in some shape or form in your company. Having a tailored integration approach as a function of your deal rationale: Will you integrate a lot? Will you not integrate a lot? How fast will you integrate?

FACTS + COMMENTS

Sony Interactive Entertainment, the company’s video game division, is laying off employees across multiple PlayStation studios, the company announced last week.

900: Employees affected in this layoff round

21 million: PlayStation consoles Sony expects to sell in the current fiscal year, down from projections of 25 million

‘Changes in the way we develop, distribute, and launch products’: One of the reasons Sony Interactive Entertainment CEO Jim Ryan gave for the layoffs

VIDEO

Yo Gotti’s Blueprint For Success In The Music Business

STRATEGIES + ADVICE

Many of the world’s top companies embrace the mindset of Agile, a project management approach often used in software development. Here’s a rundown of how they do it, and a guide for bringing these techniques to your business.

QUIZ

A majority of workers at a large automobile manufacturer’s plant have voted in support of joining the United Auto Workers. Which car maker do they work for?

A. Mercedes-Benz

B. Toyota

C. Tesla

D. Honda

See if you got the answer right here.