Signs point to a resurgence in M&A market

Silicon Valley Biz Ink – Friday, June 27, 2003

By Dennis Taylor

Changes don’t often occur in leaps and bounds; instead, subtle turns may signal important shifts in economic direction. And investment bankers and advisors in the mergers-and-acquisitions industry are guardedly optimistic a change is under way.

When the bottom began falling out of the technology sector in March 2000 and the Nasdaq Stock Market began its infamous retreat, the opportunity for companies to raise needed capital through initial public offerings and merger-and-acquisition deals all but evaporated. Expansion capital is critical to the Silicon Valley economy, as it provides the currency that creates jobs and purchasing power for goods and services.

For three years now, only the best companies have managed to go public, and those were subjected to much lower valuations for their offered equity stakes than any time in recent memory. By 2002 the M&A deals resembled fire sales — assets were being sold off for pennies on the dollar and no job-creating capital was available.

Now midway through 2003, the fire sales continue, but many in the M&A industry are noting a return to more strategically focused acquisitions. Companies are buying other companies to expand their product lines or services, rather than picking up cheap engineers or other assets. That shift may signal the intent of bigger companies to expand their business.

Ron Lissak, managing partner of Catapult Advisors in San Francisco — an investment bank specializing in private placements and M&A advisory, believes valuations are stabilizing, although deal value and the number of deals remain flat compared to last year.

There were 312 M&A deals last year, according to the National Venture Capital Association, down from 385 in 2001 and 361 in 2000. The average deal was valued at $131 million, compared with $504 million in 2000.

But the values are far from unprecedented. In 1994 before the tech bubble began to inflate, average deal values hovered around $112 million, according to the NVCA. And Lissak would expect valuations to rise as more strategic acquisitions are made.

“What is driving [the market] are more enterprise deals and fewer asset deals,” Lissak says, referring to more strategic acquisitions and fewer distressed acquisitions because companies are running out of money. “Valuations are always driven by confidence in your own business, and with the Nasdaq recovering and the war behind us, bigger companies may be looking at a growth time.”

Ray Balestri, former CEO of Attenza, a customer support software company acquired by Texas-based Skywire Software in March believes the renewed interest in M&A deals is following the strong stock market performance.

“It’s still depressed compared to the glory days of the bubble,” Balestri says. “But it has recovered from where it was at in October and is tracking the stock markets.”

He notes that companies are buying ongoing enterprises instead of “busted up software,” and that valuations are still inexpensive so bigger companies are filling gaps in their technology product lines. In short, expanding.

Rich Brenner, CEO of The Brenner Group in Cupertino, believes the resurgence in M&A deals is a matter of the market reaching equilibrium.

He refers to a “misalignment” of valuations between the acquiring companies and the selling companies. When the stock market plummeted in 2000, bigger companies found their stock, the currency in M&A deals, to be seriously compromised. Consequently they were not willing to give up the equity it would have required to buy smaller companies. At the same time, smaller companies, used to the inflated valuations of the bubble years, weren’t willing to accept the lower valuations.

Now, Brenner notes, stock prices are beginning to rise at the same time selling companies have adjusted their expectations and are willing to accept current valuations.

He adds that with the IPO market still depressed, the only exit option for smaller companies looking for liquidation is to sell.

“It’s not so much an uptick in the market as it is an acceptance of the new reality,” Brenner said.