If you are shopping around for an acquisition, in electronics or in the general business arena, it's a buyer's market. If you are looking for a buyer, get ready to put your best foot forward.
Merger-and-acquisition activity in the U.S. is expected to remain flat this year, according to America's Growth Capital, a Boston-based investment bank. The number of transactions valued at more than $20 million is expected to reach 1,493 in 2005, down from 1,543 in 2004. By comparison, during M&A's heyday, 2,755 transactions were completed in 1998.
Why the malaise? Buyers of all sizes—such as
Time Warner—still have painful memories and carry the burden of transactions completed during the bubble. Also, targets are not viewed as scarce properties and potential corporate buyers are evidencing the same attitude as many consumers: If you wait long enough, it will go on sale. "The mind-set is, 'No one else will buy the targeted company, and it can always be purchased later, maybe for less,'" says Ben Howe, a managing partner at America's Growth Capital.
But potential buyers aren't just being fussy. Company boards and shareholders are keeping a close eye on potential purchases.
Acquisitions need to have a significant strategic value to the buyer's core business and be financially stable. The Sarbanes-Oxley Act has made the due diligence process a lot more rigorous. In the past, Howe says, private companies could choose whether or not to submit audited financial statements to a suitor. "Now we haven't handled a deal in two years that hasn't required an audit." He also points out that many deals are terminated during due diligence even after term sheets—basically, the "talking points" of an acquisition—are signed.
Still, in the technology sector, M&A activity has recently picked up. The total number of deals has been inching up since the first quarter of 2003, when only 40 deals were transacted (see "Technology M&A Activity Perks Up," below). In comparison, 43 deals were transacted in the first half of 2005.
There are several drivers behind that trend. "One is the health of the technology sector—buyers as well as targets are showing strong growth, better profitability and better end customers than we have seen in years," Howe says. Also, the four-year M&A drought has resulted in pent-up demand from buyers as well as sellers (see "VC Investing Takes a Turn for the Better," June 2005).
Companies that are looking for a suitor should keep several things in mind. First, plan on beating your quarterly targeted results during the deal-making process. Be ready to defend any projections you might make. Be cognizant that your suitor may have other companies under consideration and that you may not receive a compelling bid for your company. And you may want to consider where you go shopping: America's Growth Capital has noticed a big increase in leveraged buyout (LBO) activity.
In the tech sector, big deals are no longer that common. In 2000, 63 companies completed M&A transactions worth $1 billion or more. In 2004, there were eight, and 2005 is so far keeping that pace—only four deals have been worth $1 billion or more.
Who is making those deals? Among large publicly held companies, they are the ones you'd expect:
Cisco Systems, Hewlett-Packard, IBM, Microsoft, Oracle and
Symantec have led the market in 2004 and 2005.
However, almost a quarter of all M&A deals in 2004 were LBOs. Howe estimates that there are more than 200 private equity funds worth $1 billion or more. "The ability and pressure to do deals are extremely high."
