Apr 8, 2004
By Stephen Poe, EDP
The current ?jobless recovery? is slowly showing signs of continued growth. After two quarters of good GDP and productivity growth, we're finally seeing another key indicator rising again ? Merger and Acquisition activity is on the increase.
First Quarter 2004 M&A Activity
So far in 2004 we've seen M&A deals such as:
- Blast Radius acquiring all assets of Corel's XMetaL division
- Click Commerce acquiring the operating assets of Webridge
- Comergent Technologies acquiring Profile Systems
- Documentum acquiring the askOnce business unit from Xerox
- IBM acquiring Trigo Technologies
- iPhrase Technologies acquiring Banter Systems
- Stellent acquiring Optika
- Verity acquiring Cardiff Software
- Verity Inc. acquiring certain assets of NativeMinds
- Vignette acquiring Tower Technology.
Whereas this isn't quite the breakneck pace of the late nineties, it's certainly an improvement over the past 2-3 years.
Recent Experiences
Some of my recent engagements in the area of M&A have highlighted differences in today's M&A environment from that of a few years ago.
These differences go far beyond the end of the outrageous valuations, business plans with nothing but smoke and mirrors behind them, and not-quite-ready for prime time technologies of the dot.bomb era. These differences reflect more subtle, but nonetheless critical, shifts in the HVCO business environment over the past five years.
Marketspace Confusion
One result of the past few years has been a significant shift in our previously tightly-siloed marketspaces (see ?Changing Markets? in my January 22nd column ?How to Survive in 2004, Part II?, www.outputlinks.com/content/stephen_poe). As many of the technologies and products that once were innovative, bleeding-edge become commoditized products and companies start looking to move up and down their supply chains. What were once distinct market niches have now grown fuzzy boundaries, overlapping into their nearby neighbors. This makes market analysis much more difficult during due diligence.
- First, there is less information available on what were once very distinct market segments. Many of the analyst firms have consolidated previously distinct markets, resulting in fewer, larger markets with higher overall annual value, but making it much more difficult to define marketspace in terms of revenue, delivered functionality or products.
- Second, as more and more companies are forced to enter new markets, it becomes harder to determine who the leading competitors are in a given space, or who the potential competitors might be in 12-18 months.
Product Confusion
Much like marketspace confusion, product confusion is also brought on by the changing marketspaces. Companies are broadening their products away from single function products aimed at a particular function within a particular market niche or vertical, and introducing product lines that span multiple markets, offering to solve business problems across multiple departments with a single offering. Likewise, many companies in our space have moved (or are in the process of moving) from the perception of being a vendor who specializes in selling tactical solutions, tools or utility products, to being a vendor who specializes in selling strategic enterprise-level business solutions. This move opens up a broader market with a higher average individual sale revenue and more potential for professionals services follow-on work but lengthens the sales cycle and reduces the potential client base unless the vendor can then move into more marketspaces.
This migration from tactical, well-defined products to strategic enterprise products also complicates due diligence. It is harder to compare such products. The simple product feature/functionality matrix is increasingly inadequate to capture the synergy potential with such products.
Acquisition Targets
Today, an acquisition target is more likely to be a company in an adjacent marketspace instead of a direct competitor. Although all the original reasons for taking a competitor out still exist ? lowered competition, higher market share, access to a new customer base ? there is the perception that a higher long term pay-off exists by accelerating the move into an adjacent marketspace, parallel to the older wisdom of shortening your entry into a new geography by acquiring a company located there or with a strong customer base there. Unfortunately, this also increases the risk as the company moves into an area it is less familiar with and has less experience in selling into and developing for.
Valuations
Current valuation calculations are somewhat more unstable than before. Although the traditional rule of thumb of 2x-3x trailing twelve months revenues is still a very rough guide, today there are too many ?adjustments' that bring this rule into doubt. As an example, in the recent article, ?Why are leading electronic document companies merging and acquiring now?? (www.documentboss.com/article_acquiring_now) Document Boss discussed their views on valuations within the electronic Document Management (eDM) space.
With almost all parties feeling pressure to be more risk-averse, companies with perceived stability and lower risk are going for higher multiples. Unfortunately, these perceptions may or may not be realistic. Given failures up to and including such giants as Enron in the US and the Independent Insurance Company in Europe, the perception that size denotes lower risk is certainly up for debate.
Summary
Although M&A activity is rising as companies finally shake off the recession, the business environment in which they find themselves is significantly different. Marketspaces have consolidated, old market niches have merged into new areas, product lines have broadened their scope, and many companies are moving from tactical sellers of tools and utilities to vendors targeting strategic enterprise sales. Valuations are more uncertain and subject to adjustments that significantly diverge from the old 2x-3x ttr Rule. M&A still is a useful tool in a companies' portfolio, but requires more in-depth due diligence in a different environment than five years ago.
Are you finding the M&A process after the end of the recession to be different? Email me with your stories at sdpoe@nautilussolutions.com.
Resources
These six books represent six very different approaches to M&As. If you review all of them it's unlikely you will like them all but will probably find 2-3 that fit your needs and preferences.
- Achieving Post-Merger Profitability: A Stakeholder's Guide to Cultural Due Diligence, Assessment, and Integration, J. Robert Carleton (Author) & Claude Lineberry, Pfeiffer, 2004.
- After the Merger: The Authoritative Guide for Integration Success, Price Pritchett & Donald Robinson & Russell Clarkson & Don Robinson, McGraw Hill, 1997.
- The Art of M&A Structuring : A Guide to Forming and Analyzing Transactional Agreements, Entities, and Financings, Alexandra Reed Lajoux & H. Peter Nesvold, McGraw-Hill, 2004.
- The Complete Guide to Mergers and Acquisitions: Process Tools to Support M&A Integration at Every Level, Timothy Galpin & Mark Herndon, Jossey-Bass, 2000.
- Five Frogs on a Log: A CEO's Field Guide to Accelerating the Transition in Mergers, Acquisitions And Gut Wrenching Change, Mark L. Feldman & Michael F. Spratt, HarperBusiness, 1999.
- Joining Forces, Mitchell Lee Marks & Philip H. Mirvis, Jossey-Bass, 1997.
- Winning at Mergers & Acquisitions: The Guide to Market Focused Planning and Integration, Mark N. Clemente & David S. Greenspan, John Wiley, 1998.
You can contact Stephen at sdpoe@nautilussolutions.com.