Corporate Buyers in the Driver's Seat for Buys in 2009

Many folks are speculating about what merger and acquisition activity will be like in 2009. Corporate buyers are holding the key cards, according to new research from The 451 Group, which polled 75 respondents from public and private concerns.

Corporate development executives said they plan to leverage the sagging economy in buyout negotiations in 2009, snapping up smaller companies at smaller prices, found The 451 analyst Brenon Daly. The report comes less than a month after Daly noted that the financial crisis handicapped some companies' merger and acquisition schedules in the last quarter of 2008.

However, that doesn't mean every Web 2.0 startup or suffering business will enjoy the comfort of en exit strategy into a larger company's arms. Daly, who noted his results came after the Nasdaq bottomed out in mid-November at 1,300, meaning the index had nearly been cut in half in just two months in 2008, said:

As companies found their own valuations hammered every day, they began to look for similar discounts in the companies they were thinking of buying. These 'recalibrations' meant that deals took longer to close, if they even got done at all. And that's not likely to change in 2009. In our survey, more than half of the corporate development officers said the 'valuation gap' between targets and acquirers would depress dealmaking in the coming year.

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In short, not every startup will have a seat when the musical chairs' tune stops.

Moving along, deals in 2009 are likely to be small bolt-on buys that augment current offerings with roughly 55 percent of respondents confirming those are more likely than so-called "transformative" buys, such as HP for EDS or Cisco Systems for WebEx.

Daly defines bolt-on buys as small buys deals that allow companies to sell products developed by a startup into their existing customer base, as opposed to deals that get them into new markets.

To use Google as an example, the search giant's purchase of JotSpot was a bolt-on buy, which the search engine tucked into its Apps portfolio as a wiki application. The $625 million purchase of Postini, meanwhile, was Google's bid to tackle security SAAS (software as a service) to give Google Apps instant credibility in the enterprise.

One quarter of respondents said they expected "substantially fewer" transformative deals in 2009. This is largely because most companies will have enough uncertainty in their own business outlook without piling execution risk at the acquired company on top of risks associated with integrating companies, Daly said.

Corporate development officials and senior-level bankers told Daly the uncertain financial outlook for acquirers will also put a big crimp in buys. Daly pointed to traditionally acquisition-hungry Cisco Systems, which is likely to report a 4 to 5 percent decline in revenue in the current fiscal year. Cisco has said it would boost buys in 2009.
 
"Taken altogether, the results of our survey appear to indicate that 2009 will largely shape up as a year in which strategic acquirers dictate terms from the buy side," Daly said.

Three-quarters of survey respondents told Daly they expect to get better prices in 2009, compared to less than half who predicted last year that the environment would improve.

Nine out of 10 say they expect valuations of private companies to decline in 2009 versus only one-third of respondents surveyed in 2007 who projected valuations would decline. Valuations were indeed higher in 2007 and the first half of 2008.

To wit, Microsoft pumped $240 million into Facebook in October 2007, valuing the company at around $15 billion. Many analysts now say Facebook, which cracked the 150 million worldwide user mark this week, is worth between $1 billion and $4 billion.