Buyers Sitting Pretty
If you are thinking about selling the business, it may be time to think again if you believe you can get a high valuation during these times.
While the economy has tripped up expansion plans for plenty of companies, some buyers are looking to make either a strategic or tactical acquisition. But they are not going to fork over cash or stock for overvalued companies, analysts and industry insiders say.
"What we are seeing is that many companies want to be valued on how they performed last year, or how they expect to do a year from now. That type of expectation has stalled a lot of deals," says Martin Wolf, president of Martin Wolf Associates. And Wolf has seen these market dynamics up close, because his company, through an event called M&A Forum, pairs up buyers and sellers. Its next M&A Forum is slated for June 20-21 in Phoenix.
Another market undercurrent affecting pricing is that the unrealistic expectations of sellers have evaporated in the past six months. That has led buyers, who are no longer as paranoid about the future, to press lowball offers more often than they would have at the beginning of this year.
"At the beginning of the year, sellers were still living in mid-2000," says William Kieper, VP at Martin Wolf Associates. "At the same time, buyers felt they had to go much lower to build in a cushion to protect against uncertainties and variables that might come up in the course of the deal."
Take, for example, the recent acquisition of Proxicom by Dimension Data, which paid $378 million in cash, up from the $276 million Compaq Computer had offered. Both of those offers would not even have made it onto the radar a year ago, when Proxicom had a market cap of $1.7 billion.
But there has been a gradual move toward more realistic expectations where both buyers and sellers agree that if an acquisition target is not profitable and growing, the deal wont work, Kieper says. "Beginning the second half of April 2001, we saw a greater amount of activity in the market and its increased since then," he says. In the mid-market for IT solutions and services, theres a realization that organic growth can only take a company so far. Growth through acquisition is a necessary complement to growth by internal means."
Mark Stellini, CEO and president of InfoSystems, says the market conditions are perfect for his $80 million to acquire smaller firms with certain key integration skills. "We bought a firm earlier in the year, and we were able to agree on a good price for us and for the buyer," Stellini says. "This market is great for us because we couldnt touch many companies a year ago."
Another change rapidly occurring is the technically oriented founders of companies moving aside and bringing in someone with more business know-how. "This is a very visible reflection of the maturity of business models. While technology is very much a part of solutions, the people who are the engineers and technologists are not sitting in the seat of the president and CEO," Kieper says.