M&A: The Bridge Over Troubled Waters

Below is a summary written by Dirk Van Dyke, Vice President & Director of  Valuation Services of a recent presentation given by Chris Greer, Managing Director of Mergers & Acquisitions at Robertson Stephens entitled, "M&A: The Bridge Over Troubled Waters" at a recent Association for Corporate Growth Meeting:

Gary & I attended the ACG meeting on Thursday (April 12, 2001) where Chris Greer, Managing Director of M&A at Robertson Stephens spoke about the current M&A environment. The deal flow is down considerably in 2001 compared to 2000 and 1999, as the capital markets are demanding that deals make sense financially; i.e. the pro-forma projections for the combined entity have higher earnings/cash flow than the companies on a stand alone basis-as well as from a synergy standpoint. Another reason M&A deals have decreased is that public companies have a much less valuable currency (their stock) to purchase other companies with.  Also, quite a few proposed deals have fell through due to a clause known as "MAC" (Material Adverse Changes) which allows either party to cancel the transaction due to a material change in business conditions of the other party.

He believes that in many areas of technology that there will eventually be a few really big winners and that midsize companies will have a difficult time competing. That is, there will be either more monopolies like Microsoft or oligopolies with a few big players with ~ 70-80% market share of an industry. The desire for companies to become one of the big players will drive a lot of M&A activity, in his view.

John Dunning of CrossFire Ventures, asked an interesting question, "Why aren't some of the dot.com's with cash = 2 to 3 times market value taken over and liquidated to get at the cash?" That is, pay $5.00/share to acquire a controlling interest in a company with $10/share of cash on its balance sheet after all liabilities have been paid. The answer is that

• 1) in a lot of these cases the entrepreneur still owns a controlling interest, so it is not possible to acquire a controlling interest because the entrepreneur can't accept that his/her company's best option is to liquidate and
   
• 2) a number of shareholders bought in at values much higher than the cash per share value (say at $100/share in my example above) and they want management to do everything to get the stock price back to or above the share price they bought at.

Another factor is that companies are having a tough time accepting compression of their values, i.e., they were worth $100 million in early 2000 and now they are not valued at anything near this amount. Values in the private markets have decreased since the boom/bubble period we were just in, in tandem with the obvious reduction in the stock prices/market caps of publicly traded technology companies over the last 12 months.

This is another reason that much fewer M&A deals are taking place, because owners of privately held companies don't want to do deals at lower values than their most recent financing. He gave an example of a company that had what he thought was a good offer on the table and walked away because it was less than what it got at its last round of financing.  Consequently, the company recently had to close its door because it ran out of cash.

Association for Corporate Growth www.acg.org/sv, Silicon Valley Chapter

Please note: The summary above is not the opinion of ValueNomics Research, Inc. or Dirk E. Van Dyke.