Agile Equity: Press

M&A Experts See Deal Flurry in Q4

By Ryan Naraine, AtNewYork.com - October 9, 2001

The current pace of mergers and acquisitions in the Internet economy has hit a speed bump, dipping 38 percent from quarter to quarter, but M&A experts believe deal-making will thrive in the year for one basic reason: it's impossible to ignore dirt cheap targets.

In its most recent report, online M&A hub Web Mergers said buyers spent $7.4 billion to acquire 300 Internet companies in the third quarter this year, representing a 38 percent drop from the previous quarter.

Yet, despite the slowdown, WebMergers CEO Tim Miller is predicting a flurry of deals in the fourth quarter when cash-strapped sellers will be forced to seek shelter in the arms of merger partners.

"We're expecting a giant year-end garage sale in the Internet space and I believe the events of September 11 have exacerbated the situation for some distressed companies," Miller said, arguing that a sharp drop in venture capital funding will force some companies out of business altogether.

"The possibilities for (initial public offerings) IPOs as an exit strategy have disappeared. That exit door is firmly closed so we'll see M&A activity picking up. The fact that VCs are unwilling to take risks in an uncertain environment means we'll see the bigger boys making big moves."

Ben Boissevain, managing partner at New York-based M&A firm Agile Equity, didn't share Miller's enthusiasm for a flurry of deals. "There will be a major slowdown in larger-sized transactions. Obviously, there are more risks involved in billion dollar deals and, with the current uncertainty, the ability to finance the mega-deal has diminished."

Boissevain also expects international deals to slow to a crawl in coming months as uncertainty over war and terrorism force buyers and sellers to adopt a wait-and-see approach.

"However, there will be a lot more activity locally. The only realistic exit left is an M&A exit. Venture capital funding is hard to come by and the IPO exit is dead for now so we're seeing a lot of healthy companies looking for merger partners."

He said lowered valuations of small- to medium-sized transactions would fuel a spate of rollups. "We'll see a lot of deals financed primarily with cash. There are acquirers looking to reassess their M&A strategies quickly since the events of September 11. Plus, there are some dirt cheap targets out there that are hard to ignore."

Boissevain also warned about the timing involved. "It is a game of musical chairs. If you don't go out now and find a partner, you'll be left standing. If you decide to just sit by and wait a year, the acquirers with the capital may have already bought your competitor. If you don't find your seat in six months, you could potentially have a major problem."

Boissevain and Miller both expect consolidation to speed up in the security (network/Internet) and wireless sectors.

Miller is also predicting increased deal-making in the B2B, e-learning and ASP space. He thinks the security field will not be as defensive as some of the other sectors in the move to consolidate.

"(The flurry of deals) will be at valuations that are likely to be unfavorable to sellers," Miller explained. He said a sharp drop in stock prices after September 11 may lead to takeover attempts of public companies that are seen as being undervalued.

The dealmaking fervor could also be helped by venture capitalists cutting back on funding activity. "Further adding to the activity, some of the nearly 450 Internet companies that have shut down or declared bankruptcy this year will be attempting to sell assets before the end of the year."

Although the fourth quarter is almost certain to see plenty of sell-side inventory on the market, Miller believes the key question is whether buyers are willing to pull the trigger on deals. "Cash-flush acquirers will be in the best position to seize bargains in this period - and to the extent that they perceive that valuations have reached a low, may be eager to make their moves before the end of the year."

Like Boissevain, Miller is a big proponent of adopting an M&A exit strategy when a company's business plan is being written. "From day one, an M&A exit should be built into business plan, including specific names of who acquirer might be. That is a reality these companies must face," Miller said.

A common complaint about start-ups is that they often adopt a "single-thread" strategy and rely entirely on a transaction from a single buyer. "They bank on a deal from a single company and, when that doesn't happen, they're stuck in no man's land with no money in the bank," he said. "By that time, it's time to file for bankruptcy and liquidate."

Boissevain said it's virtually impossible for start-ups to go alone in the current funding environment, and that companies should quickly adopt a specific M&A strategy that includes anything from selling to a large company or merging with the competition "Companies should look at all options at this point and be a little more realistic about their chances of survival. It's better to be aligned with the enemy than be left behind."