-Contact Thomas Rasmussen
Results from our fourth annual Tech Banking Outlook Survey earlier this week showed that bankers are turning bearish. Delving further into the data, we took a look at how it breaks out among banks of various sizes. When asked about the average time to closing a transaction, bankers said the length had trended up by less than a quarter of a month. Hardly a significant slip. Nonetheless, what struck us was that respondents who identified themselves as belonging to smaller shops (1-14 principals) showed an increase in time to close over last year of about a half-month to an average of 8.2 months. This compares to larger banks (25+ principals) reporting an average closing time of 7.6 months or very large banks (50+ principals) reporting an average closing time of 7.3 months.
Anecdotally, we’ve heard about deals dragging on for some time. (Two recent deals, for instance, took more than two years to close, bankers from two different boutiques recently lamented.) Obviously, the delays are mostly due to the uncertain economic outlook among acquirers, who have virtually all of the leverage in negotiations these days because they are the only exit available to startups. Indeed, bankers cited the cloudy picture at tech companies as the main reason that deal flow will be down next year.
And deals could lag even more next year. The reason? Broadly speaking, terms for the transactions closed so far this year were set before the October meltdown on Wall Street. We’ve already seen the upheaval in the credit market force recalibrations in the purchase prices of several acquisitions, including Brocade’s big pickup of Foundry. Those price cuts, which typically involve bumping back shareholder votes, string out deals. And every day that deals don’t close, the market seems to weaken. The Nasdaq, having dropped 25% in the past month alone, is currently at a six-year low. Since buyers are acutely aware of that decline, they’re increasingly going to be looking for a discount on what they plan to purchase. With every bid and counterbid, the deal cycle lengthens.