Small-time means good time for M&A

-Contact Thomas Rasmussen

Smaller shoppers are increasingly perusing the proverbial deal aisle. As our 2008 Corpdev Outlook Survey conducted in December indicates, 2009 looks to be the year of small-time shoppers. When we delved further into the data to try to get a feel for what corporate development officials from various companies are thinking, we observed an interesting trend: While large firms said they were more likely to do divestures than acquisitions, small companies were significantly more bullish on M&A. (For our purposes, we classified small firms as those with fewer than 250 employees and large firms as those with 2,500 or more employees). In fact, it seems that large acquirers are a bit more wary of the economic realities than their smaller rivals, with some even leaving the market entirely. Corporate development officials at large companies were twice as likely to say the current economic recession is ‘very likely’ to depress deal flow compared to their brethren at small companies.

Anecdotal evidence of this trend reinforces that sentiment. Take Pegasus Imaging Corp, a privately held, employee-owned company founded in 1991 that is recognized for its host of enterprise and consumer-imaging products but mostly for its JPEG-imaging compression technology. After having been out of the market since acquiring its competitor TMSSequoia four years ago, it picked up Tasman Software and AccuSoft’s imaging business last week for an estimated combined cash value of about $30m. The small, privately held shop told us that the current environment is ripe for M&A, and we expect the two acquisitions to be the first of many this year. Meanwhile, serial shopper Avnet may be slowing down, despite having just announced its first deal of the year (last week, the mid-cap company spent an estimated $30m for Nippon Denso Industry, an electronics distributor based in Tokyo). Avnet announced six deals worth $385m in 2008, but recently indicated to us that it will take a much more cautious approach to shopping this year.

Industry makeup of respondents

Industry Percentage
Infrastructure software 32.0%
Applications software 21.3%
Systems/hardware/semi 13.3%
Other 9.3%
Mobile 8.0%
Networking 6.7%
Services 5.3%
Telecommunications 4.0%

Source: The 451 Group Tech Corpdev Outlook Survey, December 2008

Hey, big spender?

Contact: Brenon Daly

Given all the economic uncertainty, companies have made it clear that they’re not in the market for any big deals. (In our annual survey of corporate development officials, they indicated that they were least likely to pursue ‘transformative’ deals in 2009.) To put some numbers around that sentiment, we contrasted the shopping tab of four well-known tech companies in 2008 with the previous year’s tally.

The quartet we selected (IBM, SAP, Microsoft and Nokia) all announced the largest deals in their respective histories in 2007 so we naturally expected some drop-off in spending. But we were amazed at the steepness of the plunge. In 2007, the four companies announced 40 transactions with an aggregate value of $29.2bn. Last year, that dropped to 34 deals worth a paltry $4.7bn. (In fact, each of the firms inked a single transaction in 2007 that was worth more than 2008’s collective total.) And it’s not like they don’t have the resources to continue shopping. Over the past four quarters, IBM, SAP, Microsoft and Nokia have collectively generated an astounding $45bn in cash-flow operations.

Companies go bargain-hunting

Contact: Brenon Daly

It’s a buyer’s market in tech M&A right now, and the buyers are saying they want to do deals but don’t want to pay much. That’s the takeaway from our annual survey of corporate development officials. (We’ll have a full report on the results in tonight’s 451 Group send-out.) Half of the respondents said the M&A climate would get ‘somewhat better’ for them in 2009, with another one-quarter saying it would get ‘significantly better.’

The percentage this year (75%) compares to less than half (43%) who predicted last year that the environment would improve. More than four out of 10 corporate development officials projected that the pace of their company’s dealmaking would pick up in 2009, with three out of 10 saying it would stay the same. As to what will make the environment better for them this year, the short answer is that they don’t expect to pay much. Some 45% said valuations of VC-backed companies would ‘decline substantially,’ with another 42% predicting that valuations would ‘decline somewhat.’ That’s nearly three times as many respondents who projected any decline in startup valuations in 2007. Again, we’ll have a full report on the survey tonight.

Outlook for corporate buyers

Year Improve Unchanged Worsen
2008 (for 2009) 75% 13% 12%
2007 (for 2008) 43% 35% 22%

Source: The 451 Corporate Development Outlook Survey, December 2008