70% Off in the Middle Market As Well
James Kwak of the influential economic blog, The Baseline Scenario, posted a blog earlier this week titled “70% Off Sale”. His point: Granted, stable companies need to conserve cash and avoid risks, but this economic environment provides great deals for savvy companies.
The recession hits smaller companies disproportionately, both economically and due to the lack of exit alternatives. There are great companies out there with long term viable businesses but are overleveraged and may not be able to survive a prolonged downturn. He gives the example of Oracle and Sun. Less than a year ago Oracle and Sun basically had equal share prices. Today, Oracle’s share price is down 10% from a year ago, while Sun is down almost 60%. This might not be a 70% differential, but still a great opportunity for Oracle on all strategic fronts.
Middle market firms can avail themselves of the same opportunities. There are plenty of firms with protected technologies, proven business models, growing customer bases, capable management, but poorly capitalized and short on operating funds. Financing has dried up for companies the economy over, but even more so for IP heavy technology firms that have little or no tangible assets to use as collateral. Alternative exits? Going public is not even an option for these firms unless they’re grossing at least $100M+ with healthy margins. The only lifeline is to merge or be acquired. However, deal volume has slowed dramatically. According to Capital IQ, there were 535 closed and 2 announced deals in Q1-2008 in the information technology sector, which includes internet companies (excluding Merchandising & Media/Content), but 261 closed and 62 announced in Q1-2009, a 105% decrease by volume.
Fewer buyers, less demand, lower prices. As Kwak states, “At some point, prices fall to the point where people start buying again.”
Filed Under Merger & Acquisitions, Recession
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