Tech M&A: Report Card from the Doldrums
Today’s Boston meeting of the Association for Corporate Growth featured remarks by Ben Howe, CEO of AGC Partners (an active high tech investment bank involved in M&A and finance). The highlight (or lowlight) of his presentation traced the falling arc of technology M&A from its modest recovery in 2010 and 2011 to the low point that we call 2012. Further, his anticipation is that we will see no particular upturn until the end of 2013 at best.
Why no upturn, even after the election? Partly it has to do with the social media “bubble” which has created unreasonable expectations as to enterprise value, and partly the continuing economic uncertainty that the election will not alleviate.
Key deal points in today’s cautious market, wherein sellers are fearful to commit and easily spooked:
- Balance sheet price adjustment for working capital.
- Extensive indemnities.
- Escrows (although they have “dropped” to the 10% to 15% range).
- Tying up management employment.
- Exclusivity over the long period of time that transactions are taking.
- Extended diligence (and during that extended diligence, you had better meet your quarterly P&L targets).
- Earnouts vs. cash deals (not much activity in stock deals).
Howe also noted some outliers among the big players in tech: Apple does almost no deals, and Google isn’t looking for earnings or customers but wants to pick up the technology embedded in “teams” of human beings.
As for private equity money, about half of it is going into digital media which in the long run will ultimately feed M&A in that sector, but not right away. PE is keeping its powder dry still, but is under increasing pressure to put the money to work, and in the tech area Howe estimates that there are about 100 PE firms who are capable of writing a $30,000,000 check for tech company investments.
Needless to say, most exits for tech companies are through M&A and not the IPO route. Is there a future for IPOs? Not right away and any window that will open, says Howe, will open only briefly. He notes that of the 2011 IPO class, 74% are presently trading below their offering price.
Can growing tech companies borrow from banks? The answer is, not easily for the obvious reasons, and such borrowing is particularly difficult in funding an M&A program (as opposed to a P&L based loan). This gives rise to newer players in the tech loan market, filling in for the banks.
The most interesting observation came in response to a question as to why California continues to be so far ahead of Massachusetts in terms of numbers of deals done both in finance and M&A. Howe ascribes the differential primarily to the approach of East Coast venture capital, which seeks to exit a deal too soon because they are more conservative than their West Coast brethren. He believes that West Coast investors stay with their companies longer, create much larger companies, and that those larger companies further are more prone to spin-off additional start-ups. He also noted that Massachusetts investors were slow to pick up on digital media, which is a hot topic now and which was embraced by the West Coast.
It seems that tech M&A is a constant regardless of the general economy, but it is clear that deals are much more difficult to make, and that signing an LOI simply means you are starting the process, and you have to stay focused on getting the deal closed (and, from the seller’s standpoint, resisting repricing based upon scrupulous diligence or based on missing your numbers at the end of a quarter).