2009 TECH M&A OUTLOOK
My annual end of year editorial (to be published in the quarterly Merge Briefing) provides an opportunity to identify trends and dynamics that characterized the prior period, to figure out which ones will carry forward, and to speculate on new trends that will take hold. That has been my practice. However, we are currently bombarded with reminders that “everything has changed.” Market volatility, the death of investment banking as we know it, the hedge fund shakeout, and the near collapse of several national economies have all sparked a media frenzy that is further fueled by extraordinary volatility in the equity markets and an extraordinary lack of a velocity in the credit markets. Does that mean history is no longer a reliable guide? That it no longer repeats itself?
Unlikely. Let’s take a step back and focus on what the situation in the financial markets means for those of us who operate within the technology sector.
First of all, the meltdown in the financial markets will act as an accelerant rather than decelerant on existing IT trends. Software as a Service became a fashionable delivery mechanism again in 2005 (after being rebadged from the “ASP” of the late ‘90s). The recurring revenue models that characterize software as a service are no longer just fashionable, they are a necessity for the survival of technology companies. Firms that rely on new sales to survive will be in trouble this year.
Second, the end has been nigh for IPOs as a viable exit option for 8 years, and now it is here. A savvy private equity firm could still put hundreds of millions of dollars to work in order to create an IPO vehicle, but their returns would be distant and uncertain. For the rest of us, IPO simply is not an option.
Third, the migration of enterprise computing into the cloud may not be accelerated by the economic downturn but it will certainly be considered more and more frequently as an option as companies debate increasing their fixed costs in a captive data center versus accessing resources in the cloud.
Finally, search will be proven this year or next as the new killer app for the enterprise. Search represents a means of getting more value from existing IT infrastructure and data without a lot of risk or expense. Search is a fascinating phenomenon, and under-appreciated by traditional enterprise applications vendors. I believe that the explosive growth of IT infrastructure in the enterprise over the last 15 years has created as many barriers as benefits to the flow of information. Work that used to involve human interaction and workflow processes that triggered or involved interaction are now managed through data flows that are increasingly unavailable and cryptic to knowledge workers. Search offers a way to regain the corporate information that is locked in e-mail threads, forums and archives.
I can’t overstate the impact of our current economy on all of us individually and on our companies. The template for the next 20 years of history is being written now. Many firms simply will not survive the deepening recession, but others will emerge onto a new playing field with extraordinary opportunities. We have issued a call to action. We believe that companies should take defensive measures now as market conditions deteriorate. We have taken this stand in our speaking engagements and publications, and will continue to do so.
However, we can also look at some of the factors that give us hope. Unlike the dot.com meltdown, the current economic crisis is not triggered by a tech bubble. In fact, it was triggered primarily by excessive leverage in the financial sector.
Damage to the tech sector is primarily collateral. Certain categories which had received investment but have not yet achieved sufficient revenue will collapse -Web 2.0 and social networking companies will bear the brunt of this – but the sector itself is not being eradicated in the current turmoil. IT spending will be cut both for new purchases and for existing maintenance and subscription contracts, and that will hurt all of the vendors. Cuts in IT spending appear to be lagging the public markets by one to two quarters, which means we haven’t seen the worst yet.
Buyers are doing deals. Buyers are confident that they are in a buyer’s market and they are pursuing transactions, albeit at lower valuations. At some point in the next 2 to 4 quarters this positive sentiment will give way to a paranoid lockdown and the publicly traded firms will freeze acquisitions while the vultures step up to buy assets at pennies on the dollar. In other words, a seller who intends to sell within the next three years had better find a deal in the next few months, or resolve to wait out the market.