I don’t normally broadcast a “state of the M&A market” message to my contacts, but these are abnormal times.  On October 2nd I received an email marketing message from a SAAS CRM vendor with the tagline “Business as usual won’t cut it.”  Three days later they shut their doors, unable to make payroll.  It struck me then that I should be talking to people in the field rather than relying on my inbox and news sources.  Likewise, if you have a personal or professional interest in the technology M&A market, keep reading.

I have had six closings this year, my busiest year since 2000.  The deals reflect the current market dynamics:

1) US sellers need to look globally for buyers.  I worked with a US company that develops business component software for large insurance companies.  Both finalists in the bidding were non-US firms, and the winning bidder was Polaris in Chennai India, an outsourcing, development and services company focused on the financial services sector.  The deal was announced September 29, concurrent with the emergency bailout bill, bank consolidation, and AIG bailout, all of which directly impacted our client’s customers.

Polaris Acquires SEEC

2) There is still a market for the high tech horizontal solution, but only if it is the right technology, developed by the right people, in the right market.  I worked with Caligari, a developer of 3D web collaboration software, in their sale to Microsoft, and with emBoot, a remote booting solution for virtual machines, in their sale to DoubleTake.  In both cases the revenue was small but the technology and teams were very strong.

Microsoft Acquires Caligari

Doubletake Acquires Emboot

3) Private equity firms are limited by the credit crunch in their ability to do large leveraged deals – but they are still doing them.  Only the strongest, fastest growing and most profitable firms can pull off recaps today (RadialPoint/TA Associates is a good example).  PE firms are aggressively looking for high quality transactions and ironically, a strong company that goes to market today will get a tremendous amount of attention.  However most of the work with PE firms tuck-ins for their portfolio companies.  I recently  worked with PowerTech Software, the leading independent developer of security solutions for the IBM mid-range.  Most of the interest came from private equity-backed firms, and Help/System, backed by Audax, prevailed.

HelpSystems Acquires Powertech

4) It is hard to make good decisions when the market is changing. . . but it is also good to make hard decisions when the market is changing.  WAMU turning down buyout offers and then tipping over is an obvious example.  In a more positive light, Infobasis managed to downsize and reinvent itself as a profitable, viable company after getting sidetracked last year, and successfully sold to Acquires Infobasis 

These are the profiles that have delivered closings so far this year: a business that is strategic to international buyers, a technology that is strategic to the large tech players, a logical “add-on” to a PE portfolio company, or a very strong, very profitable stand-alone business that can support a recap.

What is next?  Something nobody likes to talk about (except perhaps for the bootstrapped companies that failed to get VC funding): an astonishing percentage of VC-backed companies will close their doors or go out in fire sales over the next three years, and there really isn’t anything the investors can do about it.  Customers are tightening their budgets and allocating less of their budgets to startups, follow-on rounds are reserved for the superstars, and the buyers are smart enough to sit back and wait.

Getting any deal done amidst all this noise will require careful positioning, differentiation, and a direct, no-nonsense approach.

Smart money will step up and take advantage of the buyer’s market.  However it is worth noting that the same conditions that created the economic crisis will hamstring buyers.  When capital is scarce, allocating dollars to M&A is at best hard and at worst dangerous.  For example, I met with the CEO of a large publicly traded Utility last week to discuss a $25 million acquisition program for a software subsidiary.  Before green lighting it, he had to check with his lenders to confirm that he wouldn’t put the bank lines of the parent company at risk by pursuing this strategy.  In other words, a tiny acquisition by a tiny subsidiary could, in his estimation, put the entire business at risk.

I would be happy to discuss the market with you appreciate your perspectives on the market and where we are going. 

I will again be chairing the World Financial Symposiums conference in Silicon Valley in May of 2009.  The conference is called “Growth and Exit Strategies for Software, Internet and IT companies.   

Good luck in the coming quarter.