Acquisition Market Outlook

The timing of an exit is naturally influenced by overall activity levels in the market, and today’s market outlook for acquisitions is mixed. The pace of merger and acquisition activity has slowed down somewhat, but the picture is far from bleak. Large strategic companies continue to grow through acquisition. Private equity investors still have capital and are looking for opportunities to put it to work. Owners of private companies are looking for timely exit strategies, and prices are still strong for high-quality assets.

While there were several high-profile deals in 2008, the volume of software acquisitions M&A transactions decreased from the previous year. Fewer large-scale transactions occurred, while middle-market deals were more prevalent.

M&A Market Dynamics

Valuations were generally steady. EBITDA values in 2008 were down less than 2% year over year, and 2008’s median EBITDA multiple remained higher than 2006. Buyers still seem willing to pay solid prices for attractive acquisitions.

What are the characteristics of software industry acquisition activity thus far in 2009?

M&A Market Dynamics - First Half

Overall transaction volume dropped 10% from the same period in 2008, and aggregate transaction value dropped 27%. On the other hand, large companies like Oracle and IBM remained very active, and most people I talk to expect the acquisition market to rebound somewhat in the middle of 2010.

BerkeryNoyes provides merger and acquisition services for middle market companies. Each year they publish reports on trends in acquisitions for key industries. Most of the research for today’s post was drawn from information on their site, which is included in the 20/20 Outlook blogroll.

The CEO Dilemma

Leaders of high technology firms often face a dilemma: while they feel compelled to spend all of their time in their business, they realize they should spend more time working on their business. A high tech CEO has a finite amount of time that must be allocated across multiple activities such as overseeing operations, managing costs, marketing, sales, vision, and partnerships.

The reality of keeping a high tech business moving forward while maintaining positive cash flow often leads the CEO to focus almost all his/her time on operations and cost. With so much time spent on these two activities, they can become his/her comfort zone. Days can become consumed with adjusting business processes and managing costs.

While these activities are necessary, investors and boards want more. They want to see a clear path to a dramatic increase in the future valuation of the business, and they want to see the CEO spending time to accomplish this. How the CEO changes his/her own behavior usually takes one of two directions, depending on whether the company is growing.

If the company has a proven business model in an expanding market, the CEO needs to focus more effort and attention on marketing and sales to accelerate growth. The business model has been proven, and increasing the effectiveness of “turn the crank” activities must be the objective. On the other hand, if company growth has not materialized or has stagnated, the CEO must modify and expand the vision that drives the company in order to break it out of its slow growth mode. New vision and strategy often dictates more alliance-building and strategic partnerships to support the new vision.

The trick is to create a pragmatic framework for managing implementation of the new vision while continuing to keep operations humming and costs down. The 20/20 Outlook process was developed to address the dilemmas and challenges faced by CEOs desiring to grow the business and communicate more effectively with investors and board members. Augmenting the management team with  an experienced outside adviser enables the CEO to create breakout initiatives while continuing to manage daily operations.

CEO Activities and Zones

Source: Conversation with Executive Edge

Build a Viable Business, or Build Toward an Exit?

If you’re a CEO, board member, or investor in a high tech company, growing shareholder value is a top priority.  The obvious challenge is taking the right steps and avoiding the wrong ones. Two divergent views on how to grow value are commonly held:

  1. Focus on growing a viable business and let the exit take care of itself, and
  2. Base each corporate decision on your targeted exit strategy.

Business v. Exit

For years I was certain that the former view was the best one. Simply keep evolving the business with desirable products and services offered at a reasonable price with good support, then at some point you’ll be acquired or else the conditions will be right for an IPO.

In today’s increasingly competitive environment, I’ve reconsidered that position. Most companies find that an IPO is out of the question for now, so if they articulate an exit strategy, it’s “to be acquired.” While building the business continues to be important, the complexity of the current market landscape and, even more importantly, the speed at which the market and market perceptions change, demands a more sophisticated approach.

Taking a stand at either end of the continuum above can result in failing to reach the preferred exit. If you focus only on growing a viable business, you may survive but you may not trigger the financial event that the investors and shareholders want to occur. On the other hand, if you focus solely on the exit, the business can suffer and your company may be eliminated from consideration by potential acquirers.

The purpose of 20/20 Outlook is to ensure that the proper balance between these extreme positions is achieved, i.e. that the company’s value increases through relationships with potential acquirers and potential acquisitions while you continue to grow the business. The process defines clear steps that enable you to (1) view your company through the eyes of potential acquirers and potential acquisitions, (2) define a realistic exit strategy, (3) align your product strategy in light of what you’ve learned, and (4) define and execute partnerships that move you closer to an exit.

More on this next time. In the meantime, additional information about 20/20 Outlook can be found at

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