By Allan Maurer
NEW YORK—Although buyers are doing careful due diligence and taking longer to close deals, many of them, particularly cash flush larger firms, see the current economy as a way to grab some technology cheaper than a year or two ago, says Greg Ager, a partner with Updata Advisors, a top investment bank focused exclusively on IT.

“Deals are difficult to get done,” says Ager, “but buyers are interested in continuing to acquire. In most situations, they are not moving quickly and they’re being tough on valuations, but many see an opportunity to acquire newer technologies. It skews the build vs. buy equation toward buying because the price of most assets has come down.”

Ager will join dozens of other top VCs, entrepreneurs and business executives participating in the third annual Southeast Venture Conference March 11-12th, 2009 at the Intercontinental Buckhead in Atlanta, Georgia (see www.seventure.org for more information and registration).

“This is definitely a buyer’s market but we’ve been very active on the sell-side,” says Ager, who has completed approximately 60 transactions valued at more than $7 billion in his 18 years of investment banking experience.

Lacking muscle to survive
Founded in 1987, New York-based Updata has advised hundreds of software and IT services companies on mergers, acquisitions, private placements, fairness opinions and corporate restructurings representing $15 billion in aggregate transaction value.

Ager says some technology companies seek acquisition because they think we could be entering a protracted downturn and they don’t have the sales and marketing muscle to survive the fight. “A lot of these companies don’t have an option,” he says. “Capital is going to be expensive if available at all. In some cases, VCs who backed them are pulling the plug on their investments.”

He doesn’t expect M&A will be driven by large transactions, however. “There are wide gaps in valuations. Some more mature targets still think they’re worth what they were two years ago. But and buyers expect a discount in this economic climate.”

Smaller deals likely
So Ager says he thinks the bulk of M&A activity will take place in the markets where Updata typically plays: the sub $200 million level.

“There are lots of large, cash-rich buyers,” he notes. “They include HP, EMC, Dell, SAP, Oracle, Microsoft, Symantec and others. Most could easily do a half dozen to a dozen smaller deals without making a big dent in their cash reserves.”

Ager says a lot of them are on the prowl looking for good assets and many companies that serially raise capital every six to 12 months or so are looking for buyers because capital is so hard to obtain. “Unless a company has a fully-funded business plan, they may to be hard-pressed to survive without major cost reductions.”

Unfortunately, many deals still get “stuck in the mud” because of huge gaps in valuation expectations, he adds.

Flat volume expected
Generally speaking, says Ager, Updata expects M&A activity to be flat, give or take a few percentage points compared to last year. “It may even go up because it was down so much last year. We do think a lot of sellers will adjust their valuation expectations, which will lead to a shorter deal cycle and more closings.”

He notes that the lower valuations do not mean they are bad companies or that they’ll do cartwheels over the sales prices, but that they need to find a good home.

Something Updata is already seeing, says Ager, “are non-traditional M&As,” such as startups merging to obtain operational synergies and cut costs, gain critical mass, stop competing and take on the big guys. “Scale matters,” Ager says.

Sometimes, in compelling deals, private equity capital gets added in such transactions, he notes.

Other non-traditional M&A activity Updata sees include corporate divestitures, mergers of equals, and joint ventures, he says. Divestiture activity will be driven by the fact that some mid-cap players and larger players in tough operational situations are looking at selling non-core assets, product lines or business units to raise cash.

Updata usually does from 15-25 deals annually and last year completed 14 and ranked number one in computer software and related services in 2008, according to data from MergerStat.

Not a rosy outlook
“From the standpoint of number of deals, we don’t see a lot of slowdown,” Ager says. “It’s less than 10 percent. From a fee standpoint, it was about the same for 2008.”

Updata is in the midst of planning for 2009. “We’re not going to increase headcount a lot,” Ager says. “We’re cautiously optimistic on deal volume and we’re probably better positioned than most because we’re nimble, we’re laser focused, and we don’t have capital worries.

“We have a strong backlog, but deals are going to be extremely difficult to get done.

“They’re going to take a while. Buyers are going to try to extract their pound of flesh and conduct extremely careful due diligence.

“It’s not a rosy outlook, but deals will get done. We have a good track record of activity even since the markets turned south last summer.”

Online: www.updataadvisors.com

Southeast Venture Conference, February 29 – March 1, 2012 at the Ritz Carlton in Tysons Corner, VA – Where Smart Money Meets Smart People.
www.seventure.org

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