I attended a board meeting last week where the Board was debating whether it is a good time to seek a trade buyer for the company (see Part 1). The volatility in the stock market was at the core of their concern that the tech M&A market would not be receptive and valuations would be too low. My position is that the public stock markets are not the best indicators of the health of the tech M&A market. In this board meeting, we also talked extensively about what was happening within this companys market and the excellent progress the company had made to reposition and strengthen the company, partially in anticipation of seeking a strategic partner for the company. My position is that these factors are actually far more important to their decision about when to seek a strategic partner. Gauging timing is critical to achieving the optimal outcome, and some companies wait too long and pass their sell by date.
In this case, the last 12 months have been active in their ecosystem. Their core market is undergoing consolidation. Several of the largest and most influential companies in their market segment, who were excellent buyer candidates, have been acquired. Consolidation is also underway in adjacent sectors populated by a number of good buyers with strong synergies that were seeking to grow the vertical markets they serve.
In parallel, the company has made wonderful progress internally. The recently reconstituted Board is very supportive of management. With the Boards endorsement, the company has been able to diversify their revenue model by adding recurring revenues, expand into important new geographies, gain footholds with their core products in new verticals and formed go-to-market alliances with business partners. Revenues have rebounded from 2009 and are on-plan for 2011, the backlog is strong and the sales pipeline is full. They are well positioned for M&A now.
If this company decides to defer the search for a trade buyer, it will probably need to wait for 3 to 4 years for the next market cycle. To be relevant then, it will need to redirect its focus onto their mid-market, evolve its revenue model to even more recurring revenues and find funding to re-architect its product set. At the end of the day, these ecosystem and internal issues are the ones that should drive timing of any companys entry into the market. The progressive global recovery, the threat of a second recession and stock market volatility are important but have secondary influence on whether now is the right time for M&A.