Corum advises on mergers and acquisitions in the IT industry and has been involved in some of the biggest deals in Europe. Corum's MD Miro Parizek warns that the gap between expectations and real value is making deals hard to agree and may be holding back the level of activity...

We at Corum are certain that way too many entrepreneurs are completely underestimating the weight of the "recession" that is coming their way. Many entrepreneurs with their ever optimistic and we'll-get-through-this-too attitude who are missing the gravity of the situation.

Not all will lose. It is in times such as these when new winners appear, but it will not be the ones running businesses as usual. It will be those with disruptive technologies and new business models. Our financial system is going through systemic changes of a scale never seen before and it will have impact on everyone's business in the IT industry. The number of transactions is down in 2008. However, it dropped from record levels in 2007. The number of deals taking place is still at a level above the lowest point in 2003. In fact, IT industry M&A in 2008 was still better than in 2005. Looking forward into 2009, we expect a continued decrease in the number of transactions due to three reasons.

Firstly, a significant number of buyers are either licking their wounds or preparing to do so. Many buyers have begun experiencing significant softening of demand in Q408 and those that were able to get through 2008 relatively unscathed, have received unmistakable signals from their customers regards a reduced pipeline of IT investments in 2009. In any case, it is clear that IT customers will be reducing investments while they are fighting for survival. This uncertainty is leading many buyers to hold off on acuquisition decisions while they focus on their exisiting business and their own cuts, cost reduction and cash flow preservation.

Secondly, publicly-traded buyers are constricted by their own financial metrics and those of their peers. As stock prices plummet based on investor expectations of reduced profitability, buyer boards and CEOs get handcuffed by their own numbers. Most are not able (i.e. not willing) to pay more than their own depressed revenue and/or EBITDA multiples. Of course, if a seller brings a buyer a undisputable strategic benefit to compete against its competitors or a clear and certain path to additional reveneues and, more importantly, profitability, buyers can and will pay more than their own multiples. Nevertheless, the prices buyers are willing to pay in today's risk-adverse environment are lower than historic averages leading to challenges in bridging valuation gaps.

Which brings me to the third reason: many sellers are still dreaming of premium valuations which they read about only a couple of quarters back. This is a classic phenomenon of trying to time markets and, as a seller, not adjusting to new realities. The big question is when, if at all, the valuations will return to premium levels. More often than not, peaks in specific market segments are not repeated. In fact, more critical to timing of exit strategies, is market segment consolidation. As a seller, one needs to be aware of the deal making in their particular market segment and the actions of their competitors and the new entrants (i.e. acquires) which will be their future rivals. Sellers who think too much about valuation may be the ones that end up disappearing over the long term - or even in the short term - without an exit.

I have seen this before as at the end of 2000 going into 2001; sellers were often still targeting valuations seen only a few quarters before. Exactly these sellers were the ones that more often than not underestimated the depth and more over the length of the ensuing IT recession of 2001-03. Many of them actually went bankrupt or were totally squeezed out as they ran back to their investors looking for equity that, if at all available, became exorbitantly expensive. History will repeat itself as sellers adapt too slowly to the new M&A economics, while exasperating their problems by underestimating the impact of the global recession.

How quickly will this dichotomy (buyer and seller valuation expectation) change? All too slowly. However, the statistics seem to indicate that an adjustment has occurred and will continue. The number M&A transactions in IT has not decreased as dramatically as the total dollar volume indicating that the sellers are accepting deals at lower prices. The stats could also be indicating that there are simply a larger number of deals involving smaller companies. We think it is a combination. The good news here is that for realistic sellers, there are a lot of transaction and in fact many smaller companies are now being looked at more closely by larger buyers who wouldn't have even spent a minute looking only three quarters ago.

Ultimately though, the bigger question for many entrepreneurs is whether or not they will have the luxury to think about relative wealth. Many will not survive and should seriously be considering to do something now before it is too late. I hate to think about the many entrepreneurs that underestimated the challenges of 2002 and 2003 leading to decisions that resulted in zero wealth. www.corumgroup.com

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