Everything is on sale these days, and it's not just your friendly neighbourhood auto lot that's offering a sweet deal.
With rumours swirling that Nortel Networks Corp. may be putting two of its biggest business divisions on the chopping block, along with Bridgewater Systems Corp.'s recent pronouncement that it might look at "opportunistically" acquiring smaller companies during this downturn, local experts are saying it's a good time for both sides of the mergerand-acquisition equation.
There are great opportunities for buyers to pick up companies or pieces of technology at relatively low prices, says Debbie Weinstein of law firm LaBarge Weinstein.
"Ottawa produces a lot of great technology, but unfortunately at this time some companies can't scale their revenues to grow or have funding issues because venture capital is so pathetic, so they're forced to sell. It's been a common occurrence within the past decade," says Ms. Weinstein.
What's new, however, is that while valuations are lower due to the effect of the weak markets on the prices buyers are willing to pay, so too are the expectations of sellers.
"It used to be that there would be software companies with $1 million in revenues that wouldn't take less than $20 million in cash, and so deals rarely got done," says Bruce Lazenby. He's the Canadian regional director of the Corum Group, which helps facilitate mergers and acquisitions for privately held software and IT companies.
Most Canadian entrepreneurs start tech companies with the goal of creating liquidity, either by selling orthrough an initial public offering, Mr. Lazenby says.
But with the narrowing of one avenue due to the "abysmal" IPO market, most sellers are now more "realistic"about the best values they can expect for their firms.
"This recession is going to indiscriminately kill companies and by the time they realize it, it's too late and...they're not going to get additional investment, so they need to get ahead and start talking to strategic acquirers," he notes. While it sounds like a bit of a bum deal for sellers, Mr. Lazenby argues that's not the case.
"When you go through a transaction, what do you do with the money?
"Whether you buy a vacation property, stocks and bonds, or start new companies, it's a great time to have cash for those things, because everything's on sale," he says, adding that most entrepreneurs do go on to found new startups after closing an M&A deal. As well, an acquisition often isn't the end of the story for a company. "It used to be that a big American company would buy you, take the key people, shut down the Canadian operations and that would be the end of the company. Now, the company, people and products stay in place and ... instead of a sales force of three, you now have 600."
That was the story with Prosanto Sarkar, who sold his 22-year-old company Tilcon Software for US$3.5 million to California-based Wind River Systems in February. Mr. Sarkar, who is now director of product marketing for the latter company, insists he got a great deal for Tilcon despite what might be suggested by market conditions.
In the months prior to the sale, Tilcon had been forced to reduce its workforce from 30 to 18 people in the face of dwindling capital, he says. "Our choices came down to shrinking even further or to make the deal ... and even if we could survive (until the economy got better), we'd still have to pay the bills (until then)."
Rather than trying to hold out until there was nothing left of the company his team had worked so hard to build, Mr. Sarkar says he sold the firm to give the technology a better shot and provide stability to the employees. The deal also gave him some resources to reinvest into other startups in Ottawa, he says.
"You could wait for that unknown or for something you think might happen, but you've got to take care of what's in front of you now and go forward," he adds.
It's important to note, however, that this down market isn't all about going on a buying spree just because companies and product lines are going for a relative song.
Sellers still need to have a compelling story, says a Wind River executive, on the other side of the deal.
It just so happened that the two firms worked out the Tilcon deal in the midst of a downturn, says Marc Brown, vice-president of strategy and marketing for Wind River's VxWorks division, but that was a secondary factor in the decision.
"While it's a good time to look at acquisitions from a leverage perspective, you still need business synergies and fundamentals to make it happen. I don't think (the prices) would accelerate any M&A, but if we find things now that fit our strategic needs, we'll look with a magnifying glass," says Mr. Brown, although he acknowledges it's wise.
"Overall, I don't see the economic conditions today creating a stimulus or trigger for us to do something that wouldn't naturally fit ... and the deals take some time (to set up)."
This article was published by the Ottawa Business Journal and can be found at http://www.ottawabusinessjournal.com/20126298734443.php.