What To Do During This Long Economic Winter as Deal-Making Grinds to a Near Halt

Today, Creative Capital is publishing a guest commentary from M. Benjamin Howe, Chief Executive Officer of the Boston-based investment bank America’s Growth Capital.

Here is the introduction to a longer report.

What To Do During This Long Economic Winter

While opinions on the best path to economic recovery differ dramatically, there is little argument that the uphill climb will be even greater than it appeared just one month ago. Since our 2008/2009 Capital Markets Perspective was published in January, activity across all transaction types (M&A, Private Placements, PIPEs, IPOs, etc.) shows significant declines in all business areas and industries from the already painful levels of 2008. (See Attachment.)

Wall Street transaction activity, including global technology, is down 50% year-over-year, down 60% compared to 2007, and down even more on a dollar-value basis. (See Page 2.) So far this year, only 6 out of roughly 400 M&A global technology transactions have had values of $100 million or greater.

On the technology financing front, there have been no follow-on offerings or IPOs, and there have been only 11 PIPEs and 91 Private Placements of $5 million or greater YTD, as compared to 37 PIPEs and 190 Private Placements in the same time period last year. We expect technology transactions for 2009 and the foreseeable future to be dominated by $2-$30 million private placements, some PIPEs, very few public offerings, and M&A transactions valued between $1-100 million – which we believe will comprise 90% of disclosed M&A transactions.

The top 11 technology giants have only announced 8 deals YTD (compared to 16 at the same time last year), while the top 15 Financial Buyers of technology have yet to do a deal! Strategic and Financial Buyers have the cash for acquisitions and are attracted to the depressed valuations (public valuations have dropped over 50%), yet have been reluctant to deploy capital as these valuations have continued to fall.

This drop in transaction activity, however, cannot be solely attributable to buy-side participants. Company management teams and their private and public shareholders are hesitant to sell given battered valuations and are generally opposed to relinquishing control (and their current income) during these turbulent times. Even in this difficult economic environment, top quartile technology companies will continue to successfully draw from the tens of billions of dollars in venture capital and growth equity.

While the economic recovery will clearly take longer, within our business we are already starting to see the beginning of a recovery in M&A activity and believe the second half of 2009 will be dramatically stronger than the first half.

In one of the best buyers’ markets in decades, it’s obviously not a great time to sell your business. Still, for some companies, an exit may be necessary or will just make sense. What will not make sense is sitting on your hands in hopes that the storm passes sooner rather than later. Venture capital and private equity players should fund and grow aggressively the top 20% of their portfolios, fund and grow cautiously the middle 50%, and unload when possible the bottom 30%. Consider these initiatives as we try to weather the economic crisis:

1) Trade growth for profitability – strategic partners are placing increased importance on operating efficiency and profitability, even at the expense of top line revenue growth. Start or continue to take the difficult actions to accelerate the path to profitability. This includes actions involving customers, partners, channels, and employees.

2) Educate the most likely buyers about your business – find ways to get in front of the best buyers and let them know what you are building without giving away the secret sauce or putting up the “For Sale” sign. (See Page 3.) Get creative and aggressive. Expand your horizons and leverage your Board, investors, bankers and lawyers to make these introductions.

3) Become familiar with relevant, large, private equity-backed companies – many of these companies have cash on their balance sheets and mandates to buy. (See Pages 8-9.) Do more homework. There are always companies out there that you have never heard of, and one of them could be a good buyer for your business.

4) Go on the offensive – actively seek acquisitions or logical merger-of-equal partners to enhance your strategic positioning coming out of the recession. Turn up the heat on Business Development/Marketing to generate new candidates and get meetings. Consider stock deals if access to cash is limited.

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