ibankerblog

Feedback from InfoComm and NAB

The recent annual InfoComm (Pro Audio/Visual) and National Association of Broadcasters ("NAB") industry trade shows had some interesting, and perhaps surprising trends this year. Each are roughly $12 billion industries on the equipment side – double that amount with services added. Here are a few takeaways from the show:

1. Does lagging attendance matter?
No end-of-day lines at the Las Vegas Monorail and plenty of lunch seating in Orlando point to an estimated 15-30% drop in attendance from 2008. That said, almost every vendor we spoke to at both shows was pleasantly surprised with the quantity and quality of the business prospects that attended, with an equal amount of leads of higher quality from a year ago. The toadies appeared to have stayed home, but real buyers remain. The majority of vendors I spoke with point to at least flat-to-modestly growing revenues on a YTY basis, with very few experiencing declines. January and February 2009 appear to have been the nadir.

2. Revenue generation is taking a back seat to cost savings.
With television advertising shrinking and the broadband media business model unable to pick up the slack economically, I expect that cost savings measures will drive most decisions in the broadcast industry for the next 12 months. In both Broadcast and ProAV markets, technologies that produce strong ROI by reducing headcount, facilities and travel, and that improve workflows, control, collaboration, and the management of assets appear to be resonating.

3. Portfolio Management - diversity creates stability.
With many broadcast facilities having completed their conversion to digital and HD platforms, businesses that have focused on geographic diversity, in addition to alternative markets such as the enterprise (e.g., business, education, government) appear to be benefiting.

4. Will the “Cloud” change the game?
There is some evidence that cloud-based application environments (e.g., Software as a Service) may be an appealing alternative to equipment purchases. Advantages include the use of operational budgets (vs. capital budgets), variable usage rates, elimination of complexity and operational support, and the option to try it before buying it. Enterprise vendors are already embracing this paradigm, but it remains early days. I wonder whether Avid could utilize this strategy to change the game against Apple’s Final Cut Pro and other lower-cost competitors. Avid is well versed in end-to-end workflow environments, and a cloud-based initiative could give Avid’s customers the best of both worlds – world-class capabilities, operational efficiencies, and cost savings, and could be the game changer that nullifies Apple’s recent advances.

5. Bottoms-up technologies are experiencing strong growth.
Technology companies that enable powerful, but inexpensive, content production or take new approaches to old problems are experiencing strong growth. NAB and InfoComm are full of specialized vendors that service niche areas of the market. However, as customers continue to see advantage in buying from a single, well-capitalized vendor, best-of-breed will ultimately give way to end-to-end solutions from larger vendors. As such, I expect innovations to continue, leading to expansion, and ultimately acquisition by larger participants to bolster and add functionality to existing product lines.

6. Let’s get clear about proprietary versus open-source environments.
Traditional IT companies will play an increasingly disruptive, but not necessarily overriding role as IP-based solutions become pervasive in video markets. Will commodity-based, open-sourced solutions dominate? Well, it depends. While Apple has been lauded for its open application interface on the iPhone, it has been very careful about what it exposes. Professional broadcasters and audio/visual care deeply about perfection – a one-second glitch leads to a conniption. So while I do believe that closed proprietary solutions are bad business in the long term and that being “open” as far in the stack as possible is important (to play well with others in the network, for example), limiting one’s openness is smart and necessary in these industries.

7. It’s a multimedia, multi-platform world.
The ability to address multiple platforms – from traditional television distribution to wireless and LAN/WAN broadband distribution on multiple devices – is front and center. Investments are being made to address actual and expected demand. Will Richmond’s VideoNuze blog posted to this point this morning. Video and audio delivery over broadband connections for enterprise and entertainment use continues full steam ahead.

8. Onward and Upward – Automation and MAM (Media Asset Management).
Most businesses in this sector appear to be doing well with some discussions pointing to a joining of file-based MAM systems and automation functionality. MAM continues to be a fragmented market addressing ingest, production, marketing, distribution, and billing needs to name a few.

9. Enterprise Communications – increasing demand for video.
The use of video continues to expand its relevance in the enterprise, and vendors addressing this vertical market continue to grow at a fast and steady pace. The digital signage market continues to make strides, but continues to be very fragmented. I expect the trade winds to be favorable, with market dynamics flushing out the winners and losers.

10. Enterprise ProAV decision-makers are in transition.
The ProAV market continues its transition from its analog heritage toward IP-based solutions, with the compression of sometimes opposing decision-making groups (e.g., audio, visual, and information technology) accelerating. IT continues its mistrust of audio/visual departments on its networks. As integration companies are responsible for a majority of ProAV equipment installations, getting this group, in addition to industry sales professionals to break away from their comfort zone will be critical for the adoption of IP-based products to be truly embraced.

Like Broadcast and Cable markets, ProAV will evolve to use IP delivery in the network core, while adding value at each end of the network where human interaction occurs.

John Bowen is a  Director at Covington Associates.  He can be reached at 617-314-3950 or jbowen@covllc.com.  

Email this post

The New Revolution Brewing in Software and Hardware

At this year’s CTIA and Barcelona’s Mobile World Congress conferences, the buzz was about existing and alternative mobile platforms (e.g., Netbook, MID), mobile applications, and enhanced bandwidth capabilities. I am convinced that the convergence of these three areas will have profound changes on the market place.

The M4 – A New Mobile Category. The combination of the Smartphone, Mobile Internet Device (MID), Netbook, and Laptop products (that I will coin the “M4”) represent the new “mobile computing platform” that will morph over time. Desktop PCs are being usurped by Laptop PCs – in Q3’08, PC laptop sales increased 40% YTY to 38.6 million units in contrast to desktop PCs, which according to research firm iSupply dropped 1.3% to 38.5 million units sold. Smartphones were the only growing mobile phone category in 2008 at 14%, with RIM and Apple achieving 97% and 246% growth respectively according to Gartner. Netbooks came out of nowhere in 2008 to grow to 11 million units from 182,000 in 2007, according to IDC, which further predicts growth to 21 million units in 2009. The MID Computing platform received much fanfare in Barcelona, but it is still early days.

I don’t expect laptops to disappear, however, the remaining M4 provide interesting alternatives, and their rapid adoption suggests they are here to stay. That said, it only seems logical that since many users will have two or more of these devices, there should be a certain unity across these device types to enhance the user experience. I myself use a Blackberry and Laptop, and would buy a Netbook in a heartbeat for travel if it would sync with Outlook and other data with the ease and elegance of a Blackberry.

Bottom-up Technology Wins. What is interesting about this topic is the potential opportunity for a platform shift that the IT industry has not witnessed since Windows and Intel became dominant. Like all technology trends, bottom-up trends tend to trump top-down infrastructures. Why? Because top-down typically becomes bloated as new features are demanded, with Moore’s Law supporting the added overhead. On the other hand, bottom-up technologies are forced to be ultra efficient due to size, processing and battery (the weakest link) constraints. As the underlying technology advances, bottom-up technologies become powerful and challenge top-down products in both price and function (80% of the function for 10-20% of the price). Mainframes, minicomputers, CAD, electronic publishing, and video and audio non-linear editing have all suffered this fate.

In this case, the bottom-up technology is the ARM-based processors (which dominate the cell phone market), open-source operating systems (e.g., Android, Symbian, LiMoFoundation), alternative browsers (e.g., Opera, Mozilla), Java, and perhaps most importantly, the mobile applications that sit on top. Apple started the mobile application trend with its App Store, and has been replicated by RIM, Nokia, and Microsoft. I expect to see more announcements on this front.

Intel has made several runs at the mobile market (coming from the top, down), but exited the mobile business in June of 2006, selling its assets to Marvell Technology Group. While Intel made a splash on the Netbook and MID platform with its Atom processor at Mobile World Congress, this leaves an opening for ARM/open source to rise up from the mobile phone platform to dominate all M4 platforms. This may extend into gaming, set-top box, alternative television devices, and TVs where Intel is pushing hard.

It is Open Season. If these four platforms are viewed as a single mobile paradigm, it’s conceivable that a new single architecture could prevail, and spill over into the Windows and Intel dominated Laptop platform. Since Mobile World Congress, there have been many announcements made. Laptop manufactures are getting into the Smartphone game (e.g., Acer, Asustek) and vice versa (e.g., Nokia). Android is being tested or adopted by HP and Dell for their Netbooks, and Vodafone and T-Mobile have committed on HTC devices. LG is still committed to Windows but will also begin supporting Android later this year. With Windows 7 not expected to be released until the fall of 2009, anecdotal evidence points to a potential shift toward open source platforms.

The New M4 Channel Entrant. Service providers such as Verizon and AT&T have begun offering Netbook computers for a subsidized price of $100 with the purchase of a broadband service contract. This is an important distribution channel for Netbook proliferation, just as it has been for mobile and Smartphone expansion. Service providers are not beholden to the Wintel platform, as IT departments have been, and with a desire to have more control over their own application services (vs. outside vendors such as Apple and Google with over-the-top offerings), these operators may be a very important factor in platform direction and the success of various up and coming products and services. The Dell model, where a less expensive device equates into more users, can be leveraged in this subsidized model.

The Cloud vs. Microsoft Office. If I had to choose today, I would select a Netbook with Windows and Office because I live in Outlook, Word, Excel and PowerPoint. However, the world is not me (e.g., large corporate employees that utilize corporate SaaS and Unified Communications applications, consumers on Yahoo! Mail, Gmail, Skype etc.), and it seems that several trends are challenging this mantra. First, the Smartphone application development is on a tear (40,000 applications in Apple’s App store, and more than 1 billion app downloads to date), and these applications will trend upward over time to the Laptop PC. Second, the “Cloud” is the new Web 2.0, with Amazon’s EC2 growing success, Cisco’s Unified Computing announcement and SaaS models achieving success. IBM is heavily committed to Linux and cloud-based initiatives. From a document and rich media perspective, Adobe is all over this trend. Lastly, there are plenty of Microsoft Office alternatives and translators that work very well and offer cloud advantages such as document sharing.

The next generation of users that expects free or low-cost applications and content may begin adopting these tools to avoid shelling out a few hundred dollars for Office. Perhaps most importantly, these browser-based applications require fewer resources and better fit the M4 model (with exception to video-based applications, but companies such as Skype are figuring this out). The game is clearly not over and Microsoft is a force to be reckoned with, however, it is getting easier to see the support behind a platform shift, and the logic is not out of left field.

Bandwidth performance enhancements provided by LTE (Long Term Evolution), a fourth generation mobile broadband standard, and other core networking enhancements that support service provider infrastructures are critical in supporting Cloud and more data intensive video applications.

Application Platforms are Key. One of my favorite business models is that of Autodesk’s Autocad business. The Autocad application provided a platform for hundreds of sprouting development companies to create an ecosystem around. This relationship became symbiotic, in that everyone (except for its competitors) won. The same can be said of Macromedia’s (now Adobe’s) application platforms and Flash technology, which continues to be a mighty force. Apple’s mobile platforms have spawned a new breed of application developers and mark the beginning of a classic technology product cycle. One and two man shops have a new platform to go it alone and compete with larger organizations. These entrepreneurs join forces with other smart developers and grow into larger, more profitable organizations through consolidation.

Existing software companies need to get in front of this trend by providing tools and platforms upon which these developers can build and keep a watchful eye on which companies to acquire. With 6.5 million Java developers, perhaps this is Larry Ellison’s lens for Oracle’s announced acquisition of Sun Microsystems.

I am excited about working with these new leaders and watching how the M4 revolution unfolds.

John Bowen is a  Director at Covington Associates.  He can be reached at 617-314-3950 or jbowen@covllc.com.  

Email this post

An Opportunity For Small Caps On The Horizon

The past ten years have dampened the fun of being a small cap public company. Increased regulatory efforts, such as Sarbanes Oxley, have escalated the cost of being public. With the growing threat of litigation, the risk to management and directors has increased. Research and trading support, vital to gaining broad institutional support, has become rare. Even the ability for managers and owners to gain some liquidity has increasingly become burdensome and complicated given the regulatory and practical restrictions of insiders selling stock. Still, in recent years being public did have some benefits mostly in perceived valuation benefits and the ability to use stock to raise capital, make acquisitions or attract key employees. Well, with the market meltdown a tough situation for public companies has become even worse.

Now, being a small cap public company can be downright disheartening. Stock prices have not just dropped with the rest of the market, but given the lack of liquidity in the small end of the market, many stocks have plunged and remain depressed. So, along with the cost and the risk of being public, small public companies are now faced with a valuation discount as well. In today’s market, I would argue that it is easier and cheaper for a privately held company to raise capital than it is for its comparable publicly held brethren to do so. Not that it is particularly easy or cheap for small private companies, but at least they can raise money whereas many public companies do not have the luxury and given the fact they are restricted by their “public” price they have very little incentive to do so.

Being a glass-half-full guy, I see an opportunity on the horizon for small cap companies. There is a very long list of successful small public companies with strong balance sheets and motivated owner/managers who have quickly reacted to the downturn to right the company size and remain cash flow positive. Increasingly my conversations with these companies are focusing not on surviving the tough times, but on how to take advantage of their relative strength to get ahead over the next few years. Get bigger, get private, get bought, get value – these are all potential opportunities that strong small cap companies should be examining and prioritizing now as to have a plan to get ahead before and during the recovery.

It has been a tough road to be public and it’s gotten even more arduous, but it would be a shame for the strong companies not to be proactive and improve their standing dramatically coming out of the downturn. A company with capital, a solid balance sheet, motivated owner/managers and a well thought out strategic plan can clean up over the next 24 months. It won’t happen by accident either.

Tim McMahon is a Managing Director at Covington Associates.  He can be reached at 617-314-3950 or ibankerblog@covllc.com.  

Email this post

Healthcare Technology M&A Remains Resilient

We have all seen the recent headlines: US M&A volume dropped 38% in 2008 and
transaction values are down 24% from 2007. Other statistics and headlines are equally gloomy. By nature, I am an optimist so I look for the silver lining in things. Perhaps this is why I have chosen to focus more on the healthcare IT sector (“HCIT”), which has statistics that offer promise of better days ahead. Although not immune to the current financial crisis, HCIT continues to show resiliency: deal volume is up 3.2% from a year ago (224 vs. 217 announced deals), but more importantly, 2008 median revenue multiples have expanded to 2.1x from 1.9x in 2007, and 2008 median EBITDA multiples have increased to 17.2x from 13.5x in 2007 (source: Capital IQ). It is worth taking note that it is taking twice as long to get these deals done. Today, the average M&A timetable is up to six to eight months vs. the traditional three to four months it took to run a full deal process in the past.

Now, what’s driving HCIT to live up to its defensive reputation? The reality is that consumer spending constraints are expected to reduce healthcare spending across sectors, specifically discretionary provider budgets, creating challenges within several HCIT segments such as relationship management (e.g., health info exchange, personal health info systems, etc.). That said, HCIT is being driven by a mix of healthcare industry trends (consumerism, aging population, rising costs, medical errors, etc.), federal/state government resolve, demographic shifts, and payer funding. Government and payers are working hard to overcome lack of standards, negative financial incentives, and physician reluctance. Competitive incentives are fueling robust demand growth in physician-and-health plan-focused HCIT companies. Long-term, data-mining capabilities potentially provide value-added products and services such as care management (next gen disease management), intelligent benefit design, and provider service optimization.

The Bush administration laid much of the groundwork for the Electronic Health Records program, leading to several pilot programs in a handful of states, including standardization efforts of medical records. Given the bipartisan support, a Democrat controlled Congress should make healthcare IT legislation in 2009 much more likely. President Obama has proposed spending $10B annually for five years to improve IT adoption by healthcare providers. This stimulus amount is significant relative to the estimated $22B that healthcare providers were projected to spend in 2008. President Obama's timeframe of computerizing all health records within five years is ambitious and aggressive. The ability to track data on patients and provide cross-communication for providers within health care systems is a must for increasing patient safety and slowing the rise of healthcare premiums, and it will certainly ultimately result in potential operational savings.

This growing and attractive market opportunity has prompted several large firms to expand their HCIT presence: 3M, Cisco, EMC, GE, Google, IBM, Microsoft, Phillips, and Siemens are a few of the players whom I see taking advantage of the HCIT arena. In the coming year, I predict you will see more HCIT companies evaluating their growth plans and strategic priorities, and asking themselves if they are better off going at it alone or teaming up with one of the larger players in the field. Although financing conditions are now considerably more challenging, we are certainly not seeing the end of HCIT M&A. I remain optimistic and believe that in 2009 and 2010, there will be a number of well-planned takeovers in this sector.

Zeke Navar is a Principal at Covington Associates.  He can be reached at 617-314-3950 or ibankerblog@covllc.com.  

Email this post

2009 - Good Deals To Be Done

We are experiencing interesting times in M&A. Almost every piece of data published
indicates a negative projection for M&A in 2009. For the most part, popular belief is that 2009 will stink. The crazy thing is that I think 2009 will actually be a great year to buy companies, and for the first time in a long time the playing field has shifted. The losers in the M&A market over the last decade have been mid–sized companies looking to make good strategic acquisitions. Over the past few years, these mid-sized players have been outbid by larger competitors, PE firms, and everybody else who had access to cheap capital and fewer requirements for the deal to really make sense. Mid-sized companies have been frustrated by the “constraints” under which they have had to operate, namely doing deals that made long-term strategic sense, were financed conservatively and that actually worked financially. We hear familiar themes from financial buyers these days - VC’s are really pulling in the reins and PE is still active but really looking to buy dimes for nickels with no leverage available. In 2009, the ray of hope is for corporate buyers, particularly mid-sized public companies. Not all but most of these corporate buyers have strong balance sheets, have been early to cut costs and have a clear strategic vision. For the first time in nearly a decade, this group of buyers has the upper hand when it comes to M&A. Today, deals are taking longer than in the past few years, but this has allowed for “strategics” to stay up. In addition, the current economic decline and stock market turmoil has taken some pressure off short-term results, encouraging and supporting longer-term thinking and planning. To be sure, prices are coming down. However, if you are selling a company today, you want to be talking with a buyer who is concerned with more than just deal structure and exit multiples. You want someone who is betting their long-term success on the deal. Some very robust and resilient M&A deals will get done in 2009 - deals which will be fair to both the buyer and seller and they will certainly stand the test of time. My bet is that small to mid-sized corporate buyers will be at the center of many of these M&A transactions.

Tim McMahon is a Managing Director at Covington Associates.  He can be reached at 617-314-3950 or ibankerblog@covllc.com.  

Email this post

My Inbox Confirms We Are Deep In A Recession

Earlier this year, an obscure, under-the-radar-screen press release caught my eye. The
title of the release was “Publication of Help-Wanted Index to Cease” and it got me thinking. As an aspiring economist in college, I once took a class taught by James Medoff, a renowned Harvard labor economist. Medoff promoted the merits of tracking something called the Help-Wanted Index (“HWI”) as a leading indicator of the U.S. economy. The HWI was a monthly index developed by The Conference Board which tracked help-wanted advertising in more than 50 major newspapers across the country. The theory behind the index was that monthly movements can provide valuable insight into the general strength of the economy by first understanding labor trends. These trends would correlate to wage increases/decreases, inflation/deflation, and interest rates, which obviously have direct implications on the major stock and bond markets. As an example, a dramatic decline in the index might have suggested to you that there’s a drop in the demand for labor across the board, perhaps lower wages being paid, and maybe even an economic downturn on the horizon.

Sadly, after 57 years in existence, this past July, The Conference Board decided to discontinue the HWI. It seems the HWI’s time had come and gone, driven mostly by the advent and popularity of online employment recruiting that renders help-wanted advertising in newspapers relatively expensive and obsolete. In lieu of the HWI, let me (only semi-seriously) suggest a home-grown index that might also serve as a valuable barometer on the economy: I call it the Networking Event Invitation Index (or the “NEI²"). The NEI² is still in its infancy and at this point based mostly on anecdotal evidence and thin statistics, but let me spin it here for you: the number of networking events, seminars, conferences, and forums being hosted by firms seems to be inversely related to the performance of the overall economy. Over the past 6 months, as the economy has soured, my email inbox has seen a steady increase in invitations to everything from interactive panel discussions on the state of the credit markets to webinars on enhancing your company’s growth in turbulent markets. In fact, just in the last week or so, I received 30-plus unique invitations to sign up, attend, or call/log into some event or presentation touching on some aspect of this recession we’re in. Out of curiosity, I did a little data mining in some archived emails from a year ago and found that the NEI² is up over 50% from the same time last year. Maybe this is simply a statement about my email address finding its way onto countless blast lists. Or maybe it reflects something more. Perhaps more companies are very concerned about 2009 pipelines and are exploring the networking event as a channel for strengthening relationships and deal generation. Perhaps we all have more time on our hands to pursue business development initiatives as our businesses have slowed. Perhaps these difficult times present a more interesting subject matter to build an event around. Or perhaps it’s all of the above.

Now don’t get me wrong, I like a good networking event as much as the next person, especially one that piggybacks the event with a free meal or, better yet, an open bar. But I’m certainly going to keep an eye on the NEI² because when the index starts to head the other way, I’ll know that better times are just around the corner.

Mike Kent is a Director at Covington Associates.  He can be reached at 617-314-3950 or ibankerblog@covllc.com.  

Email this post

Calling All Angels

Yes, companies across all industries are scrambling for capital given current market
conditions, but none so desperate for inflows as the life sciences/device sector. There has always been a funding gap in the life sciences sector, proverbially known as The Valley of Death. Basic research in the U.S. is particularly well-funded by the NIH and others, but there is a steep cliff from which more than a fair share of companies exiting the academic environment fall to their premature death. With them die many potentially life saving (or at least pain-easing) technologies, along with billions of tax-payer dollars. Earlier this year, I held out some hope that in my own state of Massachusetts, Governor Deval Patrick’s $1.5 billion bio bill would help capitalize local startups and save them from the fall, but alas it looks like just another pocket of funds and incentives for basic research. To me, this defies logic. We are planting seeds that we have no intention to water.

For a while, venture capital was pitching in to fund the gap. But the party line from the VCs today is a broad unwillingness to fund regulatory risk, and a resistance to fund commercialization risk. In other words – call us when you can demonstrate safety, efficacy and demand – a very risk adverse position.

So here lies my plea – a call to angels to rescue these important technologies from that valley of death. More than ever before, there is an opportunity for angel investors, as individuals or as groups, to play a fundamental and vital role in funding early stage life sciences ventures. Through appeal to their philanthropic side – often as a result of direct connection to a medical area of need, or as a pure financial investment, we need to convince angels of the importance of the sector. Without this funding group, we are faced with the export of one our nation’s greatest core competencies.

Diane Woolf is a Principal at Covington Associates.  She can be reached at 617-314-3950 or ibankerblog@covllc.com.  

Email this post

Maintaining Perspective

If you read the headlines, there is certainly a feeling of panic in the markets.  This past Monday, the DJIA dropped more than 700 points in one day.  The market swings are unprecedented.  Despite all of this volatility, middle market M&A is still alive and well.  As investment bankers to the middle market, we’d be lying to you and ourselves if we didn’t notice some impact on our business, but due to the nature of the size of our transactions, we are somewhat protected from the major turmoil.  We are confident that despite current market volatility, buyers and sellers still want deals to take place and we can help make them happen.  Why do I feel so strongly about this? 

In my 40 years as an investment banker, I have lived through three pretty bad economic environments so it is important that I am able to maintain perspective in this current environment.  To what do I compare the current situation?

1. The mid 70’s - The 70’s was the worse decade of American economic performance since the Great Depression.  The first oil crisis began in October of 1973, spurred by the Arab-Israeli conflict, when Arab nations declared that they would no longer ship oil to nations that supported Israel.  Lines at gas stations often required a wait of more than one hour.  The U.S. was embroiled in the Iran hostage crisis and following the Iranian Revolution, the country was faced with a second oil crisis.  It was a very complex and challenging time in the capital markets.  Inflation ranged from 6% to over 13% per year, and interest rates were in the double digits, with prime at 21.5% at its climax.  Investment bankers were really handicapped for several years and deal closings were very far and few between. 
   
2. Black Monday October 1987 - The Dow Jones had the second largest one-day percentage decline (more than 22%) in stock market history.  Comparatively, the drop this past Monday of over 700 points was a decline of just over 7%.  Black Monday was a very sharp market correction of a bubble in the debt markets.  Almost one month later, it was over and we were back on track with business as usual.
   
3. dot-com bust of 2001-2002 - This was a mild yet rather lengthy period of recession following the Internet bubble of 1999 and 2000 which was exacerbated by the tailspin after the 9/11 terrorist attacks.  However, this bust was very isolated in the tech sector and it especially affected tech stocks valuations.  Interestingly, over 50% of the dot-coms have survived.  During this period, Covington Associates turned our focus to healthcare and expanded our expertise to business services and consumer and industrial services so we were not so dependant on tech sector deals.

So what does all this mean for the current environment?  The present day situation seems more extreme than any of the others I have experienced.  The 1970’s didn’t see the wholesale failures of major financial institutions coupled with a freeze in liquidity and the ability to borrow without government intervention.  The capital markets and IPO markets are practically non-existent today.  Companies are going to have trouble accessing capital and many have experienced this already. 

In our world, we see strategic buyers still playing out there.  They have the cash and they can take advantage of the recent changes in the marketplace.  We are still closing deals and in fact just closed a $78 million dollar M&A transaction this past Monday as the markets were falling.  We see the impact of today’s economy significantly affecting financial buyers particularly those who used a high degree of leverage, and we just don’t yet know where the debt markets will settle out.  The economic news isn’t good, but it is an interesting time and has our attention.  We kept our head (and head count) down in the high flying days when we did 22 deals in a year.  Now we are at half that pace but still managed to be the most active Boston based investment bank for the fourth year in a row.  Our business will prevail and it is now that the senior level attention and experience we provide is even more important to, and appreciated by, our clients.

Chris Covington is Founder and a Managing Director at Covington Associates.  He can be reached at 617-314-3950 or ibankerblog@covllc.com.  

Email this post

Culture Club on the Vineyard

I recently returned from a couple of beautiful days on the island of Martha’s Vineyard, the site of this year’s Convergence Forum – The Life Sciences Leaders Forum – where I was a speaker on the panel “Exit Scenarios: Considering the Options”  for my first YouTube appearance). The forum provided a great chance to catch up with life sciences CEOs, investors and other thought leaders while enjoying fresh lobsters at The Black Dog Tavern (for those of you unfamiliar with the Vineyard, The Black Dog Store is where President Clinton purchased a T-shirt for his favorite intern).  There was plenty of talk about the future of big pharma and what the industry is going to look like in the next few years when several more blockbuster drugs come off patent (can you say fewer and fewer).  In addition, there was the usual talk about valuations and the like.  However, what was most surprising (to a financial toad such as myself) was the continued mentioning of the importance of culture for the success of a business. 

Don’t get me wrong, I like culture but I have always viewed it as one of those softer areas which is nice but not critical.  Maybe it wasn’t as prevalent as I thought but just seemed so since it was unexpected.  The interesting thing that I heard repeatedly is much of the success from companies came not just from the big idea but from the ability of leaders to instill and maintain a culture that not only enabled but encouraged their highly skilled teams to go above and beyond. Successful leaders also recognized (and subsequently dealt with) threats to their culture from partnerships, new hires and board members.  Serial entrepreneurs were able to highlight a number of their successes and failures that were due to culture.  This conversation raised the interesting dilemma faced by convergence companies (companies who have combination products that straddle the worlds of pharma and med device where there exist major cultural differences). 

My head was spinning from all of this talk about culture (or possibly the drinks) and I longed for a return to my world of multiples, M&A, private placements and IPOs.  One of the purposes of events such as these is to give you new perspectives on things – this year’s Convergence Forum certainly did that. If you can wrangle an invite, the conference is a good take.   

Ben Dunn is a Managing Director at Covington Associates.  He can be reached at 617-314-3950 or ibankerblog@covllc.com. 

Email this post

Don't Stop Believing

I confess - as a high school kid the rock band Journey was one of my favorites (I will deny ever listening to Cheap Trick and Styx), and Don’t Stop Believing was one of their big hits in 1981. The final episode of The Sopranos (another favorite of mine) played Journey’s song as their own Swan Song. So what does Don’t Stop Believing have to do with anything? It leads me to what some people might argue is a contrarian view in the world of mid-market M&A. For the last 15 years my “day job” has focused on sell-side and buy-side M&A for the middle market.   Contrary to popular belief, M&A in my world is alive and kicking.

Also, there are misconceptions in my world.  Reports say that valuations have come down considerably – NOT TRUE.  Why do I still see activity in the mid-market M&A and healthy valuations?  Economics 101 – it is a simple supply and demand issue.  There is a continued imbalance of demand outweighing supply.  Yes, there is a supply shortage of companies looking for liquidity events.  Why?  Due to our current economic condition (some may call it a recession) business owners have incorrectly come to the conclusion that it must be a bad time to consider a possible sale of their business.  However demand is still strong from both private equity and strategic buyers. With demand still outweighing supply, prices continue to be attractive.   Sure they have softened somewhat from the peaks we experienced in the first half of 2007 but by any long term historical measures, price and terms are still robust.   So what’s creating the strong demand in the mid-market for private equity?  For one it has to do with more and more crowding going on as some of the bigger players are coming down market looking at smaller deals.  Couple that factor with a lot of dry powder from all the mid-market funds that raised capital, and you still have too many firms chasing too few deals.   Also, the big players have lived through a cycle of having to pay significant multiples to win many auctions.  So when they go down market, as much as they want to be more disciplined paying lower multiples for mid-market companies, they often get caught up in the heat of an auction.  I guess this should be my “plug” for using a banker and running a competitive process.  Its simple - you’ll achieve better terms and pricing by trying to maximize the demand supply imbalance.

In addition to the private equity players' influence on the M&A process, there are many strategic buyers out there who carry just as much weight and sometimes more in an M&A transaction.  The strategic players are flush with cash and excess debt capacity and look at “smaller” mid-market deals as easier to integrate, mitigating risks of cultural differences.  More importantly, strategic buyers rely on the benefits of cost synergies.  And as much as buyers like to tow the party line “we don’t pay for synergies” – they understand that in order to be competitive they have to share in some of the cost savings that they expect to realize.  Roll in a few strategic buyers with a long list of likely private equity buyers and, not a surprise, prices continue to be strong.

For me, I don’t stop believing that middle market M&A activity has always demonstrated resilience and healthy activity.

Tom Cibotti is a Managing Director at Covington Associates.  He can be reached at 617-314-3950 or ibankerblog@covllc.com. 

Email this post