Moving Forward: Pockets of Strength and Opportunity in a Challenging Market
TM Capital Corp. is ACG Boston’s Featured Chapter Sponsor, October 2008.
by Brad Adams, Managing Director, TM Capital Corp.
The volatility and instability we have witnessed in the market over the last three months will not resolve itself in the coming weeks. In all likelihood, the market will continue to face challenges for the next several months. While we did observe a strong third quarter with respect to acquisition activity within the middle market technology sector, M&A is often a lagging indicator because deal processes and negotiations can take six months or more to complete. We expect the true impact from the recent market turbulence to arrive late in the fourth quarter or early in 2009.
Despite these conditions, we do not believe the outlook for technology M&A should be entirely gloomy. In fact, we expect to see pockets of strength and areas of opportunity in the middle market technology sector. Because the middle market technology sector is less dependent on debt as a major source of capital, M&A activity has been somewhat insulated from the recent credit crisis. The real concern for M&A in this market segment is the anticipated slowdown in IT spending, which is expected to hit in 2009, and the impact this could have on the financial performance of many technology companies and their valuations.
Regardless, we believe good technology deals will still get done. Deal terms and structures will need to be more flexible and creative to close transactions in this market, but strategic acquisitions will be completed. There will be buyers who continue to think long-term and offer fair prices for solid targets. There will also be sellers who have reasonable valuation expectations and who see the opportunity that can be created by building scale by combining with a larger platform. Additionally, the global nature of the technology sector should help keep deal flow active. Foreign acquirers will continue to be interested in US assets and may be willing to pay strong prices given the strategic elements of cross-border transactions. The same holds true for US acquirers looking to expand overseas in an effort to penetrate new markets and better serve global customers.
It is clear that the next few quarters will be extremely difficult for global economies. While deals will continue to get done within the middle market, they will likely require more complex terms. This will push companies to retain advisors who 1) can think creatively and strategically, 2) have experience working with complicated deal structures and 3) have international relationships and cross-border expertise.
Brad Adams is a Managing Director of TM Capital Corp., an investment banking firm that is active in 
technology and other sectors. Mr. Adams would welcome the opportunity to discuss any thoughts you might have on trends in the technology sector and he can be reached at 781-320-3200 or at badams@tmcapital.com.
