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Monday, September 21, 2009

Is M&A Deal Activity Perking Up? Tip of Iceberg?

Based on recent headlines regarding mergers and acquisitions, we thought M&A activity was on the rise until we came across this 9/09/09 CNBC article with YTD/monthly 2009 deal figures sourced from Thomson Reuters (including proposed Kraft / Cadbury deal). The article noted the following:
  • $1.3 trillion globally, down 37.9% compared to same time 1 year ago
  • $550 billion US, down 46.5% compared to same time 1 year ago
  • Avg deal size: $54 million globally, $87 million US
Supporting chart from article:

Nonetheless, let's highlight some recent activity in techland, both small and large:
  • Dell (DELL, $16.00) buying Perot Systems (PER, $29.60) for approximately $3.9 billion, a 68% premium to Friday's closing price, or 1.5 times 2009E sales, 31 times 2009E earnings, and 29 times 2010E earnings. See Dell's press release and deal presentation here.
  • Adobe (ADBE, $32.91) buying Omniture (OMTR, $) for $1.8 billion, a 24% premium to the prior day's close and 45% premium to the prior 30 day average close -- the deal is 5.1 times 2009E sales, 41 times 2009E earnings, and 33 times 2010E earnings.
  • Intuit (INTU, $27.52) buying Mint.com (private) for $170 million, a free personal finance Website that, according to the company, "is tracking $175 billion in transactions, $47 billion in assets and has identified more than $300 million in potential savings for its users", but likely generated little revenue (as yet) given its "free" business model. Intuit no doubt sees significant strategic value in the company.
  • Rumors surfaced last week that Google (GOOG, $493) was acquiring Brightcove for 6 to 9 times sales (based on 2009E revenue estimate of $80 million from an article by Dan Rayburn), but were later quelled (see blog post by Dan Rayburn here).
  • Google buying On2 Technologies (ONT, $0.59) for 6 times trailing twelve month sales, which we previously discussed here in relation to Sonic Foundry's (SOFO, $0.71) growing Mediasite franchise.
So, deals are happening, providing liquidity for sellers and, potentially, strategic value for acquirers so long as diworsification (as coined by Peter Lynch) isn't occuring. Also, a Bloomberg article today points out the following:
  • "Never before have U.S. companies piled up cash faster compared with interest costs than they are now, setting the stage for a surge in mergers and acquisitions."
  • "As the economy emerges from the worst recession in 70 years, cash flow may rise from the $1.5 trillion reported by the Commerce Department for the year ended in June, according to data compiled by Credit Suisse Group AG and Bloomberg. The amount reached a record in the past 12 months amid the biggest wave of firings since World War II and central bank interest rates near zero percent."
  • "Cash relative to share prices will climb to the highest in at least two decades next year compared with yields on corporate bonds, the data show. The previous high in 2005 preceded the two busiest years ever for takeovers."
Lots of cash generation and cash on the sidelines are surely good things for potential M&A activity and, in our view, the economy at large, so long as new jobs are created for those displaced through consolidation.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SOFO.

© 2009 Jeffrey Walkenhorst
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