Monday, 10 March 2008

Size really does matter#2

The piece I wrote in February – Size really does matter – created great interest. In it I said
“After organic growth, it seems that size really does matter. The chart [I've posted it again above] from M&A specialists Regent (where I serve as a NED) analyses European tech. acquisitions in 2007. Whether you choose P/E or PSR as your choosen metric, the analysis really does show that size matters! The chart shows that a company with revenues of less than $1m might be valued with a PSR of around 0.5 whereas a company with revenues >$1b might be worth upto 3.5x revenues. In other words almost seven times more! Pretty similar metrics applies to P/Es”.

In Panmure Gordon’s morning note on 10th Mar 08, George O’Connor came to similar conclusions for quoted UK SITS companies. As you can see in the table below, companies with market values less than £100m had average P/Es of just 9.2; compared to 15 for those valued between £100m and £500m and 18.6 for the ‘Elites’ valued at more than £500m.
Peter Rowell, Executive Chairman at Regent, commented to me "Not only does it confirm the size issue, but it also supports our view that M+A valuations are at, or above, quoted valuations at present. And there are still no signs that the former are inflated."

The other point that George makes is how badly the smaller companies’ share prices have performed – 31% worse than the FTSE All Share compared with ‘just’ 13.7% worse for the mid-sized companies and pretty much ‘par’ for the big boys.

Being ‘small to middling’ is an increasingly uncomfortable place to be. You can still get away with it if you are ‘niche’ – as one of the big boys will ultimately buy you for that specialisation. But if you are ‘general’ you can expect the bad times to get worse.

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