Thursday, 13 November 2008


I was doing some quick preparation for a presentation and panel appearance I have to make at the Growth & Strategies for Software and IT Companies Conference next Tuesday 18th Nov.

There are four major ways you can make an exit:

- you can IPO
- you can get bought in a trade sale
- you can do a deal with a Private Equity firm
- you can go broke


I am indebted to Ian Spence at IS Research who was kind enough to supply me with some statistics for the last year (Q4 2007 – Q3 2008). In the UK in that period we have seen just one IPO of any note – the £436m IPO of Telecity in Q4 2007. We have however seen a quite amazing 23 companies delist . That’s about 20% of the ‘stock’ of listed UK SITS companies. It gets even worse if you consider that these delisting companies had a combined value of £2.1b so the net value loss is £1.6b. This is the worst nett loss both in numbers and value (by a very long way) since I started keeping records in 1988.

In terms of IPOs we are already back to the blackest times of 2001-2003. Regent reported just 11 tech IPOs in the whole of Europe in Q3 2008 – most of them tiddlers. In 1999-2000 we regularly reported over 100 European IPOs per quarter.

A recent survey undertaken by DLA Piper( See DLA Press release) concluded that respondents “think the tech IPO market will be stagnant until 2010 at least”. Interestingly, they also reported on the consequences for VCs. More startups would be forced to go back to original investors/VC for follow on rounds or into either bankcrupcy or into mergers at firesale prices. If PE has to fund more follow ons, there would less for new startups.

Private Equity

Ian Spence also reported to me that over 50% by value of the UK exits from the stock market in the last year had been ‘take private’ deals involving Private Equity. The biggest was the £600m KKR deal with Northgate.

We are seeing far less PE activity at the moment. Indeed the leveraged debt market is pretty impossible even for the ‘best of breed’ firms. Yesterday I was told that the leader of one of the world’s largest PE firms had said “We used to be able to do LBOs, we can’t do the Leverage bit anymore so all we are left with is BO”. Seemed rather appropriate!

Trade Sales

Trade buyers with cash are clearly King of Jungle right now. Actually there is a lot of cash on the balance sheets of some companies right now. But there is also a feeling that “today’s bargain will be even more of a bargain next year”. Despite that I do see Trade buyers being the mainstay of M&A in the next period – but in a market which will be much reduced in value terms.

Go Bust

We haven’t seen any quoted SITS companies actually failing in the last year. But I feel it is just a matter if time. Again Ian Spence has a rather interesting watch list of the suspects. There has already been an increase in private company bankruptcies – particularly amongst VARs and others that depend on lenient credit terms from suppliers. Something that is disappearing!


Ten years ago at a similar conference, when asked “What’s the best exit?”, I replied
1) IPO
2) Trade Sale
3) Private Equity

Last year, when asked the same question, I replied
1) Private equity
2) Trade Sale
3) IPO

For much of the next two years, I doubt IPOs will be on anyone’s agenda and Private equity deals will be few and far between. Avoiding the unmentioned fourth option, going broke, will lead to more trade sales at fire sale prices.

The only solace I can offer is that at this point in the last downturn, many turned down offers because they considered them to be too low/fire sale prices. A year on those same prices looked wonderful in hindsight.

With that in mind, read this from the FT of 11th Nov 08.

"Circuit City's management has rejected a number of offers for the company, starting in 2003 with a $1.65bn bid from Carlos Slim, the Mexican billionaire, who then owned its now-defunct rival CompUSA. At the height of the private equity boom in 2005 the company rejected a $3.25bn cash buy-out offer from Highfields Capital, the hedge fund.
Blockbuster, the video rental chain, also made an unsolicited $1bn offer for the retailer earlier this year, with the support of investor Carl Icahn."

Remember that Circuit City filed for bankruptcy this week.

1 comment:

Richard Holway said...

I received the comment below from Jeffrey Jenner of Westchester Associates.


I just thought I would add some perspective and comments to your excellent "Exits" article today.

As you know I have been doing IT M&A - both the buy and sell side - for a good while now and my market place is mainly in the £3-25 million transaction size with a good number of deals in the £6-15 million range. On the sell side i.e "the exit" the majority of my clients are individual owners and small groups, three or four manager/owners of a business, and if investors are involved they are invariably a minority. Here are some perspectives I can add from dealing with this sector of the market place:

1 - most owners wait too long and often the miss the boat: if a company is doing reasonably well and the outlook is reasonably good they wish to wait until the company is even bigger and hence, hopefully, more valuable. This is invariably a wrong judgement when their particularly sector or sub-sector is valued highly for "in" sectors do not last as long as owners would hope and sentiment can change quickly. Remember it is not just about getting a good headline price but it is also about the quality of the deal and most exiting shareholders prefer cash upfront in full and the best time to get the best quality of deal is when the business is doing well and the sector is highly valued. Even if the company continues to do well over the following couple of years the valuation may not have improved because the sector is no longer so highly prized. Lastly buyers pay more when a business is "sizzling" rather than just performing OK. So, if a business has the attributes of doing well and being in a highly valued sector, invariably it is right to sell. I can give numerous examples of businesses which could have sold for £5-12 million and had that opportunity and eventually went out of business and or were rescued for a nominal sum.

2 - in the current market conditions: of course buyers will be seeking good value and many hope for bargains but in my marketplace they have to be realistic too. They will invariably have to pay more than they think to make the purchase happen. Ignoring rescues, a potential seller does not have to sell. So, although any "objective" valuation may be £x the sellers will just not sell at that price; they will withdraw or seek another buyer for they do have a choice. In the real world, if the buyer wants the business the price paid will have to be at least a reasonable premium to the "objective" valuation otherwise they will not succeed in acquiring the company.

Very best,

Jeffrey I Jenner
Westchester Associates Limited