Midmarket M&A Registers a Pulse

Acquisition plans by big-name companies like IBM and Sprint Nextel breathe a little life into the deal market, which is down more than 40% this year.
Sarah JohnsonJuly 28, 2009

Companies looking to snatch up smaller competitors during the economic downturn are behind most of what little activity is happening on the mergers-and-acquisitions front.

Overall M&A activity this year is down more than 40% from 2008, and only 22 U.S. deals valued at more than $2 billion have been made in 2009, according to Thomson Reuters. Just recently, though, “there’s been a bit of a resurgence in the midmarket,” says Matt Toole, deals analyst for the firm.

Two deals in that tier were announced today: Sprint Nextel will buy Virgin Mobile USA in a stock-for-stock, $482 million deal; and IBM plans to buy SPSS — which makes predictive analytic software some CFOs use — for $1.2 billion, all cash.

Other deals announced this month include Amazon.com buying footwear retailer Zappos.com for $807 million, Agilent Technologies acquiring life-sciences services provider Varian for $1.5 billion, and Bristol-Meyers Squibb offering to buy biopharm company Medarex for $2.1 billion. For this year, there has been an average of 50 deals per week that are worth less than $2 billion, most of them under $500 million, says Toole.

Sprint’s acquisition allows it to focus on competing more heavily in the prepaid cell-phone market. It already owns 13.1% of Virgin Mobile, which went public two years ago and whose services run on Sprint’s network. “By getting our brands and our management team under one roof, they feel and we feel that it’s an excellent opportunity to be really aggressive in the marketplace,” Virgin Mobile CFO John Feehan told CFO.com.

Virgin Mobile has two main products, aimed mostly at low- and middle-income customers: a pay-as-you-go plan — in which customers put money into an account that diminishes for every minute they use their phone — and a monthly plan for unlimited calls. The firm has recently been working to acquire higher-income customers rather than solely trying to grow the number of subscribers.

Sprint says Virgin Mobile CEO Dan Schulman will head its new prepaid division once that company is folded into Sprint’s existing prepaid business, called Boost Mobile. The company has not yet revealed the fate of Virgin Mobile’s 400 employees after the deal closes, expected to be either in this year’s fourth quarter or early in 2010. Schulman “started Virgin Mobile and helped define the prepaid space,” said Feehan. “I’m excited to hopefully continue to be a part of that.”

Feehan says the deal, negotiations for which began at least three months ago, is fairly straightforward. Sprint will pay shareholders of Virgin Mobile $5.50 per share; Virgin Group, which owns 28.3% of Virgin Mobile, $5.12 per share; and Korean firm SK Telecom, which owns 15.3%, $4.94 per share. In addition, Sprint promises to retire Virgin Mobile’s outstanding debt, expected to total $205 million by the end of September. Various valuations of Virgin Mobile’s stock by independent advisers leave Feehan feeling “like we got a good deal for our shareholders.”

IBM, meanwhile, will acquire a 40-year-old vendor at $50 a share to expand its Information on Demand software portfolio and business-analytics capabilities. SPSS assured clients that “between now and the acquisition close…existing contracts will remain in effect, account relationships and support infrastructure will remain unchanged.”

The purchase, IBM says, will further its services to companies looking to cut costs and risk, as well as increase their profitability through data mining and statistical analysis.