Deal Doldrums

With valuations continuing to fall in the uneasy M&A market, buyers and sellers aren't seeing eye to eye.
Kate O'SullivanNovember 24, 2009

Despite recent news of some stirrings in the market — like the bidding war for Cadbury and Hewlett-Packard’s deal for 3Com — the M&A landscape continues to be marked by uncertainty and, for the most part, inaction. A recent report by The Boston Consulting Group forecasts total deal value could decline 46% in 2009 compared with last year.

The dramatic change in the market is producing a wide range of different approaches among seasoned acquirers, with some watchfully waiting and others jumping at the chance to buy while so many companies are sitting on the sidelines. At last week’s CFO Summit, organized by the MIT Sloan Alumni Club of Boston, a panel of finance executives discussed the unsettled state of the market. One hot topic: the lofty valuation expectations still held by many would-be sellers, even as acquirers liken the valuation process to trying to catch a falling knife.

Thomas Ackerman, finance chief at Charles River Laboratories, a global provider of research and testing services to the biotechnology and pharmaceutical sectors, has seized the opportunity to buy: his company has completed four transactions in the past 12 months. Still, he said, these have been in the $10 million–$25 million range — relatively small, bolt-on deals for the $1.2 billion company. “There is a lot of potential activity, but we are still seeing unrealistic valuations,” including some steep price tags on private-equity portfolio companies, said Ackerman.

“There are also some assets out there that are distressed, and we don’t look for fixer-uppers,” he added. Ackerman said he’s wary of adding too much new capacity; the company may hold off on large deals until it’s surer of the level of demand for its services. Such concern is likely slowing many potential buyers in their pursuit of targets.

Other acquisitive firms have stayed out of the market entirely for the past year. Dave Walde, CFO at Orchard Brands, operator of the Appleseed’s clothing chain as well as other clothing, footwear, and household brands, said his firm hasn’t done a deal in more than 12 months. While corporate owners are becoming much more willing to sell underperforming assets, said Walde, “People who own private companies still have high valuation expectations.”

Indeed, Christopher Menard, who recently helped acquire three companies in a four-month period as finance chief at Phase Forward, a company that provides software for the management of clinical trials, said he’s learned that valuation is not always a logical thought process, particularly for the small company owner-operators Phase Forward typically approaches. “Sometimes you hear things like, ‘I think my company is worth $45 million,’ and when you ask why, the person tells you, ‘Well, my friend sold his company three years ago for $45 million and I’d like to do the same,’” he said. As a result, Menard and his finance team have spent significant amounts of time trying to educate potential sellers as to what their companies are worth based on market data and comparable companies’ valuations.

Given the lengthened due-diligence process (see “Mergers: When Will Action Replace Talk?”) and the finesse it takes to get both parties to agree on a price, perhaps it’s no wonder headline-making deals have been few and far between thus far in 2009. As Mary Henry, a panelist who recently oversaw the sale of her company, Virtual Iron, to Oracle, noted: “Every single one of them is a miracle.”


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