A Year Later, Bankers Find the Well Is Dry

The West Coast investment banker was recounting complaints from technology company executives who are now getting takeover offers that would have been deemed paltry just last year.

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"They say, 'I had someone talking to me for $600 million; now they only want to pay $250 million,'" the exasperated banker says, summing up the harsh world of the new Nasdaq and the stubborn side of tech entrepreneurs.

After two years of feeding at the trough of hypervaluations, technology companies have lifted their heads to a painful reckoning: Their worth to the world is significantly less than it was a year ago. But some investment bankers say that until tech executives accept the Street's new valuation ideals -- pesky things like actually turning a profit in the near future -- the market for initial public offerings and mergers and acquisitions won't be willing to accommodate them anytime soon.

Equilibrium

"The market is going through a search for the new equilibrium," says Brian Wade, Lehman Brothers' head of private placements, a business that's seen a resurrection as the public markets have tightened. "We're finding conversations with entrepreneurs easier. They're being much more realistic."

Realism has taken the form of 270 dead dot-coms since January 2000, 70% of which have been shuttered since October, according to Webmergers.com. Worse, it seems that the remaining struggling dot-coms haven't exactly become the apples of suitors' eyes.

In January 2001, 60 destination sites sold for a combined $600 million, exceeding the 57 deals in that area last January but falling short of that month's total $3.7 billion price tag. For all of 2000, M&A activity among Internet destination sites amounted to nearly $87 billion over 910 deals.

Internet Destination Site M&A Activity

Source: Webmergers.com

Overall, tech M&A has also seen a pretty steep falloff in activity as well, with the number of deals falling to 162 in January 2001 from 451 in January 2000, according to CommScan.

The reticence of entrepreneurs to apply the current market conditions to their own companies has hamstrung some deals, and kept some players away from the market altogether.

Make Yourself Scarce

Chris Varelas, Salomon Smith Barney's head of technology M&A, says it typically "takes two quarters to recalibrate" what buyers are willing to pay and what sellers expect to get. This time around, it's taken almost a year and, Varelas says, it's not enough to simply adjust down with the Nasdaq, because there's little "scarcity value."

Varelas says he now sees literally "hundreds" of companies looking for buyers after a period in which buyers didn't want to use depreciated currency to make an acquisition and targets were getting valuations that "were no longer indicative of their expectations."

Total Tech and Telecom M&A Activity

Source: CommScan/ComputaSoft

That means prospective buyers will have to overcome their fears before the M&A pump is primed. "There isn't the psychological comfort zone to pull the trigger," he says. "Buyers are holding back because they're waiting to see who the survivors will be."

In 1999, says Tim Miller of Webmergers.com, deals for Internet commerce and content companies had price tags that valued them at roughly $100 per monthly unique visitor. That premium has evaporated to around $2 to $5.

That means that to buy Geocities, which it snapped up in 1999, Yahoo!(YHOO) would probably issue stock valued in the hundreds of millions, rather than $4.5 billion.

And it still wouldn't be enough for some investors, who say some companies haven't quite gotten this valuation climate yet.

Initial Public Offerings Jan. 1 to March 6

Source: IPOPros.com

"We'll just sit on the sidelines" when a company disagrees with a valuation estimate, says Stephen Pagliuca, a managing director at buyout firm Bain Capital. Firms became accustomed to the "new paradigm," he says, focusing on growth and market share ahead of profits.

Without the profit part, tech companies don't hold quite the same allure as they once did. "The valuation ideas have not come down as fast as they could," he says.

Well, have they gotten there yet? "No," Pagliuca says.

Standstill Agreement

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With the IPO market at a veritable standstill for Net stocks, M&A has been a viable option for private companies in need of a "liquidity event" -- a way to get capital needed to operate. "It clearly looks today like there's more value in M&A than an IPO," says Lehman banker Wade.

That's likely how optical networking firm Cyras fell into the arms of Ciena (CIEN) for $2.1 billion in December.

That deal is one type of acquisition that is still getting completed in this environment. "Equipment suppliers are looking for tuck-in acquisitions of smaller -- often private -- companies. Also, similar companies with similar valuations are getting together," Varelas says. The Net M&A landscape, especially, has "gone from a land grab to finding cash for survival."

These days, Varelas says he's using the soft sell with companies seeking a partner. "Basically, they have to decide if they want to be ahead of the curve in accepting where deal valuations are going to settle or want to wait for the time of stability," he says. "But we've seen sellers not pull the trigger and regret it three months later."

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