Friday, January 2, 2009

2008 Public Internet M&A: Year In Review

Bill Burnham, an ex-Wall Street analyst and current hedge fund manager posted reviews on Public Internet M&A, Software IPO, and Internet IPO activity for 2008. As expected, all showed a dearth (understatement) of activity.

Looking at the M&A statistics, it seems to me that the lack of actviity is related to two factors; one short term and the other industry structural. Addressing the short term issue is that it's hard to place a value on a company when it's stock (and yours) is melting down an average 41% in a six month time frame. We have seen spastic run-ups and run-downs and they just about always freeze buying and selling.

The larger issue is the lack of IPO's. This multi-year freeze seems to be turning the software/internet market structure from a classic triangle (with the largest number of companies at the top and the greatest on the bottom), to more of an hourglass where the middle-market public companies, which historically account for an outsized % of transactions, are disappearing. The disappearance of these firms, not replaced by new ones, is limiting M&A volume. Three related factors ought to be in alignment to bring back the software/internet middle market; company performance, ready equity buyers, and Wall Street firms willing to bet their balance sheets.

We are in the midst of some tidal changes that will undoubtedly give us great opportunities, but just not the same one's we saw for the past 10 years. For many investors, as Warren Buffet once said, 'the shifting tides will expose those of us who were skinny dipping'.

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