According to our Magic 8-Ball: Yes. Of course it is difficult to predict what will happen as a result of Obama’s American Recovery and Reinvestment Plan, but as this issue demonstrates, there is definitely a possibility we will hit another “mini M&A wave” within this year. In our opinion, this wave will take a different form and happen as a result of necessity and opportunity (and at more realistic valuations) as compared to what the industry saw two years ago.
With hundreds of billions of dollars being allocated to information technologies, healthcare, biotech, communication technologies and energy technologies, it is inevitable we will see substantial intellectual property (IP) changing hands. Presently, intellectual property is increasingly affordable as many large companies focus on their core competency and shed IP holdings in the process. Additionally, many small IP-rich companies are wondering how to survive and are selling innovative processes, products, and other IP in the process. Technologies in the above-mentioned industries have a history of changing so rapidly that squatting these technologies for a few years may deem them worthless. Unless the stimulus plan imposes restrictions, the funding that companies receive from the Stimulus Package will be heavily used for technology acquisition and internal research and development.
M&A activity will also increase as a result of other forces. Distressed industries such as banking, automotive, homebuilding, retail and others will focus on consolidation as a result of necessity. Owing to an increase in economies of scale and reduction in fixed costs, the historic trend of consolidation during poor economic times will likely continue. As stimulus funding becomes available, you should expect to see an increased number of acquisitions as we witnessed recently in the banking industry. As many economists still believe, the worldwide bank problems are still far from over.
Surprisingly, we may even see a wave of cross-border M&A arising from both Europe and Asia. Recently, the Chinese government announced that as part of their stimulus package, they would support local Chinese companies in overseas acquisitions in the energy and chemical industries. Asia’s reduced dependence on credit provides them with a stronger cash position to acquire more depressed US companies right now. Moreover, the stricter “Buy American” clauses implemented in Obama’s new Stimulus Plan will most likely draw investment from foreign manufacturers looking to acquire US-based businesses in order to break into the US market. US companies are still inexpensive by worldwide standards even though the dollar has gained strength against many currencies in the last year.
Overall, we’re not implying that the mergers and acquisition industry will return to the level it was at two years ago. Valuations will still be lower. “Mega-deals” may become prevalent for industries that need to have consolidations such as banking and automotive. On the technology side, we expect to see the small intellectual property deals valued up to $100 million depending on the allocation and limitations on stimulus funding. If you are a technology or intellectual property-based company, you should be considering how the American Recovery and Reinvestment Plan is going to affect you and your industry over the next few years. We suggest that you speak with an M&A advisor about your company to entertain the options that might exist for you. Orion Capital Group, Inc.'s (www.orioncg.com) M&A advisory team is specialized in information technology, healthcare, biotech, communication technologies and energy technologies and would be happy to have a complementary consultation with you about your options.
