Big fish eat little fish. That is one of nature's immutable laws, though it is also a favourite aphorism of the cigar and brandy circuit - one of those pearls of wisdom that businessmen like to blurt out whenever the topic of mergers and acquisitions crops up.
If statistics are anything to go by, the big fish have been on a binge lately. It seems the EC's shores are the preferred basking area, awash with corporate sharks waiting to devour the next minnow, especially those involved in IT.
Broadview Associates, a London-based firm of corporate marriage brokers specialising in the IT sector, believes that the value of deals in Europe - whether in the guise of a buyout, merger or acquisition - soared by more than 51 per cent to $29.5 billion in the first half of this year, compared with $19.5 billion for the first six months of 1995.
Perhaps even more surprisingly, European buyer activity was dominated as much by the UK as the US, with UK firms involved in 24 per cent of deals, compared with US involvement of 23 per cent and Germany's involvement of nine per cent.
While Broadview's survey covers the whole of the IT industry, what is clear is that PC distributors, dealers and value resellers collectively constitute the most buoyant end of the market when it comes to boardroom wheeling and dealing, though the battle lines are often blurred.
For proof of such activity, one has only to look at companies like Maidenhead-based Azlan Group. Heavily involved in distribution, networking and systems integration, Azlan has been involved in at least seven merger and acquisition deals in the past few years, according to Broadview.
So what's going on? For one thing, the recession has left those still on their feet with a golden opportunity to plunder the assets of the less fortunate. One obvious example is Escom, whose bones are still being picked at by predatory rivals following the PC dealer's dramatic collapse a few months back.
Similarly, Compel's acquisition of Metrocom, the dealer arm of Ingram Micro, and its more recent (albeit unsuccessful) bid for another unnamed rival, help underline the carpe diem mood of the industry.
But the recession is only part of the story. Arguably, the advent of the Web has had just as much impact as the value-added business rethinks its role in a rapidly changing market, where direct selling of both hardware and software becomes the norm.
Most PC manufacturers already have product Web sites which, in time, could make massive inroads on dealers' and Vars' profits. While the selling of modular software, especially of an object-oriented nature, might similarly be revolutionised once the downloading of Java-type applets catches on.
But according to Broadview, a more compelling explanation for the current frenzied spell of corporate buying and selling is globalisation. Globalisation is a situation that has resulted in customers demanding single-source service across national boundaries, which has forced their suppliers to scale up their operations or face extinction.
'The world is getting smaller and customers are demanding a full global service. They don't particularly care who provides the service as long as the work is done competently and at the right price,' says Broadview principal Ben Tompkins.
'Dealers whose companies are already publicly quoted are under pressure from the stock market to demonstrate growth. If you're a private company and you're not growing, it's almost a foregone conclusion that you will be taken over by one that is.'
Like defining an elephant to a blind man, quantifying growth is not always an easy task. Bosses worried about the size of their organisation should not just measure it in sterling, says Tompkins, but should look for less obvious clues such as the ability to attract and retain key staff. 'If you want to keep good quality people, you have to show them career progression.
To do that you need to grow.'
Similarly, a broader level of service offerings is a good sign. But it is here that the US, with its massive clout, poses the greatest threat.
Back in 1988, US software houses accounted for about one-third of Europe's top dozen suppliers. But according to Broadview, by last year that percentage had risen to more than half, with 1996 likely to show a greater US presence.
For hardware dealers and Vars not in step with the global ambitions of their US software partners, especially those involved in systems integration, the implications are obvious.
Fourtunately, Blighty's IT firms are matching their US counterparts when it comes to expansion.
Part of the explanation, suggests Tompkins, is that the London Stock Exchange is rapidly becoming as sophisticated as Wall Street when providing capital for overseas colonisation. That said, US venture capital firms continue to beat a path to British shores. Broadview's most recent example of that is a relatively unknown software house in Leeds for which it secured $35 million in investment from a US arm of Warburgs.
'More than half of all European IT deals are done by either a US or UK buyer,' Tompkins points out. 'Apart from the ready availability of capital, firms in the US and UK are accustomed to going overseas to make transactions.'
Meanwhile, for UK dealers and resellers thinking of selling as opposed to buying, the word on the street is that they are 'hot' in the eyes of investors, especially US investors. This is because of the UK's open trading market, relatively unfettered by government interference.
It's also a result of the more general trend towards a pan-European IT industry.
In the eyes of a US buyer anxious to gain a foothold in Europe, a UK acquisition is often preferred, if only because of the common language.
But UK IT firms have a strong reputation in the communications market.
That's especially true if they're involved in ISDN or ATM integration - skills which many US firms lack - as it places them at more of a premium.
For US firms, yet a further advantage exists. If they can convince their investors that a strong European base is absolutely vital for expansion, then the purchase of any goodwill can be written off against tax returns for anything between 10 and 40 years.
Not surprisingly, in Europe over the past year, there have been 35 times more IT mergers and acquisitions than public flotations, as many companies acknowledge it is better to capitulate now rather than be left a tiddler swimming increasingly against the tide.
All of this begs the question of how best to cash in if you are in the mood to sell. 'Timing is paramount. Sell when your company is performing well, preferably in the first half of the growth phase. Buyers need to demonstrate growth to their investors and therefore want to acquire growth,' says Tompkins.
'Make certain that, as a seller, you demonstrate confidence, not just in terms of technology, but also in continuity of management on offer.' Yet another piece of advice is to 'ring-fence' bad news quickly.
'If your business has any problems or unresolved issues, make sure you package them early on in the negotiations and try not to hide them. Often, if you take that strategy, potential buyers will not see such obstacles as unsurpassable,' says Tompkins.
As for the question of price, how much should you sell your own company for? How much should you offer for a rival's company? This is often best determined by weighing the asking price against turnover.
'Unlike listed companies, private firms do not always divulge their profit figures,' explains Tompkins. 'If they do, they will often compile them in tax-efficient ways that cloud the true picture. You can normally work out an asking price-to-revenue computation, but it is something generally best left to the experts.'
Software and service companies tend to command values of somewhere between 15 per cent and 17 per cent of their turnover, the median for distribution outlets being slightly higher at around 20 per cent.
Meanwhile, in the current bout of buying frenzy, statistics confirm the pattern of big companies adding small firms like bits of a prize jigsaw.
In the past five years, 90 per cent of all IT mergers and acquisitions were for less than $50 million, with only one per cent of deals worth more than $500 million. Moreover, more than two-thirds of all the sellers were private companies.
UK dealers that want to buy rather than sell should. But like their US cousins, they should take a portfolio approach when it comes to expansion.
That means acquiring firms whose skills complement and augment those of your own organisation. Tompkins believes that is a strategy which 'allows you to expand more quickly than organic growth'.
But if you want to buy, how do you set about recognising value in another company? Or if you want to sell, how do you develop value in your own?
Ken Olisa, a former Wang high flyer, once tried to buy the European operation, but now runs his own IT marketing and capital advice firm Interregnum.
He believes that the first thing to assess is the quality of the team and whether its skills are unique.
Olisa cites the case of Bill Gates who, when launching Windows 95, toured the world 'talking the talk', despite the questionable value of the operating system. 'In the US, executives will set aside one week each month to talk to potential investors. But in the UK, you're lucky to find any head of a listed company who is prepared to spend more than one day in three months doing that.'
Another tip for adding value, is to patent any intellectual property rights if only to scare off the competition. Once patented, proprietorial software might be tweaked for open systems standards, thus opening the possibility of a much bigger cash flow. 'If you are selling a company on the basis of its turnover and the life of its technology,' says Tompkins, 'going down the open systems route can make a significant difference to turnover, and to the ultimate valuation.'
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