Goldman Bullish on an Ariba Acquisition — But Don’t Discount Other Sector Candidates (Part 2)

Please click here for the first post in this series.

For the second post in our series looking at M&A in the procurement and supply chain sector, we'll take a bit of a detour from what I planned originally. The past few weeks since I wrote the original installment have not seen any material deals in the sector (at least not announced yet), but they have seen some very observant statements and themes from colleagues I've talked to or observed on the vanguard of examining deals (a business partner of mine included). Another one of these individuals, friend and colleague Paul Martyn of BravoSolution, also had some astute -- and fortunately, not self-serving -- observations to add to the discussion that I'll share later (unfortunately I can't reveal the sources for the other comments).

To begin, it appears that the overly obvious statement is that since companies starting shopping more aggressively in early Q1 in this sector, deals have been taking longer and longer to close as a general rule -- which in part explains why we haven't see more announcements in the past few months (we do expect some later in April and May, however). The early stage and pre due-diligence (pre LOI, in cases) is at a level I personally haven't seen in the past fifteen years of being involved in typically smaller transactions in the sector, in one capacity or another. Due diligence focused on technology is especially getting moved earlier and earlier in the process of examining potential suitors. Many larger suitors are also willing to make investments to do their homework upfront on potential targets, even smaller targets, if they're keen to break into a sector.

The next observation is that there is continued competition in the sector between private equity (PE) interests and potential strategic buyers. PE firms (and roll-ups backed by PE firms) are increasingly looking at anchor and tuck-in type deals whose interests may compete against larger and mid-cap tech firm buyers wanting to accelerate their growth in the sector. Look for this clash of valuations and interests to continue throughout 2012, as there are only a select number of assets in the space between the $15-75MM range (revenue) -- where things become quite interesting for both parties.

I have more personal and collected observations to share next week along with doing a deeper dive on some potential targets, but in the meantime, I was shocked at the Vulcan spend mind meld between what Paul Martyn observed and what we've seen as well. Paul started his comments noting, "Obviously in today's climate the new normal is that uncertainty reigns supreme. Cash reserves are important. Strategic investment in M&A occurs in part based on the strategic view of cash. For example, if I go spend money [to acquire] in the environment we work in, how will the asset weather another recession if sales slow? This is first reason acquisitions have not been as brisk as expected given balance sheets and the willingness to investigate options."

The next challenge Paul notes (and we second this) is that "you have a huge difference between what buyers think is a good deal and what sellers think is a good deal. You look at where transactions are being done and they're typically 2-4X, not 7-8X. The valuation disparity and buyer/seller expectations is outweighing the strong balance sheets and low-cost of capital."

Organizations are also taking the time to do their homework and check it twice before handing it in. To this end, Paul says "what you're seeing is that existing companies and players who have been here now for upwards of ten years are now looking to expand. They're looking for tangential technology and features that they can sell into existing clients and increase revenue per clients. But they're also wary -- more so than ever before -- of the risks involved in deals. At every level of evaluating a transaction, organizations are now looking at the people involved, the way they operated, etc. This sizing up does not stop and considerations of cultural fit matter more than before. Is the acquisition target a company that is customer intimate? Is it technology driven? Is it operationally efficient in delivering services or solutions? If there is not a good 'fit' it is harder than ever to get deals done."

However, some deals will still be done on the chessboard first and perhaps rather quickly. Paul says, "In the analyst space, we saw one transaction recently that was really just about taking out a competitor. We'll see this in our sector as well. Buy the brand, slowly kill off the assets without alienating customers and transition them onto your platform (eventually) but without a quick forced hand. It happens again and again."

And so it does. Up next Friday: a look at three potential acquisition targets and what is making them attractive to those looking to fill their shopping carts in the "non-organic" aisle.

- Jason Busch

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