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GROWTH THROUGH ACQUISITION

Large Mergers Could Signal Onset of Middle-Market Deals

Experts say the billion-dollar acquisitions represent a return of confidence in the economy.
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If you are an entrepreneur looking to grow your business through a merger or sell your business, put on your game face, say experts who predict that the middle market may begin to see a spike in mergers and acquisitions.

The month of September heralded a rapid-fire succession of big merger deals: Adobe announced plans to acquire Omniture for $1.8 billion, Dell agreed to pay $3.9 billion Perot Systems, Affiliated Computer Services was snagged by Xerox for $6.4 billion, and it was all capped by the announcement that Cisco Systems had agreed to buy video-conferencing giant Tandberg for $3 billion. Though large companies are enjoying the wave of acquisitions, experts say the deals could signal a forthcoming round of bids for middle-market companies.

"Mergers and acquisitions over time have had a definite impact on middle-market companies," says Bill Roman, managing director at the Boston branch of Richmond, Virginia-based Harris Williams investment banking firm, which helps manage and facilitate the sales of middle-market companies, or companies that generate an annual revenue of less than $500 million. "While the last nine months have seen a decided decrease in activity, [now] we are seeing a discernible increase in activity."

Mountain View, California-based personal finance website Mint.com was also snapped up in the buying blitz by Intuit, the developer of Quicken and other tax preparation software.

Roman says more companies are approaching the Harris Williams firm to start the deal-making process, which includes compiling a list of interested buyers and analyzing company assets and financial information. The process can take up to six months, he says, which is why the middle market has yet to experience a spike.

"In order for a deal to close today, that deal would likely have been started in March or February. If you recall back then, no one knew where the bottom was – it was a really difficult time," Roman says. "I think you'll begin to see an increase in the announcement of closed transactions in the beginning of 2010."

That increase will be possible because of a return of confidence in the economy, says Steven Schwartz, Ph.D., senior vice president of New York-based NERA economic consulting group.

"This means the firms have the cash to spend and they are looking for ways to spend it," he says. "When merger activity picks up, that can be interpreted as a signal of the improving economy."

Schwartz says there are several reasons an acquisition might be viable for a middle-market company, including access to more funding and resources.

"If you're looking for ways to exploit your technology, or for ways to take that technology and apply it to different businesses in order to extend to new products, that requires money," Schwartz says.

However, there are consequences to selling to a larger company, Schwartz warns. When the staffs of small businesses, including the owner, are placed in a corporate environment, it can take a while to adjust, he says.

"For a lot of people, going from a small, relatively young start-up business to [big business] is like being a square peg in the round hole, the (larger) company just isn't going to do a lot to change their hole into a square one."

Last updated: Oct 7, 2009

J.J. MCCORVEY | Staff Writer | Inc. Reporter

J.J. McCorvey is a reporter at Inc. magazine, where he covers a wide range of topics, including technology and business research. He has covered metro news for The Detroit News, and his work has been featured in Men's Fitness.




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