I don’t typically comment on big deals. I do consider HP’s purchase of EDS, however, a bell-weather for many middle-market M&A Deals. The $13.9 billion transaction, at $25 a share, is anticipated to close by year’s end. This deal will more than double HP's services revenue, which was $16.6 billion for 2007. The two companies' collective services businesses, at the end 2007 fiscal year, saw annual revenues topping $38 billion. The revenue stream is one obvious reason that justifies the 16 Xs multiple buy, but with tight credit markets it is clear that even the big players are relying heavily on growth through acquisition.
The HP-EDS deal is essentially a reverse merger of EDS into HP. Here, EDS’ management is going to take over the services management of HP. Certain market factors, however, have contributed to creating a prime environment for strategic acquirers. Right now, because of suppressed credit markets and inexpensive money from the Fed, low relative valuations can be found in just about every market there is, if a buyer and their banker know where to look.
Also private equity and other financial buyers are not in this market as much because of the tight squeeze on credit. This fact has allowed strategic buyers to come back into the market, as indicated by HP’s 16 Xs multiple. The current credit crunch limits wherewithal of highly-leveraged transactions and growth of undercapitalized companies. This is something that no matter what deal-size transactions one is involved with, the depressed market is still impacting individual deals, as well as the process as a whole. This does not by any means mean acquisitions should be discouraged.
Right now, the recessionary environment leads to caution when bringing sellers to the negotiating table. What is their company’s true value? Mostly likely, sellers will argue that their company is worth more than an initial offer price. This was certainly viewed as one reason for rejecting Microsoft’s initial offer for Yahoo. With a proxy fight now underway, we are about to see just what strength companies can leverage if a big buyer is willing to fight.
Both the friendly HP-EDS deal and the current Microsoft-Yahoo fight, while headline grabbers tell the same story. Human capital is hard to come by, and is one of the underlying sources for industries and markets that are driven by their intellectual property to source good buys. I believe, if one looks strategically in the market today that good buys can be found. Again, sellers may be cautious, given valuations at the moment, but dealers should strike when the iron is hot. Organic growth may be difficult to come by these days. Yet there is no dearth of good companies either within the US, India, China or elsewhere for strategic-savvy buyers.