Wednesday, 3 June 2009

The Time of the Small Giants

I think the time has finally come for the (smart) small and mid-sized companies within the ECM technology sector. As I have mentioned in previous blog posts, there have been some significant changes in this industry. The number of companies that are easily seen, what I call the “tip of the iceberg” companies, have now been reduced via acquisition. This now leaves the vastly unseen smaller companies that lurk beneath the surface and for the most part do not reach the light of the media attention.

Obviously, the other significant event in the past few months has been the big “R” word - RECESSION. The only good thing about the swine flu was that it took the media attention away from the big “R”. It was probably also a good thing for face mask manufacturers, have you ever seen so many face masks. I understand that some international flights have been looking like a surgeon’s convention.

How can we not be aware of the recession when every retailer is using the recession as a theme for their marketing. It seems that we can’t buy a packet of crisps without being told that eating these crisps will be an antidote for the “recession blues”. Or recession proof your grocery bill by shopping with “X”.

The recession has however hit some companies hard and they need an antidote which is unlikely to come out of a packet of crisps. Companies such as IBM have assessed the damage that the recession has made to their balance sheet and are looking towards new growth opportunities.

Mark Loughridge, chief financial officer of IBM. "I go through a deal review every week," he recently told Reuters. The current environment provides a "fertile" hunting ground for acquisitions, he added.
Ari Balogh, Chief Technology Officer of Yahoo believes that current tech valuations are "amazing" when compared with their levels just a few months ago. “It's a good time to be buying now," Balogh told Reuters. Yahoo is in the process of acquiring some new companies. "I can guarantee you there will be some acquisitions," he said.

The second part of this year is expected to show an increase in the number of acquisitions and for the ECM sector this will undoubtedly involve the small to midsized companies in this market.
This could create many new opportunities and some of the more profitable smaller companies could gain considerable attention. However, in order to be a small giant they need to ensure that they are prepared for what the next 18 months is likely to bring.

Potential acquirers will often look at a business in a completely different way than existing management of the smaller companies in the ECM sector. By the time a company board decides that they are open to being acquired there are often many inbuilt issues with their business which stop maximum shareholder value being achieved. Some of the problems can also scare away “good fit” acquirers from a “Smart Acquisition” or merger.

Part of any good ‘due diligence’ process is looking at the weaknesses and risks associated with a business and deciding, is it an acceptable and mitigated risk?
The problem for management is that by the time, the acquisition process is commenced it is too late to fix these problems. If these can be identified early, many of the risks can be mitigated & built into a company’s business strategy. This is something that I will be banging on endlessly about over the next few weeks as Document Boss prepares to launch a new service that addresses this and many other closely related issues to the above. The factors that effect equity value are often not aspects of the business that can be changed in a matter of a few months. Historical data about the business also greatly effects value not just what is happening NOW!

Transparent attempts to increase profitability by cutting short term costs and the expense of long term success just prior to an acquisition are all to obvious. Such companies need to start thinking and behaving like a small giant well in advance of any M&A activity if they want to achieve GIANT returns. There may never be a better time for the smaller companies in our sector to shine but only if they learn to walk and talk like the big boys!

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