The Current Competitive M&A Climate

Posted by | August 27, 2010

The Current Competitive M&A ClimateAs reported recently in The Wall Street Journal, companies are sitting on nearly $2 trillion of cash. As a result, shareholders are beginning to ask management what plans they have for such large cash reserves. Two immediate options are quickly offered — either aggressively pursue a stock buyback if management believes the share value of the company is below its fair value, or authorize stock dividends. The third option could be the use of such cash to facilitate an acquisition (or two) to enhance a company’s market penetration or long-term strategic positioning.

These sentiments are expected to begin to drive a greater level of initial identification and evaluation of potential acquisition targets and transactions. Although analysts are divided over whether the recent strong M&A cycle will continue if the economy continues to slow, most completed transactions are expected to be done with mostly cash — versus stock — as the currency. This trend seems to make sense given the larger sum of cash and the perceived below market value of stock.

We also believe that the competition will be significant for well-established enterprises capable of providing strategic advantages to the buyer. Witness the 60 percent premium Intel offered for McAfee and the struggle between Dell and Hewlett-Packard for 3Par, which pushed Dell’s bid from $18 per share up to $24.30. This enhanced level of competition may result in larger premiums for the purchase of companies of all sizes as long as they are well-positioned in a niche that will enhance the acquirer’s service offerings or technology.

This kind of competition plays to Safeguard Scientifics’ strengths, since our current partner companies are centered around five key strategic themes that take advantage of trends within life sciences and technology. Long term, we believe that the majority of our exits will be achieved by finding the right strategic buyer for our partner companies.

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