Good Signs in Financial Market Chaos

By theWHIR.com , November 12, 2008
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November 12, 2008 -- (WEB HOST INDUSTRY REVIEW) -- Over the past few weeks I have had many conversations with other merger and acquisition professionals, CEOs engaged in consolidations, and other business owners.

We discussed the current state of the financial system in the US and how it might affect the web hosting industry over the next one to three years - specifically valuation and mergers and acquisitions. We wondered if the number of active buyers would decrease, to what degree and if the number of sellers would increase as owners and investors seek to raise cash.

Granted, there was a two to three week period in October when every deal I knew of went on hold as everyone watched the capital and stock markets in awe. Since then, most deals are back on track. Everyone I know who was in the acquisition mode before the meltdown is looking again.

On the sell side, I haven't seen or heard of an unusual increase in sellers (even when the capital gains rate is likely going up soon). Whether it's because in today's market owners don't have many attractive options for the reallocation of capital following a closing, or because in this economy, owners are not sure what they might do post-closing to bring in a steady stream of income. For whatever reason, the fact that this financial crisis has so far not scared off most buyers is truly amazing, and speaks volumes to the good financial health of the industry.

This is not like what I saw in the early 1990s in another technology industry. In the early 1990s I was the director of mergers and acquisitions for a wireless paging company. There was plenty of capital being pumped into the industry for acquisitions from Wall Street, private equity groups and individuals.

Early on, there were far more buyers of paging companies than there were sellers. Sellers would sit back and listen to the sales pitches of each of the M&A guys and decide with great negotiating power who they would sell to and under what terms. This went on for three or four years, until there was a balance in the market, fewer buyers and more sellers.

As cellular began taking off, replacing the pager, the number of sellers of paging companies increased dramatically, and buyers disappeared, one by one. Eventually, the only buyers were the larger companies who couldn't find buyers for their companies, so they bought other paging companies on the brink of and in bankruptcy for pennies on the dollar.

Obviously this situation was not due to a financial markets meltdown, but a technological obsolesce event. However, the point of the story is the financial health of an industry can many times be tied to the trend of activity in the M&A market.

The fact that there are still far more buyers than sellers in the web hosting market is a very good sign.

M. Eric Furlow is president of Furlow Consulting (www.furlowconsulting.com), which helps individuals and corporations merge, acquire, divest and value telecommunication and Internet companies.