News from Mirus

We would like to congratulate the Mirus Crew who won both heats of the 12 metre regatta aboard the boat the Weatherly at The Northeast Bankruptcy Conference in Newport last week. Jamie Grant also presented at the conference discussing Distressed Companies. A glimpse into his presentation can be found by clicking HERE for last month’s Viewpoint or visiting our website at www.merger.com.

Market Overview

Recent profit warnings from tech companies, specifically Intel and Dell, have acted as a drag on the broader market, reversing an earlier market rally.  The rally followed Fed Chairman Bernanke’s comments to Congress on slowing economic growth helping to limit inflation.  In addition, meeting minutes released from June’s meeting revealed that the Fed saw “significant uncertainty” about the federal funds rate policy going forward.  Following these remarks, the markets rose as investors bet that the Fed was nearly done raising rates after a two-year campaign. 

Bernanke’s comments on a slowing economy keeping inflation in check came despite economic measures from June that came in higher than expected.  While the overall CPI’s increase of 0.2% in June was in line with estimates, the 0.3% increase in the core CPI was 0.1% higher than economists’ projections.  June’s output and capacity figures also increased by larger than expected margins, with capacity use rising to 82.4%, the highest rate since June 2000.  Current projections for core inflation rates for 2005 and 2006 are approximately 2.25-2.5% and 2-2.25% respectively, currently at the high end of the Fed’s inflationary comfort zone.

Although the slowing economy is expected to keep inflation in check and may lead the Fed to pause in its rate hike campaign, it also has led fund managers to their most pessimistic point in five years, according to a survey by Merrill Lynch & Co. Sixty percent of survey respondents expected the global economy to weaken over the next twelve months and forty-four percent expected corporate profits to deteriorate. 

Merger Overview

The security software market continues to show activity, evidenced by EMC’s recent announcement that it acquired RSA Security for $2.1 billion.  EMC’s offer values RSA at $28 a share, a premium of more than $6 on the trading price at announcement and 65% premium on the 50-day moving average.  The announcement comes as more and more enterprises are demanding additional security with their data storage solutions. It also closely follows IBM’s acquisition of DataPower, a security software firm purchased in late 2005.

The hot M&A market for security software has contributed to a weak IPO market with the last two security firms close to an IPO, Brightmail and Sybari, acquired by Symantec and Microsoft, respectively, at the last minute.  With companies like McAfee and Symantec showing a willingness to pay attractive valuations for security software firms many security software firms have eschewed the IPO process in favor of a simpler M&A exit.

This month’s metric is focused on the relationship between a company’s size at the time of being acquired and its business category.  As illustrated in the Exhibit, data on U.S. acquisitions over the last 12 months shows that at the time of acquisition, revenues of software companies tend to be significantly smaller than those of companies providing business services or industrial products.  Moreover, the revenue ranges are much wider for industrial products and business services companies.  

These results illustrate that software companies are usually acquired at earlier stages of their growth. Once software companies are able to demonstrate the viability of their products, there are often significant synergies with buyers that have the resources and channels to further develop and market these products. Acquirers can introduce the target to an existing base of customers, technology partners and other resources, providing an immediate increase in market exposure. Acquirers may also be motivated to buy software firms that are in their early growth stages to gain control of a unique technology asset before it falls into the hands of a competitor.

On the other hand, Industrial products and business services companies show higher revenues and much wider ranges at the time of an acquisition.  For these companies, the scale and access to customers they provide to an acquirer is typically a more important consideration.