Anticipating Merger-Based Changes and Disruptions During Market Downturn

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This week, IBM released surprisingly strong financial results once again, showcasing that the problems that are plaguing the U.S. and world markets are originating with subprime mortgages, not with the tech market. Clearly, the evaporation of credit will hurt all segments, but Microsoft, HP and IBM are capable of self funding and should be able to weather current conditions better than more focused companies. The downside to this diversification is slower growth during the good times than more focused companies like Apple; the upside is when the market moves down these giants don't move as quickly in that direction.


Let's look toward recovery and talk about what might happen with the companies that should end this downward cycle more strongly than their focused competitors.


The Advantage of Cash in a Down Market


As noted above, these massively diversified companies tend to have vast cash reserves and better-protected revenue streams than their more focused competitors. This means that while the focused firms will be struggling to maintain operating reserves and their valuations will likely drop precipitously, the diversified firms should be able to hold value better and have money they can spend on acquisitions.


This is often how the diversified firms become diversified in the first place. The focused firm becomes an attractive acquisition target both because its valuation can hit historic lows and because its board is looking for a quick way to restore the massive amount of financial equity they and other stockholders have lost during the decline. They may be much more willing to entertain an offer than they are in a growth phase.


Buyers and Sellers


Even Apple may become an acquisition target, but especially firms like Unisys, Yahoo and Sun may suddenly find themselves on the block as stockholders and board members become more desperate to increase their reserves so they can also better weather this financial storm.


This makes for the ideal buyer's market. I expect that we will start to see increased activity to both buy new properties and sell divisions to others that can make better use of them. For instance, it wouldn't surprise me if IBM took this opportunity to sell off its own microprocessor factories (FABs) to the new Abu Dhabi consortium that just bought AMD's FABs. It could free up capital and be in a position to buy more attractive services or software units, which Sam Palmisano appears to think are more strategic, long term.


Taking a company and a division private will also be more attractive at this time because the cost to the investment entity will be at an historic low point. The elimination of the costly financial reporting requirements associated with being a public company have never been more attractive. Existing investors will accept far less and the return to the new private investors should be impressive if the economic conditions don't last too long and the company can ride the benefits of the recovery.


Protecting Yourself


If you are making a product or services buy from anyone at this time on contract, it probably is wise to include an optional termination clause if the ownership of the vendor changes. The acquiring company will probably do its best to keep you happy anyway, but customers with this clause should top the list of firms that they will focus their efforts on, assuring you the least disruptive and best experience during the transition. In addition, mergers don't always go well. If the one you are affected by goes south, this gives you the opportunity to walk away without penalty. That will, if nothing else, take away a lot of the concern you might otherwise have.


The times ahead are going to be exciting; I'm suggesting that you'll want to make sure they aren't any more exciting than they absolutely need to be.