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Wrapping Up A Year of Superlatives
As seen in San Jose Business Journal
by Michael Sipe

As of December 2, 1999, total U. S. mergers and acquisitions transactions were in excess of $1.3 trillion according to Mergerstat. With four weeks left in the year, the 1999 annual figures already exceeded 1998's record totals by more than $100 billion. Record stock market levels, low inflation, and increased consumer confidence have driven this broad expansion of activity.

On an aggregate dollar value basis, Communications, Broadcasting, and Medical Supplies (including drugs and equipment) have led domestic industries with Computer Services (including software and supplies) and the broader Services sectors posting the largest number of transactions.

These acquisitions are also due to the overwhelming pace of technological innovation. Paul Deninger, Chairman and CEO of Broadview International LLC, observed in the November 8, 1999 issue of Forbes magazine that, "If you have the opportunity to be the Cisco of your market, you are crazy not to go public. But if you will not be the Cisco
in your space, you should sell, because your ability to generate long-term shareholder returns is limited. History shows that the cards are stacked against you."

For buyers and sellers of middle-market companies, Private Equities is seeing the emergence of innovative financial service products supporting leveraged transactions. Among these new tools are surety bonds used in seller-financed transactions which protect against buyer default and new
business acquisition lending sources using customized loan packaging and securitization. The latter are especially noteworthy when business real estate comprises part of the transaction.

Consolidations and roll-ups have been well publicized over the last year or so as an exit strategy for privately held companies. A cautionary note is in order, though. Industry consolidators can be a viable exit strategy, however they are not a panacea. For example, after acquiring Colorado-based American Medical Response (AMR), the nation's largest ambulance business, for $1.2 billion in 1997 as part of a major industry consolidation, Laidlaw announced the divestiture of AMR earlier this year and took a $250 million write-off when AMR's strategy of buying and merging 250 ambulance companies failed.

When the consolidator overestimates potential economies of scale and the benefits of centralization, the outcome can be problematic. Conversely, underestimating the complexity of combining corporate cultures and
consolidating "back office" operations, like purchasing and bill collecting, has also proven troublesome. In the final analysis, an industry consolidation must benefit customers over the long term, not just short term investors, or the business strategy is flawed.

In addition to industry consolidators, more conventional corporate acquirers or well funded, focused private investment groups can also be viable buyers for privately held middle market companies.
 

Michael Sipe is president of Private Equities, a middle market mergers and acquisitions firm. You can reach him on:408.295.4299 or at inquiry@private-equities.com.
 

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