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Corporate Acquisitions "M&A Pulse" Column

CORPORATE ACQUISITIONS
A PUBLICATION OF MERGERSTAT
Volume 29, Number 1 June 10, 2002

M&A Pulse: Our One-On-One Series Continues With Ryan Kuhn, President Of Chicago’s IT M&A Firm Kuhn Capital

Perhaps no industry was hit as hard over the past two years as information technology services, better known as IT by corporate pros. The industry experienced nearly a 40% decline in revenue. “No one foresaw this dramatic drop in IT services,” says Mr. Kuhn.

“While the most noteworthy response to this sales drop is an almost universal perception that now is a great time to buy and build share, buyers are lacking that traditional tool to lubricate these M&A transactions -- namely cash,” he says. “Banks are a disappearing factor in terms of cash flow loans. In the pre-dot com world, information systems were solid enough that they could get loans. IT wasn’t just a dot com phenomenon. The industry’s been around for a long time.”

Every spring, Kuhn’s firm does an M&A market attitude survey of IT businesses, which is useful not just for the industry but to judge the health of big businesses who rely on IT systems firms. If IT budgets increase at Fortune 1000 companies, IT firms will show improvement, the thinking goes. In this year’s survey, perhaps the most interesting responses came when companies were asked: What’s Your Company Worth? The average response was 1.25 times sales, but the divergence of answers was rather large. Thirty-seven percent said their companies were worth just 0.5 to 1.0 times sales; 26% thought they were worth 1.25 to 1.50 times sales; and 37% believed they were worth two times sales or greater.

“One theory is these multiples differ by industry or by performance or size,” says Kuhn, who adds that his firm plans on digging deeper into the survey in the coming weeks for more insight.

When considering certain factors in their decision of whether to accept or propose a specific purchase offer, respondents consistently ranked price as the top priority, with cultural fit and retaining people second-most important. Interestingly, the percentage of cash in an offer was third, perhaps meaning cash may not be king for that much longer.

A buyer’s financial condition and personal timing considerations were next. “What was interesting was how important keeping employees was to officers,” says Mr. Kuhn about his firm’s inaugural survey. “The degree of loyalty going forward was very important to executives. It confirms the nature of the IT business.”

In terms of future outlook, there are some positive signs out there. “IT pipelines bottomed out in 2002 and pipelines as well as backlog -- both key indicators for the industry -- appear stronger in April and May. Add that to the fact that manufacturing and purchasing numbers that recently came out were stronger than expected and we could very well see a modest pop in IT demand from Fortune 1000 companies,” says Kuhn.

For more information, contact Mr. Kuhn and his firm at (312) 236-0100.


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