By Brian Bollen
Financial News, 2 January 2001
Banks report there are still deals being done and fine businesses are emerging from the mist
The roster of leading banks in technology, media and telecoms (TMT) on a global basis looks pretty much as one might expect. Based on preliminary data provided by Thomson Financial early in December, Goldman Sachs, Morgan Stanley Dean Witter and Credit Suisse First Boston fill the top three places of the formal tables in that order, followed closely by Salomon Smith Barney and Merrill Lynch.
In the US table, Goldman Sachs and Morgan Stanley again take the top two places, followed by Merrill Lynch, Salomon Smith Barney and Wasserstein Perella.
In the Europe-only table, a different picture presents itself, with Lehman Brothers at the top, while Morgan Stanley, Chase Manhattan, CSFB and Goldman Sachs trail in its wake.
Most bankers active in the TMT sector will tell you that they were prepared for the telecoms and related activity that dominated M&A in 2000. But most will also admit that they had their socks blown off by the volume of transactions that took place, the rapidity with which they unfolded and the sheer scale of the valuations involved.
Less of a surprise was the correction that almost inevitably followed the glory and the hype, as the internet bubble burst spectacularly.
'We didn't expect the extension of valuations that occurred,' says John Allen, chairman of niche player ARC Associates. 'We were concerned that values were unsustainable, and so it proved. In all, this has been a remarkable year. It's unlikely to be repeated in the coming year.'
'It's either feast or famine,' says Vincent Meulliez, a managing director and co-head of Telecoms in Europe for the newly merging JP Morgan Chase. 'But still, no one foresaw the amount, breadth and depth of the correction that was to take place.'
As investors 'junked' the industry, the more astute marketing departments began to reverse the fashionable practice of only a year or so ago, by removing the 'dot-com' suffix from their name. Phone.com, for instance - the buyer of early-stage UK company Paragon Software in March 2000 - now boasts a new name, Openwave Systems.
Against this background, the sale of Freeserve to France's Wanadoo presents what will surely become a classic case study in business schools across Europe. 'Freeserve: Success or Failure? Discuss.'
Should the sale price of £1.6bn (€2.56bn) be measured against the initial value of zero when the venture was launched by High Street retailer Dixons? Or should it be benchmarked against the £9.2bn that Freeserve was worth at the height of the Internet frenzy? Wanadoo, presumably, pays its money and takes its choice.
Whatever the eventual verdict, this transaction well illustrates the meteoric rise and dramatic fall of TMT. It also serves to emphasise that even the darkest cloud can boast a silver lining. 'While M&A activity has dropped dramatically, even in a tough market you still see some deals being done,' says David Weaver, head of technology investment banking Europe at Deutsche Bank in London.
'If you look underneath, the fundamentals are still pretty strong for the best businesses in the sector. This is turning out the way it almost always does; at the end of the day you have to differentiate between high quality business models and high quality people addressing a reasonable market opportunity and those companies that don't.
'On the more traditional technology side, in semiconductors and software for instance, there are some very fine businesses emerging from the mist, executing good offerings at sustainable, even attractive, valuations.
'We've done seven or eight transatlantic cross-border deals and we're starting to hear a lot of chatter on that front, both on the network equipment side and the IT services side. People are bargain-hunting again.'
The experiences of ARC Associates' Allen echoes Weaver's. 'We are still raising money for internet-related businesses. There is still money to be made from some that are tied more to the old economy, and are built upon the evolution of existing business models and extending sales channels, rather than upon revolution.'
Despite such measured optimism, the telecom component of TMT is experiencing its own problems as telecoms companies scramble to build out their third-generation networks. Hugh Sandeman, head of telecoms at Dresdner Kleinwort Benson in London, notes: 'The implosion of the equity market and the 3G auctions stretched capital structures far beyond their expected limits.
'The effect has been to squeeze the banking market, so we end up in a period of temporary starvation. Debt capacity has been used in large part to finance 3G licences, and the collapse in equity valuations for alternative telecoms has reduced the capacity and willingness to lend to alternate telco models of many different kinds. In the equity market, financing is available only on very selective terms, or at a very expensive price. In high-yield, it's barely available at all.'
But this is a temporary situation, he predicts. 'At the beginning of the year we should see the start of at least a partial reversal out of this cul-de-sac. First, there is a considerable build-up of liquidity within institutions.
Second, the occurrence of at least some equity offerings will create a situation where IPO proceeds can begin to pay down bank debt. Third, it's in the nature of the banking market that it tends to shut down at the end of the year. People close their books, don't like to take new risks, stop writing new business and won't begin again until January. This is a normal part of the cycle; it's only the numbers that are different.'
Aside from the funding difficulties associated with the burst internet bubble and 3G telecom woes, some veterans of the TMT sector argue that it has been beset by upstart advisers.
Like any sector that finds itself suddenly thrust into the spotlight, TMT finds itself blinking somewhat as it tries to adjust to the unaccustomed glare. 'I find it interesting that so many players have stepped up their involvement in TMT,' says Victor Basta, managing director at Broadview, an advisory firm that has specialised in this sector for much longer than most.
'We have been number one in M&A in this field for many years and while everybody's now trying to grab a piece of the action, they are attempting to do so without the necessary industry expertise. The number of genuinely qualified people has not increased much in the recent past, while the number of companies in the industry that need advice has grown exponentially over the past couple of years.'
There is more than a suspicion that some of the firms seeking to sell their advisory wares are not as well equipped as they might be. Even firms that sell themselves as having global reach and perspective might be deluding themselves, as they suffer from 'dots on the map' syndrome.
This enables them to claim a geographical presence in a number of countries without being able to field a properly integrated, in-depth and capable team.
'When they join up the dots, the picture is not necessarily the one you would expect to see,' says Basta.
Reproduced from Total Telecom®
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