Values Down, Rebound Misses Information Technology Firms
Stock markets have rallied in recent weeks, with the Dow
Jones Industrial Average last week 17.5 percent above a closing low of
7286.29 set on Oct. 9. But the improvement doesn’t necessarily carry over
to other areas of the capital markets – particularly information
technology.
“In the IT space, I think 2003 is shot,” said Frank Kline, founder and
general partner of Kline Hawkes & Co. His Brentwood shop, one of the
oldest names in venture capital investing in Los Angeles, hasn’t done any
deals this year.
“I can invest today and they’re going to come back in 12 months looking
for more money,” Kline said. “It’s not the kind of deal we want to do.”
Sometimes it’s the prospective fundees who pull the plug. Many start-ups
are trying to conserve the cash they raised earlier to get through the
economic slowdown, Kline said. They don’t want to sell equity at
fire-sale prices.
Recently, Kline Hawkes spent five months researching a $6 million
investment in a venture-backed company that is actually making money on a
cash-flow basis. The company, operating in the health care services
arena, had partial bank financing to acquire two smaller companies for
about $21 million – both cash flow positive as well – and needed the
additional $6 million in equity funding to bridge the funding gap.
At the last minute, both acquisitions fell through. One of the
prospective acquisitions, based in San Diego, took a higher offer from a
corporate buyer. The other seller, based in Orange County, decided to
wait.
So when will things turn around?
First, mergers and acquisitions need to pick up, according to Kline. He’s
looking for some big M&A deals to get things rolling in 2003.
Lloyd Greif, chief executive of local merger shop Greif & Co., thinks it
will be smaller deals that pave the way.
He said that banks, which cinched back their lending ratios in 2001 and
in the first half of 2002, have at least steadied, if not yet expanded
lending formulas. Greif expects to see incremental improvement in the M&A
scene, in a number of going-private transactions, or companies selling
out to private equity or corporate buyers, until the initial public
offering market improves.
– Anthony Palazzo
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