Press Release

Deal Market is Likely to Shine for Local Tech Players

Noah Brown, Vice President, Capstone Partners, LLC

Boston, MA -- January 26, 2004 -- Strong deal activity in the technology sector toward the end of 2003 offered a new wave of optimism throughout the Bay States downtrodden technology sector. As we enter 2004, it is scarcely possible to find an investment banker not trumpeting a return to happier times for tech businesses.

While this optimism is certainly valid, the market reality is not so black-and-white. While certain sectors of the technology market are likely to see continued activity, many (if not most) middle-market companies are likely to face more complex hurdles when positioning their companies for financing or merger/acquisition. Expect the following:

The deal pencils have been sharpened

M&A activity has returned as a strategic tool for growth, and investors are aggressively looking for new opportunities across the board. The radar screen has shifted, and the factors driving their actions are a far cry from the growth at all costs mentality of prior years.

Companies are using strategic acquisitions to complete product offerings and build competitive advantage rather than enter radically different markets or reshape the enterprise. Venture capitalists and private equity groups are taking measured bets on more mature companies.

Valuations have definitely rebounded, but investors and acquirers alike are looking for opportunities that offer solid fundamental growth prospects and they are taking longer to make that determination.

Financial services technology will stay on the move

With its concentration of banks and securities businesses, Massachusetts is a greenhouse for high-impact, niche technology providers, many of which later become acquisition targets for larger national players. The local landscape has become increasingly more dynamic as financial institutions react to regulatory pressures caused by the Sarbanes-Oxley Act and the recent Basel II Accord, a cooling mortgage lending market, and an ever-changing competitive environment in which to drive organic growth.

Risk management, compliance and revenue enhancement technology tools that can demonstrate efficiencies and results will enter the spotlight. Consolidation in this space will accelerate due to converging market dynamics: the larger vendors are aggressively seeking acquisition targets to fill out their product portfolios, and the end-users are looking to consolidate vendor relationships. Early evidence of this trend is the acquisition of Falmouth-based credit union tech vendor First National Systems Corp. by bank tech consolidator Intrieve.

Niche software deals will garner a leading share

The commonwealth will remain at the center of the national trend of large enterprise software vendors acquiring smaller vendors. This pattern became evident toward the end of 2003, with the sale of Newfront, a Cambridge-based vendor of specialized data management tools for higher education, to national vendor SCT, followed by the acquisition of Wakefield-based business intelligence specialist MarketMax by global leader SAS.

Strategic buyers have re-emerged in the enterprise software space as firms seek to capitalize on the beginning of a new wave of growth; however, their acquisition strategies are a far cry from the overpriced mega-mergers of the tech bubble days.

Medical and health technology has caught fire

While biotechnology tends to attract the majority of local attention, other segments of this dynamic market continue to represent a fertile hunting ground for acquirers and investors.

The acquisitions of computerized medical imaging innovators Amicas and Zmed in late 2003 are indicative of the continuing technological arms race in the health care IT field. Similarly, global medical device players such as Teleflex and Edwards Lifesciences have also been shopping in Massachusetts, in this case acquiring medical device subsidiaries of Genzyme Biosurgery and CardioFocus, respectively. Additionally, a global medical device manufacturer recently swooped in to acquire certain assets of Acton-based Radius Medical Technologies. Activity in the medical device arena will only grow during 2004.

Equity financings will be held to higher standards

Despite the reports of their bursting coffers, the reality is that investors will continue to take a cautious approach, favoring established middle market growth companies and demanding very favorable deal structures.

The late 2003 financings announced by AngioLink, a Taunton-based developer of a next generation arterial closure device, and Turbine Entertainment, the Westwood-based developer of online games such as Asherons Call, illustrate this cautious approach. Both companies were well along in their development plans before their high-profile venture capital backers could be brought to the table.

As in prior years, early stage companies without traction or management star power will be forced to look elsewhere for growth capital.

It’s all relative

Most analysts and tech industry pundits agree that it is highly likely that 2004 will see a return to a more flurried environment for deal announcements. Granted, it may not be reminiscent of the dot.com days of yore, but Massachusetts tech companies and investors will begin to enjoy a spotlight that they deserve.