Valuation Rethink for Technology Bankers

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Byline: Janine Brewis

Technology mergers and acquisitions bankers are gradually getting some of their confidence back, even though vast swathes of their peers have been made redundant in recent months. They are doing so by adopting a back-to-basics approach.

Most technology bankers will readily admit that many of the valuation methods used in the glory days of 1999 and 2000 were misguided. Bankers refer to the "hockey-stick effect", where a company's finances look terrible now, but are projected to improve markedly once a deal is done, which shows up like a hockey stick shape on a graph.

Ben Tompkins, a managing director at Broadview, the IT, communications and media adviser, laughingly recalls the time a company attempted to value itself based on the number of engineers it had, which bore little or no relevance to its financial standing.

"Now we are going back to basics, back to earnings ratios or price to Ebitda. Before, people came up with all sorts of valuations," he says.

A recent example of a technology deal going back to basics is Scientific-Atlanta of the US agreeing to acquire Euronext-listed BarcoNet for E173m ($154.5m), which represented a 136% premium to BarcoNet's share price.

Jonathan Stankler, responsible for multimedia technology within Dresdner Kleinwort Wasserstein's European technology group, worked for BarcoNet on its takeover. He agrees that TMT deals are now being put together more wisely.

"Although the Barconet exit premium was high, the valuation metrics adopted were based on sound fundamental analysis of prospects, cost and revenue synergies and the opportunity to leverage additional business through a strong European customer base. Clearly, there is no evidence that we are seeing a return to the valuation methodologies witnessed at the height of the technology boom," Stankler said.

Ben Thorne, European head of technology at DrKW, expects to see other deals similar to the Scientific-Atlanta/BarcoNet one: "Over the next six to 12 months we are likely to see an acceleration in the number of transactions in the digital TV space. …