NEW YORK-Who’s minding the store? When it comes to security analysts following newly public high-technology companies, the answer could well be no one.
“More than half of all publicly traded `tech’ companies today went public in the last four years, yet nearly a quarter of them have no research coverage,” said Paul Deninger, chairman and chief executive officer of Broadview Associates L.P., Fort Lee, N.J.
“These companies now often find themselves competing for the attention of analysts, and-without adequate coverage-their performance lags. Many public companies are finding that the [initial public offering] route has not met their expectations.”
For telecommunications-related companies in particular, there is a dearth of qualified security analysts, said Holt Thrasher, managing director of Broadview. Even for those companies that get coverage, the number of analysts following them may be few. Without a “consensus following,” the price of their stock can be disproportionately altered up or down by the limited coverage received.
In the absence of sufficient information about individual companies, another problematic result is high-technology firms of all kinds get lumped together in the investment community’s collective mind, even if underlying internal and external fundamentals are different. This phenomenon comes into play periodically as good or bad news in one area of technology has a ripple effect throughout, he said.
“Ten-to-15 years ago, telecom was a fairly sleepy area, but now it is the most complex. It requires a high level of understanding of global regulatory and business issues.”
Coupled with inadequate understanding of the industry is a general lack of patience by investors, who seek short-term gains. This shortened time horizon of expectations is clearly out of sync with the operating realities of carriers and equipment vendors, Thrasher said.
Telecommunications services providers need time for large scale capital investments to pay off. Software sales, which is a major component of networks, follow cycles of 18-24 months, much longer than the quarter-to-quarter expectations of many in the investment community.
Many high-technology companies went public during the past 12-18 months because the capital markets placed a high value on their products or services. Continuing the same phenomenal growth rate that first lured IPO investors often is impossible without deeper pockets and wider geographic presence.
The combined effects of this situation serve as one key driver of the recent trend toward mergers and acquisitions, according to Broadview Associates’ new Technology M & A Report for 1997. The number of privately owned technology companies choosing the merger-and-acquisition route was eight times the number choosing to go public as an alternative. In 1996, the ratio was 4: 1.
“These developing companies face enormous distribution challenges in an increasingly competitive marketplace. At the same time, there are larger, well-capitalized companies that need new technology and must quickly deliver fully integrated solutions to their customers,” Deninger said.
“Larger merger partners can offer private companies attractive, strategically based value and opportunities without the risk of the IPO market.”
In 1997, telecommunications transactions grew by a strong 33 percent to 381, compared with 287 such transactions in 1996. The total number of mergers and acquisitions in information technology, media and communications industries rose 25 percent last year worldwide and 31 percent in North America, reaching new records, Broadview’s report said.
“As a sign that the telecommunications market is trending toward market concentration, we have seen a sharp rise in the median size for telecommunications acquisitions, which nearly doubled to $29 million in 1997 from $15 million in 1996,” Deninger said.
Overall, the number of public company sellers jumped 57 percent, with a far higher increase of 83 percent for those in the software sector.
Financial institution purchasers accounted for 73 acquisitions in 1997, compared with 57 in 1996, a 28 percent increase.
“U.S. buyers extended their dominance of global `tech’ M&A activity, representing two-thirds of worldwide acquirers of `tech’ companies in 1997,” Deninger said. American buyers increased their share to 26 percent of all European deals from 22 percent in 1996, and overtook U.K. buyers as the leading acquirers in Europe for the first time, he said.
