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Ken Marlin is founder and Managing Partner of Marlin & Associates New York LLC, a specialized investment banking advisory and consulting firm providing transaction advice and services to middle-market firms in the technology, information and business services sectors. M&A has had a busy 2005. A-Team asked what was behind the resurgence in mergers and acquisitions activity in our industry and how the outlook is for 2006.

A-Team: Your tag line on emails to clients is: ‘This is our space. We firmly believe no-one knows it better.’ What is your space?
Marlin: Our space is the Digital Information Economy. We talk about this world in our marketing material and on our website (www.marlinandassociates.com). We work with people who are at the intersection of technology and online content. Over the past 20 years, I have gone back and forth between running companies in this space and helping others do deals in the space. For the past seven years, however, I’ve stayed firmly on the deal side. I’m staying here. We firmly believe that every firm ought to have some area in which it believes it is the best on the planet. You are now talking about ours. I believe that even our largest competitors would agree that M&A has an unusually deep level of domain experience in the digital information space.

Five of our most recent deals have been software companies. They are not providing generic software, they are offering application software – often on an enterprise basis – that helps customers manage the flow of digital information. Three of our most recent clients have been providers of online content – of course, they are significant users of technology.

A-Team: Marlin & Associates has done four or five deals in the past 12 months in the financial markets IT space. What, if any, was the common thread that made these specifically Marlin & Associates deals?
Marlin: Yes, we have had a fairly busy year. When we started this firm, we aspired to do four deals a year. At that pace, we would have a deal closing each quarter, which would keep us plenty busy. In fact, in 2005 we helped our clients sign eight deals, with seven of these successfully concluded before year-end, and the eighth scheduled to close February 1. That is a lot for us.

It’s true that six of our most recent eight deals fall into the category of financial markets IT or providers of securities-related content or tools. Clearly, this is an area in which our domain expertise has always been particularly obvious. I started my career and spent 10 years doing deals in this space before becoming an operator. Four times, I have been a CEO of financial IT or securities information-related companies. I have bought and sold my own companies in this space, have raised growth capital for my own firm – and helped others do the same. And I know what it’s like to sell the business you built.

In 1997, I sold my last firm, Telesphere, to Bridge Information Systems, where I became executive vice president. I left Bridge in 1999 and went back to helping others do deals in this space.

A-Team: We noted that two of your recently announced deals involved non-U.S. clients. Why would a mid-sized U.K. firm (such as BFT) or a mid-sized Australian firm (such as Cameron Systems – see sidebar) hire a boutique New York investment bank to help sell themselves?

Marlin: Well – it’s certainly not just because we know American buyers – although we do…. As you noticed, we helped Beauchamp get sold to Linedata – which is a French company; and we helped Cameron get sold to Orc Software – which is a Swedish company. In both cases, neither the buyers nor the second highest bidders were American. Right now, in addition to our U.S.-based clients, we also are advising two other European companies. We are talking to buyers and sellers from Sweden to Singapore, from Israel to India, and a few in the U.S. as well.

We believe that the digital information space in general – and the financial technology space in particular – is not geographically defined. Instead, we believe that it is defined by the industry it serves. To serve our clients properly, we must work with buyers and sellers wherever they are based – and we do.

I spent 10 years doing international deals before forming M&A. As I am sure you can appreciate, there are many intricacies in cross-border deals. They revolve around things like contacting and managing potential buyers and/or sellers (we work globally and have a broad network of contacts), and managing a complex due diligence process (we have a strong relationship with a provider of virtual data rooms). Also, it takes cultural sensitivity and a lot of long distance hand-holding. There are differences in accounting rules and presentation (U.S. GAAP vs. the rest of the world), and many legal nuances that local counsel may have to help resolve. One of our strengths is that we know many of the pitfalls – and how to help get them resolved.

A-Team: How did you win the business and why did you pursue them?

Marlin: “Pursue” is an interesting concept. We do have conversations with many firms in the industry. Sometimes these are in the context of other deals we are working on – talking to prospective buyers or sellers. Sometimes, we reach out to firms that seem particularly interesting for some reason. Sometimes, we get introduced to companies by others in the field – their financial backers, for example. But, just because we talk to a firm does not mean that we will take them on as a client. We are fairly selective in that regard.

As to why we win their business – that is for a combination of reasons: Clearly, we believe that we are reasonably good as transaction oriented investment bankers. We know how to manage transactions in this space. We know the players, and the dynamics of the industry. Key managers and owners of virtually all firms we have advised are available as references for us. Moreover, the buyers of most of our clients are available as references for us. They know that we get deals done.

Another reason we win business is that we have a full team of professionals here. While I am personally deeply involved in every deal we do, it’s not just me. We have seven other professionals who also bring to our clients long-term expertise in investment banking and management in the information technology industry.

Our international capabilities certainly help us win business, too. Very few advisory firms anywhere near our size can lay claim to helping an Australian company get sold to a Swedish firm, or a British company get sold to a French one. And even fewer can make such a claim in our space.

But personally, I believe that our single biggest differentiating factor is that we also bring to the table operational expertise. I have been a CEO in this space four times. Others here also have real-world experience. CEOs relate to the combination of banking and operating expertise. As a result, we are not seen as just some investment banker that is going to have to be trained on the industry.

A-Team: The financial markets IT mergers and acquisitions marketplace seems to have heated up in the past year. What have been the key reasons for this?

Marlin: It’s true that 2005 was the best year for global M&A activity since 2000. Worldwide, $2.7 trillion of mergers and acquisitions were announced. The financial markets IT marketplace was no exception to this trend. Buyers, who had been absent from the market since 2000, came storming back. Their businesses are doing well, which has given them confidence enough to look outward, and often their coffers are full. There is also pressure to be a consolidator now, while there is still an opportunity.

Also, the financial markets are helping – at least for larger deals. Interest rates still are at historic lows, and banks are again willing to lend for larger M&A transactions – though not for smaller ones. And it helps that the financial players have a lot of money to spend too. All this “demand” for a limited “supply” of good companies, puts upward pressure on transaction prices, which, in turn, brings more sellers into the market.

A-Team: Marlin & Associates seems to have represented mostly sellers in its recent activities. How are buyers and investors measuring value in the current market environment?

Marlin: It is true that in only one of our eight deals in 2005 did we advise the buyer. We prefer to work with sellers. Clearly, strategic buyers and sellers are looking principally at two dimensions when assessing a transaction: Strategic fit and value. For the strategic buyer or seller, if the strategic fit isn’t compelling, there won’t be a transaction. Strategic and financial buyers then look to four factors in assessing ‘value’ – the key, though, is that they are looking at all four factors. Too many sellers want to pick just one – the one most favourable to them – and focus all attention on that one factor.

The four factors are: 1) Market Leadership – the leader in a well-defined niche always gets a premium. 2) Top-Line Growth – most buyers are looking for firms with a clear record of very strong top-line growth. 3) Profitability – the stronger the profit margin the more interest we see from both strategic and financial buyers. In many cases, firms without clear, real profit need not apply. 4) The final factor has to do with risk. There are many dimensions of risk in this field, but four risk factors that many look at are: management – strong teams command more interest; technology – old technology carries to much risk for many buyers; intellectual property – they want the sellers to have clear unfettered rights; and revenue risk – firms with high levels of recurring revenue with high renewal rates command a premium over firms with mostly one-time (software license) revenue or service revenue.

A-Team: Which of the larger players in our industry – Reuters, Bloomberg, Thomson, Interactive Data, SunGard and the like – do you see as becoming most acquisitive in 2006, and why? Which other potential buyers are you watching?

Marlin: With the possible exception of Bloomberg, we see all of these you named as looking to be active acquirers in 2006. And, I would not rule out Bloomberg. SunGard is under new ownership and it remains to be seen if they will pay “Strategic” prices or be constrained to pay prices more in line with the financial players. We certainly are watching all these plus a number of non-U.S. firms, including Indian firms such as Tata, Infosys and Satyam; French firms such as Linedata and GL Trade; Scandinavian firms such as Orc and OM, and many others.

A-Team: What advice can you offer CEOs and owners of small to medium-sized firms looking to sell or to raise funds this year?

Marlin: Call us. No one knows this space better.



© Copyright A-Team Group 2006.

Ken Marlin is founder and Managing Partner of Marlin & Associates New York LLC ("M&A"), a specialized investment banking advisory and consulting firm providing transaction advice and services to middle-market firms in the technology, information and business services sectors. The firm is based in New York City and Washington DC.  For more on M&A, see www.MarlinAndAssociates.com.