Financial analysts at PricewaterhouseCoopers are predicting a flurry of acquisitions and mergers in the Australian technology market as market forces drag down the value of technology assets.
The professional services organisation has released its bi-annual “TechReview” report, which among other investigations, compares the share market value of listed technology companies against the value that the management of such companies report on their balance sheets.
The study found that about a third of ASX-listed technology companies had a possible “impairment of assets” at the conclusion of the 2002/03 financial year.
An “impaired asset” essentially is one that has a market value lower than what is stated in the company’s accounts. In the technology market, this gap has usually been created by the over-valuation and failure to realise the earnings potential of research and development, or by the over-valuation and failure to realise the earnings potential of any goodwill paid for the purchase of other technology companies during stronger economic periods.
This phenomenon has the effect of inhibiting merger and acquisition activity in the technology market.
In the 2002 calendar year, merger and acquisition activity among listed Australian companies fell by about 17 per cent.
“What we have seen industry-wide is reluctance from management to pursue M&A activity as a result of uncertainty surrounding valuations,” valuation and strategy partner for PwC, Mark Reading, said.
He said that the management of technology companies was likely to “write-down” the value of several of their assets in coming financial reporting periods to better reflect market value.
These write downs will also be spurred on by the introduction of more rigorous and robust accounting standards that will become mandatory in 2005.
“These [write-downs] will be a catalyst for consolidation in the technology industry,” he predicted. “Gradually company managers will start accepting the market value of their assets, and enter into any potential transaction on more reasonable terms.”
Reading said that with more realistic sale price expectations, opportunities would open up for stronger performers to buy smaller players.
He said many small companies had assets that were not being realised – but were more likely to be realised if they were under the management of companies that had the confidence of the marketplace.
For more on this story, see this week's ARN.