Extending the Dealmaker’s Reach Via the Web: Launched a year ago, the eMergers web site has succeeded in exposing quality targets to buyers who might have been shut out of traditional m&a channels.

During the last year, there has been a massive shakeout of the Internet environment, as ill-conceived ventures have folded or have been consolidated into the surviving entities. One year ago, we launched eMergers.com, the first web site to provide online access to quality m&a opportunities. This anniversary seems a good time to review the opportunities and pitfalls we discovered in bringing the mergers and acquisitions market to the Internet. The number of parties capable of acquiring mid-sized companies ranging from $15 million to $250 million in purchase price has expanded dramatically as private equity firms raise unprecedented amounts of capital and corporate acquirers press for growth through acquisition. Therefore, it has become increasingly difficult for m&a professionals to identify and contact more than a fraction of the universe of potential acquirers of middle-market companies. The spread of the Internet created the first major opportunity to fully reach this broadened market and create a truly efficient marketplace for the sale of middle-market companies by developing a web site focused solely on quality, mid-sized m&a opportunities. The eMergers.com Concept The initial core of transactions for eMergers.com was provided by TM Capital Corp., the New York investment bank my partners and I formed in 1989. TM Capital handles a steady flow of exclusive sales and acquisition mandates. We named the site eMergers.com both to capture the concept of online m&a and provide an industry platform where other firms would feel comfortable listing their transactions. From the outset, the site was focused on quality – and we have steadfastly reinforced that commitment. No transaction is posted on the site unless the listing intermediary firm is exclusively retained and the listed company is valued at between $15 million to $250 million. The site simplifies acquirer access by providing deal descriptions, status reports, confidentiality agreements, and the ability to express interest online. Confidentiality is maintained by drafting company descriptions that are both accurate enough to interest the right bidders and broad enough to avoid specific identification. We and other listing firms continue to market sales directly through traditional channels but use eMergers to reach additional quality acquirers. These additional buyers serve to make the sale process more competitive, and, we thought, one of the new entrants occasionally might prove to be the winning bidder. We launched eMergers at the peak of media interest in the Internet and immediately gained substantial publicity and site usage. The combination of the site’s quality listings, straightforward design, and intuitive name established eMergers in the m&a community more rapidly than we could have imagined. Since the launch, we have spent the last year experiencing both the ups and downs of the Internet and m&a marketplaces, and we have developed answers to some key questions related to operating on the web. What Works on the Web? Companies focused on using an Internet-only model to physically deliver goods to consumers (eToys.com, Webvan.com, etc.) have folded as advertising, shipping, and merchandise costs have dwarfed their revenues. However, companies using the Internet to broaden distribution of sale opportunities in inefficient markets have thrived. eBay now dominates the online market for low-ticket items, achieving in the process a current market value of $16.5 billion, while Homestore.com, which leads the online market for real estate, has drawn a current market value of $2.6 billion. eBay and Homestore.com succeed because they add real value to their chosen markets and have minimal marginal transaction costs. The relative success of using the Internet to bring efficiency to sale markets versus other Internet business models is demonstrated in the magnitude by which the share prices of eBay and Homestore.com have outperformed the overall Internet sector. Similarly, eMergers has experienced substantial growth and success in this difficult Internet environment. This success is driven by the fact that, like eBay and Homestore.com, eMergers creates broadcast distribution of sale opportunities in the inefficient mergers and acquisitions marketplace. How Does a Listing Firm Benefit? In addition to TM Capital, 13 other m&a advisory firms currently are listing exclusive sale opportunities on eMergers at no charge, with all inquiries e-mailed directly to the listing firm. The benefit of this additional reach was best illustrated by our sale of Cor-Box Inc. to a bidder sourced through the web. When TM Capital was retained to sell Cor-Box, a corrugated packaging company, we utilized our industry experience, personal contacts, and databases to assemble a broad list of potential strategic and financial acquirers. By supplementing this traditional effort with Internet distribution, we were able to double the number of bidders for Cor-Box. Ultimately we closed the $30 million sale of Cor-Box to CorrFlex Graphics, an acquirer sourced through the Internet. Our broadcast e-mail regarding this opportunity had been forwarded by one banker to another adviser, who then forwarded the opportunity to CorrFlex. The open distribution that the Internet provides, combined with the collective intelligence of users in the m&a community, achieved a higher price and faster closing for our client. As the reach of the Internet and the recognition of eMergers have grown, the quantity and quality of responses to listings continues to rise. We recently listed a health care company on our site with approximately $10 million in EBIT-DA and received more than 200 bona fide expressions of interest from strategic and financial parties, each with more than $100 million in capital under management. Who’s on the Web? Before the launch, we had been concerned about whether the financial strength of bidders surfing the web would match the quality of our listings. We’ve been pleased to find that the vast majority of eMergers inquiries are either from financial acquirers with more than $100 million in capital under management or strategic acquirers with sufficient resources to complete these transactions. We also were pleasantly surprised to find how senior these web surfers often turn out to be, e.g., partners of private equity firms as well as CEOs, CFOs, and directors of corporate development at strategic buyers. Internet Only or Combined Approach? The shakeout of the past year has clearly demonstrated the benefit of combining online reach with a strong offline presence. Our success at eMergers.com is directly related to the strength of our core business at TM Capital, where we’ve completed more than 75 mergers, acquisitions, and financings totaling more than $4 billion in value. This has provided the key listings for our site, the networked relationships that have led other firms to list with us, the cash flow to support the development of the site, and credibility in the deals marketplace. Open or Limited Access? Among the key early decisions we faced were whether to offer other firms the opportunity to list deals and whether to make site access open and free to all parties. In both cases, we decided that the open approach would best leverage the distribution power of the web. By permitting other firms to list transactions on the site, we have increased the volume of quality listings – building the eMergers brand name and strengthening its credibility. We have been careful to screen all potential listings for quality, and have been able to maintain the high standards that our own listings meet. Similarly, opening the site to all visitors without requiring registration or fees has maximized the volume of site visitors, yielding far more quality bidder inquiries than a closed approach would provide. An open approach, for example, enables an attorney visiting the site to forward a link regarding an attractive deal to a banker he knows, who then forwards the link to a client who directly pursues the transaction. Some of our best leads have come from the ricochet effect this open platform encourages. Investment banking is historically resistant to change, particularly in mergers and acquisitions, where confidentiality is properly paramount. Both our clients and other firms listing transactions initially have concerns regarding the confidentiality of an eMergers listing. However, both clients and listing firms have become comfortable once we’ve prepared a mockup of the listing that captures the essence of the opportunity and yet is drafted so broadly that it could apply to any one of 50 companies in a specific industry. After one year of operation and thousands of inquiries on specific deals, we have yet to see a breach of confidentiality because of an eMergers listing. We launched eMergers as the first site providing open access at no charge to quality, exclusive m&a opportunities. Other sites existed prior to our launch, all of which were “bulletin board” sites without minimum quality standards. These sites were, and still are, flooded with listings for tiny, unprofitable companies; listings of companies that were, in fact, not for sale but were largely testing the market; and listings posted by “finders” who were not actually retained to sell the listed company. These bulletin board sites generally are not associated with quality investment banks, and they seek revenue through advertising and fees paid by site users. One year after the launch, we’re still not aware of any other m&a web site with firm quality standards in the marketplace. It’s possible that other firms have been intimidated by the cost and commitment involved in creating such a site, or they may have difficulty visualizing an online future for the deals marketplace. What’s in It for Us? Given that we don’t charge clients an additional fee for listings, we list other firms’ transactions at no charge, and we do not accept advertising, we’re often asked what the financial benefit is to TM Capital. First, eMergers enables us to deliver superior results to our clients by supplementing our traditional approach with tremendous additional reach. We believe that this quality service results in more closed transactions and repeat business. Second, the web site has raised TM Capital’s profile among referral sources. The fact that our book of business has stayed strong in the currently soft m&a market may reflect this greater market recognition. We recently were approached by international firms seeking strategic alliances to launch an international version of eMergers and by bulge-bracket firms seeking strategic alliances to leverage this platform. We will continue to pursue both opportunities, as we’ve consistently found that partners are required for a venture thisambitious to succeed.