Buy Your Rivals

When times get tough, the tough go shopping

The economy may be in low gear, but entrepreneurs are still in the mood to shop--for other companies. According to an April survey by PricewaterhouseCoopers, 41% of CEOs of fast-growth companies say they plan to make an acquisition in the next three years.

Why the shopping spree? For starters, it's a matter of survival, says Steve Hamm, a PricewaterhouseCoopers managing partner. "Accumulation of critical mass is essential to be competitive," he says. But there's more at work. The slumping economy is driving down the valuations of small companies as much as 20% to 30%, says John E. Mack, CEO of USBX Inc., a Los Angeles mergers and acquisitions advisory firm. As a result, entrepreneurs with cash on hand are finding bargains that are hard to resist.

"Buying another company means faster expansion," says David Simon, president of B.C. Exchange Inc., a 27-person commercial carpet distributor in New York. In March, 2000, B.C. bought a carpet manufacturer for about $300,000, a mere 10% of that company's revenues. Now, Simon expects to acquire two more companies, doubling his revenues to $20 million a year. The price tag: about 20% less than it would have cost a year ago.

An aging population, meanwhile, is driving up the number of sellers. "For all those businesses created by baby boomers, the time has come to cash out," says Chris Bennett, vice-president at Ashton Partners, a Chicago financial-advisory firm. Indeed, nearly half of the country's small and midsize companies are expected to change hands over the next 10 to 15 years, says Chapman Associates, an M&A specialist in Schaumburg, Ill. So entrepreneurs could find themselves in an even more robust buyer's market--presuming they survive the current slowdown.

By Naween A. Mangi

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