On Tuesday, September 23rd, the Financial Management Association of New Hampshire (”FMA of NH”) hosted its first event entitled “Preparing for a Successful Liquidity Event in Today’s Volatile Markets“.  I am fortunate to be among the founders of FMA of NH and to have had the opportunity to participate in the panel discussion on this very timely topic.  Peter Alternative and Bas van der Brugge of Mirus Capital started the evening’s discussion with a recap of the current market environment for merger and IPO activity, and touched on the availability of funds from the venture and investment community.  Steven Bell, Senior Director of Finance at venture-backed Vertica Systems, Inc., also particpated on the panel and gave his corporate perspective of deal activity and funding availability [in the way of full disclosure, Vertica is also an MFA client].

The evening’s discussion has me thinking more and more about this topic.  Let’s make no bones about it - the IPO market quite clearly is closed for the time being and we don’t expect to see any liquidity from that market in the near term.  Similarly, our guests from Mirus painted a pretty bleak picture on the M&A front.  However, there was a contrast worthy of note, and I continue to see anecdotal evidence in the market that suggests that all is not lost.  For example, one might think that this is not the time to be raising new money from venture or angel investors.  But as Steve fairly pointed out, companies like Vertica that have a solid business strategy, sound leadership team, and a market solution that customers are clamoring for, can still raise equity with relative ease.

I have been taking note these past few weeks of a number of examples whereby emerging technology companies have closed on new rounds with new investors, not just inside rounds.  Cash-rich investors, not just VCs, are still on the hunt for new deals and are approving and funding new deals.  Private equity investors are closing on new funds and are adjusting their models to rely less on the debt markets to get deals done.  We also have clients receiving LOI’s as early as this week from strategic buyers at healthy multiples.  An LOI doesn’t mean a deal will close, per se, but I find it to be an amazing sign of optimism in a market such as this.

I won’t deny that these are extremely difficult times for anyone looking to raise capital or execute on an exit strategy - they are.  The options have been severly limited by market forces.  But opportunities abound  in both day to day operations (as noted in Carl Famiglietti’s recent post) and capital strategy if you’re ready for the challenge of finding the right investment partner.  I encourage every entreprenuer reading this blog entry to stay true to his or her vision, focus on execution and market penetration, and continue to forge the necessary relationships to ensure success.

UPDATE:  I found this great blog post, even among others like Ron Conway’s recent email, that puts forth some great thoughts on this subject:  During Tough Times, The Echo Chamber Can Be Your Best Friend. 

New M&A guidelines under FAS141R are taking effect in 2009, and there’s been some talk about how it might impact the deal process. In fact, this Accounting Today article cites a study by Deloitte that concludes “out of more than 1,850 executives, 40 percent said the revised standard would cause them to rethink deal strategy or have an impact on their planned deal activity.”

This doesn’t surprise me, as some of the pending changes will have a destabilizing effect on post-merger balance sheets. However, I also feel strongly that accounting challenges should never hold back a strategically sound deal. The accounting, valuation and auditing experts simply need to adjust to the new guidelines and structure deals accordingly – not forego or delay them.

Here are some of the significant changes headed our way:

1. Timing of deals and reporting

FAS141R provides a more stringent timeline for reporting business combinations, and if deadlines are missed then provisional amounts must be reported for incomplete terms. That means not having the most qualified information, which can lead to more serious issues down the road. Expanded disclosure requirements will make the deadlines even more difficult to meet and could force companies to speed through the process, so prioritize the planning process and have the right team in place early to avoid sacrificing quality and accuracy for speed.

2. Contingent consideration

The purchase price of a business combination now includes the fair value of contingent considerations. This change could significantly increase the upfront purchase price recorded on deal transactions, as well as increase the volatility of subsequent accounting. Given the major uncertainties as to future amounts and timing of payments of the contingent payment, the fair value of this liability may materially fluctuate over time as more information is obtained.

3. In-process R&D

Under previous regulations, companies could record the fair value of IPR&D as a period cost of a transaction. FAS141R, however, requires that it be recorded as an intangible asset on the balance sheet. If the IPR&D does not come to fruition, it will subsequently need to be written down to its fair value, potentially zero, resulting in an impairment charge to the income statement.

These changes and others will bring us closer to international standards, and they will in the end make for a clearer picture of deals. We’ll take a more in-depth look at FAS141R in an upcoming MFA Perspectives article, and we encourage you to check it out when it’s posted on our Thought Leadership page.