Veteran software entrepreneur and investment banker Michael Orbach is joining Seattle-based Cascadia Capital today. As a new managing director in the investment bank, Orbach will focus on mergers and acquisitions, as well as capital raises, in software and services—all in the mid-market range of $20 million to $500 million deals. The new hiring looks to be a strategic move to strengthen Cascadia’s national and global presence in information technology.

Orbach comes most recently from Palo Alto, CA-based Pagemill Partners. But he is a Seattle-area resident and says he has been commuting to Silicon Valley for 12 years. In the early 1980s, he co-founded Simulation Sciences in the U.K. (he’s a native of Manchester), and took the company public in the early 1990s. After Simulation Sciences was bought by Invensys, Orbach joined Aspen Technology and handled mergers and acquisitions, moving to the Seattle area with that company’s purchase of Industrial Systems, Inc. in Bothell, WA, in 1995.

“We liked the place,” Orbach says. “My family was suffering major culture shock between Manchester and California.” Orbach also got his MBA at the University of Washington.

The professional rationale for Orbach’s latest move is equal parts opportunity and timing. “There’s a very large opportunity to build a software and services practice here at Cascadia,” Orbach says. Cascadia Capital has a strong national brand in capital raising, and it can use that strength to grow its mergers and acquisitions business. That sort of leverage between M&A and capital raising expertise, he says, “is very appropriate in the market today.”

And why is that? “You tend to build out new business models and get the best growth strategy when you’re coming out of a recession,” Orbach says. And because of the dearth of IPOs, startups looking for an exit have little choice but to get acquired, he says. That, of course, gives buyers the upper hand in negotiations. “The economics of buying companies has never been better. For the Oracles, SAPs, and Microsofts, less and less will they make internally, and more and more will they buy,” he says. What’s more, how they’re buying has changed radically in recent years. “M&A has become a national/global practice,” Orbach says. “The days of looking at specific geographies or specific verticals are gone, because the technologies cross those.”

What all this means is that the precise skills of bankers making deals in the technology space are more important than ever. “The days of watching lawyers doctor the deal are long gone,” Orbach says. Bankers have to position a company’s financials to a prospective buyer in the right way, which means having a deep understanding of where the technology and the business model fits into the market, and of what the buyers want. Orbach says he draws on his experience as an entrepreneur, as well as having lived in many parts of the world with diverse cultures (the U.S. and U.K., France, Germany, Switzerland, and South Africa).

We didn’t get a chance in this conversation to dive deep into software M&A trends yet, but Orbach did offer a hint at what he’s looking at. “Venture capitalists are focused on triage. Many businesses need something done. Not only here, but everywhere,” he says. “As we come out of this recession, the dealmaking will be done in countercyclical markets.” He points to a few specific areas to watch: IT infrastructure, virtualization, legal, and corporate governance, risk, and compliance. We’ll be watching to see what effect this all has on Cascadia’s dealmaking, and the broader IT world.

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If following the stock market’s swoon hasn’t been enough to sink your confidence in capitalism and the financial industry, you may want to try your hand at currency trading on the foreign exchange market. Enormous amounts of money slosh from border to border on the “forex” market, as it’s called—the equivalent of several trillion dollars each business day. Giant investment banks like Deutsche Bank, UBS, and Citi are the biggest traders, but thanks to the emergence of “retail” forex brokers such as FXCM—the currency-trading equivalents of online trading houses E*Trade or Schwab—it’s possible for individuals to play the forex market as well.

But currency trading can be a lonely, scary pastime for individuals. For good reason: most forex brokers allow account holders to leverage their trades at ratios of 100:1 or more (meaning they can put 100 borrowed dollars to work for every dollar of their own), so they can turn a tiny percentage change in the value of one currency against another into a huge gain in a matter of minutes—but just as easily lose their entire stake. As the FXCM website blandly states, “Trading foreign exchange with a high or even moderate level of leverage may not be suitable for all investors.”

Now there’s an online community based in Boston’s historic North End where forex traders can collaborate, share strategies, educate one another about the opportunities and risks of currency trading, and exchange kudos (or sympathy notes). It’s called Currensee. It’s currently in an invitation-only, beta-testing phase, but CEO Dave Lemont says the site will open to the general public this summer.

“It’s a very exciting asset class to trade in,” Lemont says of the forex market. Unlike the stock exchanges, currency trading isn’t plagued by bear markets, since a decline in one currency always means a gain for some other currency. (Making a profit is just a matter of picking the right side.) But one problem for traders, says Lemont, is that they’re alone a lot. “Currency trading is a 24-hour opportunity, because the markets rotate in their opening hours. So you might be at home on your computer at night while the kids are asleep, still trading,” he says. “Like anything you do, it’s an important decision, and you’re using your own money, so you want validation from other people. We are social people—we like to have interaction.”

Blogs and message boards provide some of that interaction. But it’s hard to know whether the people sharing their opinions online are putting their money where their mouths are. “I could be telling you to go long on the euro, but maybe I haven’t made a trade in two years,” says Lemont. “We would like to get other people’s opinions, but we like the opinions of trusted sources—information that is backed up by someone’s own trading history.”

The whole idea with Currensee—and the source of the name—is that members must be active currency traders, and are encouraged to let other members see information about their trading positions and performance, in the form of account data streamed directly from the sites of their online brokers, such as FXCM.

Currensee has many of the trappings of a Facebook or a MySpace, including personal profiles and friend networks, but Lemont says the company doesn’t use the social networking label. “We call it a ‘forex decision-making network,’” he says. “What we mean by that is that we try to take the real trades that people are making and provide information about those trades—either the trades themselves, or aggregated data—back to members, to help them make decisions about the trade they’re in or the next trade they’re going to make.”

Currensee’s co-founders are Israeli natives Avi Leventhal and Asaf Yigal. Leventhal is a longtime independent currency trader who offers forex courses and lectures around the world. (Which is a big business unto itself, by the way: “It’s easy to be unsuccessful just by doing it wrong,” Lemont says, so it’s advisable to seek training before you start trading with real money.) Yigal is a software engineer and former Israeli Navy researcher who …Next Page »

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Faced with a slowing economy, corporate buyers will increasingly turn to unsolicited acquisition offers to fulfill strategic objectives. Armed with cash and eying attractive buying opportunities, forward-looking corporations are now pinpointing potential acquisition targets that fill specific corporate needs and will help restart growth. For many prospective sellers now may surprisingly be an advisable time to sell, provided the offer reasonably reflects the strategic benefits of the proposed acquisition. But given that prospective sellers will be hard pressed to attract competitive bidders, it is all the more important to employ best practices that will help maintain control of the sale process and maximize transaction value when faced with an unsolicited acquisition offer.

Now is a good time to buy

There is no denying that volatility and lack of visibility has caused even the most hearty corporate development strategists to curtail acquisition activity. But with the new administration’s stimulus plan taking shape and some semblance of order returning to credit markets, corporate buyers and their strategy consultants are beginning to sense that now may be the time to take advantage of a historically unique buying opportunity.

Supporting this prediction is research by Boston Consulting Group showing that acquisitions during economic downturns have a higher chance of creating value for buyers than acquisitions during economic upturns. In fact, downturn deals are twice as likely to create long-term returns above 50 percent. These higher returns are not simply driven by buying at low valuations, but also result from successful acquisition practices such as extending financial resources to a capital-constrained company, improving operational performance, and gaining strategic and financial benefits from the business combination.

Corporate balance sheets currently hold historically high levels of cash, an attractive currency in today’s de-leveraging environment. As of December 2008, the S&P 500 companies held $1.2 trillion in cash and equivalents, which is 62% higher in constant dollars than the level in 2000, the height of the last M&A bubble.

The collapse of the IPO market has also created ripe conditions for corporate buyers to target high potential venture-backed companies that are currently unable to attract additional venture funding. While earnings dilution remains a pressing concern for public acquirers, some of these targets may be near profitability or are simply too strategically attractive to overlook.

But is it also a bad time to sell?

To be sure, the substantial decline in public equity prices has dropped the value of potential targets, both public and private. The price-earnings (P/E) ratio for the S&P 500 now stands at 15.2–down significantly from a recent high of 27.5 in mid-2007–and close to the long-term average of 15.7. With P/E multiples (at least for now) near the historical average, it may seem strange to say, but this may be an equally good time to sell as it is to buy. Prices seem low only when compared to their recently abnormal highs.

For companies that offer compelling strategic value to a particular acquirer and are able to hold their own in this economy, now may in fact be an advantageous time to entertain an acquisition offer. The challenge will be rustling credible alternative bidders.

Plenty of prey, fewer hunters

Continuing a trend that began in mid-2007, corporate buyers currently face substantially less competition from private equity groups who are more reliant on credit and distracted by portfolio-company concerns. While private equity groups have large amounts of committed capital to invest, with credit restricted, they are unable to compete with strategic buyers who have cash and tappable credit lines.

To mitigate risk, most targets will be relatively modest in size and carefully selected to achieve clearly defined strategic objectives. This rifle-shot approach will often leave prospective sellers without obvious prospects for competitive bidding. Ensuring the best possible terms in a single-bidder sale process, while difficult in normal conditions, will be particularly challenging in today’s environment.

Sellers must control the discussion

So what are some best practices for targets confronted with a single, unsolicited offer? The first critical decision is how much and what information to share. At my firm, we commonly see two similar types of mistakes here. There is the “tell-them-as-little-as-possible-until-we-know-they-are-real” approach, and its variant, “let’s-just-give-them-last-year’s-financials-to-get-a-ballpark-offer” approach.

Both approaches fail to provide the bidder with information sufficient to develop an initial valuation that will hold up through due diligence. Moreover, both approaches fail to tell the company’s story in the most advantageous light, neglecting to explain historical trends (whether favorable or unfavorable), growth opportunities, and potential benefits to the acquirer. The key lesson is not to elicit a value indication until the target has been properly positioned; for once a value has been established it is difficult to move a bidder substantially upwards.

Create a sense of competition

Equally critical is the need to introduce a credible threat of competition-even if it is never intended to be implemented. One way to induce fear of competition is to prepare formal offering documents and deliver them marked “draft” to the sole bidder. The message cannot be missed–you are prepared to open the process to other bidders at any time if necessary.

These days, even if there is only one bidder, it is often advisable to use an electronic data room that provides online access to the seller’s business documents. The price for electronic data rooms has dropped considerably and they help facilitate due diligence even if there is only a single bidder. But they also send a message that the seller can readily turn on a broader process if so compelled.

Even if the seller believes that the single bidder is the most likely buyer, it is always a good idea to evaluate alternative acquirers. Sellers who are in preemptive discussions with the “obvious” buyer are sometimes reluctant to approach other potential acquirers. However, it is often the case that the obvious buyer–often a direct competitor–is unwilling to pay as much as a buyer seeking to expand into an adjacent market segment.

Finally, while some sellers are tempted to manage a single-bidder process on their own, retaining an investment advisor introduces a heightened threat of competition. An investment banker (and yes, I am one, but there are many to choose from) can also provide an independent assessment of current market value as a foil to the single bidder’s value. Because a single-bidder process is more streamlined, investment bankers are usually willing to adjust their fees accordingly.

The bottom line? In tough economic times, employing these best practices will enable sellers to more effectively manage the single-bidder process and improve their odds of obtaining full value in a down economy.

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How do you run a national investment bank here in the Northwest, far away from the bustling financial centers of New York and San Francisco? I put the question to Michael Butler, chairman and CEO of Seattle-based Cascadia Capital, one of the area’s leaders in providing banking services in corporate finance and strategy. His answers provided insight into banking and local investments, as well as a broader snapshot of growth areas to watch in the region.

Butler is a Seattle native who spent 16 years working on Wall Street. Like almost everyone you meet from the Northwest, he eventually wanted to move back. In 2000, he co-founded Cascadia with an eye towards making deals across a broad geographical region centered on Seattle, but stretching north to Vancouver, BC, south to Portland, OR, and east to Denver, CO. “Out here you have to educate people about what an investment bank does. Back east, everyone knows,” says Butler. “We’re a facilitator of taking capital and getting it to companies.”

The main challenge out here, Butler says, is attracting experienced bankers to the Seattle area. He says his team tracks the top investment bankers in New York and San Francisco and actively recruits those who are from the Northwest (or whose spouses may be) to come back. It’s about “getting a few good bankers,” he says. “It’s all about the people.”

On the plus side, being away from the major financial centers means Cascadia can stay “out of the rigamarole,” Butler says. “We don’t get caught up in the group-think, and we make decisions less influenced by the day-to-day noise.”

Cascadia is small, with just under 30 bankers, and is looking to focus on three main areas of high-tech. “We see telecom and [traditional] tech as consolidating. We believe growth will be in new media, cleantech, and health care,” says Butler. “There are a lot of companies with big-time capital needs.”

—By new media, he means innovative Internet-based business models. As Butler sees it, 15 to 20 percent of the Seattle-area dot-coms from 2000-2001 survived, are raking in $20 to $30 million in annual revenue, and are “doing something to get to the next level,” he says. “There’s really some great talent out here.” Case in point: WidgetBucks, the online ad network that recently raised $10 million from Draper Fisher Jurvetson and Bellevue, WA-based Ignition Partners, with Cascadia involved in the deal.

—Cleantech and alternative energy is the “fastest growing area, with a lot of capital being raised,” says Butler. But these days most of it is in Portland, OR, Denver, Vancouver, BC, and Calgary, AB—which Butler calls “absolute hotbeds.” There has been a lull in Seattle proper since an early wave of companies getting funded, such as Imperium Renewables. “The west coast is still learning the sector,” says Butler. He’s looking at closing deals soon with Bend, OR-based PV Powered and Burnaby, BC-based NxtGen Emission Controls.

—Healthcare, especially where it converges with software, has great potential for growth. “We have pretty good expertise here in using software to discover drugs,” says Butler. Plus, he says, “the Gates Foundation will transform the city… The leading experts are all relocating out here, drug companies are locating offices here. There will be an influx of people, and some of them will migrate to the private sector.” Meantime, he says, there are three to five deals to be done in healthcare tech and services for assisted living.

Butler left me with a final thought, which echoes something Xconomist Eddie Pasatiempo of the Clarion Group told me a few weeks ago. Given that mergers and acquisitions are the “exit of necessity” these days, it has become more important to position a company so potential acquirers see how it fits their needs. And a lot of that positioning is determined by the quality of the company’s investment bank. “It’s critical,” Butler says, “absolutely critical.”

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