Positioning a Company for Sale
Silicon Forest Forum
November 12, 2004
Leading Firms in Software, Semiconductor and Other Key Technology Sectors and How to Identify and Engage a Banker
Leading Firms in Key Technology Sectors
The Obligatory Commercial
99 High Street Boston, MA 02110 617.371.3900 623 Fifth Avenue 16th Floor New York, NY 10022 646.264.6000 Four Embarcadero Center Suite 3300 San Francisco, CA 94111 415.229.7171
Member NYSE/NASD/SIPC
Leading Firms in Key Technology Sectors
A Variety of Choices
A number of high-quality firms provide technology advisory services. Examples include: CIBC
Jefferies / Broadview
Needham Pacific Crest Piper Jaffray
RBC
SG Cowen SVB Alliant The full, relevant list is probably 25-30 firms - the specific needs, relationships and culture of the clients decision-makers will dictate the best working relationship.
How to Identify and Engage a Banker
Sample Considerations
Industry research Trade commentary Referrals
Lawyers Accountants
Board members
Public company CFOs Those who have gone through the process before
Examples of what to do and what NOT to do
Establish relationships well before taking action
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How to Identify and Engage a Banker
Be Demanding
Who is showing an interest in your industry niche
Long-term commitment Helping to define the space specific investor conferences, etc.
Broader firm commitments
Trading - market making statistics
Venture fund
Specific industry or M&A practice groups
Ask bankers for / about:
Referrals Relationships at potential acquirers Their experience and process - how is it differentiated? Ideas, creativity, perspectives on valuation
Will your deal be important to the firm? Who will be the team?
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How to Identify and Engage a Banker
Focused vs. Bulge Bracket Firms
Particularly required for technology and middle-market transactions: Senior-level attention, experience
Not treated as training ground; less turnover
Importance and relevance to firms strategy Match with rest of firms investment in your industry sector
More consistent contact and influence with relevant decision-makers
Creativity / independent thinking Relationship share of client orientation vs. share of market
How to Identify and Engage a Banker
Typical Fee Arrangements
Retainer Success fee
For sell side, percentage of transaction, usually includes minimum fee
Incentive fee Expense reimbursement
The engagement:
Should align shareholder interests with those of advisor Can be customized, according to prior corporate relationships, etc. Needs to reflect strategy broad auction, narrow list of buyers, etc.
How to Identify and Engage a Banker
What Your Bankers Do
Due diligence
Discuss and discover issues internally first
Understand financial model Understand strengths and weaknesses Understand needs, priorities, objectives
Create Confidential Information Memorandum
Additional required due diligence for offerees
Refine Positioning Customize Offering Strategy
Who gets the call size of list Pre-emptive opportunity? Financial buyers?
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How to Identify and Engage a Banker
What Your Bankers Do
Initiate contact and follow-up, and set expectations
Advisor is sole contact point
Creates formality re: process, timing Protects management, ownership Maintains schedule
Collect, monitor and generate interest
Negotiate terms and agreements
Host spectacular closing dinner
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M&A Process Overview
Technology M&A: Compounding Complexities
The M&A Process
Incremental risk inherent in the industry requires special focus on buyer universe and process.
Valuation Perspectives
Execution Contingencies + Stock Market Volatility + The Perfect Storm
Business Challenges
Stock Market Volatility + The Perfect Storm
The Perfect Storm
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M&A Process Overview
Key Objectives
Primary
Maximize shareholder value Achieve strategic objectives
Maximize Value
Determine effective positioning Access key decision makers Generate competition, if necessary
Design optimal financial structure
Secondary
Maintain corporate values Retain and incent management
Minimize Company Disruption Maintain Control of Process
Stage 1: Screen buyers (more cost-effective) Stage 2: Front-loaded due diligence / informal bidding Use disciplined approach Maintain a level playing field
Minimize management distraction
Minimize disruption of operations Maintain location and employees
Control distribution of information
Move bidders along parallel paths Amend process at any time; maintain flexibility
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M&A Process Overview
Typical M&A Process Timetable
Using an Executive Summary as the principal selling document will sometimes help to compress the preparatory phases of the sale process . Additionally, the preemptive bid approach may expedite the screening and buyer diligence phases.
Phase
1
Company Evaluation
2
Preparation and Research
3
Executive Marketing Strategy
4
Screening and Due Diligence
5
Execution and Closing
Weeks
10
11
12
13
14
15
16
17+
Negotiate definitive merger or purchase agreement Announcement of transaction Close transaction
Conduct due diligence Understand / assess financial and strategic objectives Develop financial models Develop positioning strategy Draft descriptive selling memorandum Develop potential acquiror list Find agreement on all elements of process
Contact potential acquirors Execute confidentiality agreements Distribute descriptive selling memorandum
Schedule visits by potential acquirors Initial due diligence Discuss feedback with management
Evaluate proposals Select final candidates Negotiate agreement in principle Conduct final due diligence
Prepare management presentation
Personal visits 13
M&A Process Overview
Valuation Methodologies
Valuation is in the eye of the beholder
Comparable Publicly Traded Companies
Valuation reflects the public market value for comparable companies
Need to have vs. nice to have
Comparable M&A Transactions
Valuation reflects premiums paid to acquire a control interest in comparable companies
Valuation
Contribution Analysis
Valuation based on relative contribution to NEWCO Quantify amount of EPS accretion
Market Environment / Other Factors
Financial market conditions Appetite of potential acquirors Potential synergies
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Market Positioning and Preliminary Valuation
Critical Considerations
Industry-specific considerations Size of addressable / available markets Competitive landscape Stage of current cycle Technology shift
Buyer- and Target-specific considerations Competitive positioning
Business momentum
Access to capital, flexibility, alternatives Technology position Commitment of key personnel, management strength
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Market Positioning and Preliminary Valuation
M&A in this Environment
Valuation Public buyers have become more focused on accretive transactions; however, exceptions will be made for strategically critical transactions
Deals demanded by customer base; to enhance growth / synergies within established distribution channels and streamline number of suppliers / vendors
In certain sectors, valuations are at or near trough levels
Deals more likely to be strategic vs. opportunistic, potentially limiting buyer universe
Leadership companies increase growth prospects by investing during periods of slowing growth valuations improve as focus shifts to next upturn Structure Balancing act between parting with precious cash in a downturn versus issuing undervalued securities
Sellers can capture additional upside of undervalued stock prices when market recovers
Likely demands for contingency payments / earnouts in transaction structure
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The Effect of Sarbanes-Oxley
Sample Key Issues Affected
Due diligence Target behaving like a public company Comparable financials CFO sign-off at year-end Timing
Many private companies plan to or have adopted:
CEO/CFO financial statement attestation Establishment of whistle-blower procedures Board approval of non-audit services by auditors Adoption of corporate governance policy guidelines
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Middle-Market M&A
Summary of Trends
10 15 years ago: resistance
Becomes fashionable with bull market valuations
A recent pause
Currently: return to action
Realistic expectations due to costs of being public
Less of an instant alternative
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Middle-Market M&A
Summary of Trends
Number of sub-$250 million deals peaked at over 4,000 in 1998
Has declined steadily since
2,220 completed in 2003; perhaps slightly fewer in 2004
Average revenue multiple has increased
From less than 1x to approaching 2x
EBITDA Multiples have remained relatively constant
7x 8x for past six years
Cash consideration for majority of deals
Dropped-off slightly during period of hyper stock valuations Likely to decrease slightly
Earn-outs
If less than 20% of deal, is it worth it?
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Middle-Market M&A
Summary of Trends: Revenue Multiples
Median Revenue Multiple - All Transactions < $ 250MM
2.0x 1.8x 1.6x 1.4x 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
*Deals include Mergers, Acquisitions, Asset Acquisitions, and Acquisitions of Marjority Interest Source: M&A Desk
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Middle-Market M&A
Summary of Trends: EBITDA Multiples
Median EBITDA Multiple All Transactions < $250MM
12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
*Deals include Mergers, Acquisitions, Asset Acquisitions, and Acquisitions of Marjority Interest Source: M&A Desk
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Middle-Market M&A
Summary of Trends: Annual Transaction Volume
Total M&A Transaction Volume ($Bn)
6,000
5,000
4,000 3,901 3,000 1,609 1,453 799 1,000 339 743 1,058 Technology Healthcare Consumer 2,000
0 1998 1999 2000 2001 2002 2003 2004(1)
Source: Thomson Financial SDC. Excludes deals less than $20M. (1) 2004 data annualized based on YTD level of activity. As of 10/29/04.
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Final Thoughts
What should privately-held companies implement?
Really, what companies should NOT do
Insider transactions, etc.
Biggest mistakes:
Starting process too late Extending the process too long Having no valuation flexibility Not having good lawyers / advisors
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99 High Street Boston, MA 02110 617.371.3900 623 Fifth Avenue 16th Floor New York, NY 10022 646.264.6000 Four Embarcadero Center Suite 3300 San Francisco, CA 94111 415.229.7171
Member NYSE/NASD/SIPC
