Presentation Transcript
Technology M&A in 2002 Ben Howe Global Head of Mergers & Acquisitions, SG Cowen (617) 946-3700 bhowe@sgcowen.com January 25, 2002: Technology M&A in 2002 Ben Howe Global Head of Mergers & Acquisitions, SG Cowen (617) 946-3700 bhowe@sgcowen.com January 25, 2002
Massachusetts Software &
Internet Council
M&A Advice from a Wall Street Veteran... : M&A Advice from a Wall Street Veteran... “Life all comes down to a few moments. This is one of them.”
Is It a Good Time to Sell My Company?: From a macro perspective the M&A market is the best it has been in a year Is It a Good Time to Sell My Company?
Recession is almost over
Buyers are back
CEO and Board confidence has improved
Currencies are stronger
Sellers expectations are more humble
The M&A climate will improve as the year progresses
What Drives Value?: Company must present a compelling opportunity What Drives Value? Large and credible market opportunity
Leading edge and proven technology/products
Attractive financial results (not necessarily profitable)
High caliber team that wants to sign up
Raw technology without meaningful revenues and momentum is much tougher to sell
Should We Wait Another Six Months?: Maybe . . . Should We Wait Another Six Months? Certain milestones will enhance value and impact potential buyers
Significant improvements in profitability
Major technology achievement
Endorsement from customer or partner
Settling a major liability
Have Valuations Improved?: Have Valuations Improved? Yes, we bottomed out in Q3 of 2001
97 up 23% 98 up 39% 99 up 84% 00 down 40% 01 down 15%* 02 YTD Down 3% * Based on market close 01/23/02.
In Retrospect, Valuations Got Out of Hand : In Retrospect, Valuations Got Out of Hand Old Economy New Economy Company Current Revenue Multiple Peak Revenue Multiple Current Revenue Multiple Company Retail Wal-Mart 1.3 x Business Services ADP 4.7 Content/Media Cox Communications 7.9 Communications/ISP SBC 2.7 Services EDS 1.6 Software Microsoft 11.3 Hardware Dell 2.1 Infrastructure Services Verizon 2.9 30 x 1.9 x 276 0.7 217 13.3 12 0.6 22 0.1 252 3.8 11 1.5 28 3.6 Sector
How Long Will It Take & What are the Steps in the Process?: How Long Will It Take & What are the Steps in the Process? 3 weeks Preparation Transaction Closed Executed Agreement Contact Buyers Preparation Indications
of Interest Final Bids Closing 4–8 weeks
What are the Process Alternatives for a Sell-Side Transaction?: What are the Process Alternatives for a Sell-Side Transaction? Contact most logical potential buyer Mechanism
Price Competition
Confidentiality
Process Flexibility
Minimize Business
Disruption
Considerations
Risk of unsuccessful sale and suboptimal valuation Privately contact a limited number of potential buyers (10–25 buyers)
Likely to elicit optimal valuation Make public announcement and contact broad universe of potential buyers (30+ buyers) Reluctance of potential buyers to participate in auctions Exclusive Negotiation Private Auction Public Auction
+ + + +
What Are The Critical Terms of a Transaction?: What Are The Critical Terms of a Transaction? 1. Price
2. Consideration — cash or stock or cash & stock
3. Transaction structure
4. Registration rights
5. Timetable/speed
6. Management roles/employment contracts/retention agreements
7. Board composition
8. Exclusivity/no shop
9. Break-up fee/fiduciary out
10. Escrow amounts/earn-outs
11. Conditions to closing
12. Representations and warranties
How Much Time Is Required of Management?: How Much Time Is Required of Management? Management is key to success — selling the story
Critical periods — marketing, due diligence & negotiation
CFO drives the process and the work product
What Are The Typical Acquisition Challenges?: What Are The Typical Acquisition Challenges? Overpaying
Acquiring/Selling lower growth rate & lower margins
Integration
Sales force
Product offering
Customer communication
Ability to focus on achieving near-term projections
Competitive bidders
Institutional reaction upon announcement
Management/employee issues
What Happens to Employee Options?: What Happens to Employee Options? Most commonly converted into acquirors options
Exercise terms may be extended/accelerated
Problems with accelerated vesting
What Do You Look For in an M&A Advisor?: What Do You Look For in an M&A Advisor? Strong knowledge & passion for your business
Preferably, a history of supporting the Company
In depth knowledge and experience in the sector
Solid contacts with the key potential buyers
Senior level commitment to the project
Senior members who have solid sales skills
World-class execution skills
True commitment to relentless service
Strong references that are recent
What Should I Expect To Pay?: What Should I Expect To Pay? Retainer fee — $50,000 to $250,000
Minimum transaction fee — much more common
Incentive fee based on achieving a “hurdle” transaction value
Out-of-pocket expenses
Lastly . . . : Lastly . . . “All we want you to do, Ross, is make us as rich as possible.”
— Member of LBO group to F. Ross Johnson, Barbarians at the Gates
Some of you entrepreneurs have heard this before
SG Cowen M&A Effort: SG Cowen M&A Effort Exclusive focus on Technology and Healthcare
40 completed transactions per year
Typical deal size from $50 to $500 million
7 billion+ dollar deals in last 18 months
U.S., European and Asian M&A coverage