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ACQUISITION OPPORTUNITIES CREATED BY UNCERTAINTY M&A BUY SIDE: WHAT CEOS NEED TO KNOW

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Your Moderator Robert R. Grabill President & CEO Chief Executive Network


Today's Speaker Joseph M. Durnford CEO and Senior Managing Director JD Ford & Company, LLC

Acquisition Opportunities Created by Uncertainty: M&A Buy Side – What CEOs Need to Know

Joe Durnford CEO & Sr. Managing Director

JD Ford & Company

888-999-9495 x2010

What to Expect

6

1 •M&A market update

2 •Understand Sellers Motives

3 •Best Practices to Identify and Close Acquisitions

4 •Current Purchase Price Multiples

5 •Financing Trends

6 •Winning the deal

M&A Market Update Higher volume of transactions lead by consolidations in the financial sector

Rebound in M&A Activity

8

Number of Announced Deals by Sector Annually

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

2008

2009

2010

2011

TTM July 2012

• Accelerated since bottoming out in

2009

• Taxes + economic uncertainty

business owners seeking exits and

diversification

• Acquirers: good buying

environment = consolidating

industries, supplementing organic

growth

• 2013 Taxes: Deal activity will likely accelerate at the end of the year

Recent Transaction Activity Number of Announced Deals TTM July 2012

725 148

414

2,608

406

529

501

210 26 65

Legend

Consumer Discretionary

Consumer Staples

Energy

Financials

Healthcare

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

Cross-border M&A Increasing

9

Cross Border M&A Trends

2008 2009 2010 2011 TTM July 2012

1,733

1,209

1,687

1,927 1,903

1,436

1,096

1,406

1,490

1,370

US Buyer/Foreign Target

Foreign Buyer/US Target

• Cross-border M&A has increased after

bottoming with the M&A market as a

whole in 2009

• US buyers of foreign targets lead

• Foreign Buyers closed the gap in 2009

but have since restrained their

acquisitions of US companies

Cross Border M&A

Understanding Seller Motives Leverage Seller Motivations to Your Advantage

Current Factors Influencing Exits

11

Capital Constraints

Age & Lack of Succession Plan

Regulation & Compliance Costs

Risk Diversification

Limited Investment Yield

Pending Tax Increases

Economic Uncertainty

Push to Sell!

Taxes are Increasing

12 12

Current Tax Rates

TTM EBITDA $ 10,000,000

Purchase Multiple 7x

Transaction Value 70,000,000

Seller Basis 20,000,000

Taxable Gain 50,000,000

Fed Cap Gains Rate 15.0%

Taxes Due $ 7,500,000

January 1, 2013

TTM EBITDA $ 10,000,000

Purchase Multiple 7x

Transaction Value 70,000,000

Seller Basis 20,000,000

Taxable Gain 50,000,000

Fed Cap Gains Rate 23.8%

Taxes Due $ 11,900,000

Capital Constraints

13

• Community Bankers complained on recent

FDIC conference call that new Tier III Capital

rules (changed via international treaty) will

require reduced lending to small businesses

• Implementation of Dodd-Frank has slowed

lending approval at most banks

• WSJ: With regard to regulators’ call for tougher

capital rules, banks say “…holding too much

capital would force them to cut back on lending and raise the cost of loans…”

Key Issues

Past 3 Months Lending

Large Sized Firms Small & Medium Sized Firms

Loan Demand Increased Unchanged

Lending Standards Some Easing Unchanged

Commercial & Industrial Loan Volume - % Change From Previous Year

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

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Best Practices Identifying & Closing Acquisitions

Why Acquire?

15

A B

Type: Bolt-on Platform

Reason: Strengthen & Grow Current Business Expand & Redirect Business Model

What is acquired: Resources:

• People: Customers & Employees

• Balance Sheet: Cash, Fixed Assets, Intellectual

Property

Full business model:

• Value Proposition

• People – Customers & Employees

• Processes

• Profit formula

• Balance Sheet: Cash, Fixed Assets, Intellectual

Property

Effects: • Reinforce Position

• Add Revenue

• Cut Costs

• Change the trajectory of the business

• Expand into adjacent spaces

• Avoid commoditization of products/services

• Create market disruption

Use as a M&A Strategy: Very common Uncommon

Transaction: Usually Overpay May pass or hesitate due to high valuations

Performance: • Expect quick results (< 1 year) • Companies often overpay because they

overestimate the effect of synergies

• Expect slower results (> 1 year) • Companies often underpay or hesitate because they

don’t correctly assess value

Potential Returns:

High Med

A Bolt-on: Strengthen & Grow Current Business

16

• Will be successful if acquirer can increase prices and/or reduce costs

• Acquirer’s cost structure:

• Large % fixed costs: increasing scale through acquisitions = significant cost savings

• Relying on back-office (i.e. IT, HR, accounting, etc.) cost synergies not sufficient

• Questions to ask:

• Can you cross-sell products/services?

• Is there compatibility with supply chain?

• Can current employees effectively serve new customers?

• Can we add value to processes of target?

• Don’t over pay! Be realistic about synergies!

Key Issues

Bolster Current

Performance

Enhance Revenue

Generation

Capabilities

Cut Costs –

Leverage Fixed

Cost Structure

B Platform: Expand & Redirect Business Model

17

• Look for ways to improve your business model through acquisitions:

• Fight commoditization of products or services

• “Best defense is a good offense”

• Analyze value-chain – where will future profits be?

• Look for disruptive products/services

• Simpler, more affordable product/services

• Embrace improvements in technology

• Look for companies on the leading edge of sustainable trends

• Be willing to pay a Premium

• These types of acquisitions can create significant value

• Companies often underpay or do not acquire because they incorrectly assess value

Key Issues

This is a placeholder It can be replaced easily with your own text.

Placeholder

Expanded

&Reenergized

Business Model

Target:

New Business Model

Acquirer:

Established Business Model

Prepare & Identify Potential Acquisitions

18

Look at all Deal Sources

• Review press release

• Review Private Equity

portfolios

Establish Specific Goals

• Know what your looking for

Look in Adjacent Spaces

• Upstream or downstream in value chain

• Adjacent industries/markets Have a Team in Place

• Experienced internal

M&A team

• Outside professionals

ready

Be Disciplined & Patient

• Don’t shop when you’re

hungry

• Know your price and stick

to it

Alert Market of Interest

• Press releases

• Industry conferences

• Buy-side bankers &

consultants

Be Informed

• Industry multiples

• Recent transactions

Private Equity Exits via M&A

19

• Private Equity groups can be a good source of potential acquisitions

• Typically have 5-7 year holding period

• Seek rapid growth with a focus on increasing margins and cash flow

• Professionalize organizations

• Increasing portion of private equity exits are to strategic buyers

Private Equity as a Target Source

2008 2009

2010

2011

TTM July 2012

421 492

806 997

887

1,138 1,192

1,645

1,841

1,790

Financial Buyer

Strategic Buyer

Current Purchase Price Multiples Stable Buyer Friendly Multiples

Multiple Trends by Sector

21

Revenue Multiples by Sector

EBITDA Multiples by Sector

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x 8.8x 8.4x 7.5x

8.8x 8.5x 8.0x 8.8x 8.3x

7.3x 8.4x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

1.6x 1.3x

2.7x 3.4x

1.8x 1.3x 1.5x 1.4x

2.2x 2.7x

2008 2009 2010 2011 2012 Average

What is the Target Worth To You?

22

REMEMBER:

• Good Deals Are In High Demand

• Management Is Crucial

• Seek Emerging Trends and Technologies to Add Value

DO:

Establish Rate of Return Goals

Know Your Cost of Capital

Use Discounted Cash Flow Analysis (best, likely, worst case)

Net Free Cash Flow Should Be Driver

Consider Revenue and Cost Synergies

DON’T:

Rely Solely on EBITDA Multiples

Worry About What Other Bidders Might Pay

Over Estimate Synergies

Financing Trends Cash is Still King, Simpler is Better

Consideration

24

Part Played by Different Types of Consideration

2008 2009 2010 2011 2012

95% 95% 96% 96% 97%

49% 53% 48%

54% 49%

64%

75% 68% 68% 68%

5% 13%

5% 5% 4%

Cash % of Total Consideration Debt % of Total Consideration

Stock % of Total Consideration Warrant % of Total Consideration

• Most deals involved substantially all cash

• Use of earnouts, stock and debt have declined

• What it means to you: be prepared to offer cash and minimize contingent payments

Components of Total Consideration

• Trends are stable

• Again, indicates cash is king

• If you’re using debt, be prepared for it to be no more than half the consideration paid

• If you’re going to us stock, you can probably offer up to two-thirds of the consideration in stock

• Warrants are consistently at 5%

Part Played by Different Types of Consideration

Components of Total Consideration

2008 2009 2010 2011 2012

90% 87% 91% 91% 92%

5% 4% 3% 3% 2%

20% 16% 15% 12% 10%

13% 12% 10% 9% 7%

Cash Component Debt Component

Earnout Component Stock Component

Contributions: A Private Equity Perspective

25

Leverage Multiple Trends

Debt & Equity in Private Equity Deals

2008

2009

2010

2011

2012

47.2%

52.6%

51.0%

48.2%

47%

16%

18%

12%

15%

19%

37%

29%

37%

37%

34%

Equity

Sub Debt

Sr. Debt

2008 2009 2010 2011 YTD 2012

3.3x

1.8x 2.3x 2.4x 2.2x

1.0x

1.1x 0.7x 0.9x 1.2x

Sr. Debt/EBITDA Sub Debt/EBITDA

• Debt contribution consistent with deals overall at ~50%

• Combination of senior and subordinated debt

• Lending multiples peaked in 2008 and declined sharply in 2009

• Sr. Lending multiples have stabilized while sub debt multiples have moved back toward highs

• ~3.5x EBITDA worth of leverage may be available


Winning the Deal

Winning the Deal

27

1. Buying is Selling

2. Sellers Like Cash

6. Have Financing in Place

to Reduce Seller Closing Risk

5. Consider Tax Consequences in Deal Structure

3. Listen Don’t Pitch 4. Set Specific Parameters for Negotiation

Buyer Transaction Expenses

28


2008 2009 2010 2011 YTD 2012

0.3x

0.2x

0.3x 0.3x

0.2x

• Historically between 0.2x and 0.3x EBITDA

• Professional Fees: legal, accounting, environmental consultants, investment bankers

• Financing costs

• Declined in 2009 as professionals lowered fees to get engagements

• Returned to normalized levels in 2010

Buyer Transaction Expenses

Closing Comments

29

Closing Comments

Demographics favor industry consolidation

2 Purchase multiples and EBITDA are expanding

3 Taxes are big motivator to close before year-end

4 Pay attention to seller motives

5 Be focused and disciplined on your desired outcomes

6 Integration planning and execution is parmaount

7 Don‘t waste time and resources pursing non-core acquisitions

Joe Durnford CEO & Sr. Managing Director JD Ford & Company

650 S. Cherry Street, Suite 1200

Denver, CO 80246

Telephone: 888-999-9495 303.333.3673

ext. 2010

E-Mail: [email protected]

Web: www.jdford.com

© 2012 JD Ford & Company LLC

Sources:

GF Data Resources

Harvard Business Review

JD Ford & Company Proprietary Data

Standard & Poor’s Capital IQ

St. Louis Federal Reserve

Wall Street Journal


Today's Speaker Joseph M. Durnford CEO and Senior Managing Director JD Ford & Company, LLC


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