deal points: key issues in structuring m
TRANSCRIPT
Today’s Agenda
• Deal Points: Key issues in structuring M&A deals in the current market
• What it’s Worth: How technology companies are valued today.
• The M&A Market: The View from Investment Bankers and VCs.
• Until the Market Window Opens: Other Exit Strategies
• Lessons Learned: M&A Lessons from Entrepreneurs
My Roadmap
• The Numbers and What They Mean
• Trends from the Trenches – What’s Really Happening Now
• The M&A Process – Current Issues
0
5,000
10,000
15,000
20,000
25,000
30,000
Sum ($M)
1 '99 2 '99 3 '99 4 '99 1 '00 2 '00 3 '00 4 '00 1 '01 2 '01 3 '01 4 '01 1 '02
Quarter
Venture-Backed M&A Activity by Quarter, 1999-2002
Source: Venture Economics and the National Venture Capital Association
Venture-Backed M&A Activity by Quarter, 1999-2002
48
90
70
6060
8987
60
68
85
68
53
82
0
10
20
30
40
50
60
70
80
90
100
1999 2000 2001 2002
Year
Total Deals
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Source: Venture Economics and the National Venture Capital Association
1 '002 '00
3 '004 '00
1 '012 '01
3 '014 '01
1 '02
Total IPOs
Total M&A
0
10
20
30
40
50
60
70
80
90
Total
Quarter
A Comparison of Venture Backed M&A and IPO Activity by Quarter
Source: Venture Economics and the National Venture Capital Association
1 '002 '00
3 '004 '00
1 '012 '01
3 '014 '01
1 '02
Total Venture-Backed IPO Offer Size
Total Purchase Price M&A Deals
0
5,000
10,000
15,000
20,000
25,000
30,000
Total Value ($M)
Quarter
A Comparison of Venture-Backed M&A and IPO Activity by Quarter, 2000-2002
Source: Venture Economics and the National Venture Capital Association
Interpreting the Numbers
• Path to liquidity still closed
• M&A only viable exit path for now
• VC Industry recovery will be slow• Needs corporate IT spending and stability of public
markets (re-open IPO window)
• Continued difficult for startups to raise $$
Trends from the Trenches
• Survival Mergers – Lots of them– 75% of M&A deals in the last year . . . but
changing?• VCs won’t continue to nurse weaker companies –
have cleared most of portfolios• Hard to do -- high risk and need lots of funding
Trends from the Trenches• More Private Company Deals
– IPO window closed . . . for now– Public acquirers are very cautious– Public acquirers need deals with immediate
impact• Cost savings - NOW• Tangible ROI
– Public stocks depressed – expensive collateral– Private deal only means of survival for most
Trends from the Trenches
• Acquisition “Flips” (e.g., Metropolitan Venture Partners – 29% IRR for last two years)
– Potentially lucrative and permit entrepreneurs to score on multiple ventures
– Avoid problems of publicly held companies• Detailed reporting requirements
• Structure, system, bureaucracy
– But, High Risk• Hard to finance
• New competitors limit liquidity path
• Typically no backup plan for longevity – all or nothing
Trends from the Trenches
• Look for money . . . get acquired– VCs looking for “sure thing”, now– VCs accepting singles and doubles rather than
homeruns
• Limited to strong companies
The M&A Process – Current Issues
• Preliminary Negotiations– Investment Banks focused on M&A
• Working with earlier stage companies• Doing VC deals, too (for 4 to 6% fees)
– Standard IB Agreement includes right to do M&A, too
– Be aware of duration, exclusivity and credit for contacts
The M&A Process – Current Issues
• The Letter of Intent– Generally non-binding, but be careful about
good faith negotiations– Currently not in favor
• Timing issues: Time to market / Acquirer’s stock
– Not generally favorable to Target anyway• Walk away – no way• Exclusivity is restrictive
The M&A Process – Current Issues
• Due Diligence– Lots of it, and lots of time dedicated to it– Primary cause for deals to falter
• Timing – market changes• Warts – finding things that wouldn’t find before
– Give them EVERYTHING• Tech deals – open kimono slowly• Service deals – time to market is more important
The M&A Process – Current Issues
• Definitive documents– Escrows – 10% for one year – sometimes
longer• Mix of stock and cash reflects deal• Acquirer wants cash first
– Earn outs • Bridge gap in valuations, but VERY unfavorable to
target – most never achieve milestones• In almost every deal now
The M&A Process – Current Issues
• Definitive Documents cont’d– Limitation of Liability
• Try to carve up liabilities (e.g., taxes, environ.)• Limit recourse to escrowed amount• Create a larger basket (higher threshold)
– 1 to 2 % of purchase price is typical
The M&A Process – Current Issues
• Fiduciary Duty and Conflicts of Interest– Different Agendas:
• VCs – cover preference, get liquidity, avoid fiduciary breach
• Management – equity acceleration, narrow non-competes, short employment agreements
• Employees – job security, acceleration• Shareholders – best price
The M&A Process – Current Issues
• Fiduciary Duty and Conflicts cont’d– Directors Duty of Care
• Act in an Informed and deliberate manner• Keep a detailed record of deliberations• Demonstrate careful, objective process – rely on
experts– Separate counsel for Management and Board Members
– Investment Bankers fairness opinion
The M&A Process – Current Issues
• Fiduciary Duty and Conflicts cont’d– Directors Duty of Loyalty
• Act in best interests of all shareholders• Try to have only disinterested directors vote
– Special committee
– Shareholder approval
What if it doesn’t happen?
• Sources of liability– Employees – priority for unpaid wages– Uncle Sam – withholding and other taxes– 401K funds – matching payments– Investors – fraud claims– Creditors – fraudulent transfers
What if it doesn’t happen?
• Company solvent– No fiduciary obligation to creditors
• Company insolvent– Fiduciary duty extends to both shareholders
AND creditors• When company is “in the vicinity” of insolvency• Business Judgment Rule applies