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Today’s Agenda

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

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Today’s Agenda

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  1. 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

  2. My Roadmap • The Numbers and What They Mean • Trends from the Trenches – What’s Really Happening Now • The M&A Process – Current Issues

  3. Source: Venture Economics and the National Venture Capital Association

  4. Source: Venture Economics and the National Venture Capital Association

  5. Source: Venture Economics and the National Venture Capital Association

  6. Source: Venture Economics and the National Venture Capital Association

  7. 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 $$

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

  21. Whatif 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

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