Post on 10-Jun-2020
Maximizing Value In Deal Execution
Gregory Davidson and Lisa Fontenot • Gibson Dunn Padraic (Packy) Kelly • KPMG
Dual Track – Maximize Valuation & Flexibility
Dual Track is the process of initiating an IPO in parallel with a sale effort
Company keeps open both exit options • IPO gives leverage to company in sale negotiations • M&A decreases dependence on public market conditions
• IPO may enable company to use public based valuation metrics for sale
Evidence suggests dual track companies earn 22%-26% premium when a sale is consummated and 18%-21% premium when IPO is launched and an M&A transaction soon follows vs. single track M&A exit(1)
BUT one size does not fit all – consider company resources, opportunities and goals to determine if Dual Track is best option
(1) (See Brau, J., Dual-track versus single track sell outs: An empirical analysis of competing harvest strategies, Journal of Business Venturing 25 (July 2010)
Dual Track Results
Univar shelved its $863 million IPO, opting instead to sell a 42.5% stake to private equity firm Clayton,
Dubilier & Rice, which paid $760 million for its stake. The sale valued the company at roughly $4.2 billion.
Now that Electronic Arts has agreed to buy PopCap Games Inc. for up to $1.3 billion… by selling to EA, PopCap
passed up a potentially monster initial public offering that had been widely expected. Meritech Capital Partners founder and managing director Rob Ward, a top PopCap investor, said recent IPO “euphoria” was a factor.
The Daily Deal, October 13, 2010
Apache Design Solutions walked away from plans for a $75 million IPO to pursue a $310 million
sale to Nasdaq-listed ANSYS, Inc.
New York Times Dealbook, September 2, 2010; BusinessWeek, June 30, 2010
Beceem Communications Inc. announced a $316 million agreement to be acquired by Broadcom
Corp. six months after filing to go public. Beceem had aimed to raise up to $100 million in its initial public offering. Instead of public shares, its handful of venture backers now will get cash.
Private Equity Analyst, August 1, 2011
SALE PLANNING & PREPARATION COMPETITIVE AUCTION EXCLUSIVITY & COMPLETION
Exclusivity granted
Sale preparation completed
Second round offers
received
Indicative offers
received
OPTIONS
Completion
Management Review
Final Documents
Review
Final Review & Approval
Review Sale
Options
Review
points Competitive auction generates bids
Raise issues early for remedial action
Management Review
… good planning and preparation are key to a successful sale
Sell-Side Readiness Indicative Sale (Auction) Process
Data room access
Management presentations
Review draft agreement responses
Address purchaser inquiries
Assess second round offers
Seller
and
advisors Access
indicative offers &
Select bidders
Draft sale agreement
Consider price adjustment mechanism
Information memorandum
Internal approval
Data room
Strategy developed into M&A agenda
Third Party Consents and Approvals
Closing mechanics
Tax legal/ accounting structure
Validate financial model
Address value and transaction issues
Validate historical financial/ legal data
Address resource considerations / define work streams
Possible need for audited financial statements before closing
Financial Statements
Negotiate and sign definitive agreement
Articulate business proposition
Collect information
Internal due diligence and determine diligence staging
Valuation
Identify potential purchasers
Deliver information memorandum
Make contact and assess interest
Frustration over process due to
inefficiencies and delays
Bidders‟ experience / viewpoint
Poor quality / inconsistent
information in the data room and
management presentation
Seller loses credibility –
opportunity for value leakage
Inability to prepare basic analyses
early on
Lack of access to management
and underlying information –
consider information risk discount
Poor project management
Seller has unrealistic timetable
What can go wrong
Misunderstanding from quickly
assembled diligence
IM issued before supporting
information is validated
Lack of robust financial data and
adequate support/explanation
Continued delegation; inadequate
resourcing and ability to make
tough decisions
Initial value expectation
not realized
Lack of preparation time and
frustration over process
Sellers‟ experience / viewpoint
Slow start; losing control
of the process
Disruption of responding to
onerous diligence requirements
Confusion during process and
too many surprises; management
is put in a „reactive‟ position
Extended warranties & indemnities
Seller frustrations frequently mirror those of bidders
Value and deal structure considerations • Define Seller‟s value attributes for transaction
(price/speed of close/certainty)
• Deliver a credible deal structure while considering: – Legal entity structure and financial reporting structure – IP chain
– Change of control/assignment provisions, potential
obligations, consents
– Current investments
– Employee matters: Stock options / pensions / benefit arrangements and employment agreements
Resource considerations • Clearly define key work streams and
responsibilities between Seller vs. accounting vs.
legal vs. investment banks vs. others
Due diligence: Staged in auction, not in IPO • corporate structure, governing documents, stock
ledger
• minute books, confirm board actions
• support for rigorous quality of earnings and controls
• cash flow and working capital analysis
• business or strategic plans
• indebtedness and other financial obligations
• IP housekeeping, employee invention assignments
• key contracts
• compliance with laws
• related party arrangements
• HR and benefit-related matters
• contingent liabilities and litigation
• environmental matters
Process Considerations
** Do not underestimate time required to develop information and support needed to respond to requests
Going public represents a significant milestone in a company‟s lifecycle. An IPO can be the foundation which propels a company towards
achieving its full potential.
Investor Exit
Strategy
Ready Access
to Capital
Markets
Facilitated
Acquisitions
Improved
Financial
Condition
Compensation
Vehicle
Marketing
Event/ Prestige
Sale of equity can increase net
worth and improve borrowing capability; Management
increases financing
alternatives while lowering cost.
Unrestricted use of the capital raised can
fund R&D, PP&E acquisitions, debt reduction, and increased working capital.
Stock-based compensation provides an
incentive strategy to attract and retain employee talent.
Publicly traded stock is a form of “currency”
enabling a company to make acquisitions without incurring debt.
Public markets allow shareholders to
readily determine the market value of their stock and establish liquidity.
IPO increases publicity and
exposure, expanding opportunity and elevating
corporate image.
IPO
Benefits
THE IPO Advantages of Going Public
Allows for expansion of visibility and
opportunities beyond domestic market to international arena by inclusion on a key trading exchange.
Additional Requirements of Public Companies
• Ownership dilution may cause original owners to lose control of their interest in the company, depending on offering size.
• Evaluate anti-takeover protections to protect stockholder value.
IPO
Scrutiny of
Shareholder Value
• Shareholder value is scrutinized in the marketplace in comparison to competitors.
• Stock price factors in management decisions and may result in de-prioritization of long-term projects, customer value, or R&D for short-term earnings results.
• Underwriters‟ commissions, filing fees, legal and accounting fees, printing expense will be significant.
• On-going annual listing fees and exchange requirements, public relations, investor relations, SEC reporting, annual auditing, legal and SOX compliance expense.
Transparency to
Competitors & the Public
Owner Loss of
Control
Expense of IPO
Process and
Ongoing Compliance
Additional Financial
and Regulatory
Requirements
• SEC reporting, including quarterly filings, and audited annual reports in compliance with GAAP.
• SOX compliance with sufficient internal controls and disclosure controls to be certified by the CEO & CFO.
• Corporate Governance requirements of SEC and stock exchange.
• Must disclose executive compensation, related-party transactions, competitive positions, significant customers and suppliers.
• Say-On-Pay vote on executive compensation. • Major events may require SEC reports, press releases, or shareholder votes.
• Additional litigation risk and whistleblower incentives.
Effectiveness as a public company in today's environment requires balancing growth, risk taking and compliance. Being public places significant
requirements and burdens on companies.
A company intending to go public needs to put more focus on developing its finance, legal and technology infrastructure
that will allow it to support the new public company requirements.
IPO
IT Organization and
Governance Finance Organization,
Processes and Enabling
Technologies
Corporate Governance and
Capitalization Structuring
SOX and Regulatory
Compliance
Tax Strategies
Financial
Reporting
SEC Filings
Senior Management and
Independent Director
Recruiting
Development of Investor
Relations and Communications
Function
Platform for Executing A Successful IPO
Evaluating IPO Readiness – Are You Ready to Go Public?
• Do you have a strong senior management team with public company experience?
• Do you have the “right” Board of Directors?
• Do you have an “independent” Audit Committee?
• Have you developed infrastructure to manage disclosure controls and meet SEC reporting requirements?
• Do you have a plan for SOX compliance?
• Do you have material weaknesses in internal controls?
• Do you have a robust risk management procedure?
• Can you close the books under 14 days?
• Can you reliably forecast results?
• Do you have a reliable ERP?
• Have you implemented a tax efficient and market-ready corporate structure?
• Are sector dynamics favorable?
Develop and implement reporting and compliance processes and controls
Project planning and management
Co
rpo
rate
g
ov
ern
an
ce
Sy
ste
ms
&
pro
ce
sse
s
PM
Report on effectiveness of internal controls
Systems assessment
Systems and process
documentation
Improvement and
remediation
Enhance key process-level
controls
Implement entity-level
controls
Control evaluation
and test
Prepare financial statements and complete external audit
Fin
an
cia
l a
nd
leg
al re
po
rtin
g
Refine pro forma financial forecasts
Prepare first
interim filings
Prepare SEC filings and
Stock Exchange Application
Address SEC comments
Prepare first
annual report
Ongoing reporting and filing
Tax compliance review Ongoing tax compliance Tax planning and restructuring
Address capitalization & corporate housekeeping
* Selection of counsel, auditor, investment bank and trading market; preparation for investment bank due diligence; organize documents for prospectus and exhibit filings,
evaluate corporate and capital structure. Market timing is assessed throughout the process.
Year 0 …End of second fiscal year post IPO
Commence IPO plan*
SOX certification
Roadshow & Complete IPO & Listing
File initial registration statement
Drafting Documentation
Independent Majority of Board, Say on Pay
Year 1
Enhance Board charters, composition, and committees
D&O insurance review
SOX compliance preparation and implementation Evaluate compensation plans / ESOP
Executive financial and wealth transfer planning
IPO Process—Illustrative Timeline for Key IPO Activities
Navigating SEC Review
Auditor and law firm should have a good knowledge of SEC rules and procedures
Lead time for accounting and financial requirements can be significant
We performed a review of SEC comments letters for venture-backed IPO filings from April, 2008
through January, 2011.
A total of 69 IPO filings were reviewed with a total of 2,754 comments
The median number of comments on IPO filings received was 54 SEC comments
The median number of days elapsed from the first to the final comment letter was 58
Another round of comments! Groupon filed its S-1 with
the SEC June 2 – and filed 8 amendments until it IPO‟ed
November 4.
Review of Recent SEC Comment Letters
20%
16%
12% 10%
9%
9%
8%
7% 4%
3% 2%
Comment Categories
Management's Discussion and Analysis (20%)
Financial Statements (16%)
Business (12%)
Prospectus Summary (10%
Management, Directors and Stockholders (9%)
Executive and Director Compensation (9%)
Risk Factors (8%)
Other (7%)
Related party transactions (4%)
Underwriting and Use of Proceeds (3%)
Capitalization and Dilution 2%)
Other Lessons from Groupon
“Groupon updates IPO filing, admits it‟s unprofitable” – CNNMoney
Groupon‟s original IPO filing used a metric “adjusted consolidated segment
operating income,” which stripped out its steep costs for marketing and
acquiring new subscribers and showed operating income of $60.6 million for
all of 2010 and $81.6 million for the first quarter of 2011. In its updated filing,
Groupon used standard accounting procedures, reflecting Groupon incurred
$420 million operating loss for 2010 and $117.1 million loss in the first
quarter.
“Groupon revised its reported revenue to „correct for an error‟-- including in its
revenue the cash it has to return to merchants for their share of the coupons
Groupon sells. That cut Groupon's sales in half, to $688 million for the first
half of 2011 from the $1.5 billion claimed previously.
• “Groupon has been tarnished by questions surrounding unorthodox accounting measures, revisions of sales figures and scaled-back expectations of how much money Groupon will raise.”
– CNNMoney
Valuation Impact of Corporate and Capital Structure and Market
Address corporate structure • Consider streamlining corporate structure to facilitate investor understanding and enhance
valuation • If a U.S. company, consider reincorporating in Delaware – “gold standard”
• Review takeover defenses
Address capital structure • Reorganize to reduce outstanding classes and securities • Examine high vote/low vote dual class structure • Review registration and other investor rights
Offering terms • Sale of Insider Shares in IPO?
• Low float strategy used by Zillow & LinkedIn to stimulate competitive demand on pricing • Trading Market can effective valuation and IPO impact – think global not local!
Publicity, Not Gun Jumping: What should I do to prepare?
Plan early • If you are 1+ years away from IPO, consider now what you would like your publicity profile to be around
the time of the IPO. If you want to ramp up, do it well in advance.
Know when quiet period starts • Commencement of registration period is a facts and circumstances test, but certainly has begun when
bankers are hired and organizational meeting has occurred.
Review plans • As you begin the process, review all current public relations activities, including planned speaking
engagements, product announcements and communications on the company website in light of
restrictions.
Think about communications to constituents • Carefully plan communications with employees, suppliers and customers relating to IPO.
Get a team in place • Identify investor relations team and authorized corporate spokespersons early.
Publicity: What could hurt my IPO?
Gun Jumping - caused delays in numerous IPO’s. Even though loosened in 2005, securities laws impose strict
limitations on communications during registration period.
Mentioning the IPO - Communications more than 30 days prior to the SEC filing of a registration statement
have safe harbor, as long as they don’t mention an offering and the issuer takes steps to control distribution
during 30 days prior to filing.
Executive Interviews - Executive interviews that promote the growth company can still cause trouble.
Google’s Form S-1: • “If our involvement in a September 2004 magazine article about Google were held to be in violation of the Securities Act, we
could be required to repurchase securities sold in this offering.”
Failing to Communicate Rules to Board Members - Groupon had to disavow “wildly profitable”
statement by founder: • “In a June 5, 2011 news story reported on Bloomberg.com, our co-founder and Executive Chairman was reported to have
stated in a June 3, 2011 interview that “Groupon was going to be wildly profitable.” …. The reported statement does not
accurately or completely reflect Mr. Lefkofsky’s views and should not be considered by prospective investors in isolation or at
all.”
Can I fix a mistake? - Free writing prospectus can solve some problems, but use is limited in
IPO and Company take prospectus liability.
We are Public, Now What?
Whew, we didn’t miss that Q after the bankers left!
Make financial reporting routine and boring • Flatten issues - pre-close and monthly auditor meetings • Controls around close and consolidation
• Allow enough time for auditor and audit committee review • Numbers not moving when CEO working on the script
• Numbers not moving after press release • Bad Restatements = a suit and the boot
Make compliance and disclosure controls • Code of Ethics • Whistleblower
• Insider trading policy • Board/Committee processes and risk oversight
Be mindful of stockholder expectations – quarterly results, guidance & Say on Pay
Other Post IPO Financial and Accounting Requirements
Sarbanes Oxley section 404(a) and 404(b) • First annual report filed with the SEC includes a statement that the annual report does not include either
management's assessment on ICOFR or the auditor’s report on ICOFR
• Second annual report filed with the SEC must include both management’s report and auditor’s report on
ICOFR
Reporting deadlines
Audit Committee Independence
Auditor Requirements
Issuer Public Float Form 10-Q Form 10-K
Nonaccelerated filer <$75 million 45 days 90 days
Accelerated filer* >$75 million <$700 million 40 days 75 days
Large accelerated filer >$700 million 40 days 60 days
A newly public company generally must be SOX 404 compliant when it files its second annual report. However, underwriters &
investors may expect controls to be substantially in place prior to IPO. In addition, other regulatory requirements may need to be
addressed depending upon the industry.
Key Phases of SOX Compliance
Competing Priorities IT Systems Changes Process Changes Ongoing Costs Resources
Ongoing SOX Challenges
• Testing, evaluating, and
documenting controls on an ongoing basis requires extensive use of accounting
resources.
• Other priorities such as month
end close and management reporting must be balanced with compliance efforts.
• IT systems must be
continuously aligned with SOX processes and tested to maintain controls
environment.
• New processes must be
continuously aligned with SOX requirements and tested to maintain compliance.
• Resource costs, system
upgrades, hiring contractors, and SOX audits are ongoing costs of compliance.
• Determine significant controls
and business units.
• Document design of controls
over relevant assertions related to all significant accounts and disclosures.
• Test control design and
operating effectiveness.
• Document results.
• Identify and correct control
deficiencies.
• Prepare written assertion of
the effectiveness of ICOFR.
Document Controls Test Controls Correct Deficiencies Report on Controls Scope Evaluation
SOX and Regulatory Compliance
Questions to Consider
Do you realize you may need to spend over half your time for the six months prior to exit
focusing on the IPO?
How will the business continue to grow during this period?
Do you understand the ongoing commitment required from you and all your senior executives
both during the IPO itself and afterwards as a public company?
Are your systems, policies and procedures robust enough to comply with good corporate
governance practices?
Are you and the company ready for the increased scrutiny and higher stakes both at IPO and
afterwards?
Final Thoughts
In a climate of uncertainty or volatility, companies must balance near term focus on stable,
growing business with longer term strategy for exit
Early planning and analysis is critical to success for IPO and M&A
Rapid and effective evaluation is the key to articulate the value of the business, and to
delivering a successful exit
The more prepared for an IPO or sale transaction, the less disruptive and costly it will be to
your business
Being ready enables you to hit a market window and go out and remain strong
Hisoft Technology International
IPO on Nasdaq
June 2010
Parade Technologies Ltd
IPO on GreTai Securities
Market September 2011
Phoenix New Media Ltd.
(FENG) IPO on NYSE
in May 2011
Recent Intel Capital Exits: Your Story Goes Here
Opsource acquired by Dimension
Data, a wholly owned subsidiary
of NTT Holdings in June 2011
Rapid Bridge acquired by
Qualcomm in June 2011
OpenFeint acquired by GREE in
April 2011
Apache Design Solutions
acquired by ANSYS in August
2011
RAPID BRIDGE
Communicate. Collaborate. Innovate.