Acquisition Candidate Analysis

Product Management Camp Atlanta

DevelopmentCorporate

www.developmentcorporate.com

Twitter:@devcorporate

Slideshare: http://www.slideshare.net/Devcorporate

john.mecke@developmentcorporate.com

Background• 27 years enterprise software

space

• Served as trusted advisor for four public company boards of directors as well as three large private equity firms

• Developed over 325 in-depth analyses of public and private technology company acquisition candidates

• Led the approach, initial management meetings, and due diligence for over 40 acquisition projects

• Led 4 major acquisitions that closed for over $200 million in consideration. Played a supporting role in 4 other acquisitions that closed for over $300 million in consideration.

• Led 8 major divestitures that generated over $30 million in consideration

• Led numerous cross border projects, especially in Western Europe, Korea, and Japan

• Led over 12 major corporate restructuring projects

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Agenda

• Summary

• Key Concepts

• Process Overview

• Acquisition ‘Teaser’ Presentation

• Open Discussion

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Summary• Product managers are

uniquely suited to analyze acquisitions

• They understand markets, products / services, competitors, marketing, development, sales, support, & finance

• Most product managers don’t understand how execs, boards, & investors evaluate potential acquisitions

• Today’s discussion is designed to arm you with some key best practices you can employ

• Before pitching any acquisition, you need a baseline acquisition strategy

• Check out: How to Build an M&A Strategy

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Key Concepts(aka Stuff You Need to Know but Probably Have Never Been Exposed To in Depth)

• Financial Literacy

• Enterprise Value

• Accretion/Dilution

• Valuation Metrics

• Acquisition Currencies

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Financial Literacy• Product Managers need strong financial literacy:

– Ability to find, read, and interpret Income Statements, Balance Sheets, Cash Flow, and public filings (10-K, 10-Q, Proxy Statements, etc.)

• Executives, Boards, & Investors see things through numbers first, technology & strategy second

• You have to pitch acquisitions in the language they understand

• Check out: Product Management Financial Literacy

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Enterprise Value

• Total cost to acquire a company at its current market value

• Formula

– Market Cap (or equity value)

– Minus Cash

– Plus Debt

– Plus Minority Interest / Liquidation Preferences

• Market cap is only one component of a company’s value

• For private companies you can estimate equity value by looking at public company comps

• Resources– How to calculate Enterprise

Value

– How to calculate Enterprise Value of private companies

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Examples

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Accretion / Dilution

• Accretion = the degree to which a specific acquisition either increases or decreases the profitability of the combined company

• Accretion/dilution can impact gross margins, operating profit margins, EBITDA margins or EPS

• Accretion is determined by comparing the pro forma P&L of the combined company with the company’s existing metrics

• Execs, boards, & investors like acquisitions that are ‘immediately accretive’

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Valuation Metrics

• Used as common metrics to compare the relative valuation of a company to its peers

• Two most common metrics:

– Enterprise Value/Revenue

– Enterprise Value / EBITDA

• Commonly referred to as valuation multiples

• Usually refer to trailing twelve months (ttm) numbers

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Typical Valuations

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Acquisition Currency

• How to pay for an acquisition

• Typical sources: Cash, Debt, & Equity

• Debt markets are constrained now

– In 2007, you could borrow 4x to 8x PF restructured EBITDA

– In 2010 2x – 3x is max and still hard to find

• Typical deals are a mix of cash and stock

• Check out: JDA & i2. The New Normal for Tech Deals

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Acquisition Analysis Process

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Research

Analysis & Modeling

‘Teaser’ Presentation

Update & Refinement

• Gather market, financial, and competitive info

• SEC, Industry Analysts, Press, etc.

• Analyze market position, share, trends, financial

performance, technology SWOTS, headcount, etc.

• Develop operational concept

• Model PF NewCo Financials, Valuation Analysis, &

Returns Analysis

• Develop ‘Teaser’ Presentation

• Socialize internally with execs

• Deliver to board / investors

• Refine & update as new information is discovered

during overall process

Acquisition Teaser Presentation

• 20 to 30 slide presentation that presents results of analysis

• Executives, boards, & investors don’t want to read 300 page theses

• Want it in language they understand

• Key Questions– How does this deal accelerate

the achievement of our goals & strategy?

– What are the tangible financial & valuation benefits the deal provides?

– What would the NewCo look like?

– How much would it cost and can it be financed?

– What are the risks & mitigations?

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Teaser Contents• Summary Page

• Investment Thesis

• Company Overview

– Target Markets• Market Size & Trends

• Market Share Analysis

• Competitive Landscape & Positioning

• Analyst Opinions

– Product/Service Overview• Portfolio Summary

• Corporate Strategy

• Individual P/S Overviews

• Strategic Alliances

• Go To Market Strategy / Tactics

• Customer Base Analysis / Profile

– Organization Overview• Org Chart

• Headcount Analysis

• Key Players

• Financials– Historical P&L, Balance Sheet, Cash Flow

– Key metrics comparison

– Key investors / shareholders summary

• Operational Concept– Strategic Alignment

– Integration Concept

– Pro Forma NewCo P&L

• Valuation– Valuation Model

– Returns Model

• Risks & Mitigation

• Open Issues / Topics

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Teaser Contents• Summary Page

• Investment Thesis

• Company Overview

– Target Markets• Market Size & Trends

• Market Share Analysis

• Competitive Landscape & Positioning

• Analyst Opinions

– Product/Service Overview• Portfolio Summary

• Corporate Strategy

• Individual P/S Overviews

• Strategic Alliances

• Go To Market Strategy / Tactics

• Customer Base Analysis / Profile

– Organization Overview• Org Chart

• Headcount Analysis

• Key Players

• Financials– Historical P&L, Balance Sheet, Cash Flow

– Key metrics comparison

– Key investors / shareholders summary

• Operational Concept– Strategic Alignment

– Integration Concept

– Pro Forma NewCo P&L

• Valuation– Valuation Model

– Returns Model

• Risks & Mitigation

• Open Issues / Topics

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Summary Page

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Company Overview /Recent Developments

PF NewCo

Stock Price Trends

• Founded 1979. Focused on ERP solutions for manufacturing

• NASDAQ: QADI

• HQ Santa Barbara CA. 1,500 heads. 625 Support, 350 R&D, 300

Sales & Marketing, 225 F&A

• Direct operations in 25 countries

• Highest rated challenger in Gartner MQ for Mid-Market/Tier 2 ERP

• 6,000 active customers

• Pamela Lopker, President and Chairman of the Board, Karl Lopker,

CEO, Daniel Lender, CFO

• Consistent challenges in executing revenue/profitability growth

initiatives

Financial Performance

Investment Thesis• Build best-in-class, global, manufacturing ERP provider

• Extend QADI portfolio with MyCo chemical and process manufacturing offerings. >$100M cross sell opportunity <3 years

• Take QADI private, restructure to acceptable levels of profitability, drive organic growth– Drive QADI to from 3% to 25% EBITDA margins

• Exit to strategic acquirer in 3 to 5 years

• Consolidate MyCo infrastructure into existing QADI operations

• Generate $230M to $460M in incremental valution

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Historical P&L

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PF NewCo P&L

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Valuation Model

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Returns Analysis