PACIFIC CREST
M&A Banking for the Best Deal . . . Any Deal . . . In the Current Market
Erik J. Krieger
November 2001
2
PACIFIC CREST
Just When Things Looked So Good You’ve carefully thought out all the angles
Everything has falling in place so far
You know what you’re doing, its what you’ve been trained to do, you’re an expert
Its instinctual and comes naturally to you
Nothing could possibly go wrong . . . right?
3
PACIFIC CREST
Think Again!
4
PACIFIC CREST
Agenda
Brief Market Overview - Perspective
M&A Advisor/Investment Banker Why hire an advisor Who to hire What an advisor should do What the advisor wants
M&A - The Transaction Valuation Process Timing
5
PACIFIC CREST
Erik J. Krieger
Co-Founder/Chairman/Sr. Managing Director Pacific Crest Securities
Led efforts in Capital Markets, Research and Banking
15 years Investment Banking experience
New York & Chicago
Native Oregonian
6
PACIFIC CREST
Pacific Crest Securities
Services: Full-Service Investment Bank
Focus: Institutional, Next Generation Communications & Technology
Employees: 90+ Professionals
Research Coverage: Over 125 Public Companies
Institutional Reach: 250 active technology buyers
Trading: #1 market maker in US under 150 Companies85 million shares traded in October 2001
Banking: Underwriting participation in over40 public transactions valued at $6.4 billion in 2000
Completed over 200 M&A transactionswith aggregate value in excess of$100 billion
Offices: Boston, Seattle, Portland, San Francisco
7
PACIFIC CREST
Market Overview
8
PACIFIC CREST
M & A Drivers
General economic trends Outlook/confidence Company health
Investor views toward consolidation
Credit availability
Supply of quality companies
Public equity markets Volatility Valuations Availability to raise capital
9
PACIFIC CREST
What a Difference a Year Makes!
1999-2000 Seller’s market Set initial pricing/terms Record activity Silly valuations Mega deals in vogue Strategic buyers dominate Speed to market rage Stock deals dominate Positive market responses to
announcements Easy access to capital Any deal had value
2001 Buyer’s market . . . Terms &
Pace # deals off 50%, lowest level
since 1996 Valuations pushed to low end Tech/Comm deals biggest
drop of all industries Lack of capital (debt &
equity) End of pooling Negative responses to
announcements Equity “orphans” everywhere Many can not be sold
10
PACIFIC CREST
Perspective . . .
-
2,000
4,000
6,000
8,000
10,000
12,000
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
($ in m
illions)
# of Transactions Aggregate Value
Total M&A Market Past 30 Years
11
PACIFIC CREST
Stock Prices Influence M&A Market
- 200%
0%
200%
400%
600%
800%
1000%
1200%
Jan-9
4
Apr-9
4
Jul-9
4
Oct-9
4
Jan-9
5
Apr-9
5
Jul-9
5
Oct-9
5
Jan-9
6
Apr-9
6
Jul-9
6
Oct-9
6
Jan-9
7
Apr-9
7
Jul-9
7
Oct-9
7
Jan-9
8
Apr-9
8
Jul-9
8
Oct-9
8
Jan-9
9
Apr-9
9
Jul-9
9
Oct-9
9
Jan-0
0
Apr-0
0
Jul-0
0
Oct-0
0
Jan-0
1
Apr-0
1
Jul-0
1
Oct-0
1
GSTI Semi Index AMEX Computer Tech Index S&P High- Tech Composite Nasdaq
12
PACIFIC CREST
Tech Deals 1993 - 2001Technology
$-
$50
$100
$150
$200
$250
$300
$350
1993 1994 1995 1996 1997 1998 1999 2000 2001
($ in
mill
ions)
0
100
200
300
400
500
600
700
800
900
Avg. Deal Size # of Deals
Note: 2001 figures through November 5 only
13
PACIFIC CREST
Communications Deals 1993 - 2001Communications
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1993 1994 1995 1996 1997 1998 1999 2000 2001
($ in m
illions)
0
50
100
150
200
250
300
Avg. Deal Size # of Deals
Note: 2001 figures through November 5 only
14
PACIFIC CREST
Tech/Comm Deals by Size
Note: 2001 figures through November 5 only
$250M - $1,000M
020406080
100120
1993 1995 1997 1999 2001$-
$20,000
$40,000
$60,000
$80,000($
in m
illio
ns)
# of Deals Aggregate enterprise value
$1,000M +
0
20
40
60
80
100
1993 1995 1997 1999 2001$-
$100,000
$200,000$300,000
$400,000
$500,000
$600,000
($ in
mill
ions)
# of Deals Aggregate enterprise value
cc
$25M - $100M
050
100150200250300
1993 1995 1997 1999 2001
$-
$5,000
$10,000
$15,000
($ in
mill
ions)
# of Deals Aggregate enterprise value
ccc
$100M - $250M
0
50
100
150
1993 1995 1997 1999 2001$-
$5,000
$10,000
$15,000
$20,000
$25,000
($ in
mill
ions)
# of Deals Aggregate enterprise value
c
15
PACIFIC CREST
Tech/Comm Deals YTD by Size
$25M - $100M
0
5
10
15
20
Jan Feb Mar Apr May June July Aug Sept Oct
$-
$200
$400
$600
$800
$1,000
($ in
mill
ions)
# of deals Aggregate enterprise value
c
$100M - $250M
0
2
4
6
8
10
12
Jan Feb Mar Apr May June July Aug Sept Oct
$-
$500
$1,000
$1,500
$2,000
($ in
mill
ions)
# of deals Aggregate enterprise value
$250M - $1,000M
0
2
4
6
8
10
Jan Feb Mar Apr May June July Aug Sept Oct
$-
$1,000
$2,000
$3,000
$4,000
($ in
mill
ions)
# of deals Aggregate enterprise value
$1,000M +
0
1
2
3
4
5
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
$-
$10,000
$20,000
$30,000
$40,000
$50,000
($ in
mill
ions)
# of deals Aggregate enterprise value
16
PACIFIC CREST
Tech/Comm Pricing Trends
0.9
10.1
1.1
11.3
1.2
17
2.1
18.6
1.6
18.6
1.5
17.9
2
18.1
3.2
22
1.7
13.7
0
5
10
15
20
25
1993 1994 1995 1996 1997 1998 1999 2000 2001
Ent/ sales
Ent/ EBIT
17
PACIFIC CREST
Payment Trends
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1993 1994 1995 1996 1997 1998 1999 2000 2001
Both
Stock
Cash
18
PACIFIC CREST
Reaction to Public M&A Announcements
- 6.0%
- 4.0%
- 2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%Ja
n-9
9
Mar-
99
May-9
9
Jul-9
9
Sep
-99
Nov-
99
Jan
-00
Mar-
00
May-0
0
Jul-0
0
Sep
-00
Nov-
00
Jan
-01
Mar-
01
May-0
1
Jul-0
1
Sep
-01
Average
Median
% Change One Day Prior to One Day After Deal
Announcement
19
PACIFIC CREST
Premiums Paid For Public Deals
0%
10%
20%
30%
40%
50%
60%
70%
1993 1994 1995 1996 1997 1998 1999 2000 2001
20
PACIFIC CREST
Technology by SpaceHousehold Appliances
Semiconductors Capital Equip.
Components
Graphics
Networks
Mainframes
Memory Devices
PC's
Peripherals
Services
Software
Semiconductors
Measuring Devices
Miscellaneous
1999
7%2%
40%30%
1%3%
2%4%1%0% 6%
1%0%
3%
Household Appliances
Semiconductors Capital Equip.
Components
Graphics
Networks
Mainframes
Memory Devices
PC's
Peripherals
Services
Software
Semiconductors
Measuring Devices
M iscellaneous 44%
33%
4%2%5%1%0%
0%
1%0%5%
0%
3%
2%
2000
2001
37%35%
4%
2%7%
0%1%
6%
1%4%0%1%1%
1%
21
PACIFIC CREST
Communications by Space
2001
9% 6%
2%
21%
28%
23%
11%
2000
12%10%
3%
22%29%
16%8%
1999
18%
4%13%
32%
10%9%
14%
Radio/TV Broadcasting
Cable TV
Cellular
Equipment
Services
Wireless
Telephone
22
PACIFIC CREST
Bottom Line!
Feels worse than it is
People still have memories of 1998, 1999 & 2000
Wall Street geared up as if it would last forever
Need time to flush out system
Deals are still happening . . . And will continue to happen
23
PACIFIC CREST
Why are Transactions Happening?
Bigger is better . . . Scale provides for traction and stability . . . Customers are demanding it!
Buyers filling gaps
Lack of capital . . . survival
No hope of really growing on own . . . Feature versus Benefit (Business)
Orphan syndrome . . . Deal fatigue
Liquidity
24
PACIFIC CREST
What’s a Company to do?
Concentrate on internal operations
Take advantage of low prices and become a “buyer”
Wait for better environment . . . If you can
Hire quality advisor to help evaluate alternatives and execute well thought out strategy
“ Tough times require extra care. Cover all the bases”
25
PACIFIC CREST
Today’s Better M&A Spaces
Services New media eLearning
Technology Enterprise software - applications Security
Communications Wireless applications Convergent technologies
26
PACIFIC CREST
M&A Advisory
27
PACIFIC CREST
Why Hire an M&A Advisor?
Selling or buying a business is a full time job
Reduce buyer/seller friction
Increase number of alternatives
Maximize shareholder value
Drive the process and resolve trouble spots
“ None of it really matters unless deal closes . . . Advisor ensures closure”
28
PACIFIC CREST
Tangible Things an Advisor Does Evaluate marketplace
Strategic analysis of alternatives
Valuation analysis
Create marketing plan & materials
Execute marketing plan
If necessary, arrange financing
Help with due diligence
Execution, Negotiation, Close
29
PACIFIC CREST
Banker’s Role After the Deal
Sell side “Spin” control - internal and external Wealth management New sell/buy side engagements Help old management find new jobs
Buy side “Spin” control - internal and external Financing New buy side engagements
30
PACIFIC CREST
What to Look for in an Advisor Transaction experience
Commitment Banker commitment Firm commitment Resources
Knowledge of space Understanding of dynamics/drivers of value Connection with buyers
Good listener of client’s needs
“Hire an advisor that can adapt to & succeed in any situation”
31
PACIFIC CREST
Changing Banker Landscape Date Investment Bank Acquiror09/02/97 Alex. Brown Inc Bankers Trust New York Corp
09/02/97 Dillon Read & Co SBC Warburg
10/01/97 Montgomery Securities NationsBank Corp
10/08/97 Furman Selz LLC ING Barings
11/03/97 Oppenheimer CIBC Wood Gundy Securities Inc
11/28/97 Salomon Inc Travelers Group Inc (Smith Barney)
02/02/98 Wheat First Butcher Singer First Union Corp
04/06/98 Wessels Arnold & Henderson LLC Dain Rauscher Corp
04/15/98 Cleary Gull Reiland & McDevitt Freedom Securities Corp
05/01/98 Bowles Hollowell Conner & Co First Union Corp
05/01/98 Piper Jaffray Cos US Bancorp
06/30/98 Cowen and Co Societe Generale Securities
10/08/98 Salomon Smith Barney Citicorp
06/04/99 BT Alex. Brown Deutsche Bank
07/01/99 BankBoston Robertson Stephens Fleet Financial
11/01/99 Hambrecht & Quist Chase Manhattan Corp.
12/15/99
06/12/00
07/12/00
08/29/00
09/13/00
09/28/00
12/18/00
01/04/01
06/14/01
09/28/01
Volpe Brown Whelan & Co
J.C. Bradford
PaineWebber
Donaldson, Lufkin, Jenrette
J.P. Morgan
Dain Rauscher Wessels
Prudential Securities
Wasserstein Perella
Epoch Partners, Inc.
Alliant
Prudential Securities
PaineWebber
UBS AG
Credit Suisse First Boston
Chase H&Q
Royal Bank of Canada
N/A
Dresdner Bank
The Goldman Sachs Group, Inc
Silicon Valley Bank
NationsBanc Montgomery Securities
BT Alex. Brown
SBC Warburg Dillon Read
ING Barings Furman Selz
CIBC Wood Gundy Oppenheimer
Salomon Smith Barney
Wheat First Union
Dain Rauscher Wessels
Cleary Gully Freedom
US Bancorp Piper Jaffray
SG Cowen
Salomon Smith Barney
Deutsche Banc Alex. Brown
Fleet Boston Robertson Stephens
Prudential Volpe Technology
PaineWebber
UBS WArberg
Credit Suisse First Boston
JP Morgan Chase & Co.
RBC Dain Rauscher Wessels
Prudential Exits Investment Banking
Dresdner Kleinwort Wasserstein
The Goldman Sachs Group, Inc.
Silicon Valley Bank
Survivor
Bowles Hollowel Conner
Chase H&Q
32
PACIFIC CREST
Advisor Type
Global Full Service Goldman Sachs, Morgan Stanley, Merrill Lynch
National Full Service Piper Jaffray, Robertson Stephens, First Union
Boutique Full Service Pacific Crest, Soundview, Friedman Billings
M&A Boutique Alliant, Lincoln Partners, Houlihan Lokey
Local/Regional Generalist DA Davidson, Van Kasper, Veber
33
PACIFIC CREST
Large versus Mid Sized /Smaller Deals
Larger Deal Commitment Board considerations Global reach Financing
Mid Sized/Smaller Deal Commitment Sr. Banker Attention Resources Location
“Match deal size and M&A advisor size”
“M&A advisory is not dependent on capital base”
34
PACIFIC CREST
Middle Market Advisor Profile
Resources/Capabilities
Industry Knowledge
Global - Full Service
Many
High
National - Full Service
Boutique- Full Service
Local/Regional
Generalist
Business Broker
M&A Boutique
CommitmentLevel
High
Low
35
PACIFIC CREST
What Motivates an Investment Banker?
Size of Transaction
Time it takes to close deal
Additional business
Good client . . .
“Show me the Money”
36
PACIFIC CREST
What Makes a Good Client Good?
Realistic expectations
Honesty . . . Complete disclosure
Advisor versus Servant role
Clarity in decision making (fewer leaders)
Few owners . . . Or Public
“ Nobody likes surprises . . . Especially your advisor! Advisor
needs to know everything”
37
PACIFIC CREST
What Makes for an Attractive Deal?
Strong financial performance . . . “plenty of runway”
Excellent internal controls
Scale . . . Client base
Brand/market leadership/technology
Real commercial partnerships
Strong external space influences (many buyers)
Definable business . . . Simpler the better
38
PACIFIC CREST
Things that are Unattractive
Little/no revenue
Lack of “real” customers . . . More than one
“Real” validation of technology
Cash burn
Few buyers
Unrealistic expectations
“Just” employee bases/management teams
39
PACIFIC CREST
What Does it Cost to Hire an Advisor?
Fees are negotiated . . . To a point Supply & demand You get what you pay for Insignificant cost if successful
Success Fee % of transaction . . . Lehman formula Incentives & minimums Buy side capped
Retainer Flush out “real” clients Credited toward Success Fee
Expenses Disincentive if not paid Proximity/Experience reduce cost
40
PACIFIC CREST
Fee Case StudyCompany: Profitable enterprise software firm with
$30 million in revenue and no debt
Valuation: $95 to $105 million
Fee StructureRetainer: $75,000 paid 50% at signing of
engagement letter and 50% within 30 days. Credited to Success Fee.
Expenses: All out of pocket. Client approval over $25,000.
Success: 1.25% up to $95 million plus, 3% of amount over $95 million $750,000 minimum
41
PACIFIC CREST
Deal Process
42
PACIFIC CREST
Two Sides to Every Deal
“ Buyer and Seller”
43
PACIFIC CREST
Core Issues in Any Deal Technology/business fit
Fill the gap Make versus buy Time to market
Philosophical similarity Direction Culture/Style/Intangibles Relevance
Good value . . . Buyer and seller Structure dictates motivations High, low or fair will influence outcome
Ease of integration (size, location, systems, etc.)
44
PACIFIC CREST
M&A Realities
Emotions will create high anxiety throughout process
Integration is 99% of success
Expect significant disruption Time consuming Don’t lose control of business
After the deal . . . Nothing will be the same
45
PACIFIC CREST
Buyer & Seller “Valuation” Perspectives Buyer
Back to fundamentals . . . Bubble has popped
“Justification” matrices long gone
Many companies can not be sold
Comparable public companies Discount private
companies Must look at & compare
fundamentals
Comparable M&A transactions
Discounted cash flow
Asset/technology valuations
Liquidation analysis
Seller Be prepared with
knowledge of buyer
Understand impact of make versus buy decision
Evaluate impact on Buyer’s business
Impact on growth rates
Earnings accretion/ dilution . . . synergies
Operations/ unique technology
Resultant share price impact
46
PACIFIC CREST
Sale versus Buying ProcessSale
Business evaluation analysis Full due diligence Valuation analysis Financial strategic
alternatives
Marketing strategy Proper positioning . . .
Value creation Marketing materials Identify & screen buyers
Execution Market, coordinate,
negotiate, close Create sense of
urgency/scarcity
Buy M&A strategy
Develop objectives, criteria, parameters
Create Deal Flow Identify & screen targets Value Evaluate impact (external
and internal)
Execution Due diligence, negotiate,
close Financing Manage expectations and
process to best position buyer
47
PACIFIC CREST
M&A Timeline (Sale)
Expect 4 to 6 months from start to close Banker pre-marketing prep 3 weeks Marketing 8 weeks Negotiation 4 weeks Due diligence 2-4 weeks Documentation 4-8 weeks Regulatory/shareholder 4-8 weeks Public company deals adds certain time
elements
“Be prepared for a long process”
48
PACIFIC CREST
How to Prepare for Sale?
Get controls in place
Prepare detailed forecasts
Control costs
Develop strategic/commercial partnerships
Identify buyers & strategic fit
Mentally prepare for process
Run business as if not selling . . . Focus on operations
“ Clean up Shop - Like selling a house”
49
PACIFIC CREST
Summary
Evaluate alternatives . . . Don’t do it in a vacuum and be honest
Hire Advisor to maximize options . . . Maximize value
Be prepared & knowledgeable
Deals are still being done . . .
Top Related