Deal Points: Key Issues in Structuring M

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Deal Points: Key Issues in Structuring M

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

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