Bare Metal V7 (No Notes)

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This is the presentation I gave at the BareMetal 2008 Annual Conference in Denver in October 2008.

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Bare Metal V7 (No Notes)

  1. 1. Optimizing Value BareMetal Data World 2008 Conference Denver, CO October 17, 2008
  2. 2. Presentation Outline <ul><li>Tactical View: What now? </li></ul><ul><ul><li>Financial </li></ul></ul><ul><ul><li>Operational </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><li>Strategic View: Selling your business </li></ul><ul><ul><li>Valuation </li></ul></ul><ul><ul><li>Instructive transactions </li></ul></ul><ul><ul><li>Lessons learned and transaction myths </li></ul></ul>
  3. 3. Jim Howard Waterfront Capital, Inc. <ul><li>Director – WCI since December 2006 </li></ul><ul><li>20+ years IT Services/Technology Background </li></ul><ul><li>Deep ITO/BPO experience </li></ul><ul><li>Claremont McKenna College – 1977 </li></ul><ul><li>WCI has been representing information management businesses since 1996 </li></ul><ul><li>WCI principals have been involved in over 170 successful industry transactions </li></ul>
  4. 4. Current Economic Conditions <ul><li>Broad international economic downturn </li></ul><ul><li>Volatile investment climate </li></ul><ul><li>Uncertain markets </li></ul><ul><li>Credit/debt extremely expensive </li></ul><ul><li>Where’s the bottom? </li></ul>
  5. 5. Near-Term Economic Conditions <ul><li>Potential for a prolonged downturn </li></ul><ul><li>Credit market conditions are a key valuation driver </li></ul><ul><li>Further erosion of credit possible </li></ul><ul><li>Potential new market paradigms and valuations </li></ul>
  6. 6. WCI’s Viewpoint <ul><li>IM companies are very recession resistant </li></ul><ul><li>Private equity firms committed to the space and are currently still acquiring </li></ul><ul><li>Increasing selectivity by institutional buyers </li></ul><ul><li>Market will likely retreat from high multiples </li></ul><ul><li>As always, focus on building value </li></ul><ul><li>More important than ever to understand what you are selling and to whom you are selling </li></ul>
  7. 7. Important Considerations <ul><li>Growth – buyers want growing businesses </li></ul><ul><li>Good Real estate – make good decisions </li></ul><ul><li>Contracts – protect your customer relationships </li></ul><ul><li>Obtain good counsel when you decide to sell </li></ul>
  8. 8. Financial Management <ul><li>Conserve Cash </li></ul><ul><li>Focus on A/R – manage DSO’s </li></ul><ul><li>Consider deferring capital expenditures </li></ul><ul><li>Examine your key supplier relationships, especially your banker </li></ul><ul><li>Forecast & budget </li></ul><ul><li>Stay flexible </li></ul>
  9. 9. Operational Management <ul><li>Recognize service slow downs before they impact the bottom line - review and optimize staffing </li></ul><ul><li>Watch for changes in special projects & services </li></ul><ul><li>Match labor to tomorrow’s operations, not yesterday’s </li></ul><ul><li>Examine your business processes; re-engineer </li></ul><ul><li>Identify & manage your key variable cost drivers </li></ul>
  10. 10. Customer Management <ul><li>Sharpen your market focus – value vs. price </li></ul><ul><li>Determine critical markets, tailor offerings </li></ul><ul><li>Solidify customer relationships </li></ul><ul><li>Create a client-centric culture </li></ul><ul><li>Aggressively sell to grow faster than the market & increase cash flow </li></ul><ul><li>Evaluate your pricing within the context of market, not solely costs </li></ul>
  11. 11. Planning Ahead <ul><li>Many factors go into deciding to sell, beyond just the “economy” </li></ul><ul><li>If currently considering an exit, consider moving very quickly </li></ul><ul><li>Leverage experienced industry professionals – undertake a valuation </li></ul><ul><li>Build your team - Institutional buyers are sophisticated </li></ul>
  12. 12. M&A History <ul><li>500+ industry transactions with valuations distributed along a bell curve: </li></ul>
  13. 13. Proforma Adjusted EBITDA Multiples <ul><li>Transaction multiples are evaluated by Purchasers in the following manner: </li></ul><ul><ul><li>(Purchase Price) + (Integration Costs) </li></ul></ul><ul><ul><li>(Buyer’s Pro Forma EBITDA) </li></ul></ul>
  14. 14. Proforma Multiples <ul><ul><li>(Purchase Price) + (Integration Costs) </li></ul></ul><ul><ul><li>(Buyer’s Pro Forma EBITDA) </li></ul></ul><ul><li>Purchase Price factors: </li></ul><ul><ul><li>Cost of capital </li></ul></ul><ul><ul><li>Anticipated growth rates </li></ul></ul><ul><ul><li>Anticipated stability of cash flows </li></ul></ul><ul><ul><li>Forward operating leverage </li></ul></ul><ul><li>Integration Cost factors: </li></ul><ul><ul><li>Transaction costs </li></ul></ul><ul><ul><li>“ Fixing Costs” </li></ul></ul><ul><li>Buyer’s EBITDA factors: </li></ul><ul><ul><li>Synergies </li></ul></ul><ul><ul><li>Management requirements </li></ul></ul>
  15. 15. History: Three Interesting Transactions <ul><li>Proforma adjusted EBITDA multiples believed to be at least 10X EBITDA: </li></ul><ul><ul><li>First American Records Management (1999) </li></ul></ul><ul><ul><li>Pierce-Leahy (2000) </li></ul></ul><ul><ul><li>Archives One (2007) </li></ul></ul>
  16. 16. Transaction Similarities: External Factors <ul><li>Multiple bidders: </li></ul><ul><ul><li>Use of intermediaries </li></ul></ul><ul><li>Capital markets impact valuations </li></ul><ul><li>Search for a scalable model: </li></ul><ul><ul><li>Private equity modus operandi </li></ul></ul>
  17. 17. Transaction Similarities: Internal Factors <ul><li>Scale, scale, scale: </li></ul><ul><ul><li>Companies were large enough to be meaningful to the acquirer(s) </li></ul></ul><ul><ul><li>Acquisitions provided instant market presence </li></ul></ul><ul><ul><li>Accretive to earnings through known synergies </li></ul></ul><ul><li>Professional management: </li></ul><ul><ul><li>Long-term focus on structure and process </li></ul></ul><ul><ul><li>Clean businesses with solid contracts </li></ul></ul><ul><ul><li>Focus on measurement and metrics </li></ul></ul><ul><li>More strategy, less emotion: </li></ul><ul><ul><li>C onstantly sought business improvement </li></ul></ul><ul><ul><li>Outside board members sharpened management focus and drove management forward </li></ul></ul>
  18. 18. Know Your Buyer <ul><li>New buyers in the marketplace: </li></ul><ul><ul><li>BRM , ISCC, Access, Retrievex, LA Records </li></ul></ul><ul><li>Private equity has recognized the opportunity for value creation in our industry </li></ul><ul><li>Research bidders ability to perform, track record and appetite </li></ul><ul><li>Effect : Raises your purchase price multiple by negotiating and transacting with highest and best-priced buyer </li></ul>
  19. 19. Seek Scale <ul><li>Larger companies command higher multiples: </li></ul><ul><ul><ul><li>Represent a platform for potential buyers </li></ul></ul></ul><ul><ul><ul><li>Possess infrastructure for growth </li></ul></ul></ul><ul><ul><ul><li>Attract institutional buyers </li></ul></ul></ul><ul><li>Grow faster, take “wallet share” from your customers and business from your competitors </li></ul><ul><li>Effect : Raises your purchase price multiple </li></ul>
  20. 20. Optimize Capital Structure <ul><li>Most smaller RIMS companies are “equity heavy” </li></ul><ul><li>Growth is often capital-constrained </li></ul><ul><li>Real estate and leasing are excellent sources of lower cost, growth capital </li></ul><ul><li>Effect : Raises your purchase price and reduces your “fixing costs” </li></ul>
  21. 21. Transactions: “Top 10 Mistakes” <ul><li>Procrastinating and hanging on to get ‘that last little bit’ </li></ul><ul><li>Unrealistic expectations </li></ul><ul><li>Sole-sourcing to other than highest price bidder </li></ul><ul><li>Thinking that buyers ignore positive and negative synergies </li></ul><ul><li>Letting a relationship get in the way of the best deal </li></ul><ul><li>Not seeking the counsel of a skilled agent, and a practiced attorney </li></ul><ul><li>Ignorance of the sale process & not getting your house in order </li></ul><ul><li>Failing to understand and apply valuation metrics in your business </li></ul><ul><li>Indiscretion </li></ul><ul><li>Letting ego or emotions drive, rather than focusing on the bigger prize </li></ul>
  22. 22. Five Transaction Myths <ul><li>“ It’s all about you!” </li></ul><ul><li>“ Heard the one about your buddy who got 4x revenues for his business?!” (i.e. Touting irrelevant acquisition metrics) </li></ul><ul><li>“ We did x million in EBITDA last year…what am I worth?” (Actual vs. Proforma, Trailing vs. Run rate) </li></ul><ul><li>“ Don’t sell when capacity utilization is low.” </li></ul><ul><li>“ It’s worth more if I am not part of the deal.” </li></ul>
  23. 23. Strategic Management - Execution <ul><li>Focus on growth and long-term strategy </li></ul><ul><li>Utilize solid contracts </li></ul><ul><li>Understand your real estate and ‘get it right’ </li></ul><ul><li>Create organizational structure and self-sufficiency </li></ul><ul><li>Measure and use operating and financial metrics </li></ul><ul><li>Effect : Increases purchase price multiple, lowers fixing costs and increases the buyers’ EBITDA </li></ul>
  24. 24. <ul><li>Jim Howard, Waterfront Capital, Inc. </li></ul><ul><li>261 Monarch Lane </li></ul><ul><li>Austin, TX 78737 </li></ul><ul><li>ph: 512.514.0091 </li></ul><ul><li>[email_address] </li></ul><ul><li>[email_address] </li></ul><ul><li>[email_address] </li></ul>

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