Keys to Successful M&A: Transparency, Security, and Process


Published on - Webinar presented by Nat Burgess and co-hosted by The Corum Group and AppFolio SecureDocs. Learn why the current M&A environment is so favorable to tech company owners and CEOs, the “Eight Stages to Optimal Outcome” from Preparation through Integration, and how to leverage new technology to ensure both transparency and security during a transaction.

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  • Look closely at the Top Acquirers last year. First off, Google has been really dominant, setting new records for number of deals each year. Often,picking up technology in seemingly unrelated areas. They realize that it is worthwhile to use the cash, make some strategic bets as in house new developed technology has about the same mortality rate as any new small business – 90 failure over the first five years. Much easier to make acquisitions of proven technologies.We deal with Google all the time, we’ve had them as guest speakers and on panels, such as our annual report we passed out.Not only are they doing more deals, but they’re buying differently, too. When Google comes into an LOI, they will actually lay out issues you would normally be negotiating, stressing overlater on. Their attitude is “Here’s some things that we’re going to be having trouble with, we’ll tell you how we’re going to handle it.” They just get by all that stuff. They realize that their sheer size and the drain of the process can destroy the relationship during due diligence by creating “deal fatigue.” Which is the biggest single killer of deals in process these days.After Google, we see Intel, who we just sold a Korean company too. In fact we’ve got offers from or sold to all of these firms. What’s interesting to note is how the leader board has changed. Up to a couple of years ago, it was the same names over and over. Microsoft, Cisco, IBM, etc. Now the leaders are firms that didn’t exist a few years ago, who began making news on the M&A front when they were private – firms like Zynga and Facebook. With the new crowd funding law, we will see more of these private firms with plenty of cash bidding.Then we have firms many of you have never heard of, now outbidding the giants. Have you heard of WPP or Schneider Electric? What’s not shown is all of the newly minted foreign public companies who went public on international exchanges. First thing they do with the cash from their offering is make acquisitions. Not only to get access to technology and domain expertise, but often, more importantly, to acquire a ready made base in major markets in North America and Europe to expand sales.Further, foreign buyers want to get access to user bases where they can leverage their low cost development staff. For this reason, even the most legacy, old line firms are seeing suitors these days
  • Another major trend affecting M&A is the record cash hoards at the large tech companies in the U.S. Take a close look at this chart. Amazingly, this increase in cash, up to ten fold for some companies occurred during the Great Recession. Tech companies just kept motoring along, generating nearly a quarter trillion in cash.So what do you do with all this money? The interest rates are negligible.You either put it into development, you give it away in the form ofdividends, or….you buy somebody. But it’s not that simple – look where the money is – see the “held offshore column” to the right? Take a look at Cisco for example. 89% of that money is off shore. Microsoft is 85%. On average for tech giants, 70% of their cash is off shore. This is true of most multinational American companies. The United States is only about 6% of the worlds population, so the bulk of the revenues and profits will be in sales outside the U.S. – revenue that is taxed at a lower international rate. All in offshore banks. But, this money can’t be repatriated without paying full income taxes on top of the taxes they paid in offshore jurisdictions – this means up 40% additional taxes counting the state’s cut. These funds can’t be used for development in the U.S. The money can’t be loaned to the American parent. In fact, you can’t even buy stock in an American company or U.S. real estate, even through a trust. These funds were made offshore and must stay offshore unless Congress comes up with a tax holiday.Thus, the money has to be used for investment or acquisitions of foreign companies.Remember Skype? Microsoft was chided for overpaying by spending $8 Billion for the Skype. But, they had over $50 Billion at the time, burning a hole in their pocket – funds they needed to put to work. Given that, Skype looks like a pretty good acquisition. Look for a lot more international deals by American acquirers.
  • 2-way street.Buyer will have an extensive DD checklist, but you should do your own DD too. Ask for references. PE firm recently provided a list of every deal they’ve every done! Call these other buyers to see how things worked out?How to you do deals? How structure, how integrate, retention, layoffs – ask them early.ATTACHMATE story. Cort Directions story.
  • 2-way street.Buyer will have an extensive DD checklist, but you should do your own DD too. Ask for references. PE firm recently provided a list of every deal they’ve every done! Call these other buyers to see how things worked out?How to you do deals? How structure, how integrate, retention, layoffs – ask them early.ATTACHMATE story. Cort Directions story.
  • Keys to Successful M&A: Transparency, Security, and Process

    1. 1. Keys to Successful M&A: Transparency, Security and Process
    2. 2. About AppFolio SecureDocsAppFolio SecureDocs is a virtual data room for sharing andstoring sensitive documents both internally and withoutside parties.AppFolio, Inc. Company Basics:• Founded by the team that created and launched GoToMyPC and GoToMeeting• Backed by leading technology companies and investors• Web-based business software for financial and legal professionals
    3. 3. Nat Burgess, Corum Group Nat Burgess President Corum Group Ltd.Nat is a lawyer, investment banker and angel investor with over 20 years of experience in the technology sector.Prior to joining Corum, Nat worked for Morgan Stanley in New York and Tokyo, Activision in Los Angeles, and theSEC in Los Angeles.Nat has negotiated transactions with Microsoft, Intel, Google, Symantec, BMC, Fiserv, and many other leadingcompanies. Prior to joining Corum, Nat co-founded Postcard Software, an early Internet company. He has investedin several technology startups, including Cequint, SiteScout, MessageMind, PockitDoc, and Viziify.Nat is a frequent commentator on CNBC and MSNBC. He graduated from Yale College and the UCLA School of Law,and is a member of the Washington State Bar Association.
    4. 4. About Corum GroupM&A specialists since 1985. We only work with: Privately-held firms on the sell-side. Software and related tech companies.
    5. 5. About Corum Group Optimal Outcome process Team approach Largest tech M&A educator Largest databaseSold more software-related firms than anyone
    6. 6. Poll Question No. 1
    7. 7. Staying ahead of consolidation• AccountMate Software • Harper and Shuman • PeopleSoft• ACCPAC • Infor Global • Red Pepper• Activant • Infinium • PWA Group• Baan • Intentia • Ross Systems• Best Software • Invensys • Real World• Brain International • JD Edwards • SAGE Group• CDC Software • Lawson • SAP• Consona • Macola • SBT Accounting• Daamgard • Maxwell Business • Scala• Epicor Systems • Sesam• Exact • Microsoft • Softbrands• Geac • Myob Limited • Soloman• Great Plains • Navision • State of the Art• Halo Holdings • Oracle • PeachTree Software
    8. 8. US Exchanges
    9. 9. Aggregate Markets Q4:10 Q1:11 Q2:11 Q3:11 Q4:11 Q1:12 Q2:12 Q3:12 Q4:12EV/EBITDA 12.33x 12.34x 12.29x 9.44x 10.49x 10.95x 9.83x 10.43x 9.91xEV/S 2.44x 2.38x 2.27x 1.82x 1.77x 2.04x 1.76x 1.80x 1.78 x
    10. 10. Top Strategic Acquirers: 201218 16 16 15 15 14 12 12 11 11 10 10 10 10 10 9
    11. 11. Top Private Equity Acquirers: 201212 10 10 10 8 7 7 7 6 6 5 5 4 4
    12. 12. Excess Cash Driving M&A Cash Reserves Increase Held Offshore 2007 2012 Amount Percent Amount Percent $9 $121* $112* 1244%* $83* 68%* $6 $67* $61* 1017%* $58* 87%* $6 $32* $26* 433%* $25* 80%* $6 $45 $39 650% $20 44% $3 $46 $42 1050% $41 89% $9 $15 $6 67% $7 47% $4 $9 $5 125% $5 56%All estimates in US $Billions *As of Dec. 2012
    13. 13. 10 Reason M&A Will Remain Strong1. Extraordinary change – interrelated mega trends2. Strategic buyers have record cash3. Debt is at lowest cost ever4. Private equity - over $1 trillion available5. New public foreign buyers (e.g. China, India)
    14. 14. 10 Reason M&A Will Remain Strong6. Entrance of new non-tech buyers (e.g. Bosch)7. Crowdfunded buyers (Facebook, Zynga, Groupon)8. American companies are cheap to foreign investors9. Strong financial markets10. Software rising in importance (e.g. HP, IBM, Dell)
    15. 15. Poll Question No. 2
    16. 16. Manage:• Transparency• Security• Process
    17. 17. To Achieve:• Highest Value• Lowest Execution Risk• Minimal Post-Closing Liabilities
    18. 18. From Startup to Behemoth Valuation Premium PIONEER BUILDING ESTABLISHED Stages of Growth
    19. 19. TransparencyInformation
    20. 20. TransparencyPRELIMINARY DUE DILIGENCE CHECKLISTPlease populate the data room with the documents referred to below for Companyand each of its subsidiaries and predecessors. (Unless the context otherwiserequires, all references to the “Company” include Company and each of itssubsidiaries and predecessors.) Except where a list, schedule or description isrequested, please provide us with a copy of the requestedagreement, correspondence or other document. Please do archive all “privileged”documents separately; however, please indicate whether any “privileged”documents have been withheld.We would be happy to discuss with you the most effective and least burdensomeway in which you might respond to this request for documents. Thank you.Page 1 of 37
    21. 21. TransparencyTimingDetailed pipelineCustomer ReferencesCustomer ListSource Code SamplesCap Table (& Distributions)Intellectual PropertyCorporate DocumentsFinancialsLitigationWeek: 1 2 3 4 5 6 7 8
    22. 22. Transparency
    23. 23. TransparencyBEST PRACTICE: Detailed pipelineThe Data Room should be Customer Referencesupdated to “complete” at Customer List Source Code Samplesthe end of every quarter... Cap Table (& Distributions) Intellectual Property Corporate DocumentsFrom the inception of the Financials Litigationcompany
    24. 24. TransparencyIf you are prepared, you can be: • Crisp and professional • Completely transparent • In Control of the Schedule
    25. 25. TransparencyAnd avoid this
    26. 26. Transparency Or this
    27. 27. Fill the Gaps over Time1. Landlord Consent2. Missing Shareholder (Russia)3. Missing Shareholder (Iraq)4. Articles of Incorporation (Olympia)5. Work for hire (Bratislava)6. Environmental Indemnification (landfill)
    28. 28. Access from Anywhere1. Cab to the printer2. Airplane to Hong Kong3. Rental car to Fedex4. Secure FTP5. $ Virtual data room $6. SecureDocs
    29. 29. Transparency Revisited• Highest Value• Lowest Execution Risk• Minimal Post-Closing Liabilities
    30. 30. Poll Question No. 3
    31. 31. SecurityWhy the NDA doesn’t matter • Perceived as a formality • Seldom litigated • Can’t put the cat back in the bag
    32. 32. SecurityWhy the NDA does matter • IP protection for the benefit of the ultimate buyer • Sets the proper tone • Framework for negotiating precise terms of disclosure • Read the fine print • Non-enforcement of patent rights against company and successors • Assignment of ownership interests in patents • Commitment to provide all due diligence materials in French • 10 year term • Non-compete • Personal liability for signatories, including liquidated damages
    33. 33. SecurityStaged Qualification 1) Sector, Size, Customer Profile 2) Company, Products, Customers, Growth Rate 3) (NDA) Detailed financials, roadmap
    34. 34. Security Revisited• Highest Value• Lowest Execution Risk• Minimal Post-Closing Liabilities
    35. 35. Poll Question No. 4
    36. 36. Process DuePreparation Research Contact Discovery Negotiation Closing Integration Diligence
    37. 37. Stage 1: Preparation Set tasks, timeline Allocate staff resources Conduct internal due diligence Compile business/marketing plan Ready financials/projections Ready presentation materialsPreparaton Begin collecting due diligence materials DuePreparation Research Contact Discovery Negotiation Closing Integration Diligence
    38. 38. Stage 2: Research Prepare buyers list (A&B level, financial, non tech) Perform strategic analysis on each buyer Prepare preliminary valuation Determine proper contact (Execs, EA’s, advisors) Outside advisor/board/investor influencersPreparaton Prepare position statement for each buyer DuePreparation Research Contact Discovery Negotiation Closing Integration Diligence
    39. 39. Stage 3: Contact Create introductory correspondence Draft/customize executive summary Execute NDAs and non-solicitations Screen initial interest, valuation expectations Establish log on all communicationsPreparaton Refine position/process based on feedback DuePreparation Research Contact Discovery Negotiation Closing Integration Diligence
    40. 40. Stage 4: Discovery Coordinate conference calls, site visits, and meetings Establish technology review process Prepare formal valuation report Develop synergy and contribution analysis Set up NDA with customers, contractors, etc.Preparaton Finish due diligence on buyer DuePreparation Research Contact Discovery Negotiation Closing Integration Diligence
    41. 41. Stage 5: Negotiation Organize and host final visits Provide structure & valuation guidance Create an auction environment Negotiate with top bidder(s) Sign Letter of Intent (L.O.I.)Preparaton Inform other bidders of No Shop DuePreparation Research Contact Discovery Negotiation Closing Integration Diligence
    42. 42. Stage 6: Due Diligence Verification of financial statements/ projections Determine if outside advisors/opinions needed Establish confidential data room Technical/Legal/Ownership due diligence Written explanation of business model/methodologiesPreparaton Complete definitive agreement/ attachments DuePreparation Research Contact Discovery Negotiation Closing Integration Dilligence
    43. 43. Stage 7: Closing Final reps & warranties Determine escrow hold-backs Final opinion(s) Sign contracts Arrange payment/distribution Regulatory filingsPreparaton Disclosure Schedules DuePreparation Research Contact Discovery Negotiation Closing Integration Dilligence
    44. 44. Stage 8: Integration Advanced planning – during negotiation Determine synergies Best practices analysis Interim transition team Employee retention planPreparatonmonitoring/reporting Set up DuePreparation Research Contact Discovery Negotiation Dilligence Closing Integration
    45. 45. Qualifying the Buyer Top 10 Questions1. Why are you interested in my company?2. What acquisitions has your company done?3. What is your preferred deal structure?4. What is your approval process?5. Who is involved in the decision?
    46. 46. Qualifying the Buyer Top 10 Questions6. How do you see our company fitting into yours?7. What’s your integration process?8. Who are your outside advisors?9. How did your acquisitions work out?10. Can I talk to companies you have acquired?
    47. 47. Top 10 Deal Killers1. Dealing with only one buyer2. Misalignment: shareholders/empl/mgmt3. Contact at the wrong level4. Improper research of potential buyers5. Misunderstanding buyer process/models
    48. 48. Top 10 Deal Killers6. Inability to portray value properly7. Improper due diligence preparation8. Not qualifying buyers properly9. Not orchestrating all buyers properly10. Ego – Greed – Arrogance
    49. 49. Top 6 Value Destroyers1. Confidentiality—internal/external2. Theft of technology3. Loss of staff (non-solicitation)4. Wear on CEO/management5. Business drop-off—lack of focus6. Going to market too late
    50. 50. Contact UsAppFolio SecureDocs50 Castilian DriveGoleta, CA 93117Phone: (866) Group19805 North Creek Parkway Suite 300Bothell, WA 98011Phone: (425)
    51. 51. Thank You! Confidential ©2013 AppFolio, Inc.