Sellout or Build-Up? - IPOs, Mergers and Acquisitions

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  • 1. Sellout or Build Up?
    IPOs, Mergers and Acquisitions Daren ShawManaging Director, Investment BankingDecember 2, 2010
  • 2. Major Trends & Outlook
    The financial system is no longer on life support
    Companies have stronger, more conservative balance sheets and are once again looking at growth through acquisitions
    Valuations have stabilized, and most public companies are now trading in historical multiple ranges
    Earnings estimates and growth expectations are improving
    Private equity funds have record amounts of available capital
  • 3.
  • 4. Initial Public Offering Considerations
    Benefits
    Concerns
    • Pressure to maintain growth and meet or exceed quarterly expectations
    • 5. Time commitments (transaction related and on-going)
    • 6. Higher expenses due to Sarbanes-Oxley
    • 7. Loss of control
    • 8. Ownership dilution
    • 9. Financial focus competes with strategic focus
    • 10. Offering window may become more selective or closed before offering is completed
    • 11. Significant branding event
    • 12. Provides capital to fund revenue and earnings growth
    • 13. Creates liquidity opportunities for existing shareholders
    • 14. Provides stock-based currency for acquisitions
    • 15. Facilitates access to capital markets for future use
    • 16. Significantly strengthens the balance sheet
    • 17. Increases the Company’s reserves in the event the market or economy deteriorates
    • 18. Stock options represent powerful employee recruiting and retention tools
  • Initial Public Offering Market
    • The capital markets have been receptive to initial public offerings, as the number of transactions and dollar volume in 2010 is expected to exceed each of the previous two years
    • 19. During the Global Financial Crisis, the IPO market came to a near standstill as poor market conditions forced good companies to delay their offerings
    • 20. A large wave of offerings occurred in mid to late 2009, as companies quickly acted to capitalize on a stabilizing economy
    Initial Public Offerings Priced: 2007 – 2010 YTD
    Initial Public Offering Volume ($ in Millions)
    # of Initial Public Offerings
    # of Transactions
    Transaction Volume ($ in Millions)
    Source: Equidesk
    Note: Excludes the $19.6 billion IPO of Visa Inc. in March 2008
    Note: All data as of October 2010 month-end
  • 21. Initial Public Offering Market
    • Recent IPO pricing reflects a market that is still selective and cautious, with 48% of IPO’s in 2010 pricing below the target range
    • 22. IPO aftermarket performance has generally been solid, with 30-day returns consistent with historical averages
    IPO Pricing Performance: 2007 – 2010 YTD
    IPO Aftermarket Returns: 2007 – 2010 YTD
    Below the Range
    In the Range
    Above the Range
    30 Days Post Offering
    1 Day Post Offering
    Offer to Current Price
    Source: Equidesk
    Note: All data as of October 2010 month-end
  • 23. Initial Public Offering Profile
    IPOs Priced Between 2007 and 2010YTD
    • Markets are starting to open up again to smaller issuers
    Initial Public Offering Landscape 2007 2008 2009 2010YTD
    Number of IPOs 217 33 48 92
    Total Capital Raised $47.1 B $26.0 B $18.5 B $14.6 B
    Median Deal Size $109.2 M $125.5 M $175.2M $105.1M
    Median Market Capitalization $341.0 M $366.7 M $454.2 M $281.7M
    Number of IPOs Filed 366 112 117 202
    Deals Less Than $100 M in Deal Size 92 15 16 45
    Median LTM Revenue $97.8 M $79.6 M $224.1 M $112.9 M
    Median LTM EBITDA $12.3 M $15.5 M $45.3 M $15.7 M
    Note: All data as of October 2010 month-end
    Only includes initial public offerings of U.S.-based companies of major U.S. exchanges. Does not include bank demutualizations.
    Transaction profiles exclude the information provided by SPACs
    Source: Equidesk & CapitalIQ
  • 24. Initial Public Offering Backlog
    • IPO backlog experienced a steady and marked improvement from June 2009 to October 2010 before falling slightly in November
    • 25. Since June 2009, the backlog has improved by more than 11 times in both number of offerings and deal volume
    • 26. IPO backlog currently stands at 111 offerings slated to raise $26.6 billion
    Initial Public Offering Backlog: 2009 – 2010 YTD
    Source: Equidesk
  • 27.
  • 28. Middle Market M&A Activity
    Middle Market M&A Transactions, Q4 2007 – Q3 2010
    Middle Market Transaction Volume
    Middle Market Valuation Multiples
    • Transaction volume and deal totals are on the upswing
    • 29. After a steady decline in valuations since Q4 2007, middle market M&A multiples have demonstrated six consecutive quarters of multiple expansion, reaching 7.8x TEV/EBITDA in Q3 2010
    Note: Middle-market defined as transactions between $10 and $500 million
  • 30. Acquisition Financing
    Balance Sheet Financing
    • More equity, more seller rollover and notes, and less senior debt
    The Old Structure, 2008
    The New Structure
    30-40% Equity
    40-50% Equity
    35-50% Bank Debt
    15-20% Highly levered debt
    25-35% Bank Debt
    15-20% Highly levered debt
    0-20% Seller Paper
  • 31. Potential Setbacks
    Contributing Factors
    Slow Growth
    (Commercial real estate; weak consumer; unemployment)
    Counter-productive Monetary Policy (Inflation; unstable dollar)
    Government Regulation (Government intervention in the economy; tax policy)
    Protectionism (Tariffs; import restrictions)
    International Crisis
    (Financial instability; terrorist attacks)
    Financial results continue to improve
    1
    +
    Better lending environment
    2
    +
    Improved economic environment
    3
    +
    Pent-up demand: Huge amount of capital waiting to be deployed
    4
    =
    INCREASED DEAL ACTIVITY
    What is Driving an M&A Rebound?
  • 32. What Can Sellers Do to Respond to Current Environment
    Adjust Expectations – Don't start a process if you aren't prepared to trade at a realistic price
    Prepare - Avoiding surprises is always critical, but never more so than now. Have advisors, diligence, and dataroom all teed up in advance
    Perform - Don't give the buyer a reason to retrade (like missing numbers)
    Be Flexible – Be open minded when it comes to structure; the financing market is still challenging, and a seller note may be a necessary in some cases
    Execute - Once you have a deal, get it closed asap and don't do anything to slow momentum
    Be Strong - In this market, a well-run process in critical – positioning, timing, and execution
    TIME = RISK
  • 33. Daren Shaw – Managing Director
    Daren Shaw is a Managing Director for D.A. Davidson & Co. D.A. Davidson is a full-service investment banking firm with approximately 1,000 employees, $25 billion of capital under management and operations throughout the U.S. Mr. Shaw has served on D.A. Davidson’s Senior Management Committee and Board of Directors, and previously served as the Head of Investment Banking at D.A. Davidson. He has served as the lead investment banker in a wide variety of transactions including public stock offerings, private placements, and mergers and acquisitions. Prior to joining D.A. Davidson, Mr. Shaw was a Managing Director at Pacific Crest Securities, a regional investment banking firm headquartered in Portland, Oregon. Mr. Shaw is a former member of the NASD’s business conduct committee for the Western region. Previously, Mr. Shaw was a manager in the private business advisory group at KPMG, where he performed audit services and corporate advisory work. Mr. Shaw graduated with a B.A. from Utah State University.
    Contact: (801) 333-3123
    dshaw@dadco.com