JULY 19, 2011 – LOS ANGELES<br />
Opening Remarks<br />Today’s Workshop Format<br />Introducing our Distinguished Panelists:<br />AGENDA<br />JULY 19, 2011 ...
OUR PANEL<br />JULY 19, 2011 – LOS ANGELES<br />Jim Pitrat, SingerLewak LLP<br />Jim Pitrat leads SingerLewak’s Assurance ...
OUR PANEL<br />JULY 19, 2011 – LOS ANGELES<br />Lawrence M. Braun, Sheppard Mullin<br />Larry Braun is the former Co-Chair...
OUR PANEL<br />JULY 19, 2011 – LOS ANGELES<br />Kathy Griggs, J2 Global Communications<br />Kathy oversees all financial a...
OUR PANEL<br />
RISKS<br />JIM PITRAT, SINGERLEWAK<br />
RISKS<br />JIM PITRAT, SINGERLEWAK<br />SINGERLEWAK’S <br />ESSENTIAL RISKS FOR THE CFO<br />IN THE MID-MARKET<br />2011<b...
RISKS<br />JIM PITRAT, SINGERLEWAK<br />KEY SURVEY RESULTS<br />	FORMULATING OUR “ESSENTIAL RISKS” WE REVIEW 2 KEY SURVEYS...
FEI CEO’s Top Challenges Survey</li></ul>       <br />
RISKS<br />JIM PITRAT, SINGERLEWAK<br />CFOs: OUTLOOK ROSIER -SOME SECTORS HIRING, BUT INFLATION A WORRY<br /><ul><li>OPTI...
CFOs EXPECT EARNINGS GROWTH IN 2011
Earnings growth expected to jump 18% --compared to 9% in Asia and 10% in Europe
Capital expenditures expected to jump 12% in 2011
R&D expenditures expected to grow by 4%
Over half the companies in the survey expect to build more </li></ul>   cash on their balance sheets<br />       <br />
RISKS<br />JIM PITRAT, SINGERLEWAK<br />CFOs: OUTLOOK ROSIER - SOME SECTORS HIRING, BUT INFLATION A WORRY (cont’d)<br /><u...
Some industries identify need for skilled workers (engineering, product development, finance and accounting and sales)
CFOs ARE CONCERNED ABOUT INFLATION
A 4% inflation would cut earnings growth in half
High concern about fuel and commodities
39% OF CFOs FIND BORROWING CONDITIONS HAVE IMPROVED
However for companies <100MM, still say credit is tight
39% OF COMPANIES EXPECT TO ACQUIRE ANOTHER </li></ul>     COMPANY IN 2011<br />       <br />
RISKS<br />JIM PITRAT, SINGERLEWAK<br />CEOs 2011 TOP CHALLENGES FOR <br />FINANCIAL EXECUTIVES<br />ECONOMIC RECOVERY AND...
RISKS<br />JIM PITRAT, SINGERLEWAK<br />SL’s “CFO ESSENTIAL RISKS” FOR 2011<br />We have identified the following 5 ESSENT...
RISKS<br />JIM PITRAT, SINGERLEWAK<br />SL’s “CFO ESSENTIAL RISKS” FOR 2011<br />(cont’d)<br />We have identified the foll...
RISKS<br />JIM PITRAT, SINGERLEWAK<br />COMPANIES SHOULD DEVELOP<br />AN EFFECTIVE RISK MANAGEMENT PROCESS<br />PLACE RISK...
CASH FLOW<br />BRAD NII, B. RILEY<br />
CASH FLOW<br />BRAD NII, B. RILEY<br />CAPITAL MARKET INFLUENCES<br /><ul><li>GLOBAL INFLUENCES
Sovereign debt situation has led to uncertainty in the market for much of the past quarter. Recent resolutions have caused...
Asia is in a state of disarray with Japan slowly recovering from its catastrophic earthquake and China’s inflation rate at...
DOMESTIC INFLUENCES
Consumer spending in May was at its weakest pace in 20 months
Lower energy prices in recent weeks, from highs experienced in April-May, have played a role in market recovery over past ...
Housing Prices on the decline as the supply continues to outpace demand for houses both new and existing
Unemployment rose 0.1% to 9.2% in June, which is the highest level since December of 2010
Federal Reserve impact</li></li></ul><li>CASH FLOW<br />BRAD NII, B. RILEY<br />SOURCES OF CAPITAL FOR <br />MIDDLE MARKET...
IPO and Follow-On Equity Offerings are more prevalent in 2011 vs. 2010 with a volume increase of 177.4% and 67.8% respecti...
Technology and Energy have represented 42 of the 78 IPO’s in 2011
ASSET BASED LENDERS
Becoming the preferred debt instrument
Highly flexible
TRADITIONAL DEBT
Commercial lenders, SBICs, BDCs and Mezzanine Funds have become active capital providers
PRIVATE EQUITY
Private equity coffers are ready to be deployed</li></li></ul><li>CASH FLOW<br />BRAD NII, B. RILEY<br />STOCK PRICE INDEX...
CASH FLOW<br />BRAD NII, B. RILEY<br />INITIAL PUBLIC OFFERINGS<br />Source: Renaissance Capital<br />
CASH FLOW<br />BRAD NII, B. RILEY<br />FOLLOW – ON OFFERINGS<br />Source: Capital IQ<br /><ul><li>52 Registered Direct Off...
CONSISTENT FINANCIAL RESULTS
TOP LINE GROWTH
STRONG OPERATING MARGIN AND FREE CASH FLOW
BARRIERS TO ENTRY
COMPETITIVE ADVANTAGE
REPUTABLE AUDITOR
SOX COMPLIANCE
MEET OR EXCEED YOUR PROJECTIONS! </li></li></ul><li>CASH FLOW<br />BRAD NII, B. RILEY<br />KRATOS CASE STUDY – TWO YEARS<b...
CASH FLOW<br />BRAD NII, B. RILEY<br />DEBT MARKET<br /><ul><li>COMMERCIAL LENDERS ARE BECOMING MORE AGGRESSIVE
Banks have spent the last couple of years bolstering their capital ratios and </li></ul>   are now seeking to diversify th...
 Flexible capital but prefer predominantly cash pay
SBIC’S ARE HIGHLY ACTIVE IN THE LOWER MIDDLE MARKET
 Very low cost of capital
 Abilities to compete with commercial lenders for smaller deals
MEZZANINE CAPITAL IN EXCESS SUPPLY
 Reticent to over-leverage; competing on coupon pricing</li></li></ul><li>CASH FLOW<br />BRAD NII, B. RILEY<br />DEBT MARK...
Companies that faired well during the recession with strong cash flows are</li></ul>  commanding better pricing and higher...
CASH FLOW<br />BRAD NII, B. RILEY<br />M&A MARKET<br />DRIVERS OF M&A MARKET ACTIVITY<br /><ul><li>   Private Equity
   Pressure on strategics to grow in a stagnant economy</li></ul>Source: Capital IQ<br />
M&A<br />LARRY BRAUN, SHEPPARD MULLIN<br />
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Transcript of "CFO Essentials Workshop - Los Angeles"

  1. 1. JULY 19, 2011 – LOS ANGELES<br />
  2. 2. Opening Remarks<br />Today’s Workshop Format<br />Introducing our Distinguished Panelists:<br />AGENDA<br />JULY 19, 2011 – LOS ANGELES<br />The CFO Essentials SingerLewak’s POV<br />TM<br />Gale Moore, CPA - SingerLewak LLP<br />Kathy Griggs – J2 Global Communications<br />Lawrence M. Braun - Sheppard Mullin<br />Bradley Nii - B. Riley<br />Jim Pitrat, CPA - SingerLewak LLP<br />
  3. 3. OUR PANEL<br />JULY 19, 2011 – LOS ANGELES<br />Jim Pitrat, SingerLewak LLP<br />Jim Pitrat leads SingerLewak’s Assurance & Advisory practice where he oversees firm-wide assurance & advisory initiatives. Jim has experience with both private and publicly traded companies and has also advised on cost management, internal controls, corporate restructurings, and mergers and acquisitions. Jim has client service responsibilities in the business sectors of investor-backed private companies and public companies. Jim received his Bachelor of Science degree in Business Administration from the University of Arizona in 1993 and his Master’s of Business Administration in 1997. Jim is a member of AICPA, the Los Angeles Venture Association, the Software Council of Southern California and the Association for Capital Growth. Jim has been a guest instructor at California Institute of Technology’s Entrepreneur Program, the University of Arizona Small Business Incubator Program, and USC’s EC2 Incubator Program. He has also spoken on panels for Technology Council of Southern California and the California Society of CPAs. Jim has written for Los Angeles Business Journal, American Venture Magazine, and Zone Magazine.<br />Brad Nii, B. Riley<br />Bradley Nii joined B Riley & Co. in 2010 as a Managing Director in the Firm’s Investment Banking Group.  Prior to B Riley, Mr. Nii was Head of the West Coast Sponsor Finance Group at American Capital where he managed a team of investment professionals and a portfolio of mezzanine and minority equity investments.  Prior to American Capital, Mr. Nii was a Senior Vice President in the Investment Banking Group at Lehman Brothers, where he was involved in a number of transactions and financings totaling over $100 billion in value in a variety of industry sectors.Prior to joining Lehman Brothers, Mr. Nii was a certified public accountant with Ernst & Young for nine years.<br />
  4. 4. OUR PANEL<br />JULY 19, 2011 – LOS ANGELES<br />Lawrence M. Braun, Sheppard Mullin<br />Larry Braun is the former Co-Chairman of the firm’s Corporate Practice Group.  In addition to his law degree, Mr. Braun holds an M.B.A. in Finance from the Kellogg School at Northwestern University and has attained the New Jersey C.P.A. Certificate Requirements.  Mr. Braun was previously a managing director of the largest private investment banking firm on the west coast. Mr. Braun is resident in the firm’s Los Angeles office where he represents public and private companies in the areas of mergers and acquisitions, corporate finance, securities and general business.Mr. Braun is an advisor to clients ranging from family-owned businesses to multi-national corporations in many diverse industries such as high-tech and computers, health care, consumer goods, aerospace and defense, and grocery and food service.  His principal areas of practice are general corporate law, corporate finance and securities law, mergers and acquisition transactions, contractual matters (including licensing and distribution arrangements), healthcare transactions and general business counseling.<br />Gale Moore, SingerLewak LLP<br />Gale Moore is a partner in SingerLewak’s Orange County Assurance & Advisory practice. Gale has more than 20 years of experience specializing in public and real estate-based companies, including Real Estate Investment Trust reporting and compliance. Her background includes assisting companies with capital market transactions, IPOs, and participating on SOX readiness teams in reviewing control documentation, remediation plans, and testing approaches. She was formerly a director with Deloitte & Touche LLP and has experience as a corporate controller, a position that gave her valuable insight into the internal control process.<br />
  5. 5. OUR PANEL<br />JULY 19, 2011 – LOS ANGELES<br />Kathy Griggs, J2 Global Communications<br />Kathy oversees all financial accounting and analysis and treasury functions of j2 Global. She joined the company in June 2007, bringing with her over 25 years of experience with public and private technology companies. Prior to joining j2 Global, Kathy had a consulting practice and prior to that, served as Chief Financial Officer of SonicWall, Inc., a publicly held Internet security system manufacturer, as Chief Financial Officer of QAD Inc, an enterprise resource planning software company, and CFO with Borland Software Corporation and Softbank Content Services. She has an MBA from the University of Southern California.<br />
  6. 6. OUR PANEL<br />
  7. 7. RISKS<br />JIM PITRAT, SINGERLEWAK<br />
  8. 8. RISKS<br />JIM PITRAT, SINGERLEWAK<br />SINGERLEWAK’S <br />ESSENTIAL RISKS FOR THE CFO<br />IN THE MID-MARKET<br />2011<br />
  9. 9. RISKS<br />JIM PITRAT, SINGERLEWAK<br />KEY SURVEY RESULTS<br /> FORMULATING OUR “ESSENTIAL RISKS” WE REVIEW 2 KEY SURVEYS ALONG WITH REVIEWING OUR CLIENT CONCERNS<br /><ul><li>March 2011-Duke University / CFO Magazine 2011-Business Outlook Survey
  10. 10. FEI CEO’s Top Challenges Survey</li></ul>       <br />
  11. 11. RISKS<br />JIM PITRAT, SINGERLEWAK<br />CFOs: OUTLOOK ROSIER -SOME SECTORS HIRING, BUT INFLATION A WORRY<br /><ul><li>OPTIMISM AMONG CFO’S IS - HIGHEST SINCE 2007
  12. 12. CFOs EXPECT EARNINGS GROWTH IN 2011
  13. 13. Earnings growth expected to jump 18% --compared to 9% in Asia and 10% in Europe
  14. 14. Capital expenditures expected to jump 12% in 2011
  15. 15. R&D expenditures expected to grow by 4%
  16. 16. Over half the companies in the survey expect to build more </li></ul> cash on their balance sheets<br />       <br />
  17. 17. RISKS<br />JIM PITRAT, SINGERLEWAK<br />CFOs: OUTLOOK ROSIER - SOME SECTORS HIRING, BUT INFLATION A WORRY (cont’d)<br /><ul><li>CFOs EXPECT ONLY MODEST EMPLOYMENT GROWTH (1.2%)
  18. 18. Some industries identify need for skilled workers (engineering, product development, finance and accounting and sales)
  19. 19. CFOs ARE CONCERNED ABOUT INFLATION
  20. 20. A 4% inflation would cut earnings growth in half
  21. 21. High concern about fuel and commodities
  22. 22. 39% OF CFOs FIND BORROWING CONDITIONS HAVE IMPROVED
  23. 23. However for companies <100MM, still say credit is tight
  24. 24. 39% OF COMPANIES EXPECT TO ACQUIRE ANOTHER </li></ul> COMPANY IN 2011<br />       <br />
  25. 25. RISKS<br />JIM PITRAT, SINGERLEWAK<br />CEOs 2011 TOP CHALLENGES FOR <br />FINANCIAL EXECUTIVES<br />ECONOMIC RECOVERY AND THE US FISCAL OUTLOOK<br />HEALTH CARE LAW<br />FINANCIAL REGULATORY REFORM<br />GLOBAL CONVERGENCE OF US GAAP AND IFRS<br />PRIVATE COMPANY ACCOUNTING SYSTEM REFORM<br />UNCERTAIN TAX POSITIONS<br />BUSINESS TAXATION<br />PENDING INTERNATIONAL BUSINESS ISSUES<br />CLIMATE CHANGE<br />       <br />
  26. 26. RISKS<br />JIM PITRAT, SINGERLEWAK<br />SL’s “CFO ESSENTIAL RISKS” FOR 2011<br />We have identified the following 5 ESSENTIAL RISKS FOR CFOsin the Mid-Market<br />       <br />
  27. 27. RISKS<br />JIM PITRAT, SINGERLEWAK<br />SL’s “CFO ESSENTIAL RISKS” FOR 2011<br />(cont’d)<br />We have identified the following 5 ESSENTIAL RISKS FOR CFOsin the Mid-Market<br />       <br />
  28. 28. RISKS<br />JIM PITRAT, SINGERLEWAK<br />COMPANIES SHOULD DEVELOP<br />AN EFFECTIVE RISK MANAGEMENT PROCESS<br />PLACE RISK MANAGEMENT IMPORTANCE AT BOARD LEVEL<br />IDENTIFIES THE TOTALITY OF RISKS THE ORGANIZATION (NOT JUST FINANCIAL RISKS)<br />ANALYZES AND MEASURES THE SIGNIFICANCE OF EACH RISK<br />EVALUATES THE POTENTIAL COSTS OF THE AVAILABLE RISK RESPONSE STRATEGIES.<br />DETERMINES WHETHER RISKS ARE BEING OVER OR UNDER MANAGED AND PROVIDES FOR THE IDENTIFICATION OF SOLUTIONS<br />       <br />
  29. 29. CASH FLOW<br />BRAD NII, B. RILEY<br />
  30. 30. CASH FLOW<br />BRAD NII, B. RILEY<br />CAPITAL MARKET INFLUENCES<br /><ul><li>GLOBAL INFLUENCES
  31. 31. Sovereign debt situation has led to uncertainty in the market for much of the past quarter. Recent resolutions have caused market to regain some confidence
  32. 32. Asia is in a state of disarray with Japan slowly recovering from its catastrophic earthquake and China’s inflation rate at a 3-year high, reaching 6.4% in June according to the CPI index, offset by a strong second quarter GDP growth rate of 9.5%.
  33. 33. DOMESTIC INFLUENCES
  34. 34. Consumer spending in May was at its weakest pace in 20 months
  35. 35. Lower energy prices in recent weeks, from highs experienced in April-May, have played a role in market recovery over past month
  36. 36. Housing Prices on the decline as the supply continues to outpace demand for houses both new and existing
  37. 37. Unemployment rose 0.1% to 9.2% in June, which is the highest level since December of 2010
  38. 38. Federal Reserve impact</li></li></ul><li>CASH FLOW<br />BRAD NII, B. RILEY<br />SOURCES OF CAPITAL FOR <br />MIDDLE MARKET COMPANIES<br /><ul><li>EQUITY MARKETS
  39. 39. IPO and Follow-On Equity Offerings are more prevalent in 2011 vs. 2010 with a volume increase of 177.4% and 67.8% respectively
  40. 40. Technology and Energy have represented 42 of the 78 IPO’s in 2011
  41. 41. ASSET BASED LENDERS
  42. 42. Becoming the preferred debt instrument
  43. 43. Highly flexible
  44. 44. TRADITIONAL DEBT
  45. 45. Commercial lenders, SBICs, BDCs and Mezzanine Funds have become active capital providers
  46. 46. PRIVATE EQUITY
  47. 47. Private equity coffers are ready to be deployed</li></li></ul><li>CASH FLOW<br />BRAD NII, B. RILEY<br />STOCK PRICE INDEX YTD<br />
  48. 48. CASH FLOW<br />BRAD NII, B. RILEY<br />INITIAL PUBLIC OFFERINGS<br />Source: Renaissance Capital<br />
  49. 49. CASH FLOW<br />BRAD NII, B. RILEY<br />FOLLOW – ON OFFERINGS<br />Source: Capital IQ<br /><ul><li>52 Registered Direct Offerings in 1H 2011 totaling $686 Million in value</li></li></ul><li>CASH FLOW<br />BRAD NII, B. RILEY<br />KEYS TO SUCCESSFUL CAPITAL RAISES<br /><ul><li>HAVE A “CLEAN” STORY
  50. 50. CONSISTENT FINANCIAL RESULTS
  51. 51. TOP LINE GROWTH
  52. 52. STRONG OPERATING MARGIN AND FREE CASH FLOW
  53. 53. BARRIERS TO ENTRY
  54. 54. COMPETITIVE ADVANTAGE
  55. 55. REPUTABLE AUDITOR
  56. 56. SOX COMPLIANCE
  57. 57. MEET OR EXCEED YOUR PROJECTIONS! </li></li></ul><li>CASH FLOW<br />BRAD NII, B. RILEY<br />KRATOS CASE STUDY – TWO YEARS<br />$21.3 million acquisition of DEI Services Corp.<br />$18.72 million Registered Direct<br />$250 million private placement<br />$130 million Acquisition of Gichner Systems Group<br />KTOS 2 year CAGR = 30%<br />S&P 500 2 Year CAGR = 20%<br />
  58. 58. CASH FLOW<br />BRAD NII, B. RILEY<br />DEBT MARKET<br /><ul><li>COMMERCIAL LENDERS ARE BECOMING MORE AGGRESSIVE
  59. 59. Banks have spent the last couple of years bolstering their capital ratios and </li></ul> are now seeking to diversify their loan book and deploy capital<br /><ul><li>BDC’S HAVE RETURNED AS A VIABLE ALTERNATIVE
  60. 60. Flexible capital but prefer predominantly cash pay
  61. 61. SBIC’S ARE HIGHLY ACTIVE IN THE LOWER MIDDLE MARKET
  62. 62. Very low cost of capital
  63. 63. Abilities to compete with commercial lenders for smaller deals
  64. 64. MEZZANINE CAPITAL IN EXCESS SUPPLY
  65. 65. Reticent to over-leverage; competing on coupon pricing</li></li></ul><li>CASH FLOW<br />BRAD NII, B. RILEY<br />DEBT MARKETS (cont’d)<br /><ul><li> LARGE PRICING GAPS BETWEEN AVERAGE AND SOLID CREDITS
  66. 66. Companies that faired well during the recession with strong cash flows are</li></ul> commanding better pricing and higher leverage multiples<br />
  67. 67. CASH FLOW<br />BRAD NII, B. RILEY<br />M&A MARKET<br />DRIVERS OF M&A MARKET ACTIVITY<br /><ul><li> Private Equity
  68. 68. Pressure on strategics to grow in a stagnant economy</li></ul>Source: Capital IQ<br />
  69. 69. M&A<br />LARRY BRAUN, SHEPPARD MULLIN<br />
  70. 70. M&A<br />LARRY BRAUN, SHEPPARD MULLIN<br />ARE DEALS GETTING DONE?<br />
  71. 71. STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />MARKET IS ACTIVE<br />STRONG BUSINESSES COMMAND INTEREST & HIGH MULTIPLES<br /><ul><li>Very competitive
  72. 72. Valuation Multiples
  73. 73. Valuation multiples in the U.S. middle market have recovered from the levels experienced in 2009, when valuations reached their lowest levels since 2001 and 2002.
  74. 74. Multiples were supported by increased confidence among M&A participants amid the slow economic recovery as well as somewhat greater access to debt financing. </li></li></ul><li>STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />U.S. MIDDLE MARKET ENTERPRISE VALUE TO MEDIAN EBITDA AND REVENUE MULTIPLES<br />Source: Dealogic and Robert W. Baird & Co. Incorporated M&A Market Analysis. LTM as of March 31.<br />
  75. 75. STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />MARKET IS ACTIVE(cont’d)<br />DISTRESSED MARKET CONTINUES TO BE ACTIVE<br />STRATEGICS: BUYING<br /><ul><li>Market share/growth
  76. 76. Technology
  77. 77. Taking advantage of low prices
  78. 78. Enjoying the lack of PEGs</li></li></ul><li>STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />MARKET IS ACTIVE(cont’d)<br />CROSS BORDER TRANSACTIONS<br />PEGS ARE PLAYING CATCH-UP<br /><ul><li>Selling poor performing portfolio companies
  79. 79. Selling “old” portfolio companies
  80. 80. Back in the market
  81. 81. Lots of dry powder
  82. 82. Lenders support quality credits</li></ul>SELLERS<br /><ul><li>Tired
  83. 83. Taking advantage of low cap gains rates</li></li></ul><li>STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />MARKET IS ACTIVE(cont’d)<br />FINANCING BECOMING AVAILABLE<br />COST OF CAPITAL AT RECORD LOWS<br />
  84. 84. STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />MARKET IS ACTIVE(cont’d)<br />DEBT MULTIPLES SLOWLY RETURN<br />AVERAGE DEBT MULTIPLES OF MIDDLE MARKET LBO LOANS<br />Source: Dealogic and Robert W. Baird & Co. Incorporated M&A Market Analysis.<br />
  85. 85. STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />MARKET IS ACTIVE(cont’d)<br />CAPITAL – EXPECTED RETURNS<br />
  86. 86. STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />U.S. MIDDLE MARKET M&A ACTIVITY<br />Source: Dealogic and Robert W. Baird & Co. Incorporated M&A Market Analysis.<br />
  87. 87. STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />ACTIVITY<br /><ul><li>Overall U.S. M&A activity rebounded in 2010
  88. 88. Total Transactions 37%
  89. 89. Deal Value 29%
  90. 90. As of March 31, 2011
  91. 91. Total deal volume reached $333 Billion vs. $220 billion as of March 31, 2010
  92. 92. Continues to be impacted by muted economic growth</li></li></ul><li>STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br /> LOOKING FORWARD<br /> M&A activity will be very strong in Q4 2011 and all of 2012, as <br /> sellers seek to lock in current tax rates [subject to overall economy]<br /> For many sellers, 2012 will be a better time as their businesses will <br /> distance themselves from 2008/2009 results<br />
  93. 93. STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />LOOKING FORWARD (Cont’d)<br /><ul><li>With the cost of capital at record lows, strategic buyers with strong, liquid balance sheets will continue to pursue synergistic targets
  94. 94. Acquisitions will increasingly be viewed as a reliable way to capture market share and reduce expenses in this slow growth environment
  95. 95. Both private equity sponsors and strategic buyers will keep valuations for quality companies at elevated levels, as IRR expectations decline and debt markets continue to improve</li></li></ul><li>STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />EQUITY USED IN LEVERAGED BUYOUTS<br />
  96. 96. STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />STRATEGIC ACQUIRORS HAVE BEEN ACTIVELY PURSING TRANSACTIONS WITH SOUND STRATEGIC RATIONALES.<br />The higher cost of capital and more difficult financing environment for leveraged buyouts should translate into greater opportunity for strategic acquirors to prevail in M&A processes.<br />U.S. MIDDLE MARKET TRANSACTION COMPOSITION – <br />STRATEGIC VS. SPONSOR DEAL VALUE<br />
  97. 97. STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />SUMMARY OF THE M&A MARKET<br /><ul><li>INCREASED ACTIVITY
  98. 98. STRATEGIC BUYERS
  99. 99. INTERNATIONAL BUYERS
  100. 100. PEGS
  101. 101. TROUBLED DEALS
  102. 102. SELLER PARTICIPATION
  103. 103. ESOPS</li></li></ul><li>STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />AREAS OF FOCUS<br /><ul><li>STRONG COMPANIES
  104. 104. HEALTHCARE
  105. 105. AEROSPACE AND DEFENSE
  106. 106. TECHNOLOGY
  107. 107. E-COMMERCE</li></li></ul><li>STATE OF THE <br />M&A MARKET<br />LARRY BRAUN, SHEPPARD MULLIN<br />PUBLIC MARKETS IMPACT M&A MARKET<br />INITIAL PUBLIC OFFERINGS AND PROCEEDS<br />Source: Renaissance Capital.com. YTD as of July.<br />Note: Reflects deals with gross proceeds of over $100 million.<br />
  108. 108. M&A<br />LARRY BRAUN, SHEPPARD MULLIN<br />WHAT SHOULD YOU DO?<br />
  109. 109. M&A<br />LARRY BRAUN, SHEPPARD MULLIN<br />PREPARE, PREPARE, PREPARE<br /><ul><li>Consider acquisitions of product lines, technology or businesses that strengthen your business
  110. 110. “Diligence Yourself”
  111. 111. Be honest
  112. 112. Credibility is key
  113. 113. Common issues
  114. 114. IP ownership
  115. 115. Employee issues
  116. 116. Audit issues
  117. 117. Motivate Management
  118. 118. Consider a myriad of tax deferral techniques
  119. 119. Confidentiality</li></li></ul><li>FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />
  120. 120. FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />FINANCIAL ACCOUNTING AND<br /> REPORTING UPDATE<br />EFFECTIVE IN 2011<br />STILL HOT IN 2011<br />PROMISED IN 2011<br />       <br />
  121. 121. FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />EFFECTIVE IN 2011<br />GOODWILL IMPAIRMENT TEST<br /><ul><li>Guidance Related to Step 2 Analysis
  122. 122. Public Years Beginning After 12/15/10
  123. 123. Private Years Beginning After 12/15/11</li></ul>       <br />
  124. 124. FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />EFFECTIVE IN 2011<br />PUBLIC COMPANY BUSINESS COMBINATIONS<br /><ul><li>Supplementary Pro Forma Information</li></ul>       <br />
  125. 125. FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />EFFECTIVE IN 2011<br />FAIR VALUE MEASUREMENTS<br /><ul><li>Clarification on Level 3 Disclosures</li></ul>       <br />
  126. 126. FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />EFFECTIVE IN 2011<br />CERTAIN REVENUE ARRANGEMENTS THAT INCLUDE SOFTWARE ELEMENTS<br />MULTIPLE-DELIVERABLE REVENUE ARRANGEMENTS<br />       <br />
  127. 127. FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />STILL HOT IN 2011<br />REVENUE RECOGNITION<br /><ul><li>Multiple Element Arrangements (VSOE, TPE, ESP)
  128. 128. Disclosure Related to Judgments
  129. 129. Compliance with ASU 2009-13</li></li></ul><li>FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />STILL HOT IN 2011<br />GOODWILL IMPAIRMENT<br /><ul><li>Disclosures (key assumptions)
  130. 130. Skepticism Directed at Impairment Analysis
  131. 131. MD & A Discussion</li></li></ul><li>FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />STILL HOT IN 2011<br />FAIR VALUE MEASUREMENTS<br /><ul><li>Method and Assumptions Questioned
  132. 132. Disclosures</li></li></ul><li>FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />STILL HOT IN 2011<br />CONTINGENCY DISCLOSURES<br /><ul><li>Discussion Not Robust (reasonably possible range)
  133. 133. Same Disclosure for Multiple Years
  134. 134. Settlement in Same Period of Initial Disclosure</li></li></ul><li>FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />STILL HOT IN 2011<br />BUSINESS COMBINATIONS<br /><ul><li>Contingencies
  135. 135. Minority Interest
  136. 136. Acquired Business Audited Financial Statements
  137. 137. Pro-Forma Disclosures</li></li></ul><li>FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />PROMISED IN 2011<br />JOINT PROJECTS<br /><ul><li>Financial Instruments
  138. 138. Balance Sheet Offsetting
  139. 139. Revenue Recognition</li></li></ul><li>FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />PROMISED IN 2011<br /><ul><li>Leases
  140. 140. Fair Value Measurement
  141. 141. Statement of Comprehensive Income</li></li></ul><li>FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />PROMISED IN 2011<br /><ul><li>IASB – Insurance contracts
  142. 142. FASB Consolidation
  143. 143. IASB Consolidation</li></li></ul><li>FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />PROMISED IN 2011<br /><ul><li>Consolidation – Investment companies
  144. 144. Investment Properties
  145. 145. IASB – Postemployment benefits</li></li></ul><li>FINANCIAL AUDIT<br />GALE MOORE, SINGERLEWAK<br />PROMISED IN 2011<br /><ul><li>Discontinued Operations
  146. 146. ***Loss Contingencies</li></li></ul><li>KATHY GRIGGS, <br />J2 GLOBAL COMMUNICATIONS<br />
  147. 147. THE HORIZON<br />KATHY GRIGGS, <br />J2 GLOBAL COMMUNICATIONS<br />ABOUT J2 GLOBAL<br /><ul><li>Founded in 1995, j2 Global™ Communications provides outsourced, value-added messaging and communications services to individuals and businesses around the world.
  148. 148. Offices in eight cities worldwide, j2 Global™ network spans more than 4,300 cities in 49 countries on six continents.
  149. 149. j2 Global™ markets its services principally under the brands, eFax®, MyFax®, eFax Corporate™, FuseMail®, Onebox®, eVoice®, Campaigner®, Electric Mail®, and KeepItSafe®.
  150. 150. As of December 2010, j2 Global™ had achieved 15 consecutive fiscal years of revenue growth.</li></li></ul><li>THE HORIZON<br />KATHY GRIGGS, <br />J2 GLOBAL COMMUNICATIONS<br />ACCOUNTING & TAX CHANGES<br /><ul><li>LEASES
  151. 151. Leases recognized on the balance sheet
  152. 152. No grandfathering – will apply to all outstanding leases
  153. 153. Record all promised payments as a liability with an offsetting right to use asset
  154. 154. IMPLICATIONS
  155. 155. Buy versus Lease of an asset
  156. 156. Impact on financial ratios and related debt covenants
  157. 157. Educating users of financial statements
  158. 158. TREATMENT
  159. 159. Right of use asset = PV of lease payments plus initial direct costs incurred then amortized
  160. 160. Obligation to pay rent liability = PV of lease payments and subsequent front end loading of expense</li></li></ul><li>THE HORIZON<br />KATHY GRIGGS, <br />J2 GLOBAL COMMUNICATIONS<br />ACCOUNTING & TAX CHANGES<br /><ul><li>SALES TAXES - NEXUS
  161. 161. Physical location in a state
  162. 162. Employees in a state
  163. 163. Property in the state
  164. 164. Solicit business in the state
  165. 165. EFFORTS TO EXTEND SALES TAX TO INTERNET BASED BUSINESSES
  166. 166. No physical presence required
  167. 167. CONSEQUENCES
  168. 168. Subscribers in every state but limited presence in a few states
  169. 169. States broaden the definition of nexus to encompass other criteria – significant burden will be placed on the business and ultimately passed to the subscriber</li></li></ul><li>THE HORIZON<br />KATHY GRIGGS, <br />J2 GLOBAL COMMUNICATIONS<br />J2 AND M&A<br /><ul><li>32 TRANSACTIONS
  170. 170. OBTAIN CUSTOMERS AND CROSS-SELL OTHER PRODUCTS
  171. 171. ACCRETIVE
  172. 172. INTEGRATION
  173. 173. CORE</li></li></ul><li>THE HORIZON<br />KATHY GRIGGS, <br />J2 GLOBAL COMMUNICATIONS<br />J2 GLOBAL’S CORE STRATEGY<br />CLOUD SERVICES FOR BUSINESS<br />OUR OWN BRANDS<br />RECURRING REVENUE<br />EFFICIENT OPERATIONS<br />All brand names and logos are trademarks of j2 Global Communications, Inc. or its affiliates in the U.S. and/or internationally.<br />
  174. 174. CONTACT US<br />www.SingerLewak.com<br />877.754.4557<br />www.brileyco.com<br />310.966.1444<br />www.SheppardMullin.com<br />858.720.7469<br />www.j2global.com<br />323.860.9200<br />
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