Dual Track Fundraising/ M&A Process: Optimising Transaction Value & Success


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Choosing between raising money for a company or a secondary round giving liquidity to founders and investors or selling a company is a hard decision to make. A Dual-Track process of talking to potential investors and acquirors in parallel can optimize a transaction value and probability of success. Many aspects of a fundraising process are similar to those of a sale process: confidential information memorandum, detailed financial model, due-diligence materials and the use of an investment bank (fundraising advisor/ M&A advisor). The possibility of obtaining liquidity in a single transaction at a higher valuation generally makes a dual-track process appealing to shareholders in a company and can increase significantly the likelihood of a sale. Paul’s session will address the key issues using both his insight from over 13 years advising game companies as an investment banker but also as an investor in game companies in the past 3 years.

Published in: Economy & Finance, Business

Dual Track Fundraising/ M&A Process: Optimising Transaction Value & Success

  1. 1. Avista Partners Dual-Track Fundraising/ M&A Process: Optimising Transaction Value & Success Europe 12 February 2013 by: Paul Heydon
  2. 2. Avista Partners – Advisor and Investor based in London for over 14 years – Strong game sector experience, knowledge and relationships – Advised on transactions in the game sector with a total value of over $1 billion advising many companies including: – Shareholder in: Who am I? 2 Paul Heydon Managing Director Avista Partners
  3. 3. Avista Partners Agenda – Strategic Options • What? • How decide? • Filter – Dual Track Process • What is it? • Why do it? • Sample deals • Survey data • Example • Indicative Process – Strategics 3
  4. 4. Avista Partners What • Key strategic options may be summarised as follows:  Status Quo  Material Change Grow via acquisitions/ joint ventures (JV’s) Raise growth capital/ sell secondary shares with financial/ strategic investors Sell the company 4
  5. 5. Avista Partners Strategic Options – Status Quo Advantages/benefits • Low disruption option • Stable management • Captures significant shareholder value, providing business plans are met Comment • May be hard to grow fast or keep growing fast Disadvantages/risks • May require more mgmt & financial resources over time • Increasingly competitive market • May become or stay “small fish in a large pond” Assessment • Increasingly competitive game sector would recommend action vs. Status quo 5
  6. 6. Avista Partners Strategic Options – Acquisitions/ JV’s Advantages/benefits • May achieve critical mass • Synergies & cost savings • Shared know-how Comment • Acquiring complementary third party developers/ publishers could grow business significantly • Some targets may be likely to seek sale to larger companies Disadvantages/risks • May require more mgmt & financial resources over time • Can be a complex process Assessment • Complex but could achieve strong value creation 6
  7. 7. Avista Partners Strategic Options – Growth Capital/ Secondary Round Advantages/benefits • Share increasing market risk • Mgmt. continuity/ reduced disruption • Potential strong value from new board member(s) • Increases capacity to grow business organically and/or by acquisition • Current shareholders could potentially see liquidity on some shares Comment • Best fit with like minded personalities with similar visions Disadvantages/risks • Control issues may emerge depending on terms/ stake sold • Complicates ownership structure • No control premium Assessment • An attractive option particularly if new shareholders can provide value add 7
  8. 8. Avista Partners Strategic Options – Sell the company Advantages/benefits • Lock in 100% of current value (particularly for all cash deal) & control premium • New owner should bring strategic value add to grow faster than staying independent in addition to additional working capital • Synergies; cost savings Comment • Timing is everything; If too early then not enough value & if too late then lost value • Proper DD needs to be done on the buyer Disadvantages/risks • Give up independence • Working for a new owner/ bigger company • Earnout structure and timing is key Assessment • Best to do if founders are not comfortable with continued risk or the view is that valuation is unlikely to grow significantly more 8
  9. 9. Avista Partners 0.0 500.0 1,000.0 1,500.0 2,000.0 2,500.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 North America Europe Asia/ Pacific Historical Global Fundraising - Games $10bn raised since 1997; $1.2bn raised in 2012 vs $2.1bn in 2011 (USD$ millions) Source: Capital IQ, Company Filings, Brokers & Press 9
  10. 10. Avista Partners 0.0 2,000.0 4,000.0 6,000.0 8,000.0 10,000.0 12,000.0 14,000.0 16,000.0 18,000.0 20,000.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 North America Europe Asia/ Pacific Global Exits/IPO’s in Game Sector $44bn value created for VC/PE investors and/or founders since 1997(USD$ millions) Source: Capital IQ, Company Filings, Brokers & Press 10
  11. 11. Avista Partners How Choose Status Quo Acquisitions/ JV’s Funding Round Sell ? 11
  12. 12. Avista Partners Filter Decision Funding Round Sell Status Quo Acquisitions / JV’s Dual Track Process is the Filter 12
  13. 13. Avista Partners Dual Track Process • Run a process in parallel of both a funding/ secondary round and a sale of the company • Funding – VC/PE/ Strategic Investors or Institutional (IPO) – Can be one or both of primary/ secondary shares – If company does not need cash then look at secondary to generate liquidity for shareholders • Sale – 100% Exit – Strategic or Financial Acquirors • Acquisitions/ JV’s – Corporate decision to pursue; not for everybody – Need team to integrate post deal 13 13
  14. 14. Avista Partners Dual Track: Maximise Value & Flexibility • Maximise Value – Higher probability of achieving liquidity in a single transaction at a higher valuation is more appealing to shareholders and can increase significantly the likelihood of an exit transaction • Always have option to not do a deal • Evidence suggests dual track companies earn 22-26% premium when a sale is consummated and 18-21% premium when IPO is launched and an M&A transaction soon follows vs single track M&A exit* See: Brau J., Dual-track versus single track sell outs: An empirical analysis of competing harvest strategies, Journal of Business Venturing 25 (July 2010) 14
  15. 15. Avista Partners Dual Track: other reasons – Many elements of a fundraising process are similar to those of a sale process: info memo, financial model, mgmt presentation, teaser, DD materials & use of an advisor – Increases optionality with potential investors and buyers which will provide more leverage at negotiation point – Aim is to get multiple offers from both investors and buyers to have strong leverage while giving shareholders many options to choose from in deciding which deal is best for them 15
  16. 16. Avista Partners But • One size does not fit all; consider company resources, opportunities and goals to determine if Dual Track is best option 16
  17. 17. Avista Partners Keep in mind • A sale process does not always lead to a sale • A fundraising process does not alway lead to a funding • Doing both together increases the odds in your favor 17
  18. 18. Avista Partners Sample Deals • Company A – Revenue: $15m – EBITDA: $8m, No need for cash – Growth LTM: 35% – 2 founder shareholders • High offers: – Investor: $72m valuation to buy 40% – Acquiror: $50m for 75% in cash; 3 year earnout on 25% • How decide? 18
  19. 19. Avista Partners Sample Deals • Company B – Revenue: $10m – EBITDA: $2m; wants growth capital – Growth LTM: 50% – 3 founder shareholders and 1 VC (in at $10m pre-money) • High offers: – Investor: $10M @ $50m pre-money valuation with $3m to founders ($7m to company) – Acquiror: $40m for 80% in cash; 4 year earnout on 20% • How decide? 19
  20. 20. Avista Partners Avista Partners RR DONNELLEY/MERGERMARKET DUAL TRACK SURVEY RESULTS @ SEPT 2012 20
  21. 21. Avista Partners What do you expect will happen to the number of sales using a dual track process over the next 12 months? 73% 7% 20% Increase Decrease Remain the same 21
  22. 22. Avista Partners What do you expect will happen to the price of companies for sale with a concurrent IPO? 53%40% 7% Will sell at a premium Will sell for the same price Will sell at a discount 22
  23. 23. Avista Partners Under current market conditions, do you believe a dual track process will maximise the price obtained in a sale? 60%20% 20% Yes No Uncertain 23
  24. 24. Avista Partners What will be the most common outcome of a dual track process over the next 12 months? 93% 7% Sale prior to IPO IPO 24
  25. 25. Avista Partners Successful Example: Popcap “PopCap Games Ready for IPO in 2011” Allthingsd.com, Jan 31/11 “Exclusive: PopCap Games could file IPO by end of summer” Reuters, 12 April/11 “PopCap acquires ZipZapPlay while IPO looms”, VatorNews, 29 April/11 “PopCap Games: Planning IPO While Playing the Field?” Wall Street Journal, 23 June/11 “EA Buys PopCap Games For As Much As $1.3B” Techcrunch, 12 July/11 “Now that EA has agreed to buy Popcap for up to $1.3bn....by selling to EA, Popcap passed up a potentially monster public offering that had been widely expected. Rob Ward of Meritech Capital Partners, a top Popcap investor, said recent IPO euphoria was a factor” Private Equity Analyst , 1 August/11 25
  26. 26. Avista Partners Popcap: learning • Timing is everything: – Raised $22.5m in VC round Oct/09 – $100m in revenue 2010 – Well thought out strategy for 2011 • PR is very important – PR around IPO plans; for sale sign – Small acquisition; another pr event 26
  27. 27. Avista Partners Your company should have most if not all of the following: Diversified Portfolio More than one game in your future pipeline Content At least one great game Financials $5m min revenue with min 30% annual growth and profitable Management Mgmt team in place Readiness for Dual Track 27 Customers/ Partners Good relationships with key platform holders; games get featured Business Model Must be scalable Analytics Growing & Strong Metrics
  28. 28. Avista Partners Indicative Dual Track Process ... good planning and preparation are key to a successful sale Seller and advisors Review points 28
  29. 29. Avista Partners Global Strategics Console Game Companies Online Game Companies Strategic VC’s TV Broadcasters/ Telcos Hardware Companies Large Internet Companies Large Media Companies Mobile Game Companies 29
  30. 30. Avista Partners 0.0 10,000.0 20,000.0 30,000.0 40,000.0 50,000.0 60,000.0 70,000.0 Tencent Activision Blizzard Nintendo Nexon EA NetEase DeNA Sega Sammy Gree Namco Bandai Holdings Inc. Strategic Investors: Largest Game companies Note: USD$ millions and as at 8 February, 2013 Source: Capital IQ Top 10 mkt cap = $122.4bn or 76.2% of value of all public companies; Tencent is bigger than the next 9 combined 30
  31. 31. Avista Partners Valuation Considerations • Investor’s and Acquiror’s key focus will be to balance (1) success to date and market position, (2) challenges of revenue diversification/ long-term sustainability of growth • Team & organization’s ability to scale and build market share • Game pipeline and ability to grow that Growth questions • Key margin drivers in next 2-3 yearsProfit questions 31
  32. 32. Avista Partners Execution Risks • Leakage • Loss of key team member(s) • Delay in future pipeline • Monthly financial projections/ milestones not being met during process • Economic downturn 32 Once term sheet is signed do not do anything that could potentially have a negative impact on the business until the deal closes. Focus on closing the deal!
  33. 33. Avista Partners Closing – Push for closing ASAP after term sheet is signed • Push the investors/ acquiror and their lawyer(s) • Push your lawyer(s) – Post closing: • Then start executing on the plan you sold investors/ acquiror on • Agree with investors/ acquiror on content and timing for press release 33
  34. 34. Avista Partners Paul Heydon Managing Director Avista Partners Email: paul.heydon@avistapartners.com Web: www.avistapartners.com Twitter: @pheydon Presentation is posted at: http://bit.ly/pheydon 34
  35. 35. Avista Partners Disclaimer • This presentation was prepared by Avista Partners exclusively for the benefit and internal use of Recipient(s) in order to provide some thoughts on fundraising in the game sector. This presentation is incomplete without reference to, and should be viewed solely in conjunction with oral briefing provided by Avista Partners. The presentation is proprietary to Avista Partners and may not be used for any other purpose without the prior written consent of Avista Partners. • The information in this presentation reflects prevailing conditions and our views as of this date, which are accordingly subject to change. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all the information available from public sources or which was otherwise reviewed by us. Avista Partners LLP is authorised and regulated by the Financial Services Authority. 35