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M&A Presentation to VISTAGE CEO Group

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This is a copy of a presentation I gave to a Vistage CEO group on January 16, 2009.

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M&A Presentation to VISTAGE CEO Group

  1. 1. M&A Discussion Di i Prepared for: M&A Discussion January 16, 2009 Presented by: Doug Rodgers, CEO Rick Thomas, Managing Director
  2. 2. The FOCUS Perspective Middle market investment bank since 1982 We specialize in businesses with revenues or transactions between $5 million and $300 million Balanced mix of sell-side, buy-side, and capital raise Strong Team and Coverage Across US St T dC A 37 Managing Directors 5 Senior Research Professionals 12 Senior Advisors – Industry Experts Offices – Washington, DC (corporate HQ), Atlanta, Chicago, Los Angeles and San Francisco Broad range of industry expertise across Managing Directors, Research Team and Senior Advisors Steadily growing due to repeat business, partner growth, referrals Page 2
  3. 3. Discussion Topics Current Market Conditions Valuation Overview Preparing To Sell Growth Through Acquisition Banking in Today’s Environment Page 3
  4. 4. Introduction Current Market Conditions
  5. 5. Current Market and The Outlook Confusion and uncertainty in the marketplace Federal government capital injected in financial markets will make the difference Expect more government capital entering the market Financial investors haven’t figured out the new world Strategics understand the market better Page 5
  6. 6. U.S. M&A Activity Page 6 Source: Dealogic and WBC
  7. 7. U.S. Middle-Market M&A Activity Page 7 Source: Dealogic and WBC
  8. 8. U.S. Middle-Market M&A Activity by Acquirer Page 8 Source: Dealogic and WBC
  9. 9. U.S. Private Equity Activity Page 9 Source: Dealogic and WBC
  10. 10. U.S. Cross-Border M&A by Number of Deals Page 10 Source: Dealogic and WBC
  11. 11. Market Summary and a Look Ahead What is the impact? Middle market is resilient Financial buyers have less leverage in the market Strategic buyers are less affected by debt markets There are still good opportunities out there for good companies in the right sectors Where are things headed? ‘09 activity will strengthen because of credit markets coming back and also f di t d l for distressed sales d l Record number of owners will be exiting in the next several years In 2010 there will be 750k baby boomers selling vs. 50k in 2006 Page 11
  12. 12. Introduction Valuation Overview
  13. 13. Valuation Valuation Methodologies Publicly-traded Comparable Discounted Non-financial comparable transaction Cash Flow Other parameters companies analysis analysis analysis • quot;Public Market • quot;Private Market • DCF and it more d its • E t Enterprise value i l • Li id ti analysis Liquidation l i Valuationquot; Valuationquot; elaborate variations related to non- are the most • Break-up analysis financial variables • Value based on • Value based on theoretically correct such as subscribers • LBO analysis market trading multiples paid for way to think about or barrels of oil multiples of comparable valuation and should • Recap analysis comparable bl companies in sale always be considered • Can be used with • Historical trading companies transactions publicly-traded • Present value of performance comps, comparable • Includes control projected free cash acquisition analysis, premium flows or DCF • Most explicitly incorporates the future Page 13
  14. 14. Methodologies PROS CONS • Captures future outlook • Time consuming and complex Driven by cash flow, not • Highly sensitive to cost of capital DCF • and terminal value assumptions accounting earnings ti i • Wide range of forecasts possible • Ideal comps rarely exist • Simple method Tradingg • Potentially distorted by • Relies on actual market Multiples information accounting numbers • Disguises lots of assumptions included by the market • Represents values actually • Comparable universe even more Transaction paid difficult to define Comps • Explicitly considers control • Transaction multiples vary premium greatly over time • Simple and quick to calculate • No indication of profitability or Focuses on what you are cash flow Asset • buying • Snapshot in time Value • Provides an idea of asset • Most businesses are acquired financing to run, not liquidate Page 14
  15. 15. Valuation vs. Price Owner’s Expectation DCF Ego Market Comps Revenue Replacement Price Asset Value Rumors P Competitive Advantage Historical Transactions Hi t i l T ti Strategic Value Advisors Buyer’s Valuation Page 15
  16. 16. Market Summary and a Look Ahead • Public Acquirers • Is it accretive? • DCF is widely used • Trading Comps g p • Seeking a particular piece on the chess board • Private Acquirers • Transaction Comps rule the day! • DCF is too complicated and too fraught with variables • IRR is also common Page 16
  17. 17. EV/EBITDA Valuation Multiples Page 17 Source: Dealogic and WBC
  18. 18. EV/EBITDA Valuation Multiples – By Industry 2004 2005 2006 2007 2008 YTD Industry Sector Mid‐Mkt Total Mid‐Mkt Total Mid‐Mkt Total Mid‐Mkt Total Mid‐Mkt Total Business Services 14.3 13.9 15.6 14.2 12.0 12.5 11.3 14.1 13.4 12.7 Computers & Electronics 9.2 10.7 13.0 13.3 17.9 17.0 16.7 16.8 15.5 15.5 Construction/Building 9.7 7.7 9.2 10.5 10.0 11.5 10.6 11.3 8.2 8.2 Consumer Products Consumer Products 12.7 12 7 12.7 12 7 11.2 11 2 13.7 13 7 13.4 13 4 11.9 11 9 10.5 10 5 12.2 12 2 6.4 64 10.0 10 0 Consumer 10.5 10.5 12.1 11.9 14.0 13.9 12.1 13.9 12.6 13.7 Energy & Power 11.8 10.6 11.8 10.3 12.4 11.5 11.7 11.8 13.0 11.1 Financial 9.5 9.4 11.6 10.6 13.4 12.7 11.4 11.7 10.1 10.5 Healthcare 12.0 12.3 16.2 14.9 14.4 16.7 13.9 15.4 19.0 18.0 Industrial Products 13.2 13.2 13.3 13.5 10.6 12.9 10.8 10.8 18.7 18.7 Materials 9.1 10.4 7.2 8.7 12.5 13.0 10.7 11.7 9.4 12.1 Real Estate/Property Real Estate/Propert 11.8 11 8 17.6 17 6 8.6 86 14.0 14 0 11.1 11 1 16.4 16 4 15.7 15 7 16.4 16 4 12.2 12 2 13.0 13 0 Telecom 14.5 12.6 15.1 16.3 15.3 15.4 15.9 15.2 15.8 12.3 Transportation 15.0 18.1 7.6 7.6 18.0 14.1 12.7 13.2 3.2 5.4 Page 18 Source: Dealogic and WBC
  19. 19. Introduction Preparing To Sell
  20. 20. Twelve Value Drivers for Businesses 1. The Customer Base 2. History/Reputation/Brand 3. Recurring Revenue 4. Product Breadth & Mix 5 Gross Margin 5. 6. Intellectual Property 7. Human Capital 8. Management Experience and Expertise 9. G & A Leverage 10. Distribution Leverage 11. Sales and Marketing Effectiveness 12 Barriers to Competitive Entry/Competitive Differentiation 12. Page 20
  21. 21. Twelve Value Drivers for Businesses 1. The Customer Base What is the revenue concentration of your customers? What is the profile of the customer base? What is the buying trend from these customers over the past five years? 2. History/Reputation/Brand How long and how stable is the business? How long have the management team & core customers been involved? 3. Recurring Revenue This portion of revenue is valued much higher than quot;one-time revenue.quot; Is there an opportunity to alter the model to increase recurring revenue? Page 21
  22. 22. Twelve Value Drivers for Businesses 4. Product Breadth & Mix Is the suite of products complimentary? Are there obvious holes in the product suite? 5 Gross Margin 5. Most important line item on the P&L. GM compared to industry and is the trend up or down? 6. Intellectual Property In addition to trademarks, patents and copyrights IP can also be “business processquot; such as a unique way to generate sales leads. IP should be thoroughly vetted and reviewed with IP attorneys attorneys. Value of IP is often overlooked by sellers. Page 22
  23. 23. Twelve Value Drivers for Businesses 7. Human Capital Buyers often look for situations where mgmt. wants to stay for the long term. Post-sale integration failures of the past are largely the result of management departing after the deal is closed. 8. 8 Management Experience and Expertise Does the mgmt. team have substantial knowledge of a critical product, process or market segment? Is seller’s management team additive to the buyer? Can the new team grow the organization to the next level? 9. G & A Leverage Careful planning is necessary in this area prior to the LOI stage. Buyers tend to overestimate the cost savings of combining companies G&A. G&A Transition costs often are underestimated, if not overlooked altogether. Page 23
  24. 24. Twelve Value Drivers for Businesses 10. Distribution Leverage Buyers need to be certain that end user customer requirements are complementary to using distribution leverage. Demand should be measured through effective market research. Sales and training costs need to be taken into account and product installation & account, customer service expense of the new products needs to be analyzed 11. Sales and Marketing Effectiveness Does the company’s biz dev process enable it to choose it’s future customers? Who in the company owns the customer relationships? Page 24
  25. 25. Twelve Value Drivers for Businesses 12. Barriers to Competitive Entry/Competitive Differentiation Does the company have a quot;first moverquot; advantage? Are the company’s products and services difficult to duplicate? What barriers protect the company’s market position? Page 25
  26. 26. Introduction Growth Through Acquisition
  27. 27. What does this mean to me? Two Ways to Grow the Bottom Line y GROW OR REVENUES Page 27
  28. 28. What do we mean by Strategic Growth? Increase sales and profits – clearly! But there’s more……. Not just getting bigger, it’s about getting stronger Positioning your company better – market differentiation and market trends Acquisitions are often a key element Might mean selling some assets Keeping in tune with current and long term market pressures Make your Business Stronger!! Page 28
  29. 29. Strategic Growth – Why? Remain competitive Buy rather than build new market, product, skill set or geography Stagnation often leads to demise Often simply for defensive reasons Page 29
  30. 30. Ways to Grow External Growth 1. 1 Acquisitions • New Products • New Markets • Consolidations 3. Raise Capital • Additional funds to fuel Sales &Cap-Ex ORGANIC GROWTH • Funds for acquisitions & investments i t t 2. Divest Assets • U proceeds t re-invest Use d to i t in core business The best strategies consider both Organic and External Growth Page 30
  31. 31. Traditionally Proactive vs. Reactive Organic Growth External Growth Proactive Typically Reactive Dedicated Resources vs. Often Opportunistic Steady or gradual Should be proactive Would we accept sales people “waiting for the phone to ring?” Page 31
  32. 32. Six Proactive Process Steps 1. 1 Develop partner criteria 2. Create introductory materials 3. Organize a list of prospects PLAN 4. Research these prospects thoroughly R h h h hl 5. Actively contact prospects 6. Meet with 5 to 10 prospects to gain perspective Page 32
  33. 33. Focus Buy-Side Process Typical Metrics Transaction Funnel Activity by Stage 100 + potential targets Prospect and target profiles Reviewed & approved by Research client Detailed blind letter and call 30 + phone conversations Conducted by FOCUS Partner 15+ profiles Qualify Typical profile report, written before NDA, is 1-2 pages 10+ meetings Client selects targets for Meet meetings Client selects top-priority 3-5 qualified “finalists” q Close q qualified targets g Page 33
  34. 34. Introduction Banking in Today’s Environment
  35. 35. Asked to move your loan, due to company performance Loan covenant default(s): in other lending environments would most likely be waived or amended, stemming from: Erosion in profitability or operating losses p y p g Slower earnings growth resulting in failure to meet minimum EBIT or EBITDA covenant step-ups Stagnant net cash flow growth or significant slowing in collections (Days Sales Outstanding increases) resulting in failure to meet required reduction to loan agreement’s agreement s leverage ratio(s), “sweep” agreement or principal outstanding Accounting issues: specifically related to SFAS 157 (mark to market requirement), particularly with regard to any / extent of impairment to Accounts Receivable, Inventory, and Intangible assets May result in dispute with outside auditors and opinion, review or “Management Letter unacceptable to lender(s) p ( ) Page 35
  36. 36. Asked to move your loan, due to issues at the bank Shift In Portfolio Management: The bank has decided to decrease its exposure to your industry sector, because it perceives a higher degree of risk than when the loan was originally extended, (such as if GM, and Chrysler represent the majority of your business) If your bank’s regulators mandate a shift in acceptable loan type concentration The bank wishes to reduce its exposure to your industry sector to appease brokerage analysts during investor presentations Example, during its quarterly earning call, the CEO announces, “Less than 2.0% of our commercial loan portfolio is exposed to the residential building market.” Capital Adequacy: Losses incurred by bank activities unrelated to your loan or industry sector reduce equity (Tier I Capital) leading to deterioration in its Tier I Capital Ratio Current regulatory definition of “W ll C it li d” b k i 6 0% of Ri k W i ht d C t l t d fi iti f “Well Capitalized” bank is 6.0% f Risk Weighted Assets or higher Market’s definition, which is what bank’s CEO must manage to, is no less than 8.0%, but many feel is >10.0% Proxy for Tier I Capital Ratio = Shareholders Equity/ (Total Assets – Cash – Government Securities) Page 36
  37. 37. Asked to move your loan, due to issues at the bank Personnel Turnover: Industry consolidation or declining profitability resulting in staff reductions including your company’s relationship manager and related lending team. New loan officer may not understand your business, lack experience, previously had a negative experience(s) with your industry, lack chemistry... But most important, he has no personal investment in your relationship and, in fact, has a vested interest in purging the inherited loan p p g g portfolio of any “risk p y points” within a relatively y short period of time of assuming responsibility for your relationship. Change In Underwriting Standards leading to failure to renew upon maturity: Prior to 2007, we saw banks’ senior debt advance ratios equal to 3.5x - 4.5x EBITDA and with an additional turn of 1.0x in subordinated debt. Current market terms, if available, range between 1.5x – 2.5x of senior debt with some availability for subordinated debt depending upon composition of assets and p y p g p p profitability y trends. Reduced advance rates against Accounts Receivables and Inventory as banks seek greater asset coverage / risk reduction in future credit extensions. Lack of competitive pressure from multiple competing lenders enables this trend multiple, trend. Page 37
  38. 38. Best to Have Alternatives Maintain Multiple Lending Relationships: Have at least two bank relationships, three is even better, if access to bank funding - particularly for seasonal needs - is critical to your company operations. The banks should be of different types, say one regional bank, one local bank, and one nationwide player depending on your particular operating needs. Arm Your Relationship Manager: Concentrate sufficient non-lending (non-capital attracting) business (operating accounts, deposits, cash management services, foreign exchange, etc.) with your most trusted lenders to provide your banker with relationship and profitability arguments in support of your credit facility’s renewal Identify Al Id if Alternative Funding Sources: i F di S If your business is heavy in Accounts Receivable, and / or Inventory identify non-bank asset-based lenders that serve your industry, contact them, and seek a proposal, or at least identify two that would like your business. If bank underwriting standards squeeze your cash availability, these lenders generally have higher advance ratios ratios. Accounts Receivable Insurance: Consider this as a way to reduce your, and your lender’s, risk, as well as potentially increasing your advance ratio with your lender Page 38
  39. 39. Best to Have Alternatives (continued) Act Like / Treat Your Banker Like An Investor What is the financial condition of your bank? Bank holding company’s debt rating? Did your bank announce receipt / turn-down of TARP funding during the past 60 days? Healthier banks are less likely to base decisions on some of the factors referenced above. Some useful metrics that are generally available for publicly-traded bank holding companies: o Tier I Capital > 8.0% - 10.0% of assets and risingg o Positive Earnings Think of your lender as you would a shareholder / board member Proactively inform it of your business and financial condition and their respective outlooks including outlooks, negative prospects and their causes Proactively review loan covenants with specific focus on financial covenants – breach likely? o Try not to inform “after the fact” Maintain personal contact, especially if as CEO you have delegated the role in the past contact if, CEO, Meet you relationship manager’s management Build The Relationship: Give him some new business leads Offer to be a reference for him when he is courting new business Be sure more than one executive with your company has a relationship with him Page 39
  40. 40. Focus Speaker Bios Doug Rodgers – CEO & Managing Partner – doug.rodgers@focusbankers.com Executive level management experience in software, information technology, aerospace, e-commerce, real estate and construction, manufacturing and distribution, serving both commercial and g g g government clients. He serves FOCUS clients across many industries emphasizing merger and acquisitions opportunities. Served as the President and CEO of Corcentric, Inc, an e-commerce services provider spin off from Litton Enterprise Solutions. As the first CEO of the company, he raised both venture and debt capital and led the company to achieve 500,000 electronic transactions annually with a transaction volume of $180 million, including over 30 Fortune 1000 trading partners Mr. Rodgers is an active pilot, with ATP and jet ratings, a BS in Aerospace Engineering and MBA coursework. He was educated at the U.S. Air Force Academy and the University of Kansas, and was a 13 year member and local President of YPO, and currently is a member of the World Presidents Organization. Rick Thomas – Managing Director – rick.thomas@focusbankers.com i k th @f b k Over fifteen years of consulting, management and M&A advisory experience in the manufacturing, distribution, software and packaging industries. Significant M&A expertise for publicly and privately held companies in the middle market, several of which have annual revenues in excess of $1 Billion. Manufacturing Engineer for General Motors Corporation – BS in E i M f t i E i f G lM t C ti i Engineeringi Lecturer to hundreds of owners, CEO’s and CFO’s on M&A best practices and previously an adjunct faculty member for The George Washington University School of Business and Public Management. Rick has also served as a U.S. representative to South African companies in the capacity of advisor and consultant on business partnering and financing for small and middle market companies. Page 40
  41. 41. Closing and Contact Info For detailed information on FOCUS, please visit our Website: www.focusbankers.com Summary of publicly announced transactions List of currently active sectors Detailed biographies of our professional staff Office locations and contact information Archives of the monthly newsletter, publications and sector research Easy online subscription to free monthly newsletter Form for submitting online inquiries 1133 20th Street, Suite 200 Washington, DC 20036 202 470 1976 phone 202 785 9413 fax Page 41

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