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Banker's perspective on the Public Equity, M


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Banker's perspective on the Public Equity, M

  1. 1. November 10, 2006 Brad Gevurtz Head of Investment Banking D.A. Davidson & Co. Two Centerpointe Dr, Ste 400 Lake Oswego, OR 97035 503.603.3060 [email_address]
  2. 2. <ul><li>The investment banking market has evolved into three distinct tiers </li></ul><ul><ul><li>Large, multinational banks predominately based in New York City </li></ul></ul><ul><ul><li>Midsize, full-service broker dealers with a regional presence </li></ul></ul><ul><ul><li>Small, boutique firms with one or two offices </li></ul></ul><ul><li>Large investment banks are acting like mini hedge funds, generating most of their profits on proprietary trading and competing with private equity funds for deals </li></ul><ul><ul><li>The trend is to use the firm’s balance sheet to get deals, often tying loans or investments to advisory services </li></ul></ul><ul><li>Midsize, full-service broker dealers have mostly disappeared due to: (a) past mergers; and (b) the difficulty in creating new full-service investment banks given the cost of research and the narrowing of commissions on trades </li></ul><ul><ul><li>As a result, there is a lack of competition in the full-service middle tier of investment banking </li></ul></ul><ul><ul><li>But clients still need investment banks with sales and trading, institutional and retail distribution, and research </li></ul></ul><ul><li>Small, boutique firms are proliferating </li></ul><ul><ul><li>Most offer only one product (M&A) and a large percentage are unlicensed </li></ul></ul>General Investment Banking Trends
  3. 3. <ul><li>The M&A market is booming </li></ul><ul><ul><li>National M&A activity in 2006 year-to-date has eclipsed $1.0 trillion, a 23.1% increase over the same period in 2005 </li></ul></ul><ul><li>Strategic Buyers have large amounts of cash and are under pressure to use the funds </li></ul><ul><ul><li>Mature markets are consolidating </li></ul></ul><ul><ul><li>Competitive and rapidly changing markets are forcing old line companies to acquire new products or channels </li></ul></ul><ul><li>Huge supply of private equity, senior financing, and mezzanine capital is driving up valuations </li></ul><ul><ul><li>Many funds are underinvested and are aggressively seeking new opportunities </li></ul></ul><ul><ul><li>Hedge funds emerging as bona fide buyers or participants in deals </li></ul></ul><ul><ul><li>Aggressive lending by senior banks driving higher valuations </li></ul></ul><ul><li>Size has a significant impact on premium/discount </li></ul><ul><li>Process for quality companies is highly competitive </li></ul><ul><li>Great time to be a seller </li></ul>Merger & Acquisition Trends
  4. 4. M&A Activity U.S. M&A Deal and Dollar Volume, 2000 – YTD September 30, 2006 Source: Thomson Financial <ul><li>M&A volume on four-year upswing </li></ul><ul><li>YTD 2006 deal and dollar volumes on pace to exceed 2005 levels </li></ul>Dollar Volume Deal Volume
  5. 5. Buyout Environment U.S. Buyout and Mezzanine Funds Raised, 2000 – YTD June 30, 2006 Source: Buyouts Magazine <ul><li>Funds continue to raise record amounts </li></ul><ul><li>Hedge funds emerging as full-fledged participants in private equity/buyout market </li></ul>(Est.)
  6. 6. Transaction Consideration <ul><li>Stock as consideration has declined dramatically since 2003 </li></ul><ul><li>Changes in composition reflect seller preference for cash </li></ul><ul><li>Buyout market strength contributing to increased use of cash </li></ul><ul><li>Seller financing/earnouts declining as quality sellers have greater negotiating leverage </li></ul>Consideration Composition, 2003 – YTD September 30, 2006 Source: Bloomberg Cash Stock Combination Seller Note
  7. 7. Regional M&A Activity <ul><li>Source: Bloomberg LP., announced transactions. </li></ul>M&A Data by Selected Western State – 2001- 2006 YTD <ul><li>Regional M&A activity remains strong for the third consecutive year </li></ul>
  8. 8. Public Equity Market Trends <ul><li>Unrelenting pressure on commissions and spreads </li></ul><ul><li>Dis-aggregation of execution and research </li></ul><ul><li>Timely and proprietary research has become more important as more services are commoditized </li></ul><ul><li>New reality of public offerings: </li></ul><ul><ul><li>Splits are less equal </li></ul></ul><ul><ul><li>Gross spreads are under pressure </li></ul></ul><ul><li>Sarbanes Oxley has affected the decision to exit via an IPO </li></ul><ul><ul><li>Technology industry is seeing more activity in M&A </li></ul></ul>
  9. 9. <ul><li>Demand for IPOs has been volatile in 2006 with total IPOs priced down 12% year-over-year </li></ul><ul><li>IPO filings have been steady, backlog is increasing </li></ul><ul><li>SEC review and level of scrutiny have increased dramatically in the past 24 months, resulting in extended time-to-pricing </li></ul>Public Offerings Environment Source: Equidesk *Q4 2006 reflects one month of data
  10. 10. IPOs – Why Times Have Changed <ul><li>Increased costs of being a publicly traded company </li></ul><ul><ul><li>Sarbanes-Oxley - initial cost between $2 - $3 million, ongoing cost of $1+ million </li></ul></ul><ul><li>Increased difficulty getting research coverage </li></ul><ul><ul><li>Cost of providing research has escalated </li></ul></ul><ul><ul><ul><li>Narrowing of commissions on trades </li></ul></ul></ul><ul><ul><ul><li>Research analysts can not be paid by investment bankers </li></ul></ul></ul><ul><ul><li>38% of the companies listed on NASDAQ don’t have research coverage </li></ul></ul><ul><li>Increased scrutiny surrounding public companies and corporate governance </li></ul><ul><ul><li>Corporate scandals such as options backdating and fraud have significantly increased the spotlight on corporate executives </li></ul></ul><ul><li>Intense pressure on companies to meet or beat quarterly revenue and earnings estimates </li></ul><ul><ul><li>Companies can no longer set up “cookie jar” accounts to smooth earnings </li></ul></ul>
  11. 11. Alternative Investment Market (AIM) <ul><li>Since the founding of AIM in 1995, over 2,400 companies have listed on the exchange </li></ul><ul><ul><li>Approximately 275 technology-related companies are traded on the AIM, of which 9 are U.S. based companies </li></ul></ul><ul><ul><li>Over 50% of companies on the exchange trade at market capitalizations between $10 and $95 million </li></ul></ul><ul><li>Provides visibility and builds brand value </li></ul><ul><li>Provides capital to fund growth </li></ul><ul><li>Creates liquidity opportunities for existing shareholders </li></ul><ul><li>Provides stock-based currency for acquisitions </li></ul><ul><li>Facilitates access to capital markets for future use </li></ul><ul><li>Increases the company’s reserves in the event the market or economy deteriorates </li></ul>Benefits U.S. IPO <ul><li>Must have Nominated Advisor </li></ul><ul><li>No minimum size of company </li></ul><ul><li>No minimum proportion of shares to be in public hands </li></ul><ul><li>No trading record required </li></ul><ul><li>No prior shareholder approval for the majority of transactions </li></ul><ul><li>No restrictions on the transferability of the company’s shares </li></ul><ul><li>No requirement to be incorporated in the United Kingdom </li></ul>Admission Criteria AIM IPO
  12. 12. Private Equity Trends – VC/Minority Interest Funds <ul><li>Trend toward Mega Funds with rich management fees </li></ul><ul><ul><li>Necessitates larger investments and later stage focus </li></ul></ul><ul><ul><li>Decision to back less risky companies with more well-defined exits </li></ul></ul><ul><li>1999 – 2000 vintage funds need exits </li></ul><ul><ul><li>Necessitates later stage investing plus buyouts </li></ul></ul><ul><li>Hedge funds and Angels stepping in to fund Series A and B rounds </li></ul><ul><li>Name brand funds have no problem raising more capital, others starve </li></ul><ul><ul><li>The rich get richer </li></ul></ul><ul><li>Tech companies boot-strapping and selling out vs. taking VC money, due to cheaper startup costs and web services </li></ul>
  13. 13. The Crash in Seed Capital <ul><li>U.S. Seed Funding as a Percent of All Venture Funding </li></ul>Source: Venture One, Ernst & Young Seed Funding as a Percent of Total Venture Funding
  14. 14. <ul><li>Buyout Funds </li></ul><ul><ul><li>Overabundance of capital and cheap debt causing deal frenzy </li></ul></ul><ul><ul><li>Raising restructuring funds </li></ul></ul><ul><ul><li>Making a major push into tech </li></ul></ul><ul><ul><li>Teaming up on deals </li></ul></ul><ul><li>Hedge Funds </li></ul><ul><ul><li>Getting more active in private equity and buyouts – moving away from stock market arbitrage </li></ul></ul><ul><ul><li>Returns are falling and/or becoming more correlated with overall markets </li></ul></ul><ul><ul><ul><li>Result: trying to grow bigger to profit on management fees and locking up money over longer periods </li></ul></ul></ul><ul><ul><li>Fraud and disasters are becoming more prevalent </li></ul></ul><ul><ul><li>Regulators are long on talk, short on action </li></ul></ul>Private Equity Trends – Buyout and Hedge Funds
  15. 15. Regional Private Equity Activity <ul><li>Source: PWC Moneytree Survey </li></ul>Private Equity Data by Selected Western State <ul><li>California continues its lead in private equity investments </li></ul><ul><li>Washington and Colorado also have high levels of activity </li></ul>
  16. 16. How to Choose an Investment Banker <ul><li>Full-service capabilities: Public offerings, merger and acquisition advisory, valuation and private placement capabilities </li></ul><ul><ul><li>Allows the banker to offer non-biased, objective advice </li></ul></ul><ul><li>Industry expertise </li></ul><ul><ul><li>Allows the banker to offer higher value added service </li></ul></ul><ul><li>Reputation, Integrity, and Longevity </li></ul><ul><ul><li>Clients want an investment bank that has been in business for 10+ years, and will be around when needed in the future </li></ul></ul><ul><li>Experienced professionals </li></ul><ul><ul><li>Bankers must have significant investment banking experience and have witnessed Wall Street boom and bust cycles </li></ul></ul><ul><li>Regional commitment </li></ul><ul><ul><li>Facilitates long-term relationships and close interaction </li></ul></ul><ul><li>Strong aftermarket support on public equity deals </li></ul><ul><ul><li>Research coverage, sales and trading </li></ul></ul>
  17. 17. Conclusion <ul><li>M&A market is hot </li></ul><ul><li>Private equity fundraising at record highs </li></ul><ul><li>Valuations are very strong </li></ul><ul><li>VC/private equity/hedge funds are extremely active </li></ul><ul><li>Increased difficulty and costs of becoming a publicly traded company </li></ul><ul><li>Choosing the right investment bank is critical to achieving a successful outcome </li></ul>
  18. 18. D.A. Davidson & Co. - Full Service Investment Bank <ul><li>Established in 1935; privately owned by officers and employees </li></ul><ul><li>One of the largest independent full service brokerage firms in the country </li></ul><ul><ul><li>865+ employees </li></ul></ul><ul><ul><li>$20 billion in total client assets under management </li></ul></ul><ul><ul><li>52 offices in 16 states including Oregon, Washington, Colorado, Montana, and Utah </li></ul></ul><ul><li>Full service sales, trading, research and investment banking </li></ul><ul><ul><li>Market maker in 290 stocks </li></ul></ul><ul><ul><li>Provide research coverage on 180 companies </li></ul></ul>