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  1. 1. Mergers & Acquisitions: Strategies for Today’s Economy Financial Executives Institute: Annual Leadership Conference William Blair & Company Limited Liability Company Philip W. Reitz May 25, 2000
  2. 2. Presentation Overview <ul><li>Is This a Good Time to Sell Your Business? </li></ul><ul><li>Recent M&A Activity </li></ul><ul><li>Implications From Internet Explosion </li></ul><ul><li>How to Sell Your Business </li></ul>
  3. 3. Who Is Phil Reitz? <ul><li>BA in Economics from Northwestern </li></ul><ul><li>MBA from Stanford: Arjay Miller Scholar </li></ul><ul><li>Six Years with First Boston in 1980’s </li></ul><ul><li>Principal in William Blair & Co.’s M&A Group Specializing in Middle Market, Sell-Side Advisories </li></ul><ul><li>17 Years of Investment Banking Experience </li></ul>
  4. 4. Is This a Good Time To Sell Your Business?
  5. 5. Is This a Good Time To Sell Your Business? YES!
  6. 6. Best Indication Is High Volume Is This a Good Time To Sell Your Business? Source: Merger Stat Review
  7. 7. Drivers for High Volume <ul><li>Stock Market Health </li></ul><ul><li>Cost and Availability of Debt </li></ul><ul><li>Motivated Buyers: </li></ul><ul><ul><li>Both Corporate and Investment Funds </li></ul></ul>Is This a Good Time To Sell Your Business?
  8. 8. Stock Market Health: Historical P/E Ratios Is This a Good Time To Sell Your Business? Historical P/E Ratios of the S&P 500 and S&P 400 Midcap Index
  9. 9. Consistently High Premiums Is This a Good Time To Sell Your Business? Source: Mergerstat Review Median Percent Premium Offered
  10. 10. Interest Rates Still Historically Low Is This a Good Time To Sell Your Business?
  11. 11. Motivated Corporate Buyers 1999 vs. 1998 1Q 2000 vs. 1Q 1999 Real GDP Growth 4.1% 5.0% Corporate Profit Growth 8.8% N/A Average S&P 500 “ Promised” EPS Growth 18.0% 1) Corporations Are Feeling Good About Economy and Current Business Prospects 2) Corporation Must Buy To Keep Up With Promised Growth Is This a Good Time To Sell Your Business?
  12. 12. Motivated Financial Buyers Is This a Good Time To Sell Your Business? Add Debt = Huge Buying Power = Huge Motivation to Do Deals <ul><li>Over 300 Buyout Funds Each Have $250 Million of Equity to Invest. </li></ul><ul><li>Over 100 Have $1 Billion or More </li></ul>
  13. 13. Scorecard Is This a Good Time To Sell Your Business? <ul><li>Stock Market </li></ul><ul><li>Debt Market </li></ul><ul><li>Motivated Buyers </li></ul><ul><ul><li>Corporate </li></ul></ul><ul><ul><li>Financial </li></ul></ul>8 5 7 9 1 to 10 Scale 29 of 40
  14. 14. Recent M&A Activity
  15. 15. High M&A Volume Number of Transactions Overall Deal Volume 1Q 2000 2,488 $495.7 Billion Best Ever Quarter For Each Statistic Source: MergerStat Recent M&A Activity
  16. 16. M&A Volume by Size of Deal Lots of Big Deals $1 Billion + 70 Mega - Deals $399.3 Billion Best Ever Quarter For Each Statistic Lots of Medium Sized Deals $25 - 250 Million Deals 351 Deals $33.1 Billion Best Ever Quarter For Each Statistic Recent M&A Activity
  17. 17. Driving Trends <ul><li>More European Activity Up 89% from 1998 to 1999 </li></ul><ul><li>More Internet Activity 70% of 1Q 2000 M&A Announced Deal Were Internet-related Vs. 25% in 1Q 1999 </li></ul>Recent M&A Activity
  18. 18. Implications From Internet Explosion
  19. 19. Historical Perspective Implications From Internet Explosion
  20. 20. Traditional Valuation Techniques Do Not Fit Internet Implications From Internet Explosion % of IPOs Profitable
  21. 21. Internet Valuation Techniques Implications From Internet Explosion <ul><li>Price-to-Revenue Higher Gross Margin Higher Price-Revenue Multiple </li></ul><ul><li>Price-to-Unique Visitors Higher Revenue Per Page View Higher Price-to-Unique Visitor Multiple </li></ul>
  22. 22. Biggest Lesson On Internet M&A <ul><li>Tactics </li></ul><ul><li>Decide Who Stays and Who Goes Quickly </li></ul><ul><li>Establish Stay Bonuses and Option Plan Deep Into Organization </li></ul><ul><li>Consider Non-standard Compensation </li></ul><ul><ul><li>Day Care </li></ul></ul><ul><ul><li>Sabbaticals </li></ul></ul><ul><ul><li>Dress Code </li></ul></ul>When You Are Buying Potential, Make Sure You Get the People Who Will Turn Potential Into Reality Implications From Internet Explosion
  23. 23. Other Lessons for Internet M&A <ul><li>Auction Process Takes Too Long </li></ul><ul><ul><li>Internet Speed is Faster than Five Months </li></ul></ul><ul><ul><li>Must Always Be on the Make for a Partner </li></ul></ul><ul><li>Must Sell Concept of Deal </li></ul><ul><ul><li>Stocks Trade on Potential Not Here & Now </li></ul></ul><ul><ul><li>Deals Can Change the Perception of That Concept </li></ul></ul>Implications From Internet Explosion
  24. 24. How to Sell Your Business
  25. 25. How to Sell Your Business Step One: Hire an Investment Banker
  26. 26. Three Big Issues How to Sell Your Business Valuation Potential Buyers Sale Process
  27. 27. Valuation <ul><li>Numerous Techniques </li></ul><ul><ul><li>Comparable Public Company Multiples, Comparable Acquisition Multiples, Discounted Cash Flow, Theoretical Leveraged Buyout, Buyer Accretion, Value of Goodwill, Discounted Future Stock Price, etc., etc. </li></ul></ul><ul><li>“Correct” Value </li></ul><ul><ul><li>Surround Value with Analysis </li></ul></ul><ul><ul><li>Result of Auction </li></ul></ul><ul><ul><li>Application of Judgment </li></ul></ul>How to Sell Your Business
  28. 28. Decide How Valuation Will Be Used <ul><li>In true auction, preliminary valuation is wasted effort </li></ul><ul><li>Constructive Uses for Valuation </li></ul><ul><ul><li>Asking Price: Focuses Discussion but Limits Upside </li></ul></ul><ul><ul><li>Walk-away Price: Needed in Negotiated Deal </li></ul></ul>How to Sell Your Business
  29. 29. Potential Buyers How to Sell Your Business Corporate Buyers Financial Buyers Financial Buyers with Portfolio Company
  30. 30. Potential Buyers How to Sell Your Business Corporate Buyers Make Overall Business/Stock Price More Valuable Corporate Balance Sheet and Stock Will be Absorbed Into Culture Financial Buyers Make Return in Subsequent Transaction: IPO or Resale Buyout Equity Fund and Highly Levered Debt High as Long as Hit Numbers Motivation Source of Funds Post-Deal Autonomy
  31. 31. Potential Buyers: Who Pays More? How to Sell Your Business 1Q2000 Transactions Transaction Size EBITDA Multiple
  32. 32. Alternative Marketing Approaches How to Sell Your Business No new disclosure Parties able to complete transaction on favorable terms 10 weeks or less Three or fewer Evaluate interested parties and existing offers Disclosure of Intent to Sell Pre-screening Number of Potential Buyers Approximate Time Required Method Very little Four months or more Typically fifteen or more Press release Solicit offers from any interested parties Closed Negotiation Open Auction Targeted Solicitation Limited disclosure Three to four months Strategic and financial fit Five to ten Explore short list of most-likely buyers
  33. 33. Process Timeframe How to Sell Your Business Buyer Due Diligence Prepare Confidential Memorandum Plan Strategy and Conduct Due Diligence Formal Marketing Effort Final Bids and Negotiation Twenty Weeks (Four Weeks) (Three Weeks) (Two Weeks) (Five Weeks) (Six Weeks)
  34. 34. Q&A