April 17, 2008
INNOVATION 2 EXIT
Raising Capital and Executing Exits
A Primer for Technology Companies
Agenda
5:00 - 5:30 pm
Registration and Networking
5:30 - 6:00 pm
Navigating the Fundraising Process
Ryan Ziegler, Edison Venture Group
6:00 - 6:45 pm
Executing Your Successful Exit
Nat Burgess, Corum Group
Conrad Everhard, K&L Gates
6:45 - 7:30 pm
Reception and Networking
7:30 - 8:30 pm
Venture Capital Panel
Moderator:
Stephan Mallenbaum, K&L Gates
Panel:
Rich Erickson, Updata
Charlie Federman, CrossBar Capital
Kevin Greene, Flagship Ventures
Todd Pietri, Milestone Venture Partners
Albert Wenger, Union Square Ventures
Ryan Ziegler, Edison Venture Fund
8:30 pm - ?
Meet & Greet the VCs
Contents
Speaker Biographies
Tab 1
Nat Burgess, Corum Group
Rich Erickson, Updata
Conrad Everhard, K&L Gates
Charlie Federman, CrossBar Capital
Kevin Greene, Flagship Ventures
Stephan Mallenbaum, K&L Gates
Todd Pietri, Milestone Venture Partners
Albert Wenger, Union Square Ventures
Ryan Ziegler, Edison Venture Group
PowerPoint Slides
Tab 2
Nat Burgess
Executive Vice President
Corum Group Ltd.
Nat joined Corum in 1997 and brings a diverse background in
technology M&A and law. With the Strategic Development Division
of Morgan Stanley's M&A group, Nat worked on cross-border
acquisitions of U.S. and European companies by Japanese firms,
and on financings by large Japanese public companies. Nat moved to Morgan Stanley's
Tokyo office, where he reported directly to the President of Morgan Stanley, Japan Ltd.
and focused exclusively on cross-border M&A.
During law school Nat interned for the U.S. Securities and Exchange Commission,
Enforcement Division, and worked as the director of online business development for
Activision. Nat also co-founded Postcard Software, an early Internet company that
linked screen savers and web sites.
During the past 10 years Nat has negotiated transactions with Microsoft, Symantec,
Google, Intel, and many other leading companies, and has acted as an advisor and
board member for early stage companies.
Rich Erickson
Updata Partners
Mr. Erickson is based in Updata s Edison, New Jersey office and sits on the
boards of directors of Updata portfolio companies, Acclaris, HotGigs, Interactions
and Red Vision.
He joined Updata in 2004, bringing more than 20 years of executive experience
in the IT industry. As President and CEO of AlphaNet Solutions Inc., Erickson
drove the restructuring and sale of the publicly-held IT outsourcing company to
CIBER. Prior to this, he led a similar effort at iXL, an Internet application
consulting firm, in its public-to-public company merger with Scient. From 1987
until 1997, as one of two principals of Digital Network Associates (DNA), a
private network and systems integrator, he guided the growth of the company
through its ultimate sale United States Office Products (USOP). Erickson
started his career at Excelan, one of the TCP/IP Internet network pioneers.
Mr. Erickson holds a B.S. in mechanical engineering from Villanova University.
Conrad E. Everhard
AREAS OF PRACTICE
NEW YORK OFFICE
212.536.4029
TEL
212.536.3901
FAX
conrad.everhard@klgates.com
NEWARK OFFICE
973.848.4028
TEL
973-848-4001
FAX
Mr. Everhard, a partner in K&L Gates New York City and Newark, New Jersey
offices, is a corporate transactional and mergers and acquisitions (M&A) lawyer with
a particular focus on the technology and life sciences sectors. Mr. Everhard counsels
high growth companies on strategic matters at every stage of their life cycles,
including start-up formation, venture capital transactions, financings, restructurings,
public offerings, strategic partnering, transactional IP, executive compensation,
governance matters, private equity and all forms of exit transactions.
In the technology sector, Mr. Everhard draws on a vast network of funding and
entrepreneurial resources and contacts to assist technology driven companies and
entrepreneurs in implementing fundraising, commercialization and exit strategies. He
is active in virtually every high growth sector, including e-commerce, cleantech,
software, biotech, telecom, Web 2.0 and new media.
Mr. Everhard also represents venture capital funds in executing investments and
managing portfolio companies with respect to governance matters, follow-on
investments and exits.
In the M&A sector, Mr. Everhard has over twenty years of experience counseling
buyers and sellers in executing, structuring and coordinating complex buy-out
transactions in many industries, including software, telecom, drug discovery, biotech,
automotive, paper packaging, textile and hardware. Mr. Everhard is a frequent
speaker on M&A related topics.
PROFESSIONAL BACKGROUND
Prior to joining K&L Gates, Mr. Everhard was a partner in the venture
capital/technology group of a top-ten global law firm.
Board of Advisors (2006-present), Edison Innovation Fund, Economic
Development Authority (EDA) of the State of New Jersey
Legislative Assistant (98th Congress) Congressman Arlan Stangeland (R-Minn)
83-84
PUBLICATIONS
"The Limited Partnership Interest: Is It A Security? Changing Times", The
Delaware Journal of Corporate Law, Vol. 17 No. 2, 441 (1992).
BAR MEMBERSHIP
Bar of Florida (Inactive)
Bar of New Jersey
Bar of New York
Conrad E. Everhard
EDUCATION
J.D., Seton Hall University School of Law, 1987 (cum laude)
B.A.,Georgetown University, 1982
Charlie Federman
Managing Partner
Crossbar Capital
Charlie Federman has been an investor and advisor to information technology
companies for nearly thirty years. Before co-founding Crossbar Capital, Charlie
enjoyed a long relationship with BRM. In 1995 he became a BRM Technologies
board member; he later joined BRM full-time as a Managing Director in 1998 and
subsequently co-founded BRM Capital in 1999, where he led its New York office.
He served as a Managing Director of this Israel and New York based, early-stage
fund until 2007. Before joining BRM Capital, Charlie spent fifteen years
(culminating as Chairman) with Broadview, a preeminent Mergers and
Acquisitions boutique for the Information Technology industry. At Broadview he
advised on more than 100 acquisitions of software/Internet companies, was
instrumental in establishing and managing the relationship with its affiliated
venture fund, Geocapital, and spearheaded the firm s growth in Europe and
Silicon Valley.
Charlie is a member of the board of Bitwine, Payoneer, Cloudsmith, Reimage,
and Pando Networks.
He received a BS in Economics at the University of Pennsylvania's Wharton
School.
Kevin R. Greene
Principal
Flagship Ventures
Kevin joined Flagship in 2006 from IBM s Software Group. As a manager at IBM,
Kevin was responsible for establishing, retaining and growing relationships with
IBM business partners. Kevin also held a variety of product marketing positions
at IBM including managing the WebSphere Application Server product portfolio.
Prior to IBM, Kevin worked for several years at Goldman Sachs in its New York
and Hong Kong offices where he executed over $30 billion in equity, equitylinked and M&A financing transactions for technology, healthcare and energyrelated clients. Kevin earned a BS in finance and marketing from the University of
Virginia s McIntire School of Commerce where he also captained the varsity
swimming team, and earned his MBA from the Harvard Business School. Kevin
is currently participating as a member of the Kauffman Fellows Class 12 at the
Center for Venture Education.
At Flagship, Kevin focuses on investing in early-stage breakthrough technology
platform, healthcare information and medical technology companies. Kevin
currently serves on the board of IntelliVid and works closely with Flagship
portfolio companies Abla-Tx and Black Duck.
Stephan J. Mallenbaum
AREAS OF PRACTICE
Stephan Mallenbaum advises on complex business transactions, particularly at the
intersection of technology and capital.
NEW YORK CITY
212.536.4849
TEL
212.536.3901
FAX
sjm@klgates.com
Mr. Mallenbaum brings more than 25 years of experience in structuring, negotiating
and driving intricate, multi-party global transactions, including mergers and
acquisitions, financings, restructurings, public offerings, venture capital transactions,
strategic partnering, transactional IP, executive compensation, governance matters,
fund formation and private equity. He has negotiated, structured and implemented
virtually every type of transaction in the emerging growth and technology sectors, and
provides strategic counseling to both emerging and established companies and capital
sources worldwide.
In the corporate and securities area, Mr. Mallenbaum advises rapidly-growing
ventures, ranging from ambitious start-ups to established public companies, in
structuring corporate finance transactions, in coordinating merger and acquisition
transactions, and in venture capital transactions, restructurings, and executive
compensation matters.
In the technology sector, Mr. Mallenbaum draws on his substantive technology
background and industry-specific experience to advise on strategic matters and
coordinate IP-driven transactions for infotech, biotech, telecom, internet, media and
other technology-driven companies. These have included IP-based joint ventures,
licensing arrangements, commercialization of technology, and IP monetization
transactions.
In the private equity area, Mr. Mallenbaum has structured investment funds,
intellectual property funds, fund-of-funds joint ventures, as well as traditional VC
funds, and has coordinated restructurings of private equity and asset management
firms.
Mr. Mallenbaum brings both deep legal expertise and sound business judgment to
solve nuanced business problems. He utilizes law as a strategic leverage point to
achieve business objectives, and he is experienced at finding practical business
solutions.
PROFESSIONAL BACKGROUND
Prior to joining K&L Gates, Mr. Mallenbaum led the venture capital / technology
team at a top-ten global law firm.
BAR MEMBERSHIP
Massachusetts
New York
Stephan J. Mallenbaum
EDUCATION
J.D., Cornell Law School, 1980
B.S., Massachusetts Institute of Technology, 1977
Todd T. Pietri
Milestone Venture Partners
Mr. Pietri co-founded Milestone Venture Partners with Ed
Goodman in October 1999. He brings operating and
investment experience to its management.
Since launching MVP II in 2001, Mr. Pietri has developed
expertise and relationships in the financial services IT,
pharmaceutical IT, healthcare media, and outsourced business service sectors.
Mr. Pietri is responsible for nine Milestone investments: BizBash Media,
ExpertPlan, Navtrak, Derivatives Portfolio Management (successfully sold to
Mellon Financial in February 2005), Octagon Research Solutions,
GenomeQuest, Oddcast, SmartAnalyst, dLife, MedPage Today and TargetSpot.
His earlier financial experience includes co-heading the Technology and
Communications Investment Banking Group at Legacy Securities, where he
performed a broad range of capital raising, M&A and other financial advisory
services. Mr. Pietri was also a member of Legacy s direct investment team,
which provided mezzanine and growth equity through its affiliate, Legacy Capital
Partners.
Mr. Pietri gained valuable control and turn-around investment experience as an
Associate at Callier Interests, a turn-around leveraged buy-out firm focused on
middle market industrial distributors and manufacturers.
Mr. Pietri s operating experience includes direct sales, sales management,
channel management, business development and business process consulting.
He also possesses technical expertise in computer telephony systems and
enterprise resource planning software. From 1992 to 1997, he ran IT consulting
and direct sales for CompuSystems, an Atlanta-based software and services firm
focused on industrial distributors and manufacturers. He and his team provided
solutions for inventory control, order processing, and financial reporting. Prior to
his tenure at CompuSystems, Mr. Pietri worked in the voice processing industry
for Innovative Technology, Call Response Automation and his own consulting
firm.
Mr. Pietri received his BA (cum laude) in English from Duke University in 1989.
While working full-time for CompuSystems, Mr. Pietri earned his MBA from the
two year Executive MBA Program at the Robinson School of Business at Georgia
State University in 1997, graduating first in his class. He is also CFA
charterholder and graduate of the Venture Capital Institute Graduate Program.
Mr. Pietri currently serves as a director of GenomeQuest, SmartAnalyst,
MedPageToday, and BizBash Media.
Albert Wenger
Partner
Union Square Ventures
Albert combines over 10 years of entrepreneurial experience with an in-depth
technology background. As an entrepreneur, he has founded or co-founded five
companies, including a management consulting firm (in Germany), a hosted data
analytics company, a technology subsidiary for Telebanc (now E*Tradebank), an
early stage investment firm, and most recently (with his wife), DailyLit, a service
for reading books by email or RSS. Albert also served as the president of
del.icio.us through the company s sale to Yahoo. His technology background
goes back to winning the German national computer science competition at age
18. Albert graduated summa cum laude from Harvard College in economics and
computer science and holds a Ph.D. in Information Technology from MIT. He
has managed technology projects for organizations as diverse as Tacoda
(startup) and Telebanc (leading Internet bank).
Albert currently serves on the boards of Clickable, a platform for managing online
advertising; and Maptuit, a provider of real-time navigation; he is a board
observer at Etsy, an online marketplace for handmade goods. Albert is married
with three kids and lives in Scarsdale, New York.
Ryan Ziegler
Investment Manager
Lawrenceville, NJ
rziegler@edisonventure.com
609-873-9225
Ryan Ziegler discovers and evaluates investment opportunities in New Jersey and New York. He
also identifies new investment opportunities in the interactive marketing, financial services and
wireless sectors. His activities include market research, technology assessment and financial
analysis. Ryan also participates in due diligence and structuring investments.
As Investment Manager, he sourced or evaluated new investments in Blue Cod, EdgeTrade,
Games Media, M5 Networks, Operative, PlumChoice, Scivantage, SmartAnalyst and TetraData.
Ryan served as a board observer on TetraData (acquired by Follett Software) and presently for
CyberShift, Games Media and Scivantage.
Background
Region Focus
·New York
·New Jersey
Sector Focus
·Wireless
·Interactive
Marketing
·Financial Services
Director
·CyberShift
·Giant Realm
Ryan joined Edison in 2003 as Manager of Business Development. He managed and expanded
Edison's extensive referral network of service providers, technology executives and capital sources
generating proprietary investment opportunities. Previously, Ryan was a Business Development
Manager with SEI Investments (NASDAQ: SEIC). Ryan worked in the enterprise sales, marketing
and investment strategy teams serving multiple financial market segments. He launched a
multi-billion dollar corporate distribution channel program for SEI’s Enterprise business unit.
Ryan participates in numerous regional organizations including ACG, GPVG, NJTC, NYSIA,
NYPEN, SIIA, Executive Council of NY, TiE Tri-State and VIANY. He served as Co-chair of the
2006 ACG Due Diligence Symposium, Co-chair of the Recruiting & Investor Outreach
Committee for the 2005 Mid-Atlantic Venture Conference and is on the steering committee for
the 2006 SIIA Ed Tech Business Forum. He also is a member of the AngelVine selection
committee for emerging businesses.
Education
Bucknell University
BS, Business Administration & Management
BA, Biology
INNOVATION 2 EXIT:
Raising Capital and Executing Exits
A Primer for Technology Companies
Endorsed by:
Participating organizations:
PRESENTATION:
Innovation 2 Exit:
Navigating the Fundraising Process
First Meeting to Term Sheet
1
Edison Venture Fund
Currently investing out of EVF VI - $258M fund
Expansion stage, growth capital investor
Founded in 1986 22 years investing experience, 155+ portfolio companies
$660M AUM, offices in NJ, NYC, PA, VA and MA
15 IPOs, 75+ strategic acquisitions
Focus on revenue generating applied technology, software and tech-enabled
business service opportunities
Northeast and Mid-Atlantic regional focus
Deep domain in financial services technology, interactive marketing & media,
pharma./healthcare IT and general business services
Initially invest $5-9M and reserve additional capital to support growth
Accelerate sales, marketing and product development
Growth capital, management buyouts/spinouts, secondary stock purchase/recaps
Organizational development; recruit and build out the management team to scale
Industry expertise/executive network; operational and strategic counsel
Navigating the Fundraising Process
First meeting to term sheet
overview:
Research & firm evaluation
Meeting preparation
Introductions
1st VC meeting the pitch
Subsequent meetings
areas to cover
VC partnership/sponsor dynamics
Pre-term sheet & initial due diligence
Partnership presentation & review
Term sheet
2
Prepare for First Meeting
Evaluating money sources
Determine how much money you really need?
Capital efficiency argument find the right balance
Operational efficiency build a plan with the specific use of proceeds
Right size the plan to your needs, not the investors preference or strategy
Do your homework
Research VC websites & ask trusted advisors to find the right match
What type of capital sources?
Understand the positives and potential negatives of each capital source
Friends & family, Angel Investors (personal liability)
Customer funding, Strategic funding (least expensive money)
Private equity/VC funding (most expensive)
Too many capital sources around the table is hard to manage
Prepare for First Meeting
What to prepare?
Executive summary - no more than a few pages
What aisle, what shelf?
What s the business problem and how does your solution solve this problem?
Press release or case study of a specific client implementation
Map your business plan to the VC s strategy
Give the investors a reason not to say 'no' because you've aligned your company's plan
with something they believe in; not a hard and fast rule but be flexible and open
Summary financials & projections (if applicable)
Get an introduction
Service providers and advisors with VC relationships
Angel investors and other capital sources
Current executive at one of the VC s portfolio company investments
Non-partner investment professionals within VC firm
3
First Meeting
You get the meeting
Be prepared to deliver a concise presentation (e.g. 6-10 slides) in 30 minutes
Issues to address
If you have a long history, justify it focus on lessons learned and positive steps
What's going to cause you to get on the 30%+ growth rate curve that a VC wants?
Where you're going is more important than where you've been
Last year doesn't matter as much as where you're going next year
Is your pipeline telling us the same story that you are
Scalability
need to show a realistic run to $30+ million
We want to see there's a clear opportunity to grow
Exhibit your knowledge of the market
Most VC s need to see at least a 5-10x return (i.e. $50-200M+ enterprise value)
Articulate potential exit opportunities
Subsequent Meetings
Keep the dialogue going
Don't rest with a single sponsor
Once you have the attention and interest of one partner at the VC firm, don't assume
the rest of the partnership is sold on your deal
Leverage that first sponsor to get a good assessment of the terrain inside the firm.
What personalities you're likely to meet, what the hot buttons are, where you should
focus use that information to your advantage in the presentation
If you don't make the cut 1st time around, don't give up
Gain candid feedback on the areas where the investor was not comfortable
Keep investors updated on your progress and Company developments
Investors might have passed on the opportunity but some continue to monitor
activities. If we see progress, VC s will re-engage
4
Subsequent Meetings
Keep the dialogue going
Demonstrate the management team s ability to execute
Provide client references
Offer Investor the opportunity to go on a sales call
Speak with analyst community; increase awareness
Current management team is realistic about their own weaknesses
CEO is the Chief Marketing Officer
CFO or Controller most understaffed position but a critical hire in growth plan
Owners accept that dilution can lead to higher valued business
VC requires a meaningful ownership position in the Company
10-20% option pool for key hires and employees
Management team is running the Company VC interests should be aligned with
executives (post investment)
Pre-Term Sheet
Priority Deal presentation - critical areas to cover:
Business model: software or services?
Our bias is on the software side
understand the investors appetite
Hybrid models are acceptable, because services do allow you to keep on top of
customer counts, and to get good product feedback
We want to see 30-40% of revenues coming in subscriptions/licenses today,
with a path to cross over to 60-70% in software-related base
Capital efficiency & margin implications determine future capital needs
Revenue model
Recurring revenue is compelling
Longer or more predictable contracts will raise the value of your Company
Subscription-based model, SaaS, ASP
High gross margins
GMs enables Company to add development, marketing, sales and infrastructure
5
Pre-Term Sheet
Priority Deal presentation - critical areas to cover:
Management team
Separating your role as a shareholder from your role in the company
Domain and functional expertise (done this before)
# in which everybody sells
Sales, marketing & distribution strategies
Strong VP Sales is real ace-in-the-hole
Are you realistic about valuations?
When it comes to time to discuss valuations with VCs, focus on logic, not
simplistic formulas or references to single deals
Term Sheet
Don t get locked up in a term sheet without Investor
conducting some initial due diligence
Pre-term sheet phase
VC looking for fit with their investment strategy
Post-term sheet phase
due diligence process
VC looking for reasons to confirm investment strategy
Deal negotiation
It is critical for the entrepreneur to work with an attorney who understands
VC process and what are market terms
6
Edison Venture Fund Priority Deal
Presentation checklist example:
Brief history of your Company
Market overview and positioning (what s the problem and how are you solving it?)
Current and next generation products and services (what s unique and sustainable?)
Competition
Marketing programs/Lead generation
Sales and Distribution channels/Key partners
Largest customers
Pricing and renewal process.
Client teams (sales, service, development, support & account management)
Backlog and sales pipeline -- very important!
Current P&L and balance sheet
Projected financials (quarterly 2007 and 2008-09) and cash flow
Management team and organization
Development plans
Use of proceeds
Lessons learned
Edison contribution
INNOVATION 2 EXIT
Bellevue
Boston
Houston
London
Mexico City
Munich
Oslo
Paris
Philadelphia
Phoenix
Portland
Santa Clara
Toronto
Zurich
Executing Exits
Corum Group Ltd.
www.corumgroup.com
7
MARKET UPDATE
Middle Market Software M&A Specialists
M&A specialists since 1985
Software and IT experts
mostly former CEOs
Publisher of industry-leading M&A research
Host of Selling Up Selling Out conferences / M&A workshop series
Dominant North American and European presence
60%+ Cross-border transactions
Sponsor of World Financial Symposiums conferences
$6 billion in wealth created
200+ transactions completed
15
MARKET UPDATE
Selected Corum Transactions
2008
2007
Developer of
collaborative 3D
authoring technology
Provider of applications
support maintenance
services (ASM)
Microsoft U.S.
Caligari U.S.
Sierra Systems
RIS Canada
Pending
-PCI Security
-Enterprise Security
-Unified Communications
-Knowledge Management
-IT Asset Management
Canada
IT services provider
to government and
commercial
organizations.
TechTeam U.S.
RL Phillips U.S.
Human capital management
solutions
StepStone Norway
ExecuTRACK Germany
16
8
MARKET UPDATE
Selected Corum Transactions 2007 (Cont.)
Developer of 3D digital
designs in the building,
plant and marine markets
Electronic invoicing and
legal spend management
solutions
Autodesk U.S.
NavisWorks U.K.
DataCert U.S.
CorpraSoft U.S.
Leading provider of eventdriven business application
automation and batch
integration technologies
Value-added distributor of voice, data
and converged communications
solutions
UC4 Austria
backed by Carlyle (U.K.)
AppWorx U.S.
Datatec South Africa
on behalf of Westcon
CRANE U.K
Provider of payment
processing software and
service
Provider of estimating and
earth measuring software for
contractors
Purepay U.S.
Creditron Canada
Glaston Finland
Albat+ Wirsam Germany
17
MARKET UPDATE
Selected Corum Transactions 2007 (Cont.)
HR information systems for
middle market enterprises
Provider of estimating
and earth measuring
software for contractors
BPO U.S.
HR Microsystems
Maxwell U.S.
Quest U.S.
U.S.
Networking and lobby
services for game
publishers &
developers
Activision U.S.
DemonWare Ireland
18
9
MARKET UPDATE
Buyer Activity High
Current Examples
Sector
Interested Parties
Wireless
Compliance
Enterprise Infrastructure
Storage
Supply Chain
Visualization
14
13
12
12
12
11
Interested parties range from billion dollar household names to
companies never heard of
19
MARKET UPDATE
M&A Is the Primary Source of Liquidity
In Dollar Volume
U.S. dollar volume all industries
Sources: Dealogic,
Dealogic, IPO Central, Corum
20
10
MARKET UPDATE
Dynamic M&A Market
2007
2008
Overall M&A up 22%. Europe outpaced US
for first time in 5 years
Polarization between high-value and
low value markets
High tech deals for 2007 totaled $268 billion
No leveraged PE deals; PE firms
putting money in tuck-ins
Strategic buyers remained very active
Valuations down across the board
Consolidation continued across most
sectors
More distressed or urgent sellers
Global buyer community expanding
Europe, Asia
Poor earnings will constrain IT
spending in second half
2H:07 global deal volume fell 27% and US
activity fell 46%
Silver lining: Record-setting valuations
in hot markets, and new opportunities
for buyers.
Consolidation in all markets
21
MARKET UPDATE
M&A Follows Public Markets
S&P
NASDAQ
AIM
OMX
22
11
MARKET UPDATE
Software M&A Valuation Multiples
Enterprise Value / Sales
Software Industry
23
MARKET UPDATE
Sectors to Watch
Trending Up
Positive momentum in sector DEAL VOLUME underscores current
interest and viability of space.
Digial Media
Business Intelligence
Supply Chain Management
Internet Pure Plays
Security
Wireless
Financial Services
Government
Q4:07
Q3:07
Q2:07
Q1:07
Q4:06
Q3:06
Q2:06
Q1:06
Q4:05
Q3:05
Q2:05
Q1:05
Healthcare
24
12
MARKET UPDATE
Sectors to Watch
Trending Down
Deals are happening in these sectors, but slowing
Buyers are digesting previous acquisitions
Sectors are maturing
Decrease in the number of material acquisition targets
Broaden exposure and sector presence
Enterprise Applications
Storage
Gaming
Internet Infrastructure
Q4:07
Q3:07
Q2:07
Q1:07
Q4:06
Q3:06
Q2:06
Q1:06
Q4:05
Q3:05
Q2:05
Q1:05
IT Services
25
MARKET UPDATE
European IPO Market Still Accepting Deals
Emerging and Less Regulated Equity Markets
Listings down in Q4:07 when compared to Q4:06, although up when compared to Q3:07
Foreign companies continue to voluntarily de-list from U.S. exchanges and go overseas
49 non-European companies IPO d on European exchanges a growing trend
BME, the Spanish exchange, had 7 IPO s in Q4, compared to zero the previous quarter.
Q4 listing percentage by exchange
WSE
16%
London
35%
Oslo
7%
41
The number of technology
firms that have listed on
European exchanges over
the past 6 months
Other
9%
OMX
10%
Deutsche Borse
7%
BME
3%
Euronext
13%
Source: PwC IPO Watch Europe Survey
26
13
MARKET UPDATE
Global M&A Activity
Cross-border transaction
levels remain strong
Cross-border M&A activity
contributed to 47% of the
announced deals for 2007
Europe and Asia both set
records for deal volume in
2007
U.S. sellers continue to look overseas for buyers
Weak dollar attracting non-U.S. buyers
27
MARKET UPDATE
Top Buyers 2007
Active Private Equity Firms
Strategic Buyers
PE Firm (partial list)
Company
# of Deals
Kohlberg Kravis Roberts & Co.
Google
12
Microsoft
11
Oracle
10
Cisco
9
Platinum Equity
IBM
9
Thoma Cressy Bravo
HP
7
Nuance
7
Sungard
7
Silver Lake Partners
Accenture
6
Apax Partners
Dell
6
SAP
6
Yahoo!
6
AOL
5
Autodesk
5
BT Group
5
CDC Software
5
Carlyle Group
Francisco Partners
Golden Gate Capital
170+ buyers with 2-4 transactions
28
14
MARKET UPDATE
?
What Do Buyers Really Buy
Vision
Marketing Channels
Research
Alliances
Management
Competitive Position
Business Model
Technology
Planning R&D Process
Sales Process
Patents
Capital Structure
Documentation
Accounting Policies
Pricing
Growth
Support
Profitability
Market Share
Domain Expertise
Staff
User Base
>> Don t forget the intangibles
29
Strategic Acquisitions to Support Growth
Macro Considerations:
Does the acquisition meet at least one of the
following criteria?
30
15
Will the Numbers Pencil?
Financial Considerations:
Will the acquisition improve financial performance?
Return on Equity
EBITDA multiples
Impact of deal on revenue growth rate and EBITDA
Recurring revenue
Accretion / dilution to GAAP Earnings Per Share (public buyer); cash flow
(private buyer)
Don t forget -- third party analysts and / or lenders need to bless the deal
31
Buyers Red Flags
Broken business model
Negative Cash Flow; the more we grow, the more money we lose
Weak management teams
Companies that do not own their intellectual property
Patents are not essential, but buyers avoid companies that generate significant revenues from
reselling third party products
Companies must have the proper policies with employees to ensure unfettered ownership of IP
work for hire / assignment of invention, non-compete and non-disclosure
Any source code license deal must leave target always retaining all IP, including derivative works
Companies with too much client concentration or conflicting distribution strategy
Revenue risk if one or two clients comprise a large percentage of target s revenue
Risky if target is reliant on selling through a buyer s competitor
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16
Common Gotcha s
Contracts requiring consent in order to transfer
Critical point for subchapter S corporations that can sell assets without penalty
Cap Table
Missing shareholders, warrant holders, verbal promises, confusion
Inadequate or missing work-for-hire agreements
Consider getting an unconditional perpetual license and release upon termination of contractor
The rules are different in other countries
Revenue recognition, capitalized R&D, missed forecasts
Ignoring the Balance Sheet
Excess cash, working capital requirements, proper vacation accruals
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Keys to Higher Valuations
Be in the right market
high growth, high opportunity
Demonstrate strong growth
Profitability
Compatible technology platform
Strong Team
Right business model
recurring revenue
Strong, loyal customer base
Clean business structure
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17
OVERVIEW
Who Has to be Sold
?
Seller s Side:
Buyer s Side:
Senior Mgmt
CEO
Shareholders
CFO
Board of Directors
Investment Bankers
Outside Professionals
Board of Directors
Key Clients
Internal & External Attorneys
Family
Special Consultants (Technology)
Other:
COO
Debt Holders
Business Dev. Mgr.
Key Vendors
Marketing Manager
Shareholders
R&D Manager
Internal & External Accountants
Division Managers
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OVERVIEW
Process
Decision
Decision
SELL UP SELL OUT
SELL UP SELL OUT
Research
Research
POTENTIAL PARTNERS
POTENTIAL PARTNERS
Preparation
Preparation
INTERNAL DUE DILIGENCE
INTERNAL DUE DILIGENCE
Presentation
Presentation
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
Contact
Contact
INFORMATION EXCHANGE
INFORMATION EXCHANGE
Follow-up
Follow-up
CONFERENCE CALLS & VISITS
CONFERENCE CALLS & VISITS
Valuation
Valuation
WEIGHTED AVERAGE
WEIGHTED AVERAGE
Structure
Structure
LETTER OF INTENT
LETTER OF INTENT
Due Diligence
Due Diligence
Final Negotiations
Final Negotiations
CONTRACT
CONTRACT
Closing
Closing
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18
OVERVIEW
For Maximum Value
Be thorough in research
Without it you will miss some of your best candidates
Follow through with each partner
Do not get side-tracked with one partner negotiation
Each buyer has own timeline
Orchestrate your contact
Allow enough time
buyers can t jump
Especially true with SOX
Start with thorough preparation
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PREPARATION
Presenting Your Company
You Will Need (Minimum):
Researched buyers list (contact names and EAs)
Strategic analysis per buyer
Introductory Letter(s)
Executive Summary
Transaction NDA
Financial Memorandum
Three-year projections
Corporate Presentation (verbal / PPT)
Valuation (later)
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19
PREPARATION
Target Buyers
Identify the target companies
The A List
You probably know who they are; they may have already approached you
The B List
Similar characteristics to the A list candidates, but you are probably less familiar
with these
Markets adjacent to where you operate
Foreign firms*
Non-technology
* Don t ignore newly public international firms
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VALUATION
Projections
Last Year
Year 1
Year 2
Year 3
Revenues
4.30
7.70
12.00
18.00
Expenses
3.30
6.20
8.50
12.50
Income Before Tax
1.00
1.50
3.50
6.50
Understand and document your assumptions
Do not be too conservative
Do not be overly optimistic
Earn-outs may be tied to projections
Forecasts are most
credible when well
supported by realistic
assumptions.
Do not miss your targets during negotiation!
Be clear if projections require additional funding
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20
VALUATION
Primary Ways to Value a Software Company
Sales Multiple (EV/S)
Public Company
Earnings Multiple (PE)
Similar
Company(EV/S)
Transaction
Sales Multiple
Public Company
Discounted Cash Flow
Replacement Value
Earnings Multiple (PE)
41
VALUATION
Valuation
The Challenging Part
Good three-year forecasts
Growth rates
Discount percentage
Terminal value
Relevant public company peer group
Finding M&A transaction data for comparable sales
Proper Recasting
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21
VALUATION
Common Mistakes
Not providing clean financial data
Using improper revenue recognition methods
Overly aggressive or timid forecasts
Using forecasts that are not based on the company going forward
as a standalone entity
Irrelevant and/or outdated comparables
Comparing public to private companies without applying a liquidity
discount
Not using the appropriate time period (TTM, FYE, etc.)
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STRUCTURE
Structure
Structure
more important than Price
What is being purchased?
Stock or Assets
Sellers generally prefer to sell shares
Better tax benefits
Less liability
Fewer minority shareholder problems
How and when it is paid?
The currency used
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22
STRUCTURE
Forms of Payment
Cash or equivalents
Stock
Notes (Debt)
Employment and consulting agreements
Non-compete agreements
Options agreements
Profit sharing
Earn-out
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STRUCTURE
Structure
Highest Potential Price
Earn-out
Employment Agreements
Assumption of Debt
Notes
Stock
Cash
Lowest Price
(least risk to seller)
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23
NEGOTIATION
Buyer Tactics
Hide level of interest
Attempt to receive benefits via licensing distribution, minority investment,
and specific asset sale
Complain about the quality of the valuation
comparables
Tell you your price is unreasonable and ask you to sharpen your pencil
(negotiate with yourself)*
2008: Anything BUT an acquisition
* Don t let buyers serial negotiate
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NEGOTIATION
Seller Should:
Create competition (bidders)
Reveal problems early while leverage is highest
Be specific in the LOI (Letter of Intent)
Be willing to negotiate a creative structure to close the valuation gap between
buyer and seller
Close as quickly as possible
Use transactions and comparables for companies as similar as possible to your
company
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24
NEGOTIATION
LOI Process Timeline
LETTER
LETTEROF
OFINTENT
INTENT(LOI)
(LOI)
Business
BusinessDeal
DealNegotiation
Negotiation
DEFINITIVE
DEFINITIVEAGREEMENT
AGREEMENT
Detailed
DetailedLegal
LegalNegotiation
Negotiation
Information
Exchange
DUE
DUEDILIGENCE
DILIGENCE
Assessing
AssessingRisks/Problems
Risks/Problems
CLOSING
CLOSING
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NEGOTIATION
The Letter of Intent (LOI)
Outlined terms
The agreed purchase price
The manner of payment/structure
Procedures that the parties will adhere to in proceeding toward a
definitive agreement
Stock registration rights, obligations and transfer restrictions
Contingent pricing adjustments
No Shop or Stand Still provision*
Break-up fee and other contingencies
Conduct of Business
* Try to make this for a short period of time
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25
PREPARATION
Due Diligence Checklist
You Will Need (Minimum):
Income Tax Returns
Financial Statements
Projections
three years
three years
three years
Customer/Supplier lists/Agreements
Copies of all sales literature
Organization chart/key job descriptions
Bank and accounting records
List of all assets owned
Copies of leases and contracts
Board minutes/resolutions
.
Written explanation of the method of doing business:
Development
Support
Sales/Marketing
Upgrades
Services
Accounting procedures
Identification and analyses of competitors
Written description of financial condition of the company
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CLOSING
Biggest Mistakes in Partnering Process
Dealing with only one buyer
No leverage in negotiation
Improper research of potential buyers
A, B, financial, international
Not understanding buyer s process/models
Timeline, decision-makers
Improper due diligence preparation
This will prolong the process
Not qualifying buyer properly
Ability, interest, etc.
Not orchestrating all buyers properly
This is the tough part!
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26
Contact Information
Corum Group Ltd.
10500 NE 8th Street, Suite 1500
Bellevue, WA 98004
USA
Corum Group International S.à
S.à.r.l
+1 425-455-8281
Beim Paradeplatz
Basteiplatz 7
8001 Zurich
Switzerland
+41 44 251 82 65
www.corumgroup.com
For full research and conference registration
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THE DEAL
Secrets to a Successful Negotiation
Conrad E. J. Everhard
April 2008
27
It s Not a Level Playing Field
You need pitchers, not throwers
Be a good listener
Understand your limitations
Deploy your negotiation capital wisely
Maximize Your Negotiating Leverage
Opponent s Negotiating Leverage
Minimize Your
Drive the deal at your point of maximum leverage
Seller s
Leverage
Pre
Lock-Up
Execution of
Lock-Up
Execution of
Purchase K
Closing
28
Maximize Your Negotiating Leverage Minimize Your
Opponent s Negotiating Leverage (cont d)
Be prepared to walk away
Judicious use of word no . . .
. . . and mean it!
Public disclosure is not your friend
Competitive bids best way to level playing field
Preserve Your Goodwill with Buyer
Clean up your act before going to market
Don t hide the ball
Bring out your dirty laundry
Disclosure shifts risks to buyer
29
Beyond the Purchase Price
Other Issues You Should Care About
Is the purchase price real?
Is the purchase price liquid?
What s my exposure in this deal?
Other things
Executive Compensation
Non-Competition Covenants
Post-Closing Covenants
Make Sure That Purchase Price is Liquid
Market Risk Pre-Closing
Market Risk Post-Closing
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Market Risk Post-Closing
Securities laws
Registration requirements and insider trading
S-3, S-4, Rule 144, Reg. S, Section 16
Insider trading policies of buyer
Tension between control and liquidity
Contractual restrictions
Market conditions and corporate culture
Conrad s Strategies for Enhancing Liquidity
Agree on a liquidity plan with buyer
Insist on liquidity at closing. . .
. . . or guarantee trading windows
Don t become an insider. . .
. . . or become a super-insider
If purchase price illiquid, do your due diligence
Price protection, hedge and put mechanisms
31
What s My Exposure?
Fraud
Securities law
Common law
Contractual
Acquisition Agreement
Purchase price adjustment
Representations and warranties
Fact specific indemnities
Purchase Price Adjustment Traps
Adjustments triggered by accounting judgments
No bearing to actual loss
Public announcement can adversely impact balance
sheet
Watch out for non-cash charges, reserves,
contingent liabilities
Revenue recognition, stock option accounting, inprocess R&D
Overlap between PPA and representations
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Conrad s Strategies for Mitigating
PPA Exposure
Make sure your financial house is in order
Set measurement date before public announcement
Make sure you are comparing apples to apples
Lots of flexibility within GAAP
Coordinate interaction between PPA and
representations
Don t double count
Limit adjustment to working capital. . .
. . . or at least back-out intangibles, non-cash items
Reps and Warranties: Standard Protection
Escrow holdbacks, deductibles and caps
Liability qualifiers: knowledge and materiality
No personal exposure beyond purchase price
33
Conrad s Strategies for Limiting Liability
Disclose everything: shift risk to buyer
Take post-closing impact of deal out of liability equation
Sacrifice the hostages: put escrow at risk. . .
. . . but limit liability to escrow
Incentivize buyer to act reasonably
Cost sharing, controls on 3rd party claims
Neutralize buyer s resource advantage
Put legal fees in play
Offer alternatives
Due Diligence
Opinion of Counsel
Insurance
Questions?
Conrad E. J. Everhard
April 2008
34
INNOVATION 2 EXIT:
Raising Capital and Executing Exits
A Primer for Technology Companies
Endorsed by:
Participating organizations:
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