Today’s Agenda
• Deal Points: Key issues in structuring M&A deals
in the current market
• What it’s Worth: How technology companies are
valued today.
• The M&A Market: The View from Investment
Bankers and VCs.
• Until the Market Window Opens: Other Exit
Strategies
• Lessons Learned: M&A Lessons from
Entrepreneurs
My Roadmap
• The Numbers and What They Mean
• Trends from the Trenches – What’s Really
Happening Now
• The M&A Process – Current Issues
Venture-Backed M&A Activity by Quarter, 1999-2002
30,000
25,000
20,000
Sum ($M) 15,000
10,000
5,000
0
1 '99
2 '99
3 '99
4 '99
Source: Venture Economics and the National Venture
Capital Association
1 '00
2 '00
3 '00
Quarter
4 '00
1 '01
2 '01
3 '01
4 '01
1 '02
Venture-Backed M&A Activity by Quarter, 1999-2002
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
100
90
90
89
87
85
82
80
68
70
60
70
68
60
60
60
53
Total Deals 50
48
40
30
20
10
0
1999
2000
2001
Year
Source: Venture Economics and the National Venture
Capital Association
2002
A Comparison of Venture Backed M&A and IPO Activity by Quarter
90
80
70
60
50
Total
40
30
20
10
0
1 '00
2 '00
3 '00
4 '00
Quarter
Source: Venture Economics and the National Venture
Capital Association
Total M&A
1 '01
2 '01
3 '01
Total IPOs
4 '01
1 '02
A Comparison of Venture-Backed M&A and IPO Activity by Quarter, 2000-2002
30,000
25,000
20,000
Total Value ($M) 15,000
10,000
5,000
0
1 '00
2 '00
3 '00
4 '00
Quarter
Source: Venture Economics and the National Venture
Capital Association
Total Purchase Price M&A Deals
1 '01
2 '01
3 '01
Total Venture-Backed IPO Offer Size
4 '01
1 '02
Interpreting the Numbers
• Path to liquidity still closed
• M&A only viable exit path for now
• VC Industry recovery will be slow
• Needs corporate IT spending and stability of public
markets (re-open IPO window)
• Continued difficult for startups to raise $$
Trends from the Trenches
•
Survival Mergers – Lots of them
–
75% of M&A deals in the last year . . . but
changing?
•
•
VCs won’t continue to nurse weaker companies –
have cleared most of portfolios
Hard to do -- high risk and need lots of funding
Trends from the Trenches
• More Private Company Deals
– IPO window closed . . . for now
– Public acquirers are very cautious
– Public acquirers need deals with immediate
impact
• Cost savings - NOW
• Tangible ROI
– Public stocks depressed – expensive collateral
– Private deal only means of survival for most
Trends from the Trenches
• Acquisition “Flips” (e.g., Metropolitan Venture Partners – 29%
IRR for last two years)
– Potentially lucrative and permit entrepreneurs to score
on multiple ventures
– Avoid problems of publicly held companies
• Detailed reporting requirements
• Structure, system, bureaucracy
– But, High Risk
• Hard to finance
• New competitors limit liquidity path
• Typically no backup plan for longevity – all or nothing
Trends from the Trenches
• Look for money . . . get acquired
– VCs looking for “sure thing”, now
– VCs accepting singles and doubles rather than
homeruns
• Limited to strong companies
The M&A Process – Current Issues
• Preliminary Negotiations
– Investment Banks focused on M&A
• Working with earlier stage companies
• Doing VC deals, too (for 4 to 6% fees)
– Standard IB Agreement includes right to do
M&A, too
– Be aware of duration, exclusivity and credit for
contacts
The M&A Process – Current Issues
• The Letter of Intent
– Generally non-binding, but be careful about
good faith negotiations
– Currently not in favor
• Timing issues: Time to market / Acquirer’s stock
– Not generally favorable to Target anyway
• Walk away – no way
• Exclusivity is restrictive
The M&A Process – Current Issues
• Due Diligence
– Lots of it, and lots of time dedicated to it
– Primary cause for deals to falter
• Timing – market changes
• Warts – finding things that wouldn’t find before
– Give them EVERYTHING
• Tech deals – open kimono slowly
• Service deals – time to market is more important
The M&A Process – Current Issues
• Definitive documents
– Escrows – 10% for one year – sometimes
longer
• Mix of stock and cash reflects deal
• Acquirer wants cash first
– Earn outs
• Bridge gap in valuations, but VERY unfavorable to
target – most never achieve milestones
• In almost every deal now
The M&A Process – Current Issues
• Definitive Documents cont’d
– Limitation of Liability
• Try to carve up liabilities (e.g., taxes, environ.)
• Limit recourse to escrowed amount
• Create a larger basket (higher threshold)
– 1 to 2 % of purchase price is typical
The M&A Process – Current Issues
• Fiduciary Duty and Conflicts of Interest
– Different Agendas:
• VCs – cover preference, get liquidity, avoid
fiduciary breach
• Management – equity acceleration, narrow noncompetes, short employment agreements
• Employees – job security, acceleration
• Shareholders – best price
The M&A Process – Current Issues
• Fiduciary Duty and Conflicts cont’d
– Directors Duty of Care
• Act in an Informed and deliberate manner
• Keep a detailed record of deliberations
• Demonstrate careful, objective process – rely on
experts
– Separate counsel for Management and Board Members
– Investment Bankers fairness opinion
The M&A Process – Current Issues
• Fiduciary Duty and Conflicts cont’d
– Directors Duty of Loyalty
• Act in best interests of all shareholders
• Try to have only disinterested directors vote
– Special committee
– Shareholder approval
What if it doesn’t happen?
• Sources of liability
–
–
–
–
–
Employees – priority for unpaid wages
Uncle Sam – withholding and other taxes
401K funds – matching payments
Investors – fraud claims
Creditors – fraudulent transfers
What if it doesn’t happen?
• Company solvent
– No fiduciary obligation to creditors
• Company insolvent
– Fiduciary duty extends to both shareholders
AND creditors
• When company is “in the vicinity” of insolvency
• Business Judgment Rule applies