Robin A. Graham
Needham & Company, Inc.
The Emerging Growth Investment Bank for Technology Leaders
Page 1
Today’s M&A discussion
•
Understand the M&A environment that you are in
•
How to find and engage the right investment bank for M&A
advice
•
Working with an investment banker to prepare for a
negotiation/sale
•
The range of services provided by bankers in the M&A
process
•
•
Issues in selecting the best merger or acquisition partner
Where M&A bankers are focused today and why
Page 2
The Mergers and Acquisitions Environment
Market Capitalization Over Time
Valuation corrections in 2001 altered the Market Cap landscape dramatically
•
More than half of large-cap companies ($1bn+) reassigned to the middle market
($500M - $1bn)
•
Only 93 companies went public in 2001, yet the small-cap sector continued its
growth trend grow due to devaluation of large and mid-cap stocks
Market Capitalization Analysis
U.S. Targets
January 1, 1990 to December 31, 2001
6,000
0 - $500MM
> $500MM - $1B
> $1B
5,500
5,000
4,500
Number of Companies
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: FactSet
Page 4
Macro Trends in M&A
• An extended period of high valuations followed
by tight credit markets have caused financial
buyers to be an insignificant factor in the
overall M&A market as compared to earlier
periods.
• Overall M&A volume has retreated dramatically
from the past few years all-time highs
• M&A activity is still driven by corporate buyers
fulfilling strategic imperatives
Value of Completed M&A Transactions
Acquisitions Completed by Financial Buyers
U.S. Targets
January 1, 1987 to April 30, 2002
U.S. Targets
January 1, 1987 to April 30, 2002
($ in billions)
(% of Total Volume)
30%
$1,740.1
$1,800
23.8%
$1,600
25%
$1,352.2
$1,317.5
20.2%
$1,400
20%
$1,091.7
$1,200
16.2%
$1,000
15%
$740.7
$800
10%
$600
$402.7
$292.3 $311.0
$400
10.0%
$613.5
$210.2
5.9%
$198.2
$137.0 $121.1
4.9%
4.6%
$287.2
$180.5
$110.8
3.9%
3.6%
5%
1.2%
1.9%
0.8% 0.5%
$200
0.5%
0.5%
0.2%
0%
$0
1987
1988
Source: Securities Data Company.
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002 ytd
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001 2002 ytd
Source: Securities Data Company.
Page 5
The Impact on Technology M&A
Technology M&A volume was most significantly impacted
•
2001 tech M&A volume was down more than 60% from 2000 levels after an
unprecedented run that began in 1994.
•
Broken deals were prevalent as business fundamentals and expectations eroded.
•
2002 YTD M&A volume is even more depressed
Value of Completed Technology M&A Transactions
U.S. Targets
January 1, 1987 to April 30, 2002
($ in billions)
$800
$722.8
$700
$600
$513.2
$500
$400
$271.5
$300
$222.8
$162.3
$200
$100
$125.5
$45.5
$13.4
$10.2
$10.2
$13.5
$14.4
$8.7
$67.9
$27.5
$9.7
$0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002 ytd
Source: Securities Data Company.
Page 6
Mergers & Acquisitions Environment
M&A Currency - what is different now?
•
Cash is King - reversing the accelerating use of high p/e stock seen 1995-2000
•
New FASB rules no longer penalize creative structures using stock and cash
•
Cash is an increasingly attractive currency to sellers and low P/E buyers.
M&A Currency Analysis
U.S. Technology Transactions greater than $25MM
January 1, 1990 to April 30, 2002
350
Cash
Stock
Combination
325
300
275
Number of Transactions
250
225
200
175
150
125
100
75
50
25
0
1990
1991
Source: Securities Data Company.
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002 ytd
Page 7
The Public/Public M&A Story
M&A dollar volume between public companies fell dramatically after Q1 2001
•
Most of Q1’s dollar volume were CY 2000 transactions that closed in early 2001
•
Public companies froze merger discussions due to valuation uncertainty and
eroding business performance at both buyers and sellers.
•
The number of transactions consummated declined >6x Q1/Q1
M&A Activity Between Public Companies
U.S. Targets
January 1, 2000 to April 30, 2002
$400
400
# of Transactions
$350
350
$300
300
$250
250
$200
200
$150
150
$100
100
$50
50
$0
Number of Transactions
Volume of Completed Transactions
$ Volume
0
2000 - Q1
2000 - Q2
Source: Securities Data Company.
2000 - Q3
2000 - Q4
2001 - Q1
2001 - Q2
2001 - Q3
2001 - Q4
2002 - Q1
Page 8
The Private Company Liquidity Path
Private companies found liquidity paths scarce in 2001
•
Of the 93 IPOs in 2001, just 19 were technology companies
 This compared to 308 tech IPOs in 1999 and 221 tech IPOs in 2000
 The period 1980 – 1998 averaged just 61 IPOs per year
•
M&A continually reinforced as the most likely liquidity path for private companies
U.S. Private Company Liquidity Events
January 1, 1990 to April 30, 2002
6,000
IPO
M&A
4,949
5,036
5,000
4,463
4,243
Number of Transactions
4,097
3,873
4,000
3,466
3,000
2,732
2,549
2,337
2,082
1,986
2,000
818
1,000
604
874
645
629
578
403
389
536
386
214
93
258
24
0
1990
1991
Source: Securities Data Company.
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002 ytd
Page 9
The Good Old Days…
The BOOM
Economy
Unprecedented wealth creation and
high consumer confidence
M&A EXIT:
High p/e
stock currency used
in “strategic” MA& boom
Low cost and easy access to capital
IPO EXITs: underdeveloped
companies go public early
Investors seeking abnormal
returns increasingly turned
to private equity
“Public” Venture
Capital Phenomenon
Proliferation of
venture funds
M&A outpaces
IPO’s 11-1
Explosion of young VCbacked tech and Internet
companies
Page 10
Mergers & Acquisitions Environment
Significantly reduced M&A activity seen in 2001 will continue
•
Classic “Buyers Market”, yet the universe of buyers contracted dramatically
•
The number of sellers remain high as the valuation-sensitive sellers are more than
outnumbered by the illiquid desperate sellers
 Distressed public companies and stranded / capital-starved private companies
•
Industry leaders that had built their businesses through aggressive acquisition were on
the M&A sidelines -- until very recently
 In 2001, corporate buyers were waiting for valuations and their businesses to
stabilize. Examples: Cisco, Lucent, Nortel, Broadcom
 However, “Gorilla” acquisition appetites are renewed in 2002
—
Cisco just announced two “spin-in” acquisitions and 2002 M&A intentions
—
Broadcom just re-entered with acquisition of Mobilink ($258M)
Page 11
Mergers & Acquisitions Environment
The results are:
•
Fewer M&A transactions and lower valuations for M&A transactions
•
Longer cycle times for transactions
 Much greater emphasis on detailed financial/business due diligence
 Management cautious throughout process
 Greater degree of Board involvement in acquisitions
 Slow, difficult negotiations – every point counts
•
More carefully structured M&A transactions
 the return & proliferation of earn-outs for acquired companies
 Passing EPS accretion/dilution acid test is critical
Page 12
Mergers & Acquisitions Environment
M&A Market Outlook for 2002
•
Significant transition made in 2001 from Sellers market to Buyers market
•
Companies with strong balance sheets, experienced management teams and
profitable business models are now the drivers of the M&A market.
•
M&A transactions will continue to suffer higher attrition rates and lower net
valuations
•
An increasing percentage of transactions will be“distressed sales” or
bankruptcies
•
Leveraged companies and undercapitalized companies will be at a
tremendous negotiating disadvantage
Choosing and using the right M&A advisor and experienced legal counsel will
be all the more critical to a successful outcome
Page 13
The M&A transaction
Assembling the Transaction Team
•
The Core Working Group:
 Senior management team, legal counsel, Investment Banker & their
M&A team
•
Getting to know investment bankers
 Who can make the right introductions
—
Directors
—
Venture Capitalists
—
Legal counsel
 If your company is an attractive acquisition candidate, bankers have
probably been beating down your door
 Take the time to get to know bankers well before a transaction is
imminent – a long-standing relationship benefits everyone involved
Page 15
Selecting the Right Banker
•
Bankers who know your industry sector and its competitive
dynamics
•
Active M&A team with current & recent experience on transactions
•
An investment bank with a tradition of representing companies that
are your size and profile
•
Research analysts who cover your industry sector and follow its
public companies
•
Leverage the relationship with your banker
 Hire a full service investment who can advise you on a multitude of
possible alternatives to M&A (alternatives = negotiating leverage)
Page 16
Current Structure of the Investment Banking Industry
Independent National
Emerging Growth Firms
Needham & Company
Thomas Weisel Partners
Wit Soundview
Emerging Growth Firms Now
Owned by Major Commercial Banks
ABN Amro / ING Barings / Furman Selz
Bank of America Securities / Montgomery
JP. Morgan / Chase / H&Q
CIBC World Markets / Oppenheimer
Deutsche Bank / Bankers Trust / Alex. Brown
Firstar / US Bancorp / Piper Jaffray
Fleet / BancBoston / Robertson Stephens
Royal Bank of Canada / Dain Rauscher / Wessels
SG / Cowen
Major Bracket Institutional Firms
Bear Stearns
UBS Warburg / Paine Webber
Special Bracket Firms
Citigroup / Salomon Smith Barney
CS First Boston / DLJ
Goldman Sachs
Lehman Brothers
Merrill Lynch
Morgan Stanley Dean Witter
Regional Retail, Institutional or
Emerging Growth Firms
A.G. Edwards (St. Louis)
Adams Harkness & Hill (Boston)
Janney Montgomery Scott (Philadelphia)
KeyCorp / McDonald & Company (Cleveland)
Morgan Keegan (Memphis)
Raymond James Financial (St. Petersburg)
SunTrust Equity Securities (Atlanta)
Stephens Inc. (Little Rock)
Robert W. Baird (Milwaukee)
Wachovia (Richmond)
Wells Fargo/FSVK (San Francisco)
William Blair (Chicago)
Page 17
The Role of an Advisor
…extracts from a standard engagement letter:
•
Reviewing with the Board of Directors and management the Company's
financial plans, strategic plans and business alternatives
•
Reviewing and analyzing the historical and projected financial information
of the Company and the Other Party provided by the respective
managements of the Company and the Other Party
•
Assisting the Company's Board of Directors and management in the
valuation of the business(es) involved in the Transaction
•
Assisting the financial due diligence efforts of the Company with respect to
the Other Party
•
Advising the Company with regard to the financial structure and terms of
any Transaction that might be realized in the current market environment
and assisting the Company in structuring and negotiating the financial
aspects of the Transaction
Page 18
Preparation is Key
•
Discuss your business’ history and prospects with M&A advisors in detail
•
Realistic assessment of financing/M&A options with advisors
 Avoids “death-march” or “firesale” scenarios
•
Prepare realizable, bottoms-up, detailed financial forecasts
•
Outline non-financial concerns to your advisors
 Employee treatment, cultural and strategic fit with each potential buyer
•
Establish reasonable valuation expectations up front
•
Determine initial preference for cash, stock or combination thereof
•
Help your advisors build a Negotiating Plan
Page 19
Assessing Negotiating Leverage
Multiple Elements Drive Negotiating Leverage
• Competition
• Strategic Alternatives
• Necessity/Desire
Negotiating
Leverage
(5 key elements)
• Resources
• Time
Page 20
Building the Negotiating Plan
Planning is an Important Component of Successful Negotiations
Collecting
Information
Achieving
Resolution
Assessing
Leverage
Negotiating
Plan
Establishing
Expectations
Determining
Response
Page 21
Critical Transaction Parameters
Successful Negotiation Can Usually Result in a
Broad Range of Outcomes
Financial Terms
Valuation
Structure
Liquidity
Buyer’s Minimum Terms
Seller’s Minimum
Terms
Non - Financial Terms
Strategic Fit
Culture
Timing
Page 22
Structure of M&A Advisor Fees
Sellers pay advisory fees as a % of Total Transaction Value
 Sometimes staggered for additional incentive: 1% plus 2% over $100M
•
Advisors “minimum fee” common in this business environment
 Example: Fee is the greater of 1.5% or $750,000
•
Interim fees sometimes charged and credited against total fees due on
closing:
 Retainer fee on signing engagement letter
 Milestone Fees on signing of Letter of Intent/Agreement or
Announcement
•
Fairness Opinion fees (Only necessary for public companies)
 Set $ amount charged is independent of transaction completion
Page 23
Where Advisors are Focused Today
•
The Investment Banking industry is itself retrenching
 Many firms are pre-occupied with their own M&A and restructuring
•
M&A professionals spending more time advising Acquirers in a buyers
market
 In 2000, Needham represented Buyers in just 27% of transactions
 In 2001 & 2002, Needham represented Buyers in 47% of transactions
•
Public companies who are building market leadership through M&A
•
Still very active in representing sellers, but Very cautious in assessing
valuation and probability of transaction completion prior to committing
resources
 Seller’s business stability and negotiating leverage, strategic drivers of
transaction are critical
 Acquisitions of stand-alone private companies by public companies are
difficult in today’s M&A market
Page 24
Where Advisors are Focused Today
Needham & Company remains committed to Emerging Growth companies
•
Supporting client-base through the downturn
 Follow-on equity offerings
 Private Placements
 PIPEs
•
Grew headcount in 2001 and YTD 2002 while maintaining profitability every
quarter
•
Strong Q1 2002 -- our second best Q1 in 15 years
•
Taking market share in Emerging Growth M&A
 Ten M&A transactions announced YTD
 Including four public/public M&A transactions
Page 25
Appendices
The M&A Transaction
A Typical Sale / Divestiture Process
Preparation
Weeks 1 - 4
Canvas Buyers
Weeks 5 - 8/10*
Phase/Action Items
•Engagement of Needham
Due Diligence
•Review Co. Financial and
Operational Information
•Contact Buyers
•Needham Values Co.
•Send Executive summary
•Prepare Memorandum,
•Sign NDAs
Weeks 8/10 - 12/14
•Distribute informational
memorandum / materials
Executive Summary and
NDA with co. counsel
•Prepare List of Likely Buyers •Prepare management team
for diligence presentations
•Request and receive initial
non-binding bids in writing.
Week
1
2
3
4
5
6
7
Final Negotiation
Weeks 12/14 - 16/18
•Setup Data Room
Closing
•Select Qualified Bidders
for D.D.
•Schedule and Conduct
Visits
•Provide Draft Definitive
Agreement
9
10
•Shareholder Approval
Process
•Submit HSR Filing
•Receive Final Bids
8
(TBA)
•Select Winning Bidder
•Negotiate & Execute
Definitive Agreement
•Press Release
($50 million threshold)
11
12
13
14
15
16
17
18
* The length depends on such factors as the size of canvas, the overall market and the geographic location of contacts.
Page 27
The M&A Transaction
Acquisitions & Transactional Issues
Financial Positioning
•Press release announcing
transaction
Due Diligence
•Backgrounder on the acquisition
•Guidance for analysts’ forecasts
•Interview key management
•Financial due diligence
Negotiations
•Financial advisor or principal
•Cash or stock preferable
Structuring
•Understand potential synergies
•Employee issues such as:
•Acceleration of options
Valuation
•Determine ability to use either
•Employment agreements
cash or stock
•Non-compete agreements
•Analyze respective proforma
•Condition of closing
acquisition
•Financing outs
•Balance sheet
•Discuss business history and
•Reps & warranties
•P&L
•Break-up fees
prospects with management
•Goodwill (write-off upon
impairment)
•Shopping restrictions
•Analyze comparable transactions
and projected financial statements;
interview independent auditors
•Plan and execute roadshow to
sell the deal, if necessary
•Third-party interviews and
reference checks
•Facility visits
•Legal due diligence
•Key issues to be negotiated:
effects of a stock or cash
•Analyze financial statements
•Analyze comparable public
companies’ trading multiples
including analysis of historical
•Prepare and conduct conference
call
•Topping offers
•Material adverse change
•Shareholders’ vote
required (either company)
Page 28
Representative Financial Advisory Assignments
Undisclosed
$128,000,000
$103,000,000
Acquiring
Sale to
Acquiring
Sale to
Sale to
Innoveda Inc.
Asyst
Technologies, Inc.
Mechanical
Dynamics, Inc.
Mentor Graphics
Corporation
Level 3
Communications
GHz Technology, Inc.
Pending
2002
2002
2002
2002
2002
$68,000,000
$77,000,000
$50,100,000
$140,000,000
$12,300,000
$26,000,000
$160,000,000
Sale to
$120,000,000
$29,000,000
Acquiring
has Acquired
ADC
Telecommunications, Inc.
(RF Equipment Business)
Spin-off to
Sale to
Sale to
Therma-Wave, Inc.
Integrated Circuit
Systems Corp.
Existing Shareholders
FEI Company
Lawson Software
2002
2002
2001
2001
2001
2001
$100,000,000
$115,000,000
$37,000,000
$36,000,000
$900,000,000
$77,000,000
Sale to
Excalibur Technologies Corp.
Sale to
Merger of
Sale to
has Acquired
Sale to
has Acquired
MMC Technology, Inc.
NVIDIA Corporation
CMD Technology
Computer Network
Technologies
Intel’s Interactive
Media Service Division
Viasystems
Group, Inc.
2001
2001
2001
2001
2000
2000
with
Page 29
Representative Public Equity Offerings
$125,000,000
$109,500,000
$52,200,000
$50,000,000
$60,750,000
$53,550,000
Convertible
Debt
Follow-On
Offering
Follow-On
Offering
Convertible
Preferred
Follow-On
Offering
Follow-On
Offering
Co-Manager
Co-Manager
Lead Manager
Co-Manager
Co-Manager
Co-Manager
April 2002
March 2002
March 2002
March 2002
March 2002
February 2002
$93,020,000
$100,350,000
$66,000,000
$23,490,000
$68,000,000
$76,467,060
Follow-On
Offering
Follow-On
Offering
Follow-On
Offering
Follow-On
Offering
Follow-On
Offering
Follow-On
Offering
Lead Manager
Co-Manager
Co-Manager
Lead Manager
Co-Manager
Co-Manager
January 2002
January 2002
December 2001
December 2001
November 2001
November 2001
$100,000,000
$103,020,000
$26,000,000
$150,000,000
$29,700,000
$62,100,000
Follow-On
Offering
Follow-On
Offering
Follow-On
Offering
Convertible
Debt
Follow-On
Offering
Follow-On
Offering
Co-Manager
Co-Manager
Co-Manager
Co-Manager
Lead-Manager
Co-Manager
October 2001
October 2001
September 2001
August 2001
August 2001
July 2001
Page 30
Representative Public Equity Offerings
$64,000,000
$50,000,000
$36,000,000
$250,000,000
$200,000,000
$244,000,000
Follow-On
Offering
Initial Public
Offering
Follow-On
Offering
Convertible
Debt
Convertible
Debt
Follow-On
Offering
Co-Manager
Co-Manager
Co-Manager
Co-Manager
Co-Manager
Co-Manager
July 2001
June 2001
June 2001
June 2001
May 2001
May 2001
$141,000,000
$42,000,000
$98,000,000
$126,000,000
$41,000,000
$36,000,000
Follow-On
Offering
Initial Public
Offering
Follow-On
Offering
Follow-On
Offering
Follow-On
Offering
Initial Public
Offering
Co-Manager
Co-Manager
Co-Manager
Co-Manager
Lead Manager
Co-Manager
February 2001
November 2000
October 2000
September 2000
August 2000
August 2000
$75,000,000
$26,000,000
$20,000,000
$53,000,000
$39,000,000
$120,000,000
Initial Public
Offering
Follow-On
Offering
Follow-On
Offering
Initial Public
Offering
Initial Public
Offering
Follow-On
Offering
Co-Manager
Co-Manager
Lead Manager
Co-Manager
Co-Manager
Co-Manager
August 2000
August 2000
August 2000
August 2000
July 2000
July 2000
Page 31
Representative Private Placements
$29,450,000
$17,000,000
$20,000,000
$12,000,000
$8,220,000
$28,600,000
Common Stock
Common Stocks
Convertible Preferred
Series C Preferred
Series C Preferred
Common Stock
Common Stock
Virtual Silicon
Current
Status:
Current
Status:
2002
2002
2002
2001
2001
2001
Public
Public
Private
Private
Public
Public
$10,250,000
$18,600,000
$10,000,000
$19,500,000
$37,500,000
$11,850,000
Common Stocks
Common Stock
Convertible Preferred
Common Stock
Series G Preferred
Series D Preferred
2001
2001
2001
2001
2000
2000
Public
Public
Public
Public
Private
Private
$21,500,000
$8,200,000
$8,300,000
$10,000,000
$12,700,000
$6,000,000
Series B Preferred
Common Stock
Series B Preferred
Common Stock
Series I Preferred
Common Stock
Bernàrd Technologies, Inc.
Current
Status:
2000
2000
2000
2000
2000
1999
Private
Public
Private
Public
Public
Private
Page 32
Representative Corporate Investment Transactions
Undisclosed
$10,000,000
$35,000,000
$60,000,000
Conner
Peripherals, Inc.
Hitachi Metals
Limited
Philips N.V.
Northrop Grumman
and
Vitesse Semiconductor
investment in
investment in
Applied Magnetic
Corporation
$20,000,000
$10,000,000
strategic partnership with
Sears, Roebuck
& Company, Inc.
investment in
MaxServ, Inc.
investment in
Epoch System
investment in
Applied Magnetic
Corporation
Navigation
Technologies
Corporation
Elo Touch
System, Inc.
$10,000,000
$24,000,000
$10,000,000
Westinghouse Electric
Corporation
Telemetrix PLC
investment in
Undisclosed
investment in
investment in
investment in
GTI Corporation
RF Micro
Devices
GAMMA-METRICS
Corporation
Page 33