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Monadnock Advisors
Hank Nelson
Monadnock Advisors LLC.
Mergers & Acquisitions Overview
Market Overview – M & A ProcessMaximizing Value
Monadnock Advisors
M & A Market Overview 2010
• Global M&A volume increased 25% $2 Trillion• U.S. M&A volume grew 17%• Aggregate number of transactions increased 34%• Record number of transactions• Middle market deals up 59%, volume 72%– Number of deals under $100M jumped 58%– Enterprise Value/EBITDA 8.6 compared to 7.6– Acceleration 2H FY10
Monadnock Advisors
M & A Market Overview 2010
• Drivers:– Equity market gains– Favorable credit markets – Cash/capital stockpiles driving corporations and
financial sponsorship activity–Moderate economic recovery – Global GDP 4%– Returned focus on growth vs operational efficiencies
Monadnock Advisors
U.S. M & A Activity
Source: Software Equity Group 2010
Monadnock Advisors
U.S. Middle Market M & A Activity
Source: Baird M&A Analysis 2011
Monadnock Advisors
M & A Definitions
• EV – Enterprise Value• EBITDA – Earnings Before Interest Taxes Depreciation & Amortization• M & A Measurements– EV/Revenues – Multiple of Revenues 1.0x– EV/EBITDA – Multiple of EBITDA 9.0x– Comparables • Multiples for public companies similar sector – size • Announced transactions• Discounted for size, lack of liquidity, concentration
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U.S. Technology Sector M&A Activity
Source: Baird M&A Analysis 2011
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M & A Overview 2011• General outlook - continued growth from 2H FY10
• R. Blair & Co. – “Dollar volumes would be consistent with levels achieved in 2005
record year of the previous M&A recovery.”
• Pepperdine Survey IB’s – Private Sale Increase 51%– Significant Increase 21%
• Drivers:– Strategic buyers flush with cash $2T in U.S. Co.– Modest economic growth projected– M & A perceived as best way for growth– Financial sponsors (PE) opportunity– Smaller companies- Make vs. Buy– Credit markets in play
• Timing….
Monadnock Advisors
M & A Process
• Role of the M & A Advisor– Quarterback of Advisory Team• Legal, Tax, Accounting, Wealth Mgmt
– Operations Consultant– Strategy Advisor– Preparation for Sale–Marketer of Business– Deal Technician– Financial Advisor
Monadnock Advisors
M & A Process
M & A Advisor:• Cultivate relationship(s) as part of your company
development process– Free advice – market knowledge, timing, business
model – Forces outward discussion and viewpoint– Excellent preparation for first time seller– Ability to respond immediately to any inquiries
Monadnock Advisors
M & A Process
Determine Goals and Objectives
Company Review : Strategic, Operational, Financial,
Establish Marketability
Realistic Valuation
Review Process
Engagement
Business Model
Historical Financials
RecastFinancials Projections
Identify Weaknesses
Improve Operations
Develop a Buyers View
Marketing
Offering Memorandum
Executive Summary
Management Presentation
Competitive
Bidding
Select Finalist
Structure of Transaction
Asset vs Stock
Marketing Plan
Industry Research
Selection Targets
Data Room
Confidentiality
Agreement
Estate Planning
Execute Agreement
Funds Transfer
Indemnification
Reps & Warranties
Purchase Agreement
Letter of
Intent
Final Due Diligence
Term Sheet
Taxes
Contact and CA
Meetings
Due Diligence
Screening and
Planning TransactionsMarketingDocument
PrepBusiness Review Negotiations
6 -12 Month Process
Monadnock Advisors
M & A Process
Seller
Buyer
1
23
4
56
7
Executive Summary
Offering Memorandum
Competitive Bidding
Letter of Intent
Due Diligence P&S Agreement
Closing
Process Control Change Point
6 -12 Months Process
Time is the Enemy
Preparation -NO Surprises
Monadnock Advisors
M & A Process
Degradation of Value:• Lack of a business plan or projections• Due diligence preparation – surprises• Intellectual property - protection or documentation
• Missing projections - timelines• Lose focus on business• Customer references• Employees
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Maximize Value - Range of Values
Employee Stock Ownership Plans
Recapitalization –Angel, VC, PE
Management Buyout
Synergy ValueSale to an Outside Buyer - company
Gifting
Investment Value
Investment Value (structured)
Fair market Value
Fair market Value
Monadnock Advisors
M & A Maximizing Value
Primary types of buyers:• Strategic: Competition – Vendors
– Desire specific aspect – technology –customer base
– New market entrant, leverage internal resource (marketing sales/distribution)
• Financial: Angel, VC, Private Equity, Individuals – Focus on cash flow from business– Business base from which to grow – platform– Theoretically paying for the present value of the future cash flows – usually
applied by applying multiple price periods
• Hybrid: Add-ons, Consolidations, Rollups, Product– Market share but with cash flow that can be enhanced through improved
relationships/distribution
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Risk vs. Return by Investor Class
Risk
Angel
Investor
VC Investor
PE Investor
Strategic
Buyer
Multiple
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10012%
10017%
Risk Assessment = EBITDA Multiple
= 8.3x = 5.9x
Private Business – Growing -Mature
10025%
= 4.0x 10035% = 2.9x
Private Business – Mid Stage/SMB
Higher Risk Assessment by buyer will generate a lower EBITDA Multiple
Monadnock Advisors
Maximizing Value - Valuation Drivers
Stable and Predictable
High Return on Capital
Brand Name
Growing Industry
Recurring Revenue
Alignment of Interest
Technology
Investment Risk
Cyclical
Capital Intensive
Commodity
Market Share Driven
New Competition Threat
Management Selling out
IP, Owners, Competition
Investment Consideration
Monadnock Advisors
M & A - Maximizing Value
Differentiators:• Company vision• Technology – product• Customer base• Employees• Business model• Financial performance• Stability – (ability to sell future)• Strategic relationships (gateway)
Monadnock Advisors
M & A Maximizing Value
Market Reality for the Entrepreneur:
• Companies no longer look at one opportunity to satisfy needs, but evaluate, compare, assigning weighted value and risk
• Large companies are presented hundreds or more opportunities a month for 5- 15 deals a year
• Need to differentiate• Market is usually the determinant of time to sell
Monadnock Advisors
M & A
M & A is a process not an event
Hank Nelson
Monadnock Advisors LLC.
hnelson@monadnockadvisors.net
www.monadnockadvisors.net
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