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Goldenhill Technology Advisors

Goldenhill Technology Advisors

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Goldenhill Technology Advisors

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  1. Goldenhill Technology Advisors March 31, 2014

  2. Executive Perspective for Scientists & Engineers Tech Mergers & Acquisitions (M&A)

  3. Introduction • We are a full service Mergers and Acquisitions advisory firm • Our focus on the Information Technology in general and with a number of sector specializations • Offices in San Diego, London and Buenos Aries • Our 4 Partners have advised on dozens of transactions with values from $1m - $100+m 2

  4. Agenda • Purpose of the session & expected results • What/Why/How M&A? • Team Exercise #1 • Issue & Alternatives to M&A • Team Exercise #2 • Tech M&A, Valuation, Deal Process • Team Exercise #3 3

  5. Purpose & Intended Results • Purpose • Provide a high level M&A overview, especially from Buyer perspective • Intended Results • Business perspective for a technical audience • Build some knowledge/respect for the subject • Provide some key success factors/pitfalls • Practice with several relevant exercises However, We Can Only Really Scratch The Surface 4

  6. M&A as a Strategy? • What does that mean? • Who has been acquired? • What was your experience? • Who has been a part of an acquisition process or team? • What was your experience? • What did the ‘deal’ mean to your Company? • What did it mean to your Group or Department? • What did it mean to You? 5

  7. Merger vs. Acquisition? • Merger: a strategy through which two companies agree to integrate their operations on a relatively co-equal basis (“a merger of equals” which almost never happens) • Acquisition: a strategy through which one company buys a controlling interest in another company with the intent of making the acquired company a subordinate or integrated business within its own portfolio 6

  8. In the Real World, there is always a subordinate party! 7

  9. Types of Acquisitions • Stock: acquisition of the stock of a legal entity • Can be entire Company or a Subsidiary Company • Asset: acquisition of just all or certain Assets (and usually Liabilities) of a Company, Subsidiary or Division/Unit Different levels of risk Different tax implications Usually a different level of Due Diligence required 8

  10. How do you measure success? • Acquisition successfully created value in accordance with the approved Acquisition Business Plan • Met or exceeded strategic objectives (i.e. Products, Technology, Customers) • Fulfilled financial expectations (i.e. ROI) • Augments revenues, boosts profits, generates shareholder value 9

  11. What are the chances of success? • Successful acquisition is a journey, closing of the deal is only the beginning • Integration of the acquired business is majority of the journey • especially in Technology (different IP, cultures, tools, etc.) • Thus, a number of acquisitions are subsequently considered a bust and even divested by the Acquirer (recall Google and Motorola?) 10

  12. So why do Acquisitions? • In most cases it is a “Make” versus “Buy” decision • Core Technology/Products/Services • Market Position • Faster Growth in Revenue/Profitability, Market Valuation, etc. • Time, Competition, Customers, Image, etc. • Human Resources i.e. talent, know-how, customer relationships • Geographic Presence • Combination of some/all of the above 11

  13. Overlap of Buyer/Seller Capabilities Types of Acquisitions Entry to New Market Sector(s) Complements or Extends Buyer Capabilities 12

  14. Reasons for making acquisitions Overlap of Buyer/Seller Capabilities Clearly Complements or Extends Buyer/Seller Offerings • Normally called a Consolidation or Roll-up Acquisition • Consolidate choices, remove competitors • Increase economies of scale, market position, realize cost synergies • Improve revenue and profitability from this area or business • Examples: AT&T  Leap Lenovo  IBM x86 server biz HP  Compaq 13

  15. Reasons for making acquisitions Complements or Extends Buyer Capabilities Clearly Complements or Extends Buyer/Seller Offerings • Often called a Complementary or Bolt-on (not affiliated with the San Diego Chargers) • Acquisition • Expands Technology/Products/Services in complementary way • Enables Buyer to broaden offerings or customer set • Reduces risk(?), time to market for complementary offerings • Improve revenue and profitability from this area or business • Example: Cisco  Sourcefire, Yahoo!  Tumblr, Oracle  Responsys 14

  16. Reasons for making acquisitions Entry to New Market Sector(s) Clearly Complements or Extends Buyer/Seller Offerings • Often called a Strategic or Expansionary Acquisition • Expands Technology/Products/Services into truly new areas/markets • Enables Buyer to significantly broaden offerings or customers • Well beyond complementary or extension of current capabilities • Improve revenue and profitability from this area or business • Example: Google  Motorola or Oracle  Sun or Microsoft  Skype 15

  17. Real Life Example M&A ‘Needs’ Map Existing Solutions Some Solutions Solutions Required 16

  18. Team Exercise #1 Assume you are running your company • What kinds of acquisitions would you consider? • Why? – What would it do for you company? • How would you prioritize acquisitions for your company? • What? – What would be most important? • What would be the key criteria for evaluating potential targets? • Why? – Why do you select these 3-4 key criteria? 17

  19. Acquisitions are part of business, but there is risk & potential problems!? 18

  20. Issues with acquisitions – Poor integration • Perhaps #1 cause of post-deal issues • Vast majority of the deal value is unlocked in the Integration • Especially in Tech with differing technologies, passions, cultures • Must start Integration Planning in Due Diligence, not @ Closing! • Key issues to address in Tech Integration include: • Product/technology roadmaps • Cultural differences (e.g. corporate vs. entrepreneurial) • Sales force and Marketing combination • Licensing, Service policies, IT systems, IP processes, etc. 19

  21. Issues with acquisitions – Integration To Do’s • Ideas for a successful Integration • Buy the right target, always helps  • Well-defined Acquisition Plan including Integration plan/budget • Defined goals in the Plan for short and medium term • In a deal of any size, an Integration Manager and even a Team • Include key people from the target in the planning and execution 20

  22. Issues with acquisitions – Wrong target acquired • Evaluation requires that many issues be closely examined, including • Fit of the target to the stated acquisition goals/criteria • Customer, Product/Service, Channel, People “fit” • Actions to successfully meld the workforces (esp. Sales & Technical) • Financing for the transaction • Ineffective due diligence process may • Cause technical, economic & legal surprises post-acquisition • Result in paying excessive premium for the target company • Failure to make an Integration Plan during due diligence process 21

  23. Issues with acquisitions – Financial burden • Acquisition financed with significant debt can be high risk • Can increase the likelihood of bankruptcy • Lead to a downgrade in the company’s credit rating • Preclude other needed investment in activities that contribute to the company’s long-term success • Use of cash or subsequent cash drain from debt service and/or requirements from new company can be huge burden to acquirer 22

  24. Issues with acquisitions – Synergy achievement • Synergy exists when combining separate entities results is greater productivity • In terms of increasing revenues • In terms of improving products/services • In terms of reducing costs • Factors negatively impacting synergy achievement • The actual fit may be different than the projected fit • Underestimating the indirect costs • Overestimating the cost savings • Inability to effectively resolve inconsistencies 23

  25. Issues with acquisitions – Distraction • Management & staff in target companies may operate in a state of virtual suspended animation during acquisition process • Management & staff in acquirer may focus too much on acquiring, not enough on own business • Post-acquisition distractions of integration issues, new business challenges, larger company to manage, etc. 24

  26. Given the potential issues, what are alternatives to M&A? 25

  27. Alternatives to M&A • Add channels to market • Use more suppliers, subcontractors • Strategic alliances • Joint ventures 26

  28. As M&A is a reality especially in Tech, how to improve chances of success? 27

  29. How to improve chances of successful M&A • Define target criteria in advance & be realistic • Seek & find targets that fit the criteria • Be patient, selective • Do your due diligence & make integration plan same time • Integration is KEY • Set goals before Closing, monitor progress afterwards • Keep the key players 28

  30. Team Exercise #2 Back to Exercise #1 & the targets you identified • What are the top 3 issues of concern in your case? • What would you do to mitigate these potential problems? • Offer any examples from your own actual experience? 29

  31. Effective M&A – The Pitfalls • Lack of compelling strategic rationale (why do this deal?) • Inadequate Due Diligence (didn’t find all the risks) • Unrealistic expectations or excessive price paid • Failure to integrate expeditiously • Lack of shared vision (not on same page) • Conflicting corporate or national cultures • Not investing adequate resources to properly integrate and develop the acquired business 30

  32. Effective M&A • Complementary assets or resources • Buying companies with assets that meet current needs to build competitiveness, profitability, market presence • Careful selection process • Deliberate criteria, evaluation & negotiation is more likely to lead to easy integration & building synergies • Maintain financial flexibility • Don’t overextended the company financially to do a deal! 31

  33. Effective M&A • Focuses on value creation • Incurs appropriate (or no) debt • Combined company maintains financial flexibility • Flexibility • Has experience at managing change & is flexible & adaptable • Emphasizes innovation • Continue to invest appropriately in R&D as part of the company’s overall strategy 32

  34. Effective M&A – Hard stuff : Soft stuff • The hard stuff • Correct criteria, right fit to criteria • Realistic synergy evaluation • Buy at the ‘right’ price • Through due diligence • Careful integration planning • The soft stuff • Selecting the management team • Resolving cultural issues (common vision, roles, responsibilities, measurement & reward systems • Integrating the working groups • Communications 33

  35. Effective M&A – Recap the key steps • Strategic decision, even if opportunistic circumstance • Pre-acquisition planning • Acquisition process • Search process • Evaluation criteria • Deal structure • Post-acquisition integration 34

  36. Tech M&A – Maximizing Value 35

  37. Tech M&A – Buyers ROI • Thorough risk assessment is at the heart of all business valuations • Risk factors appear on 3 levels • Macro environment • Industry • Company Elements of Risk… Quantifying the Elements of Risk Determines the Required ROI 36

  38. Lots of Tech acquisitions – activity aligns roughly with market fluctuations Source Ernst & Young Tech M&A Report 2009

  39. Tech acquisitions – bigger deals back up

  40. Tech M&A – What to pay? • That depends on • What kind of buyer are you? • What are you buying? • The valuation method you use! • How much you want it! Sometimes one overrides the other!!!!! 39

  41. Tech M&A – What kind of buyer are you? • Strategic • Focus on the ROI based on the strategic leverage • Roll up • Focus on the ROI based on a “strategic formula” and the economies of scale • Financial • Focus on the ROI of the standalone business & the potential to “flip” 40

  42. Tech M&A – What are you buying? • Revenue/earnings/cash flow (EBITDA) • Tangible assets • Balance Sheet assets (A/R, INV, Cash) • Customers/Contracts/Patents • Intangible assets • Off balance sheet assets e.g. IP/Know how • People • Potential!! 41

  43. Tech M&A – How to value the target? • Market Comparables • To other like businesses; public & private; usually in multiples of EBITDA, Earnings or Revenue (for software companies) • Adjusted Book Value • Essentially calculating the adjusted (to replacement value of the assets) net book value of the assets of the business from its Balance Sheet • Income Statement Methods • Essentially uses historical, and projected, discounted cash flows of the Company to develop a potential valuation range 42

  44. Tech M&A – Key valuation factors • Recent revenue, earnings and cash generation history • General condition of the target including facilities, staffing, growth record, processes utilized, etc. • Market opportunity, size and potential demand for the offerings of the target • Economic conditions including current trends in business valuations • Tangible & Intangible assets of the target • Future growth, earnings and cash generation potential • Privately owned or publicly traded 43

  45. Mainly Private Companies Emerging Companies Market Size Growth Potential . . Revenues Gross profits EBITDA Est. Private & Public Companies Net income Traditional Companies Tech M&A – Market valuation approach 44

  46. Tech M&A – Key valuation factors • Market comparables are usually best method to determine valuation, at least as a really good starting point • “Rule of Thumb” discount 20%-30% for Private Company compared to Public Company comps • But Market comps normally crossed-checked to Discounted Cash Flow (DCF) analysis • Build business plan projecting future cash flows with proper discount factor • Determine NPV and compare to Market Comp valuation • If a significant delta, then bears further scrutiny 45

  47. Planning an acquisition • Define the objective of M&A, a means of ….. growth, add product/ services, new markets, technology, geography, etc. • Identify acquisition target companies that meet your criteria in terms of business and transaction characteristics • Conclude one or more acquisitions that meet your criteria and that can be effectively integrated and produce the expected results 46

  48. Planning an acquisition • Choosing the target – 3 ways to extract value • Lower costs – economies of scale, better cost management • Increase the combined company’s market power – stronger brand over a wider product or service base • Helps the buyer change the competitive game – example is Cisco which has used M&A to build its technology base as realized it couldn’t be innovation in every tehcn 47

  49. Transaction structure There are normally three or four players in any acquisition • The Sellers • The Buyer • The IRS • The Bank/Financing Source, if any 48

  50. The Letter of Intent (LOI) • An LOI or term sheet – most important part of deal process! • The result of negotiating all specific deal points • It is expected the terms of the LOI will be incorporated in the Definitive/Purchase Agreement • Should not be signed without benefit of legal review • Usually incorporates a “exclusivity period” • Once completed, starts the detailed due diligence process • Start of the real costs 49