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INNOVATION 2 EXITRaising Capital and Executing ExitsA Primer for Technology Companies
April 17, 2008
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.
NEW YORK OFFICE
212.536.4029 TEL
212.536.3901 FAX
NEWARK OFFICE
973.848.4028 TEL
973-848-4001 FAX
Conrad E. Everhard
AREAS OF PRACTICE
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, equity-linked and M&A financing transactions for technology, healthcare and energy-related 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.
NEW YORK CITY
212.536.4849 TEL
212.536.3901 FAX
Stephan J. Mallenbaum
AREAS OF PRACTICE
Stephan Mallenbaum advises on complex business transactions, particularly at the intersection of technology and capital.
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 Lawrenceville, [email protected]
Investment Manager 609-873-9225
Ryan Ziegler discovers and evaluates investment opportunities in New Jersey and New York. Healso identifies new investment opportunities in the interactive marketing, financial services andwireless sectors. His activities include market research, technology assessment and financialanalysis. 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 forCyberShift, Games Media and Scivantage.
Background
Region Focus Ryan joined Edison in 2003 as Manager of Business Development. He managed and expanded·New York Edison's extensive referral network of service providers, technology executives and capital sources·New Jersey generating proprietary investment opportunities. Previously, Ryan was a Business Development
Manager with SEI Investments (NASDAQ: SEIC). Ryan worked in the enterprise sales, marketingSector Focus and investment strategy teams serving multiple financial market segments. He launched a·Wireless multi-billion dollar corporate distribution channel program for SEI’s Enterprise business unit.·InteractiveMarketing Ryan participates in numerous regional organizations including ACG, GPVG, NJTC, NYSIA,
·Financial Services NYPEN, SIIA, Executive Council of NY, TiE Tri-State and VIANY. He served as Co-chair of the2006 ACG Due Diligence Symposium, Co-chair of the Recruiting & Investor Outreach
Director Committee for the 2005 Mid-Atlantic Venture Conference and is on the steering committee for·CyberShift the 2006 SIIA Ed Tech Business Forum. He also is a member of the AngelVine selection·Giant Realm committee for emerging businesses.
Education
Bucknell UniversityBS, Business Administration & ManagementBA, Biology
1
INNOVATION 2 EXIT:Raising Capital and Executing ExitsA Primer for Technology Companies
Endorsed by:
Participating organizations:
Innovation 2 Exit:Navigating the Fundraising ProcessFirst Meeting to Term Sheet
PRESENTATION:
2
Edison Venture FundCurrently investing out of EVF VI - $258M fund
Expansion stage, growth capital investorFounded 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 growthAccelerate 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
3
Prepare for First Meeting
Evaluating money sourcesDetermine 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 homeworkResearch VC websites & ask trusted advisors to find the right match
What type of capital sources?
Understand the positives and potential negatives of each capital sourceFriends & 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 strategyGive 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 introductionService 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
4
First Meeting
You get the meetingBe prepared to deliver a concise presentation (e.g. 6-10 slides) in 30 minutes
Issues to addressIf 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+ millionWe 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 goingDon'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 upGain 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
5
Subsequent Meetings
Keep the dialogue goingDemonstrate 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 weaknessesCEO 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 businessVC 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 SheetPriority 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 modelRecurring revenue is compelling
Longer or more predictable contracts will raise the value of your CompanySubscription-based model, SaaS, ASP
High gross margins GMs enables Company to add development, marketing, sales and infrastructure
6
Pre-Term Sheet
Priority Deal presentation - critical areas to cover:
Management teamSeparating 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 strategiesStrong 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 phaseVC looking for fit with their investment strategy
Post-term sheet phase due diligence processVC looking for reasons to confirm investment strategy
Deal negotiationIt is critical for the entrepreneur to work with an attorney who understands
VC process and what are market terms
7
Edison Venture Fund Priority DealPresentation 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
Bellevue Boston Houston London Mexico City Munich Oslo Paris Philadelphia Phoenix Portland Santa Clara Toronto Zurich
Corum Group Ltd.www.corumgroup.com
Executing ExitsExecuting Exits
INNOVATION 2 EXIT
8
15
M A R K E T U P D A T E
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
16
Provider of applications support maintenance services (ASM)
Sierra Systems CanadaRIS Canada
Selected Corum Transactions
2008
Developer of collaborative 3D authoring technology
Microsoft U.S.Caligari U.S.
2007
IT services provider to government and commercial organizations.
TechTeam U.S.RL Phillips U.S.
Human capital management solutions
StepStone NorwayExecuTRACK Germany
M A R K E T U P D A T E
Pending-PCI Security -Enterprise Security-Unified Communications-Knowledge Management-IT Asset Management
9
17
Selected Corum Transactions 2007 (Cont.)
Electronic invoicing and legal spend management solutions
DataCert U.S.CorpraSoft U.S.
Value-added distributor of voice, data and converged communications solutions
Datatec South Africa on behalf of WestconCRANE U.K
Leading provider of event-driven business application automation and batch integration technologies
UC4 Austria backed by Carlyle (U.K.)AppWorx U.S.
Developer of 3D digital designs in the building, plant and marine markets
Autodesk U.S.NavisWorks U.K.
Provider of payment processing software and service
Purepay U.S.Creditron Canada
Provider of estimating and earth measuring software for contractors
Glaston FinlandAlbat+ Wirsam Germany
M A R K E T U P D A T E
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Selected Corum Transactions 2007 (Cont.)
Provider of estimating and earth measuring software for contractors
Maxwell U.S.Quest U.S.
HR information systems for middle market enterprises
BPO U.S.HR Microsystems U.S.
Networking and lobby services for game publishers & developers
Activision U.S.DemonWare Ireland
M A R K E T U P D A T E
10
19
Buyer Activity High
Current Examples
Sector Interested Parties
Wireless 14Compliance 13Enterprise Infrastructure 12Storage 12Supply Chain 12Visualization 11
Interested parties range from billion dollar household names tocompanies never heard of
M A R K E T U P D A T E
20
In Dollar Volume U.S. dollar volume all industries
Sources: Sources: DealogicDealogic, IPO Central, , IPO Central, CorumCorum
M&A Is the Primary Source of LiquidityM A R K E T U P D A T E
11
21
Dynamic M&A Market
2007
Overall M&A up 22%. Europe outpaced US for first time in 5 years
High tech deals for 2007 totaled $268 billion
Strategic buyers remained very active
Consolidation continued across most sectors
Global buyer community expanding Europe, Asia
2H:07 global deal volume fell 27% and US activity fell 46%
Consolidation in all markets
M A R K E T U P D A T E
2008
Polarization between high-value and low value markets
No leveraged PE deals; PE firms putting money in tuck-ins
Valuations down across the board
More distressed or urgent sellers
Poor earnings will constrain IT spending in second half
Silver lining: Record-setting valuations in hot markets, and new opportunities for buyers.
22
M&A Follows Public Markets
S&P NASDAQ AIM OMX
M A R K E T U P D A T E
12
23
Software M&A Valuation Multiples
Enterprise Value / Sales Software Industry
M A R K E T U P D A T E
24
Sectors to Watch Trending Up
Positive momentum in sector DEAL VOLUME underscores current interest and viability of space.
Q1
:05
Q2
:05
Q3
:05
Q4
:05
Q1
:06
Q2
:06
Q3
:06
Q4
:06
Q1
:07
Q2
:07
Q3
:07
Q4
:07
Digial Media
Business Intelligence
Supply Chain Management
Internet Pure Plays
Security
Wireless
Financial Services
Government
Healthcare
M A R K E T U P D A T E
13
25
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
Q1:
05
Q2:
05
Q3:
05
Q4:
05
Q1:
06
Q2:
06
Q3:
06
Q4:
06
Q1:
07
Q2:
07
Q3:
07
Q4:
07
Enterprise Applications
Storage
Gaming
Internet Infrastructure
IT Services
M A R K E T U P D A T E
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European IPO Market Still Accepting Deals
Emerging and Less Regulated Equity MarketsListings 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.
Source: Source: PwCPwC IPO Watch Europe SurveyIPO Watch Europe Survey
The number of technology firms that have listed on European exchanges over the past 6 months
Q4 listing percentage by exchange
41
M A R K E T U P D A T E
London35%
Euronext13%BME
3%Deutsche Borse
7%
OMX10%
Other9%
Oslo7%
WSE16%
14
27
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
M A R K E T U P D A T E
28
Top Buyers 2007
Strategic BuyersActive Private Equity FirmsCompany # of Deals
Google 12
Microsoft 11
Oracle 10
Cisco 9
IBM 9
HP 7
Nuance 7
Sungard 7
Accenture 6
Dell 6
SAP 6
Yahoo! 6
AOL 5
Autodesk 5
BT Group 5
CDC Software 5
PE Firm (partial list)
Kohlberg Kravis Roberts & Co.
Carlyle Group
Francisco Partners
Platinum Equity
Thoma Cressy Bravo
Golden Gate Capital
Silver Lake Partners
Apax Partners
170+ buyers with 2-4 transactions
M A R K E T U P D A T E
15
29
Vision
Research
Management
Business Model
Planning R&D Process
Patents
Documentation
Pricing
Support
Market Share
Staff
User Base
Marketing Channels
Alliances
Competitive Position
Technology
Sales Process
Capital Structure
Accounting Policies
Growth
Profitability
Domain Expertise
>> Don t forget the intangibles
What Do Buyers Really BuyM A R K E T U P D A T E
?
30
Strategic Acquisitions to Support Growth
Macro Considerations: Does the acquisition meet at least one of the following criteria?
16
31
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
32
Buyers Red Flags
Broken business modelNegative 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
17
33
Common Gotcha s
Contracts requiring consent in order to transferCritical point for subchapter S corporations that can sell assets without penalty
Cap TableMissing shareholders, warrant holders, verbal promises, confusion
Inadequate or missing work-for-hire agreementsConsider 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 SheetExcess cash, working capital requirements, proper vacation accruals
34
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
18
35
CEO
CFO
Investment Bankers
Board of Directors
Internal & External Attorneys
Special Consultants (Technology)
COO
Business Dev. Mgr.
Marketing Manager
Shareholders
R&D Manager
Internal & External Accountants
Division Managers
Who Has to be Sold
Seller s Side: Buyer s Side:
Senior Mgmt
Shareholders
Board of Directors
Outside Professionals
Key Clients
Family
Other:
Debt Holders
Key Vendors
O V E R V I E W
?
36
ProcessO V E R V I E W
DecisionSELL UP SELL OUT
DecisionSELL UP SELL OUT
PreparationINTERNAL DUE DILIGENCE
PreparationINTERNAL DUE DILIGENCE
PresentationEXECUTIVE SUMMARY
PresentationEXECUTIVE SUMMARY
ResearchPOTENTIAL PARTNERS
ResearchPOTENTIAL PARTNERS
ContactINFORMATION EXCHANGE
ContactINFORMATION EXCHANGE
Follow-upCONFERENCE CALLS & VISITS
Follow-upCONFERENCE CALLS & VISITS
ValuationWEIGHTED AVERAGE
ValuationWEIGHTED AVERAGE
StructureLETTER OF INTENT
StructureLETTER OF INTENT
Due DiligenceDue Diligence
Final NegotiationsCONTRACT
Final NegotiationsCONTRACT
ClosingClosing
19
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For Maximum Value
Be thorough in researchWithout it you will miss some of your best candidates
Follow through with each partnerDo not get side-tracked with one partner negotiation
Each buyer has own timelineOrchestrate your contact
Allow enough time buyers can t jumpEspecially true with SOX
Start with thorough preparation
O V E R V I E W
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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)
Presenting Your CompanyP R E P A R A T I O N
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* Don t ignore newly public international firms
Target BuyersP R E P A R A T I O N
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 operateForeign firms*Non-technology
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Understand and document your assumptions
Do not be too conservative
Do not be overly optimistic
Earn-outs may be tied to projections
Do not miss your targets during negotiation!
Be clear if projections require additional funding
ProjectionsV A L U A T I O N
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
Forecasts are most credible when well supported by realistic assumptions.
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Primary Ways to Value a Software Company
V A L U A T I O N
Sales Multiple (EV/S) Public Company
Earnings Multiple (PE)
Sales Multiple (EV/S) Public Company
Earnings Multiple (PE)
Similar Company Transaction
Discounted Cash Flow
Replacement Value
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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
Valuation The Challenging PartV A L U A T I O N
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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.)
Common MistakesV A L U A T I O N
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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
StructureS T R U C T U R E
Structure more important than Price
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Cash or equivalents
Stock
Notes (Debt)
Employment and consulting agreements
Non-compete agreements
Options agreements
Profit sharing
Earn-out
S T R U C T U R E
Forms of Payment
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Earn-out
Employment Agreements
Assumption of Debt
Notes
Stock
Cash
Highest Potential Price
Lowest Price(least risk to seller)
StructureS T R U C T U R E
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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
Buyer Tactics N E G O T I A T I O N
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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
Seller Should:N E G O T I A T I O N
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LOI Process TimelineN E G O T I A T I O N
LETTER OF INTENT (LOI)Business Deal Negotiation
LETTER OF INTENT (LOI)Business Deal Negotiation
DEFINITIVE AGREEMENTDetailed Legal Negotiation
DEFINITIVE AGREEMENTDetailed Legal Negotiation
DUE DILIGENCEAssessing Risks/Problems
DUE DILIGENCEAssessing Risks/Problems
CLOSINGCLOSING
Information Exchange
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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
The Letter of Intent (LOI)N E G O T I A T I O N
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Due Diligence Checklist
You Will Need (Minimum):
Income Tax Returns three years
Financial Statements three years
Projections three years
Bank and accounting records
Copies of leases and contracts
P R E P A R A T I O N
Customer/Supplier lists/Agreements
Copies of all sales literature
Organization chart/key job descriptions
List of all assets owned
Board minutes/resolutions .
Written explanation of the method of doing business:
Development
Sales/Marketing
Services
Identification and analyses of competitors
Written description of financial condition of the company
Support
Upgrades
Accounting procedures
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Dealing with only one buyerNo leverage in negotiation
Improper research of potential buyersA, B, financial, international
Not understanding buyer s process/modelsTimeline, decision-makers
Improper due diligence preparationThis will prolong the process
Not qualifying buyer properlyAbility, interest, etc.
Not orchestrating all buyers properlyThis is the tough part!
Biggest Mistakes in Partnering ProcessC L O S I N G
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Contact Information
www.corumgroup.com
CorumCorum Group Ltd.Group Ltd.
10500 NE 8th Street, Suite 1500Bellevue, WA 98004USA
+1 425-455-8281
For full research and conference registration
CorumCorum Group International Group International S.S.àà.r.l.r.l
Beim ParadeplatzBasteiplatz 78001 ZurichSwitzerland
+41 44 251 82 65
THE DEALSecrets to a Successful Negotiation
Conrad E. J. EverhardApril 2008
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It s Not a Level Playing Field
You need pitchers, not throwersBe a good listenerUnderstand your limitationsDeploy your negotiation capital wisely
Maximize Your Negotiating Leverage Minimize Your Opponent s Negotiating Leverage
Drive the deal at your point of maximum leverage
Seller s Leverage
Pre Lock-Up
Execution of Lock-Up
Execution of Purchase K
Closing
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Be prepared to walk awayJudicious use of word no . . .. . . and mean it!
Public disclosure is not your friendCompetitive bids best way to level playing field
Maximize Your Negotiating Leverage Minimize Your Opponent s Negotiating Leverage (cont d)
Preserve Your Goodwill with Buyer
Clean up your act before going to marketDon t hide the ballBring out your dirty laundry
Disclosure shifts risks to buyer
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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 CompensationNon-Competition CovenantsPost-Closing Covenants
Make Sure That Purchase Price is Liquid
Market Risk Pre-ClosingMarket Risk Post-Closing
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Market Risk Post-Closing
Securities lawsRegistration requirements and insider tradingS-3, S-4, Rule 144, Reg. S, Section 16
Insider trading policies of buyerTension between control and liquidityContractual restrictionsMarket conditions and corporate culture
Conrad s Strategies for Enhancing Liquidity
Agree on a liquidity plan with buyerInsist 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 diligencePrice protection, hedge and put mechanisms
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What s My Exposure?
FraudSecurities lawCommon law
Contractual Acquisition AgreementPurchase price adjustmentRepresentations and warrantiesFact specific indemnities
Purchase Price Adjustment Traps
Adjustments triggered by accounting judgmentsNo bearing to actual loss
Public announcement can adversely impact balance sheetWatch out for non-cash charges, reserves, contingent liabilities
Revenue recognition, stock option accounting, in-process 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 orderSet measurement date before public announcementMake 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 capsLiability qualifiers: knowledge and materialityNo personal exposure beyond purchase price
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Conrad s Strategies for Limiting Liability
Disclose everything: shift risk to buyerTake post-closing impact of deal out of liability equationSacrifice the hostages: put escrow at risk. . .
. . . but limit liability to escrow
Incentivize buyer to act reasonablyCost sharing, controls on 3rd party claims
Neutralize buyer s resource advantagePut legal fees in play
Offer alternativesDue DiligenceOpinion of CounselInsurance
Questions?
Conrad E. J. EverhardApril 2008
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INNOVATION 2 EXIT:Raising Capital and Executing ExitsA Primer for Technology Companies
Endorsed by:
Participating organizations:
