Silicon Forest ForumNovember 12, 2004

Positioning a Company for Sale

Leading Firms in Software, Semiconductor and Other Key Technology Sectors

and…

How to Identify and Engage a Banker

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Member NYSE/NASD/SIPC

99 High Street

Boston, MA 02110

617.371.3900

623 Fifth Avenue

16th Floor

New York, NY 10022

646.264.6000

Four Embarcadero Center

Suite 3300

San Francisco, CA 94111

415.229.7171

Leading Firms in Key Technology SectorsThe Obligatory Commercial

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Leading Firms in Key Technology SectorsA Variety of Choices…

A number of high-quality firms provide technology advisory services.

Examples include:

• CIBC

• Jefferies / Broadview

• Needham

• Pacific Crest

• Piper Jaffray

• RBC

• SG Cowen

• SVB Alliant

The full, relevant list is probably 25-30 firms - the specific needs, relationships and culture of the client’s decision-makers will dictate the best working relationship.

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How to Identify and Engage a BankerSample Considerations

• Industry research

• Trade commentary

• Referrals

–Lawyers

–Accountants

–Board members

–Public company CFOs

–Those who have gone through the process before

• Examples of what to do and what NOT to do

• Establish relationships well before taking action

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How to Identify and Engage a BankerBe Demanding…

Who is showing an interest in your industry niche

• Long-term commitment

• Helping to define the space – specific investor conferences, etc.

Broader firm commitments

• Trading - market making statistics

• Venture fund

• Specific industry or M&A practice groups

Ask bankers for / about:

• Referrals

• Relationships at potential acquirers

• Their experience and process - how is it differentiated?

• Ideas, creativity, perspectives on valuation

• Will your deal be important to the firm? Who will be the team?

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How to Identify and Engage a BankerFocused vs. Bulge Bracket Firms

 

Particularly required for technology and middle-market transactions:

• Senior-level attention, experience

– Not treated as training ground; less turnover

• Importance and relevance to firm’s strategy

• Match with rest of firm’s investment in your industry sector

– More consistent contact and influence with relevant decision-makers

• Creativity / independent thinking

• Relationship – share of client orientation vs. share of market

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How to Identify and Engage a BankerTypical Fee Arrangements

• Retainer

• Success fee

– For sell side, percentage of transaction, usually includes minimum fee

• Incentive fee

• Expense reimbursement

• The engagement:

– Should align shareholder interests with those of advisor

– Can be customized, according to prior corporate relationships, etc.

– Needs to reflect strategy – broad auction, narrow list of buyers, etc.

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How to Identify and Engage a BankerWhat Your Bankers Do…

Due diligence

• Discuss and discover issues internally first

• Understand financial model

• Understand strengths and weaknesses

• Understand needs, priorities, objectives

Create Confidential Information Memorandum

• Additional required due diligence for offerees

Refine Positioning

Customize Offering Strategy

• Who gets the call – size of list

• Pre-emptive opportunity?

• Financial buyers?

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How to Identify and Engage a BankerWhat Your Bankers Do…

• Initiate contact and follow-up, and set expectations

• Advisor is sole contact point

– Creates formality re: process, timing

– Protects management, ownership

– Maintains schedule

• Collect, monitor and generate interest

• Negotiate terms and agreements

• Host spectacular closing dinner

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Stock Market Volatility+

“The Perfect Storm”

Valuation Perspectives

“The Perfect Storm”

Business Challenges

Execution Contingencies+

Stock Market Volatility+

“The Perfect Storm”

The M&A ProcessIncremental risk inherent in the industry requires special focus on buyer universe

and process.

M&A Process OverviewTechnology M&A: Compounding Complexities

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• Maintain corporate values

• Retain and incent management

• Minimize management distraction

• Minimize disruption of operations

• Maintain location and employees

Primary • Maximize shareholder value

• Achieve strategic objectives

Secondary

Maximize Value

• Determine effective positioning

• Access key decision makers

• Generate competition, if necessary

• Design optimal financial structure

Minimize Company Disruption

Stage 1: Screen buyers (more cost-effective)

Stage 2: Front-loaded due diligence / informal bidding

Maintain Control of Process

• Use disciplined approach

• Maintain a level playing field

• Control distribution of information

• Move bidders along parallel paths

• Amend process at any time; maintain flexibility

M&A Process OverviewKey Objectives

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1

Company Evaluation

Weeks

Conduct due diligence

Understand / assess financial and strategic objectives

Develop financial models

Develop positioning strategy

Draft descriptive selling memorandum

Develop potential acquiror list

Find agreement on all elements of process

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Preparation and Research

3

Executive

Marketing

Strategy

4

Screening and Due Diligence

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Execution and Closing

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Contact potential acquirors

Execute confidentiality agreements

Distribute descriptive selling memorandum

Prepare management presentation

Personal visits

Schedule visits by potential acquirors

Initial due diligence

Discuss feedback with management

Evaluate proposals

Select final candidates

Negotiate agreement in principle

Conduct final due diligence

Negotiate definitive merger or purchase agreement

Announcement of transaction

Close transaction

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Phase

M&A Process OverviewTypical M&A Process Timetable

Using an Executive Summary as the principal “selling document” will sometimes help to compress the preparatory phases of the sale process . Additionally, the preemptive

bid approach may expedite the screening and buyer diligence phases.

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Valuation

Comparable Publicly Traded Companies

• Valuation reflects the public market value for comparable companies

Comparable M&A Transactions

• Valuation reflects premiums paid to acquire a control interest in comparable companies

Market Environment / Other Factors

• Financial market conditions

• Appetite of potential acquirors

• Potential synergies

Contribution Analysis

• Valuation based on relative contribution to NEWCO

• Quantify amount of EPS accretion

M&A Process OverviewValuation Methodologies

Valuation is in the eye of the beholder

“Need to have” vs. “nice to have”

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Industry-specific considerations

• Size of addressable / available markets

• Competitive landscape

• Stage of current cycle

• Technology shift

Buyer- and Target-specific considerations

• Competitive positioning

• Business momentum

• Access to capital, flexibility, alternatives

• Technology position

• Commitment of key personnel, management strength

Market Positioning and Preliminary ValuationCritical Considerations

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Market Positioning and Preliminary ValuationM&A in this Environment

Valuation

• Public buyers have become more focused on accretive transactions; however, exceptions will be made for strategically critical transactions

– Deals “demanded” by customer base; to enhance growth / synergies within established distribution channels and streamline number of suppliers / vendors

• In certain sectors, valuations are at or near trough levels

– Deals more likely to be strategic vs. opportunistic, potentially limiting buyer universe

• Leadership companies increase growth prospects by investing during periods of slowing growth – valuations improve as focus shifts to next upturn

Structure

• Balancing act between parting with precious cash in a downturn versus issuing “undervalued” securities

• Sellers can capture additional upside of “undervalued” stock prices when market recovers

• Likely demands for contingency payments / earnouts in transaction structure

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The Effect of Sarbanes-Oxley Sample Key Issues Affected

• Due diligence

• Target behaving like a public company

• Comparable financials

• CFO sign-off at year-end

• Timing

• Many private companies plan to or have adopted:

– CEO/CFO financial statement attestation

– Establishment of whistle-blower procedures

– Board approval of non-audit services by auditors

– Adoption of corporate governance policy guidelines

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Middle-Market M&ASummary of Trends

• 10 – 15 years ago: resistance

• Becomes fashionable with bull market valuations

• A recent pause

• Currently: return to action

– Realistic expectations due to costs of being public

• Less of an instant alternative

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Middle-Market M&ASummary of Trends

Number of sub-$250 million deals peaked at over 4,000 in 1998

• Has declined steadily since

• 2,220 completed in 2003; perhaps slightly fewer in 2004

Average revenue multiple has increased

• From less than 1x to approaching 2x

EBITDA Multiples have remained relatively constant

• 7x – 8x for past six years

Cash consideration for majority of deals

• Dropped-off slightly during period of hyper stock valuations

• Likely to decrease slightly

Earn-outs

• If less than 20% of deal, is it worth it?

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Middle-Market M&ASummary of Trends: Revenue Multiples

Median Revenue Multiple - All Transactions < $250MM

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

1.8x

2.0x

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

*Deals include Mergers, Acquisitions, Asset Acquisitions, and Acquisitions of Marjority Interest

Source: M&A Desk

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Middle-Market M&ASummary of Trends: EBITDA Multiples

Median EBITDA Multiple All Transactions < $250MM

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

*Deals include Mergers, Acquisitions, Asset Acquisitions, and Acquisitions of Marjority Interest

Source: M&A Desk

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Middle-Market M&ASummary of Trends: Annual Transaction Volume

Total M&A Transaction Volume ($Bn)

1,609

1,058

3,901

1,453799

339 743

0

1,000

2,000

3,000

4,000

5,000

6,000

1998 1999 2000 2001 2002 2003 2004(1)

Technology

Healthcare

Consumer

Source: Thomson Financial SDC. Excludes deals less than $20M. (1) 2004 data annualized based on YTD level of activity. As of 10/29/04.

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Final Thoughts

• What should privately-held companies implement?

– Really, what companies should NOT do

• Insider transactions, etc.

• Biggest mistakes:

– Starting process too late

– Extending the process too long

– Having no valuation flexibility

– Not having good lawyers / advisors

Member NYSE/NASD/SIPC

99 High Street

Boston, MA 02110

617.371.3900

623 Fifth Avenue

16th Floor

New York, NY 10022

646.264.6000

Four Embarcadero Center

Suite 3300

San Francisco, CA 94111

415.229.7171