Title: Robin A. Graham Needham
1Robin A. GrahamNeedham Company, Inc.
2The Emerging Growth Investment Bank for
Technology Leaders
3Todays MA discussion
- Understand the MA environment that you are in
- How to find and engage the right investment bank
for MA advice - Working with an investment banker to prepare for
a negotiation/sale - The range of services provided by bankers in the
MA process - Issues in selecting the best merger or
acquisition partner - Where MA bankers are focused today and why
4The Mergers and Acquisitions Environment
5Market 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
6Macro Trends in MA
- An extended period of high valuations followed by
tight credit markets have caused financial buyers
to be an insignificant factor in the overall MA
market as compared to earlier periods.
- Overall MA volume has retreated dramatically
from the past few years all-time highs - MA activity is still driven by corporate buyers
fulfilling strategic imperatives
7The Impact on Technology MA
Technology MA volume was most significantly
impacted
- 2001 tech MA 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 MA volume is even more depressed
8Mergers Acquisitions Environment
MA 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.
9The Public/Public MA Story
MA dollar volume between public companies fell
dramatically after Q1 2001
- Most of Q1s 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
gt6x Q1/Q1
10The 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 - MA continually reinforced as the most likely
liquidity path for private companies
11The Good Old Days
The BOOM Economy
Unprecedented wealth creation and high consumer
confidence
Low cost and easy access to capital
Investors seeking abnormal returns increasingly
turned to private equity
Public Venture Capital Phenomenon
Proliferation of venture funds
MA outpaces IPOs 11-1
Explosion of young VC-backed tech and Internet
companies
12Mergers Acquisitions Environment
- Significantly reduced MA 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 MA
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 MA intentions - Broadcom just re-entered with acquisition of
Mobilink (258M)
13Mergers Acquisitions Environment
- The results are
- Fewer MA transactions and lower valuations for
MA 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 MA transactions
- the return proliferation of earn-outs for
acquired companies - Passing EPS accretion/dilution acid test is
critical
14Mergers Acquisitions Environment
- MA 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 MA market. - MA transactions will continue to suffer higher
attrition rates and lower net valuations - An increasing percentage of transactions will
bedistressed sales or bankruptcies - Leveraged companies and undercapitalized
companies will be at a tremendous negotiating
disadvantage - Choosing and using the right MA advisor and
experienced legal counsel will be all the more
critical to a successful outcome
15The MA transaction
16Assembling the Transaction Team
- The Core Working Group
- Senior management team, legal counsel, Investment
Banker their MA 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
17Selecting the Right Banker
- Bankers who know your industry sector and its
competitive dynamics - Active MA 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 MA
(alternatives negotiating leverage)
18Current Structure of the Investment Banking
Industry
Independent National Emerging Growth
Firms Needham Company Thomas Weisel Partners
Wit Soundview Emerging Growth Firms NowOwned by
Major Commercial Banks ABN Amro / ING Barings /
Furman Selz Bank of America Securities /
Montgomery JP. Morgan / Chase / HQ 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)
19The 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
20Preparation is Key
- Discuss your business history and prospects with
MA advisors in detail - Realistic assessment of financing/MA 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
21Assessing Negotiating Leverage
Multiple Elements Drive Negotiating Leverage
- Competition
- Strategic Alternatives
- Necessity/Desire
- Resources
- Time
Negotiating Leverage (5 key elements)
22Building the Negotiating Plan
Planning is an Important Component of Successful
Negotiations
Collecting Information
Assessing Leverage
Negotiating Plan
Achieving Resolution
Establishing Expectations
Determining Response
23Critical Transaction Parameters
Successful Negotiation Can Usually Result in
a Broad Range of Outcomes
Valuation Structure Liquidity
Buyers Minimum Terms
Financial Terms
Sellers Minimum Terms
Strategic Fit Culture Timing
Non - Financial Terms
24Structure of MA 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
25Where Advisors are Focused Today
- The Investment Banking industry is itself
retrenching - Many firms are pre-occupied with their own MA
and restructuring - MA 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 MA - Still very active in representing sellers, but
Very cautious in assessing valuation and
probability of transaction completion prior to
committing resources - Sellers business stability and negotiating
leverage, strategic drivers of transaction are
critical - Acquisitions of stand-alone private companies by
public companies are difficult in todays MA
market
26Where 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 MA
- Ten MA transactions announced YTD
- Including four public/public MA transactions
27Appendices
28The MA Transaction
A Typical Sale / Divestiture Process
Preparation Weeks 1 - 4
Canvas Buyers Weeks 5 - 8/10
- Engagement of Needham
- Review Co. Financial and
- Operational Information
- Needham Values Co.
- Prepare Memorandum,
- Executive Summary and
- NDA with co. counsel
- Prepare List of Likely Buyers
Due Diligence Weeks 8/10 - 12/14
Final Negotiation Weeks 12/14 - 16/18
- Contact Buyers
- Send Executive summary
- Sign NDAs
- Distribute informational
- memorandum / materials
- Prepare management team
- for diligence presentations
- Request and receive initial
- non-binding bids in writing.
- Setup Data Room
- Select Qualified Bidders
- for D.D.
- Schedule and Conduct
- Visits
- Provide Draft Definitive
- Agreement
- Receive Final Bids
Closing (TBA)
Phase/Action Items
- Select Winning Bidder
- Negotiate Execute
- Definitive Agreement
- Press Release
- Submit HSR Filing
- (50 million threshold)
- Shareholder Approval
- Process
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Week
The length depends on such factors as the size
of canvas, the overall market and the geographic
location of contacts.
29The MA Transaction
Acquisitions Transactional Issues
Financial Positioning
- Press release announcing transaction
- Backgrounder on the acquisition
- Guidance for analysts forecasts
- Prepare and conduct conference call
- Plan and execute roadshow to sell the deal, if
necessary
Due Diligence
Steps to successful transactions
- Interview key management
- Financial due diligence
- including analysis of historical
- and projected financial statements interview
independent auditors - Third-party interviews and
- reference checks
- Facility visits
- Legal due diligence
Negotiations
- Financial advisor or principal
- Cash or stock preferable
- Understand potential synergies
- Employee issues such as
- Acceleration of options
- Employment agreements
- Non-compete agreements
- Key issues to be negotiated
- Condition of closing
- Financing outs
- Reps warranties
- Break-up fees
- Shopping restrictions
- Topping offers
- Material adverse change
- Shareholders vote
- required (either company)
Structuring
- Determine ability to use either
- cash or stock
- Analyze respective proforma
- effects of a stock or cash
- acquisition
- Balance sheet
- PL
- Goodwill (write-off upon impairment)
Valuation
- Analyze financial statements
- Discuss business history and
- prospects with management
- Analyze comparable public companies trading
multiples - Analyze comparable transactions
30Representative Financial Advisory Assignments
160,000,000
Acquiring Innoveda Inc. Pending
31Representative Public Equity Offerings
32Representative Public Equity Offerings
33Representative Private Placements
CurrentStatus
CurrentStatus
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34Representative Corporate Investment Transactions