May 18, 2016

Maximizing M&A Value…

Tales from the Trenches

Today’s Presenters:

• Richard Scudellari, Managing Partner,Silicon Valley, DLA Piper

• Jan Robertson, Managing Partner, SiValAdvisors, LLC

• Craig Hamm, Managing Director,Assurance and Consulting, BPM

• Scott Taylor, Partner, Assurance, BPM

• Robert Ressler, Partner, Tatum

Maximizing M&A value

Market – how important is the current market?

– update and deal trends: 2015/2016 YTD

Planning – why? when? how?

Saleability – key attributes

Buyers – categories and characteristics

Valuation – what is the business worth?

Sale Process – how a managed process with competitivebidding can maximize value

Timing – when is the right time to sell?

Legal – minimizing your risk during and after the sale

Global M&A overview – Q1 2016

Source: Mergermarket Q1 2016

Q1 2106: $597.4 billion of which $310 billion cross-border. Percent market share of global M&A by region.

China outbound $82 billion, up 130 percent vs. Q1 2015. US inbound $115 billion, up 43 percent vs. Q1 2015 – Chinese bidders ¼ ofthis.

Global M&A overview

Source: Mergermarket Q1 2016

US deal trends

Source: Mergermarket Q1 2016

US deal trends

Source: FactSet

US merger metrics

Source: FactSet

Technology M&A

Source: Morgan Stanley & SDC data. Transactions > $25M

Global mid-market

Source: Thomson Reuters

US mid-market

Source: Thomson Reuters

US Mid-Market – Q1 2016 by Industry

Source: Thomson Reuters

US mid-market: EV/EBITDA

Deals valued between $1 million and $500 million.

Source: FactSet

Current market still positive for exits

• 2015 record M&A activity – globally and the US:• highest volume and dollar value; tech and non-tech sectors

• Q1 2016 deal activity strong but not record setting pace

• Stock market– Still favorable despite recent volatility

• Low interest rates continue– Possible increase June or July?

– Spreads have widened for lesser credits

• Cash on corporate balance sheets– US $3 trillion, Global $8 trillion

• Big corporates: top tech acquirors have changed

• Private equity: still active, but less aggressive

Maximizing M&A value

• Exits don’t just happen – they require:

– Planning

– Realistic expectations

– Disciplined execution

– Timing (company lifecycle)

Planning

• Control over when and how exit occurs

• To be ready when:

– Optimal time in company lifecycle

– Optimal time in industry

– Market is favorable

• Just in case….plan for contingencies

– e.g. management change; unsolicited offer

• Maximizing value

Why?

Planning

• Never too early to start!

– At initial investment consider exit potential

– Envision future buyers

• Takes 6 – 18 months to sell

• Three key areas:

– Business/management

– Financial/taxes

– Legal

When?

Planning

Business/management:

• Build management team – CEO, COO and below

• Focus on revenue growth/credible forecasts

– Strategy, market penetration, etc.

• Secure IP – patents, trademarks

• Trim costs where possible to enhanceprofitability (EBITDA is key – private co.)

• Diversify revenue base, especially if highlydependent on one or two key customers

• Identify and segregate any redundant assets

PlanningFinancial/tax:

• Financial statements audited/reviewed by CPA firm– At least past three years

– Buyers will discount value and/or due diligence will be protractedif financials not in good order

• EBITDA calculation– Adjusted for non-recurring or owner expenses

• Tax & Estate Planning – stock vs. asset sale; trusts

• Valuation – set expectations, based on:– Company performance: growth & profitability (hist. & fcst.)

– Comparable market multiples (public & private co.)

– General market conditions

Planning

Legal:

• Organize books, records and other legal documents inpreparation for due diligence (virtual data center)

• Understand various stakeholder rights (debt and equity)

• Ownership/cap table review

• Clarify any contractual rights which may affect value(e.g., IP, leases, permits, contracts, etc.)

• Intellectual Property Ownership & Rights

• Review Employee Files (compliance, documentation)

• Regulatory Issues

Planning

Big company due diligence can look like this – so be ready for it!

Planning - possible reasons for selling

Positivedrivers

Business isgrowing and

profitable

Hot industrysector

One or moreinterested

buyers

Value ofgrowth and

promisecurve

IP - need capital andmarket reach

Planning - possible reasons for selling

Neutral/negativedrivers

Retirement “Burn-out”

Portfolioend-of-life

Need forliquidity/risk

reduction

Technologyobsolescence

Saleability

What makes a company Saleable?

• Programmable/teachable products or services

• Valuable IP or brands

• Specialty/uniqueness in a sought-after area

• Key customer relationships

• Recurring, diversified revenue stream

• Founder should be dispensable

• Accretive – especially for public buyers

• Mini-conglomerate – logical fit critical

Buyers

I. Strategics:

• Big companies• Cash to spend; M&A vs. R&D; size/scalability key

• Medium companies• More plentiful; harder to uncover; can move faster; often bid

aggressively to capture market share; sometimes cash-constrained & need to raise financing (bank, PE)

• International• Growing category; highly strategic; typically well-capitalized;

focused on operating businesses that augment customerreach, or technology gaps; speed is variable; buyers fromEurope, Japan and China mainly

BuyersII. Financial:

• Private equity• $2 trillion to invest; Team critical; Synergistic fits with existing

portfolio companies; achieve scale for future larger exit

• Boomers• Wealthy individuals have successfully run companies;

usually sub $25 million acquisition size

• Family offices/groups• Diversified portfolio; seeking higher returns; often industry

preferences; operate similar to private equity

• VCs operating like Private Equity• Burned by early-stage failures; have money to put to work;

seeking high returns with lower risk; somewhat stealth mode

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Valuation

• Current market

• Estimate of sale price in acompetitive process

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Valuation

Preparation

• Company information

• executive summary

• presentation

• Buyers’ List

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Valuation

Preparation

ContactingProspects

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Valuation

Preparation

Contacting Prospects

Negotiations

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Valuation

Preparation

Contacting Prospects

Negotiations

Letter(s) of Intent

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Valuation

Preparation

Contacting Prospects

Negotiations

Letter(s) of Intent

Due Diligence• Legal

• Financial

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Valuation

Preparation

Contacting Prospects

Negotiations

Letter(s) of Intent

Due Diligence

Purchase & SaleAgreement

Sale processP

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Valuation

Preparation

Contacting Prospects

Negotiations

Letter(s) of Intent

Due Diligence

Purchase & Sale Agreement

CLOSING!

Comments on sale process• Think process first…not transaction

• Transaction or papering deal comes towards end

• Packaging/presenting company story is key:– How to best position, assess fit, entice buyers to next stage, etc.

– How /when to disclose sensitive issues, e.g. customers, IP

• Buyers– What if some move more quickly than others?

– What if there’s only one serious buyer?

• Board and team– Alignment on strategy/process is key – often a difficult challenge

• Due diligence• How to manage so key staff are not buried?

• Post-Merger Integration Planning

Sale process: professional team

1. M&A Advisor – market canvass: competition iskey for negotiating leverage/maximizing value

2. Legal – how to balance maximizing your returnand minimizing your risk

3. Financial/tax – sound financialand tax preparation is essential fora smooth due diligence processand minimizing tax bill post-closing

Time

EV

Growth

BeginExit

OptimalSale Late

Start

Timing – value of growth/promise

Planning

← 6-18 mos. →

Timing

• 6 – 18 months to sell

• Factor this into strategic planning

• Implications of missing optimal exit time:

– Lower values than peak

– Or worse: no exit happens

• Why? Market sector dynamics:

– Crowded market/competition

– Hot sector/VC-overinvestment

– Team sensing peak passed/negative momentum

– Consolidation party/wave

Timing – missing the party….Sector story

• Internet/social media – better access to information

• Global market – many potential buyers

• Sellers engage M&A advisors – stimulate buyer interest

• Buyers go shopping too

• More companies focus on their exit paths

• Creates deal fever – then music stops….

• Bad news for company that didn’t get acquired

• Formerly small competitors, now owned by big guys with$$$s and marketing clout

• Investors know consolidation has happened, so don’t invest

• Usually doesn’t end well for company left out

Summary

• M&A markets still favorable

• Large, diversified pool of buyers

• Cash available for deals

• Planning and preparation key

• Professionally managed process

• Maximize value and minimize risk

• Timing paramount

Questions?

Thank you for attending!