acquisition opportunities created by uncertainty …business owners seeking exits and...
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CEO Leadership Network
ACQUISITION OPPORTUNITIES CREATED BY UNCERTAINTY M&A BUY SIDE: WHAT CEOS NEED TO KNOW
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Your Moderator Robert R. Grabill President & CEO Chief Executive Network
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Today's Speaker Joseph M. Durnford CEO and Senior Managing Director JD Ford & Company, LLC
Acquisition Opportunities Created by Uncertainty: M&A Buy Side – What CEOs Need to Know
Joe Durnford CEO & Sr. Managing Director
JD Ford & Company
888-999-9495 x2010
What to Expect
6
1 •M&A market update
2 •Understand Sellers Motives
3 •Best Practices to Identify and Close Acquisitions
4 •Current Purchase Price Multiples
5 •Financing Trends
6 •Winning the deal
M&A Market Update Higher volume of transactions lead by consolidations in the financial sector
Rebound in M&A Activity
8
Number of Announced Deals by Sector Annually
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
2008
2009
2010
2011
TTM July 2012
• Accelerated since bottoming out in
2009
• Taxes + economic uncertainty
business owners seeking exits and
diversification
• Acquirers: good buying
environment = consolidating
industries, supplementing organic
growth
• 2013 Taxes: Deal activity will likely accelerate at the end of the year
Recent Transaction Activity Number of Announced Deals TTM July 2012
725 148
414
2,608
406
529
501
210 26 65
Legend
Consumer Discretionary
Consumer Staples
Energy
Financials
Healthcare
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Cross-border M&A Increasing
9
Cross Border M&A Trends
2008 2009 2010 2011 TTM July 2012
1,733
1,209
1,687
1,927 1,903
1,436
1,096
1,406
1,490
1,370
US Buyer/Foreign Target
Foreign Buyer/US Target
• Cross-border M&A has increased after
bottoming with the M&A market as a
whole in 2009
• US buyers of foreign targets lead
• Foreign Buyers closed the gap in 2009
but have since restrained their
acquisitions of US companies
Cross Border M&A
Understanding Seller Motives Leverage Seller Motivations to Your Advantage
Current Factors Influencing Exits
11
Capital Constraints
Age & Lack of Succession Plan
Regulation & Compliance Costs
Risk Diversification
Limited Investment Yield
Pending Tax Increases
Economic Uncertainty
Push to Sell!
Taxes are Increasing
12 12
Current Tax Rates
TTM EBITDA $ 10,000,000
Purchase Multiple 7x
Transaction Value 70,000,000
Seller Basis 20,000,000
Taxable Gain 50,000,000
Fed Cap Gains Rate 15.0%
Taxes Due $ 7,500,000
January 1, 2013
TTM EBITDA $ 10,000,000
Purchase Multiple 7x
Transaction Value 70,000,000
Seller Basis 20,000,000
Taxable Gain 50,000,000
Fed Cap Gains Rate 23.8%
Taxes Due $ 11,900,000
Capital Constraints
13
• Community Bankers complained on recent
FDIC conference call that new Tier III Capital
rules (changed via international treaty) will
require reduced lending to small businesses
• Implementation of Dodd-Frank has slowed
lending approval at most banks
• WSJ: With regard to regulators’ call for tougher
capital rules, banks say “…holding too much
capital would force them to cut back on lending and raise the cost of loans…”
Key Issues
Past 3 Months Lending
Large Sized Firms Small & Medium Sized Firms
Loan Demand Increased Unchanged
Lending Standards Some Easing Unchanged
Commercial & Industrial Loan Volume - % Change From Previous Year
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
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Best Practices Identifying & Closing Acquisitions
Why Acquire?
15
A B
Type: Bolt-on Platform
Reason: Strengthen & Grow Current Business Expand & Redirect Business Model
What is acquired: Resources:
• People: Customers & Employees
• Balance Sheet: Cash, Fixed Assets, Intellectual
Property
Full business model:
• Value Proposition
• People – Customers & Employees
• Processes
• Profit formula
• Balance Sheet: Cash, Fixed Assets, Intellectual
Property
Effects: • Reinforce Position
• Add Revenue
• Cut Costs
• Change the trajectory of the business
• Expand into adjacent spaces
• Avoid commoditization of products/services
• Create market disruption
Use as a M&A Strategy: Very common Uncommon
Transaction: Usually Overpay May pass or hesitate due to high valuations
Performance: • Expect quick results (< 1 year) • Companies often overpay because they
overestimate the effect of synergies
• Expect slower results (> 1 year) • Companies often underpay or hesitate because they
don’t correctly assess value
Potential Returns:
High Med
A Bolt-on: Strengthen & Grow Current Business
16
• Will be successful if acquirer can increase prices and/or reduce costs
• Acquirer’s cost structure:
• Large % fixed costs: increasing scale through acquisitions = significant cost savings
• Relying on back-office (i.e. IT, HR, accounting, etc.) cost synergies not sufficient
• Questions to ask:
• Can you cross-sell products/services?
• Is there compatibility with supply chain?
• Can current employees effectively serve new customers?
• Can we add value to processes of target?
• Don’t over pay! Be realistic about synergies!
Key Issues
Bolster Current
Performance
Enhance Revenue
Generation
Capabilities
Cut Costs –
Leverage Fixed
Cost Structure
B Platform: Expand & Redirect Business Model
17
• Look for ways to improve your business model through acquisitions:
• Fight commoditization of products or services
• “Best defense is a good offense”
• Analyze value-chain – where will future profits be?
• Look for disruptive products/services
• Simpler, more affordable product/services
• Embrace improvements in technology
• Look for companies on the leading edge of sustainable trends
• Be willing to pay a Premium
• These types of acquisitions can create significant value
• Companies often underpay or do not acquire because they incorrectly assess value
Key Issues
This is a placeholder It can be replaced easily with your own text.
Placeholder
Expanded
&Reenergized
Business Model
Target:
New Business Model
Acquirer:
Established Business Model
Prepare & Identify Potential Acquisitions
18
Look at all Deal Sources
• Review press release
• Review Private Equity
portfolios
Establish Specific Goals
• Know what your looking for
Look in Adjacent Spaces
• Upstream or downstream in value chain
• Adjacent industries/markets Have a Team in Place
• Experienced internal
M&A team
• Outside professionals
ready
Be Disciplined & Patient
• Don’t shop when you’re
hungry
• Know your price and stick
to it
Alert Market of Interest
• Press releases
• Industry conferences
• Buy-side bankers &
consultants
Be Informed
• Industry multiples
• Recent transactions
Private Equity Exits via M&A
19
• Private Equity groups can be a good source of potential acquisitions
• Typically have 5-7 year holding period
• Seek rapid growth with a focus on increasing margins and cash flow
• Professionalize organizations
• Increasing portion of private equity exits are to strategic buyers
Private Equity as a Target Source
2008 2009
2010
2011
TTM July 2012
421 492
806 997
887
1,138 1,192
1,645
1,841
1,790
Financial Buyer
Strategic Buyer
Current Purchase Price Multiples Stable Buyer Friendly Multiples
Multiple Trends by Sector
21
Revenue Multiples by Sector
EBITDA Multiples by Sector
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x 8.8x 8.4x 7.5x
8.8x 8.5x 8.0x 8.8x 8.3x
7.3x 8.4x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
1.6x 1.3x
2.7x 3.4x
1.8x 1.3x 1.5x 1.4x
2.2x 2.7x
2008 2009 2010 2011 2012 Average
What is the Target Worth To You?
22
REMEMBER:
• Good Deals Are In High Demand
• Management Is Crucial
• Seek Emerging Trends and Technologies to Add Value
DO:
Establish Rate of Return Goals
Know Your Cost of Capital
Use Discounted Cash Flow Analysis (best, likely, worst case)
Net Free Cash Flow Should Be Driver
Consider Revenue and Cost Synergies
DON’T:
Rely Solely on EBITDA Multiples
Worry About What Other Bidders Might Pay
Over Estimate Synergies
Financing Trends Cash is Still King, Simpler is Better
Consideration
24
Part Played by Different Types of Consideration
2008 2009 2010 2011 2012
95% 95% 96% 96% 97%
49% 53% 48%
54% 49%
64%
75% 68% 68% 68%
5% 13%
5% 5% 4%
Cash % of Total Consideration Debt % of Total Consideration
Stock % of Total Consideration Warrant % of Total Consideration
• Most deals involved substantially all cash
• Use of earnouts, stock and debt have declined
• What it means to you: be prepared to offer cash and minimize contingent payments
Components of Total Consideration
• Trends are stable
• Again, indicates cash is king
• If you’re using debt, be prepared for it to be no more than half the consideration paid
• If you’re going to us stock, you can probably offer up to two-thirds of the consideration in stock
• Warrants are consistently at 5%
Part Played by Different Types of Consideration
Components of Total Consideration
2008 2009 2010 2011 2012
90% 87% 91% 91% 92%
5% 4% 3% 3% 2%
20% 16% 15% 12% 10%
13% 12% 10% 9% 7%
Cash Component Debt Component
Earnout Component Stock Component
Contributions: A Private Equity Perspective
25
Leverage Multiple Trends
Debt & Equity in Private Equity Deals
2008
2009
2010
2011
2012
47.2%
52.6%
51.0%
48.2%
47%
16%
18%
12%
15%
19%
37%
29%
37%
37%
34%
Equity
Sub Debt
Sr. Debt
2008 2009 2010 2011 YTD 2012
3.3x
1.8x 2.3x 2.4x 2.2x
1.0x
1.1x 0.7x 0.9x 1.2x
Sr. Debt/EBITDA Sub Debt/EBITDA
• Debt contribution consistent with deals overall at ~50%
• Combination of senior and subordinated debt
• Lending multiples peaked in 2008 and declined sharply in 2009
• Sr. Lending multiples have stabilized while sub debt multiples have moved back toward highs
• ~3.5x EBITDA worth of leverage may be available
Debt & Equity in Private Equity Deals
Winning the Deal
Winning the Deal
27
1. Buying is Selling
2. Sellers Like Cash
6. Have Financing in Place
to Reduce Seller Closing Risk
5. Consider Tax Consequences in Deal Structure
3. Listen Don’t Pitch 4. Set Specific Parameters for Negotiation
Buyer Transaction Expenses
28
Debt & Equity in Private Equity Deals
2008 2009 2010 2011 YTD 2012
0.3x
0.2x
0.3x 0.3x
0.2x
• Historically between 0.2x and 0.3x EBITDA
• Professional Fees: legal, accounting, environmental consultants, investment bankers
• Financing costs
• Declined in 2009 as professionals lowered fees to get engagements
• Returned to normalized levels in 2010
Buyer Transaction Expenses
Closing Comments
29
Closing Comments
Demographics favor industry consolidation
2 Purchase multiples and EBITDA are expanding
3 Taxes are big motivator to close before year-end
4 Pay attention to seller motives
5 Be focused and disciplined on your desired outcomes
6 Integration planning and execution is parmaount
7 Don‘t waste time and resources pursing non-core acquisitions
30
Joe Durnford CEO & Sr. Managing Director JD Ford & Company
650 S. Cherry Street, Suite 1200
Denver, CO 80246
Telephone: 888-999-9495 303.333.3673
ext. 2010
E-Mail: [email protected]
Web: www.jdford.com
© 2012 JD Ford & Company LLC
Sources:
GF Data Resources
Harvard Business Review
JD Ford & Company Proprietary Data
Standard & Poor’s Capital IQ
St. Louis Federal Reserve
Wall Street Journal
CEO Leadership Network
Today's Speaker Joseph M. Durnford CEO and Senior Managing Director JD Ford & Company, LLC
CEO Leadership Network
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