Maximizing Value In Deal Execution

Gregory Davidson and Lisa Fontenot • Gibson Dunn Padraic (Packy) Kelly • KPMG

Dual Track – Maximize Valuation & Flexibility

Dual Track is the process of initiating an IPO in parallel with a sale effort

Company keeps open both exit options • IPO gives leverage to company in sale negotiations • M&A decreases dependence on public market conditions

• IPO may enable company to use public based valuation metrics for sale

Evidence suggests dual track companies earn 22%-26% premium when a sale is consummated and 18%-21% premium when IPO is launched and an M&A transaction soon follows vs. single track M&A exit(1)

BUT one size does not fit all – consider company resources, opportunities and goals to determine if Dual Track is best option

(1) (See Brau, J., Dual-track versus single track sell outs: An empirical analysis of competing harvest strategies, Journal of Business Venturing 25 (July 2010)

Dual Track Results

Univar shelved its $863 million IPO, opting instead to sell a 42.5% stake to private equity firm Clayton,

Dubilier & Rice, which paid $760 million for its stake. The sale valued the company at roughly $4.2 billion.

Now that Electronic Arts has agreed to buy PopCap Games Inc. for up to $1.3 billion… by selling to EA, PopCap

passed up a potentially monster initial public offering that had been widely expected. Meritech Capital Partners founder and managing director Rob Ward, a top PopCap investor, said recent IPO “euphoria” was a factor.

The Daily Deal, October 13, 2010

Apache Design Solutions walked away from plans for a $75 million IPO to pursue a $310 million

sale to Nasdaq-listed ANSYS, Inc.

New York Times Dealbook, September 2, 2010; BusinessWeek, June 30, 2010

Beceem Communications Inc. announced a $316 million agreement to be acquired by Broadcom

Corp. six months after filing to go public. Beceem had aimed to raise up to $100 million in its initial public offering. Instead of public shares, its handful of venture backers now will get cash.

Private Equity Analyst, August 1, 2011

SALE PLANNING & PREPARATION COMPETITIVE AUCTION EXCLUSIVITY & COMPLETION

Exclusivity granted

Sale preparation completed

Second round offers

received

Indicative offers

received

OPTIONS

Completion

Management Review

Final Documents

Review

Final Review & Approval

Review Sale

Options

Review

points Competitive auction generates bids

Raise issues early for remedial action

Management Review

… good planning and preparation are key to a successful sale

Sell-Side Readiness Indicative Sale (Auction) Process

Data room access

Management presentations

Review draft agreement responses

Address purchaser inquiries

Assess second round offers

Seller

and

advisors Access

indicative offers &

Select bidders

Draft sale agreement

Consider price adjustment mechanism

Information memorandum

Internal approval

Data room

Strategy developed into M&A agenda

Third Party Consents and Approvals

Closing mechanics

Tax legal/ accounting structure

Validate financial model

Address value and transaction issues

Validate historical financial/ legal data

Address resource considerations / define work streams

Possible need for audited financial statements before closing

Financial Statements

Negotiate and sign definitive agreement

Articulate business proposition

Collect information

Internal due diligence and determine diligence staging

Valuation

Identify potential purchasers

Deliver information memorandum

Make contact and assess interest

Frustration over process due to

inefficiencies and delays

Bidders‟ experience / viewpoint

Poor quality / inconsistent

information in the data room and

management presentation

Seller loses credibility –

opportunity for value leakage

Inability to prepare basic analyses

early on

Lack of access to management

and underlying information –

consider information risk discount

Poor project management

Seller has unrealistic timetable

What can go wrong

Misunderstanding from quickly

assembled diligence

IM issued before supporting

information is validated

Lack of robust financial data and

adequate support/explanation

Continued delegation; inadequate

resourcing and ability to make

tough decisions

Initial value expectation

not realized

Lack of preparation time and

frustration over process

Sellers‟ experience / viewpoint

Slow start; losing control

of the process

Disruption of responding to

onerous diligence requirements

Confusion during process and

too many surprises; management

is put in a „reactive‟ position

Extended warranties & indemnities

Seller frustrations frequently mirror those of bidders

Value and deal structure considerations • Define Seller‟s value attributes for transaction

(price/speed of close/certainty)

• Deliver a credible deal structure while considering: – Legal entity structure and financial reporting structure – IP chain

– Change of control/assignment provisions, potential

obligations, consents

– Current investments

– Employee matters: Stock options / pensions / benefit arrangements and employment agreements

Resource considerations • Clearly define key work streams and

responsibilities between Seller vs. accounting vs.

legal vs. investment banks vs. others

Due diligence: Staged in auction, not in IPO • corporate structure, governing documents, stock

ledger

• minute books, confirm board actions

• support for rigorous quality of earnings and controls

• cash flow and working capital analysis

• business or strategic plans

• indebtedness and other financial obligations

• IP housekeeping, employee invention assignments

• key contracts

• compliance with laws

• related party arrangements

• HR and benefit-related matters

• contingent liabilities and litigation

• environmental matters

Process Considerations

** Do not underestimate time required to develop information and support needed to respond to requests

Going public represents a significant milestone in a company‟s lifecycle. An IPO can be the foundation which propels a company towards

achieving its full potential.

Investor Exit

Strategy

Ready Access

to Capital

Markets

Facilitated

Acquisitions

Improved

Financial

Condition

Compensation

Vehicle

Marketing

Event/ Prestige

Sale of equity can increase net

worth and improve borrowing capability; Management

increases financing

alternatives while lowering cost.

Unrestricted use of the capital raised can

fund R&D, PP&E acquisitions, debt reduction, and increased working capital.

Stock-based compensation provides an

incentive strategy to attract and retain employee talent.

Publicly traded stock is a form of “currency”

enabling a company to make acquisitions without incurring debt.

Public markets allow shareholders to

readily determine the market value of their stock and establish liquidity.

IPO increases publicity and

exposure, expanding opportunity and elevating

corporate image.

IPO

Benefits

THE IPO Advantages of Going Public

Allows for expansion of visibility and

opportunities beyond domestic market to international arena by inclusion on a key trading exchange.

Additional Requirements of Public Companies

• Ownership dilution may cause original owners to lose control of their interest in the company, depending on offering size.

• Evaluate anti-takeover protections to protect stockholder value.

IPO

Scrutiny of

Shareholder Value

• Shareholder value is scrutinized in the marketplace in comparison to competitors.

• Stock price factors in management decisions and may result in de-prioritization of long-term projects, customer value, or R&D for short-term earnings results.

• Underwriters‟ commissions, filing fees, legal and accounting fees, printing expense will be significant.

• On-going annual listing fees and exchange requirements, public relations, investor relations, SEC reporting, annual auditing, legal and SOX compliance expense.

Transparency to

Competitors & the Public

Owner Loss of

Control

Expense of IPO

Process and

Ongoing Compliance

Additional Financial

and Regulatory

Requirements

• SEC reporting, including quarterly filings, and audited annual reports in compliance with GAAP.

• SOX compliance with sufficient internal controls and disclosure controls to be certified by the CEO & CFO.

• Corporate Governance requirements of SEC and stock exchange.

• Must disclose executive compensation, related-party transactions, competitive positions, significant customers and suppliers.

• Say-On-Pay vote on executive compensation. • Major events may require SEC reports, press releases, or shareholder votes.

• Additional litigation risk and whistleblower incentives.

Effectiveness as a public company in today's environment requires balancing growth, risk taking and compliance. Being public places significant

requirements and burdens on companies.

A company intending to go public needs to put more focus on developing its finance, legal and technology infrastructure

that will allow it to support the new public company requirements.

IPO

IT Organization and

Governance Finance Organization,

Processes and Enabling

Technologies

Corporate Governance and

Capitalization Structuring

SOX and Regulatory

Compliance

Tax Strategies

Financial

Reporting

SEC Filings

Senior Management and

Independent Director

Recruiting

Development of Investor

Relations and Communications

Function

Platform for Executing A Successful IPO

Evaluating IPO Readiness – Are You Ready to Go Public?

• Do you have a strong senior management team with public company experience?

• Do you have the “right” Board of Directors?

• Do you have an “independent” Audit Committee?

• Have you developed infrastructure to manage disclosure controls and meet SEC reporting requirements?

• Do you have a plan for SOX compliance?

• Do you have material weaknesses in internal controls?

• Do you have a robust risk management procedure?

• Can you close the books under 14 days?

• Can you reliably forecast results?

• Do you have a reliable ERP?

• Have you implemented a tax efficient and market-ready corporate structure?

• Are sector dynamics favorable?

Develop and implement reporting and compliance processes and controls

Project planning and management

Co

rpo

rate

g

ov

ern

an

ce

Sy

ste

ms

&

pro

ce

sse

s

PM

Report on effectiveness of internal controls

Systems assessment

Systems and process

documentation

Improvement and

remediation

Enhance key process-level

controls

Implement entity-level

controls

Control evaluation

and test

Prepare financial statements and complete external audit

Fin

an

cia

l a

nd

leg

al re

po

rtin

g

Refine pro forma financial forecasts

Prepare first

interim filings

Prepare SEC filings and

Stock Exchange Application

Address SEC comments

Prepare first

annual report

Ongoing reporting and filing

Tax compliance review Ongoing tax compliance Tax planning and restructuring

Address capitalization & corporate housekeeping

* Selection of counsel, auditor, investment bank and trading market; preparation for investment bank due diligence; organize documents for prospectus and exhibit filings,

evaluate corporate and capital structure. Market timing is assessed throughout the process.

Year 0 …End of second fiscal year post IPO

Commence IPO plan*

SOX certification

Roadshow & Complete IPO & Listing

File initial registration statement

Drafting Documentation

Independent Majority of Board, Say on Pay

Year 1

Enhance Board charters, composition, and committees

D&O insurance review

SOX compliance preparation and implementation Evaluate compensation plans / ESOP

Executive financial and wealth transfer planning

IPO Process—Illustrative Timeline for Key IPO Activities

Navigating SEC Review

Auditor and law firm should have a good knowledge of SEC rules and procedures

Lead time for accounting and financial requirements can be significant

We performed a review of SEC comments letters for venture-backed IPO filings from April, 2008

through January, 2011.

A total of 69 IPO filings were reviewed with a total of 2,754 comments

The median number of comments on IPO filings received was 54 SEC comments

The median number of days elapsed from the first to the final comment letter was 58

Another round of comments! Groupon filed its S-1 with

the SEC June 2 – and filed 8 amendments until it IPO‟ed

November 4.

Review of Recent SEC Comment Letters

20%

16%

12% 10%

9%

9%

8%

7% 4%

3% 2%

Comment Categories

Management's Discussion and Analysis (20%)

Financial Statements (16%)

Business (12%)

Prospectus Summary (10%

Management, Directors and Stockholders (9%)

Executive and Director Compensation (9%)

Risk Factors (8%)

Other (7%)

Related party transactions (4%)

Underwriting and Use of Proceeds (3%)

Capitalization and Dilution 2%)

Other Lessons from Groupon

“Groupon updates IPO filing, admits it‟s unprofitable” – CNNMoney

Groupon‟s original IPO filing used a metric “adjusted consolidated segment

operating income,” which stripped out its steep costs for marketing and

acquiring new subscribers and showed operating income of $60.6 million for

all of 2010 and $81.6 million for the first quarter of 2011. In its updated filing,

Groupon used standard accounting procedures, reflecting Groupon incurred

$420 million operating loss for 2010 and $117.1 million loss in the first

quarter.

“Groupon revised its reported revenue to „correct for an error‟-- including in its

revenue the cash it has to return to merchants for their share of the coupons

Groupon sells. That cut Groupon's sales in half, to $688 million for the first

half of 2011 from the $1.5 billion claimed previously.

• “Groupon has been tarnished by questions surrounding unorthodox accounting measures, revisions of sales figures and scaled-back expectations of how much money Groupon will raise.”

– CNNMoney

Valuation Impact of Corporate and Capital Structure and Market

Address corporate structure • Consider streamlining corporate structure to facilitate investor understanding and enhance

valuation • If a U.S. company, consider reincorporating in Delaware – “gold standard”

• Review takeover defenses

Address capital structure • Reorganize to reduce outstanding classes and securities • Examine high vote/low vote dual class structure • Review registration and other investor rights

Offering terms • Sale of Insider Shares in IPO?

• Low float strategy used by Zillow & LinkedIn to stimulate competitive demand on pricing • Trading Market can effective valuation and IPO impact – think global not local!

Publicity, Not Gun Jumping: What should I do to prepare?

Plan early • If you are 1+ years away from IPO, consider now what you would like your publicity profile to be around

the time of the IPO. If you want to ramp up, do it well in advance.

Know when quiet period starts • Commencement of registration period is a facts and circumstances test, but certainly has begun when

bankers are hired and organizational meeting has occurred.

Review plans • As you begin the process, review all current public relations activities, including planned speaking

engagements, product announcements and communications on the company website in light of

restrictions.

Think about communications to constituents • Carefully plan communications with employees, suppliers and customers relating to IPO.

Get a team in place • Identify investor relations team and authorized corporate spokespersons early.

Publicity: What could hurt my IPO?

Gun Jumping - caused delays in numerous IPO’s. Even though loosened in 2005, securities laws impose strict

limitations on communications during registration period.

Mentioning the IPO - Communications more than 30 days prior to the SEC filing of a registration statement

have safe harbor, as long as they don’t mention an offering and the issuer takes steps to control distribution

during 30 days prior to filing.

Executive Interviews - Executive interviews that promote the growth company can still cause trouble.

Google’s Form S-1: • “If our involvement in a September 2004 magazine article about Google were held to be in violation of the Securities Act, we

could be required to repurchase securities sold in this offering.”

Failing to Communicate Rules to Board Members - Groupon had to disavow “wildly profitable”

statement by founder: • “In a June 5, 2011 news story reported on Bloomberg.com, our co-founder and Executive Chairman was reported to have

stated in a June 3, 2011 interview that “Groupon was going to be wildly profitable.” …. The reported statement does not

accurately or completely reflect Mr. Lefkofsky’s views and should not be considered by prospective investors in isolation or at

all.”

Can I fix a mistake? - Free writing prospectus can solve some problems, but use is limited in

IPO and Company take prospectus liability.

We are Public, Now What?

Whew, we didn’t miss that Q after the bankers left!

Make financial reporting routine and boring • Flatten issues - pre-close and monthly auditor meetings • Controls around close and consolidation

• Allow enough time for auditor and audit committee review • Numbers not moving when CEO working on the script

• Numbers not moving after press release • Bad Restatements = a suit and the boot

Make compliance and disclosure controls • Code of Ethics • Whistleblower

• Insider trading policy • Board/Committee processes and risk oversight

Be mindful of stockholder expectations – quarterly results, guidance & Say on Pay

Other Post IPO Financial and Accounting Requirements

Sarbanes Oxley section 404(a) and 404(b) • First annual report filed with the SEC includes a statement that the annual report does not include either

management's assessment on ICOFR or the auditor’s report on ICOFR

• Second annual report filed with the SEC must include both management’s report and auditor’s report on

ICOFR

Reporting deadlines

Audit Committee Independence

Auditor Requirements

Issuer Public Float Form 10-Q Form 10-K

Nonaccelerated filer <$75 million 45 days 90 days

Accelerated filer* >$75 million <$700 million 40 days 75 days

Large accelerated filer >$700 million 40 days 60 days

A newly public company generally must be SOX 404 compliant when it files its second annual report. However, underwriters &

investors may expect controls to be substantially in place prior to IPO. In addition, other regulatory requirements may need to be

addressed depending upon the industry.

Key Phases of SOX Compliance

Competing Priorities IT Systems Changes Process Changes Ongoing Costs Resources

Ongoing SOX Challenges

• Testing, evaluating, and

documenting controls on an ongoing basis requires extensive use of accounting

resources.

• Other priorities such as month

end close and management reporting must be balanced with compliance efforts.

• IT systems must be

continuously aligned with SOX processes and tested to maintain controls

environment.

• New processes must be

continuously aligned with SOX requirements and tested to maintain compliance.

• Resource costs, system

upgrades, hiring contractors, and SOX audits are ongoing costs of compliance.

• Determine significant controls

and business units.

• Document design of controls

over relevant assertions related to all significant accounts and disclosures.

• Test control design and

operating effectiveness.

• Document results.

• Identify and correct control

deficiencies.

• Prepare written assertion of

the effectiveness of ICOFR.

Document Controls Test Controls Correct Deficiencies Report on Controls Scope Evaluation

SOX and Regulatory Compliance

Questions to Consider

Do you realize you may need to spend over half your time for the six months prior to exit

focusing on the IPO?

How will the business continue to grow during this period?

Do you understand the ongoing commitment required from you and all your senior executives

both during the IPO itself and afterwards as a public company?

Are your systems, policies and procedures robust enough to comply with good corporate

governance practices?

Are you and the company ready for the increased scrutiny and higher stakes both at IPO and

afterwards?

Final Thoughts

In a climate of uncertainty or volatility, companies must balance near term focus on stable,

growing business with longer term strategy for exit

Early planning and analysis is critical to success for IPO and M&A

Rapid and effective evaluation is the key to articulate the value of the business, and to

delivering a successful exit

The more prepared for an IPO or sale transaction, the less disruptive and costly it will be to

your business

Being ready enables you to hit a market window and go out and remain strong

Hisoft Technology International

IPO on Nasdaq

June 2010

Parade Technologies Ltd

IPO on GreTai Securities

Market September 2011

Phoenix New Media Ltd.

(FENG) IPO on NYSE

in May 2011

Recent Intel Capital Exits: Your Story Goes Here

Opsource acquired by Dimension

Data, a wholly owned subsidiary

of NTT Holdings in June 2011

Rapid Bridge acquired by

Qualcomm in June 2011

OpenFeint acquired by GREE in

April 2011

Apache Design Solutions

acquired by ANSYS in August

2011

RAPID BRIDGE

Communicate. Collaborate. Innovate.