Monadnock Advisors

Hank Nelson

Monadnock Advisors LLC.

Mergers & Acquisitions Overview

Market Overview – M & A ProcessMaximizing Value

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M & A Market Overview 2010

• Global M&A volume increased 25% $2 Trillion• U.S. M&A volume grew 17%• Aggregate number of transactions increased 34%• Record number of transactions• Middle market deals up 59%, volume 72%– Number of deals under $100M jumped 58%– Enterprise Value/EBITDA 8.6 compared to 7.6– Acceleration 2H FY10

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M & A Market Overview 2010

• Drivers:– Equity market gains– Favorable credit markets – Cash/capital stockpiles driving corporations and

financial sponsorship activity–Moderate economic recovery – Global GDP 4%– Returned focus on growth vs operational efficiencies

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U.S. M & A Activity

Source: Software Equity Group 2010

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U.S. Middle Market M & A Activity

Source: Baird M&A Analysis 2011

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M & A Definitions

• EV – Enterprise Value• EBITDA – Earnings Before Interest Taxes Depreciation & Amortization• M & A Measurements– EV/Revenues – Multiple of Revenues 1.0x– EV/EBITDA – Multiple of EBITDA 9.0x– Comparables • Multiples for public companies similar sector – size • Announced transactions• Discounted for size, lack of liquidity, concentration

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U.S. Technology Sector M&A Activity

Source: Baird M&A Analysis 2011

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M & A Overview 2011• General outlook - continued growth from 2H FY10

• R. Blair & Co. – “Dollar volumes would be consistent with levels achieved in 2005

record year of the previous M&A recovery.”

• Pepperdine Survey IB’s – Private Sale Increase 51%– Significant Increase 21%

• Drivers:– Strategic buyers flush with cash $2T in U.S. Co.– Modest economic growth projected– M & A perceived as best way for growth– Financial sponsors (PE) opportunity– Smaller companies- Make vs. Buy– Credit markets in play

• Timing….

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M & A Process

• Role of the M & A Advisor– Quarterback of Advisory Team• Legal, Tax, Accounting, Wealth Mgmt

– Operations Consultant– Strategy Advisor– Preparation for Sale–Marketer of Business– Deal Technician– Financial Advisor

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M & A Process

M & A Advisor:• Cultivate relationship(s) as part of your company

development process– Free advice – market knowledge, timing, business

model – Forces outward discussion and viewpoint– Excellent preparation for first time seller– Ability to respond immediately to any inquiries

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M & A Process

Determine Goals and Objectives

Company Review : Strategic, Operational, Financial,

Establish Marketability

Realistic Valuation

Review Process

Engagement

Business Model

Historical Financials

RecastFinancials Projections

Identify Weaknesses

Improve Operations

Develop a Buyers View

Marketing

Offering Memorandum

Executive Summary

Management Presentation

Competitive

Bidding

Select Finalist

Structure of Transaction

Asset vs Stock

Marketing Plan

Industry Research

Selection Targets

Data Room

Confidentiality

Agreement

Estate Planning

Execute Agreement

Funds Transfer

Indemnification

Reps & Warranties

Purchase Agreement

Letter of

Intent

Final Due Diligence

Term Sheet

Taxes

Contact and CA

Meetings

Due Diligence

Screening and

Planning TransactionsMarketingDocument

PrepBusiness Review Negotiations

6 -12 Month Process

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M & A Process

Seller

Buyer

1

23

4

56

7

Executive Summary

Offering Memorandum

Competitive Bidding

Letter of Intent

Due Diligence P&S Agreement

Closing

Process Control Change Point

6 -12 Months Process

Time is the Enemy

Preparation -NO Surprises

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M & A Process

Degradation of Value:• Lack of a business plan or projections• Due diligence preparation – surprises• Intellectual property - protection or documentation

• Missing projections - timelines• Lose focus on business• Customer references• Employees

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Maximize Value - Range of Values

Employee Stock Ownership Plans

Recapitalization –Angel, VC, PE

Management Buyout

Synergy ValueSale to an Outside Buyer - company

Gifting

Investment Value

Investment Value (structured)

Fair market Value

Fair market Value

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M & A Maximizing Value

Primary types of buyers:• Strategic: Competition – Vendors

– Desire specific aspect – technology –customer base

– New market entrant, leverage internal resource (marketing sales/distribution)

• Financial: Angel, VC, Private Equity, Individuals – Focus on cash flow from business– Business base from which to grow – platform– Theoretically paying for the present value of the future cash flows – usually

applied by applying multiple price periods

• Hybrid: Add-ons, Consolidations, Rollups, Product– Market share but with cash flow that can be enhanced through improved

relationships/distribution

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Risk vs. Return by Investor Class

Risk

Angel

Investor

VC Investor

PE Investor

Strategic

Buyer

Multiple

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10012%

10017%

Risk Assessment = EBITDA Multiple

= 8.3x = 5.9x

Private Business – Growing -Mature

10025%

= 4.0x 10035% = 2.9x

Private Business – Mid Stage/SMB

Higher Risk Assessment by buyer will generate a lower EBITDA Multiple

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Maximizing Value - Valuation Drivers

Stable and Predictable

High Return on Capital

Brand Name

Growing Industry

Recurring Revenue

Alignment of Interest

Technology

Investment Risk

Cyclical

Capital Intensive

Commodity

Market Share Driven

New Competition Threat

Management Selling out

IP, Owners, Competition

Investment Consideration

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M & A - Maximizing Value

Differentiators:• Company vision• Technology – product• Customer base• Employees• Business model• Financial performance• Stability – (ability to sell future)• Strategic relationships (gateway)

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M & A Maximizing Value

Market Reality for the Entrepreneur:

• Companies no longer look at one opportunity to satisfy needs, but evaluate, compare, assigning weighted value and risk

• Large companies are presented hundreds or more opportunities a month for 5- 15 deals a year

• Need to differentiate• Market is usually the determinant of time to sell

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M & A

M & A is a process not an event

Hank Nelson

Monadnock Advisors LLC.

hnelson@monadnockadvisors.net

www.monadnockadvisors.net