Technology  M&A:  Deal  Prepara4on  and  Management  

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About  Chris4an  Benne?  •  Managing  Director  at  Pagemill  Partners  where  he  focuses  on  M&A  

Advisory  for  soCware,  internet,  and  service  companies.  

•  Since  joining  Pagemill  in  2004,  has  successfully  closed  more  than  50  M&A    transac4ons  across  a  variety  of  technology  segments.  

 •  Prior  to  Pagemill,  he  was  a  strategy  consultant,                ini4ally  at  The  San  Francisco  Consul4ng  Group  and              then  with  The  McKenna  Group.    •  Chris4an  holds  an  A.B.  from  Dartmouth  in                Computer  Science  and  an  MBA  from  UC  Berkeley’s              Haas  School  of  Business.  

Agenda  

•  Key  ac4ons  and  steps  to  take  in  advance  of  a  poten4al  transac4on  

•  Process  overview  and  best  prac4ces  for  value  maximiza4on  in  running  a  process    

•  Opportuni4es  and  strategies  to  maximize  value  and  certainty  of  close    

Pre-­‐Process  Ma?ers  

•  External  Readiness  //  Strategic  &  Market  –  Develop  strategic  relevance  to  buyers  in  advance  of  a  process  –  Cul4vate  commercial  partnerships  with  poten4al  acquirers  –  Build  awareness  and  rela4onships  –  Improve  financial  profile  as  possible/available;  investment  4ming  and  impact  

•  Internal  Readiness  //  Organiza8onal      –  Diligence  prepara4on;  organiza4on  ma?ers    

–  Proac4ve  internal  diligence  and  remedia4on;  financial  and  IP  ma?ers  –  Alignment  of  internal  stakeholders  

Process  Overview  

•  M&A  transac+ons  are  complex  and  require  crea+vity,  a9en+on,  and  significant  experience  to  be  executed  properly  

•  Maximize  quality  and  quan+ty  of  interest  in  a  businesses  throughout  the  M&A  process  

•  The  typical  +meline  is  six  to  nine  months  to  a  closed  transac+on  

Prepara4on  Phase   Deal  Marke4ng   Due  Diligence  &  Closing  

1   2   3  

30  Days   60  –  90  Days   45  –  75  Days  

Ini$ate  an  organized  process  focused  on    maintaining  the  $meline  and  pushing  the  most    interested  buyers  to  management  mee$ngs  

Prepare  the  company  for  a  sale  process,  finalizing  the  poten$al  strategic  buyers  and  marke$ng  material  

Enter  exclusivity  with  the  selected  party  and  conduct  due  diligence,  leading  to  a  final  closing    

Prepara4on  Phase  

Prepara4on  Phase   Deal  Marke4ng   Due  Diligence  &  Closing  

•  Define objectives –  Develop strategy –  Determine timing –  Identify assets for sale

•  Review operations –  Assess strategic positions –  Review historical and projected financials –  Financial model / audited financials

•  Develop preliminary valuation analysis –  Comparable public companies –  Precedent transactions –  Discounted cash flow analysis

•  Develop preliminary strategy –  Potential buyers –  Sale process –  Sale of stock or assets –  Timing

Financial  

Strategic  Opera4onal  

1   2   3  

30  Days   60  –  90  Days   45  –  75  Days  

•  Define key selling points

•  Prepare marketing materials –  Executive Summary –  Information Memorandum –  Management presentation

•  Prepare NDA and initial bid process letter

•  Gather intelligence on potential buyers –  Presumed level of interest –  Financial strength –  Buyers’ perspectives on value –  Ability to execute a timely transaction

•  Finalize buyer list

•  Complete marketing strategy

Deal  Marke4ng  

•  Contact buyers

•  Distribute marketing materials –  Executive Summary

–  NDA

•  Finalize management presentation

•  Send Descriptive Memorandum upon execution of an NDA

•  Continue gathering market feedback

•  Prepare data room and due diligence sessions

•  Receive preliminary indications of interest

Prepara4on  Phase   Deal  Marke4ng   Due  Diligence  &  Closing  

1   2   3  

30  Days   60  –  90  Days   45  –  75  Days  

•  Select participants based on: –  Price

–  Terms

–  Fit

•  Arrange due diligence visits

•  Coordinate response to buyers’ questions

•  Confirm financing arrangements (as appropriate)

Due  Diligence  &  Closing  

Prepara4on  Phase   Deal  Marke4ng   Due  Diligence  &  Closing  

1   2   3  

30  Days   60  –  90  Days   45  –  75  Days  

•  Collect final LOIs

•  Choose party to enter into exclusivity

•  Facilitate comprehensive due diligence including: –  Financial –  Business –  Human Resources –  Technology

•  Draft and negotiate transaction agreements

•  Work with legal counsel and company to sign a final agreement

•  Target a simultaneous sign and close

•  Continue executing on the business

Valua4on  Considera4on  •  Acquirers value a business based on a number of factors; commonly

these three are primary considerations:

−  Strategic Value: Strategic importance of an asset that is difficult to replicate, the value of new market opportunities made possible through the acquisition, and the threat posed by the potential acquisition of an interesting target by a competitor

−  Fundamental Value: Company’s financial profile (growth, profitability, cash flow, tangible assets, etc.) and market valuation multiples of comparable transactions

−  Process Driven Value: Competitive dynamic required to buy the business through a well managed process

Timing,  Value,  and  Certainty  Maximiza4on  

•  Posi8ve  Timing  Drivers  –  Buyers  are  indica4ng  specific  and  substan4al  interest  –  Company  has  achieved  key  value  /  growth  inflec4ons  –  Company  has  de-­‐risked  the  acquisi4on  for  the  poten4al  

acquirers  (e.g.,  technology  risk,  market  risk,  execu4on  risk)  –  Ability  to  sell  on  strategic  value  with  a  valua4on  floor  driven  

by  fundamental  value  

–  Market  is  ac4vely  consolida4ng  

•  Ineffec8ve  8mes  to  sell:  –  Only  thing  to  sell  is  “strategic  value”  /  future  poten4al  –  When  a  company  is  out  of  capital  

–  End  of  a  consolida4on  wave  

Goal  to  maximize  leverage—yields  higher  valua8ons,  improved  buyer  interest,  superior  deal  terms,  and  

increases  certainty  of  close  

About  Mykel  Sprinkles  •  Senior  Associate  with  TVC  Capital,  a  soCware-­‐focused  growth  equity  firm.  

•  Sources  and  executes  growth  equity  investments  and  buyouts  in  the  soCware,  internet,  and  financial  technology  sectors.  

•  Began  his  career  on  the  funds  team  of  a  private  equity  real  estate  group  responsible  for  capital  raising,  manager  selec4on,  and  due  diligence.  

             •  BS  in  Business  Administra4on  from  the  University  of  

Richmond,  MBA  from  London  Business  School.  

Perspec4ve  and  Landscape  •  As  an  investor  in  growth  stage  technology  (soCware)  companies,  

TVC  has  found  that  the  best  outcomes  are  the  result  of  companies  gegng  bought…  and  not  sold…  –  Maximizes  valua4on  –  Provides  a  greater  certainty  of  close  –  Provides  a  greater  likelihood  of  a  smooth  transi4on  post  close  

•  What  are  the  steps  you  can  take  12-­‐24  months  prior  to  and  leading  up  to  a  target  transac4on  to  get  bought:    –  Become  a  strategic  priority  –  Professionalize  the  organiza4on  –  Bu?oning  up  –  Best  foot  forward  

Perspec4ve  and  Landscape  SoRware  Industry  M&A  Ac8vity  

Transac8on  Analysis  by  Size  –  2012  

Ø In  SoCware,  96%  of  all  transac4ons  get  done  at  less  than  $100m.  Ø In  your  sector,  how  can  you  land  on  the  right  hand  side  of  the  distribu4on?  

Ø What  are  the  drivers  to  op4mize?  

Ø In  SoCware,  revenue  growth  rate  (x  axis)  is  the  primary  determinant  of  the  mul4ple  achieved.  

Ø Know  your  sector  –  similar  informa4on  is  available  on  all  technology  sectors.  

Steps  in  Gegng  Bought  Become  a  strategic  priority  –  get  buyers  knocking  on  your  door,  and  not  the  other  way  around.  •  Iden4fy  and  priori4ze  5  –  10  target  acquirers.  

–  Complementary  and/or  subs4tute  products  –  Technology  gaps  –  Product  road  map  –  Customer  lists  

•  Ini4ate  business  development  efforts  to  develop  deep  partnerships  with  target  list.  –  Sales  and  marke4ng  programs  –  Product  integra4ons  

•  Execute!  –  Put  top  team  members  on  the  projects  –  Drive  tangible  value  –  Capture  execu4ve  sponsorship  

Steps  in  Gegng  Bought  Professionalize  the  organiza4on  –  strategic  buyers  and  public  en44es  want  assets  and  organiza4ons  that  can  migrate  into  their  corporate  structures  without  undue  heavy  liCing.  •  Demonstrate  organiza4onal  excellence  around  cri4cal  business  func4ons  and  key  

valua4on  drivers.  –  Sales  organiza4on  –  Product  teams  –  Research  organiza4on  –  Client  services  

•  Allocate  likely  limited  resources  accordingly.  

•  Look  like  a  mature  company  that  will  fit  seamlessly  into  a  larger  en4ty.    

Steps  in  Gegng  Bought  Bu?oning  up  –  as  the  company  progresses  in  its  4meline  toward  a  transac4on  ensure  that  the  house  is  in  order.  •  Corporate  clean  up.    

–  Up-­‐to-­‐date  board  docs  and  other  corporate  /  legal  documents  

•  Compliance  across  the  organiza4on.  –  Industry  specific,  regulatory  and  standards  boards  –  Relevant  cer4fica4ons  –  Federal  and  state  taxes  –  Insurance  coverage  

•  Accoun4ng  and  finance.  –  Recent  409a  valua4on  –  Audited  financials  –  No  unknown  comp  and  accrued  benefit  liabili4es  

•  Proac4vely  remove  roadblocks  to  a  smooth  transac4on.  –  Easy  steps  to  take  in  advance  to  op4mize  the  team’s  4me  and  focus  –  As  you  engage  advisors  demands  on  the  team’s  4me  will  increase  

Steps  in  Gegng  Bought  Best  foot  forward  –  as  the  company  engages  buyers  have  a  clear  and  consistent  message  that  solidifies  strategic  fit  and  value.  •  Show  that  the  company  has  hit  its  projec4ons.  

•  Demonstrate  that  key  valua4on  drivers  have  been  op4mized.  –  And  will  remain  strong  going  forward  

•  Steer  into  objec4ons.  –  Know  your  weaknesses  and  address  them  directly  

•  Growth  rate,  margin  compression,  product  specific  issues,  etc…  –  Show  that  you  understand  the  buyer  audience  and  be  prepared  to  address  poten4al  areas  of  

concern  head  on  –  Detail  how  poten4al  areas  of  concern  can  be  resolved  and  the  steps  that  have  been  taken  

•  If  you  have  established  the  company  as  a  strategic  priority  poten4al  issues  become  easier  to  work  through  –  acquiring  the  asset  becomes  most  important!  

Closing  Ques4on      Given  the  informa4on  provided,  what  are  the  biggest  obstacles  you  face  as  a  business  owner  /  execu4ve  in  effec4vely  posi4oning  your  company  for  purchase?    How  can  the  panel  use  their  experience  to  crea4vely  address  and  help  you  think  through  such  obstacles?    

About  Tom  Cleary  •  Member  of  Dykema’s  Corporate  Finance  Prac4ce  Group    •  Extensive  experience  in  mergers,  acquisi4ons  and  dives4tures  and  in  

public  and  private  offerings  of  equity  and  debt  securi4es.  

•  Acted  as  outside  corporate  and  securi4es  counsel  to  various  public  and  private  issuers,  including  an  array  of  high  technology,    

           aerospace  and  defense,  e-­‐commerce,  food  service  and                consumer  product  companies,  and  more.              

•  Tom  holds  a  B.S.  from  the  University  of  Notre  Dame              and  a  J.D.  from  the  University  of  California,  Berkeley’s              Boalt  Hall  School  of  Law.  

THE  TIMING,  STEPS  AND  PROCESS  INVOLVED  WITH  A  SUCCESSFUL  SALE  TRANSACTION  

•  Role  of  a?orney  prior  to  the  involvement  of  the  target’s  sell  side  advisor  

•  Process,  structures  and  key  legal  and  other  terms  involved  in  a  sale  transac4on  

•  Important  issues  to  be  addressed  aCer  closing  

ROLE  OF  THE  ATTORNEY  PRIOR  TO  THE  INVOLVEMENT  OF  THE  TARGET’S  SELL  SIDE  ADVISOR  

•  Virtual  Data  Room  •  Intellectual  Property  Due  Diligence  •  Employment  and  Real  Estate  •  Financial  Statements  •  Market  Timing  

PROCESS,  STRUCTURES  AND  KEY  LEGAL  AND  OTHER  TERMS  INVOLVED  IN  A  SALE  TRANSACTION  

•  Choice  of  En4ty  –  Taxa4on  –  Asset  vs.  Stock  Sale  •  Process  –  Full  vs.  Limited  Auc4on;  Single  Buyer  •  Timing  –  Signing/Execu4on  Period/Closing  •  Terms  –  Price/Considera4on/Escrow/Earn-­‐Outs/  Purchase  Price  Adjustments/Representa4on  and  Warran4es/Closing    Condi4ons/Indemnifica4on  (Baskets,  Caps  and  Survival)  

•  Regulatory  Ma?ers  –  Hart  Sco?/SEC/CFIUS/    Exon    Florio  

IMPORTANT  ISSUES  TO  BE  ADDRESSED    AFTER  CLOSING  

•  Escrow  Releases  and  Indemnifica4on  Ma?ers  •  Employment  Ma?ers  •  Real  Estate  Ma?ers  •  Seller  Notes,  Earn-­‐Outs,  Purchase  Price  Adjustments,  and  Stock  Swaps  

Q&A  Contact:    SecureDocs  866.700.7975  info@securedocs.com  www.securedocs.com    Tom  Cleary  213.457.1760  tcleary@dykema.com      

 Chris4an  Benne?  650.354.4085  cbenne?@pmib.com      Mykel  Sprinkles  858.345.5268  msprinkles@tvccapital.com