What’s an M&A? (merger and aquisition)
Discussing Mergers and Acquisitions
The M&A market has changed considerably since the Perfect Storm. Around 1995, the new economy prompted a reallocation of capital previously unseen in the corporate world and drove M&A activity to record levels from 1995 on to 2000. In 2003, considered the worst economic downturn in a decade, M&A activity had not ground to a halt, however. For many ventures that are unable to arrange for an IPO, or for whom conventional bank financing during these uncertain times becomes a stretch, M&A deals still remain one of the few viable options for raising capital. They also allow venture capitalists and others to cash out their investments.
There are three basic types of mergers:
– A horizontal merger involves two ventures operating and competing in the same kind of business activity.
– A vertical merger occurs between ventures in different stages of production, operation, or the value chain.
– A conglomerate merger involves ventures engaged in unrelated types of business activities.
Peter Drucker once commented that the drive for mergers and acquisitions comes less from sound reasoning and more from the fact that doing deals is a much more exciting way to spend one’s day than doing actual work. Actually, we found that acquisitions occur for sound reasons.
In a comprehensive survey conducted by Deloitte Consulting:
– 91 percent of the executives surveyed acquired another venture to grow their business
– 60 percent were after economies of scale
– 50 percent were interested in expanding their product portfolio
– 52 percent were facing pressures to consolidate
– 37 percent were pressured by globalization
– 35 percent were diversifying
– 37 percent thought it was an opportunistic deal.
Cisco Systems’ approach was, “We don’t do R&D, we do A&D: acquire and develop.” During their hyper-growth days in the mid-1990s they were in hot pursuit of serial entrepreneurs; 45 percent of the ventures they acquired had entrepreneurs who had been acquired before, and some in fact had already sold their previous ventures to Cisco.
Situation Analysis: Sector by Sector
In 2001 there were some 7,500 acquisitions in the United States, totaling $819 billion, or about half the world’s M&A volume. M&As continue to be the preferred exit strategy for venture capitalists. During the period of 1996 to 2002, 57 percent of the venture-backed exit strategies were through M&As. Mark Heesen, president of NVCA, concluded that “the M&A market continues to be an extremely important exit strategy for venture capitalists, especially in years when the IPO market experiences high levels of volatility.”
In 2001 a record number of 322 venture-backed companies were acquired, but at much lower valuations than in recent years. In 2000, M&A activity accounted for $67 billion, through 190 known deals, or an average $355 million per deal. In 2001, of all the known deals, we saw a sharp decrease in the activity—a decline of 77 percent to $15 billion. There were 146 deals, or an average $105 million per deal. For a point of reference, looking at venture-backed M&A deals between 1991 to 2001, we researched and found 1,693 deals worth $156 billion, or an average $92 million per deal.
Overview of the M&A Deal Process
The M&A deal process is second only to preparing for an IPO as the most stress testing a venture team will encounter. Like the preparation and planning involved before an IPO, the M&A process will last most of one year. We briefly outline what to expect in selling a venture.
Overview of the M&A Deal Process
– Months 1 to 2: The preparation for the transaction; discussing the seller’s decision and preparation, which involves the mental aspects, personnel planning, tax and estate planning, business review and method of sale; assembling the team with investment bankers, accountants, and lawyers; determining the confidentiality treatment and limitation on use of disclosed information.
– Months 3 to 4: Contact of potential buyers, maintaining confidentiality through the process; receiving and analyzing all indications of interest; assembly of data room.
– Months 5 to 6: Start of the management presentations; conducting extensive buyer due diligence; evaluating proposals.
– Months 7 to 8: The beginning of the end. Negotiating and executing the chosen Letter of Intent (LOI). Facilitating requests for information and buyer’s due diligence. Negotiating and finalizing terms of purchase agreement, stock versus asset deal, tax planning, use of earn-outs, and termination or hiring of key employees.
– Months 8 to 12: The closing. Continuing involvement of seller includes honoring covenants not to compete, no shop clauses, and determining consulting vs. employment agreements.
Reaching the closing means discussing employee issues, change of control agreements, and indemnities for directors and officers. Other issues include managing the communications in public M&A transactions, such as media and government-relations strategies, road shows, Web sites, and analysts calling U.S. Regulation FD.
Dealing with Investment Bankers
The role of investment bankers is to assist you in the M&A process outlined above. They help determine valuation, prepare and assist with the “selling memorandum,” and identify potential candidates. Their assignment is usually undertaken on an exclusive basis, meaning that each party—the seller and the buyer—bears their own costs associated with their investment bankers. Typically, the seller pays the banker a retainer and a “value-added” success fee upon the completion of the deal. It is well understood that investment bankers will do more than earn the money back you may pay them. To avoid million-dollar mistakes, it is important to find a firm that knows its way around a deal like yours, and one that has deep experience in deal making rather than in specialized niche sales.
Obviously, venture-backed firms have the assistance of their board members and of an extended network when it comes to choosing an investment banker. A great start would be making contact with the best research analysts at investment banking firms that understand your particular industry space, sector, customers, and technology. Find out who has done deals similar to your venture, compare their success records, and finally ask around. While an investment banker can be brought in at any point in the M&A process, having one as a permanent part of your advisory team enhances the value of your business and, of course, guarantees you ready access to one.