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Everything You’ve Ever Wanted to Know About Mergers, Acquisitions, Divestitures, & Exits . . . but Were Afraid to Ask

Background & Perspective

There are dozens of high profile firms like Cisco, IBM, Microsoft, Oracle, & Google that are experts at using mergers, acquisitions, and divestitures to create market leading positions and tremendous wealth for shareholders and management alike.  These companies have the teams, financial resources, and connections that make them the absolute top dogs in tech M&A.  The last thing these companies need is advice on M&A strategy and execution.

If you are not one of these Goliaths, then are you locked out of leveraging M&A to build your company?  The answer to that question is clearly no.  Many small to mid-sized tech companies, however, do not have a lot experience or expertise in mergers, acquisitions, divestitures, or exits.  As a result, they tend to shy away from using classic corporate development techniques to grow the value of their business or to achieve a significant exit.  Over the next six weeks DevelopmentCorporate is going to publish an eleven part series that is designed to provide a basic introduction to corporate development techniques.  The series will cover the following topics:

  1. How to Build a M&A Strategy
  2. How to Build an Exit Strategy
  3. How to Build an Acquisition Pipeline
  4. How to Divest a Business
  5. How to Analyze an Acquisition Candidate
  6. How to Pitch an Acquisition to a Board of Directors, Private Equity Firm, or a VC
  7. How to Work with Private Equity, Venture Capital, & Investment Bankers
  8. The Art of the Initial Management Meeting
  9. Operational Due Diligence or What the Lawyers & Accountants Can’t Tell You
  10. Acquisition Integration Planning the Sterling Software Way
  11. Acquisition Cultural Integration.  Horror Stories & Best Practices

I won’t claim to be the industry’s leading expert on these topics, but I have a fair amount of experience to bring to the table.  I’ve spent the majority of the past 15 years serving as a corporate development executive for public companies, private equity-backed firms, and even a few venture backed firms.  Some of my credentials include

  • Served as trusted advisor for four public company boards of directors as well as three large private equity firms.
  • Led 4 major acquisitions that closed for over $200 million in consideration. Played a supporting role in 4 other acquisitions that closed for over $300 million in consideration.
  • Led 8 major divestitures that generated over $30 million in consideration
  • Led the approach, initial management meetings, and due diligence for over 40 acquisition projects
  • Developed over 325 in-depth analyses of public and private technology company acquisition candidates
  • Led over 12 major corporate restructuring projects

In addition to my successes I’ve also had some blazing failures including joining two venture backed startups that flamed out and trying to create a startup that was totally unfundable.  I am not an investment banker or business broker.  Instead I focus on providing the highest quality, pragmatic advice to management teams, boards, and investors from an operator’s perspective.  I have over 25 years of experience in the technology market place including functional and executive positions in marketing, product management, sales, research and development, customer services, network operations, business development, general management, and corporate development. 

The first post in this series will describe the basics of building an overall M&A strategy.  A key starting point in any M&A strategy is to understand the Enterprise Value of your own company. 

How to Calculate the Enterprise Value of Your Company

Decisions about mergers, acquisitions, divestitures, and exits are typically made in context of your firm’s enterprise value.  Enterprise value is the amount of cash that would be required to purchase your company.  It takes into consideration the value of your equity (market cap for public companies), cash and cash equivalents, debt, preferred stock, and liquidation preferences.  If you are a public company it is easy to calculate your enterprise value.  All you need is a copy of your most recent publicly filed financial statements and your market cap. 

If you are a private company there is a pretty straightforward way to estimate what your enterprise value is.  Here is the basic formula to calculate enterprise value:

Enterprise value =

 common equity at equity value
 + debt at market value
 + minority interest at market value, if any
 – associate company at market value, if any
 + preferred equity at market value
 – cash and cash-equivalents.

Most of the information required to calculate your enterprise value is contained in your financial statements.  Cash and cash equivalents are the easiest since they are right on your balance sheet.  If your firm has debt, you need to calculate not only the outstanding balance but any prepayment or other charges that you would incur if you settled the debt today.  The same thing is true about preferred stock and liquidation preferences.  The value of preferred stock and its associated liquidation preferences should come right off of the stockholders equity section of your balance sheet.  If you have venture capital or private equity invested in your firm you should have a deep understanding of the impact of liquidation preferences.

The challenge with calculating enterprise value for private firms is the value of your common stock or equity.  For public firms this is easy – market capitalization is simply the current share price multiplied by the number of outstanding shares.  For private companies, however, there is no public market to value your stock on a daily basis.  Instead, you have to estimate its value by comparing yourself against other public companies.  You can do this by analyzing at least three public companies in your market place and applying some of their metrics to your situation.

To make this process a little clearer, let’s assume that you are a private provider of ERP solutions for the wholesale distribution marketplace.  Here is a snapshot of your business at this point in time:

 AB 1

To estimate your enterprise value, you need to compare yourself to some other public technology companies that are similar in size and nature to your business.  There’s no point in comparing your company to SAP or Oracle since those firms are 75 times the size of yours.  Four good candidates in the ERP space are MSC Software, i2, Epicor, and QAD.  Once you have identified some firms to compare against, develop a summary matrix of some key indicators, like the one shown below:

 AB 2

Next, develop a comparison matrix where you look at the ranges of key valuation metrics and decide where your company fits into the continuum, as shown below:

 AB 3

Another source of comparable statistics is the fairness opinions developed by investment bankers to support the paid by an acquirer for a particular company.  Often, summaries of these documents are included in SEC filings associated with a public company involved in an acquisition.  Any time a public company in your market is involved in an acquisition, you should review the filings to see what tidbits you can learn.  Recently, Golden Gate Capital and Infor announced the acquisition of SoftBrands.  In conjunction with the deal, SoftBrands filed a pretty extensive proxy statement that included detailed information about the fairness opinion rendered by Piper Jaffray.  You can read the filing here.  The following table presents a list of 33 transactions between 2004 and 2009.  It is interesting to see how valuations changed over that time period.  The Enterprise Value / EBITDA multiple is a good bellwether metric that reached a peak in late 2006.

 AB 4

 The goal of this exercise is to leverage information about the valuation of the companies you are comparing yourself to so you can develop an estimate of your enterprise value.  A couple of notes.  First, you generally should base your calculations off of trailing twelve months (ttm) numbers.  This provides a better insight into your actual performance.  Management teams always have high expectations for the future and basing your enterprise value on anticipated performance is a bit of a crap shoot.  Also, most investors prefer to look at actual performance instead of management’s future projections.  Second, you need to have some logic to justify where you value your firm in the continuum of valuation metrics.  In this particular analysis I felt that the mythical ‘My Company’ was closer in nature and performance to MSC Software and Epicor than i2 or QAD.  Some of the factors in that decision making process were the relative strength of “My Company’s” EBITDA and its relatively strong cash/debt position.  If I were asked to estimate the enterprise value of ‘My Company’ based on the limited information presented here I would estimate a range of $275 million to $325 million. 

The approach to calculating enterprise value for your private company presented in this post is a quick and dirty technique.  It will get you into the relative valuation ballpark.  You can always hire an investment banker or a specialized valuation firm to develop a comprehensive analysis of your value.

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2 Responses to “Everything You’ve Ever Wanted to Know About Mergers, Acquisitions, Divestitures, & Exits . . . but Were Afraid to Ask”

  1. mark Says:

    good paper.! when you plan to submit the next topic? how to building am acquisition pipeline.
    Thanks
    Mark

  2. Robert Says:

    You said that next slide will be share in 6 weeks..
    # How to Build an Acquisition Pipeline
    # How to Divest a Business
    # How to Analyze an Acquisition Candidate
    # How to Pitch an Acquisition to a Board of Directors, Private Equity Firm, or a VC
    # How to Work with Private Equity, Venture Capital, & Investment Bankers
    # The Art of the Initial Management Meeting
    # Operational Due Diligence or What the Lawyers & Accountants Can’t Tell You
    # Acquisition Integration Planning the Sterling Software Way
    # Acquisition Cultural Integration. Horror Stories & Best Practices

    Keep waiting for it…

    Thanksss

Leave a Reply


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