M&A Deals - Hockey Stick Projections

M&A Deals - Hockey Stick Projections

During the deal making process, there are a number of common mistakes that can cost sellers millions of dollars. Many of these mistakes can be avoided by simply hiring an experienced M&A team to guide the parties through the transaction. One common mistake committed by sellers in M&A deals is the use of “hockey stick” projections in sales growth.

A hockey stick projection, depicted above, is an unrealistic forecast for future sales growth. These projections portray a growth rate substantially higher than what the company has traditionally achieved, and often times make the seller appear not credible. Overly optimistic projections are a mistake that many sellers make in an attempt to fetch higher valuations for their companies; however, from a buyer’s perspective a hockey stick sales growth usually raises suspicions over the validity of the forecasts and other information.

The buyer’s due diligence process will examine all aspects of the target company and expose the unrealistic nature of the lofty projections. In many cases, a seller will attribute the growth rate to estimates made by the sales team or expected catalysts foreseen in the market. But, the buyer will want to check the forecasting methodologies of the sales team and validate the proposed market catalyst. The buyer’s due diligence team and M&A advisor will thoroughly evaluate the seller’s data, obtain expert opinions, and research the assumptions and economics behind the projections. Ultimately, if the seller’s forecasts cannot be substantiated, potential buyers will lose faith in both the future performance and management of the company. As a result, potential buyers will either walk away from the deal or make offers at many multiples below the industry average.

The stakes are high during an M&A transaction, with average deal values in the millions of dollars. Consequently, mistakes can prove to be very expensive. The mistake of making hockey stick projections is one that can shatter deals and put far less money in a seller’s pocket. Careful preparation of valid sales forecasts and the advice of experienced deal makers will eliminate this mistake from the process. In fact, when buyers find solid rationale and data behind forecasts, they are more likely to pay a higher price for the company.

To conclude, for M&A deals – hockey stock projections do not add value, they actually diminish the value.

M&A Deals - When Should I Sell my Business?

M&A Deals - When Should I Sell My Business

The question that every business owner asks themselves at some point is “when should I sell my business?” The answer to this question may not be as simple as it sounds as often times the owner of a business is not only looking to maximize the value of a sale but may also be looking to stay with the business in order to help it grow and reach its full potential.

Age/Health of the Majority Shareholder

There are several factors to consider when contemplating whether or not it is time to sell. The age and health of the controlling shareholder is one of the most important factors. Many owners wait too long, either age or health-wise. Are there existing health issues or familial/hereditary health issues that may restrict the owner from operating the business at its maximum potential? These are concerns that should be addressed when considering the potential sale of a business.

Time of Life Considerations

In other cases, owners may want to sell because they feel “burnt out.” Sometimes, owners may not be burnt out; however, they’d like to pursue a different line of business or other opportunities. Both of these reasons should motivate the potential seller to consider the sale of their company. Usually, a loss of interest is permanent and the business will suffer if the owner isn’t that interested.

Risk Profile / Capital Constraints

Sometimes, when a company is growing at a pace that is difficult to maintain, it maybe time to seek a partner to help manage and finance the growing business. This is also one of the best times to sell, i.e., when the business’ growth looks like it will last forever.

Business owners should also plan to exit a declining business before the financial difficulties become extreme. Usually, there is still good value to be had in the sale of a business that has had financial difficulty. However, if the situation reaches the point of bankruptcy, particularly for a smaller middle market company, it’s usually game over. In contrast, it may also be time to exit a declining business that is heading towards financial difficulties.

Owners considering a sale should consider technological changes happening in their marketplace and consider if their company is keeping up or can keep up with it. If not, a sale should be arranged. Similarly, increasing or decreasing product demand should be considered. Increasing demand is great if the company has the wherewithal to finance the growth. Otherwise, it could be dangerous if the company can’t scale appropriately. If there’s lots of demand, it will increase the value of the company in a sale, even if the company can’t meet that demand itself.

Market Conditions

Owners should always stay abreast of the market conditions. Obviously, everyone wants to sell at the “top;” however, many wait too long. It’s better to sell just before the absolute “top” than to risk missing it. Over the years, Versailles Group has seen far too many entrepreneurs miss the “window” because they waited too long. As the expression says, “better safe than sorry.”

Conclusion

The issues of when to sell are often intertwined so it’s highly recommended for the business owner to have some serious conversations with their M&A advisory. Every company and owner has unique circumstances and challenges. A trusted M&A advisor will be able to understand the owner’s desires and factor in the other things like market conditions in order to determine the timing of the sale of the company.

Further Information

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M&A Deals - Q1 2015 Activity

Global M&A Activity - Q1 2015

Globally, M&A transaction value for Q1 2015 was approximately US$831.5 billion, which showed growth of approximately ten percent over Q1 2014. The following chart shows Q1 global M&A activity from 2012 through 2015.

Both the US/Canada and Asia/Pacific showed an approximate 22 percent growth in M&A transaction value from Q1 2014 to Q1 of 2015. As shown in the following charts, both markets (except for 2013 in Asia/Pacific) have had steady M&A growth over the last few years.

US/ Canada M&A Activity - Q1 2015

Asia/Pacific M&A Activity - Q1 2015

European M&A Activity - Q1 2015

European M&A deals have slowed from last year, but have not slipped below 2013’s slowdown.

Latin America M&A Activity - Q1 2015

M&A deals in Latin America/Caribbean have slowed from last year, but are still ahead of 2012 and 2013.

Africa/MEast M&A Activity - Q1 2015

M&A deals in Africa/Middle East have shown a steady decline from 2013’s high and, are, in fact, lower than even 2012.

While M&A activity is robust, sellers should move quickly. Over the years, Versailles Group has seen many sellers miss the "window." This was very apparent in the Great Recession as many buyers waited too long and found that not only did their businesses suffer during the recession, but that the value of their business declined tremendously.

M&A Deals - The Benefits of a Global Auction

M&A Deals - The Benefits of a Global Auction

With regard to M&A Deals – the benefits of a global auction should always be considered when selling your business. It is important to offer a sell side transaction as broadly as possible to achieve the best possible results.
A broad based approach will result in a global auction for the company, thus ensuring the highest possible value as bids are received from across the globe. A multitude of bids to examine will reveal the true value of the selling company. It will also provide the seller with unique insights as some of the bids will have different structures. This will give the seller a chance to “mix and match” structures to obtain not only the highest value, but also the best terms.

Versailles Group has conducted a number of these global auctions over the last 28 years. It should be stressed that all of these auctions are 100 percent confidential. It should also be noted that the results have been phenomenal, in terms of both value and terms. Versailles Group sold a company in Massachusetts to a company in South Africa. Another company headquartered in Houston was sold to a company in New Zealand. The firm has multiple success stories, all based on the international, highly confidential auction. In the case of the South African company, they paid two times the next closest bid, which demonstrates that this process works.

Entrepreneurs and corporate sellers should always be cognizant of the eventual sale of their business and should be preparing for a sale long before they think it’s time. Private equity investors and venture capital investors achieve success when selling businesses because they start preparing for a sale even before they invest.

Most business owners don’t think about selling their business, particularly when they’re starting out; however, it is something that should be considered annually. This should be done with a professional M&A advisor that can advise you about your company’s possible value, the market, possible timing, etc.

When it is time to sell, a broad based approach to the sale should be your first consideration. Frequently, the best buyer is a company on the other side of the world. That being said, as with all M&A deals, confidentiality is paramount. Only responsible M&A advisors know how to conduct themselves and the sale of your company in a secure and confidential manner.

M&A Deals - The Benefits of a Global Auction - Conclusion

An M&A advisor with decades of experience and a global reach will know how to create and facilitate a worldwide, confidential auction. That is the best way to achieve the maximum value and terms when selling a company. To summarize, for M&A deals – the benefits of a global auction should not be underestimated.

M&A Deals - Sell Side Considerations

M&A Deals - Sell Side Considerations

With regard to M&A deals, as an owner of a middle market private company, it is important that you seek the assistance of a boutique investment bank to help you sell your business. Having a team of advisors with decades of M&A experience will help you understand the value of your business, as well as help you attain the maximum value through a sale.

Considerations Before A Sale Is Launched
One of the most important considerations before selling your business is to determine the best time to pursue an M&A transaction. Your M&A advisors will assist you in this regard. Many entrepreneurs delay the process, most of the time to their detriment. Many entrepreneurs want to launch one or more new products or develop one more sales channel or do something that they think will make their business more attractive to buyers. However, while the entrepreneur is focused on projects like these, they miss a seller’s market or don’t realize that a dangerous competitor is in the process of taking their largest customer. It’s a shame when these things happen, particularly because the entrepreneur has spent years building a valuable business. And, then in the final moments, they lose a large percentage of the value.

In all M&A deals, the seller is concerned with confidentiality. The M&A advisor should have a strong Non-Disclosure Agreement to protect the seller’s business. In addition, the seller and the financial advisor need to determine whether or not a broad based approach of contacting a large number of buyers is right for the company. In most cases, contacting a large number of potential buyers will yield the best results. But, in particular cases, a seller may want to deploy a more limited process. The seller and the M&A advisor need to discuss the pros and cons of each approach and agree how the company should be marketed.

Considerations During A Sale
It is important for the seller to be prepared to address any issues that may arise during the transaction with regard to the company’s operations, technology, human resources, and financials. The due diligence that potential buyers will conduct undoubtedly will raise questions about the selling company. The buyer needs to fully understand the intricate details of the business being purchased. Sellers usually find this part of the process of selling their business to be daunting, which makes it invaluable to have an experienced team of advisors helping to answer questions and ease any concerns the buyers might have raised.

Considerations After The Sale
After an M&A deal is completed, the buyer is faced with integration and how to run the new business efficiently. Issues regarding employee retention, disparate compensation strategies, and more will need to be addressed. Most of the time, the buyer will address these issues directly; however, it’s important that the seller to help, particularly if it’s requested. A smooth transition will preserve the seller’s legacy, protect the entrepreneur’s former employees, and provide former customers with the best on-going customer service. A good M&A advisor can help guide the seller through this process and find the appropriate level of involvement for the departing entrepreneur.

M&A Deals - Integration of Employees

in Acquisitions

M&A Deals - Integration of Employees in Acquisitions

In M&A deals - integration of employees in acquisitions is critical. In many cases, retaining personal is an overlooked aspect by the new owners of an acquired business. For some reason, this neglect starts during the due diligence phase. Buyers keep saying that the people are important, but do little to prove it. Frequently, employment agreements are the very last documents that a buyer submits to the seller and/or the employees. It’s a pity because the people are very important “assets” and have feelings. By contrast, the accounting details or legal matters don’t care if they’re verified first or last. It’s important for the buyer to send strong signals to employees that they will keep. As they say, action speaks louder than words.

Emphasis needs to be placed on making the employees to be acquired comfortable in knowing that they will be kept. This usually means talking with them directly and presenting fair and reasonable employment agreements. For most acquisitions, keeping key employees from leaving is essential to ensure a successful transaction. In most middle market M&A deals, the employees have been with the business for years and have special expertise in the company’s day to day operations. The experience and information that these employees have can be invaluable to a new management team. In many cases, existing employees have good ideas on how to improve customer service or create other efficiencies so new management should be open to their suggestions.

Interviewing and listening to employees is also a good way for management to evaluate newly acquired personal and see which ones take initiative and are really dedicated to their jobs. Employees are important “assets.” The most successful M&A transactions use this as a cardinal rule and deploy these people in an appropriate and mutually beneficial way. Furthermore, smart acquirers show these employees respect from an early stage in the transaction.
Newly merged companies need to work towards building a winning team-oriented attitude within the company culture. This encourages teamwork and builds mutual respect between employees and management. Post-acquisition, it is important that management is transparent with employees about possible changes within the company. If management is honest with the employees about these changes, then the employees will be more receptive to new ideas and strategies within the company. Furthermore, in many cases, the employees will actually embrace the changes and help the company to achieve its objectives.

M&A deals can be complex; however, if well thought out and executed properly, they can be very productive for the acquiring company. An experienced M&A advisor can help the acquiring company with these details because they’ve seen different buyers implement different strategies and generally know what works and what doesn’t work. The most successful managers are those that seek advice from their advisors and listen carefully to the input.

M&A Deals - Q1 IT Update

M&A Deals - Q1 IT Update

With regard to M&A deals - Q1 IT update, IT deals for the first quarter of this year are slightly ahead of the same period last year in terms of both volume and value. Approximately 1,500 transactions were closed with a value of approximately US$67.8 billion.

By region, 616 of the approximately 1,500 transactions (or about 41 percent) were announced in the US and Canada. Europe accounted for 461 transactions or about 31 percent. Approximately 348 transactions were announced in the Asia Pacific region for about 23 percent. Here are the details:

Versailles Group, founded in 1987, is an expert at closing successful M&A deals. Software transactions have included the sale of Bedford Software, a Toronto Stock Exchange listed company, the sale of Layered Inc., a company owned by Mr. Paul Allen, co-founder of Microsoft, the sale of BEZ Systems, the sale of a software business for Logica plc, etc. Versailles Group's forte is to listen to its clients objectives and works diligently to find the appropriate buyer. In these cases, high valuations are achieved and both buyer and seller are happy with the results.

Versailles Group was founded by Mr. Donald Grava, who has an extensive background in accounting, finance, M&A, and other matters. Mr. Grava started his M&A career on Wall Street in New York, where at an early stage in his career, he was exposed to international companies and cross-border transactions. As a result, many of Versailles Group's transactions have been cross-border.

M&A Deals - Failed Acquisitions

Why Do Some M&A Deals Result in Failure?

After the closing of an M&A deal, it is up to the buyer to ensure the success of the transaction. However, it’s only fair to say that not all of the work comes post-closing! In fact, the most successful buyers expend a lot of time and effort before the closing.

There are several reasons why acquisitions fail, but this generally occurs for two primary reasons. The first is that the buyer was overly optimistic about the potential synergies of a transaction. Thorough due diligence and analysis, before closing, is imperative to avoid these types of failures. Second, and this happens more than we’d like to see, the buyer is not able to competently manage the newly acquired business or underestimates the amount of time the transition will take.

When the buyer is overly optimistic about possible synergies with the target company and possible economies of scale, it can lead to a failure. Similarly, if the newly acquired company’s products or services do not grow as anticipated, there’s a chance for failure. Furthermore, if the buyer has underestimated the strength of the market competition, the amount of capital needed to grow the business, or other associated costs related to the transition of ownership or overestimated potential cost savings, it will be very difficult to ensure the success of the newly acquired company.

If the buyer is unable to properly manage the business it will almost certainly lead to a failed acquisition. The management team needs to have a strong understanding of the business being acquired. Furthermore, the acquiring company needs to make sure that it retains key management and other employees to ensure the operations run as planned. If the corporate cultures of the acquiring and acquired companies are vastly different, it can lead to poor chemistry between the employees of the two companies, which can cause tension in the workplace. This tension deteriorates the team effort and can cause financial losses.

In order to complete a successful acquisition, thorough due diligence is an absolute must. Such diligence must include a complete assessment of the buyer’s own strengths and weaknesses and a detailed analysis of the expected financial results. While there are too many conflicts of interest to have your investment banker complete the due diligence, the bankers are certainly well equipped, or should be equipped to help guide the process. A well experienced investment banker certainly knows about the potential pitfalls related to doing an acquisition and can help the buyer avoid them. When the proper diligence and analysis is done, the result is a successful acquisition.
M&A deals can be exhilarating for both the buyer and the seller, if done properly.

M&A Deals - Locked Box

Locked Box

In M&A deals, buyers and sellers are always looking for ways to reduce what is often a lengthy process of preparing, reviewing, and agreeing on final price adjustments derived from the closing accounts. In order to simplify this process, more M&A transactions are beginning to implement a “locked box” pricing mechanism. The locked box mechanism negates the need for preparing and reviewing final price adjustments post-closing and allows the buyer and seller to allocate their resources into other aspects of the M&A deal.

The Locked Box M&A deal is an essentially a fixed price transaction. This means that the equity price is fixed in the sale and purchase agreement at signing based on the historical balance sheet at the pre-signing date or “locked box date.” Protection against any “leakage” of value between the locked box date and the closing is provided by the seller through representations and warranties written into the sale and purchase agreement and are usually supported by indemnification. This “leakage” of value can be in the form of dividends, management fees, or the transfer of assets. By using this mechanism, no closing accounts are required. Therefore, there are no adjustments made between the locked box date and closing; the price the buyer is paying is the price agreed upon at the locked box date.

There are several benefits from both the buyer and seller’s point of view with regard to the locked box. It offers price certainty as the price is fixed from the locked box date which makes the deal simpler as there is no closing mechanism. There are fewer costs associated with this deal structure as the creation of a definitive agreement takes a shorter amount of time. Another benefit is that management’s time is not tied up post-closing. Provided the seller can offer appropriate comfort in terms of the integrity of the locked box balance sheet as well as relevant warranties over locked box accounts, the locked box will be beneficial for both parties.

As in all M&A deals an experienced M&A firm can help take care of these details. Many think that their lawyer can handle these points, and they’re right. But, the most successful transactions are completed by a team and the most successful entrepreneurs and corporate managers know this. When the team addresses these types of complex issues, the client always wins!

M&A Deals Telecom

M&A Deals - Telecom Industry - Q1 Update

M&A deals in the telecom space are off to a good start this year. Through March 23, 2015, there have been 90 M&A deals - telecom closed or announced worldwide. With approximately one more week left in the quarter, this is more transactions than either Q1 2013 or Q1 2014.

Here’s a chart showing the activity by quarter from 2013 to date.

With regard to value, through March 23, 2015, US$663.2 billion of M&A deals were closed.

Europe saw the most M&A deals with 43 of the 90 transactions. Asia was next with 19 transactions. Here is a chart with the number of transactions by region.