Keys to Successful M&A: Transparency, Security, and Process
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Transcript of Keys to Successful M&A: Transparency, Security, and Process
Keys to Successful M&A: Transparency, Security
and Process
About AppFolio SecureDocs
AppFolio SecureDocs is a virtual data room for sharing and
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AppFolio, Inc. Company Basics:
• Founded by the team that created and launched GoToMyPC and
GoToMeeting
• Backed by leading technology companies and investors
• Web-based business software for financial and legal professionals
Nat Burgess, Corum Group
Nat is a lawyer, investment banker and angel investor with over 20 years of experience in the technology sector. Prior to joining Corum, Nat worked for Morgan Stanley in New York and Tokyo, Activision in Los Angeles, and the SEC in Los Angeles.
Nat has negotiated transactions with Microsoft, Intel, Google, Symantec, BMC, Fiserv, and many other leading companies. Prior to joining Corum, Nat co-founded Postcard Software, an early Internet company. He has invested in several technology startups, including Cequint, SiteScout, MessageMind, PockitDoc, and Viziify.
Nat is a frequent commentator on CNBC and MSNBC. He graduated from Yale College and the UCLA School of Law, and is a member of the Washington State Bar Association.
Nat BurgessPresidentCorum Group Ltd.
About Corum Group
We only work with:
Privately-held firms on the sell-side.
Software and related tech companies.
M&A specialists since 1985.
Optimal Outcome process
Team approach
Largest tech M&A educator
Largest database
Sold more software-related firms than anyone
About Corum Group
Poll Question No. 1
Staying ahead of consolidation• AccountMate Software• ACCPAC • Activant• Baan• Best Software • Brain International• CDC Software• Consona • Daamgard • Epicor • Exact • Geac • Great Plains • Halo Holdings
• Harper and Shuman• Infor Global• Infinium• Intentia• Invensys• JD Edwards• Lawson• Macola • Maxwell Business
Systems• Microsoft • Myob Limited• Navision • Oracle• PeachTree Software
• PeopleSoft • Red Pepper• PWA Group• Ross Systems• Real World• SAGE Group• SAP• SBT Accounting• Scala • Sesam • Softbrands• Soloman • State of the Art
US Exchanges
Aggregate Markets
Q4:10 Q1:11 Q2:11 Q3:11 Q4:11 Q1:12 Q2:12 Q3:12 Q4:12 Q4:10 Q1:11 Q2:11 Q3:11 Q4:11 Q1:12 Q2:12 Q3:12 Q4:12
EV/EBITDA
12.33 12.34 12.29 9.44 10.49 10.95 9.83 10.43 9.91
EV/S
2.44 2.38 2.27 1.82 1.77 2.04 1.76 1.8 1.78
Top Strategic Acquirers: 2012
18
16 1615 15
14
12 1211 11
10 10 10 10 109
12
10 10 10
8
7 7 7
6 6
5 5
4 4
Top Private Equity Acquirers: 2012
Excess Cash Driving M&A
All estimates in US $Billions *As of Dec. 2012
Cash Reserves Increase Held Offshore
2007 2012 Amount Percent Amount Percent
$9 $121* $112* 1244%* $83* 68%*
$6 $67* $61* 1017%* $58* 87%*
$6 $32* $26* 433%* $25* 80%*
$6 $45 $39 650% $20 44%
$3 $46 $42 1050% $41 89%
$9 $15 $6 67% $7 47%
$4 $9 $5 125% $5 56%
10 Reason M&A Will Remain Strong
1. Extraordinary change – interrelated mega trends
2. Strategic buyers have record cash
3. Debt is at lowest cost ever
4. Private equity - over $1 trillion available
5. New public foreign buyers (e.g. China, India)
10 Reason M&A Will Remain Strong
6. Entrance of new non-tech buyers (e.g. Bosch)
7. Crowdfunded buyers (Facebook, Zynga, Groupon)
8. American companies are cheap to foreign investors
9. Strong financial markets
10. Software rising in importance (e.g. HP, IBM, Dell)
Poll Question No. 2
Manage:
• Transparency
• Security
• Process
To Achieve:
• Highest Value
• Lowest Execution Risk
• Minimal Post-Closing Liabilities
From Startup to Behemoth
Stages of Growth
PIONEER BUILDING ESTABLISHED
Valu
ation
Pre
miu
m
TransparencyInformation
Transparency
PRELIMINARY DUE DILIGENCE CHECKLISTPlease populate the data room with the documents referred to below for Company and each of its subsidiaries and predecessors. (Unless the context otherwise requires, all references to the “Company” include Company and each of its subsidiaries and predecessors.) Except where a list, schedule or description is requested, please provide us with a copy of the requested agreement, correspondence or other document. Please do archive all “privileged” documents separately; however, please indicate whether any “privileged” documents have been withheld.We would be happy to discuss with you the most effective and least burdensome way in which you might respond to this request for documents. Thank you.
Page 1 of 37
Transparency
TimingDetailed pipelineCustomer ReferencesCustomer ListSource Code SamplesCap Table (& Distributions)Intellectual PropertyCorporate DocumentsFinancialsLitigationWeek: 1 2 3 4 5 6 7 8
Transparency
Transparency
BEST PRACTICE:
The Data Room should be updated to “complete” at the end of every quarter...
From the inception of the company
Detailed pipelineCustomer ReferencesCustomer ListSource Code SamplesCap Table (& Distributions)Intellectual PropertyCorporate DocumentsFinancialsLitigation
Transparency
If you are prepared, you can be:
• Crisp and professional
• Completely transparent
• In Control of the Schedule
Transparency
And avoid this
Transparency
Or this
Fill the Gaps over Time
1. Landlord Consent
2. Missing Shareholder (Russia)
3. Missing Shareholder (Iraq)
4. Articles of Incorporation (Olympia)
5. Work for hire (Bratislava)
6. Environmental Indemnification (landfill)
Access from Anywhere
1. Cab to the printer
2. Airplane to Hong Kong
3. Rental car to Fedex
4. Secure FTP
5. $ Virtual data room $
6. SecureDocs
Transparency Revisited
• Highest Value
• Lowest Execution Risk
• Minimal Post-Closing Liabilities
Poll Question No. 3
Security
Why the NDA doesn’t matter• Perceived as a formality• Seldom litigated• Can’t put the cat back in the bag
Security
Why the NDA does matter• IP protection for the benefit of the ultimate buyer• Sets the proper tone• Framework for negotiating precise terms of disclosure
• Read the fine print• Non-enforcement of patent rights against company and successors• Assignment of ownership interests in patents• Commitment to provide all due diligence materials in French• 10 year term• Non-compete• Personal liability for signatories, including liquidated damages
Security
Staged Qualification1) Sector, Size, Customer Profile2) Company, Products, Customers, Growth Rate3) (NDA) Detailed financials, roadmap
Security Revisited
• Highest Value
• Lowest Execution Risk
• Minimal Post-Closing Liabilities
Poll Question No. 4
Process
IntegrationClosingDueDiligenceNegotiationDiscoveryContactResearchPreparation
Stage 1: Preparation
IntegrationClosingDueDiligenceNegotiationDiscoveryContactResearch
Preparaton
Preparation
Set tasks, timeline Allocate staff resourcesConduct internal due diligenceCompile business/marketing planReady financials/projectionsReady presentation materialsBegin collecting due diligence materials
Stage 2: Research
IntegrationClosingDueDiligenceNegotiationDiscoveryContactResearch
Preparaton
Prepare buyers list (A&B level, financial, non tech) Perform strategic analysis on each buyerPrepare preliminary valuationDetermine proper contact (Execs, EA’s, advisors)Outside advisor/board/investor influencersPrepare position statement for each buyer
Preparation
Stage 3: Contact
IntegrationClosingDueDiligenceNegotiationDiscoveryContact
Preparaton
Create introductory correspondenceDraft/customize executive summaryExecute NDAs and non-solicitations Screen initial interest, valuation expectationsEstablish log on all communicationsRefine position/process based on feedback
ResearchPreparation
Stage 4: Discovery
IntegrationClosingDueDiligenceNegotiationDiscovery
Preparaton
Coordinate conference calls, site visits, and meetingsEstablish technology review processPrepare formal valuation reportDevelop synergy and contribution analysisSet up NDA with customers, contractors, etc.Finish due diligence on buyer
ContactResearchPreparation
Stage 5: Negotiation
IntegrationClosingDueDiligenceNegotiation
Preparaton
Organize and host final visitsProvide structure & valuation guidanceCreate an auction environmentNegotiate with top bidder(s)Sign Letter of Intent (L.O.I.)Inform other bidders of No Shop
DiscoveryContactResearchPreparation
Stage 6: Due Diligence
IntegrationClosingDue
Dilligence
Preparaton
Verification of financial statements/ projectionsDetermine if outside advisors/opinions neededEstablish confidential data roomTechnical/Legal/Ownership due diligenceWritten explanation of business model/methodologiesComplete definitive agreement/ attachments
NegotiationDiscoveryContactResearchPreparation
Stage 7: Closing
IntegrationClosing
Preparaton
Final reps & warranties Determine escrow hold-backsFinal opinion(s)Sign contractsArrange payment/distributionRegulatory filingsDisclosure Schedules
Due DilligenceNegotiationDiscoveryContactResearchPreparation
Stage 8: Integration
Integration
Preparaton
Advanced planning – during negotiationDetermine synergiesBest practices analysisInterim transition teamEmployee retention planSet up monitoring/reporting
ClosingDue
DilligenceNegotiationDiscoveryContactResearchPreparation
Qualifying the BuyerTop 10 Questions
1. Why are you interested in my company?
2. What acquisitions has your company done?
3. What is your preferred deal structure?
4. What is your approval process?
5. Who is involved in the decision?
Qualifying the BuyerTop 10 Questions
6. How do you see our company fitting into yours?
7. What’s your integration process?
8. Who are your outside advisors?
9. How did your acquisitions work out?
10. Can I talk to companies you have acquired?
Top 10 Deal Killers
1. Dealing with only one buyer
2. Misalignment: shareholders/empl/mgmt
3. Contact at the wrong level
4. Improper research of potential buyers
5. Misunderstanding buyer process/models
Top 10 Deal Killers
6. Inability to portray value properly
7. Improper due diligence preparation
8. Not qualifying buyers properly
9. Not orchestrating all buyers properly
10. Ego – Greed – Arrogance
Top 6 Value Destroyers
1. Confidentiality—internal/external
2. Theft of technology
3. Loss of staff (non-solicitation)
4. Wear on CEO/management
5. Business drop-off—lack of focus
6. Going to market too late
Contact Us
AppFolio SecureDocs
50 Castilian Drive
Goleta, CA 93117
Phone: (866) 700-7975
www.securedocs.com
@SecureDocsVDR
Corum Group
19805 North Creek Parkway Suite 300
Bothell, WA 98011
Phone: (425) 455-8281
www.corumgroup.com
@CorumGroup
Thank You!
Confidential ©2013 AppFolio, Inc.