M&A ++

I’m pleased to announce that over the coming months we’ll be having more members of the Bay Capital team adding insights across the various industries and deal types we are active in.

As 2008 has started, we continue to see a ton of growth and activity globally within our firm. We are looking to make investments this year in a permanent EMEA footprint that will better help us serve our current and future European client base. In the past 12 months we’ve really extended, working with companies in Asia, Latin America, Europe, Russia, and North America.

I’m hopeful the team’s contribution to this blog and resulting dialog with business owners will be insightful and interesting. Here’s to a great 2008.

John Barneson

Some key points and thoughts garnered from the recent Deal Journal report:

Strong prediction that multiples will stabilize after several years of increases, with strategic buyers making perhaps a more aggressive play for bolt-ons while private equity players continue to look for opportunities to bring what is a still a significant amount of capital to bear on the market.

Mid-Market Investment

The cutoff for deals that look to continue to be active during a tighter lending market seems to be $500 million and lower. Nevertheless, it’s at this price point and below where the real action for 2008 will be, thanks to a tightening down of leverage levels and remaining economic hurdles in the big-market landscape. After many years of steep increases in valuations-where generous terms drove leverage multiples as 8-12x EBITDA look to anticipate stable pricing for the foreseeable future, with companies valued under $500 million financed at multiples in the range of four to six times EBITDA.

Private Equity – Not Going Anywhere

Private Equity will remain a player, having collectively raised $300 billion in 2007, which is $46 billion more than in 2006. Terms and leverage might not be as easy as 2007,

Multiples

Multiples will probably hover in the same range-four to seven times adjusted cash flow-even though demand is expected to tick upward. Buyers remain cautious, even skittish, and the smaller the deal, the more challenging it will be to close the transaction.

Sweet Spot Scarcity

Meanwhile, sellers with revenues between $10 million and $20 million with good earnings remain in a very strong position. However, acquisition opportunities in this sweet spot are scarce. Hence, the renewed focus on strategic acquisitions under $10 million. Now more than ever it critical to have the right advisor on your side if attempting to raise capital or be acquired. The intricacies of the financial and strategic dealscape are becoming more and more complex, and more and more often we are seeing unrepresented sellers leaving money on the table.

There is a common misconception that to be a good negotiator you need to be tough, mean, and hard-nosed. Negotiation can be confrontational and the stakes can be extreme. You don’t!

Confrontation is not a good environment for negotiating. Most people are intimidated by the prospect of having to barter to begin with. Create a pleasant environment for the other party and show respect and genuine interest for the other parties concerns and values. Treating the other side with respect means less defensiveness and more rational, reasonable communication. Better yet, build a reputation as someone who is honest, prepared, and intelligent, and deliver on that every time.

A couple excerpts from recent Venture Capital Association reports:

Corporate Venture Activity
Corporate venture capitalists invested $1.3 billion into 390 deals in the first half of 2007, representing the highest percentage of corporate venture deals and dollars since 2001.

Q3 Deal Volume
In the third quarter of 2007, total disclosed venture-backed M&A dollar volume reached the highest level
since 1Q 2001, when 37 disclosed deals accounted for $7.7 billion in value. Additionally, the average deal
size for disclosed venture-backed M&A transactions has not reached 3Q 2007 levels since the fourth
quarter of 2000. The Technology sector dominated the venture-backed M&A landscape, with 45 deals with disclosed values of approximately $3.8 billion. The Computer Software/Services and Internet Specific industries saw 17 and 15 transactions, respectively. The Internet Specific sector reached $2.2 billion in disclosed deal value – 59 percent of the overall value within technology businesses.

Source: NVCA.org

Thoughts

Despite the headlines about a tightening credit market, capital is still very much in play. The increase in corporate investments and M&A activity have helped keep the market liquid. There is still a lot of middle market targeted private equity and venture capital powder out there.

Having PE, VC, hedge fund, corporate buyers, and a healthier IPO market all competing for deals will help sustain the mid term investment landscape.

It is commonly known that lying or withholding information with your lawyer is one of the dumbest things you can do. Full disclosure provides the 360 degree view necessary for a lawyer to provide a thorough defense strategy. If you fail to communicate the whole picture, not only will your attorney not have a plan to overcome your shortcomings, you also risk having your advisor blindsided with new information at trial presented by the other side. Not smart.

Your M&A advisor requires the same level of disclosure. Hiding skeletons, whether they relate to past owners, founders issues, balance sheet, debt problems, or employee issues, you must communicate with your advisors. If issues are discussed early, some can be solved, others alleviated. At the very least you will get a professional opinion on the potential effect on a transaction. Due diligence will uncover these issues even if you fail to communicate them up front. If a buyer unearths a skeleton in due diligence you are going to be dealing with trust and ethics questions that could easily end interest.