Today

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Todays Agenda

• Deal Points Key issues in structuring MA deals
  in the current market
• What its Worth How technology companies are
  valued today.
• The MA Market The View from Investment Bankers
  and VCs.
• Until the Market Window Opens Other Exit
  Strategies
• Lessons Learned MA Lessons from Entrepreneurs

2
My Roadmap

• The Numbers and What They Mean
• Trends from the Trenches Whats Really
  Happening Now
• The MA Process Current Issues

3

Source Venture Economics and the National
Venture Capital Association
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Source Venture Economics and the National
Venture Capital Association
5
Source Venture Economics and the National
Venture Capital Association
6
Source Venture Economics and the National
Venture Capital Association
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Interpreting the Numbers

• Path to liquidity still closed
• MA only viable exit path for now
• VC Industry recovery will be slow
• Needs corporate IT spending and stability of
  public markets (re-open IPO window)
• Continued difficult for startups to raise

8
Trends from the Trenches

• Survival Mergers Lots of them
• 75 of MA deals in the last year . . . but
  changing?
• VCs wont continue to nurse weaker companies
  have cleared most of portfolios
• Hard to do -- high risk and need lots of funding

9
Trends from the Trenches

• More Private Company Deals
• IPO window closed . . . for now
• Public acquirers are very cautious
• Public acquirers need deals with immediate impact
• Cost savings - NOW
• Tangible ROI
• Public stocks depressed expensive collateral
• Private deal only means of survival for most

10
Trends from the Trenches

• Acquisition Flips (e.g., Metropolitan Venture
  Partners 29 IRR for last two years)
• Potentially lucrative and permit entrepreneurs to
  score on multiple ventures
• Avoid problems of publicly held companies
• Detailed reporting requirements
• Structure, system, bureaucracy
• But, High Risk
• Hard to finance
• New competitors limit liquidity path
• Typically no backup plan for longevity all or
  nothing

11
Trends from the Trenches

• Look for money . . . get acquired
• VCs looking for sure thing, now
• VCs accepting singles and doubles rather than
  homeruns
• Limited to strong companies

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The MA Process Current Issues

• Preliminary Negotiations
• Investment Banks focused on MA
• Working with earlier stage companies
• Doing VC deals, too (for 4 to 6 fees)
• Standard IB Agreement includes right to do MA,
  too
• Be aware of duration, exclusivity and credit for
  contacts

13
The MA Process Current Issues

• The Letter of Intent
• Generally non-binding, but be careful about good
  faith negotiations
• Currently not in favor
• Timing issues Time to market / Acquirers stock
• Not generally favorable to Target anyway
• Walk away no way
• Exclusivity is restrictive

14
The MA Process Current Issues

• Due Diligence
• Lots of it, and lots of time dedicated to it
• Primary cause for deals to falter
• Timing market changes
• Warts finding things that wouldnt find before
• Give them EVERYTHING
• Tech deals open kimono slowly
• Service deals time to market is more important

15
The MA Process Current Issues

• Definitive documents
• Escrows 10 for one year sometimes longer
• Mix of stock and cash reflects deal
• Acquirer wants cash first
• Earn outs
• Bridge gap in valuations, but VERY unfavorable to
  target most never achieve milestones
• In almost every deal now

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The MA Process Current Issues

• Definitive Documents contd
• Limitation of Liability
• Try to carve up liabilities (e.g., taxes,
  environ.)
• Limit recourse to escrowed amount
• Create a larger basket (higher threshold)
• 1 to 2 of purchase price is typical

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The MA Process Current Issues

• Fiduciary Duty and Conflicts of Interest
• Different Agendas
• VCs cover preference, get liquidity, avoid
  fiduciary breach
• Management equity acceleration, narrow
  non-competes, short employment agreements
• Employees job security, acceleration
• Shareholders best price

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The MA Process Current Issues

• Fiduciary Duty and Conflicts contd
• Directors Duty of Care
• Act in an Informed and deliberate manner
• Keep a detailed record of deliberations
• Demonstrate careful, objective process rely on
  experts
• Separate counsel for Management and Board Members
• Investment Bankers fairness opinion

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The MA Process Current Issues

• Fiduciary Duty and Conflicts contd
• Directors Duty of Loyalty
• Act in best interests of all shareholders
• Try to have only disinterested directors vote
• Special committee
• Shareholder approval

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What if it doesnt happen?

• Sources of liability
• Employees priority for unpaid wages
• Uncle Sam withholding and other taxes
• 401K funds matching payments
• Investors fraud claims
• Creditors fraudulent transfers

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What if it doesnt happen?

• Company solvent
• No fiduciary obligation to creditors
• Company insolvent
• Fiduciary duty extends to both shareholders AND
  creditors
• When company is in the vicinity of insolvency
• Business Judgment Rule applies