Financial Executives Institute: Annual Leadership Conference William Blair & Company Limited Liability Company Mergers & Acquisitions: Strategies for Today’s Economy Philip W. Reitz May 25, 2000
Nov 07, 2014
Financial Executives Institute: Annual Leadership Conference
William Blair & CompanyLimited Liability Company
Mergers & Acquisitions:Strategies for Today’s
EconomyPhilip W. Reitz
May 25, 2000
Limited Liability Company
2 William Blair & Company
Presentation Overview
1) Is This a Good Time to Sell Your Business?
2) Recent M&A Activity
3) Implications From Internet Explosion
4) How to Sell Your Business
Limited Liability Company
3 William Blair & Company
Who Is Phil Reitz?
• BA in Economics from Northwestern
• MBA from Stanford: Arjay Miller Scholar
• Six Years with First Boston in 1980’s
• Principal in William Blair & Co.’s M&A Group Specializing in Middle Market, Sell-Side Advisories
• 17 Years of Investment Banking Experience
WBCWilliam Blair & Company
Is This a Good Time To Sell Your Business?
Limited Liability Company
5 William Blair & Company
YES!
Is This a Good Time To Sell Your Business?
Limited Liability Company
6 William Blair & Company
U.S. Merger Market Volume
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Ann
ounc
emen
ts
$0$100$200$300$400$500$600$700$800$900$1,000$1,100$1,200$1,300$1,400$1,500
$ V
olume
Announcements $Volume (Billions)Source: Merger Stat Review
Best Indication Is High VolumeIs This a Good Time To Sell Your Business?
Limited Liability Company
7 William Blair & Company
Drivers for High Volume
• Stock Market Health
• Cost and Availability of Debt
• Motivated Buyers:– Both Corporate and Investment Funds
Is This a Good Time To Sell Your Business?
Limited Liability Company
8 William Blair & Company
Stock Market Health: Historical P/E Ratios
Historical P/E Ratios of the S&P 500 and S&P 400 Midcap Index
Is This a Good Time To Sell Your Business?
Limited Liability Company
9 William Blair & Company
Consistently High Premiums
32.0%29.4%
34.7%33.0%
35.0%
29.2%27.3% 27.5%
30.1%
34.6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: Mergerstat Review
Median Percent Premium Offered
Is This a Good Time To Sell Your Business?
Limited Liability Company
10 William Blair & Company
Interest Rates Still Historically Low
Is This a Good Time To Sell Your Business?
10 Year Treasury Interest Rates, 1980 - Present
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Jan-
80
Jan-
81
Jan-
82
Jan-
83
Jan-
84
Jan-
85
Jan-
86
Jan-
87
Jan-
88
Jan-
89
Jan-
90
Jan-
91
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Limited Liability Company
11 William Blair & Company
Motivated Corporate Buyers
1999 vs. 1998
1Q 2000 vs. 1Q 1999
Real GDP Growth 4.1% 5.0%
Corporate Profit Growth 8.8% N/A
Average S&P 500 “ Promised” EPS Growth 18.0%
1) Corporations Are Feeling Good About Economy and Current Business Prospects
2) Corporation Must Buy To Keep Up With Promised Growth
Is This a Good Time To Sell Your Business?
Limited Liability Company
12 William Blair & Company
Motivated Financial Buyers
• Over 300 Buyout Funds Each Have $250 Millionof Equity to Invest.
• Over 100 Have $1 Billion or More
Is This a Good Time To Sell Your Business?
Add Debt = Huge Buying Power
= Huge Motivation to Do Deals
Limited Liability Company
13 William Blair & Company
ScorecardIs This a Good Time To Sell Your Business?
Stock Market
Debt Market
Motivated Buyers
– Corporate
– Financial
8
5
7
9
1 to 10Scale
29 of 40
WBCWilliam Blair & Company
Recent M&A Activity
Limited Liability Company
15 William Blair & Company
High M&A Volume
Number of Transactions
Overall Deal Volume
1Q 2000 2,488 $495.7 Billion
Best Ever Quarter For Each Statistic
Source: MergerStat
Recent M&A Activity
Limited Liability Company
16 William Blair & Company
M&A Volume by Size of Deal
Lots of Big Deals
$1 Billion + 70 Mega-Deals $399.3 Billion
Best Ever Quarter For Each Statistic
Lots of Medium Sized Deals
$25-250 Million Deals 351 Deals $33.1 Billion
Best Ever Quarter For Each Statistic
Recent M&A Activity
Limited Liability Company
17 William Blair & Company
Driving Trends• More European Activity
Up 89% from 1998 to 1999
• More Internet Activity
70% of 1Q 2000 M&A Announced Deal Were Internet-related
Vs. 25% in 1Q 1999
Recent M&A Activity
WBCWilliam Blair & Company
Implications From Internet Explosion
Limited Liability Company
19 William Blair & Company
Historical Perspective Prime Buying
Motivation
Example Companies
1970’s Diversification W.R. Grace, ITT
1980’s & 1990’s
Accelerate EPS Growth
Illinois ToolWorks, Tyco
Internet Age Technology,
Critical Mass, Concepts, Branding,
Diversification
Cisco, Healthcon/ WebMD,
CMGI
Implications From Internet Explosion
Limited Liability Company
20 William Blair & Company
Traditional Valuation Techniques Do Not Fit Internet
68%
59%63%
60%
27%
19%
0%
10%
20%
30%
40%
50%
60%
70%
80%
1995 1996 1997 1998 1999 2000
% o
f IP
Os P
rofi
tab
le
Implications From Internet Explosion
Limited Liability Company
21 William Blair & Company
Internet Valuation Techniques
• Price-to-RevenueHigher Gross Margin Higher Price-
Revenue Multiple
• Price-to-Unique Visitors Higher Revenue Per Page ViewHigher Price-to-Unique Visitor Multiple
Implications From Internet Explosion
Limited Liability Company
22 William Blair & Company
Biggest Lesson On Internet M&A
Tactics
• Decide Who Stays and Who Goes Quickly
• Establish Stay Bonuses and Option Plan Deep Into Organization
• Consider Non-standard Compensation
– Day Care
– Sabbaticals
– Dress Code
When You Are Buying Potential, Make Sure You Get the People Who Will Turn Potential Into Reality
Implications From Internet Explosion
Limited Liability Company
23 William Blair & Company
Other Lessons for Internet M&A
• Auction Process Takes Too Long– Internet Speed is Faster than Five Months– Must Always Be on the Make for a Partner
• Must Sell Concept of Deal– Stocks Trade on Potential Not Here & Now– Deals Can Change the Perception of That
Concept
Implications From Internet Explosion
WBCWilliam Blair & Company
How to Sell Your Business
Limited Liability Company
25 William Blair & Company
How to Sell Your Business
Step One: Hire an Investment Banker
Limited Liability Company
26 William Blair & Company
Three Big IssuesHow to Sell Your Business
Valuation
Potential Buyers
Sale Process
Limited Liability Company
27 William Blair & Company
Valuation
• Numerous Techniques– Comparable Public Company Multiples,
Comparable Acquisition Multiples, Discounted Cash Flow, Theoretical Leveraged Buyout, Buyer Accretion, Value of Goodwill, Discounted Future Stock Price, etc., etc.
• “Correct” Value– Surround Value with Analysis– Result of Auction– Application of Judgment
How to Sell Your Business
Limited Liability Company
28 William Blair & Company
Decide How Valuation Will Be Used
• In true auction, preliminary valuation is wasted effort
• Constructive Uses for Valuation– Asking Price: Focuses Discussion but Limits
Upside– Walk-away Price: Needed in Negotiated
Deal
How to Sell Your Business
Limited Liability Company
29 William Blair & Company
Potential BuyersHow to Sell Your Business
Corporate Buyers
FinancialBuyers
Financial Buyers
with Portfolio Company
Limited Liability Company
30 William Blair & Company
Potential BuyersHow to Sell Your Business
Corporate Buyers
Make Overall Business/Stock Price
More Valuable
Corporate Balance Sheet and Stock
Will be Absorbed Into Culture
Financial Buyers
Make Return in Subsequent
Transaction: IPO or Resale
Buyout Equity Fund and Highly Levered Debt
High as Long as Hit Numbers
Motivation
Source of Funds
Post-Deal Autonomy
Limited Liability Company
William Blair & Company
31
Potential Buyers: Who Pays More?
How to Sell Your Business
5.43
7.256.87 6.72
6.98
8.65
6.80
8.93
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
< $100MM $100 - 249M $250 - 499M > $500M
FinancialCorporate
1Q2000 Transactions
Transaction Size
EB
ITD
A M
ult
iple
Limited Liability Company
32 William Blair & Company
Alternative Marketing Approaches
How to Sell Your Business
No new disclosure
Parties able to complete transaction on favorable terms
10 weeks or less
Three or fewer
Evaluate interested parties and existing offers
Disclosure ofIntent to SellPre-screening
Number of PotentialBuyers
ApproximateTimeRequired
Method
Very little
Four months or more
Typically fifteen or more
Press release
Solicit offers from any interested parties
Closed Negotiation Open AuctionTargeted Solicitation
Limited disclosure
Three to four months
Strategic and financial fit
Five to ten
Explore short list of most-likely buyers
Limited Liability Company
33 William Blair & Company
Process TimeframeHow to Sell Your Business
Buyer DueDiligence
PrepareConfidential
Memorandum
Plan Strategyand Conduct
Due Diligence
Formal Marketing
Effort
Final Bids and Negotiation
(Four Weeks)(Three Weeks)(Two Weeks) (Five Weeks)
(Six Weeks)
Twenty Weeks
Limited Liability Company
34 William Blair & Company
Q&A