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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
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Page 1: Mergers

Financial Executives Institute: Annual Leadership Conference

William Blair & CompanyLimited Liability Company

Mergers & Acquisitions:Strategies for Today’s

EconomyPhilip W. Reitz

May 25, 2000

Page 2: Mergers

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

Page 3: Mergers

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

Page 4: Mergers

WBCWilliam Blair & Company

Is This a Good Time To Sell Your Business?

Page 5: Mergers

Limited Liability Company

5 William Blair & Company

YES!

Is This a Good Time To Sell Your Business?

Page 6: Mergers

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?

Page 7: Mergers

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?

Page 8: Mergers

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?

Page 9: Mergers

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?

Page 10: Mergers

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

Page 11: Mergers

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?

Page 12: Mergers

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

Page 13: Mergers

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

Page 14: Mergers

WBCWilliam Blair & Company

Recent M&A Activity

Page 15: Mergers

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

Page 16: Mergers

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

Page 17: Mergers

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

Page 18: Mergers

WBCWilliam Blair & Company

Implications From Internet Explosion

Page 19: Mergers

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

Page 20: Mergers

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

Page 21: Mergers

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

Page 22: Mergers

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

Page 23: Mergers

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

Page 24: Mergers

WBCWilliam Blair & Company

How to Sell Your Business

Page 25: Mergers

Limited Liability Company

25 William Blair & Company

How to Sell Your Business

Step One: Hire an Investment Banker

Page 26: Mergers

Limited Liability Company

26 William Blair & Company

Three Big IssuesHow to Sell Your Business

Valuation

Potential Buyers

Sale Process

Page 27: Mergers

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

Page 28: Mergers

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

Page 29: Mergers

Limited Liability Company

29 William Blair & Company

Potential BuyersHow to Sell Your Business

Corporate Buyers

FinancialBuyers

Financial Buyers

with Portfolio Company

Page 30: Mergers

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

Page 31: Mergers

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

Page 32: Mergers

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

Page 33: Mergers

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

Page 34: Mergers

Limited Liability Company

34 William Blair & Company

Q&A