Friday, 13 January 2012

Milestones in the M&A Process: How Long Does it Take?

Milestones in the divestiture or private capital raising process are similar and generally as follows:
Preparation of the marketing materials (by the advisor in concert with the seller) and due diligence materials (by the seller).
The documentation including a teaser, CIM and buyer list, while iterative with the seller, can be completed within four weeks.

Preparation of the due diligence materials is highly company dependent and can take from several weeks to several months.

Engaging potential buyers and securing expressions of interest.
Potentially to many parties; up to 2 months.

Management meetings and supplemental information provisioning; securing and negotiating the final LOI.
With the top 3 to 5 parties; up to 2 months.

Due Diligence and drafting/negotiating the purchase and sale agreement.
With the final party; 45 to 60 days.

7 to 9 months

Having said that, the following is an actual example of a divestiture of a private company.  In this case, the owner and 100% shareholder wanted to retire and was well prepared to initiate the process.  The business was a very profitable software business operating out of one location servicing a diversified customer base.  In short, an attractive acquisition opportunity supported by a motivated seller.
The engagement letter to commence the process was signed May 11th, a Wednesday.  That Friday we met with the company for an information gathering and strategy session.  One week later we met again, this time having completed a first draft of a potential buyer list, a Confidential Information Memorandum (CIM) and the teaser.  First emails and calls to potential buyers commenced on may 26th; first books (CIMs) were sent on June 10th; and expressions of Interest (EOIs) were requested by June 30th. 
Getting a sense of market interest and indicative value can be a fast process; in this case about seven weeks.  Key contributors to a speedy process are client readiness and working as expeditiously as possible on the factors that the selling team can control.  While only half-way through the process (with management presentations, requesting and negotiating LOIs and due diligence yet to come), the selling team will have a good sense of the market interest and whether a good deal is possible at this point in the process.
Many things, both economic and company specific, can change during the selling timeframe and it is strongly in the seller’s and advisor’s interest to complete the process as quickly as possible.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

Thursday, 12 January 2012

Veracap Launches Mid-Market Technology Index

While there is an S&P/TSX Information Technology Sector index, it consists of just six companies and five of those have a market cap greater than a billion dollars.  Due to the small number of companies included, it is susceptible to company specific risk influences.  As an example, the S&P/TSX Information Technology sector index was down 18.5% January to November 25th largely due to RIM falling over 70% during this period.
The Veracap Technology Index (the “VTI”) includes all technology sector companies trading on the TSX and TSX-V with a market capitalization between $10 million and $500 million.  As at November 25, this included 75 companies.
There are 179 technology companies listed on the TSX and TSX-V, further segmented in the following subsector classifications: Hardware & Equipment, Internet Software & Services, Communication Technology, Software, and IT Consulting & Services.  As at November 25th, 88 listed companies had a market cap of less than $10 million and the average market cap in the VTI is $70 million.
We feel the VTI is a better representation of Canada’s vibrant mid-market technology sector.  The VTI composite share price outperformed both the S&P/TSX Composite Index and the S&P/TSX IT sector index since the beginning of 2011 with a year to date return of -8.4% versus -14.7% and -18.5% respectively.  Technology sector valuation multiples crossed the S&P/TSX Composite index in mid August as the latter was dragged down by falling commodity prices. 
Since the beginning of 2011 VTI companies have been trading at an average valuation of around 9.0 times LTM EBITDA.  The strongest subsector, in terms of valuation multiples, was the Software sector where companies such as Guestlogix, Redknee Solutions and March Networks contributed to an average LTM EBITDA multiple of 12.9. The Communications Technology subsector brought up the rear with companies such as Aastra Technologies, Sangoma Technologies, and C-Com Satellite Systems trading below four times LTM EBITDA.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.