Thursday, 29 November 2012

What Exactly Does an M&A Advisor Do?

In “How Does an M&A Advisor Add Value to the Divesture Process?”, I noted that M&A advisors typically charge between 3% and 7% as a success fee for managing the sale process for a company.  The question I addressed then was, will engaging an M&A advisor improve your expected sale value by at least 5%?
Here I would like to outline exactly what an advisor does in the process of a sale mandate.  At this point I am assuming that pre-mandate matters such as preparing a business for sale, value expectations and timing from a business and market perspective have been discussed and it is agreed that it makes sense to proceed.
The advisor side of the deal team typically includes a senior lead such as a Director or Managing Director plus at least one Associate or Analyst as support.  In addition, in our case, there are usually international resources involved through our M&A international alliance.  Our M&A partners can do as little as buyer introductions to as much as negotiating and structuring deal terms.
An M&A advisor will: (i) position the selling company as a strategic fit for target buyers; (ii) present the opportunity to numerous logical and capable buyers; and (iii) manage the process along a defined and orderly timeline, in order to generate the highest premium possible.  We typically identify what we are responsible for in our engagement letters as follows:

·              Conduct a review of the company in order to better understand the nature of its operations and value proposition to prospective partners including:
o      a review and analysis of the historical and prospective financial results of the company;
o      a review and analysis of operational, marketing, technical and other information regarding the factors that influence the cash flow prospects and risk dynamics of the company;
o      discussions with management regarding the operations of the company;
o      a review and analysis of public information and other available information pertaining to the company and the industry in which it competes, and
o      a review and analysis of transactions that have taken place in recent years among businesses whose operations are similar to those of the company.
·              Prepare company overview materials in consultation with the company, which will provide prospective partners with an understanding of the nature of the company and allow them to assess value;
·              Conduct a search to identify suitable potential partners, guided by any criteria provided by the company;
·              Contact and screen potential partners;
·              Assist the company in the preparation of due diligence documentation, a management presentation and related materials for review by possible partners;
·              Negotiate with possible partners;
·              Work with the company’s legal counsel, tax advisors and other advisors to assist the company in structuring the transaction so as to meet its financial objectives; 
·              Review the documentation in respect of the transaction; and
·              Other functions as required in support of the transaction, and as agreed to from time to time.

The whole process may take six to eight months and the M&A team will spend somewhere between 300 and 500 hours on a file.  M&A advisors will have a lot of familiarity with legal documents and tax issues, but ultimately lawyers and accountants are required in the areas of due diligence, purchase and sale contracts, and tax planning.

M&A advisors often highlight how competitive bidding between several eager buyers resulted in an extraordinary price for their clients but, like the over-night success story ten years in the making, a completed divestiture relies on a foundation of thorough planning and process.

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.

Wednesday, 14 November 2012

It is all About the Platform

I have mentioned the word platform several times in my posts, however, the word actually means different things in different circumstances, so I thought I should clarify.  Private Equity (PE) looks for platform investments and sellers look for platform buyers but they are not necessarily the same thing.
A platform investment for a PE is an investment/acquisition in a new space that it intends to grow in.  For example, when Vector Capital bought 20-20 Technologies in July of this year, they announced it as a platform investment.  Before the acquisition Vector had holdings in consumer software (Corel) and digital media (RealNetworks) but nothing in computer-aided design software for the interior design and furniture industries.  In a platform investment, the buyer is looking for a market leader that it can use as a platform for growth.  Subsequent acquisitions or “add-on” investments will be one way to achieve this growth.  The investment criteria differ between platform and add-on investments in that they are typically stricter for a platform investment. A platform investment would ideally be on the larger end of a PE’s size range and be bought at a good price.  There is more risk in a platform investment because it comes with the challenges of learning a new sector landscape and the target company’s competitive position in it.  When considering add-on investments the PE is effectively acting as a strategic buyer and looks to exploit potential synergies between the buyer and the target.  Add-on investments are also called “tuck-in” or “tuck-under” investments because they tend to be smaller than the platform investment.
The other way the word platform is used is to describe a type of buyer.  A platform buyer is a strategic buyer looking for a platform to grow its revenues by adding complementary products, personnel, technology, etc.  Platform buyers are good buyers because, (i) they can pay a good price because they bring a growth opportunity to the target, and (ii) they will leave the existing assets (brands, people and legacy) in tact.  As an example, we were engaged to sell a pattern recognition company in the field of product quality control.  The technology would scan a production line and identify products that did not meet certain quality parameters.  In this case, the ultimate buyer was the US Department of Defense, who paid a strong premium and who then used the technology for facial recognition for national security purposes. 
I spoke earlier of a PE acting as a strategic buyer and looking to exploit synergies.  Synergies can come about in constructive or destructive ways.  A destructive way would occur when a direct competitor buys a company for its customer base.  In this case, if the buyer has excess capacity, it could shut down the acquired company and service the customers using its existing product and plant, thereby growing revenues and improving margins (synergies) but leaving the target decimated.  On the other hand, a platform buyer will consider the target company’s customers, personnel, or technology as complementary rather than redundant. In this case the target retains the existing customer base and also adds the acquirers’ customers thereby growing revenues by a higher factor than in the previous example and creating more value.  As a result, a platform buyer is a good buyer.  They can pay more because they can create more value and they retain the brand, team and legacy of the seller.
In the first instance the word platform refers to the vehicle that will form the basis of a sector growth strategy and in the second case it refers to the assets that generate complementary growth.  Either way, it is all about the platform.

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.