Liquidity: The M&A Forum Blog

Business Buyers Are Ready to Act! -- Don’t Psych Yourself Out of a Liquidity Event

admin1 — Tue, 10 Feb 2009 22:18:00 GMT

Psychology is a key part of success in the marketplace conditions of today. Understanding what we know (really know) and what we don't, can make the difference between liquidity, and just being ‘stuck'. For example, M&A Forum currently has a number of mandates from legitimate buyers of IT sector companies. These buyers are actively looking for businesses they can add to their existing portfolio in order to continue growing, when organic growth is not sufficient or isn't there at all.

Here are a few descriptions of the kinds of businesses currently being sought by several active M&A Forum buyers:

A growing, profitable $500M+ company seeks a Cisco Gold Partner with > $20M revenue for immediate acquisition. Strong Cisco technical expertise, and professional pre-sales consultation experience addressing enterprise-level commercial clients. Also seeking solid management that wants to stay, and a business possessing financial and back-end infrastructure systems and processes to efficiently manage the services business.

A $70M+ technology management firm seeks IT Managed Services providers with >$4M revenue, EBITDA positive financial performance and growth potential of at least 15% annually. Prefer a Western US location and an independently-owned operation with a quality, entrepreneurial management team committed to managing and growing the firm for at least several years.

A highly profitable SAP consulting firm seeks acquisition candidates with revenue in the range of $1M - $3M for an immediate opportunity to help accelerate growth beyond its current forecast of 40% over 2008. Targets should have expertise in SAP, Business Objects or Hyperion HFM serving the healthcare, manufacturing or energy sectors.

U.S. based consulting firm wants to acquire multiple professional services firms in the Northeast, focused on ERP, software development and BI consulting. Ideal candidate is Oracle or SAP-focused with revenue in the range of $8M to $12M, >20 consultants, and operations serving mid-market and enterprise-level commercial accounts.

Government integrator, in business for more than 20 years, seeks IT services and solutions firms for acquisition. Targets should have >$1M revenue, EBITDA of at least 10% and be headquartered in the U.S. Oracle and SAP consulting, and IT Managed Services businesses preferred.

Established provider of Managed Services to the SMB marketplace seeks companies with services revenue in the range of $500K to $2M. Prefer a Managed Services provider, but this is not required. Must have an SMB customer focus and an owner willing to stay for at least a year. Areas of greatest interest include Denver, Chicago and Phoenix, but other cities will be considered.

A business providing IT solutions to the retail sector seeks companies with revenue in the range of; $5M to $30M focused on SaaS, and network infrastructure services, with the ability to serve customers on-site. There is immediate opportunity for transactions in Texas, California, Virginia and the Southeast.

I recently spoke with a company that would be a great fit for one of these buyers. I asked what their expectations were as to the value of their company. Their expectations as expressed to me, were quite reasonable, and I knew that at least a couple of viable buyers were currently looking for a business just like theirs. Their reply was telling, "In this environment nobody is going to pay us what we are worth." Even though we have a ready, willing and able buyer, willing to pay fair value for the company - they cannot escape the psychology of the market that they interpret as "I can't get fair value, because the market is discounting everything".

They are speculating, or worse, guessing about things they know nothing about, and it is costing them. It is becoming clear that there is no certainty about values being higher tomorrow, than they are today. The conversation should be, "Are you a seller?" Answer. "Yes, if there is a buyer who will meet my price". This is what achieving liquidity, and being able to diversify out of the large investment in your business asset, is all about.

Our job is to understand the market for IT sector companies, the buyers and the sellers that might make for good matches. We don't run IT sector companies - we help find the right buyer and the right transaction. If the match is made - good things can happen for all concerned.

If the presumption is indulged that ‘It can't be true that my company is saleable today for fair value' and you fail to take the step in the direction of a solid buyer....then you make the "It can't be true..." a self-fulfilling prophecy. And, by the way - we will tell you if we don't think we can get fair value for your company today - and will discuss with you what is required to get positioned to receive fair value for your business asset. There are buyers waiting...

Getting “More Strategic” in Difficult Times

admin1 — Wed, 04 Feb 2009 23:37:00 GMT

We live and work in the IT sector of the business world, and ‘our business' is helping owners and entrepreneurs with the sales process for the most important business asset they have: the IT business that is ‘their baby'. The most strategic decision to be made in the life of the business is often "How do I turn my business into cash, or stock in another company, such that I can not have all of my eggs in one basket?" In other words "What is my exit strategy?" What is the strategy that will successfully monetize all of your hard work, and reward the risks you have taken through the years?

First things first. In the economic environment which we are experiencing now, the most important step in getting to the decisions around a sale of your business asset is taking the steps to immediately and successfully manage it in a downturn. If you don't do this first-there may be nothing left to sell. In this blog, I will address several of these ‘must dos':

Be sure you can articulate your business proposition in terms relevant for today's challenging economy. Is your value proposition clear, unambiguous, and to the point? More importantly, if you are stating it the way you did last year, and the year before, is it still relevant today? Given the importance of providing a clear ROI on the IT spend that will be made with your company, can you ‘prove the value' of your business offerings. If you cannot prove the ROI in an understandable way, you are less likely to continue to ‘get the order'.

What can be done to create some rapid sales improvements? Conduct an account assessment by the relative profit contribution made to the bottom line of your company...a novel approach. This requires an understanding of the margin and costs by account. But then-you can refocus your limited sales and support resources on those accounts that are more profitable and faster growing. And you know what to do with those that are marginally profitable or producing losses. No free rides!

Instead of short term cost reductions, take the opportunity to see if there are ways to dramatically change the real structural look of your costs. Can you use contractors and make the labor expense variable? Can you use voice systems to connect support calls directly with the person who can solve the problem (reduce the layers)? Can you use offshoring for certain of your business processes? What business owner do you know in your area who has lead the way with new and innovative best practices in the area of structural cost improvement? Meet with them-and ask for help.

What has the devaluation in assets over the past months, created in terms of business opportunity for you-if you reframe the question into ‘how do I take advantage' rather than OMG! Buyers of products and services want to know they are getting best value to meet their requirements. What tools can you create today to be the best at proving the business value in choosing your business and your solution? What can you say about the longer term value of a relationship with your business?

The reality is that there will be more competition for fewer dollars across the spectrum of IT and software service and solutions companies. This means that margins will be under pressure. There will most likely be a decline in IT spend for some period of time. How do you put your business in a position to take market share and gain more of the limited spend? How will you meet the challenges of tight credit and receivables that are extended beyond normal? There are answers---but the questions need to be addressed head on and without delay.

The truth of the matter is that in a downturn of the magnitude we are facing: "Strategy" is "Execution"....precision execution of your business operations is where the rubber meets the road. And, it is the requisite step in creating the road ahead; the road to successful monetization of your business asset, at the appropriate moment.

Welcome to Liquidity: The M&A Forum Blog

admin1 — Sat, 22 Nov 2008 16:08:00 GMT

By William Keiper, CEO of the M&A Forum

Much has been written about the global financial meltdown which is still in process. It is one of those events that would be better experienced by looking in the rear view mirror of history, as was the Great Depression for those of us younger folks. Unfortunately we are living this one in real time and ‘Real Life’.

My friends at Cascadia Capital summarized the current conditions well: “The recent weeks and months have seen unprecedented change in the global financial system. Not only have we witnessed unprecedented volatility and steep declines in market indices worldwide, but also government intervention at levels not previously contemplated…Parties who have no immediate need to engage in a transaction are likely to stand on the sidelines for the next two quarters, if not longer. But we caution companies to be proactive with respect to understanding the health of their lenders; this is important so companies aren’t thrust into situations where capital is required with limited time to plan or react. That said, there remains significant capital accumulated in the hands of private investors. And while majority recapitalizations are under duress as a product, appetite for minority growth equity and recapitalizations in middle market companies appears strong in sectors that are still growing…Deals will continue to get done.

Outside of the private capital realm, strategic buyers and foreign buyers remain active in consolidating industries that are not impacted by the banking crisis. The pendulum has shifted, and these buyers welcome the change of conditions.”

Serious buyers remain prepared to continue acquiring even in the current market conditions. The IT sector is one that is still growing, albeit at a slower rate now than before. There are buyers who are finding creative ways to get deals done today, and sellers of IT companies are getting attention through the vehicle of the M&A Forum and others…several Forum deals have closed in the past couple of months, and we have handful of deals at the letter of intent stage now.

One of those letters of intent involves a company that was recently put in a very difficult position by their lender—jeopardizing the value built by the owner over a number of years. He was not prepared for the change in the credit market—a change that affected him quickly and directly—right in his ‘Potential for Liquidity’. He was forced to act quickly to find a buyer who could take him out of his predicament and his business, and preserve some of his hard earned asset value. This project was started two weeks ago…he now has two letters of intent, and three other interested parties—with the intention of closing the deal before the end of the year (six weeks from now). It can be done…

Although “remaining on the sideline” may seem like the better choice at the moment—if you must make a move to sell your IT-related business—there are buyers prepared to pay reasonable valuations, if you know where to find them. If you are OK staying the course, remember the old Buddhist saying, “Before enlightenment; chop wood, carry water. After enlightenment; chop wood, carry water.” Despite the losses of value and asset re-pricing that we have all seen—that has directly affected our lifetime of building for retirement, children’s education, care of parents and myriad other requirements—we all have to do what we were doing before…staying committed to our businesses and pursuing our work with redoubled energy and resolve.

Creating Shareholder Value in Today’s Market

admin1 — Wed, 11 Jun 2008 20:55:00 GMT

How do you create shareholder value in a market defined by $130/barrel, rising unemployment, and inflationary concerns? By acquiring a large competitor and ruthlessly focusing on servicing customers.

The Dow was down 1.68% today and the NASDAQ was off 2.25%, yet Staples (SPLS) was up a whopping 5.30%. They achieved this by thoughtfully, and systematically increasing its then hostile tender offer for Dutch giant Corporate Express (CXP) from an initial 7.25 euros on Feb 19th to 8, then 9.15 to the final, and now-friendly price of 9.25 euros.

To recapitulate, CXP shareholders are up 176% from the prior 12mo low, and the shareholders of SPLS reward the acquisition announcement by buying more shares on the news and driving up the price. Well done.

marty

Announcement – Second Closed Transaction

admin1 — Thu, 05 Jun 2008 14:38:00 GMT

I am happy to announce the successful closure of our second Forum transaction in 30 days. A small systems integrator in Atlanta was acquired by a private company from neighboring Tennessee. What’s amazing is they did not know each other before, the acquirer was aggressively looking to expand in the area, and that it happened relatively quickly. Yeah!

marty

What does HP acquiring EDS mean?

admin1 — Wed, 14 May 2008 19:43:00 GMT

The announcement that HP was acquiring EDS rightly sent shockwaves around the world. What’s it mean? Well, it means a number of things in no particular order:

1) Look out IBM, the new sheriff in town, Mark Hurd, who has rolled 7’s for a few years now, is looking like a winner again, and the gains in efficiencies will come out of IBM’s hide;

2) bad, bad news for Dell. This is a well-run products company buying a poorly run services company with low moral. They can turn it around where the old regime that failed, couldn’t. With this arm of enterprise customer delivery functioning well, look out Dell;

3) this is really bad news for Sun – really, really bad;

4) it also means size in service is more meaningful than before. Whereas HP bought a small, but very well respected IT services company (Knightsbridge) awhile back, with a hundred or so million in revenue, now that looks like an appetizer. So long midsize IT services deals for larger enterprise players; and

5) the big 4 Indian IT and outsourcing companies will now have to really step up their acquisition strategies to counter the customer aggregation capabilities of the new combined entity.

Watch for more with an emphasis on cross-border.

marty

Announcement - First Closed Transaction

admin1 — Mon, 12 May 2008 21:50:00 GMT

It is with great pleasure we announce the first closed transaction from the Forum. See the announcement. The buyer is a $700m rev publicly traded IT solution provider, and they found their match, a small, vertically focused CISCO solution provider, here, on the Forum. Clearly, the Forum is the IT mergers and acquisitions marketplace.

Congratulations to all those who participated, and look for more announcements shortly.

Marty

Per the WSJ

admin1 — Fri, 15 Feb 2008 18:57:00 GMT

Per the WSJ, January announced deals are off 37% from the prior January , 50% from December and the lowest level since October, 2004. Further, if January’s numbers are annualized, we are off nearly 60% versus 2007, a major correction, not a speed bump. International buyers have pulled way back and off their highs, and private equity buyers are off to their slowest start in five years. There is good news, however, in the January numbers....it’s February. More to come.

marty

Indian IT Companies

admin1 — Thu, 07 Feb 2008 16:08:00 GMT

Just back from Mumbai and I have two things to say, those advertised fold flat seats aren’t exactly flat when you are nearly 6'5", and secondly, those who haven’t been to India need to go at least once. Then they will understand what the Wild West looked like in the mid to late 1800's. Wild, woolly, and tremendous opportunity.

Let me add a third thing, the reason the Indian IT companies trade at such multiples is because... they deserve to. When you can take a sub-10% EBITDA business, through labor arbitrage and sales expansion, by enabling the top of the funnel to be larger due to leveraging an existing, trained, and low cost bench, and make it 20%, huge value is created.

I met with a local company whose top line is growing 50% and his margins are increasing. This is as uncommon today as Hillary Clinton not crying at a campaign stop today. Top line growth and margin expansion is the mother’s milk of financial alchemy.

More to follow.

marty

Three Things

admin1 — Thu, 17 Jan 2008 17:49:00 GMT

First, please keep those notes coming; I enjoy hearing from people who read this blog and claim to get some benefit.

Second, in case you missed it, the capital markets are in a complete and total tizzy, and while your guess is as good as mine, I think it portends bad things. Having said that, the M&A business continues to have pockets of strength and the common element when successful, whether advising the buyer or the seller, is having market-based valuation expectations. We have had discussions with 2 forum prospects, both want to hire us for additional services. Both in the ERP space, same primary vendor, both near $10m in revenue, one wanting around $8m which is achievable, the other near $15m, which I suspect is drug induced. Guess which one we are going to try and go market?

Third, we are advising a sub-$5m infrastructure services company who has received indications of interest from online forum buyers. We expect to announce our first closing, shortly. Hmm, I think we may be onto something.

Happy selling.

marty

EDS acquires Saber Corp.

admin1 — Mon, 10 Dec 2007 22:56:00 GMT

Last week, arguably the best and most rewarding transaction we have ever been involved in, closed. Our client, Saber Corp., sold approx 93% of the company to EDS for $420m, making the deal worth over $450m. What makes this transaction so gratifying is that by not selling initially 100% of the company, like most service deals, it was “mostly” clear to us when we started our process over two years ago, that the value maximizing approach was non-conventional, and we needed a two-step process. We also needed and required a lot of confidence along the way, as it was quiet on a few occasions. Rather than take the cash up front, we found a private equity group who really delivered on their promises, and helped grow the business by finding, then financing, an acquisition nearly three times the size of themselves. Certainly, Saber management had proven themselves, but to add on a company that much larger required a lot of foresight by the private equity group. Based upon the ensuing growth as reported, their confidence was justified.

And again, while we were not directly involved in the deal with EDS, Saber management, again, sold not all of the company, retaining a sliver of equity, about $50m; and if history is any guide, will leverage that up again. Good for them. They have demonstrated by taking a longer view, continuing to work hard and smartly, you can have your cake and eat it too. BTW, I failed to mention, the founders of Saber are as classy as they come, and were a joy to work with.

marty

Latest Offerings

admin1 — Wed, 14 Nov 2007 16:25:00 GMT

For those who have been following our product development, a few weeks ago we did not have a robust services offering. Based upon client feedback, we now have a range of services to assist sellers in the M&A process accomplish their objectives. In the case of our most comprehensive service offering, we now have two very interesting engaged clients. Both are IP and service plays, both have secret sauces, worldwide applications, one is Asian-based, the other U.S. In terms of size, both are valued in the $8 figure plus range, and both companies are more valuable to prospective buyers than they are to themselves. Patents with meaningful cost savings, plus barriers to entry, are good things when looking for liquidity. Because both entities offer value across a wide spectrum of users, the search process will be complex and time consuming. A lot of frogs will be kissed to find qualified bidders consistent with our timing. We will keep you updated as to our progress and hope to be broadcasting tombstones in the near term.

marty

Lack of Targets

admin1 — Wed, 31 Oct 2007 21:26:00 GMT

According to a recent Frost and Sullivan M&A report, they cite the key barriers to a successful M&A strategy. They clearly quantify the primary reasons why more deals don't get done. In other words, what's stopping them? As expected, the biggest reason why transactions don't get done is price. Over a third of all deals according to their report can't reach agreement on valuation. That is not really surprising. What was surprising, to me at least, were one out of six deals per the report do not get done because the acquiring company can't find a suitable target. That means they are all dressed up and ready to go, but can't find a mate. This I found fascinating. There are no lack of targets. There is simply an inefficient system to put them together in a timely and cost effective manner.

Hence, the M&A Forum. When we open up searching, shortly, we will have over 50 companies listed for sale from principals and intermediaries, from multiple countries, varying in size from $1M in revenue to nearly $40M, and in value from little, to nearly $75M. BTW, did we say yet our list of buyers, including strategic acquirers, private equity/venture capitalists, and international companies now measures in the hundreds? We will be making a more formal announcement as we exceed a certain retail figure. Happy selling.

marty

A Fond Farewell

admin1 — Mon, 29 Oct 2007 16:30:00 GMT

Any day now, it's reasonable to expect Stan Laybourne, CFO, of Insight to retire, and ride off into the sunset. It was announced a few months ago, he would be leaving in the third quarter, and he's still there. I have personally worked with Stan on a number of strategic activities, and have found him to be a cut above, and will miss the opportunity to go into battle again.

With Stan first assisting CEO Tim Crown, and now CEO Rich Fennessey, he has supported a total, and successful, transformation of the company. As it has morphed from a phone reseller, or dmr, with a few non-core functions, the company is now well positioned behind CDW as the preeminent national solution provider with hardware, software, and services wrapped around meaningful cost efficiencies due to the scale in their business. Stan was in the room each time a key decision was made, and at the end of the day, had much responsibility to translate vision into reportable buckets of revenue and profitability. I like to think he was where the rubber did not meet the sky.

Happy trails Stan. I wish you a happy and healthy retirement and a big loss against Michigan when the Buckeyes show their ugly faces November 17^th in Ann Arbor.

Go Blue!

marty

Buying Stock in the Buyer

admin1 — Fri, 26 Oct 2007 16:23:00 GMT

Let me outline what I consider a real dilemma. Consider selling an IT BPO company in the US, and the two most logical suspects are international companies. One is Indian, the other is Chinese. Both value the company at $20m US, expect to be public in the next 12mo, both expect the seller to continue on with an earn out over the next 12-24mo and both want the seller to take up to 25% of the total consideration in stock. Let's see, you give up control, you get 33-50%of the total value in cash, which is good, and then need to deliver numbers to get your balance of cash, and end up with a minority position in a private company in a another continent. Sounds like a story you read about, but in many cases, with the buyers being non-US, this is the world sellers are in, and you know what, this creates really good opportunities to get liquid, and, creates meaningful upside.

Do you know what is relevant in the above example? It is not so much what our client may be worth, but what is the real value of the buyers shares. In this case, since you theoretically know what your business can deliver, history, pipeline, management authority, the variable is the buyer. Therefore, we are buying stock in the buyer.

In this context, things are clearer and you can see your leverage points. With an earn out of approx 1/3 cash, 1/3 earn out, and 1/3 stock, the decision to select which shares to buy is the difference in this example of getting $18m or $29m, when all the variables were the same. Except in one case, the shares were worth 66% of par in 24mo, and the other 300% of par in the same period.

marty