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Exit and Growth Strategies for Middle Market Businesses

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M&A Quarterly News In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Sep 12, 2019

The report below gives a good overview of the third quarter M&A activity in the Technology, Media and Telecom Industry Sector. M&A activity for North American based target companies in the Technology, Media and Telecom sector for Q2 2019 included 306 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions in the sector was announced in April when Lear Corp acquired Xevo, Inc., a portfolio company of MMV Financial, Inc., Intel Capital Corp, Shaw Ventures, Inc. and SPARX Group Co Ltd, for US$320 million in cash. The acquisition would broaden Lear Corp’s connectivity portfolio and enhance its capabilities in software. Xevo provides solutions to automakers and merchants. The company was founded in 2000 and is headquartered in Bellevue, WA.

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M&A Quarterly News In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | May 22, 2019

The report below gives a good overview of the second quarter M&A activity in the Technology, Media and Telecom Industry Sector. M&A activity for North American based target companies in the Technology, Media and Telecom sector for Q1 2019 included 328 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in March when Envestnet, Inc. acquired PIEtech, Inc. for US$521.2 million in cash and stock. Envestnet engages in the provision of intelligent systems for wealth management and financial wellness. PIEtech develops financial planning software for financial advisors. It offers MoneyGuidePro, an Internet based financial planning software that helps advisors to create, implement and maintain investment strategies to meet financial goals. The company was founded in 1997 and is headquartered in Powhatan, VA.

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We Have No Debt

By Dan Vermeire | Apr 30, 2019

We Have No Debt. I hear this from some business owners, early in our first meeting.

It seems “Debt” has a bad reputation. As a family-owned business, “no debt” may sound like a stronger company. But, things are quite different when you consider a growth opportunity, or a transaction for the business. The fact is, debt should not be feared – it is fundamental in financial engineering – because it greatly increases the rate of return on the equity investments. Here’s what you should know about debt.

Different Types of Capital– a business should layer different types of investment in the capital stack, some layers are debt and some are equity. Why? Because each type has a different level of risk vs. return. So, to be most efficient, the company can be structured with the cheapest capital first, then the more expensive capital is used later. Of course, the company can only handle so much debt, and that is easily analyzed in the cash flow models. Here are the basic layers:

  • Senior debt, or “bank debt” is typically the cheapest, today around 5%. It is secured against assets and may involve a personal guarantee. It amortizes monthly, that is, you pay against the principal and interest monthly.
  • Sub-debt, or Mezzanine debt, is more flexible, but more expensive, today around 10-12% interest. Some Mezz debt may include warrants on stock as a sweetener. This type of debt is subordinate to any senior debt and is generally not secured by assets. The good news is that it is not paid monthly, and often, the interest is just rolled into the note – that means there is little or no strain on the monthly cash flow. This type of debt behaves very much like an equity investment in that it is paid when the business has the cash, typically when the business is bigger, in a future sale. The Mezz investor’s return is capped at the interest rate, and may be less than the equity return. But, the Mezz investor will get paid before any equity gets paid.
  • Preferred stock may be used and it behaves very much like Mezz debt. Typically there is an interest payment, which may be rolled into the stock, and it may have a feature to convert to common stock. Even though it has “stock” in its name, it behaves like debt.
  • Equity – last in the capital stack is equity, which is cash invested by the buyer. Today, most buyers expect 15-20% return on their equity investment, which is down significantly from prior years, because of the competitive nature of the M&A market. As you would expect, the equity does not have any returns, unless the company has paid off the debt and can declare a dividend, or in the case of a sale of the business. Equity can have an unlimited return – if the company sells for greater value, the equity holders reap the benefits. However, the equity investment is not secured and could be entirely at risk.

As you can see from the list above, only the senior debt is a burden to the company’s monthly cash flow. The rest can be viewed as different forms of “partner-investors” in the business. They win, to different degrees, as the business does well. And they can lose, to different degrees, if the business does poorly. Industry reports show that the average level of debt for transactions during 2018, on companies of $20M to $50M in valuation, was 3.9 times EBITDA. Most valuations are 6-8 times EBITDA, so you can see that some form of debt generally accounts for more than half of the capital stack.

The return for the different layers of capital can be illustrated this way. Think about a company that is valued at $30M, and is capitalized in 3 equal parts, $10M each of senior debt at 5%, Mezz debt at 10% and the rest in equity. Five years in the future, the business has paid the senior debt and sells for $36M, a modest 20% increase in value.
But how is that 20% return divided between each layer, per year? It would be: Senior 5%, Mezz 10%, and Equity about 40%. Which would you prefer?

Seller’s Options – in a business transaction, the seller also can participate in the new capital stack. In many deals, if the seller is not quite sure what he’ll do with all the proceeds, then he may consider the option to partially finance the transaction with a seller note, very similar to being a provider of Mezz debt. This may provide better returns than other investment options he is considering, post transaction.

Perhaps more importantly, the seller may choose to “rollover” some equity into the new capital stack. The rollover investment is done at the leveraged cost of equity, meaning after the debt is applied. In this case, the new debt is your friend, because you buy equity in the company at a discounted rate. For example, if the value of the company is $50M, that is what you would receive. If the buyers use $30M leverage, in a combination of senior and Mezz debt, then the new equity value is $20M. Then, you may choose to buy back in 30% of the equity, which would cost $6M at the leveraged rate, so your net proceeds would be $44M. Without any debt in the transaction, then 30% would cost $15M, and your net proceeds would be $35M, a difference of $9M to you.

In summary – don’t fear the name “debt”. Not all debt instruments are the same, and most don’t affect the monthly cash flow. How do you avoid any risk? By understanding the different types of debt and using them wisely, especially with a conservative cash flow model. Any good investment banker can work through the details with you.


M&A Quarterly News In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Feb 26, 2019

The report below gives a good overview of the first quarter M&A activity in the Technology, Media and Telecom Industry Sector. M&A activity for North American based target companies in the Technology, Media and Telecom sector for Q4 2018 included 403 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in December when Perforce Software, Inc., a portfolio company of Clearlake Capital Group LP, acquired Perfecto Mobile, Inc., a portfolio company of Vertex Venture Capital, Viola Ventures Ltd, Vodafone Ventures Ltd and Globespan Capital Management LLC, for US$200 million. The transaction expands the business offerings of Perforce. Founded in 2006, Perfecto is located in Burlington, Massachusetts and provides on-demand mobile testing infrastructure services.

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M&A News In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Nov 20, 2018

The report below provides a good overview of the fourth quarter M&A activity in the Technology, Media and Telecom Industry Sector. M&A activity for North American based target companies in the Technology, Media and Telecom sector for Q3 2018 included 429 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in September when GrubHub, Inc. acquired Tapingo, Inc., a portfolio company of Viola Ventures Ltd, Khosla Ventures LLC, Shanghai Fosun Kinzon Equity Investment Management Co Ltd, QUALCOMM Ventures and Doll Capital Management, Inc., for US$150 million in cash, subject to standard closing conditions. Founded in 2012, Tapingo is located in San Francisco, California and offers a mobile shopping application.

Software, hardware and platforms are migrating to the cloud at a rapid rate as on-premise solutions phase out.

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Environmental Liability in M&A

By Dan Vermeire | Oct 23, 2018

Environmental concerns can be hugely important in an M&A deal, and are typically investigated as part of the due diligence process. But, for a business owner, that may be too late.

What’s at stake for your business?
It’s important to know that PLL (Pollution Legal Liability) can affect both the property owner and the tenant. Yes, a business that leases the property can still be responsible for environmental problems. Further, PLL can be from the historic uses, well before you owned or leased the property. And PLL can affect you because of an adjacent property, even if you don’t operate there.

PLL costs can be significant to identify and remediate problems. This may involve drilling and digging at the property, through the floors, parking lots, and open ground, to remove and dispose of contaminated soil. Far worse, if the environmental issue isn’t properly managed, it can be disruptive to your business if customers, employees and regulatory agencies draw the wrong conclusions.

How does the process work?
It is a three-step process, starting with a simple assessment and, if problems are found, progressing to more rigorous efforts. The initial step, Phase 1, reviews the property and creates the Environmental Site Assessment (ESA), which identifies potential or existing environmental contamination liabilities. Various engineering firms specialize in the practice of these reports, according to guidelines from the EPA. The assessment will look for any visible signs of contamination and review the historic uses of the property. If the ESA identifies areas of significant concern, then a Phase 2 is recommended which involves further analysis such as boring, collecting soil samples, and installing ground water monitoring wells. If the Phase 2 identifies significant issues, then a Phase 3 project will remediate the site. As you can see, each step costs more money, takes more time, and may create further disruption to your business.

How can you protect your business?
It is important that the business or property owner’s attorney order the ESA, not the buyer. Why? Because the report can be protected by attorney-client privilege. Should the ESA identify problems, then the information can be kept confidential. Most good law firms will have a working relationship with an engineering firm and keep the owner’s interests in mind, thereby avoiding overly aggressive, or “make work” recommendations.

There are several areas of the ESA that are somewhat subjective, such as the classifications of risks. Professional opinions can vary – one group may think action is needed, while others may not. For this reason, ESA’s are initially produced in a draft form and issues can be discussed. If it is warranted, you can get a second opinion, perhaps more favorable. If the process continues, eventually a report becomes final, and then can be made available to the buyer, banks, and regulatory agencies. A clean ESA has value to both the buyer and seller.

To stay ahead of any issues, you should consider ordering an ESA well before you start the M&A process. In that way, you can be aware of any potential risks and solve them before they become bigger problems.

Other ways to manage environmental risk include indemnification from the seller to the buyer. This approach may often require some meaningful security, such as continued equity, a note, escrow or insurance. Leasing may be considered as an alternative to buying property in an M&A deal. There may be other business reasons to control the property and leasing does not completely eliminate risk for the new owner, but this approach can help in many cases.

Last, but certainly not least, environmental insurance is a very good way to eliminate risk and should be considered in any PLL situation. Policies have been used for many years, are available from many respected providers and can have customized coverage. Many policies are transferrable to the new owner and will cover pre-existing conditions, both onsite and offsite contamination, claims for bodily injury and legal costs. In certain cases, policies will exclude voluntary digging, that is, don’t go looking for trouble. This restriction can be included in the lease or purchase agreement, too. Environmental insurance is affected by the findings in an ESA, so it is important to consider insurance before starting the process. Always work with your advisor to control the process and manage the information flow to the insurance market.

Environmental concerns continue to gain attention, as we move closer to a green planet. Any business that involves owning or leasing property should have an effective strategy to manage environmental risk. Our CFA professionals regularly lead programs that successfully avoid environmental pitfalls.


M&A News In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Aug 20, 2018

The report below provides a good overview of the third quarter M&A activity in the Technology, Media and Telecom Industry Sector. M&A activity for North American based target companies in the Technology, Media and Telecom (TMT) sector for Q2 2018 included 429 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in May when Cisco Systems, Inc. acquired Accompani, Inc., trading as Accompany, a portfolio company of Resolutevc, LLC, Ignition Venture Partners, ICONIQ Capital, FLOODGATE Fund LP, Cowboy Capital LLC and Charles River Ventures, Inc., for US$270 million in cash and assumed equity awards. The acquisition enhances Cisco’s portfolio of software solutions. Accompani develops and publishes software tools for relationship intelligence. Its platform integrates email, contacts and social feeds to keep users informed on professional connections. The company was founded in 2013 and is headquartered in Los Altos, CA.

The video game market is experiencing explosive growth on mobile platforms. According to data from industry research group Newzoo, in 2018 the mobile video game market will generate $70.3 billion comprising 51% of the global video game market.
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M&A News In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | May 16, 2018

The report below provides a good overview of the second quarter M&A activity in the Technology, Media and Telecom Industry Sector. M&A activity for North American based target companies in the Technology, Media and Telecom sector for Q1 2018 included 432 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in March when Allen Media LLC, a subsidiary of Entertainment Studios, Inc., acquired Weather Group Television LLC, a portfolio company of Rosemont Solebury Capital Management LLC, AlpInvest Partners BV, Bain Capital Private Equity LP and Blackstone Corporate Private Equity, for $300 million. The acquisition is in line with the growth strategy of Allen Media LLC. Weather Group Television LLC is located in Atlanta, Georgia and broadcasts weather related information.

UBM, the company that puts on the annual Game Developers Conference, took a survey regarding which platforms developers currently consider the most important. Approximately 60 percent of the roughly 4,000 developers surveyed are currently working on a game that will be released on PCs.
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M&A News In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Mar 28, 2018

The report below provides a good overview of the first quarter M&A activity in the Technology, Media and Telecom Industry Sector.
M&A activity for North American based target companies in the Technology, Media and Telcom sector sector for Q4 2017 included 420 closed deals, according to data published by industry data tracker FactSet.
One of the notable transactions of the quarter was announced in November when private equity group Thoma Bravo, LLC acquired Barracuda Networks, Inc. for US$1.5 billion in cash. Under the terms of the transaction, Thoma Bravo paid US$27.55 in cash per Barracuda Networks share. This represented a 22.5% premium to Barracuda Networks’ 10-day average stock price prior to November 27, 2017. Barracuda Networks designs and delivers powerful yet easy-to-use security and data protection solutions. It offers cloud-enabled solutions that empower customers to address security threats, improve network performance and protect and store their data.
The technology sector continues to evolve as companies focused on the Internet of Things (IoT) continue to garner interest from investors and strategics looking acquire greater capabilities.

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M&A News In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Nov 17, 2017

The report below provides a good overview of the fourth quarter M&A activity in the Technology, Media and Telecom Industry Sector. M&A activity for North American based target companies in the Technology, Media and Telecom sector for Q3 2017 included 266 closed deals, according to data published by industry data tracker FactSet.

One of the more notable deals of the quarter was announced in September when Internet Brands, Inc., a portfolio company of Kohlberg Kravis Roberts & Co LP, acquired WebMD Health Corp for US$2.5 billion in cash. Under the terms of the agreement, Internet Brands paid US$66.5 in cash for each share of WebMD Health Corp. The transaction enhances the business portfolio of both companies.

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