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Exit and Growth Strategies for Middle Market Businesses

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Fall 2021 | M&A Report In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Nov 04, 2021

The report below gives a good overview of the Fall 2021 M&A activity in the Technology Industry Sector. The technology, media, and telecommunications industry is rapidly evolving, due to increased investor interest. The sector experienced increased investments driven by initial public offerings of special-purpose acquisition companies, and venture capital funding during the initial period of 2021. This industry has significant potential for growth due to large capital inflows. The rapid pace of technological change, due to the impact of Covid-19 pandemic, is driving companies to continuously innovate to transform their business and gain a competitive advantage. However, the technology, media, and telecommunications industry’s capital, strategic, and operational decisions are being influenced by geopolitical uncertainty, ESG/climate crisis and awareness, and inclusion & diversity realizations. Currently, technology demand is rising due to increased global IT spending and swifter hardware sales recovery. The adoption of 5G networking and devices is increasing, with the prospect of more efficient data processing, lower network costs, and increased network density on the horizon.

Posted by Dan Vermeire.

Read the Entire Fall 2021 Technology, Media and Telecom Report Here


Summer 2021 | M&A Report In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Aug 17, 2021

The report below gives a good overview of the Summer 2021 M&A activity in the Technology, Media and Telecom Industry Sector. The COVID-19 pandemic has led to the increase in demand for a variety of technological solutions. Ecommerce, videoconferencing, electronic signature, collaboration, and cloud-based applications, which had a strong revenue growth in 2020, will continue to grow in 2021 at a normal pace. In 2021, it is expected that the technology businesses would upgrade their supply chains to improve transparency and resiliency. The technology companies would enhance its digital transformation through cloud, everything-as-a-service (XaaS), and edge intelligence. It will also pursue strategic acquisitions to boost its technology and talent capabilities. Technology companies must develop solutions to address vulnerabilities like supply networks complexity, while being environment friendly and flexible to deal with a volatile geopolitical environment. In addition to that, the most pressing risk for the technology industry is data security and privacy. Companies should tackle various regulatory and ethical hurdles related to data privacy and maintain public’s trust as recent incidents of high-profile data breaches have tarnished the reputations of some technology companies.

Posted by Dan Vermeire.

Read the Entire Summer 2021 Technology, Media and Telecom Report Here


Spring 2021 | M&A Report In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Jun 24, 2021

The report below gives a good overview of the Spring 2021 M&A activity in the Technology, Media and Telecom Industry Sector. The pandemic has ushered in a new reliance on tech, connectivity, and e-commerce. While many industries have been severely affected by the crisis, for the Technology, Media and Telecom sector (TMT) the economic impact has been largely neutral, or even positive for some industry segments.

With surges in online gaming, video streaming, mobile data consumption, remote working models, voice traffic, and residential broadband; the industry saw companies make several operational improvements in network infrastructures to cope with increased technological demands. The pandemic has shifted the spending toward resources that support digital methods of workforce collaboration, sales and customer experience delivery. The big data technology and rising number of connected devices across enterprises are increasing the demand for IT service management and information security management platform.

Posted by Dan Vermeire.

Read the Entire Spring 2021 Technology, Media and Telecom Report Here


Measuring Growth and Profits

By Dan Vermeire | Aug 21, 2020

Business owners often face a crossroads. Should I invest to create growth? Or should I keep expenses in check and generate profits? It is usually hard to have both.

This question gets compounded in an M&A opportunity – Will my valuation be penalized because I invested for growth, rather than profits? How can I keep running my business-as-usual when I want to maximize the valuation?

 

The Rule of 40

In the technology sector, there is a handy equation that helps assess a company and considers both growth and profits – called the Rule of 40.
Simply stated: Revenue Growth % PLUS EBITDA Margin % should be 40 or more.
An example: Revenue growth over last year is 20% and the adjusted EBITDA margin is 25%. That equals 45, which is more than 40.

Looking more closely, you can see that a high investment in expenses like sales and marketing should generate higher revenue growth, though profits may be lower. This is particularly true of start-ups and younger companies. If the revenue growth isn’t that good, then perhaps rethink where the investment is made. Conversely, keeping expenses low and foregoing those investments should yield a higher bottom line. This could be the case of more mature companies with well established market relationships and product lines.

This rule can be applied to a variety of companies, both startups and mature, because it considers both growth and profitability. Most analysts will do this measurement over multiple years and also apply it to the forecast. While the number 40 is a recognized benchmark in the software sector, other benchmarks can apply to other sectors such as manufacturing, processing, services, and distribution.

If you are considering an M&A transaction, be sure to talk to a professional and discuss the balance between growth and profitability.


This Week’s NEW NORMAL in M&A

By Dan Vermeire | Mar 24, 2020

What a difference a week or two can make! The world has gone to war against the Coronavirus, the DOW is down by a third, and most of the population is sheltering at home.

What does this mean to the M&A market? The answer is… it depends.

This crisis is unique. The financial crisis of 2008/09 nearly killed the banking industry. Banks were essentially closed – couldn’t or wouldn’t lend into deals. Most buyers were very shy and without the support of the banks, they had to work with limited capital. Naturally, times were very lean in M&A.

In this crisis, the banks are still open and interest rates are lower than ever. Most buyers are still flush with cash and want to put it to work. For the most part, the buy-side is still strong.

But for sellers and businesses in general, you need to look on a case-by-case basis. Some sectors are terrible. With the Saudi/Russia/US oil war, the O&G sector is not very attractive for buyers. Airlines, cruise lines, hotels and restaurants, and anything directly servicing them are very difficult targets now and for the foreseeable future. Many won’t survive.

However, some sectors are stronger because of the Coronavirus. IT Services is very strong, if their customer base isn’t tied to one of the sectors mentioned above. Healthcare continues to be strong. And most food companies are strong, especially ones in the “good for you” products. Many other sectors are strong too.

With some sectors being unattractive, the buyers’ universe of good targets has just gotten smaller. That means that companies in the strong sectors have become more interesting.

Keep in mind that many companies are scrambling to adjust to the new conditions and revamp their strategic plans. Many have travel restrictions and other logistical challenges. All to say that it is more difficult to engage and make progress on M&A deals. But, not impossible. With the right combination of buyer and seller, deals are continuing to move forward.


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

By Dan Vermeire | Feb 28, 2020

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 2019 included 421 closed deals, according to data published by industry data tracker FactSet.

One of the largest lower middle market transactions closed in November when PTC, Inc. acquired Onshape, Inc., a portfolio company of Commonwealth Capital Ventures, NEA Management Co LLC, AH Capital Management LLC and North Bridge Venture Partners for US$470 million in cash. PTC engages in the development and provision of software-based product management and development solutions. Onshape is a modern CAD system that unites advanced modeling tools and design data management in a secure cloud workspace that is accessible on any device.

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

By Dan Vermeire | Nov 27, 2019

The report below gives 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 2019 included 409 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions in the sector was announced in September when Commvault Systems, Inc. acquired Hedvig, Inc. for US$225 million in cash, contingent and future payout, subject to customary transaction adjustments. Hedvig is a portfolio company of Atlantic Bridge Ventures, Redpoint Ventures, True Ventures LLC, HC Capital Management LLC, Hewlett Packard Ventures LLC, Oman Investment Fund and EDB Investments Pte Ltd. Founded by Avinash Lakshman in 2012, Hedvig Inc is located in Santa Clara, California and provides software defined storage solutions.

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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.