November 2006 webinar continued ..
Mark Reed
Thank you, Marshall. Here is a question that I
am going to lob to Bill Montgomery. The question is this, Having
created a strong product company without venture capital, our revenue remains
low. How important is revenue, or should I take the opportunity to
sell at a lower price without the venture capital? So I assume the whole
question really is, how does the option of M&A sort of balance against the
option of seeking venture capital to wrap up the growth of the company. Bill?
Bill Montgomery
You know, that is a hard question to answer without knowing
more about your company. It partly depends on what you think the
venture capital money is going to do for you in terms of being able to grow and
that sort of thing. The only other observation I can make about that
is that going down the venture capital route for many companies at some point
really precludes doing an M&A transaction at all. VCs come in,
they put money in, things maybe dont go as well as you would like, you have to
go to that second round, you get some more money, and by the time you have
taken two or three rounds of money, you have created a company with a capital
structure that is extremely difficult to actually sell. That is why
a very high percentage of venture capital companies that dont succeed just go
away.
So, it is an interesting question, but I dont think I can
come out with any sort of advice at this point.
Mark Reed
Thank you, Bill. Here is another question about due diligence, and I assume this is
about transactions in the U.S., so I will answer it as if it is a U.S. seller,
anyway. Is there a way to forecast legal fees associated with a
deal, any rule of thumb, and what does due diligence typically look like, when
the buyer comes in will it read each and every customer contract or
license?
The answer is, it is difficult to forecast legal fees, but
I think you can really say that legal fees for a transaction will start in the
neighborhood of $50,000 and move up from there. With respect to due
diligence and what that looks like, I would strongly recommend taking advantage
of the complimentary pass to the Corum Selling Up, Selling Out conference,
because we do have a whole section there focused on due diligence, and how you
pass or fail due diligence has a great deal of influence on the value of the
transaction and even your ability to get the transaction done at
all. So the answer is, buyers will dig through everything related to
your company and another rule of thumb is make sure there are no surprises that
they find during that process.
Bill Montgomery
I would like to make an additional comment. I am
right in the middle of due diligence with one of my clients, and the whole
issue of customer contracts in particular came up. I think the
answer to that question is it depends on who your customers are. In
this particular case, the customers tend to be Fortune 1000 type clients, and
they have contracts that are, more often than not, patterned after the standard
contract that the customer wrote, rather than their own
contract. So, if you have got kind of an off the shelf contract
which everyone signs, it is much less of a problem than we are having right
now, where virtually not only is every contract different, but many of them
actually have confidentiality clauses in them that make it even difficult to do
the due diligence. The lawyers are fighting as we speak over whether
or not a particular customers name can even be revealed to the
buyer. So, you have to kind of think about these things as you
structure how you do business with people.
Mark Reed
Thank you, Bill. I notice that it is 10 oclock
here in the Seattle area, and I dont know how much time we have budgeted for Q&A, so I will continue to try to
answer some questions here, right up until the last moment. If we
hit a hard stop, someone let me know a little bit in advance, please.
It looks to me like we have a few minutes left, so we will
try to get your questions answered. I know that we will miss some of
them, so please feel free to just contact us here directly at Corum if we end
up not answering your question.
Miro, let me ask you another question here. The
question is as follows. If you become a key supplier to several
main players, is this likely to trigger a defensive acquisition attempt by some
of those suppliers? I assume we are talking about supplying
software to other companies.
Miro Parizek
That is an interesting question. You know what I
think might happen? I wouldnt be surprised if someone were to try
to make what is called a strategic investment, which we always react
allergically to. Whether or not one of those will jump up and buy
you probably depends on how you position yourselves and whether or not you
start an active process. I do not think that just because you are
supplying key technology to a few suppliers that one of them will automatically
jump up and buy you. That would depend on how you position yourself
and whether or not you actually approach them.
Mark Reed
Thank you. Here is another question, Ward, that
I will lob to you. The question is this, If timing is so important
to successful M&A, how does one know when to go to market?
Ward Carter
Good question. Certainly there are a lot of
factors. I think that one of the things you need to be is a real
student of the market and of your sector. Take a look at research,
such as that which we develop, and try to understand what deals are occurring
in your marketplace and also where the valuations are and what the trends
are. You certainly dont want to be the last person in your sector
to be acquired. If you can be acquired at that point, you will
probably see yourself acquired at a lower valuation than some of the other,
more strategic transactions that took place earlier. It also, to a certain
extent, is going to depend upon things internal to your company, as well as
external. The extent to which you have recently developed the newest
version of your software, you have rolled it out, software as a service, youve
managed to gain some market traction, there is a time when you can probably
generate a lot more excitement in the market from an M&A viewpoint, than if you are on an outdated legacy product
that is on its last legs and you are only part of the way through a technology
upgrade. So, we always look at, lets try to sell from a point of
strength, lets look where we have momentum that we can capitalize in the
market and take advantage of that as we approach buyers. This is
also the kind of question that we always dig in deeply on when we are talking
to prospective clients, because it is very important for us that we be able to
succeed in an engagement taking you to market and so timing is obviously very
critical and dependant upon a lot of factors. Mark?
Nat Burgess
Let me just add quickly to what Ward said. At a
time when you have your new product out, everyone is jumping all over,
customers are going crazy, youre busy and you cant keep up, the market is
moving in your favor, youre stealing market share, and youre thinking I
dont have time to even think about M&A because things are going really
well. That is the time to go to market.
Mark Reed
Thank you, Nat. Here is another question that I
will lob to you also, Ward, and it is, How competitive are the valuations
being offered by strategic buyers as compared to financial buyers?
Ward Carter
Good question. I would say that our primary
effort, initially, is to find strategic buyers, because those are the companies
that are going to be able to look beyond just the financial aspects of your business
and really take advantage of your technology, be able to take advantage of
perhaps their stronger brand, their deeper resources, their broader
distribution, and really take the vision and take your smaller company and
really take it multi-national and grow it. So, they are going to
have the greatest leverage. I would say, however, that we are seeing
an increasing amount of deals that are getting done with private equity firms
who may be looking at your company as an add-on to an existing portfolio company
and therefore may see you as a strategic add-on. We are also seeing
private equity step in, in many cases, offering competitive valuations to
strategic buyers. One of the ways that they can do that is that the
private equity firms in many cases deploy leverage or they will put up a
portion of the purchase price of a transaction value in cash and perhaps up to
half of it in the form of debt. What that allows them to do it
effectively offer a transaction value which is higher than might be justified
from a pure financial viewpoint on an all cash transaction, but it allows them
to achieve their return on equity objectives, but the use of that
debt. So, we have increasingly been doing deals with a lot of
private equity firms, obviously a deal which involves debt presumes that there
is lots of positive cash flow available to service that debt going forward, but
it is something to be considered, and it is one of the reasons on the right
kind of profile that we are always looking at private equity firms as a potential buyer, as well as looking at
strategic buyers.
Mark Reed
Thank you, Ward. There are a number of questions
here about how Corum actually does business. I would love to answer
those in this forum, but we can also answer those offline, so some of you have
posed those questions, please do contact us so that we can answer those
questions. I am not going to be able to get to all of the questions
here today, as we are running short of time, but I will try to get in at least
one more here. I will send this to you, Miro. Here is the
question. We have actually had experience in this area, and I have
as well. Mrio, here it is. Our company is part of the
Microsoft Business Solutions Navision ecosystem, servicing a vertical market
niche. This potential market is global, because Navision is one of
the few ERP products that can accommodate multi-country, multi-language,
mult-currency financial applications. Are you aware of any
indicators that place companies like ours above or below normal interest levels
as M&A targets?
Miro Parizek
It really depends on the market that you are
addressing. There are going to be a number of potential buyers, obviously in that space, and that depends on the
vertical that you are actually addressing and whether or not you are providing,
for instance, for the Navision platform, maybe the capability to sell the
Navision application that an independent software vendor has developed as a
subscription model, for instance. That kind of technology would
probably have a higher valuation than something that is servicing an older,
low-growth industry segment.
Mark Reed
Thank you. I guess the comment I would add to
that is that having completed a transaction much like this about a year ago,
the company was not on a Microsoft platform, but it did have a lot of expertise
in multi-country, multi-language, multi-currency financial reporting according
to the standards of all different countries, and that was very much a strength
in the transaction. It was a key part of being able to get the deal
done, so it wasnt so much the platform they were on as much as it was the
vertical market expertise of that particular company.
Okay, I think we have basically run out of time,
unfortunately, for the day, for the Q&A. Just to reiterate, the
slides will be available in flash format following the completion of this
presentation and the audio portion of the Q&A will also be part of
that. Participants in todays presentation will be sent a link with
that so they will be able to obtain the flash version of this
presentation.
Brought to you by Corums M&A advisors