Transcript Private Alternatives to the Public Markets

Private Alternatives to the Public Markets
How to Survive and Grow in a Capital Constrained Environment
A Private Conference on
May 16, 2001
J. Richard Knop
Windsor Group LLC
Agenda
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Windsor Group Overview
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Middle Market M&A Trends
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Recent M&A Trends
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Approach on Doing a Deal on the Best Price and Terms
Today
Windsor Group Overview
3
Windsor Group Overview
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25-year old investment bank with 30 employees
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Industry Representation
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Government Contracting
Commercial IT
Telecommunications
General Middle Market Corporate Finance
Locations
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Mergers and acquisitions (buy- and sell-side)
Private placements (debt & equity)
Leveraged buyouts & management buyouts
Headquartered in Middleburg, VA (Satellite office to open in Reston, VA, in 2001)
Windsor Group Securities in Southport, CT
Transactions
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50% of engagements $20M to $100M, with remainder $100M to $1B
Over 40 M&A transactions (aggregate value > $6 Billion) closed in past 5 years
Windsor Group Reputation
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Reputation for closing almost every engagement on
terms favorable to client
Capable of managing both middle and large market
transactions
Strong reputation and network
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Strong deal flow generated through banks and investment banks, law
firms, “word of mouth”, marketing, industry participation, and previous
clients
Seasoned client staff with blend of strong operational
experience, industry knowledge, and financial expertise
Intense “hands-on” involvement of senior management
Middle Market M&A Trends
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Middle Market M&A Trends
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1,600
1,490
1,337
1,400
Transactions
1,200
1,007
1,000
815
800
680
546
600
400
1,306 1,318
380
443
M&A transaction volume
in the $50-500MM value
range grew consistently
through the 1990’s,
driven by:
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200
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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
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Strong economic environment
Increasing stock market valuations
Globalization of business
Low cost of credit
Active private equity industry
Recent M&A Trends
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Deterioration of Public and Private Capital
Markets
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Closing of IPO market leaves sale/merger as only
liquidity path for many companies
Stock market decline reduces value of stock as
currency
High yield market not available to fund acquisitions
Bank financing terms tightened - less leverage
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2.5-3.0 x EBITDA v. 4-4.5 x one year ago
40% Equity required from LBO funds v. 20% one year ago
Private equity groups more conservative in underwriting
acquisitions due to dot.com fallout
Impact on M&A Transactions
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Realignment of expectations (primarily seller)
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Creative capital structures required
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Good opportunities for buyers with capital
Consolidation trend continues in government
and IT industries
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Industry Factors
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Acquisition reform
Outsourcing trend
Commodization of products and services
Competition stronger and larger
Internal Factors
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“Build or buy”
“Glass ceiling” syndrome
“Bifurcated” shareholder issue
Personal issues
Current Environment: “Kiss a lot of frogs
until you find your Prince”
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Buyers filling voids in technologies & customers v. bulking
up
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Buyers seeking growth & margin improvement
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“Back to basics” investor/buyer psychology
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More focus on intangible issues
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Management
Cultural fit
Integration issues
Trend toward consolidations (merger of
multiple companies)
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Efficiencies and synergies
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More critical mass
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Better access to capital markets
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More complicated (corporate valuations and
HR/management issues)
Impact of Recent Legal & Accounting
Changes
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Pooling accounting method eliminated effective July 2001
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Potential positive development for private & financial buyers v. public
buyers
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HSR threshold increased from $15 to $50 Million.
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Use of installment note as part of consideration
Valuations
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Commercial market valuations have softened more than
government market valuations (“flight to safety”)
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Highest valuations paid for:
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Companies with high end skill sets and intellectual property
Companies with customers hard to break into
Good operating margins
Focused growth strategy
Strong senior and mid level management team that will transition
Past performance
Approach to Doing a Deal on Best Price and
Terms Today
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Sellers: Use systematic approach
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Overall theme: exploring and developing all options will
produce better results than discussion with a few
competitors and colleagues
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Emphasize EBITDA for current year
Books and records in good order
Resolve litigation
Hire experienced team of professionals
Don’t “reinvent the wheel.” Do only once in your lifetime
Allows you to manage company
Typically return is several times the cost
Investment banker services
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Evaluates alternatives
Provides valuation range
Packages the company
Identifies, qualifies, initiates & contacts most qualified
prospective purchasers
Creates competition among potential purchasers
Provides critical assistance in structuring and
negotiating deal terms & guiding company through due
diligence
Brings deal to closure
The Windsor Philosophy
“Complete the transaction as soon as possible on the best
financial terms and the best strategic and cultural fit for our client.”
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Be patient
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Be prepared to walk away
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Continue to manage and move company forward during
sales process
Buyers
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Engage knowledgeable investment bank and other
professional advisors who:
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Identify financial resources to make acquisitions
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Know your industry
Have relationships and a track record
Enables you to take advantage of opportunities that arise
Capital is key today
Develop a well thought out acquisition plan and criteria
“Kiss a lot of frogs until you find your Prince”
Buyers
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Cont’d
Be sensitive to cultural, management, and employee
benefit issues
Develop before closing an integration program with the
owners/managers of the acquired company
Follow the general “code of honor” in the M&A business
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Don’t put a company under letter of intent expecting to renegotiate the
terms irrespective of the results of due diligence
Deal openly and directly as opposed to “playing games”
Develop a reputation of being trustworthy and fair in your dealings
Backdrop to Current Environment
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Slowing economy and Internet “bubble” are reducing the
opportunities for IPO’s and secondary stock sales
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Number of United States IPO’s are down to 429 in 2000 from 538 in 1999
(down 20%)
Only $8.1 billion of proceeds in fourth quarter 2000 versus $27.4 billion in
fourth quarter 1999
Performance very poor in 2000:
2000
Return
1999
Return
S&P 500
-10.1%
19.5%
Nasdaq
-39.3%
85.6%
Rule “FD could make things worse, due to increasing uncertainty in minds
of analysts and portfolio managers
Backdrop to Current Environment
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Leveraged loan market has contracted to levels of the
early 1990s
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Proceeds of debt syndications of $1,175 MM in 200 versus $1,298 MM in
1999 (down 9.5%)
Bank debt multiples at a 10-year low
Bank examiners caused 60% of syndication buyers to exit the market
since mid-2000
Predicting a recession - and may be getting what they predicted!
Leverage Multiples of $100MM to $249MM
LBOs
7.0 x
6.0 x
5.0 x
4.0 x
3.0 x
2.0 x
1.0 x
0.0 x
3.3 x
2.6 x
1.9 x
1.9 x
1.0 x
2.8 x
2.5 x
2.3 x
2.4 x
2.1 x
1989
1992
1995
1998
2001
Bank Debt/EBITDA
Total Debt/EBITDA
Backdrop to Current Environment
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High-yield bond market is no longer an option for most issuers
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Assets more concentrated than in stock market, leading to larger minimum
size thresholds (now $250MM+)
Returns under 5% annually since 1998
Yields and spreads have increased, but liquidity has not returned
2000 new issuance down to levels of 1994-95
Leverage Multiples of $100MM to $249MM
LBOs
7.0 x
6.0 x
5.0 x
4.0 x
3.0 x
2.0 x
1.0 x
0.0 x
3.3 x
2.6 x
1.9 x
1.9 x
1.0 x
2.8 x
2.5 x
2.3 x
2.4 x
2.1 x
1989
1992
1995
1998
2001
Bank Debt/EBITDA
Total Debt/EBITDA
Backdrop to Current Environment
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cont’d
Significant amount of LBO capital has been raised but not
invested yet
LBO Funds Raised
70
60
50
($B)
40
30
20
10
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Source: Venture Economics/NVCA
Backdrop to Current Environment
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LBO funds are investing more equity in deals, despite high
acquisition multiples implying a reduction in expected returns
Average Equity Contribution to LBOs
38%
40%
32%
30%
22%
20%
Acquisition Multiples of $100MM - $249MM
LBOs
7.5 x
24%
7.2 x
7.0 x
6.5 x
13%
6.5 x
6.3 x
6.0 x
10%
5.5 x
0%
1989
1992
1995
% of Total Sources
1998
2000
1995
1998
Price/EBITDA
2000