M&A 2015 CONFERENCE INDIANAPOLIS JUNE 11

Transcription

1 M&A 2015 CONFERENCE INDIANAPOLIS JUNE 11 1

2 What Makes Private Equity M&A Different? 2015 M&A CONFERENCE 2015 M&A CONFERENCE 2

3 Panelists Jeff Brown, Partner, Faegre Baker Daniels John Ackerman, Principal, Cardinal Equity Partners Gary Laitner, Partner, Faegre Baker Daniels Scot Swenberg, Managing Director, CID Capital Bob Welch, Managing Director, David A. Noyes & Company 3

4 Panelists Jeff Brown, Partner, Faegre Baker Daniels John Ackerman, Principal, Cardinal Equity Partners Gary Laitner, Partner, Faegre Baker Daniels Scot Swenberg, Managing Director, CID Capital Bob Welch, Managing Director, David A. Noyes & Company 4

5 Topics to Cover Deal Metrics Primer Buying with Leverage Valuation Drivers Owner/Management Perspective Deal Process 5

6 Strategic v. Financial Buyers Strategic Financial Cost of Equity Lower Higher Cost of Debt Lower Higher Required IRR Lower Higher Tax Advantages More Less Time Horizon Longer Shorter Need for Accretion Higher Lower So: Who can justify a higher Enterprise Value? But: Financial buyers are better at using leverage, which helps level the playing field. 6

7 Primer - Buying with Leverage Buying with leverage magnifies both gains and losses. Example: Buy Acme for $5 million, using 40% equity: Debt = $3 million; Equity = $2 million. Debt/Capital ratio = 60%. Debt/Equity ratio = 1.5x. Leverage ratio = 2.5x. Assume cost of debt is 6% per annum. 7

8 Buying with Leverage Sell Acme at end of year 5 for $10 million, repay $3.9 million in debt (including accrued interest), and distribute remaining $6.1 million to equity holders: Cash on cash return = 6.1/2 = 3x return. IRR = 25%. In reality, the result would be better because the buyer would use the target's cash flow to pay down some debt over the 5 years. What if the deal is financed with 100% equity? Cash on cash return = 10/5 = 2x return. IRR = 14.9%. 8

9 Deal Metrics Strategic M&A dwarfs PE acquisition activity: Both number of deals: 106 PE deals of 998 total deals announced in March 2015 And dollar volume: $20.6 billion (PE equity base) of $194 billion total deal value announced in March

10 Valuation Drivers Strategic Buyers Synergies Economies of scale, overhead consolidation, complementary business lines, access to new markets, etc. Earnings accretion PE Buyers Cash Flow Steady revenue and free cash flow, quality earnings, no substantial capex requirements, etc. Cost of debt Management equity rollover approx. 20% 10

11 Owner/Management Perspective Strategic sale is likely to be a complete exit: 100% sale Management may or may not stay on Business typically absorbed into buyer s business PE sale is more like a partnership: 80% sale and 20% equity roll Management more likely to stay on Business remains more entrepreneurial PE firm supplies advice, board guidance, maybe growth capital The business will be sold again the 2nd payday could be the larger 11

12 Deal Process Hard to generalize: PE firms are in the M&A business Strategic buyer may or may not have a dedicated M&A team / experience Factors to consider that could be very different: Diligence process Legal risk allocation indemnities and rep / warranty insurance Financing condition/lender meetings closing risk Time to closing 12

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