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CFO/GC Deep Dive

Closing Reception. Breakfast Sponsor. CFO/GC Deep Dive . National Venture Capital Association Annual Meeting - CFO / GC Deep Dive Analysis of Post-Closing Issues and Inefficiencies Highlights from the SRS|Acquiom Studies. Paul Koenig Managing Director Mark Vogel Managing Director

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CFO/GC Deep Dive

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  1. Closing Reception Breakfast Sponsor CFO/GC Deep Dive

  2. National Venture Capital AssociationAnnual Meeting - CFO/GC Deep DiveAnalysis of Post-Closing Issues and InefficienciesHighlights from the SRS|Acquiom Studies Paul Koenig Managing Director Mark Vogel Managing Director May 13, 2014

  3. Key Points from SRS Claims Study • Claim activity across all deals • Two-thirds (67%) of expired-escrow deals* had material post-closing issues arise • 18% of expired-escrow deals had at least one claim made in the final week of the escrow period • 12% of deals with a claim had at least one claim that resulted in litigation or arbitration • Earnouts • 51% of milestones that have come due have been achieved • Majority of earnout metrics (89%) in non-life sciences deals were financial (revenue, earnings) * “Expired-escrow deals” as used herein includes deals where selling shareholders have no further escrow-based indemnification obligations.

  4. Claim Types and Subject Matter Claim subject matter as % of all claims (~700 claims) Subset: breaches of R&W (~ 400 claims) Data set: claims across all deals (open and completed) * Claims pursuant to a post-closing purchase price adjustment mechanism (e.g. working capital).

  5. Post-Closing Purchase Price Adjustments (“PPAs”) Adjustment direction Key figures • 73%: deals with a PPA mechanism • 46%: deals where the PPA statement was delivered after the contractual deadline • 3%: median PPA claim size, as a percentage of a deal’s total escrow dollars, when buyer-favorable adjustment • The average was 10% of escrow, swayed by a number of large claims • 33%: average PPA claim reduction due to negotiation • The average time to resolve a contested PPA claim was 2.5 months

  6. Claim Sizes Generally Claim size breakdown (median: $140k) Average claim size as % of escrow Data set: claims across all deals (completed and ongoing)

  7. Claim Activity Based on Buyer Type Claim frequency based on buyer type Claim size based on buyer type Data set: claims in deals with expired escrows * Including deals with no claims.

  8. Correlations: Escrow Size and Survival, by Buyer Type Data set: All deals closing in 2010–2013 Escrow size vs. Buyer type Survival vs. Buyer type One standard deviation One standard deviation Average: 16.9 Average: 12.5%

  9. Ultimate Payouts Ultimate payouts of general indemnification escrows Data set: escrows in completed deals * * Excludes escrows set aside for special purposes, e.g., working capital adjustments or known issues.

  10. Target Counsel Conflict Waivers 2014 Deal Terms Study 2012 Deal Terms Study * A provision allowing Seller’s pre-closing counsel to represent the selling shareholders post-closing in matters relating to the acquisition.

  11. Legal Opinions (Non-Tax) of Seller’s Counsel * Includes opinions delivered pursuant to both stand-alone and “closing deliverables” conditions. Opinion required as a condition to closing

  12. Management Carveouts: Frequency and Size Deals including a management carveout Median size as a percentage of transaction value* * Measures size of carveout only, disregarding consideration received by Seller management in respect of equity ownership. “Transaction value” includes escrowed amounts but does not include potential earnout consideration.

  13. Management Carveouts: Frequency and Size Deals including a management carveout (2013) Carveout sizes as % of transaction value* (2013) * Measures size of carveout only, disregarding consideration received by Seller management in respect of equity ownership. “Transaction value” includes escrowed amounts but does not include potential earnout consideration. Equity capital data provided by S&P Capital IQ™. Each point is a deal

  14. Expense Funds Expense fund sizes Expense fund notes Data set: all deals • Median size = $250,000 • Expense fund accounts slightly larger in deals with earnouts • 3% of transaction value for deals without an earnout • 5% of transaction value (not counting the potential value of the earnout) for deals with an earnout • Expense fund usage • 42% used some portion of the expense fund in completed deals • 20% average amount, when used

  15. Correlations: Transaction Value and Escrow Size Transaction value vs. Escrow size (deals over $800MM hidden) Data set: All deals closing in 2010–2013 * Equity capital investment data provided by S&P Capital IQ™. Each point is a deal; linear fit line in blue

  16. Correlations: Transaction Value and Preferred Series Transaction value vs. Preferred series at exit (deals over $600MM hidden) Data set: All deals closing in 2010–2013 Each point is a deal; linear fit line in blue

  17. Correlations: Multiple of Return and Preferred Series Transaction value as multiple of return vs. Preferred series at exit (deals over 30x return hidden) Data set: All deals closing in 2010–2013 * Equity capital investment data provided by S&P Capital IQ™. Each point is a deal; linear fit line in blue

  18. Correlations: Transaction Value and Multiple, by Buyer Type Data set: All deals closing in 2010–2013 Transaction value vs. Buyer type Multiple of return vs. Buyer type * Equity capital investment data provided by S&P Capital IQ™. One standard deviation One standard deviation

  19. M&A Closing Inefficiencies Payments Escrows $17M Paper $5.4 Billion Lost

  20. M&A Inefficiencies – Escrows Poorly Invested $17M Paper Escrows Shouldn’t Escrows Earn More? $5.4 Billion Lost • $225B in M&A escrows • Least efficiently managed assets • Invested for overnight liquidity per terms of escrow agreement • Average escrow interest rate in February 2014 – 0.0306% • Not how escrows behave • Most held for full duration • When claims are made, resolution takes months Opportunity Cost = $22.5M per basis point

  21. A Tough Challenge Without Data and Scale Financial Model Higher Yields with Immediate Liquidity

  22. Enhanced Yields Worth $340 Million Per Year Average Escrow Yield February 2014 0.03% Yields of 0.15% and higher are available

  23. M&A Closing Inefficiencies Payments Escrows $17M Paper $5.4 Billion Lost

  24. M&A Inefficiencies – The Pain of Payments Payments Submission Approved? Check Sent $17M Paper A Costly Trail of People & Paper $4.9 Billion Lost • $1.5 T/Year in Payments • Lots of Paper • Mailing Delays • Highly Manual • Error-Prone • Costly Wires/Holds on Checks • Time-Consuming/Frustrating • Slow and Expensive

  25. On Average, It Takes 6-7 Days to Get Paid Payment Delays Cost M&A Industry~$5 Billion per Year

  26. Everything is Online – Why Not LOTs & M&A Payments? • Return of the stock certificates is not necessary • UCC § 8-207 • Provides extensive protection to an issuer that makes a distribution to a registered owner of a security issued by the issuer, even if the registered owner is no longer the actual owner of the security • The issuer’s right to rely on the registered owner as the person entitled to the “rights” means that the issuer does not have to inquire about who the “real” owner is • Although a protected purchaser ordinarily has superior rights to the security, under UCC § 8-207 the rights of a protected purchaser are subject to the issuer’s rights exclusively to treat the registered owner as the person entitled to a distribution

  27. Moving the Process Online • Fast – Hours not Weeks • Low to no Cost • Improved User Experience • Less Errors • No Paper • No Stock Certificates Email Provides Access to Online System Shareholder Verifies Holdings and Submits Tax Info Shareholder Chooses Payment Method & eSigns $ Electronic Payment Sent

  28. More Intuitive Online Experience Step-by-step instructions guide shareholder Data pre-populated, making process even faster

  29. Reusable W-9s Review, eSign, Done

  30. Click to eSign and Submit – It’s that simple to deliver an LOT Completed LOT ready for E-Signature in minutes

  31. In Summary - $5.4B Found in the M&A Closing Process On future deals, consider new options to increase efficiency and return for your funds • Escrow solutions that yield higher returns with immediate liquidity • Online distribution and submission of LOTs that are quick and easy • Use less paper, save trees and reduce mailing costs • Distributions in hours not days or weeks • Encourage cheaper, more efficient electronic payment methods • Eliminate surety bonds and affidavits of lost certificates

  32. SRS|Acquiom Data Resources • 2013 SRS M&A Post-Closing Claims Study • 2012 SRS Life Sciences M&A Study • 2012 SRS M&A Deal Terms Study • Newsletters Subscribe to receive resources: srsacquiom.com/newsletters Paul Koenig paul.koenig@srsacquiom.com Currently Available Released Today

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