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The Current Technology M&A and Capital Market Environment

CONFIDENTIAL DRAFT. NEW YORK SILICON VALLEY BOSTON LONDON. The Current Technology M&A and Capital Market Environment. Prepared for TeleSoft Partners Annual Venture Capital EcoSystem Meeting. Robert Abbe, Managing Director Broadview International October 29, 2004. BROADVIEW INTERNATIONAL

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The Current Technology M&A and Capital Market Environment

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  1. CONFIDENTIAL DRAFT NEW YORK SILICON VALLEY BOSTON LONDON The Current Technology M&A and Capital Market Environment Prepared for TeleSoft Partners Annual Venture Capital EcoSystem Meeting Robert Abbe, Managing Director Broadview International October 29, 2004 BROADVIEW INTERNATIONAL A DIVISION OF JEFFERIES & COMPANY, INC

  2. The Changing Landscape For Emerging Growth Technology Companies • 2004 forecast IT spending up 3.9%…but a $2.1 trillion market1 • NASDAQ up slightly over last twelve months • IPO market thawed but “bar” remains very high • M&A continues to rebound…sector specific • Regulatory / structural changes driving rationalization of US public companies IT Companies Must Adapt Their Exit Strategies To The New Environment 1 Source: Gartner Dataquest Global Market Sizing – January 2004

  3. Technology IPO Market Trends Software Other 23% 27% Computing Equipment IT & Network Services 4% 15% Network Infrastructure 10% Semiconductors Technology IPO Backlog Has Grown Dramatically 21% Amount Filed Amount Offered ($ Billions) • Despite a stable equity market and lots of liquidity, relatively few companies have been able to go public • Disconnect between what Wall Street says it can do and what it can do (resulting in a growing backlog) LTM IPO Issuances by Subsector1 As of September 24, 2004. Source: Jefferies Broadview capital markets. Technology defined per SDC Platinum high technology industry classification

  4. US IPO v. Follow-On Technology Market Stats 100% 50 $9,000 43 45 $8,000 80% 40 $7,000 35 $6,000 30 29 60% 30 $5,000 Amount Raised ($millions) Number of Deals 25 21 $4,000 40% 20 16 $3,000 14 15 $2,000 10 20% 7 4 4 $1,000 5 2 - $0 0% Q3 '02 Q4 '02 Q1 '03 Q2 '03 Q3 '03 Q4 '03 Q1 '04 Q2 '04 Q3 '04 Q4 '04 Below Filing Range Above Filing Range QUARTERLY IPO ISSUANCES IPO PRICING VS. FILING RANGE 100% 25 $7,000 21 $6,000 80% 20 $5,000 60% 15 $4,000 Amount Raised (millions) 12 Number of Deals 10 $3,000 40% 9 10 7 $2,000 20% 4 5 3 $1,000 2 - - 0% - $0 Aug-04 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Q3 '02 Q4 '02 Q1 '03 Q2 '03 Q3 '03 Q4 '03 Q1 '04 Q2 '04 Q3 '04 Q4 '04 Below Filing Range Within Filing Range Above Filing Range QUARTERLY FOLLOW-ON ISSUANCES FOLLOW-ON PRICING VS. FILING RANGE Aug-04 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 As of October 18, 2004 Source: Jefferies Broadview capital market. Technology defined per SDC Platinum high technology industry classification

  5. % of Companies with Revenue < $25MM 11% 14% % of Companies Unprofitable 11% 11% % of Companies Trading Below IPO 53% 68% The “Bar” for Tech IPOs Remains High in 2004, But The Quality And Performance Is Suspect TTM TTM % Change Offering TTM Revenue Quarters of EBIT 1 Amount Revenue Growth Profitability Margin From IPO Q3-Q4 2003 Median Performance $85,000 $72,493 36.3% 6 4.5% 0.4% 2004 YTD Median Performance $86,000 $87,357 55.7% 5 7.5% 2.2% 1 Q3-Q4 2003 vs. 2004 YTD IPO Performance 2003 2004 1 As of 09/17/04. Source: Broadview’s IPO Database / Hoover’s IPO Central / Capital IQ

  6. The Current IT M&A EnvironmentHas Returned To 1996 Levels M&A Activity 1992 – Q3 2004 Number Of Transactions North America - IT, Media, Communications 4,000 $800 3,801 Number of Deals Total Consideration ($B) 3,763 741.7 3,500 $700 2,994 3,000 $600 2,844 544.3 2,500 $500 2,343 2,327 2,156 2,079 1,901 2,000 $400 1621 369.0 1,593 1,500 $300 920 1,000 $200 831 195.7 583 116.3 139.6 126.9 500 $100 95.7 75.9 74.3 48.1 36.8 33.1 0 $0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Q3 2004 Source: Broadview's Global Mergers & Acquisitions database

  7. 2001 2002 2003 2004 The Number Of Transactions Above $50 Million Remains Stable 78 74 68 57 40 53 42 44 43 55 66 71 62 60 51 >$500MM $250MM - $500MM $100MM - $250MM $50MM - $100MM North American M&A Transactions >$50MM Source: Broadview’s Global Mergers and Acquisitions Database. Data includes announced North American transactions with transaction value greater than $50MM. 1 Data compiled based on deals where the value was known.

  8. 50 of These Companies Were Venture Capital-Backed 10 of These Companies Were Venture Capital-Backed 15 of These Companies Were Venture Capital-Backed The Venture Capital Industry Has Seen A Reduction In Higher Value Private Company Exits but some recovery in 2004 Middle Market Transactions Will Drive Venture Capital Returns In The Current Environment 2000 2002 2003 H1 2004 >$20MM 563 172 138 97 >$50MM 397 84 80 51 >$150MM 193 30 23 14 39 of These Companies Were Venture Capital-Backed Source: Broadview's Global Mergers & Acquisitions database. North American private seller transactions.

  9. Trading Values # Companies 2 % of Total <Cash 41 1% <$100m 1,136 34% <$250m 1,882 56% Public Company Rationalization Continues to Be a Major Driver of Technology M&A Number Of NASDAQ Listed Public Companies1Mar 2000 – Sep 2004 56% of NASDAQ Listed Public Companies Have No Research Coverage3 CHANGE ’00-’04 MAR 2000 DEC 2000 DEC 2001 DEC 2002 DEC 2003 SEP 2004 5,181 5,000 (1,838) 3,800 (35%) 3,500 3,300 3,343 1 Source: NASDAQ 2 Source: CapitalIQ 3 Source: Thomson Financial First Call

  10. Late Stage Private Equity and Buyout Market is an Increasingly Important Factor Secular Changes Implications • Large private equity capital pools focused on technology • Hedge funds entering the private market • Acceptance of sponsors selling companies to other sponsors • Historically low borrowing costs • Sarbanes-Oxley and lack of research and trading support hollowing out low end of public market • Reduced required rate of return / IRR driving pricing higher • Sponsors more comfortable about ultimate exit as other sponsors provide safety net • Companies valued between $100 and $300m have an attractive alternative to an IPO

  11. The Quest For Growth In EARNINGS Is Driving Even “Strategic” M&A • Higher gross margins • Leveraging sales/channel costs • Responding to customers rationalizing vendors • Access to new/larger markets • Make vs. Buy (avoiding P&L hit)

  12. Most Buyers Are Seeking Acquisitions At A Later Stage Of Company Development STAGE VALUE/ PROOF 1 Technical Feasibility Product is possible to do Technology Acquisition 2 Product does what it is supposed to do Product Functionality 3 Customer Acceptance Customers care Size Of Addressable Market Drives Valuation Product Acquisition 4 Customers are willing to pay a rational economic price Economic Model Works 5 Business Model Works Company can be profitable Business Acquisition 6 Increasingly profitable growthis possible Scalability Proven

  13. The M&A Environment: The Challenges • Proven business model (not just technology) a requirement for most buyers • Few Buyers can stomach dilution, pursue early stages companies (Cisco, Symantec, etc.) • Bias towards partnership versus M&A • Mid-cap buyers only beginning to consider M&A again • Valuation disconnect and preference structures

  14. The M&A Environment: The Good News • Convergence, open standards are driving renewed focus on growth verses consolidation (in some segments) • Positive Wall Street reaction to recent M&A • Computer Associates / Netegrity • Verisign / Jamba • Juniper / Netscreen • Many large and mid caps substantially reduced R&D as they right sized their businesses • Customers seek complete solutions from fewer vendors • Lines between software and hardware are blurring • Many software companies open to selling standards based appliances • Systems companies increasingly look like software and services companies

  15. Drive to profitability first • Develop visibility and partnerships with marketplace gorillas • Don’t fight industry rationalization … like fighting the rising/falling tide Young Company CEOs The Resulting “New Rules of the Road” • Restructure liquidation preferences NOW • Target IRR on the first $75MM of enterprise value … the best deals will use <$20MM total investment VCs

  16. Recent M&A Activity Reflects Access To Today’s Dominant Technology Firms has been acquired by has agreed to be acquired by has been acquired by has been acquired by has divested has divested its XGS enterprise technology platform and the associated software licenses to has sold substantially all of OMR Systems Corporation andOMR Systems International, Ltd. has been acquired by its operating assets to to $445,000,000 $123,000,000 $160,000,000 $242,000,000 Hewlett-Packard Company Pending September 2004 August 2004 July 2004 $28,000,000 $497,000,000 $20,000,000 June 2004 September 2003 June 2004 April 2004 has been acquired by has been acquired by has been acquired by has been acquired by has been acquired by €475,000,000 April 2004 Confidential $122,000,000 Confidential $120,000,000 January 2004 August 2003 March 2003 May 2003 has been acquired by has sold its virtualmachine assets to $150,000,000 Confidential April 2003 February 2003

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