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Sophisticated investors always think about exits before they invest. “Does the company have the potential to go public or become an attractive acquisition target?” If not, they’d take their money elsewhere.
Going public or IPO means the company raises money by offering stocks to the general public – you know, those stocks that anyone can buy at the public stock exchange. This allows private shareholders (e.g. founders and angel investors) to eventually cash out by selling their shares in the public market, explains one veteran angel investor.
Mergers and acquisitions or M&A, on the other hand, means the company
In angel investing, IPOs are far and few between. A vast majority of angel investors exit their early seed investments via M&As.
Ron Conway, the most influential early stage investor in Silicon Valley, said he won’t invest if he can’t think of five potential acquirers for a company within 10 seconds.
Conway is of course legendary. But you get the idea: Think about exits before you invest. That’s how you make money.
According to exit strategist Basil Peters, an increasing number of young tech startups (two to three years old) are getting snapped up by big companies to increase competitive edge. Most of the M&A deals are done in the US $10 to US $40 million range, and the sweet spot is about US $30 million. Once the selling price exceeds that sweet spot, it’d become more difficult for the corporation’s M&A department to get approval for the acquisition.
With a record-breaking, all-time quarterly high of 111 startup M&A deals completed in the first quarter of 2010, M&A is the new black in the startup investment community. We did hear Paris Hilton say “That’s Hot.”
To learn more about the sell-side M&A process, we once again caught up with John J. Maalouf of Maalouf Ashford & Talbot to talk about small M&A transactions; specifically, M&A deals that are under US $50 million.
John J. Maalouf, known as the “Idea’s Man,” is a globally recognized attorney who’s been ranked by the United States Lawyer Rankings as one of the “Nation’s Top 10 International Trade & Finance Lawyers” five years in a row from 2006 to 2010.
Maalouf Ashford & Talbot regularly advises clients in the areas of M&As, IPOs, venture capital, private placements, and private equity investments, among others. They’ve recently opened their sixth office in Riyadh, Saudi Arabia. The firm also has offices in Boston, Hong Kong, London, New York City, and Shanghai.
* Edited interview
VH: What’s the typical sell-side M&A process? Let’s say the name of the selling company is called AppleSoft, whose valuation is under US $50 million.
JM:
1. Select M&A Advisors
AppleSoft needs to select experienced M&A advisors, such as an investment bank and a law firm. If AppleSoft selects a law firm first, the firm can help the company choose the right investment bank.
AppleSoft should look for advisors who specialize or have the expertise in representing companies of similar size. Otherwise, small transactions like this will be passed on to junior associates and won’t receive the senior level attention that it deserves.
2. Collect Documentation and Prepare Marketing Materials
This step involves
3. Shop for Potential Buyers
Next, the investment bank will look for and contact potential buyers. These generally include: (i) direct competitors; (ii) companies that are in the same industry as AppleSoft but operate in a different geographic region; (iii) companies that are in a related industry and where potential synergies exist; and (iv) firms that exist mainly to buy companies, help them to grow, and then exit.
As an example to (i), one of our clients, which we’ve represented since the company was a startup three years ago, has just acquired a major competitor and is now worth over US $200 million.
Potential buyers are then vetted based on their interest level and financial ability. Shortlisted potential acquirers then submit a non-binding Letter of Intent, which spells out the proposed deal in broad terms.
AppleSoft compares the various offers and selects a single potential buyer.
4. Start Due Diligence
Enters due diligence, which is a lengthy and sometimes arduous process. It’s during this phase that many deals fall apart. Particular attention must be given to ensure that all documentation is in order and is in conformity with the information provided in the Information Memorandum.
5. Draft Contracts
The drafting phase is where actual contracts are negotiated and written. No two deals are exactly the same. It’s essential that the contracts are drafted by an experienced finance lawyer. Otherwise, AppleSoft may end up with significantly less than what they’ve bargained for.
6. Close the Deal
Once the contracts have been properly drafted, all that remains is the actual closing where the documents are signed and the consideration (either cash or stock) is delivered to AppleSoft.
Stay tuned next week as Maalouf talks about the roles lawyers play in the M&A process; how to prevent deals from falling apart; the purpose of Special Purpose Acquisition Corporations (SPAC); and more.
* For series, references are published in the last installment of the series.
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