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					April 2, 2003   Leveraged Buyouts
                Building Shareholder Value
                Through Capital Structure

                Scot Sedlacek

                                  Pptname 2 01/07/98


    Market Environment for LBOs

    LBO Fundamentals

    Venture Investing vs. LBOs
Market Environment
for LBOs
                                                          Pptname 4 01/07/98

Nearly Three Years From The Peak, The Private
Equity Markets Remain In Transition

      Technology recession

      Over funding in numerous segments

      Low appetite exists for innovative markets

      Valuation collapse

      IPO market disappearance

      Corporate M&A retrenchment

       The Current Business Cycle Has Radically Changed
            The Landscape For Private Equity Firms
                                                                                                                         Pptname 5 01/07/98

  The Current Business Cycle Has Driven Private
  Equity Returns To All-Time Lows
                                          Cumulative Weighted Average IRRs
       Venture Capital

23.6                                                                                               23.2
                                 21.4               20.6

                                        16.3 15.9
                                                           15.2                14.6
             11.8         12.1                                          12.2

                    5.5                                           4.8


  1993         1994         1995          1996        1997         1998          1999         2000        -1.9 2001          2002
                                                        Pptname 6 01/07/98

The Current Market Environment Favors
Buyouts And Late Stage Investing
      Rationalization of the Public Markets
        Surge in micro caps
        Regulatory Issues (e.g. Sarbanes-Oxley)

      Massive Corporate Restructuring
        Increase in divestitures/asset sales
        Availability of seasoned executive management

      High Availability of Capital
        Inflow of equity capital into buyout funds
        Improvement of the debt markets

      Limited Shareholder Liquidity Options
        IPO market closed
        Precipitous decline of strategic M&A
LBO Interest Remains Strong Given The
Current Transaction Profile
                          Financial Buyouts
 1,681                      $230                              8.4



  2000    2001    2002      2000    2001    2002      2000    2001    2002

 Number of Transactions    Average Deal Size ($MM)   Median EBITDA Multiple
LBO Fundamentals
                                                                                 Pptname 9 01/07/98

Characteristics Of LBO Candidates
Financial Characteristics                Operating Characteristics
 History of demonstrated                 Strong management team willing to
 profitability and ability to maintain   take the personal risks associated with
 above average profit margins (e.g.      an LBO
 strong EBITDA)
                                         Mature business with strong brand and
 Repeatable and predictable cash         market position (e.g. competitive
 flows to service debt                   insulation)
 Low current debt; leverageable          Products are typically not subject to
 asset base                              rapid technological obsolescence
 Excess cash or marketable               Diversified customers base that
 securities                              generate recurring revenue through
                                         long-term contracts/maintenance
                                         Company is perceived to be a low-cost
                                         producer with modern capital
                                         Turnarounds and “messy” situations
                                         will rely more heavily on asset-based
                                         lending and equity financing
                                                                                   Pptname 10 01/07/98

Typical LBO Structure
               Representative                        Representative
              Capital Structure                     Equity Ownership
   Typical         100%                                   100%          Typical
   Range:                                                               Range:
                                                       “Sweat Equity”
                 Common Equity                                          8 - 15%
    Equity       Preferred Stock                                         0 - 5%
   20 - 50%
                                         Equity         Former Owner    5 - 30%
               Junior Subordinated      Provided
              debt with repayment in       by
                    8-12 years         Management

               Senior Subordinated
              debt with repayment in                       Equity
                    8-12 years
     Debt                                               Provided by
                                                         Financial      50 - 85%
   50 - 80%

                 Bank debt with
               repayment over 5-8
                                                                   Pptname 11 01/07/98

 Capital Structure Plays A Critical Role In LBO
 Acquisition Pricing

Expected Growth      On average, senior lenders (e.g. banks and
 Rate, Operating     institutions) will lend 2.0-2.5x trailing twelve
   Margin and        months EBITDA at 4-5% spread over LIBOR
Capital Investment
Requirements are     Subordinated debt providers will lend an
Important Pricing    additional 1.0-1.5x trailing twelve months
    Variables        EBITDA at 12-13% coupon with equity
                     kickers that provide 17-20% total return
                     Management typically receives 8%-15% in
                     “sweat equity” in options with 4-5 year
                     Given a 30-35% IRR target on equity
                     investment over 5 years, acquisition pricing
                     will typically range between 5x-6x trailing
                     twelve months EBITDA
                                                                 Pptname 12 01/07/98

LBO Value Creation Can Be Derived From
Several Sources
             Operating Improvement
               Accelerated revenue growth
               Enhanced cost efficiencies

             Financial Leverage
               Debt reduction through operating cash flow
               Tax deductions on interest payments

             Multiple Expansion
               Buying at the bottom of a value cycle
               Accelerated earnings growth

             Multiple Arbitrage
               Monetizing undervalued assets
               Below market acquisitions
               “Critical Mass” premium (e.g. rollups/acquisitions)
                                                                                                   Pptname 13 01/07/98

 Case Study: Recapitalization For An
 Eventual IPO
                        Situation Analysis
                        E-TEK was a private company based in San Jose, California where principals
                        owned 100% of the equity
                        E-TEK developed passive components used in fiber-optic networks to route and
                        guide light
                        TTM revenues of approximately $72 million with EBITDA margin of nearly 40%
                        Summit invested $120 million in E-TEK in July 1997 for 60% of the equity pre-
                        option dilution; approximately 7.5x TTM EBITDA

  has completed a
recapitalization with   Strategic Rationale
                        Founders wanted partial liquidity for themselves, upside of equity ownership for
                        their employees and assistance in scaling the business
                        Summit rebuilt the management team, drove significant operational/reporting
     July 1997          improvements, provided acquisition assistance, recruited an outside board and
                        led the IPO process

                        Deal Parameters
                        E-TEK went public in December 1998 at a valuation of $1.5 billion1
                        E-TEK was eventually acquired in January 2000 by JDS Uniphase for $15.0
                        billion in a stock merger – 63x price/revenue multiple
Venture Investing vs. LBOs
                                                                                                                             Pptname 15 01/07/98

 Venture Investors And Buyout Funds Typically
 Target Different Points In The Market Lifecycle
                                                                         Leaders Begin to Emerge
                                                                         Market Validated With As
                                                                         Least One or Two IPOs
                                                                         Heavy Capital
 Lifecycles Play

                          Market Penetration
                                                                         Requirements                           Entrenched Market
A Critical Role In                                                       Product Diversification                Leaders
Determining The                                                          to Leverage Channel                    Distribution/
   Appropriate                                                           Investment                             Customer Retention
    Investing                                  Disruptive                                                       Key Differentiators
     Strategy                                  Technology                                                       Market Share
                                               Private Company                                                  Expansion Drives
                                               Startups                                                         Scale Economies
                                               Build Out

                                               Emerging Stage            High-Growth Stage                    Mature Stage

       Market/Business Risk                                 High                                          Low
                                                    Seed Investment,                                  Going Private,
             Private Equity
             Transactions                         Technology Spinouts,                             Divestitures, PIPEs,
                                                     Growth Capital                                 Recaps, Rollups
                                                                    Pptname 16 01/07/98

The Typical Company Profile Reflects Major
Differences In The Risk/Reward Equation
  Characteristics           Early Stage           Buyouts

        Market                Nascent               Niche

      Technology             Disruptive            Mature

       Customer            Early Adopter           Follower

     Management              Visionary            Seasoned

    Revenue Model            Unproven             Recurring

  Capital Consumption          High                  Low

 Competitive Advantage   R&D; Manufacturing   Distribution; Scale
Comparison Of Investment Characteristics

 Characteristics         Early Stage               Buyouts

    Target IRR             50% Plus               25% to 35%

Shareholder Position       Minority                 Control

Management Control     Personal Influence      Capital Structure

 Valuation Method        Comparables              Cash Flow

   Value Creation         Innovation               Arbitrage

  Time to Liquidity       3 - 5 Years             4 – 7 Years

Primary Exit Options    IPO, Acquisition    IPO, Acquisition, Recap
                                                          Pptname 18 01/07/98

      Comparison Of Value Add Requirements
      Based On Investment Lifecycle
Low        High

                    Skill Set         Venture   Buyouts




                  Sales & Marketing


                                                                  Pptname 19 01/07/98

Buyout Funds Will Need To Design Their
Strategies To Meet The Challenge Of An
Increasingly Competitive Market
                  Provide greater value add
Characteristics    —   Strategic advice/market intelligence
That Will Drive
  Superior         —   Operational skills to complement finance
                   —   Business development assistance
                   —   Exit assistance
                  Increase scale of sourcing, qualification and
                  execution processes
                   —   Global awareness and reach
                   —   Deeper industry and market knowledge
                   —   Increased responsiveness under shorter
                       evaluation timeframes
                  Willingness to embrace a higher level of risk

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