The Return of M&A
An Outlook For The Venture Industry
June 2009 Montgomery & Co.
Introduction
• M&A markets have historically rebounded quickly and top quality companies are acquired
first and at the highest multiples. • Venture capital firms need to shift their focus from “the triage of the weak” to how to “monetize the strong” as the recovery in M&A becomes apparent. • We currently see a demand for companies with: • • • • • An established revenue / customer base Proprietary technology Profitable and receptive to fair valuation metrics Unique and defensible market position Strong management teams
• Well‐timed and well‐executed M&A will be vital to the success of the venture industry. • Montgomery & Co. is in the business of generating attractive exit opportunities for portfolio companies. We would like to share this analysis with you and expand our dialogue.
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Summary of the Montgomery & Co. Outlook
1) There were over 7,000 private and independent venture‐backed companies at the end of
2008. There are 800 independent companies with venture investment dating 10 years or more. This level would double within 18 months unless M&A accelerates.
2) We expect pressure on venture firms to achieve realizations combined with consolidation
of the growth sectors to drive M&A activity to 50% above historic levels by 2011.
3) We expect an increase in M&A as strategics accelerate their acquisition activity. 4) We project the median consideration for M&A to recover, but remain below recent levels 5) The total consideration of venture‐backed M&A will reach $60 billion per annum by 2013. 6) “IPO ready” companies have been delayed by the economic downturn, but we expect a
recovery in the IPO market—which will also boost M&A activity.
7) Investment returns for venture investors will remain largely driven by M&A exits.
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1. There were over 7,000 private and independent venture‐backed companies at the end of 2008. There are 800 independent companies with venture investment dating 10 years or more. This level would double within 18 months unless M&A accelerates.
1200
1000
Independent Venture-Backed Companies
800
600 1053 877 400 748 769 918
793 companies aged 10 years or greater at YE 2008
579 442 433 427
200
399
177 77 0 1990 1992 1993 1994 1995 1996 1997 51 59 102 124
203
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Year of Initial Venture Capital Financing Year of Initial Financing
Inde pe nde nt Ve nture -Backe d Companie s Ne t of Closure s, M&A, and IPO s (as of 12/31/08)
Source: Ernst & Young Venture Insights
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2. We expect pressure on venture firms to achieve realizations combined with consolidation of the growth sectors to drive M&A activity to 50% above historic levels by 2011.
800 750 8020 7867 700 7438 8029 7888 750 7751 8000 9000
7000 600 6520 600
500 M&A Transactions 468 4590 400
5467 473 457 450 5000
4000 325 300 3000 225 200 2000
100
1000
Actual
0 2005 2006 2007 2008 2009 2010
Projected
0 2011 2012 2013
M&A Transactions
Inde pe nde nt VC -Backe d Private C ompanie s
Independent VC-Backed Private Companies
6000
Source: Ernst & Young Venture Insights (Actual) / Montgomery & Co. Analysis (Projected)
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3. We expect an increase in M&A as strategics accelerate their acquisition activity.
The Top Buyers Are Consolidators of Venture‐Backed Companies
60%
M&A Projected to Increase
50%
48%
Other Buyers: 1607 Transactions Top 6 Buyers: 596 Transactions
40% 33% 30%
20%
19%
10%
0% Increase No Change Decrease
From 2004 – 2008, there were 2203 venture‐backed M&A transactions. The top 6 buyers in each of the Media, Technology, and Healthcare industries made 596 acquisitions combined during this period.
A survey of tech & media corporate development officers forecast an expected change in corporate M&A activity in 2009.
Source: Capital IQ & Ernst & Young Venture Insights (Buyers) / 451 Group (Survey)
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4. We project the median consideration for M&A to recover, but remain below recent levels.
800 100
90 750 700 750 90
80 600 600 70 Median M&A Deal Consideration ($M)
500 60 M&A Transactions 468 400 44 473 457 48 45 40 40 300 325 30 30 200 225 20 20 45 450 50 50
100 10
Actual
0 2005 2006 2007 2008 2009 2010
Projected
0 2011 2012 2013
M&A Transactions
Me dian M&A De al C onside ration ($M)
Source: Ernst & Young Venture Insights (Actual) / Montgomery & Co. Analysis (Projected)
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5. The total consideration of venture‐backed M&A will reach $60 billion per annum by 2013.
800 70
750 700 56
750 60 60
600
50 600 50
500 M&A Transactions 473 457 33 30 27 300 325 34 450
42 40 Total M&A Volume ($B)
468 400
30
20 200 225
11 10 100
Actual
0 2005 2006 2007 2008 2009 2010
Projected
0 2011 2012 2013
M&A Transactions
Total M&A Volume ($B)
Source: Ernst & Young Venture Insights (Actual) / Montgomery & Co. Analysis (Projected)
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6. “IPO ready” companies have been delayed by the economic downturn, but we expect a recovery in the IPO market—which will also boost M&A activity.
M&A Transactions 800 269 700 250 600 600 IPO Transactions 300
Actual
265
Projected
750
750
200 500 M&A Transactions 465 411 391 400 138 307 300 232 78 200 57 41 100 29 22 6 0 1997
% of Total Exits From M&A 63%
480
468
473
457
450 IPO Transactions
363 325
150
253
94 86 225
100
56 50 40 40 40 50
10 0
1998
76%
1999
53%
2000
64%
2001
91%
2002
95%
2003
93%
2004
84%
2005
89%
2006
89%
2007
84%
2008
98%
2009
96%
2010
90%
2011
94%
2012
95%
2013
95%
Source: Ernst & Young Venture Insights/ NVCA Yearbook (Actual) Montgomery & Co. Analysis (Projected)
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7. Investment returns for venture investors will remain largely driven by M&A exits.
M&A Total Volume ($B) 70 IPO Pre -Mone y Marke t C apitaliz ation ($B)
60 60 56
50.3 50
49.9
43.3 42 Total Volume ($B) 40
32.7 30.2 30 24 23.5 27
20 14 12.1 10 6.3
17
16 14.4 11 14.4
16
Actual
0 2003 2004 2005 2006 2007
2.2
3.2
Projected
2009 2010 2011 2012 2013
2008
% of Total Proceeds From M&A Exits
69%
48%
71%
66%
54%
91%
78%
63%
74%
80%
79%
Source: Ernst & Young Venture Insights/ NVCA Yearbook (Actual) Montgomery & Co. Analysis (Projected)
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Comments on Methodology
• Providing liquidity to the U.S. venture capital industry remains a major challenge as
highlighted in the recent National Venture Capital Association report, “NVCA 4‐Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry.”
• We developed a perspective of the outlook for 2009 – 2013 for venture‐backed mergers and
acquisitions after an extensive analysis of the remaining companies, likely IPO levels, likely attrition, the aging of portfolio companies, and the financial health and acquisition appetite of key buyers.
• We utilized historical data and conservative assumptions in our model, which include: • New company formation – 850 new companies assume financed every year
(historical levels)
• Projected M&A exits (based on our experience) • Projected IPO exits (based on current filings and industry interviews) • 2.5% annual attrition rate due to shut downs and failures. Historical levels are well
below this, however newer business failure will increase as lenders continue to pull credit lines due to covenant default, forcing companies to file for bankruptcy.
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Conclusions
• The M&A market weakened significantly in FY 08 and Q1 09. • 56 VC‐backed companies were sold in Q1 09 – the lowest total since 1999. • IT was hit the hardest with under 40 companies sold—also a 10‐year low. • However recently there have been encouraging signs from leading public technology
companies (Oracle’s acquisition of Sun, Cisco’s acquisition of Pure Digital).
• The conditions that facilitate an increase in venture‐backed M&A are re‐emerging: • Normalization of valuations • Strong cash position and low cost of capital for the buyers • Need for the strong cash flowing buyers to redeploy capital for growth • Competition for transactions • The next five years will witness an unprecedented level of M&A. • The venture firms who are most strategic in their approach will be the most successful.
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Please Contact Our Senior Bankers with Questions, Comments, or Follow‐up
Media
Michael Montgomery 310.260.6941 michael@monty.com James Min 310.455.6966 jmin@monty.com Mark Wasserberger 646.274.4970 mwasserberger@monty.com Rajat Sharma 646.274.4973 rsharma@monty.com
Technology
John Roediger 415.962.4558 jroediger@monty.com Eric Wagner 415.962.4551 ewagner@monty.com Adrian Fadrhonc 415.962.4593 afadrhonc@monty.com Stewart Hindley 310.260.6922 shindley@monty.com Joe Morgan 415.962.4566 jmorgan@monty.com
Healthcare
David Parrot 415.962.4541 dparrot@monty.com Jason Yip 415.318.7066 jyip@monty.com Pritesh Shah 415.962.4549 pshah@monty.com
Private Capital
Sherri Williams 646.274.4967 swilliams@monty.com
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