In This Issue
LESSONS LEARNED
What We've Learned: A Note from SRS Managing Directors, Paul Koenig and Mark Vogel
SRS Managing Directors discuss patterns that have emerged and lessons learned over the years as a professional shareholder representative.
EXIT TRENDS
Companies Demonstrate More Financial Value Prior to Exit
Trends analysis reveals that buyers are purchasing more mature companies, which have consumed more rounds of financing and increasingly demonstrated positive EBITDA.
DEAL TERM TRENDS
Post-Closing Process Grows Longer and More Complex
Longer survival periods and more earnouts based on financial metrics indicate the continuance of an ongoing trend over the last decade that the post-closing process continues to grow more complicated.
LESSONS LEARNED
What We've Learned: A Note from SRS Managing Directors, Paul Koenig and Mark Vogel
When we started SRS nearly five years ago, there was a lot we did not know about the business of being a professional shareholder representative. There weren't any experts in this. Sure, some lawyers and investors had worked on post-closing deals here and there, and everybody had war stories, but nobody really understood the whole process or universe of possible issues. Back then, SRS was the best option available because we invented the job of being a professional shareholder representative, but what we were able to offer our customers on our first couple dozen deals is nothing compared to what we offer now.
The simple reality is that until you've been through hundreds of transactions, you still have a lot to learn, and you just don't know what you don't know. The job of being a professional shareholder representative is different. It does not matter how much time you've spent as an M&A attorney or venture capitalist because the issues aren't the same. There are quirky problems related to distributions and obscure tax rules. It takes repeated experience to figure out how best to work with buyers and escrow agents. After you've served as a representative hundreds of times, patterns start to emerge. People new to the business or doing this as a volunteer are learning on the fly, and there is a higher likelihood of error.
SRS is now in the fortunate position to have far more experience than anyone else serving as a professional shareholder representative. While being engaged alone does not automatically equate to having experience doing the job (because the actual work comes later), we serve on over 250 transactions and have seen scores of escrows through to final releases. On those transactions, we have represented over 30,000 shareholders, and have handled over 200 indemnification claims, 100 working capital claims, 6000 customer support inquiries, 600 distributions and more than 50 earnouts. SRS has assembled an amazing team of over 30 full-time experts devoted solely to the job of being a shareholder representative, because no one person could possibly be good at all of it. We have also invested hundreds of thousands of dollars in technology and now have a system, SRS ComPort™, that is far more sophisticated than anything the marketplace has ever seen for shareholder representation.
This breadth of experience has allowed us to put together studies of the aggregated terms of the transactions on which we serve. The M&A community has told us that they find this information highly valuable and relevant to understanding their transactions. Today, SRS is releasing the latest version of the 2011 SRS M&A Deal Terms Study. We welcome any comments or feedback you may have about anything we could do to make this study more valuable going forward.
We appreciate all of you who have supported us over the years. We look forward to continuing to work with you on future transactions.
EXIT TRENDS
Companies Demonstrate More Financial Value Prior to Exit
The 2011 SRS M&A Deal Terms Study looks at multi-year trends for the first time. Trends analysis reveals that buyers are purchasing more mature companies, which have consumed more rounds of financing and increasingly demonstrated positive EBITDA. This may be the result of the closure of IPO and M&A markets during the preceding period, or may indicate that buyers were especially risk-averse in the recent uncertain economic times. These trends indicate that there has been, and likely continues to be, a backlog of acquisition targets.
As M&A activity rebounded in 2010, the percentage of companies with positive EBITDA increased substantially over the preceding years. The number of companies with positive EBITDA remains high in 2011 (as shown in the graph below). This could be driven by several factors, including such companies being more efficient, an ability of buyers to be more selective in targeting companies with proven financial track records, and the failure of many companies that were not able to drive profitability to survive the recent economic downturn.
Through the same period, there has been an increase in the average number of financing rounds by time of exit (as shown in the graph below). This is likely driven by investors having to fund companies longer than they were anticipating due to the economic downturn. It seems reasonable to assume that during the downturn many portfolio companies had depressed revenue and needed more capital. At the same time, there were fewer exit opportunities, so promising companies had to be supported for longer periods by their investors.
The good news for both buyers and sellers is that many emerging companies have been able to achieve revenue and profitability in spite of the economic climate, which demonstrates the value creation of venture and private equity-backed companies. While assessing trends across M&A exits in aggregate can be challenging because results tend to be bifurcated between distressed sales and aggressively sought after deals, this type of analysis can be helpful as investors assess their current portfolios.
DEAL TERMS TRENDS
Post-Closing Process Grows Longer and More Complex
The overall M&A exit market has rebounded, but the deal doesn't end at closing. The 2011 SRS M&A Deal Terms Study assesses a comprehensive set of key deal terms, including those that have the greatest impact on post-closing consideration, such as escrows and earnouts.
The average survival period, generally the time period after closing in which the buyer may make a claim against the selling shareholders for a breach of most representations and warranties, has increased steadily from 2009-2011 (as shown in the graph below). This seems to indicate a continuance of an ongoing trend over the last decade that the post-closing process continues to grow longer and more complicated. SRS data shows that many claims are brought towards the end of the survival period as buyers want to resolve issues while there is an escrow or holdback in place. While a longer survival period does not mean that there will be more claims, longer periods clearly present a disadvantage for sellers because it negatively impacts IRRs and a portion of deal consideration remains at risk well into the future.
The continued prevalence of earnouts during this period is also an indicator of increased complexity. When earnouts were included, the ratio of the earnout to closing payment ranged from 69%-93% on average for deals from 2009-2011. These mechanisms were frequently used with sales of life sciences companies, but are also present in other industries, which typically used financial metrics as milestones. In fact, more than half of all earnouts include revenue-based metrics (as shown in the graph below).
The use of earnings/EBITDA as an earnout metric increased nearly five-fold compared to the 2010 SRS Study. Earnouts have always presented a heightened risk of litigation and can present unpredictable challenges because both buyers and sellers have difficulty in trying to predict how a company will best operate after an acquisition.
The full 2011 SRS M&A Deal Terms Study is available here.
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Just Released
2011 SRS M&A Deal Terms Study
Download the Full Study
SRS Deal Terms Study Announcement
SRS Deal Terms Study Reveals New M&A Benchmarks and Trends
Multi-year trends indicate acquirers are targeting more mature companies that successfully navigated the downturn
Read Press Release
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About SRS
SRS | Shareholder Representative Services is the leading global expert in professionally managing the post-closing process to safeguard selling shareholders' interests in private company M&A transactions. On over 250 deals valued in excess of $25 billion in aggregate, SRS has represented more than 400 venture capital and private equity firms and over 30,000 shareholders in 44 countries. No one has as much knowledge and experience in serving as a shareholder representative and navigating the issues that arise post-closing than SRS.
For more information, visit www.shareholderrep.com
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