Discussion on the Advantages of Mergers and Acquisitions and the Related Process. Peter Manos, Arlington Capital Partners

Transcription

1 Discussion on the Advantages of Mergers and Acquisitions and the Related Process Peter Manos, Arlington Capital Partners 1

2 Background on Arlington Capital Washington, DC based private equity firm Over $1.5 BB of committed capital under management Focused on industries that either sell or are regulated by the government 65% of our holdings are in aerospace, defense, and government services ( ADG ) Examples of our ADG investments: Apogen (Qinetiq) NLX (Rockwell Collins) Thermal Solutions (BeAerospace) CMI (Lockheed) IDS Focused on middle market companies Revenue $50-$500 MM Platform investors Buy and build investors Over 50% of our platform investments have been founder/management recapitalizations CPP AeroMetric Novetta Solutions CompuSearch Software Systems 2

3 Capital Options for Companies Internally Generated Cashflow Debt Senior Subordinate (Mezzanine, high yield, etc.) Equity Public Private 3

4 Strategy Should Drive Decision on Capital/M&A Goals of the shareholders Liquidity Capital preservation Growth Lifecycle of the company Maturity Size Desires of senior executives and employees 4

5 Liquidity in the Marketplace: M&A Activity Has Increased *Houlihan Lokey 2013 study 5

6 Advantages of M&A Greater aggregate value Cash flow valuation as a floor Third party recapitalization and the second bite of the apple (worth more when larger and more diverse) Limitations of dividend based recaps Synergies from other portfolio companies Ability to grow the business quickly Internal investments in capital and people Consolidation of competitors Re-energize the business Spins-offs Struggling (resources) Too small Investments in capital & people Risk Reduction Growth excites managers and employees Pursue larger programs Elimination of personal guarantees Money in the bank ( playing with house money ) Equity ownership for next layer of management Maintain identity and culture of the business 6

7 Negatives of M&A Loss of legal control Less relevant with private equity Performance expectations of buyers Strategics with specific delivery metrics Meeting loan covenants Potential new reporting requirements Bureaucracy associated with larger strategic buyers Preparing for and going through a due diligence process is time consuming Running the business in parallel Managing unwanted rumors 7

8 What are Buyers Looking For? Strong management Large and growing market Franchise value ( defensible position ) Cashflow Good revenue growth Healthy and sustainable margins Low capital expenditure needs Low working capital needs Attractive risk/return profiles 8

9 Positives Valuation Influences Larger size High Margins Geographic diversity Long term agreements Sole source positions Same Store sales growth and new wins Diverse customer and platform base Large backlog IP Scalable systems and management team Negatives Smaller size Low margins Local only One off projects Multiple competitors on same jobs Declining programs Customer or platform concentration Small backlog Undifferentiated product or service offering Inadequate systems and management team 9

10 Preparing for a Sale Prepare audited and reviewed financials for the prior three years Prepare a 3-5 year forecast Upgrade accounting systems to produce financial and operating data timely Fill in missing key management positions or upgrade as necessary Launch your process when you have strong certainty of hitting your current budget Financial misses during a process can hurt valuation Demonstrate at least 2-3 years of growth and profits Clean up any large liabilities and avoid any large business event exposure in the immediate 12 months Hire experienced M&A counsel Either approach directly the logical buyers or hire an advisor Start this process at least one year in advance 10

11 After the Transaction 3 Ways to Create Value for Shareholders EBITDA growth Revenue growth (price and volume) Organic Acquisitions Margin improvement Debt pay down EBITDA growth Working capital management Capital expenditure management Multiple expansion Size Growth Margins Strategic positioning 11

12 After the Transaction What to Expect From a Private Equity Partner Quarterly board meetings Weekly shared ideas Same reporting as the lenders Assistance Recruiting outside board members Recruiting senior executives as necessary Opening doors for new business Cross selling synergies with other portfolio companies Best practice sharing with other portfolio companies Outsourced M&A activity and Strategy Capital for both organic and acquisition growth 12

13 Shareholders goals Culture and vision (fit) Value-add Domain knowledge Identifying the Right Buyer What to look for Business development (growth) Synergies from other portfolio/related companies & network of contacts Best practices Resources People Available capital Track Record Valuation Organic investments Acquisitions 13

14 Summary Shareholders goals should drive choice of capital M&A offers significant advantages Greater aggregate value Capital, advice and synergies to grow rapidly (organic + acquisitions) Re-energize the business Risk Reduction Equity ownership for a broad base of executives 14