Selling your tech company? Forget DIY and hire an Industry Specific Investment Banker.
It’s an exciting time to work in TMT Investment Banking.
Immersive technologies, the expansion of blockchain models and the arrival of 5G are all expected to drive an increase in Mergers and Acquisitions in the Telecom, Media and Tech (TMT) industries over the coming months and years.
Consumer connectivity and user acquisition are key factors in this space, as demonstrated by the recent $7.4 billion acquisition of ARRIS International PLC by Commscope Inc., said to benefit the new company from key industry trends like network convergence, fiber and mobility everywhere, 5G, Internet of Things and rapidly changing network and technology architectures.
Where there is an opportunity to sell, an industry specific investment banker will be the key in navigating the challenges related to M&As with an edge in sector insights and a competitive advantage from having an overview of your company within the business context.
The investment banker takes on the key role of target representation, advising on potential buyers after a full valuation and a recommendation of tactics to navigate the challenges and dynamics of M&As which entail several key legal, business, human resources, intellectual property, and financial issues.
To successfully manage the sale of your company, it is helpful to understand the dynamics and issues that frequently arise.
An M&A valuation is always negotiable, and your TMT industry investment banker knows how to establish fair value.
Key factors affecting negotiations that require an in depth knowledge of the sector are:
1. Market comparables.
2. Understanding whether potential buyers are motivated financially or strategically.
3. An in-depth understanding of the projected financial growth of the company and the sector.
4. Any proprietary technologies and licenses owned by your company, as well as previous valuations and future IPO prospects.
5. Experienced negotiators will also know when buyers are keeping something back and the first offer is not their best offer.
Mergers & Acquisitions can take between six months to a year between inception and close, which is a long time in a fast-moving industry like TMT.
Industry specific investment bankers can shorten the time frame, by running a tightly controlled auction process, advising on the documentation and presentations and preparing the CEO and CFO on the value add and the financial projections to be presented to the buyer.
Appointing an experienced lead negotiator to make quick decisions on the company’s behalf, will also speed up the process.
Sellers always need to anticipate the buyer's due diligence investigation: setting up a proper data room is an important element in this process.
Experienced investment bankers will know the types of information and documents that potential buyers will expect to get access to.
The seller’s financial statements and projections are thoroughly vetted and all financial metrics will be under review.
M&A sell side investment bankers know that multiple bidders give you a clear advantage in your negotiations. Knowing the market and industry players will provide a key advantage in engaging with these bidders for the best possible outcome.
In addition to the legal team required to make an M&A a success, the investment banker will assist the seller and legal counsel in designing and executing an optimal sale process. From identifying and contacting prospective buyers to coordinating meetings, confidentiality agreements and executive summaries, the investment bankers assist in negotiations on price and key deal terms, with market comparable valuation in mind.
Investment bankers coordinate the responses to due diligence requests and assist in creating, updating and populating the data room.
Your intellectual property needs to be evaluated and assessed. In TMT especially, knowing that you as the seller own or have the right to use of all of your IP is a critical deal factor and any employees and consultants involved need to sign non-disclosure agreements in your favour.
If open-source software was used or incorporated into the technology, this could lead to licensing and compliance issues, that need to be identified early on.
Cyber-security and data are a growing concern in TMT M&As, especially since EU/EEA General Data Projection Regulations came into effect on 25th May 2018.
At the early stages of the M&A process, a letter of intent or term sheet signed too quickly will cause you to lose your leverage and should, therefore, be carefully negotiated even though the terms are not yet binding.
The later stage acquisition agreement needs to protect the seller as much as possible.
TMT M&As are also likely to involve several employee benefits including stock options, equity, severance or cash compensations, that can affect the negotiation dynamics.
An industry specific experienced M&A negotiator knows your company, your industry and the issues worth fighting for.
At the end of the day, remember that all M&A negotiations will require a form of compromise from both sides. Nobody better than your specialized investment banking negotiator can bring about a transaction that works for both parties.
So why do some companies try to go it alone when selling their company?
Many entrepreneurs and midcap companies believe that without an investment banker, they will save both time money.
These perceptions are almost always incorrect.
Even if a potential buyer approaches you, never attempt to sell your business on your own.
What you may pay in fees to a sell-side professional, will always be compensated by getting a better valuation and a better fit for your company.
A specialized investment banking firm or M&A consultant knows how to bring value to the negotiating table. A fair business valuation will help you establish the best sale price, which means the price at which both buyer and seller are happy.
Independently of the valuation methods used (EBITDA, growth, assets, liquidity, contracts with other companies, etc.), every industry sector and geographical location needs to be dealt with using varying cross-cultural approaches.
Trying to value your own company is rather like trying to do your own dental work!
Valuation is a skill which investment bankers spend their entire career mastering. And as much as financial modelling will be a large part of the process, valuation is an art, not a science.
If you don't have an investment banking or M&A background yourself, with experience on negotiating deal points such as excluded assets, working capital or discount rates, you’re potentially underestimating your own valuation.
If your potential buyer has hired a consultant, you would be very unwise not to enlist an investment banker, as you are now in negotiations with an expert whose role is to drive your enterprise valuation down.
Unfortunately, we are often called in when a company already tried selling to a potential buyer and the deal fell apart.
Under these circumstances, there is normally no second chance to engage with that particular buyer again.
Failed deals also send very negative signals to the market in which you operate.
Another kind of failure is when owners are in panic mode and want to get a deal done quickly.
They end up selling their business at a very low multiple, well below the real value of the company.
On a final note, think carefully about what is best for your business while you are in the process of selling it. Taking time off from continuing to successfully manage and grow your existing business, to work on the actual sale itself, is self-defeating, as any drop in revenues will ultimately lead to a lower valuation at the time of signing.
Make the smart choice and hire an investment banker who knows your industry and understands the cultural and geographical issues involved in a cross-border merger.
Severnaya Group Limited trades as Severnaya Investments across Europe, CIS and MENAT and is specialized in Cross-Border M&A and Corporate Finance for the Technology, Media and Telecommunications industries.
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*This article was originally published on LinkedIn on July 24th, 2019
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