July 2005 webinar continued ..
Bill Wignall
Thanks, Ward. Good afternoon. There
are three parts to my talk. I thought, when Corum asked me to speak
Id cover a little bit of background on our company first. Secondly
how or why we picked Corum as advisers, and then thirdly the body of the talk
is on the process we went through in our transaction. In the second
and third parts Ill try to do that Lessons learned section that Bruce and
Ward alluded to.
Our company is a Canadian firm. We are
headquartered in Toronto. Its a well-established company with a
long history of profitability, since I took over as CEO about seven years ago,
so its not a new startup, its not pre-profitability. Im not the
founder, I was brought in as a hired gun, a professional manager, and one of
the things that made the deal a little bit unique, especially the engagement
with Corum, the founder and primary shareholder for Electronics Workbench is
not at all involved, and has not been involved in running the company for many
years, and was not involved with the transaction. So, it needed a
sophisticated M&A advisory firm
to understand that and get comfortable and help clients and potential acquirers
understand that.
Our business is that we make engineering software for
electrical engineers. We sell that software into two markets: the
professional engineering market in which engineers design circuitry, so you can
think of Hewlett-Packards of the world, the Motorolas, the Ciscos,
etc. That sector is called EDA for Electronic Design Automation. The
other sector we sell our products into are the double E faculties at colleges
around the world. The fact that there were two separate market
sectors so unique and different from each other did pose some unique challenges
in the transaction, since a lot of the potential acquirers were heavily
interested in one of the sectors, but less interested in the other, and that
needed some careful stick-handling as well. All of the R&D is
done in Canada for our firm, our products are shrink wrap software, relatively
inexpensive in the $2-10,000 per seat range, and therefore we market and sell
the products around the world through a mix of direct and indirect
channels. About half the business is offshore. The
company had a very strong management team, which was one of the attractions to
the eventual acquirer.
Now Ill go to the second part and talk about why we, or I, picked Corum. I had
personally done a lot of M&A over my career, I had worked with many banks,
advisory firms of all shapes and sizes, and when Corum asked me to give this
talk, I went back and found a presentation from our second quarter board
meeting last year when I first proposed that we do this, and found that there
were six points that wed identified when picking
an advisory firm, so I thought Id just share them with you. It
was these six points that led us to select Corum.
- We wanted a highly
defined rigorous process. Being an engineer I wanted to know
that there was a set of steps written down that we all agreed to and were
going to pass through. - A large network of
contacts for potential buyers to add to the obvious ones that I had
supplied. - A clear understanding of
the technology industry generally and the software sector specifically. - We wanted an advisory
firm that was focused on private companies and that had international
success with clients in Europe and Asia, since that was where many of our
potential acquirers would exist. - Adding credibility to us
as a selling company. We were a reasonably small company, less
than $20 million in revenue and we needed this not to be a neutral impact
from retaining an advisor. - We wanted someone that
brought enough experience that they would know how to work with
professional managers, especially with different styles. Im a heavily
hands-on person and would want to be deeply involved in all steps on the
way. Lots of M&A
firms, especially ibanks, have a process, this is the way it runs, do
it, well tell you when youre finished, and that wasnt something we were
comfortable with.
I had first encountered Corum, like many of you on the call
today, through seminars like this, webinars, I eventually sat in on one of
Bruces talks in a Selling Up, Selling Out session, and we just stayed in touch
over several years. Corum was great in that respect, there was never
any pressure, we werent ready to go to market for the first several years in
that process, and eventually when we were, it was probably 4 or 5 years after
we had first met. I contacted Corum, talked to Ward, that would be
last April, after our Q1 board meeting, and we formally engaged in May of last
year.
For us it was a pretty straight forward
choice. We wanted someone who we thought was the best fit for a
private software company, and we didnt feel like wed get the attention or the
knowledge we needed from a Wall Street ibank or the corporate finance arm of
one of the big CPA firms.
Now into the third part, the process we went through and
the transaction we ultimately consummated. I was thinking about this
yesterday, preparing what I would say, and it seemed in hindsight that there
were seven steps we passed through, and Ill try to tell you about those steps
and how long each one too.
The first step was a simple briefing from me to educate
Corum on our business. That probably took about two weeks, and most
of the work was mine at that stage and it was just me preparing documentation,
attending meetings, explaining what the company, and a series of conference
calls after that.
The second step in the process was the assembly of three
critical documents that would be used when contacting prospective
buyers. It was an executive summary, a financial memorandum, and an
evaluation document. That probably took 1-2 months, although it was
not all contiguous time, it was split up into various stages in the
process. It did become clear to me that traditionally Corum does
most of that work on their own, although in my case that wasnt necessarily
true. I wanted a lot of involvement in writing those documents,
especially the executive summary, and they were quite open to that, although I
know it created some consternation along the way. There were
different specialists involved in each of those documents. You heard David
talk earlier, he did a great job on the valuation document. And
although there are various specialists, there is a different single point of
contact, kind of overseeing the project for Corum, and in my case that was Mark
Reed, who kind of coordinates the various Corum people that are involved,
contacts the prospective buyers, helps with negotiations, etc. He
was a pleasure to work with, a great human being, always
available. Almost every day at 5:30 in the morning hed pick up my
voicemail at 8:30 Eastern time and wed be on the phone at 6 oclock Western
time without ever an instance of whining (laughter in background).
The third section we went thorugh was the target company
research. I provided my list of the more obvious ones, and Corum
added their own, as well as the ones from research that they thought made
sense. That was probably another month. It was surprising
to me how long that list turned out to be. There were about 100-110
companies on that list. We scaled that down to about 65 for making
contact with, so well in excess of what I would have expected.
The fourth step was that contact: Emails,
letters. Calls to the most likely candidates, emails and letters to
all the rest. This the one area where I felt the most stress, its
the section you have the least control over. I was surprised how few
companies that we contacted showed the courtesy to respond, even with a simple
no. I wasnt surprised at all at the small number that did engage,
where engagement would be defined as expressing interest, having a series of
phone conversations and emails, meeting with people, reviewing the information,
asking for more information, for us that was only 5 or 6 companies, and I would
say we spent the longest period in this stage, 2-3 months, I would guess.
The fifth step in this process for us was the selection of
the preferred buyer. It actually turned out to be quite
easy. There was only one company, as it turned out, that was willing
to go fast enough to meet our timeline, so it was quite
straightforward. When I met with our board at the end of the second
quarter last year I said that wed have a deal in place by January 31 of 2005,
which was our fiscal year end, and we closed February 1. The
eventual buyer was National Instruments, a U.S. public company about $500
million in revenue, a market cap of $2-3 billion. They were the only
one that was ready or prepared to go as fast as the time frame that wed
set. They were also the only one that was adequately able to deal
with us selling into both market sectors. I alluded to that earlier,
National Instruments sells to both professional engineers and universities and
colleges around the world, so that led to higher valuations and an easier
deal. And, to Bruces point, we did actually have a marketing
relationship with these guys for several years, so that might have contributed to
them being interested.
The sixth step in the process was the actual negotiations,
this is exchanging LOIs or MOUs, and then the SPA, the Shared Purchase
Agreement, which is a huge legal document, for those of you on the call who
havent been through this before. Get ready for some intimidation,
there are typically well over 100 pages and tons of legalese and youll need to
get to know your lawyers really well. For us this stage of
negotiation was reasonably fast. We got serious about it in early
December I guess, and it closed at the end of January, so just under two
months, I guess. This is always the hardest section, theres a
tendency to get emotional about positions the other side takes that may seem
unreasonable, and I guess my humble counsel would be that it is important to
remember the ultimate objective is to put together a good deal and not dig in
on issues just because someone, pardon my language, might piss you
off. Its just not that important.
The last stage is just the due diligence leading up to
close. That happens in parallel with the negotiations, or at least
it did in our case. So, youre talking about the terms and
negotiating the Shared Purchase Agreement, the asset deal at the same time as
theyre doing due diligence. It was quite straightforward for us,
since the buyer was not an acquisitive company, they hadnt done many deals
before and so they due diligence was less detailed than you would typically
expect, it only took 1-2 weeks in our case. Lesson there is, I
guess, that with due diligence, the shorter, the better. The buyer
doesnt ask for much information or doesnt ask many detailed questions, dont
be pro-offering it.
So thats kind of it. Our deal was undisclosed
terms, so I cant give you the specifics, but it was good valuation and very,
very good terms. Ultimately we were pleased with the decision to
proactively go to market and not just wait and respond when an acquirer came
calling.
So, Bruce Ward, thats it for me.
Brought to you by Corums M&A advisors