Finding Capital for Growth

Private Equity Exits were down in 2011. PEGs are holding investments longer.

Jamie Grant — Tue, 21 Feb 2012 15:15:47 +0000

According to a study just released by Pitchbook in collaboration with Grant Thornton, Private Equity Groups (“PEGs”) sold or took public 213 U.S. companies during the second half of 2011, bringing the past year’s total exit count to 420, down slightly from 2010. Private equity investment activity declined by 20% during the second half of 2011, and the median “hold” period for PEGs grew to 4.8 years.

Link to Full Report from Pitchbook and Grant Thornton: PitchBook_GT_Private Equity Exits_Report_2H 2011

5 Disastrous Moves That Will Botch Your Pitch

Jamie Grant — Wed, 07 Dec 2011 15:17:09 +0000

FC Expert Blog

5 Disastrous Moves That Will Botch Your Pitch

BY FC Expert Blogger Josh LinknerTue Dec 6, 2011

This blog is written by a member of our expert blogging community and expresses that expert’s views alone.

Most of us have something to pitch. You may be pitching your startup to a VC to secure funding. Or perhaps you’re pitching your product or service to potential customers. Whether you are pitching your case to a jury, your hypothesis for a research grant, yourself for a new job, or your best friend for a date with that cute guy, a simple rule applies: The better the pitch, the better the results.

As a venture capitalist, I hear pitches every day. In this highly competitive environment, a strong pitch can be the difference-maker between securing millions in funding and completely missing the mark.

There are many obvious cliché moves: Give a firm handshake, communicate with passion, make strong eye contact, and try to relate with your audience. Yet there are approaches I see constantly that sabotage an otherwise good pitch. To significantly improve your batting average, avoid these disaster moves when pitching just about anything:

1) THE GREAT GATSBY: Grandiose braggarts may entertain at cocktail parties, but they rarely win the battle of the pitch. Keep it authentic and real. Your startup with 11 beta customers isn’t a billion-dollar company just yet. Think big, but stay humble. After hearing a pitch where the daring hero outperforms Groupon and Apple in their second year with trillions of revenue and six billion customers, I’m ready for a shower instead of a closing dinner.

2) THE FACT LEAP: Anyone who is being pitched has turned on their highly developed BS detector to full tilt. We are questioning everything you say and trying to poke holes in your story. So the minute you exaggerate a stat, make an outrageous claim, or state a fact that can be challenged, your credibility crumbles.

3) THE OVERSELL: If you make a strong point once, it resonates. If you feel the need to make the same point several times you end up diluting the power of the message. If you keep pushing a point, you transform before our eyes from a passionate world-changer to a used-car salesperson or infomercial pitchman. If what you are pitching is that special, you don’t need to oversell it.

4) THE S.A.T.: When responding to a question, just answer it directly. If you tell a four-minute story that includes 73 data points, the listener feels like they are taking a college-entrance exam in which they need to sift through all the irrelevant stuff in order to get the answer. This does not help you shine or get your message heard.

5) THE RUN-ON SENTENCE: One of my pet peeves is listening to someone drone on for a 45-minute monologue. In your big moment, your instinct is to communicate everything you know, the entire history of your idea, and endless amusing anecdotes. Avoid this urge. Your pitch will be 100 times more powerful if you can make it concise. Make every word count.

Hone your pitch to stand out from the hapless masses that continue to fall into the same traps. In turn, you’ll land the job, get the girl, win the capital, and seize your full potential.

For more insight on creativity and innovation, visit author Josh Linkner’s site at JoshLinkner.com

For more leadership coverage, follow us on Twitter and LinkedIn.

[Image: Snarky's Machine]

Short Term Performance Drove Up Venture Returns in Early ’11

Jamie Grant — Fri, 23 Sep 2011 20:08:44 +0000

Venture capital performance continued on a gradual upward trajectory as of the first quarter of 2011 according to the Cambridge Associates U.S. Venture Capital Index®, the performance benchmark of the National Venture Capital Association (NVCA). The improvements were seen across all time horizons, with the exception of the 15-year numbers, and were driven by the strong one-year venture capital return of 18.5 percent. The quarter marks the second consecutive one in which there were double digit returns for the one year horizon and modest improvements in the three-, five-, and ten- year performance numbers.

Clicke Here for Full Report: U.S. Venture Capital Index® NVCA 2011 Q1

Venture capital returns outperformed the public indices in the one-, five-, 15- and 20-year horizons.

“Slow and steady improvement has been the name of the game in venture performance for the last several quarters,” said Mark Heesen, president of NVCA. “The venture capital industry is coming through a very turbulent period in U.S. economic history and recovery is going to take time, even with the improving exit market we have seen in the last year. But make no mistake that we are headed in the right direction and we expect these gains to continue throughout the coming year. Overall, this should be encouraging for the upcoming class of companies preparing to exit as well as new companies just entering the pipeline.”

“The one-year return was strong and the longer-term performance continued to improve. The five-year return, which outperformed public indices, encompasses the recent recessionary period, the recovery and now three quarters of good IPO activity. The improving exit environment is encouraging and should continue to boost performance in 2011,” said Theresa Sorrentino Hajer, Managing Director and Venture Capital Research Consultant at Cambridge Associates.

Vintage Year Return Ratios

The following chart lists the ratio between the dollars paid into venture capital funds by limited partners and the dollars distributed back to them by vintage year. The chart also includes the multiple of residual value to paid-in capital as 3/31/11. For example, the 2004 vintage year funds have distributed cash of 0.28 times the amount of capital paid in by LPs and the residual value is 1.09 times the paid-in capital; the total value multiple is therefore 1.37 times. It is important to note that the residual value is unrealized and will change as companies exit the portfolio, are revalued, or are written off.

The 1996 vintage year funds have the most positive ratio, returning 4.96 times the capital contributed by LPs, a number which rises to 5.03 should those funds realize the value of what is currently in the portfolio. More recent vintage years have yet to return significant cash to LPs as most funds do not have the opportunity to begin returning capital until after year five.

The Cambridge Associates LLC U.S. Venture Capital Index® is an end-to-end calculation based on data compiled from 1,308 U.S. venture capital funds (867 early stage, 170 late & expansion stage, 268 multi-stage and 3 venture debt funds), including fully liquidated partnerships, formed between 1981 and 2010.

1 Pooled end-to-end return, net of fees, expenses, and carried interest as of 3/31/2011.

Sources: Barclays Capital, Bloomberg L.P., Cambridge Associates LLC U.S. Venture Capital Index®, Frank Russell Company, Standard & Poor’s, Thomson Datastream, The Wall Street Journal, and Wilshire Associates, Inc.

For More information on the data, contact:

Itay Engelman, Sommerfield Communications, itay@sommerfield.com, 212-255-8386

Emily Mendell, NVCA, emendell@nvca.org, 610-565-3904

And now, introducing the “Too Big to Fail” Tax.

Jamie Grant — Mon, 27 Jun 2011 15:34:34 +0000

Finally, the continuing fall-out of the financial crisis will have an impact on those very institutions that made it possible.

The world’s largest banks will now be required to finance a larger share of their balance sheets with equity, or “Tier 1 Capital” in the future. This past weekend international banking regulators agreed to require the world’s largest banks, those considered “too big to fail” to maintain capital cushions that are at much as 35% higher than those of other institutions, and several times greater than what they have needed to maintain in the past.

The regulators (and this blogger) hope the new rules, which will phase in gradually over the next seven years, will discourage lenders from imprudent risk taking and ensure that giant institutions can absorb sudden losses without imperiling the overall financial system or requiring taxpayer bailouts.

According to the Wall Street Journal (see article: “Capital Rules Tighten for Big Banks” http://online.wsj.com/article/SB10001424052702303627104576409662082986084.html?mod=rss_whats_news_us&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Fxml%2Frss%2F3_7011+%28WSJ.com%3A+What%27s+News+US%29&utm_content=My+Yahoo)The The new agreement came after months of lobbying by financial groups on both sides of the Atlantic. Big banks, which until now have avoided the capital surcharges advocated by senior U.S. policy makers will require roughly 30 of the world’s top banks to hold between 1% and 2.5% of extra capital as a percentage of their “risk-weighted assets.” That is 14% to 35% more than the base 7% Tier 1 Capital requirement for all banks.

GRAPHIC FROM THE WALL STREET JOURNAL ONLINE, JUNE 27, 2011:

The rules also feature the threat of an additional 1% capital requirement on giant banks that grow bigger. The goal, the regulators said in a statement, is “to provide a disincentive for banks facing the highest charge to increase materially their global systemic importance in the future.”

Shareholder Agreements in Closely-Held Massachusetts Corporations

Jamie Grant — Fri, 20 May 2011 18:59:46 +0000

MAY 20‚ 2011

Shareholder Agreements in Closely Held Massachusetts Corporations

BY ELIZABETH B. BURNETT AND JEHANNE M. BJORNEBYE

Attorneys at Mintz Levin

Can fiduciary duties trump contractual rights of shareholders in closely held companies? Are shareholders of a subchapter-S corporation entitled to sell their shares to third parties, even when that sale would destroy the corporation’s subchapter-S status? These are the questions addressed in the recent Superior Court decision Merriam v. Demoulas Super Markets, Inc.,¹ and lawyers who draft shareholder and employment agreements for closely held corporations should take note of the court’s guidance.

Merriam marks yet another chapter in the ongoing infighting among Demoulas shareholders. The dispute centered on the shareholders’ right to sell stock when that sale would cause the corporation to lose its favorable subchapter-S status. One Demoulas faction argued that fiduciary duties prohibited such a sale, even though nothing in the corporate charter prohibited it, citing to A.W. Chesterton Company v. Chesterton.² The would-be selling shareholders disagreed, arguing that their contractual right to sell company stock was not restricted by their fiduciary duties, citing to Chokel v. Genzyme Corporation.³

Merriam held that when shareholder conduct “falls clearly within the scope of” articulated contract rights, fiduciary duties do not restrict shareholders’ exercise of their contract rights, but that fiduciary duties can serve as a check on shareholder conduct when shareholders act “in a manner inconsistent with the express terms of a shareholder agreement.” In either situation, Merriam held that contracts between shareholders are subject to the implied covenant of good faith and fair dealing.

Although Merriam did resolve some of the underlying tension in Massachusetts law between fiduciary duties and contract rights,⁴ the court’s renewed emphasis on the implied covenant of good faith and fair dealing creates murky waters for practitioners crafting contracts for closely held companies. Under Massachusetts law, that covenant requires that contracting parties remain faithful to the intended and agreed expectations of the contract; a breach is found where one party violates the reasonable expectations of another. When drafting contracts between shareholders of closely held companies, including corporate charters, employment agreements, or shareholder agreements, practitioners should take care to clearly establish the parties’ rights and obligations, to unambiguously define any restrictions on those rights, and to expressly memorialize the parties’ expectations. Failure to do so could result in interpretations of these contracts in which fiduciary duties trump contract rights and pave the way for claims for breach of the implied covenant of good faith and fair dealing which allege “reasonable expectations” of parties that were never intended.

If you have any questions or would like more information about this advisory, please contact the authors or your Mintz Levin attorney.

* * *

Click here to view Mintz Levin’s Litigation attorneys.

Endnotes

1 Merriam v. Demoulas Super Markets, Inc., Civ. A. No. 10-02681 (Mass. Super. Ct. Mar. 29, 2011) (Haggerty, J.).

2 A.W. Chesterton Co., Inc. v. Chesterton, 128 F.3d 1 (1st Cir. 1997).

3 Chokel v. Genzyme Corp., 449 Mass. 272 (2007).

4 Pointer applied fiduciary duty principles, and not contract law, to the employment termination of a minority shareholder based on its finding that the employment contract permitted termination only upon a violation of the employment contract, and there was no finding of such a violation. Pointer v. Castellani, 455 Mass. 537 (2009). Blank applied the implied covenant of good faith and fair dealing, and not fiduciary duties, to the termination of a minority shareholder/employee because the employment contract permitted termination without cause. Blank v. Chelmsford OB/GYN, P.C., 420 Mass. 404 (1995). Merriam reconciled these two seemingly inconsistent Supreme Judicial Court employment termination cases involving closely held corporations when it held that “fiduciary duties may still govern where shareholders act in a manner inconsistent with the express terms of a shareholder agreement [as in Pointer], but that courts will not entertain fiduciary claims where a shareholder’s action falls clearly within the scope of an agreement [as in Blank].

Restricted Stock: A Simpler Solution for Mid-Sized Companies

Jamie Grant — Wed, 18 May 2011 14:29:39 +0000

Restricted Stock: A Simpler Solution for Mid-Sized Companies

By Eric D. Altholz* of Verrill Dana, LLP

The owner of a privately held mid-sized company (120 employees and annual sales of $20,000,000) calls me with a “good problem”. He wants to reward a small number of key employees for their contributions to the success of the company, and provide a meaningful inducement for them remain with the company and keep driving growth in the future. The company already has an annual incentive plan with performance goals, so the owner is looking for a longer term incentive that might encourage the key employees to think more like owners. We discuss the basic panoply of equity-based compensation arrangements: stock grants, stock options, restricted stock, stock appreciation rights and phantom stock. I explain that any one or more of these programs could be appropriate depending on the circumstances and goals of a given business. What’s right for one employer may not be right for another. Ultimately, this business owner (like many of my clients) decides to go for restricted stock as the basic foundation of his equity-based compensation program. Wise choice.

There are at least five reasons why restricted stock grants remain appealing for a variety of companies, large, medium and small: (1) it’s real stock; (2) it creates a meaningful element of employee retention; (3) the income tax consequences are straightforward; (4) the grantees really do have skin in the game; and (5) an employer can add features that help preserve the control of the current owner(s).

Real Stock

Unlike phantom stock or stock appreciation rights, restricted stock is real stock. Once issued, the holder of restricted enjoys most of the rights enjoyed by any shareholder. Specifically, the holder of restricted stock is generally entitled to vote (if the stock issued to him is voting stock), is entitled to receive dividends (if any are declared on that class of stock) and would be allowed to participate in a stock split or similar capital structure transaction. The only important right that the holder of restricted stock does not enjoy is the right to sell or otherwise transfer the shares. (More on that in a moment.)

One caveat: some corporate lawyers don’t love restricted stock precisely because it is real stock and the holders of real stock have rights under state law (such as the right to receive notice of shareholder meetings, the right to review corporate books and records, etc.) Of course, that’s the result under a stock option plan as well after the options are exercised.

Retention

As noted, the key “restriction” that comes with restricted stock is that the holder does not have the right to sell or otherwise transfer the stock until his full ownership rights become vested. Vesting can be structured in a wide variety of ways. A restricted stock grant may vest all at once on a given date or upon the occurrence of a given event, or it might vest gradually over a period of years. For example, a company might award 100 shares of restricted stock to an employee and the award might vest over five years in increments of 20 shares; or the company may award 100 shares that all vest on the third anniversary of the grant date; or the company may award 100 shares that vest upon the attainment of a specified performance goal. The key is this: the employee must remain in the employ of the company on the vesting date in order gain full ownership of the shares. Take an employee who receives the grant of 100 shares on January 1, 2011 and who terminates employment in June 2013 (two and half years after the grant date). Under the first vesting approach, that employee would have vested in 40 shares. Under the second approach, the employee wouldn’t have vested in any shares (because he was not employed on the third anniversary of the grant). Vesting schedules can be as long or short as the company sees fit, but the vesting schedule must be set at the time of the grant. (Vesting is often accelerated in the event of death or disability, and sometimes in the event of a sale of the company, so long as the employee is still employed at the time.)

Straightforward Tax Consequences

The income tax consequences of restricted stock are well established for both the employee and the employer. The employee is taxed on the fair market value of the vested shares in the year(s) in which they vest. That income is considered ordinary income (in the nature of compensation) and the employer is entitled to a compensation deduction for the same year(s). Taking our first example, the employee would be taxed on the fair market value of 20 shares of company stock in 2012 (when the first portion of the grant vests) and then on the fair market value of another 20 shares in 2013 (when the second portion vests). Importantly, it’s the fair market value in the year of vesting (not the year of the grant) that is used to determine the tax liability. So if the company continues to perform well, and the value of the stock appreciates over time, the tax liability will increase as well. That is, unless the employee makes a special one time election to pay taxes on the aggregate fair market value of the whole block of restricted stock in the year of the grant. That election is available under Section 83(b) of the Internal Revenue Code and is beyond the scope of this modest post. (Suffice it to say that an employee who receives a grant of restricted stock from a start up company with a current fair market of zero and loads of potential for speedy growth should consider making the Section 83(b) election.) Finally, when the employee goes to sell the stock in the future, the gain on the sale will be capital gain just like it would be for any sale of stock.

Requires Recipient to have Skin in the Game

Many business owners don’t like the idea of just “giving” stock to their employees, which is one reason why outright stock grants are rarely seen. But the recipients of restricted stock earn the shares as part of their compensation package by working through the vesting period AND (as noted) they do have to pay income taxes on the value of the shares when they vest. It is certainly a great deal for the grantee – I know I would rather pay the taxes on $5,000 worth of stock than pay the full $5,000 to get the stock – but the out of pocket tax payment still represents a meaningful outlay that certainly will feel like an investment to most employees. Nevertheless, some employers view the obligation to go out-of-pocket to pay taxes as unduly burdensome and wish to mitigate that consequence. In those cases, an employer can either lend the employee the money to pay taxes on the vested shares or pay a cash bonus (which itself would be taxable) to help pay the tax bill. Note that if vesting is tied to a company liquidity event, the employee would be able to sell some or all of his stock to cover the taxes.

Attaching Strings to Keep Interests Aligned

Finally, even after the restricted stock becomes vested and fully owned by the employee, there are ways to protect the interests of the majority owner(s) particularly where the company may be positioned for a sale. A classic example would be the imposition of a “drag along” right, which essentially allows the majority owner to require the grantees of restricted stock to sell their shares to whomever the majority owner sells to (so long as they get the same terms). This will assure that when the majority owner finds the right deal, his employee-shareholders won’t be in a position to impede progress on the deal. In most cases, the employees are thrilled to be a part of the deal anyway. Restricted shares often preclude sales to third parties, limit voting rights and impose other restrictions that protect the interests of the majority owner(s).

These five attributes that make restricted stock compare favorably to other forms of equity-based compensation can really be summed up in one word: simplicity. For most successful business owners that key attribute makes all the difference.

_______________________

* Eric Altholz is a Partner in the Employee Benefits and Executive Compensation Group at Verrill Dana, LLP. Eric advises employers on a wide range of issues affecting benefits and compensation, including retirement plans, deferred compensation plans and fiduciary compliance. Eric is also a primary contributor and editor of www.employeebenefitsupdate.com. Verrill Dana, LLP is a full service law firm based in Portland, Maine with more than 100 attorneys serving businesses throughout New England.

Eric D. Altholz

Verrill Dana, LLP

One Portland Square

Portland, Maine 04112-0586

Office 207.253.4908 | Fax 207.774.7499

http://www.verrilldana.com/ealtholz/

Blog: Employeebenefitsupdate.com

Bubblicious. Mark Andreesen is making big bets on the next tech IPO rally.

Jamie Grant — Tue, 10 May 2011 16:23:15 +0000

From the Wall Street Journal, 5/10/11

A Venture-Capital Newbie Shakes Up Silicon Valley

By PUI-WING TAM, GEOFFREY A. FOWLER and AMIR EFRATI

MENLO PARK, Calif.—As a newly minted venture capitalist, Marc Andreessen, co-founder of Netscape, aimed for nothing less than big. “Whale” size, as he puts it.

Associated PressGame On: Marc Andreessen, right, talking to Zynga CEO Mark Pincus at the Allen & Co. media conference in July. Andreessen Horowitz invested in the social-games maker in 2009.

Like other investors here, he’d been eying Web companies with explosive growth and global star power. But acquiring shares in tech titans like Facebook is tricky. Most are closely held and don’t trade on a public stock market. Interlopers can’t simply waltz in.

So Mr. Andreessen set out to make his own rules—maneuvering his way into hot private deals at huge cost.

Some of his more established rivals weren’t amused. They complained about the lofty prices he paid, and about being shut out of the action.

“Hate away,” says the unfazed Mr. Andreessen.

The onslaught began last August, after Mr. Andreessen—along with partners Ben Horowitz and John O’Farrell—drew up a “harpoon” list of companies to target.

Over a six-month period, Mr. Andreessen tapped his formidable network of Silicon Valley connections to snag stakes in Facebook Inc., micro-blogging service Twitter Inc. and deals-site Groupon Inc. Other investments include social-game developer Zynga Inc. and Internet-telephone company Skype SA. In the process, he helped to ignite Silicon Valley’s latest Web boom and the burgeoning market for private-company shares.

“We wanted to get these deals done because we had a strong feeling [the market] would heat up fast,” says Mr. Andreessen, who heads the firm Andreessen Horowitz. “When push comes to shove, would you rather be in the winners?”

Just over a decade ago, Silicon Valley minted millionaires through a reliable venture-capital formula: invest in a nascent company for cheap and grab a large stake in the firm. The next step was to build the company up so it could go public, at which point the start-up’s illiquid shares would convert into stock market gold.

Now, investors like Mr. Andreessen are challenging that equation. Initial public offerings of start-ups have been damped by regulatory issues and the headaches associated with being a public company. Last year, venture-capital-backed IPOs totalled 46, down from 210 in 2000, during the peak of the tech bubble. Private companies like Facebook have said they are in no rush to go public.

The 39-year-old Mr. Andreessen, meanwhile, is in quite the hurry. In November, Andreessen Horowitz spent $50 million to acquire Facebook shares in a private deal that valued the social-networking company at $35 billion, more than triple its 2009 valuation of $10 billion.

Best Practices for Raising a VC Round

Jamie Grant — Thu, 05 May 2011 20:30:20 +0000

Best Practices for Raising a VC Round

by Chris Dixon http://cdixon.org/

Having raised a number of VC rounds personally and observed many more as an investor or friend, I’ve come to think there are a set of dominant best practices that entrepreneurs should follow.

1. Valuation: Come up with what minimum valuation you’d be happy with but never share that number with any investor. If the number is too low, you’ve set a low ceiling. If your number is too high, you scare people off. Just like on eBay, you only get to your desired price by starting lower and getting a competitive process going. When people ask about price, simply tell them your last round post-money valuation and talk about the progress you’ve made since then.

2. Never tell VCs the names of other VCs that are interested. Reasons: 1) if you are overplaying your hand that could send a negative signal. Most VCs know each other and talk all the time. 2) it is possible they’ll get together and offer a two-handed deal in which case you have less competition.

3. I think the optimal number of VCs to talk to seriously is about 5. That is usually enough to get a sense of market but not so much that you get overwhelmed. You should pick these VCs carefully – this is where trusted, experienced advisors are critical.

4. If there is a VC you really like, have a “buy it now price” and if they hit that valuation (and other terms are clean) do the deal. Otherwise, say you’d like to “run a process” and include them in it.

5. Try to set timelines that are definite enough that investors feel some pressure to move but not so definite that you look dumb if you don’t have a term sheet by then. (Investors have an incentive to wait – “to flip another card over” as they say – whereas entrepreneurs want to get the financing over with asap). Depending on where you are in the process, say things like “we’d like to wrap this up in the next few weeks.”

6. Once you start pitching, the clock starts ticking on your deal looking “tired.” I’d say from your first VC meeting you have about a month before this risk kicks in. You could have a great company but if investors get a sense that other investors have passed, they assume something is wrong with your company and/or they can wait around and invest later at their leisure.

7. The earlier stage your company is the more you should weight quality of investors vs valuation. For a Series A, you are truly partnering with the VCs. You should consider taking a lower valuation from a top tier firm over a non top tier firm (but probably any discount over 20% is too much). If you are doing a post-profitable “momentum round” I’d just optimize for valuation and deal terms.

8. Term sheets: talk about terms in detail over the phone. Only accept a term sheet once you have decided that if it matches what was described you are prepared to sign it. After sending a term sheet VCs get worried you’ll shop it and usually want it signed in 24 hours.

9. Get to know the VCs. Talk to their other portfolio companies, read their blogs, call references, etc. You will be in business with this person for (hopefully) a long time.

10. Timing. While it’s ideal to raise money once you hit the milestones you set out initially, you also need to be opportunistic. Right now, for example, seems to be a really good time to raise a VC round. You could make a ton of progress over the next 6 months but the market could tank and end up in a worse place than you would be today.

About Chris Dixon (from http://cdixon.org/):

Professional Background

Currently:

- Co-founder of Hunch.

- Personal investor in early-stage technology companies, including Skype, Foursquare, Kickstarter, Stack Overflow, TrialPay, DocVerse (acq by GOOG), Invite Media (acq by GOOG), Gerson Lehrman Group, ScanScout, OMGPOP, BillShrink, Panjiva, Knewton, and a handful of other startups that are still in stealth mode.

- Co-founder of Founder Collective

Previously:

- Co-founder and CEO of SiteAdvisor through its acquisition by McAfee. SiteAdvisor has been downloaded over 135 million times, and was awarded Time Magazine’s “50 Coolest Websites”, Popular Science’s “Best of What’s New”, and PC World’s “100 Best Products of 2007″ (#15).

- Worked at Bessemer Venture Partners making early-stage investments, including the lead investment in the Series A of Skype.

- Designed and programmed multimedia web applications, including the original version of Oddcast’s talking avatar software, and the karaoke software that became kSolo, later acquired by MySpace/Fox.

- Co-head of R&D at Arbitrade, a hedge fund focusing on high speed options trading (acquired by Knight Trading Group and eventually Citigroup).

- BA and MA from Columbia University, majoring in Philosophy.

Personal Background

- I am originally from Ohio and now live in NYC.

Cash-Rich Companies Share the Wealth with Trillion-Dollar M&A Activity in 2011

Jamie Grant — Mon, 02 May 2011 16:51:24 +0000

April 18, 2011

Money Morning

Cash-Rich Companies Share the Wealth with Trillion-Dollar M&A Activity in 2011

By Larry D. Spears, Contributing Writer, Money Morning

Mergers and acquisitions, or M&A activity, so far in 2011 has been a driving force in the stock market’s positive performance.In fact, global M&A activity in the first quarter topped $799.8 billion, the most since 2007′s pre-crash frenzy, according to a recent report in Forbes magazine.

MergerInvesting.com, which tracks the M&A market, says 130 deals have either already been closed in 2011 or are currently pending. And, while the total number of global deals is down slightly from the same period in 2010, the actual value of the deals is up more than 55% (with deals involving U.S. companies accounting for 49.6% of that total – a 117% jump from 2010).

Looking forward, most M&A analysts now predict more than $3 trillion in takeover activity for all of 2011.

Striking While the Iron is Hot

There are many reasons why 2011 has been such a strong year for M&A activity, but the biggest is the large cash piles being held by many businesses.As a rule, takeover attempts are driven by economics. The acquiring company may have a lot of cash on hand and buying another firm offers a greater potential return than any other investment the acquirer can make. A recent report estimated that non-financial companies in just the United States are currently sitting on $1.93 trillion in cash – the highest total since 1959. And with bank deposits and bond interest rates essentially yielding nothing, acquisitions make sense in terms of boosting corporate returns.

Cash-rich companies typically look to buy firms whose activities fit with their own line of business; offer an entry point into a new and compatible market segment; that are profitable; that also have a large amount of cash on hand; and that are undervalued.

Attractive valuations are another key reason 2011 has been a good year for M&A activity. The Standard & Poor’s 500 Index is currently priced at an average of just 12-times free cash flow, whereas the average takeover in 2010 was done at 20-times free cash flow. Numbers for 2011 haven’t yet been tabulated, but buyouts in 2010 were accomplished at an average price of $1.24 per dollar of the acquired company’s sales – which is a pretty cheap way for the buyers to add a dollar in revenue to their balance sheets.

Increasing desire among cash-laden Asian companies to gain a firmer foothold in the U.S. market also is helping to fuel takeovers. Last year, Asian companies executed more than 8,700 buyouts worldwide (about 70% of them for cash), with about 425 involving American companies.

Some of the Asian acquisitions illustrate another key point about takeovers – not all of them are strictly about economics. In many cases, a company will engineer an acquisition to improve its cultural image, expand its strategic reach (even if it’s not totally profitable) or achieve new political influence.

Finally, the egos of top corporate officers often can play a major role in driving high-profile takeovers. That is, acquisitions can add to the perception of power or business acumen of the executives who put together the deal.

Mergers Vs. Acquisitions

Although they’re generally mentioned in the same breath, there’s actually a significant difference between mergers and acquisitions for shareholders. Acquisitions usually offer the potential for much larger gains for shareholders than do mergers.

In an acquisition, one company is acquired by the other – using either cash, stock or a combination of the two – and the company being bought or taken over ceases to exist, as does its stock. The stock of the acquiring company continues to trade, representing the new value of the combined companies.

In a merger, two companies combine into one and both companies cease to exist. The rewards to the shareholders – at least in immediate terms of stock prices – are generally lower than in acquisitions. Sometimes, the stock of one of the merger parties is adjusted to reflect the deal and continues to trade for the combined companies; in others, the stocks of both companies cease to exist, with new shares being issued for the merged entity.

Though there are no guarantees, and the market’s response to buyout announcements can vary widely, deals generally mean hefty gains for investors in the target companies. Here are just a few examples from some of the deals announced so far in 2011:

Cephalon Inc. (Nasdaq: CEPH) stock rose from $57.57 when Valeant Pharmaceutical Int.’s (NYSE: VRX) offer was made on March 28 to $75.44 on March 30 – a gain of 31% in two days.
National Semiconductor Corp. (NYSE: NSM) went from $14.07 on April 4 to $24.06 on April 5 – a one-day gain of 71% – following an offer from Texas Instruments Inc.’s (NYSE: TXI) offer.
And Lubrizol Corp. (NYSE: LZ) climbed from $105.44 on March 11 to $133.77 on March 15 – a gain of 26.8% – after Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) made an offer for the company.

Of course, not all takeover bids spark moves of those magnitudes. Progress Energy Inc. (NYSE: PGN), for example, rose to just $47.20 a share, from $44.20, in the two weeks following Duke Energy Corp.’s (NYSE: DUKE) bid.

Still, nearly all M&A deals generate some immediate gain for shareholders – enough to make the search for takeover situations a worthwhile pursuit for savvy investors with a little extra cash on their hands.

Let’s Make a Deal

There are a number of companies with strong potential for getting scooped up by hungry buyers, and interested investors can scan the market for these likely targets.

One way to spot potential takeover targets is to look at industries or sectors where consolidation is already occurring and target the likely losers should takeover activity continue. That’s what’s currently happening in the mobile communications sector, and it’s the source of one good current buyout candidate:

Millicom International Cellular SA (Nasdaq: MICC), recent price $97.70 – Millicom is a global company, based in Luxembourg. It has landline, cable and broadband operations in five countries in Latin America, and mobile operations in 14 developing markets around the world. Earnings and revenue have grown in four of the past five years, hitting a whopping $15.26 a share in 2010. The company also finished 2010 with $1.03 billion in cash and reported free cash flow of $454.6 million. And, if it doesn’t get bought right away, it also pays a dividend of $2.38, good for a yield of 2.47%.

Another possibility with ties to the communications sector, as well as a key product niche is:

ARM Holdings (Nasdaq: ARMH), recent price $29.22 – ARM is a leader in the production of processors for mobile phones, ARMH could be a potential target for any of its customers, including Apple Inc. (Nasdaq: AAPL) (both the iPad and iPhone use ARM chips). The company earned 32 cents a share in 2010, has $456.2 million in cash in the bank and a levered free cash flow of $169.94 million. The stock also pays a 15-cent dividend.

Switching sectors entirely, Money Morning Chief Investment Strategist Keith Fitz-Gerald sees takeover potential in:

Petrohawk Energy Corp. (NYSE: HK), recent price $25.14 – A leading U.S. natural gas producer. Petrohawk had earnings of 63 cents a share in 2010 on revenue of $1.6 billion. Its Enterprise Value to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio is an acceptable 9.89, meaning the company generates good profits relative to its size. Though it’s a bit short on cash and free cash flow, its infrastructure and reserves make it an attractive target, with Fitz-Gerald estimating a potential buyout price of $30 a share or more.

Although it’s unlikely you’ll get a 40% or 50% pop in a single day, another way to profit from the M&A market on a longer-term basis is to invest in the companies that help engineer the takeovers. Though not at the top of the deal-making list, two possibilities we like in this category are:

Evercore Partners Inc. (NYSE: EVR), recent price $33.47 – This firm – which specializes in M&A, corporate restructuring after bankruptcy filings, and asset management – is only mid-sized but it has some heavyweight clients. It advised AT&T (NYSE: T) on its deal to acquire T-Mobile, and also counseled optionsXpress Holdings Inc. (Nasdaq: OXPS) on its recent $1 billion sale to The Charles Schwab Corp. (NYSE: SCHW). The stock pays a 72-cent dividend, good for a yield of 2.14%.
Piper Jaffray Companies (NYSE: PJC), recent price $37.77 – PJC gets more than 50% of its revenue from investment banking, with a focus on M&A counseling and financing, and also acts as a rep for several major private equity groups. The company increased revenues and earnings in each of the last three quarters, reporting $1.53 per share profit in 2010.

The M&A markets get a lot of press, but they’re also ignored by most individual investors, who feel it’s too difficult for “outsiders” to get in quick enough to make a major profit. However, if you start thinking like the potential buyers and doing a little extra analysis, you should be able find enough likely takeover targets to acquire some substantial profits of your own.

An Uptick in MBOs Brings Renewed Emphasis on Process

Jamie Grant — Tue, 26 Apr 2011 17:41:20 +0000

April 26, 2011

An Uptick in MBOs Brings Renewed Emphasis on Sales Process Protections *

Dear Jamie:

Management led buyout (MBO) activity continues unabated. From J Crew to Kinder Morgan, MBOs can be good for company shareholders if the company engages in a fair auction. A fair auction can occur through various means and all the stakeholders should understand the role of the Special Committee in any transaction with a perceived conflict.

Special committees, fair dealing and fair price

Typically, when a shareholder challenges the actions of a Delaware corporation’s Board, the court will presume that decisions were made by the Board upon the exercise of proper business judgment. However, in transactions where a Board’s disinterestedness or independence is at issue, such as in the MBO or affiliate transaction context, courts may require that the Board bear the burden of showing that its actions were entirely fair to the Company, its equity holders and debt holders (Entire Fairness). If however, the Board has taken documented steps to ensure the fairness of a transaction, such as the use of a truly independent Special Committee to review and approve the transaction, then the burden will usually shift back to the shareholder to prove that a transaction was not fair. Courts will generally look to the following seven factors to determine if a Special Committee was truly independent: (i) did the committee have sufficiently separate interests from interested directors and shareholders; (ii) did the committee have outside legal and financial advisors who had sufficiently separate interests from interested directors and shareholders; (iii) did the committee have a broad scope of authority to approve, reject, and negotiate the transaction; (iv) was the committee aware of its role and has it received full disclosures to sufficiently carry out its responsibilities; (v) was the committee actively involved in the negotiation process; (vi) was the committee large enough to engage in robust diligence and analysis of the transaction (a committee of one person is generally insufficient); and (vii) did the committee have sufficient time to analyze the transaction.

Notwithstanding the showing of a truly independent Special Committee, courts will still scrutinize a conflict transaction with much greater intensity and a Board should be able defend the Entire Fairness of the transaction by showing the fairness of the transaction process (fair dealing); and fair price. A court reviewing the fair dealing of a transaction will look to the details and timing of the negotiations, the degree of disclosure to directors and how approvals were obtained. A Board may use the creation of a Special Committee and its participation in the transaction as evidence of fair dealing and any of the seven ‘independence’ characteristics outlined above can be used to bolster this defense.

A Board defending the fair price of a transaction does not need to show that the price was the highest price that a bidder could afford to pay, but rather that under the circumstances a reasonable seller would regard the price as within a range of fair value. A proper defense of the transaction price should show that a Special Committee approved the price after fairly valuing all the assets, the earnings, the future prospects and any other factors that would effect the transaction. The breadth and scope of a Special Committee’s analysis of fair price is an essential factor in determining fair price. One way that a Special Committee can evidence fair price is by retaining an independent financial advisor to render a Fairness Opinion. The Fairness Opinion would explain and opine as to the fairness of the price being offered. The financial advisors’ independence, diligence procedures, and especially its Fairness Opinion are key pieces of evidence in demonstrating fair price. It should be noted that a major factor in considering a financial advisors’ independence is whether that advisor stands to collect a material success fee upon closing of the transaction. Legal advisors play a crucial role in overseeing the financial advisors’ independence, diligence procedures and in reviewing and commenting on the language of the advisors’ Fairness Opinion to ensure that these defensive measures are properly evaluated and not contested in court.

Conclusion

In sum, the role of a Special Committee is pivotal in any transaction with a perceived conflict. A committee that is structured as a truly independent committee accomplishes two key purposes: (i) under Delaware law, evidence of such committee shifts to the plaintiffs the burden to prove that the directors breached their fiduciary duties; and (ii) the existence of such committee is a key piece of evidence to defend the fair dealing component of the transaction. Legal advisors play a key role in carefully structuring and monitoring the committee and its activities. From periodic evaluation of the composition of the committee, to preparing minutes and other written materials showing a committee’s activities, to carefully reviewing and commenting on a financial advisory opinion, thoughtful legal advice can be crucial in assisting a party in successfully executing an entire fairness defense through a clear showing of both fair dealing and fair price.

We hope that you find this information helpful. Should you have any questions, please contact any member of Baker Hostetler’s Mergers and Acquisitions Team.

Sincerely,

Steven Goldberg

Baker & Hostetler LLP

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* A version of this article was published in Financier Worldwide’s Global Reference Guide: Middle-Market M&A 2011 in April 2011.

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Baker & Hostetler LLP publications are intended to inform our clients and other friends of the Firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience. © 2011 Baker & Hostetler LLP

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