Feature - An Interview with Veber Partners

"M&A" is often used as industry jargon to include mergers, acquisitions and divestitures, and raising capital for companies. In the following roundtable discussion with partners of the firm, an M&A professional focuses on common questions asked by clients and the general public about private investment banking and M&A.

M&A Interviewer: "There are often misconceptions about what an ‘investment banker' really does. We have a few questions that we would like you to discuss. Can we take them one at a time? To start, Gayle, can you tell us what you do?"

Gayle: We work with a client throughout a transaction. This varies based on whether the client is buying another company or selling their company or a division. First, the chart we've included below reviews the key steps in buying or selling a business and in raising capital. Later we can talk about the process of raising capital and identify our role in each of step of these.

M&A: "Don't you really just find me the names of companies to buy or sell?"

Gayle: No. We are not a "Business Broker", or a "Finder". We work with companies from the beginning of a transaction through closing. We utilize a team concept, drawing on the knowledge of shareholders, management, industry consultants and other advisors.

Rodger: Everyone is expected to contribute to the objective. There is a lot more to a transaction than a name, and more work than most people realize. There are many steps in which we either lead or actively participate. Since we have been through so many transactions, we know what to expect and can help position a transaction to the benefit of our client. Transactions always sound like fun from an observers standpoint, but few owners or business managers find it fun. It's usually a lot of work.

If you think about selling real estate, few homes or buildings sell for their "appraised" value. Rarely do they even sell for the price the agent gets through their "comps" or "comparative sales" analysis. That's because the market trends and the specific buyer who shows up, really determine the price. In a hot market, houses can sell above the asking price (I know, I bought one and I sold one). In slow markets, owners can take large discounts just to sell a house (ask any Californian in today's market).

M&A: "So, what do you do?"

Nick: Our job is to take an objective look at a company, gather sufficient information to tell the company's story, and then take the company to the market - the investors, lending institutions, buyers or sellers best suited to the company's current situation.

Gayle: That's right. We can cast the critical eye of a potential lender or buyer. We understand the tradeoffs in selling between cash and promises. We've been principals as lenders, buyers and sellers before. We completed over $400 million of transactions as lenders. We were senior management in companies buying other companies. We have advised clients on over 100 transactions. We sold a business we started from scratch. And we are owners. This is our business, not a division of a division of a parent company. We care about results.

We create the blind horse race, the unspoken knowledge in the minds of interested parties that they may not be our client's only option. Our goal is getting at least one candidate across the finish line - even if it really is a one horse race.

Rodger: After reviewing these areas and conducting a preliminary due diligence on the products, markets and operations of the company, it is our job to determine and recommend the best marketing approach. Whether its an acquisition, sale of a business, or raising debt and equity capital, we use our knowledge and experience in the markets, combined with hands-on research, to develop a convincing, defendable story for the market.

John: It's really important to understand the team concept. We help identify and target buyers, sellers or funding sources and create the marketing documents to bring our client and the candidate parties together. In selling a business or raising capital, this document creates an organized, unified way of describing the company in its best light, including its products and markets, its management, its past, and its future prospects. Even when a candidate party is already identified, this document serves as the first line of due diligence for interested parties. Sometimes, it even highlights problems that need to be resolved now, before third parties arrive.

We learn from the client and hope they get some education in return. We explore strategies the company may not have thought about and financial market options management will probably not have the time or expertise to explore.

We value offers, often including corporate valuations of purchase price, the net present value of long term commitments, and the tradeoffs between cash, terms and covenants.

We assist the decision making process to find a balance between the shareholders' goals and objectives and the available market.

M&A: "But what about after a good candidate is identified and the price is set?"

Gayle: Transactions do what most transactions do...fall apart. Little things may cause it, sometimes a single term of the transaction. We have assisted clients and ourselves in many negotiations. We think we've learned some things about the process. We are also less emotionally involved.

Sometimes our advice is taken - sometimes not. But our job is to see good transactions close. And no one signs up for a transaction they just can't live with unless they are desperate. It's our goal to work with clients before they reach that stage.

M&A: "Does it work?"

Gayle: Most of the time.

M&A: "Are you always successful?"

Rodger: I wish we could say yes. Sometimes, the answer is "No", sometimes just "not now". Sometimes a strategy or business issue first needs to be resolved. Sometimes, it's selecting between "No Option" or "Do Nothing" and an option that is less attractive than the team had hoped to achieve. This is a time and market driven process. BUT, we will turn over each stone worth turning.

This includes not only its financial history, but also its prospects for the future. We produce a long list of questions that need to be answered before we really begin. Primary areas deal with management and management practices, markets served, potential markets, and prospects for the future; and, importantly, the goals, motivations, and objectives of the shareholders.

M&A: "Gayle, you said you could review your role in these transaction steps in the charts. Where do you participate? Can you also tell us who does what in a transaction?"

Gayle: We participate in all phases of a transaction as part of the team. Often as the driver, sometimes as the horse, at times as the cart, and sometimes as the back seat driver (advisor). The tables are quite detailed, but a transaction has many steps some people don't think about.

Click on the topics below to view the charts demonstrating the main areas of "Responsibility" and "Key Support".

Acquisitions

Selling a Business

Raising Capital

M&A: "If a company is looking for money, don't you just identify banks and other institutions or people who will give it to me? It seems they have to do all the work once you find them."

Gayle: No. It's true that each and every lender, investor, buyer or seller will want to do their own due diligence and will have their unique perspective on pricing, terms and requirements.

Our experience in these markets as both principals and as advisors helps us anticipate their objectives, attitudes, reactions and expectations. Part of our value will be structuring the type of transaction, equity or debt that best fits the company and the market.

Part of our value is the "road not taken" - NOT pursuing options with a low probability of success. Part of our value will be anticipating questions and problems and having the information and proper perspective in the answers to allay fears and concerns and resolve problems.

Rodger: But we aren't perfect, and part of our value is just having been through this before. Many times before. Transactions can stall or become emotionally charged. It's our goal to find workable solutions. We continue to monitor progress (or the lack of progress) in a transaction and recommend alternate approaches, structures and creative solutions to roadblocks and problems. We're part of the repair crew, picking up the elements of a transaction and gluing them back together in a new and different - but achievable- form.

M&A: "Can you give me examples of how you ‘add value' to a transaction?"

Nick: I think there are many different kinds of value.

In one transaction the client already had a valuation of the firm from a well known valuation firm. We obtained a 30% higher price from the buyer that had already been identified before we entered the transaction.

In two other transactions, an offer had been made by management to acquire the company. We obtained a much higher price by identifying strategic buyers and opening the transaction to competitive bidding.

In another transaction, we obtained a higher price than offered by the original buyer, because they thought there was competition for the purchase from other strategic buyers ... even though they the sole bidder. In other words, we created a blind horse race.

For one seller, the terms of the transaction were more important than the highest price, so we negotiated a lower price structure to control the terms. This is sometimes true in an "earn-out" or transactions where future payments are dependent on future performance. Clarifying a company's objectives are key to negotiating the right price and terms. Many times shareholders haven't recognized all of their options.

After one buyer had negotiated a letter of interest, we still assisted them in renegotiating the purchase price, saving $1.8 million.

We have often advised clients to refocus their strategies and objectives to obtain better long-term value. For one client, bridge debt financing we arranged precluded loss of equity through stock options that were to be exercised by an existing lender if the debt was not retired. The deadline was too close for the company to arrange traditional financing. The bridge loan gave them the time to do it right.

Sometimes though, it looks too easy. We may save a company significant time by NOT pursuing certain options that our experience has proven have a low probability of success. It's hard to put a direct tangible value on these situations, since the value is in the path NOT taken.

M&A: "How do you get paid?"

Gayle: Our fees are typically based upon a percentage of the transaction, based on the size and nature of the transaction and ranges from 1/2% to 10% of the transaction amount. We ask for an initial retainer which is usually 5% to 20% of our total expected fees.

But we are flexible and try to structure our fees with our client's needs and interests in mind. Sometimes our retainer is paid over a few months or may be structured as an ongoing monthly retainer in long-term or complex projects. The balance of our fees are paid as the transaction closes.

In representing sellers and buyers of companies, we often structure an additional incentive bonus for getting an extra high (or low) purchase price, as well. We think the extra incentive helps assure the client that we are highly motivated to get the last marginal dollar out of a transaction.

M&A: "Although I understand you are working without pay during most of the transaction, what happens if you aren't successful?"

Gayle: We don't collect closing fees. We try to anticipate our probability of success and the market's response before we begin an engagement.

In some high risk situations or in cases where we are precluded from continuing to work with a client - and situations occur beyond our control or anyone's foresight - we may earn a "break-up" fee. If we feel this may be necessary, we discuss the issues with the client at the beginning of an engagement.

We are both professionally and economically motivated to complete each transaction we begin.

Rodger: And we turn down transactions where we don't believe we can be successful or where we can't bring value to the potential transaction.

M&A: "What about initial public offerings - IPOs - and public debt offerings. You don't do these. Aren't you at a disadvantage?"

Rodger: No. And this is an advantage for our clients. Even for the ones with hopes of going public. I'll explain.

Many firms doing IPOs specialize in specific industries. They also supply market research and act as the company's market makers - publicizing the company and keeping other analysts and stock houses informed and interested in the company. This is good for the company and good for investors. There are several bankers in the Northwest that can "take a company public," but given the diversity of Northwest businesses, few of these specialize in one or more industries.

Although we are all registered broker dealers, we don't have to support a group of stockbrokers competing with national firms. The market for IPOs changes, too. In slower IPO periods, these groups begin working more in the private markets.

John: And that's why our approach is an advantage. We are always in the private markets. When a company wants to "go public", we will then help them find a public investment banking firm that fits their company - usually one that has specialists in their specific industry and markets. That's best for the company and good for our long term relationship with the major shareholders.

Gayle: In acquisitions and divestitures, we work with both public and private companies, but we raise debt and equity from institutional, corporate and private sources, not from the public markets.

I have worked to put in place a team concept for private investment banking. Since public company information is readily available from traditional sources, we bring a special capability to private Northwest companies - we have amassed a great deal of information and research expertise focused on private companies, private M&A, and sources of capital.

Our custom databases and on-line research capabilities give us an equal footing with larger firms and a distinct advantage in the Northwest.

We understand the private business owner and the special strategic, accounting, tax, legal and family concerns they bring to a transaction.

M&A: "Well, thank you all for your time. I hope our readers will have a better grasp of your practice and the world of investment banking."