Post on 28-Nov-2014
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November 10, 2006
Brad GevurtzHead of Investment BankingD.A. Davidson & Co.Two Centerpointe Dr, Ste 400Lake Oswego, OR 97035503.603.3060bgevurtz@dadco.com
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The investment banking market has evolved into three distinct tiers
Large, multinational banks predominately based in New York City
Midsize, full-service broker dealers with a regional presence
Small, boutique firms with one or two offices
Large investment banks are acting like mini hedge funds, generating most of their profits on proprietary trading and competing with private equity funds for deals
The trend is to use the firm’s balance sheet to get deals, often tying loans or investments to advisory services
Midsize, full-service broker dealers have mostly disappeared due to: (a) past mergers; and (b) the difficulty in creating new full-service investment banks given the cost of research and the narrowing of commissions on trades
As a result, there is a lack of competition in the full-service middle tier of investment banking
But clients still need investment banks with sales and trading, institutional and retail distribution, and research
Small, boutique firms are proliferating
Most offer only one product (M&A) and a large percentage are unlicensed
General Investment Banking Trends
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The M&A market is booming National M&A activity in 2006 year-to-date has eclipsed $1.0 trillion, a 23.1% increase
over the same period in 2005
Strategic Buyers have large amounts of cash and are under pressure to use the funds Mature markets are consolidating Competitive and rapidly changing markets are forcing old line companies to acquire new
products or channels
Huge supply of private equity, senior financing, and mezzanine capital is driving up valuations Many funds are underinvested and are aggressively seeking new opportunities Hedge funds emerging as bona fide buyers or participants in deals Aggressive lending by senior banks driving higher valuations
Size has a significant impact on premium/discount
Process for quality companies is highly competitive
Great time to be a seller
Merger & Acquisition Trends
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M&A ActivityU.S. M&A Deal and Dollar Volume, 2000 – YTD September 30, 2006
Source: Thomson Financial
M&A volume on four-year upswing
YTD 2006 deal and dollar volumes on pace to exceed 2005 levels
Dollar VolumeDeal Volume
11,135
7,7027,041
7,740
8,5589,217
7,768
0
2,000
4,000
6,000
8,000
10,000
12,000
2000 2001 2002 2003 2004 2005 YTD9/30/06
Dea
l Vol
ume
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
Dol
lar
Vol
ume
(Bil
lion
s)
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Buyout EnvironmentU.S. Buyout and Mezzanine Funds Raised, 2000 – YTD June 30, 2006
Source: Buyouts Magazine
Funds continue to raise record amounts
Hedge funds emerging as full-fledged participants in private equity/buyout market
$54
$36
$10$21
$42
$174$165
$54
$36
$21
$42
$174
$82
$10
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
2000 2001 2002 2003 2004 2005 YTD6/30/06
Fun
ds R
aise
d ($
Bil
lion
s)
(Est.)
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2003 2004 2005 YTD 9/30/06 Cash 55.6% 58.8% 65.7% 75.7% Stock 23.6% 19.2% 16.3% 10.9% Seller Note 1.2% 1.6% 0.4% 0.2% Combination 19.7% 20.3% 17.6% 13.2%
Transaction Consideration
Stock as consideration has declined dramatically since 2003
Changes in composition reflect seller preference for cash
Buyout market strength contributing to increased use of cash
Seller financing/earnouts declining as quality sellers have greater negotiating leverage
Consideration Composition, 2003 – YTD September 30, 2006
Source: Bloomberg
Cash
Stock
Combination
Seller Note
0%
20%
40%
60%
80%
100%
2003 2004 2005 YTD 9/30/06
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Regional M&A ActivityM&A Data by Selected Western State – 2001- 2006 YTD
Source: Bloomberg LP., announced transactions.
Regional M&A activity remains strong for the third consecutive year
(in millions) Value # Value # Value # Value #
California $98,675 1,112 $108,834 1,400 $164,115 1,553 $139,578 1,221Colorado 12,855 142 16,302 182 43,682 250 36,232 207Idaho 126 23 3,950 19 1,221 35 16,666 24Montana 476 13 64 12 558 19 862 19Oregon 1,502 56 1,219 53 10,444 61 1,012 61Utah 675 63 931 73 640 94 3,159 81Washington 6,359 100 54,579 130 23,511 191 12,778 152Wyoming 607 8 457 12 244 25 552 27
Regional $121,275 1,517 $186,336 1,881 $244,415 2,228 $210,840 1,792
9/30/20062003 2004 2005
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Public Equity Market Trends
Unrelenting pressure on commissions and spreads
Dis-aggregation of execution and research
Timely and proprietary research has become more important as more services are commoditized
New reality of public offerings: Splits are less equal Gross spreads are under pressure
Sarbanes Oxley has affected the decision to exit via an IPO Technology industry is seeing more activity in M&A
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Demand for IPOs has been volatile in 2006 with total IPOs priced down 12% year-over-year
IPO filings have been steady, backlog is increasing
SEC review and level of scrutiny have increased dramatically in the past 24 months, resulting in extended time-to-pricing
Public Offerings Environment
Source: Equidesk
2005 2006
Total IPOs Priced 181 159
Total IPOs Filed 275 248
IPO Backlog as of October 1st 129 152
Year-to-Date
0
5
10
15
20
25
30
Jan
Feb
Mar
Apr
May Jun
Jul
Aug Se
p
Oct
Nov Dec Jan
Feb
Mar
Apr
May Jun
Jul
Aug Se
p
Oct
2005 2006
IPO
s P
rice
d
$0
$5
$10
$15
$20
$25
$30
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
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Q4
Q1
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Q1
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Q1
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Q4
2000 2001 2002 2003 2004 2005 2006
Dol
lar
Vol
ume
($ b
illi
ons)
0
20
40
60
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120
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Dea
l Vol
ume
Dollar Volume # of deals
*Q4 2006 reflects one month of data
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IPOs – Why Times Have Changed
Increased costs of being a publicly traded company
Sarbanes-Oxley - initial cost between $2 - $3 million, ongoing cost of $1+ million
Increased difficulty getting research coverage
Cost of providing research has escalated
Narrowing of commissions on trades
Research analysts can not be paid by investment bankers
38% of the companies listed on NASDAQ don’t have research coverage
Increased scrutiny surrounding public companies and corporate governance
Corporate scandals such as options backdating and fraud have significantly increased the spotlight on corporate executives
Intense pressure on companies to meet or beat quarterly revenue and earnings estimates
Companies can no longer set up “cookie jar” accounts to smooth earnings
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Alternative Investment Market (AIM)
Since the founding of AIM in 1995, over 2,400 companies have listed on the exchange
Approximately 275 technology-related companies are traded on the AIM, of which 9 are U.S. based companies
Over 50% of companies on the exchange trade at market capitalizations between $10 and $95 million
Provides visibility and builds brand value
Provides capital to fund growth
Creates liquidity opportunities for existing shareholders
Provides stock-based currency for acquisitions
Facilitates access to capital markets for future use
Increases the company’s reserves in the
event the market or economy deteriorates
Benefits U.S. IPO
Must have Nominated Advisor
No minimum size of company
No minimum proportion of shares to be in public hands
No trading record required
No prior shareholder approval for the majority of transactions
No restrictions on the transferability of the company’s shares
No requirement to be incorporated in the United Kingdom
Admission Criteria AIM IPO
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Private Equity Trends – VC/Minority Interest Funds
Trend toward Mega Funds with rich management fees Necessitates larger investments and later stage focus Decision to back less risky companies with more well-defined exits
1999 – 2000 vintage funds need exits Necessitates later stage investing plus buyouts
Hedge funds and Angels stepping in to fund Series A and B rounds
Name brand funds have no problem raising more capital, others starve The rich get richer
Tech companies boot-strapping and selling out vs. taking VC money, due to cheaper startup costs and web services
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The Crash in Seed CapitalU.S. Seed Funding as a Percent of All Venture Funding
Source: Venture One, Ernst & Young
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
1980 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Seed
Fun
ding
as
a Pe
rcen
t of
Tot
al V
entu
re
Fund
ing
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Buyout Funds Overabundance of capital and cheap debt causing deal frenzy Raising restructuring funds Making a major push into tech Teaming up on deals
Hedge Funds Getting more active in private equity and buyouts – moving away from stock market
arbitrage Returns are falling and/or becoming more correlated with overall markets
Result: trying to grow bigger to profit on management fees and locking up money over longer periods
Fraud and disasters are becoming more prevalent Regulators are long on talk, short on action
Private Equity Trends – Buyout and Hedge Funds
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Regional Private Equity ActivityPrivate Equity Data by Selected Western State
Source: PWC Moneytree Survey
California continues its lead in private equity investments Washington and Colorado also have high levels of activity
(in millions) Volume ($M) # of Deals Volume ($M) # of Deals Volume ($M) # of Deals Volume ($M) # of DealsCalifornia $2,779 332 $2,584 328 $3,030 334 $3,127 389Colorado 176 21 127 18 146 26 89 22Idaho 0 0 0 0 0 0 0 0Montana 23 1 5 1 0 0 0 0Oregon 38 7 26 6 26 5 50 9Utah 31 6 28 5 60 10 28 5Washington 186 28 279 35 269 31 326 44Wyoming 0 1 1 1 7 1 0 0
Regional $3,233 396 $3,050 394 $3,538 407 $3,620 469
Q2 2006Q1 2006Q4 2005Q3 2005Last Twelve Months
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How to Choose an Investment Banker
Full-service capabilities: Public offerings, merger and acquisition advisory, valuation and private placement capabilities
Allows the banker to offer non-biased, objective advice
Industry expertise
Allows the banker to offer higher value added service
Reputation, Integrity, and Longevity
Clients want an investment bank that has been in business for 10+ years, and will be around when needed in the future
Experienced professionals
Bankers must have significant investment banking experience and have witnessed Wall Street boom and bust cycles
Regional commitment
Facilitates long-term relationships and close interaction
Strong aftermarket support on public equity deals
Research coverage, sales and trading
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Conclusion
M&A market is hot
Private equity fundraising at record highs
Valuations are very strong
VC/private equity/hedge funds are extremely active
Increased difficulty and costs of becoming a publicly traded company
Choosing the right investment bank is critical to achieving a successful outcome
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D.A. Davidson & Co. - Full Service Investment Bank
Established in 1935; privately owned by officers and employees
One of the largest independent full service brokerage firms in the country
865+ employees
$20 billion in total client assets under management
52 offices in 16 states including Oregon, Washington, Colorado, Montana, and Utah
Full service sales, trading, research and investment banking
Market maker in 290 stocks
Provide research coverage on 180 companies