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Odds Are 8 To 1 For M&A EXIT

“A startup is 8 times more likely to EXIT as a result of M&A than by IPO.”

This is just one of many fascinating bits of information I picked up at the Cooley event in Tel Aviv this week. The Event was about Opportunities to Raise Capital and Achieve Liquidity in the U.S. Markets. In other words, it was about the different exit opportunities and the pros and cons of each.

Too many internet and technology related conversions I go to, are dead boring and offer no real benefit perhaps maybe that of networking. This one was surprisingly professional, enriching and highly practical. So for you, fellow entrepreneurs, I’ll share some of the interesting exit strategies discussed.

Let’s start by getting these two definitions out of the way:

• M&A - Mergers and Acquisitions - merging and acquiring of different companies (in this context, we’re talking about you’re company being bought by the Googles or Yahoo!s of the world).
• IPO - Initial Public Offering - first offering to the public of your company’s shares on the stock market.

So You Wanna File For IPO In NASDAQ…
The first Panel, moderated by Robert Brigham from Cooley Godward Kronish LLP, discussed current issues companies face in the U.S. IPO market. Panel members were: Aryeh Fund from KPMG, Yoram Inbar from Merrill Lynch, Ronald Lehmann from Fischer Behar Chen Well Orion & Co. and Rick Mann from Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co.

Here are some of the interesting points raised in this panel:

• Israeli companies traded in the US market enjoy more flexible reporting requirement. For example: there’s no obligation to report the salaries of the top 5 executives in the company AND the filing of the IPO to the SEC can be done confidentially. The latter gives the company the advantage of picking the right time to penetrate the market.

• Yoram Inber mentioned the advantages of raising funds by IPO in comparison to raising from VCs or “angles”. These advantages include: validating the product in the global arena and detachment from the local market, increasing name awareness by being reviewed by research firms and attracting highly qualified employees by offering options.

• But IPO is no walk in the park. Aryeh Fund highlighted that it requires a shift in mind set from a small privately held company to a pubic company. There’s suddenly great significance and responsibility in making sure financial reports are professional and accurate. Internal control and reporting to the SEC requires the top management’s time and attention and it increases accounting expenses significantly. This is something Israeli CEOs don’t always take under consideration when filing for IPO.

• Not all companies are right (or ready) for IPO. According to Yoram Inbar, the profile of a company that files for IPO in the U.S. market should be:
  • Strong management
  • Addressable market in the U.S.
  • Protected IP (intellectual property)
  • Sustainable business model
  • Turnover of $10-15 million per quarter.

• It’s important not to file for IPO too soon (when your quarterly revenues are lower than $10 million ). Israeli companies that hurry to file for IPO dilute the reputation of Israeli companies is the global market. For such companies, there’s always the options of IPO in AIM or TASE, which are more suitable for smaller IPOs.

• Another exit strategy discussed was “Dual Tracking”, which means pursuing both IPO and M&A at the same time. The down side is of course lack of focus and very high overhead in managing both processes simultaneously. But the upside in increased name awareness and higher valuation can be great.

• So what does an Israeli company need to do to prepare for a U.S. IPO?
  • Build a management team - In particular this means hiring a CEO that can take the company on a road show and a CFO which is familiar with the US market and can handle research analysts. This may seem trivial but is sometimes what founders find most difficult to do. Emotionally attached to their “baby”, many founders often view themselves as the most qualified to lead the company when if fact they lack experience and knowledge of the U.S. market.
  • Select the right investment bank to lead the IPO - Not all banks are right for all IPOS. First, it should be a bank of the right size. A smaller IPO will probably get the attention in deserves from a boutique investment bank rather then going from Merill Lynch, which handles mostly big-time IPOs . A presence of the Bank in Israel, industry knowledge and strong equity platform are also important.
  • Corporate House Cleaning - Post Enron and WorldCom, the importance of corporate and accounting house cleaning is pretty obvious. What this means for example is making sure employee options are in order, no withstanding loans to officers etc.

And now for the more viable EXIT opotion: M&A
Between 1997 and Q1 of 2007 start ups exited 8 time more by M&A than by NASDAQ IPO. The second panel, led by Richard Climan from Cooley discussed the more viable EXIT option: M&A. Members of this panel were: David Chertok form Meitar Liquornik Geva & Leshem Brandwein, Yoav Hineman from Magnolia Capital Partners, Barry Levenfeld from Yigal Arnon & Co., Hillel Schuster from KPMG, and Dr. Ayal Shenhav from Danziger, Klagsbald & Co..

The M&A session focused on:

• Trends in the U.S. M&A Marketplace for Venture-Backed Companies
• What U.S. buyers look for when acquiring venture-backed companies
• How Israeli companies can position themselves for an M&A exit
  
• The key negotiating points and regulatory challenges

The big take away from this session is: It’s A Sellers Market!

Here are some of the interesting points in more detail:

• Company valuations are rising, there are currently more auctions for every hot company AND more private equity is entering the market. It’s an M&A boom of unprecedented proportions. The recent acquisitions of My Space by Rupert Murdoch, of LastFM by CBS, and of Stumbleupon by Ebay are just a few examples.
• We’re witnessing massive amounts of liquidity. The estimate is of that over $200 billion in private equity is now competing with strategic buyers. These private buyers can offer synergy benefits (with other companies in the portfolio) that aren’t less attractive than those offered buy strategic buyers.
• In a sellers market, M&As can offer quicker exit, non-price terms in favor of the seller, and hiring investment bank on success based fees.
• Another interesting point raised was that start ups that were funded by the “Chief Scientist” should know that there’s a fine to pay when you go for IPO (because you take IP out of Israel).

Don’t let all this talk about EXITs, and the current acquisitions boom, make you forget the lessons of the .com bubble. EXIT is NOT a revenue model! Think sustainable business model and if you think big enough, EXIT will follow…