Archive for the ‘M&A’ Category

Start-Up Fun. A Fiscal Year Review…

July 25th, 2013 Comments off

I think I have been living the adage of “time flies when you’re having fun…”.  I realized yesterday that it had been almost a full two months since my last blog entry and I was a bit mortified. Especially when I try and keep a strong discipline in all aspects of my life. However, when I look back on what has been happening the last 60-days, it’s easy to see how that could have happened. With the final wrap-up of an ERP implementation and the closing of our first fiscal year, it’s been a crazy few months. But it’s not just the last few months, it’s the satisfaction of looking back over the last year and seeing what we have been able to accomplish as a team. While I’m obviously not going to share financial results or product development achievements, the growth and operational achievements are something for the team to be proud of.

When I first started with Cylance, we were all of 7 employees, I was given a laptop with Quickbooks installed on it, and the company had signed on with a PEO to administer our payroll and benefits. The company’s founder, Stuart McClure, had just started to implement his vision and we were working out of a living room. At that point, you couldn’t have asked for a cleaner slate to move the company forward. Fast forward to now and you realize how much of a transformation this company has gone through.

While I continued to use Quickbooks for a short amount of time, we put tremendous effort into bringing a sales management platform online to manage the opportunities we were already seeing coming into the company. Once we had the confidence we had effectively installed the first phase of our automation, we moved on to implement an additional platform aimed at the management of our professional services business. How do you make effective business decisions if you don’t have the ability to measure your business? A rhetorical question I know, but those needs can easily be lost in a hectic start-up environment. Once we were about halfway through that effort, we already knew that we were going to have to upgrade the Finance side of the house so we could have seamless integration of all three platforms. Hence, the process started to interview ERP candidates. I started having bad flashbacks to the SAP implementation I had carved myself out of a year prior. However, we aligned ourselves with a great partner and the calendar was set to bring the final piece online. As with everything else, we committed to the calendar and executed to the exact day and brought all elements of the business online with platforms that will support us for years to come.

Time for a break…right? Not even close. The next big step, with a VERY underestimated effort of what it would take, was to extract ourselves from our PEO parent on payroll and benefits and bring that entire effort in house. This might have been more painful than the SAP implementation, but a worthwhile endeavor. Again, a full interviewing of partner candidates. In the end, we were able to achieve savings, enhance our benefits offering to employees, and be the master of our destiny with regards to program management. We successfully brought our benefits offering online and on time, as well as bringing all payroll processing internal.

What a year it’s been. But wait…there’s more. Toss in the scouting for a new corporate office, 3 different office moves before we settled permanently, an increase in our employee count from 7 to 60, the development of a remarkable team, customer base, and marketing results that would make most established companies envious. Ok, now for a break….right?

We’re not just knocking on the door of our 2014 fiscal year, but we’re kicking it in. It’s still a target rich environment and the task list is longer than Santa’s naughty & nice list in December. At the end of the day, you need to look back on the day, the week, and ultimately, the last year and feel satisfaction with what you’ve accomplished. Start-ups are not for the faint of heart and you need to stay motivated and driven. It’s easy to stay that way when you have a mission you’re committed to and a team that is equally committed.

Thanks for reading…

Jeffrey Ishmael

Due Diligence: Sometimes Even The Best Miss….

February 10th, 2010 Comments off

            One of the things that I love about what I do is the opportunity to continue learning, whether that’s during the course of my day:day activities, or through the actions of others….good or bad. One area I have a real interest in is that of acquisitions and the manner in which they structure and strike their deals. What’s even more interesting is how those same folks approach the due diligence process. For some, it’s about speed, trying to capture 90% of the key data, and hedging the other 10% in one form or another. For others, it’s about a slow and methodical approach, turning over every rock, and scrutizing every report, employee, past employee, vendor, and service provider. I’ve seen both approaches….and I’ve seen them both fail as well.

            In a recent dinner conversation with someone in my network, we were discussing a recent acquisition and the manner in which the due diligence was conducted. The entire due diligence process lasted all but a handful of weeks before the investors came rushing in. What was unfortunate about the situation is that the corporation had a real estate loan that was not reflected on the balance sheet, and the mortgage payment that was being made was reflected as a lease payment. A further unfortunate discovery was that the building was purchased only in the last handful of years when real estate was approaching a fully valued scenario and is now valued significantly less.

            Unfortunately, in the haste to conduct the due diligence, it appears the reviews went no farther than system generated financial statements, banking records, and reconciliations of vendor payables.  Yes, there was a review of stated assests, but only those reflected on the balance sheet. Although it was likely that there was not any ill intent in the actions of the incumbent owner, it was an unfortunate discovery. The omission on the balance sheet was, in further review, likely attributed to the fact the during the 10+ history of the company, there was never a CFO or other key financial figure. Keep in mind that the investor group leading this effort were seasoned professionals and had generated significant wealth in their execution of prior transactions.

            So how do you avoid such a predicament in your own future transactions? It goes without saying that the itemization below is not an exhaustive view of approaching an acquisition, but merely a start to analyzing every element of the situation…

·         Who are you really dealing with…have you conducted background checks on key stakehoulders?

·         Have you run a full credit review / D&B on the corporation to identify all loans, liens, and other considerations?

·         Are there reconciliations available for all material balance sheet items? Reviewed?

·         Has the existence of all material assets on the balance sheet been confirmed?

·         Have a review of banking statements, vendor purchases, A/P balances, and A/R balances confirmed figures reflected within the income statement?

·         Have all tax returns been submitted on time & correspond to the income statement?

·         Are there contingencies built into the agreement to hedge against any unforeseen risks, unknown off-balance sheet liabilities, or any other non-reported liens?

            Like I said, this isn’t even close to an exhaustive list, which should ultimately be an extensive punch list of data to review, forecasts to be developed and riddled with considerations, and ultimately, considerations given to the respective cultures and other intangibles. Truly a complex jigsaw puzzle to consider….


Thanks for reading . . . .


Jeffrey Ishmael

Goodwill Considerations & Foreign Entities.

September 16th, 2009 Comments off

            Yesterday’s blog post was one that turned out to be a great example of the value of the network I’ve been able to build up, and tap into, when it comes to subjects or situations that are outside of my experience or knowledge range. Yesterday I wrote about the recent 10Q filing for Quiksilver and the fact that they had reported an increase in their stated goodwill value as a result of favorable foreign currency exchange rates. After pulling a Sherlock Holmes and making some calls to accountants and private equity contacts, I was still coming up short. Leave it to Twitter! One of my contacts in Twitter, a CPA up in the Santa Rosa area, researched the subject a bit more and came up with the necessary guidance.

            In addition to SFAS 142, which covers Goodwill & Other Intangible Assets, Joe pointed me in the direction of SFAS 52, which covers the element of Foreign Currency Translation. While I’m familiar with both of these standards, the combination of the two, and a resulting change in goodwill, which was not associated with an acquisition, divestiture, amortization, or general write-down (as we’ve recently seen), was certainly an approach I had not encountered. I should also clarify that while it is certainly common to see companies reporting the foreign currency impact on their operations, particularly within the income statement and management discussion, the application of this standard to the valuation of goodwill was one I had not previously seen.

            While I have always viewed goodwill as a relatively static number, it’s not until you get into paragraph 101 of SFAS 52 that it provides any specific guidance for this area. Keep in mind that SFAS 52 is 54-pages of guidance, but the section on goodwill is a mere 5 sentences. Regardless, in paragraph 101, FASB states “Likewise, after a business combination accounted for by the purchase method, the amount allocated at the date of acquisition to the assets acquitted and the liabilities assumed (including goodwill) should be translated in conformity with the requirements of this statement”. Given that, it would seem that guidance would call for calculating the adjusted value, based on exchange rates, of the goodwill for a foreign subsidiary, well after the actual business combination.

            I’m always pretty intrigued when I find a topic that is so open to interpretation, and one that can have a material effect on income statement or balance sheet accounts. In this case, the adjustment resulted in a 7% increase in reported goodwill. What will be interesting to see is if the same downward adjustments are reflected in future reporting if the exchange rate becomes unfavorable. Thanks again to my Twitter contact up in Santa Rosa!

Thanks for reading . . . .

Jeffrey Ishmael

SFAS 142 & Increasing Goodwill in a Down Climate . . .

September 15th, 2009 Comments off

            One of the aspects I enjoy about my profession is the continual evolvement of standards used for financial reporting. Usually, they are relatively straightforward and don’t take excessive work to understand the mechanics. In other instances, you find an approach taken by a company, on a standard you may have thought you were clear about, and you’re left scratching your head wondering what you missed. Take for instance the recent 10Q filing by Quiksilver, Inc. (ZQK). In the recent 10Q I noticed that their recorded level of goodwill had increased by $22.1 million, or 7.4% over the last 9-months. According to the company filing, “The increase was primarily related to the effect of changes in foreign currency exchange rates”.

            When I read this I was a bit puzzled as I had not previously seen reported figures where goodwill was adjusted due to a foreign exchange impact. Since I don’t profess to being the accounting oracle, I made a number of calls within both the accounting sector, as well as the private equity sector, which I thought the latter would have definitive insights on anything that would impact goodwill. Of those I spoke with, none were familiar with such a situation or precedent. While SFAS 142 has been straightforward, it was clear that I have some additional homework to do. I’m not calling foul on the reported figures, but it’s certainly an application of 142 I have not previously seen and am a bit intrigued.

            The other part about the filing that was interesting to me is that the company is increasing the recorded value of their goodwill in a period when most are restating. Further, Quiksilver has been divesting non-performing entities over the last year, which were the primary contributors in the increase of goodwill going back to 2004. In 2004 the company had a reported goodwill total of $169.8 million. This amount increased to $449.4 million in 2005 with the acquisition of DC Shoes, Rossignol, and Surfection. Of the $317 million increase, $244 million was attributed to Rossignol, which has now been sold. Interestingly, recorded goodwill is 89% higher now than prior to the volume of acquisitions the company undertook starting in 2004. However, it should be noted that goodwill was reduced between the 2006 and 2008 period by $215 million, from the high of $515.7 million. With that said, and with the current state of the Retail and Apparel sectors, I have to wonder if Quiksilver is a prime candidate for further write-downs in this area as the sector continues to struggle.

            Don’t have a conclusion on the topic at this point, but it’s certainly a reporting issue that creates a great topic of conversation and challenges what we know about the reporting standards in place. I definitely want to find other examples of companies that have increased their stated goodwill, or reduced, in the face of currency exchange. I’m also interested to really dig into the mechanics of the goodwill in this situation and get a better understanding of the application of SFAS 142. I’ve got my homework cut out for me…..

Thanks for reading . . . .

Jeffrey Ishmael

IAS 36 Asset Impairment – & Subsequent Recovery? The eBay/Skype Deal…

September 2nd, 2009 Comments off

            After my coordination of an IFRS conversion in 2005, I’ve keenly been watching the move towards a convergence here in the U.S. as policymakers believe IFRS is the next great move for U.S. accounting policy. With the meltdown of the financial markets, many believe that this could be an answer to the avoidance of future issues. As I’ve mentioned in previous posts, IFRS will not be a solution or provide avoidance of future issues, but is only another reporting mechanism. In fact, it will likely create more confusion for the greater investing public as they try and wade through the a company’s financials trying to make an informed decision.  One area I have been planning to profile is IAS 36, which covers the Impairment of Assets, and the procedures that should be followed to ensure that assets are carried at no more than their recoverable amount.

            Basically, IAS 36 calls for a company, at the end of each reporting period, to test and determine whether an asset may be impaired. Without going into all the details, if the company determines that an asset is impaired in its value then the company will recognize that decrease in value as an impairment loss and include it within the profit/loss reporting for the company. However, one of the more significant elements of IAS 36 is the ability to reverse the impairment of that same asset, which is an option not allowed under GAAP accounting. I have been looking at determining an appropriate example of applying this to a realistic situation and was given a perfect opportunity with the eBay / Skype acquisition and subsequent divestiture.

Purchase Analysis of Skype:
Initial cash consideration  $   1,300.00
Initial stock consideration  $   1,300.00
Potential earnouts  $   1,500.00
Total Projected Purchase Price  $   4,100.00
Earnout not paid  $     (975.00)
Net Purchase Price  $   3,125.00
Skype cash generation  $       (324.0)
Write-down  $       (1,400)
Total Carrying Value  $         1,725
Sale of 65% of Skype  $         1,900
Projected Skype Value  $         2,923
Excess over Book Value  $         1,023

             If you start looking at the total considerations and estimated purchase price for Skype, eBay was potentially on the hook for $4.1 billion. However, Skype failed to meet the aggressive goals that were set and missed the payout on the majority of the potential earnout. This reduced the final purchase price to $3.1 billion. Then, in October 2007, the company recorded a $1.4 billion writedown in the value of Skype, which was reflected in the earnings for eBay that year. Fair enough, admitting that you overpaid and now you pay for the sins. This basically gave Skype a carrying value of $1.7 billion.   This is completely separate from the estimated $324 million in cash that was generated by Skype during the 2007-2009 period, under the eBay watch. With the recent divestiture deal that eBay struck, at $1.9 billion, for a 65% share, this puts an effective valuation of $2.9 billion. Almost $1.2 billion higher than what was reflected on the books, and without consideration to the cash generated by Skype, which is also part of the IAS 36 impairment test. This, also in consideration to the fact that eBay still owns 35% of Skype.

            So if I’m interpreting IAS 36 as it reads, eBay has essentially recovered the entire carrying value of Skype, while also retaining a 35% stake in the company, which has an estimated value of just over $1.0 billion. Would this mean, under IFRS, that eBay is obligated to revalue this asset and include in their P&L. With approximately 1.3 billion shares outstanding this would equate to almost $0.79 per share. With a trailing 12-month PE of 18x, we’re not talking about chump change. So with this example in mind, how is Joe Q Public investor supposed to interpret the earnings of a highly recognized company like eBay and feel comfortable in his decision when this would clearly not be normal operating results and risks overpaying for a stock that has such a significant non-recurring element?  This is a very material consideration.  I would enjoy hearing back from my IFRS friends if this is an inappropriate application / judgment of IAS 36. Since we’re talking about a Principles-based application versus Rules-based, it seems a great example to examine.

Thanks for reading . . . .

Jeffrey Ishmael

Why discuss Acquisition planning now? We’re not selling now….

January 23rd, 2009 Comments off

     I continue to work with both small and larger companies and continue to be amazed at the lack of real forward thinking when it comes to formulating long-term strategies for the entity in question.  In particular, the process of setting up a company for an eventual acquistion or the entrance of a key strategic partner.  Quite often the response has been “We’re not quite ready to put ourselves on the selling block” or “I think were atleast 1-2 years out from such an activity”. Did you really think about what you just said…?

     Let’s take the example of a smaller entity, that acknowledges they want to be sold, & that this is the stated goal within a few years. Let’s also assume that this entity is not ready now and has quite a bit of clean-up to do before deciding to start that fun little dance. Most Managers and Directors do not appreciate the complexities and depth that go into an effective due diligence process. Let’s start with only the top layer of information, which some companies even struggle to deliver:

  • Multiple years of auditied financials, tax returns, and supporting documents.
  • Documented internal controls and processes used for daily operating activities.
  • Implemented Budget and Forecasting efforts, along with reconciliations to judge accuracy.
  • Reconciliation of all H.R. related information to mitigate any post-deal employee lawsuit risk.
  • Reconciliation of all intellectual property matters, which support underlying business or identify areas of competitive risk or potential litigation.
  • Review of the management team, skillsets, and to determine if they will take the company to the next level.
  • Review of vendor listing to identify difficulting in sourcing or any single-source vendor risk.
  • Review of the customer list to determine depth/quality of customers and any single-customer concentration risk.

     Keep in mind, this is only a portion of the likely punch list. Starting to get the idea? This is not an effort that can be taken on and accomplished in a matter of months. To maximize the value that you’ll receive for the business, this effort needs to start well in advance and the planning process is immense. If you have not started going through and documenting these areas, then any attempt at a punch list will be half-baked and will not provide the most complimentary view of the company, thus resulting in a decreased valuation.

     The effort that will go into this exercise spans the entire organization and will likely be a large distraction from the business at hand if not properly planned for. The discipline to plan and enact the necessary change over a longer period will show that the management is consistent in their actions, show that they understand what it takes to change the business, shows that they are willing to make change, and ulitmately, will support higher valuations at the bargaining table.  Anything short of this will lead to varying degrees of discount in the final valuation. Want to improve your valuation?….then that’s why you start your planning now . . . .

Thanks for reading,

Jeffrey Ishmael

Private Equity panel: Definitive info or Hypothesizing?

October 29th, 2008 Comments off

Tonight I had the opportunity to sit in on a panel discussion on Private Equity and their views on the 2009 Outlook. The panel was hosted by the Pepperdine Graziadio School of Business. While not a Top-25 school, they’ve been doing some good work locally in expanding their alumni base and putting on some worthwhile events. The panel was comprised of three MD’s/VP’s with a variety of industry participation between them. The panel was moderated by a Thompson/Reuters contributing editor.

While I typically look forward to these events, I have to say that I was a bit disappointed in that tonights panel lacked some of the definitive information I always look forward to taking away from the event. While the group said they are still pursuing deals, the discussion centered around the common knowledge of lack of credit, lower multiples, lower debt requirements, and the emergence of more seller financing in deals. Thanks, but isn’t this the same information I’ve been reading about in The Deal magazine, hearing on CNBC, and seeing in the WSJ every day? Isn’t this the same information that’s been a topic of discussion at FEI events over the last 6-8 months?

For a Finance professional who is always looking to deliver additional value for shareholders, whether I’m looking to sell the business or not, it would have been more insightful for the panel to discuss how Buyers and Sellers can come to the table at such a difficult time in the market and structure a deal that is advantageous for both sides. If you’re a company that has no near-term pressure to sell or raise capital, how do you explore strategic alliances or structure minority deals in this market without leaving shareholder value on the table? The event would have been a better success if there was more definitive discussion and less hypothesizing about where the market might be headed.

Thanks for reading . . . .

Jeffrey Ishmael

Corporate valuations – Premiums start w/ the foundation

September 18th, 2008 Comments off

Some recent conversations and emails have prompted discussions regarding the valuations placed on a company and how to move towards achieving a premium. While there are some PE / VC firms that seem to have their “formula”, the process of applying a valuation is a very fluid process that is affected by an unlimited number of elements. The most obvious are trends within an industry, the company’s market share within that industry, as well as the market’s view of the company in question. There dozens of data points to start with. One thing is for certain….securing a premium valuation does not happen over night. It starts with methodical planning that begins with a solid internal foundation and extends to the external efforts directed at satisfying the customer base. It’s a journey and not the result of impatience.

This is not rocket science but it does take the formulation of a specific goal and a disciplined approach. Whether your company is working on a succession plan or working towards an acquisition, discipline is the key. And it’s not going to be just a discipline focused on financial results. The discipline has to start at the operational foundations of a company. The potential buyer of your company does not want to inherit a myriad of headaches or a company that needs a complete facelift. They want a company that will be a complement to their bottom line, their operations, and will be accretive in a very short amount of time. Any areas that are viewed as a “fix” are going to bring down your valuation.

1. What is the state & accuracy of your budgeting, forecasting, and planning process?
2. What is the quality of your working capital elements? Inventory, A/R, etc….
3. What is the quality of your employee base and their skill sets? Tenure, degrees, etc.
4. What is the extent of processes documented within the company?
5. What is the quality of the information systems that are in place? Quality of data….?
6. What is the state of the customer base? Strong relationships, reliance on one customer….
7. What is the state of the vendor base? Is there any single source risk……

This is far from any type of an exhaustive list and the typical due diligence checklist will make most managers heads spin. When these elements are not in place and they need to be addressed last minute before any type of a potential deal, it will typically result in mistakes or the identification of weaknesses in the business. It also means that the efforts of management will be pulled away from the day-to-day operations, which might result in decreased short-term performance. The few issues listed above cannot be remedied in a month or two. They need a much longer planning window to address. When these elements, and many more, are dialed in it will result in a much higher premium in placed on the entity. Strong foundations result in premium valuations.

Thanks for reading . . . .

Jeffrey Ishmael

Brand longevity & the Hertz history…

July 24th, 2008 Comments off

     I received the latest edition of one of my favorite magazines yesterday, The Deal, and found an interesting article on Hertz rental cars and the history the brand had gone through relative to the different suitors that had acquired the company.  What jumped out at me immediately was how old the brand actually was, and what a great fun fact this info is.  The brand was started in 1918 by a Walter Jacobs who founded the company in Chicago with a dozen Model T’s!  Within 5 years the company was already doing $1 million in revenue.  Adjusted for a modest 3% annual inflation figures it’s almost $15 million in todays figures. The company then went through a number of acquisitions over the next 5 decades.  One of the more notable though was it’s acquistion by United Airlines in 1967 for a price of $567 million from RCA Corp. Now we don’t usually equate corporate M&A performance with that of the folks specializing in it, especially airline M&A, but United ended up divesting Hertz in one of the largest LBO’s (that is until the $25 billion purchase of Nabisco). That’s a multiple most would be envious of. 

     The article went into more detail on the current financial sitution of the company, their strategic direction, and some further changes. What’s always fun though is to learn of the history behind a brand, especially those that aren’t as recent as the iPod, Prius cars, or even IBM. 

Thanks for reading . . . .

Categories: CorpFin Cafe, M&A Tags: , , ,

More about relationships in M&A….

July 2nd, 2008 Comments off

     Although pending at this point, I’ve been able to secure a tentative interview after the July 4th holiday with a fellow USC-alum who recently sold a successful business.  While I’m not sure what his near-term plans are, I would doubt that he his heading into retirement.   We are going to discuss the psychological aspects of the transaction and what ultimately led him to make the decision he did.  We’ll be discussing the bidders that were involved in the process and whether it came down to simply the highest bidder or if there were other intangible elements to the transaction.  I should be a great interview and I look forward to sharing what I learn in the interview.

Categories: CorpFin Cafe, M&A Tags: