2. Introduction
• M&A markets have historically rebounded quickly and top quality companies are acquired
first and at the highest multiples.
• Venture capital firms need to shift their focus from “the triage of the weak” to how to
“monetize the strong” as the recovery in M&A becomes apparent.
• We currently see a demand for companies with:
• An established revenue / customer base
• Proprietary technology
• Profitable and receptive to fair valuation metrics
• Unique and defensible market position
• Strong management teams
• Well‐timed and well‐executed M&A will be vital to the success of the venture industry.
• Montgomery & Co. is in the business of generating attractive exit opportunities for
portfolio companies. We would like to share this analysis with you and expand our dialogue.
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3. Summary of the Montgomery & Co. Outlook
1) There were over 7,000 private and independent venture‐backed companies at the end of
2008. There are 800 independent companies with venture investment dating 10 years or more.
This level would double within 18 months unless M&A accelerates.
2) We expect pressure on venture firms to achieve realizations combined with consolidation
of the growth sectors to drive M&A activity to 50% above historic levels by 2011.
3) We expect an increase in M&A as strategics accelerate their acquisition activity.
4) We project the median consideration for M&A to recover, but remain below recent levels
5) The total consideration of venture‐backed M&A will reach $60 billion per annum by 2013.
6) “IPO ready” companies have been delayed by the economic downturn, but we expect a
recovery in the IPO market—which will also boost M&A activity.
7) Investment returns for venture investors will remain largely driven by M&A exits.
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6. 3. We expect an increase in M&A as strategics accelerate their acquisition activity.
The Top Buyers Are Consolidators of Venture‐Backed M&A Projected to Increase
Companies
60%
50% 48%
Other Buyers:
1607 Transactions 40%
33%
Top 6 Buyers:
596 Transactions 30%
19%
20%
10%
0%
Increase No Change Decrease
From 2004 – 2008, there were 2203 venture‐backed M&A A survey of tech & media corporate development
transactions. The top 6 buyers in each of the Media, officers forecast an expected change in corporate M&A
Technology, and Healthcare industries made 596 activity in 2009.
acquisitions combined during this period.
Source: Capital IQ & Ernst & Young Venture Insights (Buyers) / 451 Group (Survey) 6
7. 4. We project the median consideration for M&A to recover, but remain below recent
levels.
800 100
90
750 750 90
700
80
600
600
70
Median M&A Deal Consideration ($M)
500
60
M&A Transactions
468 473
457 450 50
400 48 50
44 45 45
40
40
300 325
30
30
200 225
20
20
100
10
Actual Projected
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013
M&A Transactions Me dian M&A De al C onside ration ($M)
Source: Ernst & Young Venture Insights (Actual) / Montgomery & Co. Analysis (Projected) 7
8. 5. The total consideration of venture‐backed M&A will reach $60 billion per annum
by 2013.
800 70
750 750
60
700
60
56
600 50
600 50
500 42
Total M&A Volume ($B)
40
M&A Transactions
468 473
457 450
34
400 33
30
30
27
300 325
20
200 225
11
10
100
Actual Projected
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2013
M&A Transactions Total M&A Volume ($B)
Source: Ernst & Young Venture Insights (Actual) / Montgomery & Co. Analysis (Projected) 8
9. 6. “IPO ready” companies have been delayed by the economic downturn, but we
expect a recovery in the IPO market—which will also boost M&A activity.
M&A Transactions IPO Transactions
800 300
750 750
Actual Projected
269
265
700
250
600
600
200
480 473
500 465 468
457 450
M&A Transactions
IPO Transactions
411
391
400 138 363 150
325
307
300
253 94
232 86 100
225
78
200
57 56
50
41 40 40 40 50
100 29
22
10
6
0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
% of Total 63% 76% 53% 64% 91% 95% 93% 84% 89% 89% 84% 98% 96% 90% 94% 95% 95%
Exits From
M&A
Source: Ernst & Young Venture Insights/ NVCA Yearbook (Actual) Montgomery & Co. Analysis (Projected) 9
10. 7. Investment returns for venture investors will remain largely driven by M&A exits.
M&A Total Volume ($B) IPO Pre -Mone y Marke t C apitaliz ation ($B)
70
60
60
56
50.3 49.9
50
43.3
42
40
Total Volume ($B)
32.7
30.2
30
27
24 23.5
20
17
16 16
14 14.4 14.4
12.1
11
10
6.3
3.2
2.2
Actual Projected
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
% of Total 69% 48% 71% 66% 54% 91% 78% 63% 74% 80% 79%
Proceeds
From M&A
Exits
Source: Ernst & Young Venture Insights/ NVCA Yearbook (Actual) Montgomery & Co. Analysis (Projected) 10
11. Comments on Methodology
• Providing liquidity to the U.S. venture capital industry remains a major challenge as
highlighted in the recent National Venture Capital Association report, “NVCA 4‐Pillar Plan
to Restore Liquidity in the U.S. Venture Capital Industry.”
• We developed a perspective of the outlook for 2009 – 2013 for venture‐backed mergers and
acquisitions after an extensive analysis of the remaining companies, likely IPO levels, likely
attrition, the aging of portfolio companies, and the financial health and acquisition appetite of
key buyers.
• We utilized historical data and conservative assumptions in our model, which include:
• New company formation – 850 new companies assume financed every year
(historical levels)
• Projected M&A exits (based on our experience)
• Projected IPO exits (based on current filings and industry interviews)
• 2.5% annual attrition rate due to shut downs and failures. Historical levels are well
below this, however newer business failure will increase as lenders continue to pull
credit lines due to covenant default, forcing companies to file for bankruptcy.
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12. Conclusions
• The M&A market weakened significantly in FY 08 and Q1 09.
• 56 VC‐backed companies were sold in Q1 09 – the lowest total since 1999.
• IT was hit the hardest with under 40 companies sold—also a 10‐year low.
• However recently there have been encouraging signs from leading public technology
companies (Oracle’s acquisition of Sun, Cisco’s acquisition of Pure Digital).
• The conditions that facilitate an increase in venture‐backed M&A are re‐emerging:
• Normalization of valuations
• Strong cash position and low cost of capital for the buyers
• Need for the strong cash flowing buyers to redeploy capital for growth
• Competition for transactions
• The next five years will witness an unprecedented level of M&A.
• The venture firms who are most strategic in their approach will be the most successful.
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13. Please Contact Our Senior Bankers with Questions, Comments, or Follow‐up
Media Technology Healthcare
Michael Montgomery John Roediger David Parrot
310.260.6941 415.962.4558 415.962.4541
michael@monty.com jroediger@monty.com dparrot@monty.com
James Min Eric Wagner Jason Yip
310.455.6966 415.962.4551 415.318.7066
jmin@monty.com ewagner@monty.com jyip@monty.com
Mark Wasserberger Adrian Fadrhonc Pritesh Shah
646.274.4970 415.962.4593 415.962.4549
mwasserberger@monty.com afadrhonc@monty.com pshah@monty.com
Rajat Sharma Stewart Hindley
646.274.4973 310.260.6922 Private Capital
rsharma@monty.com shindley@monty.com
Sherri Williams
Joe Morgan 646.274.4967
415.962.4566 swilliams@monty.com
jmorgan@monty.com
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