Choosing between raising money for a company or a secondary round giving liquidity to founders and investors or selling a company is a hard decision to make. A Dual-Track process of talking to potential investors and acquirors in parallel can optimize a transaction value and probability of success. Many aspects of a fundraising process are similar to those of a sale process: confidential information memorandum, detailed financial model, due-diligence materials and the use of an investment bank (fundraising advisor/ M&A advisor). The possibility of obtaining liquidity in a single transaction at a higher valuation generally makes a dual-track process appealing to shareholders in a company and can increase significantly the likelihood of a sale. Paul’s session will address the key issues using both his insight from over 13 years advising game companies as an investment banker but also as an investor in game companies in the past 3 years.
2. Avista
Partners
– Advisor and Investor based in London for over 14 years
– Strong game sector experience, knowledge and relationships
– Advised on transactions in the game sector with a total
value of over $1 billion advising many companies including:
– Shareholder in:
Who am I?
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Paul Heydon
Managing Director
Avista Partners
3. Avista
Partners
Agenda
– Strategic Options
• What?
• How decide?
• Filter
– Dual Track Process
• What is it?
• Why do it?
• Sample deals
• Survey data
• Example
• Indicative Process
– Strategics
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4. Avista
Partners
What
• Key strategic options may be summarised as follows:
Status Quo
Material Change
Grow via acquisitions/ joint ventures (JV’s)
Raise growth capital/ sell secondary shares with
financial/ strategic investors
Sell the company
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5. Avista
Partners
Strategic Options – Status Quo
Advantages/benefits
• Low disruption option
• Stable management
• Captures significant shareholder value,
providing business plans are met
Comment
• May be hard to grow fast or keep
growing fast
Disadvantages/risks
• May require more mgmt & financial
resources over time
• Increasingly competitive market
• May become or stay “small fish in a large
pond”
Assessment
• Increasingly competitive game sector
would recommend action vs. Status quo
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6. Avista
Partners
Strategic Options – Acquisitions/ JV’s
Advantages/benefits
• May achieve critical mass
• Synergies & cost savings
• Shared know-how
Comment
• Acquiring complementary third party
developers/ publishers could grow
business significantly
• Some targets may be likely to seek sale to
larger companies
Disadvantages/risks
• May require more mgmt & financial
resources over time
• Can be a complex process
Assessment
• Complex but could achieve strong value
creation
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7. Avista
Partners
Strategic Options – Growth Capital/
Secondary Round
Advantages/benefits
• Share increasing market risk
• Mgmt. continuity/ reduced disruption
• Potential strong value from new board
member(s)
• Increases capacity to grow business
organically and/or by acquisition
• Current shareholders could potentially see
liquidity on some shares
Comment
• Best fit with like minded personalities
with similar visions
Disadvantages/risks
• Control issues may emerge depending on
terms/ stake sold
• Complicates ownership structure
• No control premium
Assessment
• An attractive option particularly if new
shareholders can provide value add
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8. Avista
Partners
Strategic Options – Sell the company
Advantages/benefits
• Lock in 100% of current value
(particularly for all cash deal) & control
premium
• New owner should bring strategic value
add to grow faster than staying
independent in addition to additional
working capital
• Synergies; cost savings
Comment
• Timing is everything; If too early then not
enough value & if too late then lost value
• Proper DD needs to be done on the buyer
Disadvantages/risks
• Give up independence
• Working for a new owner/ bigger
company
• Earnout structure and timing is key
Assessment
• Best to do if founders are not
comfortable with continued risk or the
view is that valuation is unlikely to grow
significantly more
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9. Avista
Partners
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
North America Europe Asia/ Pacific
Historical Global Fundraising - Games
$10bn raised since 1997;
$1.2bn raised in 2012 vs
$2.1bn in 2011
(USD$ millions)
Source: Capital IQ, Company Filings, Brokers & Press
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13. Avista
Partners
Dual Track Process
• Run a process in parallel of both a funding/ secondary round and a
sale of the company
• Funding
– VC/PE/ Strategic Investors or Institutional (IPO)
– Can be one or both of primary/ secondary shares
– If company does not need cash then look at secondary to generate
liquidity for shareholders
• Sale
– 100% Exit
– Strategic or Financial Acquirors
• Acquisitions/ JV’s
– Corporate decision to pursue; not for everybody
– Need team to integrate post deal
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14. Avista
Partners
Dual Track: Maximise Value & Flexibility
• Maximise Value
– Higher probability of achieving liquidity in a single
transaction at a higher valuation is more appealing to
shareholders and can increase significantly the likelihood of
an exit transaction
• Always have option to not do a deal
• Evidence suggests dual track companies earn 22-26%
premium when a sale is consummated and 18-21%
premium when IPO is launched and an M&A
transaction soon follows vs single track M&A exit*
See: Brau J., Dual-track versus single track sell outs: An empirical analysis of competing harvest strategies,
Journal of Business Venturing 25 (July 2010)
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15. Avista
Partners
Dual Track: other reasons
– Many elements of a fundraising process are similar to
those of a sale process: info memo, financial model,
mgmt presentation, teaser, DD materials & use of an
advisor
– Increases optionality with potential investors and buyers
which will provide more leverage at negotiation point
– Aim is to get multiple offers from both investors and
buyers to have strong leverage while giving shareholders
many options to choose from in deciding which deal is
best for them
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16. Avista
Partners
But
• One size does not fit all; consider company
resources, opportunities and goals to determine if
Dual Track is best option
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17. Avista
Partners
Keep in mind
• A sale process does not always lead to a sale
• A fundraising process does not alway lead to a
funding
• Doing both together increases the odds in your favor
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18. Avista
Partners
Sample Deals
• Company A
– Revenue: $15m
– EBITDA: $8m, No need for cash
– Growth LTM: 35%
– 2 founder shareholders
• High offers:
– Investor: $72m valuation to buy 40%
– Acquiror: $50m for 75% in cash; 3 year earnout on 25%
• How decide?
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19. Avista
Partners
Sample Deals
• Company B
– Revenue: $10m
– EBITDA: $2m; wants growth capital
– Growth LTM: 50%
– 3 founder shareholders and 1 VC (in at $10m pre-money)
• High offers:
– Investor: $10M @ $50m pre-money valuation with $3m to
founders ($7m to company)
– Acquiror: $40m for 80% in cash; 4 year earnout on 20%
• How decide?
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21. Avista
Partners
What do you expect will happen to the
number of sales using a dual track process
over the next 12 months?
73%
7%
20%
Increase Decrease Remain the same
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22. Avista
Partners
What do you expect will happen to the price
of companies for sale with a concurrent
IPO?
53%40%
7%
Will sell at a premium Will sell for the same price
Will sell at a discount
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23. Avista
Partners
Under current market conditions, do you
believe a dual track process will maximise
the price obtained in a sale?
60%20%
20%
Yes No Uncertain
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24. Avista
Partners
What will be the most common outcome of
a dual track process over the next 12
months?
93%
7%
Sale prior to IPO IPO
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25. Avista
Partners
Successful Example: Popcap
“PopCap
Games Ready
for IPO in
2011”
Allthingsd.com,
Jan 31/11
“Exclusive:
PopCap Games
could file IPO
by end of
summer”
Reuters, 12
April/11
“PopCap
acquires
ZipZapPlay
while IPO
looms”,
VatorNews, 29
April/11
“PopCap
Games:
Planning IPO
While Playing
the Field?” Wall
Street Journal,
23 June/11
“EA Buys
PopCap Games
For As Much
As $1.3B”
Techcrunch, 12
July/11
“Now that EA has agreed to buy Popcap for up to $1.3bn....by selling to EA, Popcap passed
up a potentially monster public offering that had been widely expected. Rob Ward of
Meritech Capital Partners, a top Popcap investor, said recent IPO euphoria was a factor”
Private Equity Analyst , 1 August/11
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26. Avista
Partners
Popcap: learning
• Timing is everything:
– Raised $22.5m in VC round Oct/09
– $100m in revenue 2010
– Well thought out strategy for 2011
• PR is very important
– PR around IPO plans; for sale sign
– Small acquisition; another pr event
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27. Avista
Partners
Your company should have most if not all of the following:
Diversified
Portfolio
More than one game in your future pipeline
Content At least one great game
Financials $5m min revenue with min 30% annual growth and profitable
Management Mgmt team in place
Readiness for Dual Track
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Customers/
Partners
Good relationships with key platform holders; games get featured
Business
Model
Must be scalable
Analytics Growing & Strong Metrics
31. Avista
Partners
Valuation Considerations
• Investor’s and Acquiror’s key focus will be to balance (1) success to date and market
position, (2) challenges of revenue diversification/ long-term sustainability of
growth
• Team & organization’s ability to scale
and build market share
• Game pipeline and ability to grow that
Growth questions
• Key margin drivers in next 2-3 yearsProfit questions
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32. Avista
Partners
Execution Risks
• Leakage
• Loss of key team member(s)
• Delay in future pipeline
• Monthly financial projections/ milestones not being met during
process
• Economic downturn
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Once term sheet is signed do not do anything that could
potentially have a negative impact on the business until the
deal closes. Focus on closing the deal!
33. Avista
Partners
Closing
– Push for closing ASAP after term sheet is signed
• Push the investors/ acquiror and their lawyer(s)
• Push your lawyer(s)
– Post closing:
• Then start executing on the plan you sold investors/
acquiror on
• Agree with investors/ acquiror on content and timing for
press release
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35. Avista
Partners
Disclaimer
• This presentation was prepared by Avista Partners exclusively for the benefit and internal use of Recipient(s) in order to provide some thoughts on fundraising in the
game sector. This presentation is incomplete without reference to, and should be viewed solely in conjunction with oral briefing provided by Avista Partners. The
presentation is proprietary to Avista Partners and may not be used for any other purpose without the prior written consent of Avista Partners.
• The information in this presentation reflects prevailing conditions and our views as of this date, which are accordingly subject to change. In preparing this presentation,
we have relied upon and assumed, without independent verification, the accuracy and completeness of all the information available from public sources or which was
otherwise reviewed by us. Avista Partners LLP is authorised and regulated by the Financial Services Authority.
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