M&A TODAY: TECHNOLOGY, INFORMATION &
BUSINESS SERVICES
INVESTING IN BUSINESS SERVICES
Amy LaBan Lake Capital
February 12, 2004
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Lake Capital uses its extensive operational, transactional, and investment expertise in business services to build great companies and create shareholder value
Lake Capital Management LLC:– Private equity firm founded in 1998 with a focus on
building quality middle-market, business services companies with reliable cash flows, high potential for organic and acquisition-driven growth, and significant equity appreciation.
$700 million under management focused on investing significant amounts of equity in services companies:
– Service sector-focused fund looking to commit $25-75 million in equity to each portfolio company initiative (with additional equity available through LP’s co-investing).
Experience investing and operating across the business services universe:
– Lake Capital has worked with companies that range from transaction services to professional services in multiple industries.
Hands-on, strategic approach:– The firm takes a “strategically involved” approach to
partnering with its portfolio company management teams.
Historical track record and focus on attractive, long-term returns:
– Lake Capital focuses on investment opportunities that offer a minimum of 3x return on invested capital.
INTRODUCTION
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THE BUSINESS SERVICES UNIVERSE
The business services universe offers a large number of investment opportunities that range from tactical offerings and project-based contract hiring to strategic services often delivered in a wholly outsourced, systems-driven environment
There are more than 50 different SIC codes relating to business and management services within the services sector:
HumanCapital
Finance, Accounting,
AdminSupplyChain
Sales &Marketing IT Facilities
StrategicHR
outsourcing
Finance & accountingoutsourcing
Supply resource
management
Sales & customer
care outsourcing
IT outsourcin
g
Outsourced facilities
management
Business Process
Outsourcing
Document & information
managementLogistics
Facilitiesmanagemen
t
Professional
employer organizatio
ns
Transaction processing
Customer relationship management
Catering
Management consulting
Distribution
Advertising, PR, sales
promotion, direct
marketing
Web hosting
Uniforms
TrainingAccounting & tax services
Security
Tactical Staffing LegalTransportat
ion
Outbound telemarketin
gIT services
Engineering &
construction
Contracting
Source: KPMG, Lake Capital
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BUSINESS SERVICES INVESTORS LOOK FOR
M arket Size/Duration of
Grow th
EarningsVisibility
StrongM arket
Position
HighReturns on
Capital
P roven la rge addressab le m arket w ith h igh grow th
L ike ly dura tion o f growth
P roven underlying un it growth and pric ing power
G eograph ic d iversifica tion and broad va lue added service o ffe ring
D efendab le m arket n iches and strong custom er re la tionsh ips
E conom ies o f scope and sca le
V isib le backlog and recurring revenue stream
S trong and d iversified custom er re la tionsh ips
Track record o f m eeting or exceed ing earn ings estim ates
Low cap ita l in tensity
A bove average pro fit m argins
E V A focused m anagem ent incentives
InstitutionalSponsorship
/Liquidity
StrongM anagem ent
Team
S tab le group o f core institu tiona l ho lders
Large floa t reduces investors ' e ffective transaction costs
S ize and liqu id ity a ttracts se ll-s ide and buy-s ide research coverage
M anagem ent experience and judgm ent
M eaningfu l equ ity ownersh ip fo r sen ior m anagem ent
A lignm ent w ith strong brand nam e partners
Source: Lehman Brothers
Private equity investors and public company investors look for similar characteristics in target companies
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“FOLLOW THE MONEY”
Top-Line Focused
Initiatives
Bottom-Line
Focused Initiatives
Specialty Services
Corporate Client
Lake Capital starts by identifying services used by corporate clients and then prioritizes:
Industry trends that create demand. Consultative versus commoditized services. Contact points at senior levels within large organizations. Value placed on single source providers. Need for geographic reach resulting in international growth
opportunities. Deploy technology to benefit product development and the
delivery of services. Require capital for growth. Opportunity to enhance management.
Lake Capital proprietary research on services spending: “Trends in Business Services”(www.lakecapital.com/news/2003WhitePaper.pdf)
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“FOLLOW THE MONEY”
Top-Line Focused
Initiatives
Bottom-Line
Focused Initiatives
Specialty Services
Corporate Client
Sales and Marketing–related Services:
Marketing communicationsMarket researchWeb-enabled services
Finance-related services:
Accounting-related services
Operational and infrastructure services:
Human capital management
Corporate trainingLegal servicesSpecialty/professional publishing
Specialists in Various Industries
Example service sub-sectors Lake focuses on(more on p. 10)
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DEAL SOURCINGLake Capital has extensive relationships in the business services sector and an active, in-house market research and deal sourcing process produce a significant number of unique investment opportunities:
Relationships with key intermediaries and ongoing market research result in unique investment opportunities
Lake Capital Researchand Business Development
Investors/IntermediariesBusiness Owners
2 - 4 New Platform Investments Per Year2 - 8 Add-on Acquisitions Per Platform Per Year
Lake CapitalPipeline
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Lake Capital looks to invest a minimum of $25 million and, ideally, $40-75 million in equity over a 3-6 year time horizon
New portfolio companies:– Traditional “platform company:” $5 million in EBITDA for a
platform; a minimum of $1 million in EBITDA for an add-on acquisition.
– “Mass start-up:” A group of professionals that Lake can back in a “new home” and take advantage of a market opportunity.
Strong management team focused on growth in fragmented industries.
Based in North America but may offer international expansion opportunities.
Multiple sector and industry opportunities:– Marketing services such as sales promotion, direct
response, public relations, market research, and event services.
– Finance-related services such as accounting-related services, cost recovery services, and financial and economic consulting.
– Operational and infrastructure services such as human capital management, distribution services, technology consulting, and other outsourced services.
– Specialty services such as corporate training, insurance services, legal services, and specialty and professional publishing.
– Industry-focused companies with businesses offering services combined with deep expertise in consumer products, energy, financial services, healthcare, legal, and manufacturing, among other industries.
LAKE CAPITAL INVESTMENT PARAMETERS
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Lake Capital adds value at every stage of the investment and management process:
Active support for portfolio company operations differentiates the Lake Capital approach
THE LAKE TEAM OFFERS MORE THAN CAPITAL
Enhance executive teams through incentives and recruitment of key employees
Manage exits:• IPO• Recapitalization • Strategic sale
Identify and execute add-on investments to extend:• Service offerings • Geographic and market reach
Aggressively expand through:• Organic growth• Acquisitions
Strategic partner supporting management’s day-to-day operations
Identify, source, and structure transactions
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Lake Capital has partnered with management teams to build leading companies in various areas of business services:Highly-
fragmented business services sector offers numerous attractive investment opportunities
SUCCESS IN BUSINESS SERVICES INVESTING
Advance Ross Corporation
EAGLE RIVER INTERACTIVE
Specialized Transaction Services
Sales Promotion
e-Consulting
Specialized Financial Consulting
Branding/Financial PR/Marketing Services
IT Training
Strategic and Operational Consulting
Public Affairs and Lobbying