1. Maximising the Value of your businessMarc FecherandRichard Heap16th February 2011

2. Recent Trends and Deal drivers for2011Technology and TelecomsTechnology & Telecoms Group 3. Richard HeapPartnerTechnology, Media & Telecoms 4. Recent Trends 5. Equities UK and USA good year, technology performs ahead of the overallmarket7000600050004000FTSE (+8%)3000FTSE Techmark2000(+25%)NASDAQ (+19%)1000 0 Dec09 Dec10 Jan11 6. Technology Deals in EuropeNumbers increased in 2010, but still down on 2005 -2007Number of Deals Europe Technology15001000 500 0 2005 20062007 2008 2009 2010 7. Technology IPOs in EuropeA weak market, with few noteworthy IPOs, for size orsuccessNumber of IPOs - Europe - Technology160140120100 80 60 40 2002005 2006 2007 20082009 2010 8. Value of Deals in EuropeOverall values down in line with volumes, and smaller dealsizes$bn400350300250200150100 5002005 2006 2007 2008 2009 2010 9. UK Technology DealsUK Corporates were responsible for 2/3 of deals20118%16%Private EquityUK TradeCross border trade 66% 10. Global Technology SpendGrowth of 8% in 2010 due to capital spending upgrade Worldwide IT Spending Growth (%)14%12%10% 8% 6% 4% 2% 0% 19981999 20002001 20022003 20042005 20062007 20082009 20102011 -2% -4% -6% Source: IDC 11. Today 12. Private EquityIncreasingly active in the sector with funds to spend$ 1 trillion of untapped committed capitalworldwide200 billion in EuropeWanting to invest in quality assetsMixture of deals - replacement IPOfinancing, public to private.... 13. CorporatesHave huge cash piles burning a hole in their pockets Driven by the need for growth and want to plug gaps in product and service offerings The top 25 tech companies have approx $500bn of cash, including:Apple MicrosoftGoogleCisco$60bn $50bn$35bn $40bn Money needs putting to work 14. ValuationsOn the increase Zynga $5.8bn 300m players GrouponTwitter$15bn $10bn50m usersFacebook 175m users $50/60bn600m users Huff post LinkedIn $315m $2.5bn25m90m usersLovefilmreaders200m1.2m users A bubble.......? 15. Global Technology spendForecast to increase between 3-6% in 2011 2011 forecasts: Gartner 3% and IDC 6% (2010: 8%) Emerging markets will account for 25% of IT (IDC), BRIC will dominate China is transforming to becoming a centre for innovation 16. MultiplesAre increasing across the sectorPrice Earnings (P/E) Ratios year end30252015 Technology10 Media Telecoms 5 02006 20072008200920102011 (15th Feb.) 17. SummaryCash reserves and Private Equity funds +Plugging gaps in offerings + the need forgrowthRecovery of valuations +Improving credit markets =A positive outlook for Technology M&A in 2011 18. Deal Drivers for 2011And who will be showing the money 19. Key Themes Mobility Social networks Cloud computing Security Blurring of industries e.g. healthcare, automotive, media 20. Mobile Ecosystem Tablet v Smartphone v PC iOS v Android....and Blackberry OS and Windows Phone 7 (Symbian is dead!) Smartphones - 3D, dual screen, voice recognition, video calling, gaming Infrastructure NFC, Sensors, Femtocells, Wifi, LTE.... Mobile payments to reach $1.1tn by 2014 (IE Mkt Research) 21. Social NetworksGaming and AppsSocial commerceMarketing & the BrandsMobileDriven by the biggest of them all, ,causing a huge shift in consumer andbusiness behaviours 22. Cloud Computing Momentum will continue to gather pace After 18 months of frenzy around cloud storage, attention is turning to Cloud Applications Companies are preparing for a monumental shift that will make Cloud standard2010 2014 5.8bn 10.4bn UK UKTechMarketView 23. Security and Data PrivacyWe are giving up privacy for access tocontentWell publicised breaches of privacy byFacebookData Protection Act fines being raisedMobile wallet means paymenttechnologies will get more sophisticated 24. Marc FecherPartnerCorporate Finance 25. Agenda Multiples Sector overview The strategic review The valuation methodologies and myths Tax Who are the buyers and what do they want Timing Top Tips 26. Long-term Strategy Corporate Strategists Our Alternative Solutions Focus Articulate in plain language Action - Hands on director team FSA Regulated firmOur Services:Long termCorporateShareholderStrategic Fundraising Acquisitions Advice Value 27. DCFL Sector P/Es40353025 Health20 Marcomms Food15 Transport Construction10 Engineering 5 0 28. What are my options? Despite such high awareness of the meaning of exit Strategic plan 21%strategy, only (30%) have any form of formal successionWritten exit plan9%planning or written exit plan in place. Unformulated exit plan24% However, one in four (24%) Identification of potential 6%have an unformulated exitbuyerplanned a further 6% have 33% identified a potential buyer.None The survey showed that 40% of 7% those surveyed have not Dont know considered their exit route grooming or their exit strategy despite being aware of the term exit strategy. 29. Activity Specific Hardware and Software Software sales ConsultancydistributiondevelopmentB to B B to CSocial Media Communications e-commerce e-commercePublishingInformation Advertising Recruitment 30. Single most important transactionin business lifeProperPreparation The Pre-saleandNo secondplanningplanning Get it rightchance processfirst timeStrategicPlan Failing to plan isPlanning to Fail 31. What is a good Exit Strategy?A plan, that matches owners aspirations with a rangeof purchasers and their needs Unique to each business A full strategic review of all business and non businessassets and objectives 32. The Pre sale Planning ProcessStrengths EnhanceWeaknesses RemoveOpportunities ExploitThreats Manage To Improve the multiple and the quality of earnings and cash generation 33. Valuation Summary 21.2m 16.8m11.6m7.0m Valuation Split 000 % Contracts 7,629 36% Products3,799 18% new 67% Government1,9509%4.3m Analytics 8064% Projects3,765 18% Current Fieldworkks 2,266 11% 33% Other 1,0464%21,262 100%FY10FY11FY12 FY13 FY14 34. Timeline and Action PlanShort termMedium TermLong TermImmediatePhase 1 Phase 2 Phase 3Phase 4Performance managementImplement timesheet systemremuneration systemBudget for all jobs on detailedControl job costs and profitabilityproforma by employeePrepare cashflow forecast for alllarge jobs and negotiate terms Improve working capitalaccordinglyPerformance improved, complete XYZ platform Corporate reorganisation and structure 2nd tier management team empowered and setup EMI Scheme Focussed Growth Strategy Long term contracts Government sector Product developmentInterim debt raising / capitalinjection to support growth ifnecessary Deliver exit strategy Key Milesone: Key Milesone: Key Milesone: Key Milestone: New system goes live Group ReorganisationKey Milesone: Projects Developed 500k of products sold Delivery Exit Strategy Performance improved 2nd tier management fully and implemented. 5 main contracts won empowered Ongoing trading/KPIs enshrined: Time targets Write off targetsIncreasing Partnership Value 35. The Process Objective = maximise value, meet owners emotional expectationsand maintain confidentiality MaintainablePrice The Business Earnings EarningsValue(Post-Tax) Ratio To improve both the multiple and the quality of the earnings To attract a premium buyer 36. What valuation should I expect? NAV minimum EBITDA multiple less Debt P/E multiple of maintainable earnings Discounted Cashflow Strategic acquisition valuation 37. Which multiple is used ? 2008 200920 10 Valuation of business 7m 000 000 0 00 Multiples: 2008 20092010Turnover 7,000 8,0009,000Gross Profit 2,100 2,4002,700Pre tax 70.0 23.0 18.0Overheads2,000 2,1002,300Adjusted pre Tax 50.0 17.59.8Pre tax profit 100 300400 EBITDA15.99.36.7AdjustmentsExcess Directors Rem40 65 200One off Recruitment costs35Redundancy payment 70Repairs and maintenance4540100 315Adjusted Pre Tax profits140 400 715Depreciation250 300 300Interest 505535 38. Entrepreneurs relief First 5million 10% Thereafter 28% One-off lifetime amount 5% of the business 12 month test of ownership and employment 39. Who are the buyersFinancial International TradeStrategic BuyerThe ManagementCompanyTeam 40. Case study-S Limited - Digital agencyNo pressure on sale realised opportunityExpected commitment post saleEBIT on an upward curveCharacteristics: Geography Expertise New market entrant GrowthNegotiated valuation of up to 10m [30x historic 10.5xcurrent run rate] 41. Why would they buy Competitor removal Gain market share Geographic expansion Enter complementary market Broaden product / service offering Buying power cost benefits Marginal costs to run Diversification As Preparation for their exit 42. What buyers wantGood marketFlexibleOther keyQuality of dynamics andproperty issues bothmanagement secure market arrangementsgood or bad teamposition Quality of earnings and Relatively rapid Low price and aFuture growthsustainability inPaybacklow riskthe future Hidden assetQuality of Maintainable Protected IPvaluesoperations earningsMinimalSimple Hidden assetworking capital transactionvalues requirements structure 43. Exit Puzzle CashBuyersMarketWarranties Esteem USPEmployeesResults Timing 44. The Best Time to Sell 50 40 Profits after tax 30 20 10 0 - 10 0 1 2 3 45 6 7 8 9 10 - 20Time 45. Do I need to stay on? Motivation Deal structure Deferred consideration Earnout 46. Corporate Clean Up1. Excess directors / family 1. The Management Team salaries, pensions2. Option scheme2. Benefits in kind3. Maintainable Earnings3. Family property 4. Subsidiaries & Branches4. Cash drawings 5. Share buy backs5. Private Assets6. Ownership of intangibleassets 7. Property 8. Cost base and Margins 47. Top 10 Mistakes1. Process Triggered by adversity2. No strategic plan3. No idea of real worth4. Too much own involvement5. No DD on other side6. CASH only7. Weak secondary management team8. Wrong partner/strategy9. Wrong time10. Eye off the ball 48. C Limited Page impressions 1.5m Income 100k PBT 8k NO forecasts Developed revenue model Proved concept Sold for 49. Objectives Platform for growth Broadens products and services Enter new market / GeographyVendors Critical mass Objectives Non-cash Deferred Overhead savings If necessary tie in vendor Secure future for business Income stream or retire De-risk Cash Buyers Up-frontObjectives Goodwill recognition New challenges 50. H Ltd Sale Profitable - Turnover 65m Excellent business trade buyers were interested 3 offers from international buyers Offers were based upon valuation of 15m Offers were based on 65/35 completion/performance Owners felt loyalty to staff and wanted a continuedinvestment but also wanted to retire from the business. 51. Plan B Current management wanted to acquire the business Deal structure Total business valued at 12m Vendors kept 20% of the equity MBO team funded 12m of acquisition finance (Once ina life time opportunity) Assist with raising the debt funding to buy the business Business currently valued at 40m Devonshires Plan B realized over double the best offer froma trade buyer for the vendors! 52. Top Tips1. Its never too early for strategic pre-sale planning2. Get earn outs clearly documented3. Strategic buyers pay premiums4. Auction situations maximise value5. Keep your eye on the ball6. Experienced advisors pay for themselves7. Timing, Timing,Timing Window of opportunity 53. Conclusion and next steps No second chances Get it right first time The best outcome arises when there is:- A well planned grooming and sales process And Plan B 54. World wide NetworkKsi Member Firms Total number Total number ofTotal number of of offices partners staff 1464073,780 55. The Technology andTelecoms teamMarc Fecher Richard HeapPartner , Corporate Finance Partner, Technology & Telecomsmfecher@kingstonsmith.co.uk rheap@kingstonsmith.co.uk020 7566 3588 020 7566 3765Jon Sutcliffe Head of Technology & Telecomsjsutcliffe@kingstonsmith.co.uk020 7566 3810Mark Twum-Ampofo - Partner Twum-LinkedIn: KSTechMtwum-ampofo@kingstonsmith.co.uk020 7566 3648Paul Spindler - Partner : Taxpspindler@kingstonsmith.co.uk020 7566 3815KSTechnology