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Pete Danko, moderator: Let’s get current: What’s the vibe right now in the M&A world?

Sherrill Corbett, partner, Tonkon Torp LLP: We’ve seen an increase in activity on both buy side and sell side, but the Oregon market is traditionally a sell-side market – we have more companies for sale than we have buyers. We work with both, but we’re definitely seeing a majority of sell-side deals and an increase in that activity. Over the course of the last few months it has picked up.

Brad Gevurtz, managing director of investment banking, D.A.

Davidson & Co.: Transaction activity is still very robust. It’s pulled back slightly in 2016 vs. 2015, which was the biggest year ever for M&A globally, about $4.7 trillion. I’ll offer a few reasons why M&A is robust. First, while valuations are high, underlying growth in the economy is slow on a global basis. As a result, companies start to focus on buying versus building, and big companies, with high stock prices, have the currency to buy other companies. In addition, there’s a lot of cash on corporate balance sheets, and debt is very cheap, so companies have the added advantage of being able to pay with cash, if necessary. On the private equity (PE) side, a lot of funds were started prior to the Great

Recession. They’re getting to the end of their life, and they have a lot of dry powder.

Todd Wall, partner, Moss Adams: From our perspective it’s almost universally sell side. Valuation expectations have compressed a bit between buyers and sellers. Coming out of the Great Recession there seemed to be a significant gap between those expectations. We commonly work with start-up businesses where it has been their strategy from the outset to grow the businesses and ultimately sell. But we’re seeing some acceleration of family-owned businesses looking to sell, and primarily to private

equity. There are a number of factors: the availability of buyers, the valuations that are involved, the challenges with family succession. It’s an environment where M&A is on the uptick and it’s creating some pretty nice exits for startups and longstanding Oregon businesses.

Corbett: On the valuation side we’re seeing more earn-outs in deals. So to bridge the gap between what the buyer’s willing to pay and what the seller wants to receive, the buyer will give the seller the ability to earn additional purchase price after the closing. They set metrics, goals,

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It’s been a busy time for Oregon company mergers and acquisitions, reflecting a thriving startup culture that’s producing attractive businesses, and a trend of local public companies getting gobbled up by out-of-state firms. We recently gathered leading M&A experts in the legal, banking and accounting fields to talk about where things stand in mergers and acquisitions, where they might be headed and what businesses need to know to protect

themselves and flourish in a very active marketplace.

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16 PORTLAND BUSINESS JOURNAL

Brad Gevurtz | Managing Director bgevurtz@dadco.com | 503.603.3060

Greg Thomas | Vice Presidentgthomas@dadco.com | 503.603.3055

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D.A. Davidson & Co. is a full-service investment firm with one of the most active middle market investment banks in the country.

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BRAD GEVURTZDA DAVIDSON & CO., MANAGING DIRECTOR IN THE INVESTMENT BANKING DIVISIONBrad Gevurtz is managing director in the Investment Banking Division of D.A.Davidson & Co. Gevurtz has been with D.A. Davidson since 2005 and during his time with the firm has served as the head of investment banking and as a member of the firm’s board.

Prior to joining D.A. Davidson, Gevurtz worked for over 20 years on Wall Street as a senior banker at JP Morgan Chase, KeyBanc Capital Markets, and Broadview International (now Jefferies Broadview). . Gevurtz has significant experience in M&A, private placements, and public offerings.

TODD WALL, CPAMOSS ADAMS LLP, PARTNER Todd Wall has practiced public accounting for more than 20 years, and has substantial expertise in working with public and private companies.

He is a leader of the SEC practice in Moss Adams’ Portland office and primarily works in the manufacturing and distribution and technology industry groups. He provides assurance and business advisory services, focusing on administering audit and review engagements, assisting clients with evaluating their internal control systems, and reviewing periodic reports and registration statements for compliance with securities laws and generally accepted accounting principles.

Wall also consults on matters related to private debt and equity offerings, restructurings, leveraged recapitalization, stock option accounting, and private equity transactions. He is a member of the American Institute of Certified Public Accountants, the Oregon Society of Certified Public Accountants, and Technology Association of Oregon.

SHERRILL CORBETT TONKON TORP LLP , PARTNER AND CHAIR OF MERGERS & ACQUISITIONS GROUPSherrill Corbett is a partner at Tonkon Torp LLP and is chair of the firm’s Mergers & Acquisitions practice group and a member of the firm’s managing board.

For over 20 years, she has counseled clients on buying and selling businesses, structuring joint ventures, and a range of other corporate and securities matters. Sherrill’s clients value her ability to combine quality legal counsel with practical business advice and creative solutions. She also has a talent for making “legalese” easy to understand.

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and if the performance is achieved after closing the seller receives an additional payment or payments.

Danko: Other trends or takeaways?

Corbett: We’re seeing a lot of IP-based transactions, intellectual property. People are coming into the market and buying technology, trade secrets, know-how – not necessarily your traditional patent portfolio. So from a sell-side and legal perspective, companies need to be really careful about how they protect that IP and make sure they own it. We’re seeing more focus on diligence and ownership of IP, and that’s harder to do when it’s trade secrets and know-how.

Wall: I scanned the Business Journal for recent transactions and the list includes many big names in Oregon business, including: FEI, Cascade Microtech, Hydro Flask, Elemental, Dave’s Killer Bread, Precision Castparts, StanCorp, Planar – all of these businesses have sold. In many cases these were businesses that were performing very well, that became attractive to strategic buyers. Ideally, these transactions represent good exits for the shareholders and provide an opportunity to continue to grow under new owenership. But all on sell side, and these are great Oregon businesses that are no longer going to be headquartered here, and that’s disappointing.

Gevurtz: I’ve heard people say, “Gee, it’s bad that our private companies are being bought, but it’s great Precision

Castparts got bought.” I think it’s the opposite. When our public companies are bought we lose the headquarters, the CEOs, the CFOs, the donations, and the infrastructure. Not all the time, but a lot of the time. When private companies are bought, it increases the pool of available capital in Oregon because VCs look at the positive results and want to invest. In addition, the more private companies that are sold in the region, that have gotten money from local investors, the more money that will be recirculated to new startups. Elemental was great for Oregon. But if Precision Castparts is sold to Warren Buffet, what does that do for us?

Danko: Sherrill mentioned IP issues earlier; what are other things businesses need to be aware of vis-à-vis M&A?

Wall: At the risk of being self-serving, I do think having an appropriate team of advisors in place is important, and that includes an investment banker, legal and accounting. The process of selecting trusted advisors needs to occur early in the process. Businesses that are self-aware are thinking about strategy – their long-term vision for an exit or how they’re going to grow the business – and about creating alignment between strategy and options in the marketplace from an M&A standpoint. That process needs to start early.

Danko: What kind of a timeline are we talking about here?

Wall: I think you might want to be thinking two years between deciding you want to sell your business or you want to bring in additional investment,

to give yourself a head start and to avoid common pitfalls.

Corbett: Definitely the sooner you start thinking about it, the better. Hire a lawyer, look at all of your contracts, your inbound licenses. Do you have your key agreements with your significant suppliers? Do you have your intellectual property protected and have the right assignment of invention’s documents so that the company actually owns the IP? These are things that you don’t want to find out when you’re in the sale process.

Gevurtz: I put together a list of common problem areas for sellers. No. 1 is poor financial statements or controls. If you bring in a strong accounting firm early, you have a good chance of solving that one. No. 2 is the lack of a complete management team or management transition plan. Hopefully the banker can help you with that. No. 3 is an inappropriate legal structure, inadequate legal documentation, etc., which are all things the lawyer can help solve. Which leads to No. 4, an unsophisticated attorney. The big corporations who want to buy your company are going to have sophisticated attorneys. If your attorney is someone who doesn’t do a lot of M&A work, you’re at a disadvantage. No 5 is trying to sell the company without a licensed advisor or taking the first bid – the banker can help here.

Corbett: Often sellers will have regular corporate counsel, their long-term corporate counsel who helped them set up the company and do their annual minutes. But when a transaction is on the table or they have an offer, a letter of intent, it’s a more sophisticated

transaction. Having somebody on your side who specializes in these transactions and is experienced in negotiating transaction documents, such as letters of intent and purchase agreements, they know where the tricks and traps are.

Danko: Tricks and traps?

Corbett: For instance, knowing what should be in there and what isn’t in there. Oftentimes there will be provisions that can obviously be drafted buy-side friendly or sell-side friendly, but there are sometimes things that aren’t even in there that should be, such as liability limitations – caps and deductibles. Having experienced counsel who knows what those things are is very helpful in the process.

Gevurtz: I’ll give you two examples where we’ve come in and helped recently. We had a deal where we ran a full auction process. We went to probably 100 different buyers and because we ran a full process we were able to get our client an incredible offer. The second was a company that got a bid and they didn’t want to run a full process, they just wanted us to negotiate with the buyer directly. We got them a 50 percent higher price by explaining to the buyer why the company was worth more and by stating that if the buyer did not offer more, we would bring in other bidders, some of whom were direct competitors with the buyer. And, as important, we worked with all the advisors for the company in a team approach. The corporate acquirer was a multibillion-dollar international company. If we hadn’t had

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18 PORTLAND BUSINESS JOURNAL

a great accounting firm and law firm with us, we would have been seriously disadvantaged.

Corbett: I can think of a recent example as well. A client received a letter of intent that didn’t describe the buyer’s intended tax treatment for the transaction as a deemed asset sale. This had significant ramifications for the seller, but before we asked the question, it wasn’t even in the document. They had to re-evaluate and ask if an asset sale was something they wanted to do.

Wall: Certainly when these are family businesses that are selling, there are so many aspects to the transaction that are outside the framework of the deal that need to be considered and addressed. If you get into the deal and have signed the letter of intent, there may be negative consequences if all the details haven’t been addressed. It’s a very expensive process to gear up, get the diligence teams in and get the advisors engaged, only to have a deal fail.

Corbett: I’ve never seen a situation where advance planning wasn’t worth the expense.

Gevurtz: If we get in there and work with our client a year prior to the eventual sale, we’ll have an extra year to increase the company’s valuation. That’s a very big part of what we do. And a lot of times a CEO will say to us, “I plan on selling in a year and I can position my company in two different directions over the next year. Which approach adds the most value?” We can answer that question.

Corbett: All of this is going to help prevent future liability on the back end, too, because once the deal is done it’s not really done. The seller stands behind that business for a certain period of time after closing, the indemnity. If you take care of things up front, then there’s less looking over your shoulder afterward.

Danko: Should companies, in a sense, always be ready to sell?

Wall: Any time you bring in outside investment, you’ve basically put your business up for sale. Those outside investors are coming in to earn some return on that investment. It’s an education process for many entrepreneurs, and understanding the expectations of your investors when you bring them in is important. Meanwhile, you should continue to think about how you’re going to operate your business and the investments you make, which can be critical to what the valuation will look like on the back side.

Gevurtz: Todd’s point is great: Once you bring in the outside investors you’ve technically put yourself up for sale. But a savvy CEO might say, “I’ll deal with that in five years when the investors want their liquidity.” Well, not necessarily. Two years from now, if a buyer offers an extremely high price for the company,

the outside investor and the board are going to take a serious look at that. You always have to entertain bids. And even if you haven’t brought in an outside investor, you may have family members who will want to respond to an outside bid for the company.

Wall: The phone is ringing all the time. If a business has made its way into the press and their product is gaining visibility, they’re going to receive cold calls from private equity firms.

Danko: What should someone do when the calls come?

Wall: I would call Brad. Frankly, if the frequency of calls is such that it’s creating an interest to transition the business, I would start thinking about who’s going to help you do that. I would either call my attorney or accountant, and simultaneously get an investment banker involved so you can maximize your value.

Gevurtz: We were representing a California tech company a year and a half ago. This company was a lower-middle market company, but well known given the PR it was getting. As a result, they were getting two inquiries a week from buyers. That’s a hundred a year. It turns out, however, the vast majority of inquiries were not from strategic companies or PE firms. They were from fundless sponsors – e.g., buyers who don’t have money. So one of the first things we do when we are called in and there is an existing suitor, is to find out if the buyer actually has the money to do the deal. You might say, “Brad, that’s obvious.” It’s not obvious. Of the hundred calls this company got during the year, 80 of them were not qualified. And you don’t want to sign an LOI (letter of intent) with a buyer who has no money and is going to shop your company to the world. Fortunately, we have the experience, and the resources (such as proprietary databases), to determine whether or not buyers are real and can close their deals.

Corbett: We often help sellers analyze who the real buyer is and are they legitimate. Do they have the financial means to back a letter of intent? What is their background and experience? Do they have other portfolio companies in the same space? How litigious have they been in other deals?

Gevurtz: Are they a competitor who just wants to go in there and steal secrets? That’s another can of worms.

Corbett: Absolutely. When you talk about a competitor coming in and evaluating an acquisition, there are some additional sensitivities and legal limitations in terms of confidential information, such as sharing customer and pricing information, a lot of these things you want to carefully consider, limit or avoid.

Gevurtz: There’s even antitrust.

Corbett: Yes. Having the appropriate advisors in place to help you with the process, it’s key because you don’t want to divulge all of this information, first, if it’s against the law, and second, if you give the information, then they start picking off your people or business. They have your payroll information, they’ve got your pricing information, they start taking your customers and you don’t even have a deal.

Gevurtz: We’ll set up an electronic data room for our client and we’ll program it so that private equity buyers who don’t compete with our client will get to see more documents than strategic buyers who do compete. And we’re not going to show your customer list to the strategic buyer until we know we have a deal. There are unlicensed investment bankers who don’t understand these protocols, but we do. We put things in place to protect you.

Corbett: Another thing we haven’t talked about is advising sellers on what’s next. Because once they get this really big check they need to have thought about what they’re going to do with it.

Wall: That can become very complex. Let’s focus on the family owned business. The aging entrepreneur sells their business for $100 million. How does that hit the estate? What’s the planning in terms of what’s going on with your family? Frankly, where do you put $100 million?

Danko: So contemplating a sale also means thinking about life after the sale.

Wall: It shouldn’t be a mystery. Frequently business owners underestimate the complexity of the transaction and the entire process. They aren’t prepared for many aspects of the deal, and that can certainly include what do they do with themselves after they sell their business.

Gevurtz: An aspect of that is the non-compete agreement. We’ve spent a lot of time helping our clients with these agreements. For example, a buyer might state that the seller can’t engage in a broad definition of his business anywhere in the world after the transaction. That is ridiculous. We’ll work with Sherrill or the law firm because we understand the business and we understand what is fair on non-competes. By the way, the courts will honor non-competes by sellers, even when they look down at non-competes from non-selling employees. Which brings us to the employees. Let’s say the banker gets four good bids for the company. Let’s say the bids are all equal in terms of price/consideration. One of those bids might be from a strategic buyer who’s going to make deep cuts in the employee headcount in order to generate “synergy.” And one of the other bids might be from a private equity firm who’s going to keep your employees, incentivize them and hopefully make them wealthy. The point is that all of

these deals will have an extra layer of complexity, and the seller needs experienced advisors to help navigate the issues.

Danko: Let’s talk a little about tax structure, specifically Measure 97. How might that impact M&A?

Wall: If you’re a software company and you’re going to start to develop your technology in this state, you’re going to have revenue that is generated across the country. What are the ramifications of a 2.5 percent tax on your revenue? And that’s a tax that may start to occur prior to profitability. Is that relevant to the investment decision? My suspicion is yes. If you get to choose between building or buying a business in Oregon or a business in Austin, Texas, maybe Austin looks more favorable in terms being able to invest your revenue back into the business.

Gevurtz: There has to be equilibrium between funding the public schools and having vibrant businesses that can offer good jobs in the community. The reality is that we can do both, so long as we also have fair laws and good government. I don’t know if this measure is the right way to tax Oregonians. What I do know is that if it is the wrong way we’re making a mistake, because you can’t have good public schools without a tax base and you cannot put in the wrong tax system and keep that base.

Danko: We’ve seen lots of M&A activity, but what ever happened to IPOs?

Wall: There have even been efforts in the public sector to ease the path toward IPOs. The JOBS Act, in theory, would have lowered the hurdles for emerging growth businesses to go public. But I still think IPOs are going to be a less desirable exit for a variety of reasons – the complexity of the process, the cost of the process, the cost of being public after that initial public offering. That’s all very challenging. Meanwhile, the valuations from either a sale or bringing in outside investors are good and there is a ready supply of capital, so you can grow your business without going through the IPO process.

Corbett: The costs of being public are so high that it doesn’t make a lot of sense for many Oregon businesses to be public. With Sarbanes-Oxley and Dodd-Frank requirements, I think that’s true.

Gevurtz: It’s really a scale issue. Our firm takes companies public and we think a company has to have at least a $250 to $300 million market cap to go public, raising about $75 million. And there aren’t a lot of Oregon companies that have those features. If you ask a native Oregonian like me, I’d like to see more of a balance. I don’t think every company is the type that can go public, but it would be nice if we had more IPOs than two every 12 years.

Contact Anne Van Gordon at 503-219-3406 or avangordon@bizjournals.com. Future topics to include nonprofits, international business, and higher education.

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