Merchant Banking
Our merchant banking philosophy is that each opportunity that merits investment has a limited number of optimal financing solutions, but many secondary alternatives.
As merchant bankers our job is to chart a direct course to the transactions that offer the combination of terms, value added intangibles and personality fit best suiting the Company. This is a threefold process:
First, we work with management to refine their investment proposition. For example: “The Company’s proprietary technology offers a 50% advantage in a multi billion dollar market. $5 million to develop a marketing program and sales force will generate 30% annual growth in sales, earnings and return on investment.” Another common example is, “Management has a successful track record in the industry. $50 million to finance several complementary acquisitions positions the Company for a premium liquidity event within 3 years.”
Second, we identify the universe of financial investors and the strategic players that can be investors, buyers, sellers, or operating partners. Within that universe of financial alternatives, we identify the handful of optimal financing solutions. We then discuss with Management the pros and cons of the optimal solutions and of the larger universe of opportunities. A typical discussion contrasts the merits of a “quick deal with smart money” against “a formal process leaving no stone unturned.” A related discussion evaluates the time commitment, management distraction and trade secret exposure inherent in a formal process.
Third, we help execute the agreed transaction plan. Working as officer, director, or employee, we contact the targeted party(ies). We provide descriptive information, field questions, evaluate interest, and ballpark the likely terms. Findings are reviewed with Management and often with the board of directors. Then we proceed to negotiate the financial terms of the transaction and to value the proposed consideration. Finally, we coordinate the efforts of the Company’s professional advisors such as attorneys, accountants, MIS and benefits advisors toward developing definitive agreements and closing the transaction.
Experience
Our investment and transaction management experience is so varied and long term that we are accomplished, comfortable and effective in most corporate finance and advisory capacities.
We have been on just about every imaginable side of the transaction. We have been investment bankers, buyers, sellers, managers, directors, investors, lenders, founders, fund managers, advisors, purchasers of advisory services, and so forth. More specifically, the kinds of transactions we have managed include:
Equity related transactions such as founders’ capital, private placements and public offerings of common stock, preferred stock, convertible debentures, and warrants;
Debt related transactions such as corporate bonds, tax exempt bonds, letters of credit, credit facilities, personal guarantees and SBIC financings;
Change of control transactions including sell side and buy side mergers and acquisitions, initial public offerings, and follow on financings;
Marketing transactions such as royalty, licensing, and selling agreements; and
Grant funding through foundations both as grantors and as recipients, federal and state sources, and pharmaceutical sponsors.
Terms of Engagement
Our Terms of Engagement tend to be flexible and tailored to the circumstances.
As background, we view our clients as long-term relationships, not single transactions. To be clear, there is generally a focal transaction driving each Engagement. Nevertheless, our goal is to work again and again with the individuals involved in the transaction. The significance of this to the terms of our Engagements is that we don’t strive to maximize our compensation, as in a cash fee at closing. Rather we try to maximize our return, as in total remuneration over time. We take into account both the resources expended and the expected eventual payout. As a result, our return tends to be a function of three variables: risk, time, and value. Each variable factors into the Engagement as follows.
As to risk, the leading risk is transactional; this relates to the likelihood of closing the transaction. A secondary risk is business execution; this relates to the likelihood that the Company succeeds in executing its business plan. Most simply stated, we charge more for higher risk Engagements. For example, placing common stock at a premium price for an unprofitable, $10 million company is a very difficult Engagement. In contrast, selling a $30 million business with a consistent 20% margin and growth rate is straight forward. The high risk of getting to closing in the difficult Engagement suggests current compensation and a relatively high success bonus. In contrast, the compensation for the straight forward Engagement would be considerably less and can defer current compensation.
As to time, the less time involved, the lower the compensation. A leading factor that increases the time involved is the level of required documentation. For example, a full descriptive memorandum requires more time than a 5 page executive summary with financial statements and descriptive brochures attached. Other factors that can extend the time involved include the number of targets approached, the amount of reporting to third parties such as boards and shareholders, and the complexity of closing the transaction. For example, closing related or simultaneous transactions, rather than a single transaction, getting third party approvals from lenders, investors, business collaborators and regulatory bodies all increase complexity and thus typically expand the time involved.
As to value, the value to our firm and size of the transaction factor into our Engagement agreements. Arbitrarily, we have fixed six figures as the minimum value to our firm for each transactional Engagement we will enter. Non transactional services, such as fairness opinions and valuations, are not subject to this minimum.
Transaction size influences the terms of our Engagements. There is a seemingly counter intuitive element to transaction size. All else being equal, larger transactions are easier to complete than smaller ones. A contributing factor is that larger businesses and transactions tend to be better able to accommodate error. In this way they have lower risk. Another contributing factor is that institutional investors, including operating businesses, generally focus on larger transactions so as to generate larger returns for their investors.
In summary, we strive to make our Engagements flexible such that the risk involved and the time expended in the transaction is balanced against the return reasonably expected for the effort. Specifically, current compensation, paid in cash or stock, can mitigate transaction risk. Further, ongoing business development advisory roles can mitigate business execution risk. As described more fully below in Principal Investing, our business development roles tend to be either for the purpose of helping the Company grow to the point that it can be institutionally financed, or for the purpose of helping the Company execute the plan for which we have arranged financing.
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