Amidst a lot of the doom and gloom (and Solyndra!) talk at the Renewable Energy Finance Forum in San Francisco this week, one presentation stood out as a bright spot for entrepreneurs and investors building greentech companies: mergers and acquisitions have been pretty good in 2011, and the M&A deals for the year are expected to about double from the amount in 2009, said Jeff McDermott, Managing Partner of Greentech Capital Partners.
Greentech Capital Partners was involved in the deals between French power giant Areva and solar thermal company Ausra, and Cooper and Eka Systems, among others. McDermott says the firm has nine deals it’s working on currently. In particular McDermott sees a lot of activity happening “across borders” from the U.S. to Asia, including China, Korea (HelioVolt and SK Group) and Japan. Three of Greentech Capital Partner’s nine deals are between U.S. companies and Chinese strategic investors.
But despite the bullish outlook, McDermott says that the greentech deal sizes themselves aren’t all that large — there have been 133 deals in 2011 and only 10 are above $1 billion. “In investment banking parlance this is lower, middle market. For big banks, a billion dollar deal is not that big to be honest,” said McDermott. Sixty to 70 percent of the deals go for less than $250 million, and McDermott says the sweet spot for M&A is in the $100 million to $500 million to $750 million range.
Given all of McDermott’s experience in ushering these deals, he put together four myths that companies should pay attention to when they are looking to sell their firms:
Myth #1). Strategic investors won’t pay high prices: McDermott pointed to the acquisition of Ausra by Areva, which was in the $200 million to $300 million range, and Ausra was a pre-revenue company. Toshiba paid a high price for Landis & Gyr as did Schneider for smart grid software firm Telvent. Some of the companies are getting five times or six times revenue, when many companies trade at one-times revenue. “When strategic acquirers find a company that is enabling technology. . . they will pay for synergy value. It’s not easy but it can be done.”
Myth #2). Acquisitions are led by the CEO: Yes, for M&A that is small, that is correct, but for companies with market caps of $10 billion to $200 billion, you need to get the entire corporate strategy on board, and the different divisions. CEO’s need to sign off on deals, but it isn’t sufficient just to win over the CEO. It’s a sale to a team of people. At huge conglomerates there isn’t a Larry Ellison that swoops in and single-handedly does a deal. The people at these large companies take their time, don’t take much risk. You have to understand the buyer’s universe.
Myth #3). Filing an IPO will increase your price and chances for M&A: While that might work in general tech, it doesn’t seem to be working in greentech. This is for a variety of reasons, including that exposing financials isn’t always good for the company. “I’d rather you keep the numbers hidden from the analyst community and make the sale upfront, and the CEO and management team isn’t subject to criticism for over paying.”
Myth #4). Buyers will find you: They won’t, this isn’t the tech space again, it’s greentech. The buyers are large conglomerates across industries and geographies and they might not know about your company. Tailored marketing is crucial. Don’t wait for them to find you.
And finally, McDermott’s tips for selling your greentech company:
- Be close to a few investment bankers that understand your sector.
- Analyse the prospective buyer universse, think global.
- Build relationships with prospective buyers.
- Have detailed diligence-able financial models.
- Understand your valuation drivers.
- Understand your potential synergy value to different types of buyers.
- Wait for the ping. Sometimes it comes to you.
- But then qualify the ping.
- Launch a process with an experienced M&A bank.
- Run a competitive process to maximize price and terms.
Structured transactions bridge the value gap.
Image courtesy of Dreamsjung.