An important event in the life of a private equity fund is when the fund “exits” its investment in a portfolio company.  An exit is also known as the time when a fund “cashes out” or “liquidates” its investment in a portfolio company.  Exits occur in three main ways: (1) the portfolio company is sold and the fund receives cash or publicly-traded securities for its shares in the portfolio company; (2) the portfolio company holds its initial public offering, or IPO, and the fund later sells its shares in the portfolio company on the public market or the fund distributes the publicly-traded shares to the fund’s limited partners; and (3) the fund sells its shares of a portfolio company to another investor in a private transaction (this is known as a direct secondary sale).  While there are other ways a fund can achieve a full or partial exit, the above exit routes are the main ways a fund achieves liquidity.
 
We have discussed IPOs in prior posts (see for example: LP Corner: What LPs Need to Know About IPOs).  In this post, we will discuss some of the things about the sale of a portfolio company that LPs should know.
 
Common M&A structures.
The sale of a company can take many different forms.  The most common sale structures are:

• Stock for Cash
• Stock for publicly-traded stock
• Stock for privately-traded stock
• Asset sales
• Mergers

The type of structure can have an impact to a limited partner in a fund (“LP”) in terms of how and when the LP may receive a distribution from the fund relating to the transaction.
​
To read more, please click on "Read More" below.

Scott Kupor, Managing Partner of venture capital firm Andreessen Horowitz, has an interesting blog post "What's Holding Tech M&A Back?" that's worth a read.  In the post, Kupor asserts that only 10% of tech mergers & acquisitions have been "growth" transactions - deals "involving rapidly expanding, venture-financed private companies or modern software-as-a-service providers."  Worse, 40% of this deal volume has been by five acquirers - Facebook, Google, Microsoft, Oracle and SAP.

This paucity of growth transactions is due to two main factors: (1) venture-backed companies are staying private longer due to the significant availability of private capital available to these companies; and (2) public companies are hamstrung due to activist investors, which are demanding actions like stock buybacks, dividend distributions and breakups - short-term actions to books stock price - at the expense of actions that enhance long term shareholder value such as investing in R&D or growth-oriented acquisitions.

It's a thought-provoking piece that's worth a read.

Link to blog post: http://a16z.com/2015/04/10/whats-holding-tech-ma-back/

In a recent post on mergers & acquisitions, I outlined some of my thoughts of the qualities of acquisitions that had the greatest probability of success:

• The rationale (strategic goals) for the transaction is compelling and well articulated.
• The target is much smaller in size than the acquiring company.
• The target has a similar culture to the acquiring company (the target is a "good fit" with the acquiror). 
• The target's systems are similar to the acquiring company or can be easily ported over to or integrated with the acquiror's systems.
• The due diligence has been comprehensive and any any issues (and there are always issues) have been resolved before the closing.
• The integration process is transparent and well-managed.  The integration team should be involved very early on in the due diligence process and continue through the post-closing integration process.  Communication is key.
  
• The retained employees of the target should be appropriately incentivized and aligned with the success of the merger.

Subsequent to that post, an article "Why so many mergers and acquisitions fail after the deal is closed" looks at why many middle-market M&A deals fail in the integration process.  The article lists four primary reasons why the post-closing integration period is so prone to failure, including that the importance of the integration process is under-appreciated, integration is complex and takes time, and the integration leader is often installed too late in the process.  It's a good article that builds on my thoughts above.

Here's the link:
http://www.denverpost.com/business/ci_27174636/why-so-many-mergers-and-acquisitions-fail-after

There's an interesting article by Andrew Ross Sorkin in the NY Times DealBook called "The Mergers and Acquisitions Cycle: Buy. Divide. Conquer" that was posted recently.  As a private equity fund-of-funds adviser who follows the M&A industry, and as an investment banker and attorney who has worked on many acquisitions, I found the article of interest.  The article explores the value created and destroyed by mergers, acquisitions, spinoffs and divestitures.  The article states that mergers have a spotty record of creating value, but also adds that "when mergers are timed right - usually during a downturn in the market - and executed properly (usually with smaller acquisitions), much value can be created."  The article then goes on to discuss spinoffs and divestitures, and how these transactions usually perform better than M&A.  It's an interesting article and worth a read.

I agree with most of what was said in the article, but would add from my own experience that the most successful acquisitions are those that have the following qualities:

• The rationale (strategic goals) for the transaction is compelling and well articulated.
• The target is much smaller in size than the acquiring company.
• The target has a similar culture to the acquiring company (the target is a "good fit" with the acquiror). 
• The target's systems are similar to the acquiring company or can be easily ported over to or integrated with the acquiror's systems.
• The due diligence has been comprehensive and any any issues (and there are always issues) have been resolved before the closing.
• The integration process is transparent and well-managed.  The integration team should be involved very early on in the due diligence process and continue through the post-closing integration process.  Communication is key.
  
• The retained employees of the target should be appropriately incentivized and aligned with the success of the merger.

In my experience, acquisitions that have the above elements have a much greater probability of success than those without these elements.

Here's a link to the NYTimes DealBook article:
http://mobile.nytimes.com/blogs/dealbook/2014/12/10/the-mergers-and-acquisitions-cycle-buy-divide-conquer/

Investment in Chinese funds plummeted to $73 million in just two funds in the second quarter of 2013, according to an article appearing on China Money Network.  This amount was less than a tenth of the amount raised in the first quarter.  The vast majority of the funds raised were by Envision Capital's Growth Fund II, according to the article.  Investment in Chinese venture-backed companies was also down - $438 million was invested in 47 deals, with deal value down 9% from the first quarter.

Exits actually improved, albeit from pretty dismal levels.  There were two venture-backed IPOs in the second quarter, up from zero in the first quarter.  Also, there were nine venture-backed merger and acquisition exits in the first half of 2013, up from four in the first half of 2012.

I continue to hear from venture capitalists that the Chinese venture market is challenged, but these figures seem worse than what I'm hearing.

Link:  http://www.chinamoneypodcast.com/2013/08/01/venture-capital-fundraising-plummets-in-china

Steve O'Hear's article on TechCrunch this past weekend "Anatomy Of An Undisclosed Investment or Exit" provides an interesting look at the motivations why certain exits or investments are announced but don't contain a valuation or a financing amount.  It's worth a read.  Here's the link:  http://techcrunch.com/2013/05/26/follow-the-money/

Yammer, the enterprise social networking company, is being acquired by Microsoft for $1.2 billion, according to The Wall Street Journal.  Yammer facilitates social networking, collaboration and file sharing across the enterprise, and currently more than 85% of the Fortune 500 use Yammer's services.

Benefits to Microsoft of the acquisition include:

• Product enhancement.  Yammer's enterprise social networking platform may enhance a number of Microsoft products, including Outlook, SharePoint and possibly SkyDrive and Dynamics CRM.  These are likely the true synergies from the acquisition.
• Enterprise Customer Base Expansion.  Yammer reportedly has over 200,000 enterprise customers, and Yammer boasts that more than 85% of the Fortune 500 use Yammer's services.  This could drive cross-selling and up-selling opportunities.
• Skype possibilities.  Skype could be a beneficiary of Yammer's enterprise solutions.  Imaging Skype at an enterprise level that includes Yammer's capabilities.
• Defensive acquisition.  Acquiring Yammer takes away a future competitor and also takes Yammer out of play for other companies to acquire.  It also helps Microsoft catch up to Salesforce.com and Oracle, which have recently made acquisitions in this space.

Links:

Prior post on the acquisition:  http://www.allenlatta.com/1/post/2012/06/yammer-to-be-acquired-by-microsoft-for-12-billion-wsj-report.html 

WSJ.com article on the acquisition:  
http://online.wsj.com/article/SB10001424052702303822204577467312505454118.html?mod=googlenews_wsj 

VentureBeat article on the synergies from the transaction:  
http://venturebeat.com/2012/06/15/why-microsofts-purchase-of-yammer-is-the-smartest-deal-of-the-year/ 

ZDNet article on the synergies (and an argument that the acquisition is "zany"):  
http://www.zdnet.com/blog/btl/microsoft-yammer-and-the-land-grab-social-enterprise-lunacy/80009 

Trefis article on the synergies:  
http://www.trefis.com/stock/msft/articles/126937/microsoft-to-acquire-yammer-for-1-billion-we-think-it-makes-sense/2012-06-15 

Yammer, the enterprise social networking company, has agreed to be acquired by Microsoft for $1.2 billion, according to a report by The Wall Street Journal.  The acquisition will help Microsoft fill in its Office product suite with social networking and collaboration tools and it's also defensive in nature in that these types of companies are likely to become competitive to the Office suite of products.  It's good news to enterprise technology firms because it helps to ratify the business model and valuations, and its good for venture capital firms as it shows there's a lucrative exit for these deals.

Yammer's last venture round was in February of this year, raising $85 million at a rumored valuation of $500-$600 million, according to an article in TechCrunch.  The February financing brought total venture investment in Yammer to $142 million.  Assuming the rumored valuation range was correct, this is a nice (and fast) payday for the February round investors.

Venture capital investors in Yammer include Charles River, CrunchFund, DFJ Growth, Emergence Capital, Founders Fund, Khosla Ventures, Meritech and USVP.
 
Link to the WSJ.com story:  http://online.wsj.com/article_email/SB10001424052702303822204577467312505454118-lMyQjAxMTAyMDEwNDExNDQyWj.html#articleTabs%3Darticle 


Link to the TechCrunch story:  
http://techcrunch.com/2012/02/29/enterprise-social-networking-platform-yammer-raises-85m-from-dfj-growth-khosla-and-others/ 

Salesforce.com, the cloud computing company, has announced that it will acquire social media marketing company Buddy Media for $689 million in a combination of cash and Salesforce.com equity.  The transaction is expected to close in Salesforce.com's third fiscal quarter ending October 31, 2012.  Here's a link to the press release:  http://www.salesforce.com/company/news-press/press-releases/2012/06/120604.jsp 

With Salesforce.com's recent acquisition of Radian 6, a leading social listening company, and now with the acquisition of Buddy Media, Salesforce.com is moving swiftly into the social media marketing arena.  According to the press release, Salesforce.com is "doubling down on the Salesforce Marketing Cloud to provide CMOs with the ability to manage the entire social marketing lifecycle.” 

Venture capital investors in Buddy Media include Bay Partners, GGV Capital, Greycroft Partners, Insight Venture Partners,Institutional Venture Partners and SoftBank Capital. 

Here's a link to a prior post on the acquisition:  http://www.allenlatta.com/1/post/2012/5/buddy-media-to-be-acquired-by-salesforcecom-reports.html 

The Wall Street Jornal's article "Behind Groupon's $6 Billion Brushoff" describes how Groupon came so close to selling itself to Google for nearly $6 billion, but ultimately decided not to do the deal.  Good article:   http://online.wsj.com/article_email/SB10001424052702303640104577440580610986086-lMyQjAxMTAyMDAwMTEwNDEyWj.html

AllThingsD reports that Salesforce.com is close to a deal to acquire Buddy Media, a venture capital-backed company that provides social media marketing services for enterprises.  According to the article, Buddy Media is being valued at more than $800 million.  In its most recent funding round in August 2011, Buddy Media was valued at $500 million.  According to a TechCrunch article, as of last year Buddy Media projected a revenue run rate of $100 million for 2012.  This suggests an 8x forward revenue multiple for the acquisition.

GigaOM calls this a "smart play" for Salesforce.com as CRM is evolving past its sales process roots to include branding, social media interactions and marketing for customers.

Venture capital investors in Buddy Media include Bay Partners, GGV Capital, Greycroft Partners, Insight Venture Partners, Institutional Venture Partners and SoftBank Capital.

Link to AllThingsD article:  
http://allthingsd.com/20120529/salesforce-set-to-snap-up-facebook-friend-buddy-media-for-more-than-800-million/
 
LInk to the TechCrunch article:   http://techcrunch.com/2012/05/29/salesforce-acquires-buddy-media/ 


Link to the GigaOM article:  http://gigaom.com/2012/05/29/salesforce-close-to-buying-buddy-media-for-800m/ 

Good article by The Wall Street Journal on the pace of acquisitions by new tech bellweathers Facebook, Zynga and Groupon.  In "New Tech Spenders in Feeding Frenzy," the buying habits of tech companies are explored.  According to the article, in the first three months of this year, Facebook, Zynga and Groupon have combined to make 21 acquisitions, over double the pace of their combined acquisitions during the same period last year.  Many of the deals are moves to acquire technologies or enter new markets, as opposed to "aqui-hires" - acquisitions to acquire engineering or other talent.   Here's a link to the article:   http://online.wsj.com/article/SB10001424052702304543904577396691153835210.html

GigaOM reports that Facebook's acquisition of Instragram may take up to a year to clear regulatory hurdles.  Apparently the Federal Trade Commission may be launching a probe into the acquisition, which would make Facebook a leader in photo sharing both on the internet and on mobile platforms.  The FTC is concerned that Facebook would become the dominant advertiser on both these platforms, and hurt competition.

Link:  http://gigaom.com/2012/05/11/expect-a-6-month-freeze-on-facebooks-instagram-acquisition/ 

In the peHUB article "More Evidence Of The Rising Interest in Corporate Venturing and M&A," the author discusses how technology companies are increasing their efforts in this area.  Good article.  Here's the link:  http://www.pehub.com/148844/more-evidence-of-the-rising-interest-in-corporate-venturing-and-ma/ 

The Wall Street Journal reports that the ax is about to fall on investment bankers at some of the largest banks, as a result of lower M&A deal volume this year.  According to the article, global M&A revenue fell 17% in the first quarter of 2012 compared to the same period last year.  With pay and bonuses shrinking at the banks, it's a tough environment for bankers.  

Here's the link:  http://online.wsj.com/article/SB10001424052702303978104577361833023859446.html 

A couple of good weekend reading articles on M&A and why M&A deals fail are "Why So Many M&A Deals Fail"  and "If Financing is Marriage, Is M&A Death?" by Ashkan Karbasfrooshan, which are posted on TechCrunch.

Here are links to the articles:  
http://techcrunch.com/2011/12/17/why-so-many-ma-deals-fail/ 

http://techcrunch.com/2012/04/21/if-financing-is-marriage-is-ma-death/ 

Yesterday's post covered some of the reasons why Facebook acquired Instagram.  Don Dodge, a Developer Advocate at Google, has posted some thoughts on his blog why the acquisition makes sense, which add to yesterday's analysis.  Don points out that the acquisition price is roughly $30 per user, when Facebook is valued at roughly $100 per user.  So if Facebook can monetize the users, the acquisition makes a lot of sense.  In addition, as discussed in yesterday's post, Don points out that everything is going mobile, and Facebook needs to upgrade its mobile application, so the acquisition also helps Facebook from that perspective.  He also points out why Instagram might not be worth $1 billion to Microsoft or Twitter.  Interesting read.

Link to Don Dodge's post:  
http://dondodge.typepad.com/the_next_big_thing/2012/04/why-instagram-is-worth-1b-to-facebook-web-20-just-went-mobile.html 

Here's a link to yesterday's post on the rationale behind Facebook's acquisition of Instagram: http://www.allenlatta.com/1/post/2012/04/the-rationale-behind-facebooks-acquisition-of-instagram.html 

Facebook announced yesterday that it was acquiring mobile photo-sharing application provider Instagram for approximately $1 billion in cash and Facebook stock.  Why would Facebook pay so much for a two-year old company with only a dozen or so employees and no revenue?  Reports have identified several reasons for the largest acquisition in Facebook’s history:

• Defensive acquisition.  By acquiring Instagram, Facebook keeps this rapidly growing company out of the hands of its competitors, such as Google and Microsoft.  In a short period of time, Instagram has accumulated over 30 million users, and their recent introduction of an Android application has been a huge success.  Certainly Facebook doesn’t want this to be in the hands of its competitors.  In addition, if Instagram were to remain independent and continue its remarkable growth trajectory, it could end up being a formidable competitor to Facebook in the future.  From a defensive perspective, this acquisition makes perfect sense.
• Mobile photo-sharing platform  synergy.  Instagram’s mobile photo-sharing application has proven to be very popular and easy to use.  By acquiring Instagram, Facebook will be able to leverage this technology and improve its own mobile experience, which by some reports has lagged lately.
• Engineering talent acquisition.  Istagram has a small team of a dozen or so employees, but they have created a highly successful platform that is experiencing rapid growth.  Facebook can leverage this engineering talent to improve its own mobile platform.
• Users and data.  Facebook acquires access to 30 million users and the treasure chest of data contained in the uploaded and tagged photos.  This type of data could be very valuable to advertisers.
  

Instagram completed a $50 million round of financing just last week.  Venture capital investors in Instagram include Greylock Capital and Sequoia Capital.

The acquisition is expected to close later this quarter.
Link to Facebook's press release:  
http://newsroom.fb.com/Announcements/Facebook-to-Acquire-Instagram-141.aspx

Links to articles on the acquisition:
WSJ.com:
http://online.wsj.com/article/SB10001424052702303815404577333840377381670.html

CBSNews.com:
http://www.cbsnews.com/8301-205_162-57411761/facebook-buys-instagram-...but-for-what/

NYTimes.com:
http://dealbook.nytimes.com/2012/04/09/facebook-buys-instagram-for-1-billion/