Interview with Sasson Darwish Managing Director in the Technology Investment Banking Group at Bank of America

By Jason Caplain

Recently I sat down with Sasson Darwish to get his thoughts on the IPO and M&A markets. Sasson is Managing Director in the Technology Investment Banking Group at Bank of America.

Previously, Sasson was VP at Lehman Brothers’ Global Technology Group. There he focused on software and Internet Infrastructure investment banking. He covered leading companies in telecommunications, Internet and software industries.

With a lot of companies in our market maturing and talking about potential exits, I thought it would be useful to share parts of our conversation here.

CAPLAIN: We see a lot of M&A activity, but how active is that market and how does it stack up to past years?

DARWISH: The M&A market is one of the most robust ones in recent history, outpacing the late 90′s both in terms of volume and number of deals.

CAPLAIN: What are some of the key drivers behind all this activity?

DARWISH: Let’s talk about the buy side.

First, companies are flushed with cash due to increased productivity and cost efficiencies derived from prudent management styles and internal operational focus after the Internet bubble burst. Historic low interest rates created an unprecedented credit availability with convertible bonds and cheap loan markets on fire in the past two years.

Second, private equity firms have more than one trillion dollars of “dry powder” available to buy any company, private or public and continue to consolidate industries. Also, private equity firms are now focusing more on technology companies that have matured and have stable cash flows that can support large amounts of leverage. Just as one example of that is the $11 billion SunGard LBO.

CAPLAIN: You’ve talked about why so many companies are interested in making acquisitions, but why are there so many high quality companies on the market?

DARWISH: First, start-ups from classes of 2000-2004 that survived the bust years have been able to create critical mass of revenues ($20+ million) but the IPO window has been practically shut in the past 18 months with few success stories.

Second, larger startups who are “IPO material” utilize “dual route” processes run by investment banks, i.e. starting to draft a prospectus and in parallel run a small “market test” with potential acquirors to try and create an exit opportunity before going public. As definition “IPO material” equals $50+ million revenue run rate with current or near current profitability.

Third, most of the funds that have supported their star companies are getting towards their 5th and sixth year and have to demonstrate few exits and generate some returns prior to starting their next fund marketing process, thus are generally more flexible on the negotiation table.

CAPLAIN: With the robust M&A activity, have you seen more bidding wars and if so, what has that done to valuations?

DARWISH: Consolidation is a key theme in many technology sub sectors and bidding wars are more of the norm when an auction is under way. This has resulted in historically high exit multiples for software as well as equipment companies in the ranges of 5-7 times last twelve months revenues or 20-30 times last twelve months profits.

CAPLAIN: What are some of the traps you see some companies run into when they may be looking for an exit?

DARWISH: There are many mistakes
companies make, but here are the top six:

1. It is tempting, but running an unstructured/ casual process could be disastrous.

2. Devoting little time to M&A is a mistake. This is a time consuming process, you better work double shifts!

3. We’ve also found structure is key to any transaction – explore and think out of the box, but still cash is always king.

4. Of course, this is easy to say – but you need a trusted and experienced advisor.

5. Don’t forget your employees’ future.

6. Lastly – always remember your fiduciary duty to your shareholders.

Jason Caplain is a General Partner with Southern Capitol Ventures. Founded in 2000, SCV is a Raleigh, NC-based venture capital fund focused on providing capital to early stage technology companies in the Southeast and Mid-Atlantic. Previous investments have included Art.com, Motricity, Batanga, ChannelAdvisor and Synthematix (acquired by Symyx). SCV is currently making investments ranging from $100k to $1m.

© 2006, TechJournal South. All rights reserved.