A Blog from Gerbsman Partners Board of Intellectual Capital on “Maximizing Enterprise Value” for technology, life science, medical device and cleantech companies and their Intellectual Property
Steven R. Gerbsman, Principal of Gerbsman Partners is pleased to announce that Dr. Steven. B. Heymsfield has joined Gerbsman Partners Board of Intellectual Capital.
Dr. Heymsfield is an International Life Science, BioTech Professional and Educator. Dr. Heymsfield will provide to Gerbsman Partners and its clients significant domain expertise and access to national and international companies.
Please see below information on Dr. Heymsfield and his significant bibliography of published papers.
Dr. Steven B. Heymsfield, M.D. – International Life Science, BioTech Professional & Educator
Dr. Steven B. Heymsfield, M.D. is Professor and Director of the Body Composition-Metabolism Laboratory at the Pennington Biomedical Research Center of the Louisiana State University System in Baton Rouge. He is on the visiting faculty at Harvard Medical School and a former Professor of Medicine at Columbia University, College of Physicians and Surgeons. Prior to Pennington, he was Global Director of Scientific Affairs for the Obesity Group at Merck & Co.
Dr. Heymsfield has published more than 700 peer-reviewed papers covering topics such as obesity, malnutrition, cancer, cachexia, body composition, and caloric expenditure. His contributions to the study of human nutrition led to the TOPS Award from The Obesity Society (TOS), the Rhoads Award from the American Society of Parenteral and Enteral Nutrition (ASPEN), the Robert H. Herman Memorial Award, American Society of Nutrition (ASN), and the George Bray Founders Award from TOS. During the President Bush’s Administration he was considered for the Office of the Surgeon General.
Dr. Heymsfield is past president of ASPEN, ASN and TOS. He was recently appointed as an Amazon Scholar and works on the Amazon HALO product.
Please see below Dr. Heymsfield Bibliography from the National Library of Medicine, NIH National Center for Biotechnology Information.
Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in underperforming, undercapitalized and undervalued companies and their intellectual properties. Since 2001, Gerbsman Partners has successfully maximized the values of 116 companies in a wide and diverse spectrum of industries, including technology, software, life science, medical device, biotechnology, etc. In the process, GP has successfully restructured/terminated over $810 million of real estate executor contracts and equipment lease/sub-debt obligations, and has assisted in over $2.3 billion of financings, restructurings and M&A transactions.
Gerbsman Partners has offices and strategic alliances in Boston, New York, Washington DC, McLean VA, San Francisco, Miami, Orange County, Europe and Israel.
Advantages of ‘Date-Certain M&A Process over Standard M&A’
Every venture capital investor hopes that all his investment will succeed. The reality is, however, that a large percentage of venture investments eventually are shut down.
In the extreme they end in bankruptcy or assignment to creditors. The majority falls into the category of the “living dead.” Such companies are not complete failures, but their prospects do not justify continued investment, yet they are rarely shut down quickly.
Once reality has been recognized, most investors engage investment bankers to sell their investment off through prevailing M&A processes. Unfortunately, seldom with good results.
REASON #1
The main reason for that sad result is a fundamental misunderstanding of buyer psychology. In general, buyers act quickly and pay the highest price only by force of competitive pressure.
Potential buyers of the highest probability are those already familiar with the company for sale, such as competitors, existing investors customers and vendors. Once a sales process starts the seller is very much a diminishing asset. Both financially and organizationally. Unless compelled to act, potential buyers simply start to draw out the process, submit a low-ball offer when the seller runs out of cash, or try to pick up key employees and customers at no cost.
REASON #2
The second reason is usually a misunderstanding of the psychology and methods of investment bankers.
Most investment bankers do best at selling “hot” companies. Companies whose value is perceived by buyers to be increasing quickly over time, and where there are multiple bidders.
They tend to be more motivated and work harder on such cases because transaction sizes –and resulting commissions– are larger and surrounding publicity can bring in new assignments, among others. They also tend to be more effective in maximizing value in such situations by using time to their advantage, pitting buyers against each other and setting very high expectations.
In a situation where time is not your friend, the actions of standard investment banking practices often make a bad situation much worse. Such actions include assigning less experience B-Teams to smaller transaction size cases, “playing out the process” which works against the seller, and pitting multiple players against each other which can drive away potential buyers who often know far more about the seller than does the banker.
THE GERBSMAN PARTNERS ‘DATE-CERTAIN’ M&A PROCESS
The most effective solution in situations where time is not on your side is a Date-CertainMerger and Acquisition Process.
Under this proprietary process, the company’s board of directors hires a crisis management/private investment banking firm (‘advisor’) to wind down business operations in an orderly fashion and to maximize the value of their intellectual properties and tangible assets. The Advisor works closely with board and corporate management to:
Focus on Control, Preservation and Forecasting of CASH
Develop a Strategy/Action Plan and Presentation to Maximize Value of Assets.
Plans to include Sales Materials, Due Diligence access. a list of all possible Interested Buyers for Intellectual Properties and Assets and Identify and Retain Key Employees on a go-forward basis.
Stabilize and provide Leadership, Motivation and Moral to all Employees.
Communicate with the Board of Directors, Senior Management, Senior Lender, Creditors, Vendors and all other Stakeholders in Interest.
THE PROCESS:
The company attorney prepares a simple “As-Is/Where –Is” asset sale documents. This document is very important and includes a “No-Reps or Warrantee” Agreement, as the board, officers and investors typically do not want any additional exposure on a deal.
The advisor then follows up systematically with ALL potentially interested parties and coordinates their interactions with company personnel, including on-site visits.
Typical terms for a Date-Certain M&A asset sale exclude representations and warranties and include a sales date –typically four to six weeks – from the point of readying sales materials for distribution, a refundable CASH deposit in the range of $200,000, a strong preference for cash consideration and with the ability to close a deal in seven business days.
Date-Certain M&A terms can be varied to suit needs unique to given situations. For instance, the board may choose not to accept any bids, or to allow re-bids if there are multiple competitive bids, and/or allow early bids.
The typical workflow timeline from advisor hiring to transaction close and receipt of consideration is four to six weeks. Such timelines may be extended as circumstances warrant. Upon receipt of considerations, the restructuring/insolvency attorney then distributes funds to creditors and shareholders (if there is sufficient consideration to satisfy creditors), and takes all needed steps to wind down the remaining corporate shell. Typically in coordination with the CFO.
PROCESS ADVANTAGES:
Speed: – The entire Date-Certain M&A Process can typically be concluded in 4 to 6 Weeks. Creditors and investors receive their money quickly. A negative PR impact on investors and board members related to a drawn out process is eliminated. Where required, such timelines can be reduced to as little as two to three weeks, however severely compressing the process often impacts the final value received during asset auction.
Reduced Cash Requirements: – Owing to the Date-Certain M&A process’ compressed turn-around time, there is a significantly reduced need for any additional investor cash to support the company during the process.
Maximized Value: – A quick and effective process during wind-down mode minimizes strain and rapid asset depreciation and thereby preserves enterprise value. The fact that an auction will occur on a certain date typically brings truly interested and qualified parties to the table. In our considerable experience, this process strongly aids in maximizing the final value received.
Cost: – Advisory fees consist of a retainer and a performance fee, which is a percentage of the sales proceeds.
Control: – At all time during the process, the board of directors retains complete control. For instance, it can modify the auction terms, or discontinue the auction at any point, thereby preserving all options for as long as possible.
Public Relations: – As the entire sales process is private, there is no public disclosure. Once closed, the transaction can be portrayed as a sale of the company with all terms kept confidential. Accordingly investors can list the company in their portfolios as sold vs. having gone out of business.
A Clean Exit: – Upon closing of the auction, considerations received are distributed and the advisor, under the leadership of the insolvency counsel, then takes all remaining steps to effect an orderly shut-down of the remaining corporate entity.
About Gerbsman Partners
Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in underperforming, undercapitalized and undervalued companies and their intellectual properties. Since 2001, Gerbsman Partners has successfully maximized the values of 116 companies in a wide and diverse spectrum of industries, ranging from technology, life science, medical device, digital marketing, consumer to cyber security, to name only a few.
Since inception in 1980, Gerbsman Partners has successfully restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations, and has been involved in over $2.3 billion of financings, restructuring and M&A transactions.
Gerbsman Partners has offices and strategic alliances in San Francisco, Orange County CA, Boston, New York, Washington DC, Mc Lean VA, Miami, Europe and Israel.
by Eric Bell, Managing Director at Progress Partner and Member of Gerbsman Partners Board of Intellectual Capital
IPOs, Unicorns and $1B+ Exits: Overall, global IPO deal volume is down (46%) and IPO proceeds are down (58%) YTD. So far in 2022, 19 new cybersecurity unicorns have been minted and there have been 8 $1B+ exits in the space, keeping pace with 2021
Public Market Performance: The Progress Cybersecurity Index was down (21.6%) in Q2 and (22.7%) YTD vs. NASDAQ’s (22.7%) decline in Q2 and (30.3%) YTD. TTM revenue multiples for cybersecurity stocks declined similarly quarter-over-quarter at 7.0x, down from 10.9x at the end of Q1—the lowest level we’ve seen in 2 years.
Financing Trends: During the quarter, VC and PE firms invested $5.4B in 180 cybersecurity companies, down from 249 deals in Q1 but flat from a transaction value perspective. Application security, data security and threat and vulnerability management (TVM) were the most active product categories receiving funding.
M&A Activity: Q2 2022 was another strong quarter for M&A activity for cybersecurity with 118 deals worth $19.7B, excluding Broadcom’s whopping $69.2B acquisition of VMWare. Revenue multiples for deals declined slightly less than public markets, declining to 8.7x in Q2 from 11.6x TTM revenue in Q1
Segment Spotlight | Post-Quantum Cryptography: Recent legislation is driving newfound investment and activity in the race to protect critical infrastructure and systems against potential threats from quantum computers. We highlight the key trends, players and legislation driving the segment.
This article was published by Steven R. Gerbsman and Robert Tillman in previous years and has significant relevance today due to the Russia/Ukraine situation, inflation, the energy crisis, the potential recession and Covid.
Please read, enjoy and “be prepared”.
We are currently in one of the most challenging times in our country’s history. The stock market had hit at all-time highs and now suffers from higher interest rates, inflation, high energy costs and world political turmoil. There are, of course, many other worrisome trends: the situation in Ukraine and Eastern Europe, Russia, terrorism, excessive government spending, trade deficits, high and higher oil prices, immigration and over the longer term, such issues as an aging population and (possibly) global warming. Although problems and worries always exist, in historical terms, these are times of challenges.
The big questions for us as specialists in maximizing enterprise value are:
When will the Black Swan and Tipping Point issues end?
It will eventually end of course. Even fundamentally healthy economies experience frequent and often violent corrections. The current world economy has evolved in many ways over the past decade. All large businesses are international. The primary economies of the world are very tightly linked together. Money is far more liquid and moves around the world with far less “friction” than it did in the past. The pace of technical change continues to increase. Nevertheless, we do not believe that the laws of history, and especially, the laws of human nature, have been repealed.
As always, “The more things change, the more that they remain the same.”
Unfortunately, no one knows the answer to this question. In historical terms, the current economic expansion has continued for a very long time and has survived numerous shocks, including war, a doubling and maybe a future tripling of energy prices, natural disasters and localized economic downturns, such as the bursting of the sub-prime mortgage bubble. The markets have been in for a downturn. On the other hand, inherently unstable situations often persist for far longer than anyone could believe possible. During the 2000 Internet bubble, it seemed to us for quite some that the old rules of business no longer applied and that 25 year-old CEOs knew something us old guys did not know. When the crash occurred, we were relieved to find out that we were not so obsolete after all.
We did, however, underestimate the staying power of technically insolvent companies with broken or non-existent business models. Many of these companies had significant cash on the balance sheet (offset, of course, by significant liabilities) and investors who continued to infuse more cash far beyond the point of reason. Today, there exist immense pools of uncommitted cash, much of it in the hands of entities, such as private equity funds and hedge funds that are subject to minim al regulatory scrutiny and whose operations are obscured from the public view. In addition, the weakness of the dollar against both the Euro and the Pound Sterling makes U.S. assets a relative bargain. These factors tend to mitigate against an economic downturn. For how much longer they will continue to do so we do not know (and if we did know, we would certainly would not tell).
How will it end?
Fast, hard and unexpectedly. Three books shed a great deal of light on the process:
The first book, The Tipping Point by Malcolm Gladwell describes how human behavior causes events to cascade rapidly once a certain critical mass (the “Tipping Point”) has been achieved. Examples in the business world include periodic economic ?panics? and the spread of certain technologies and products, such as personal computers, iPods, cell phones, etc. It is very difficult to predict in advance when the ?tipping point? in any situation will be reached, but history has shown that, once it has been reached, events proceed very quickly.
The second book, The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb describes how highly improbable, and hence unpredictable, events periodically create massive change. The title of the book derives from the observation that the existence of even a single black swan disproves the assertion that all swans are white. Historical examples include the Fall of France at the beginning of World War II, the rise of the Internet and 9/11.
The third book, “The Sun Also Rises” by Ernest Hemingway describes the character Mike Campbell and discusses his money troubles where he responded with a vivid description embracing self-contradiction. “How did you go bankrupt”, Bill asked. “Two Ways”, Mike said. “Gradually and then Suddenly”. “What brought this on?”. “Friends,” Mike said. “I had a lot of friends. False friends. Then I had creditors, too. Probably had more creditors than anybody in England.”
There are many obvious candidates for a “black swan” event that pushes the world economy over “the tipping point” into a downturn – a war with Iran, Russian/Ukraine situation, Korea and/or China over Taiwan, a nuclear terrorist attack or the coninutaion of the Covid epidemic, but generally, it is what you do not see that gets you. We are fundamentally optimists about the long-term prospects of the world economy. In many highly measurable ways, the world really is improving, driven by technological innovation, a lowering of barriers to trade and increasing economic integration. Nevertheless, we are old enough to have lived through many “bumps” along the road and know that such discontinuities will always occur. We believe that we will see a significant economic event sometime over the next 6-18 months, either localized to a particular sector or geographic region or globally.
Gerbsman Partners and other Equity Investors Advice?
Before such an event occurs:
As a board member, investor, senior lender or stakeholder:
Implement tight cash flow, account receivable focus and inventory reporting so that you are alerted to problems early.
Focus on the control, preservation and forecasting of CASH on a weekly, monthly and quarterly basis.
Require “bottoms up” forecasting for all aspects of revenue and expense. Have the CEO and CFO defend ALL numbers.
Hold the CEO responsible and accountable for Performance. If you are off the business plan/forecast, re-forecast based on the reality of “what is” today.
Communicate frequently with all parties at interest. Check that the CEO is providing leadership, motivation and morale to the management team and employees.
Review all companies in your portfolio. Identify and define action plans to fix weaknesses now.
Utilize professional resources to assist in maximizing enterprise value, when appropriate.
When such an event occurs:
Face up to reality and act quickly. When things are going bad, waiting seldom improves them. We have never seen a board of directors act too quickly when faced with a crisis. We have all too frequently seen a board act slowly or not at all.
Call for assistance early. The earlier professionals can get involved in the process, the better the potential outcome in maximizing enterprise value. Many times board’s request assistance only after a company has run out of cash. Many more options exist to maximize enterprise value if a company has some running room.
About Gerbsman Partners
Gerbsman Partners focuses on maximizing enterprise value for stakeholders and shareholders in underperforming, undercapitalized and undervalued companies and their intellectual properties. Since 2001, Gerbsman Partners has successfully maximized the values of 116 companies in a wide and diverse spectrum of industries, ranging from technology, medical device/life science, digital marketing to cyber security, to name only a few.*
In the process, GP has successfully restructured/terminated over $810 million of real estate executory contracts and equipment lease/sub-debt obligations, and has assisted in over $2.3 billion of financings, restructurings and M&A transactions.*
Gerbsman Partners has offices and strategic alliances in San Francisco, Orange County, Boston, New York, Washington DC, McLean, VA, Europe and Israel.
*For further information on Gerbsman Partners expertise and industry experience, please request our company profile here
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