White Paper

Growing Businesses in Tough Economic Times
How a VDR can help steer businesses through the seven stages of the financial lifecycle

M E R R I L L

D A T A S I T E

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Contents

Introduction Funding Planning to grow your business Mergers and acquisitions Seizing international opportunities Post-deal integration Making M&A work Equity Turning businesses into cash Debt financing Getting a cash injection Right-sizing Re-focusing on what you do best Bankruptcy and restructure Restructuring debt

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Growing Businesses in Tough Economic Times

Anyone with financial authority over a deal will expect to see a raft of detailed, accurate information about the business in question.

Introduction
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Striving for growth The ongoing financial crisis has changed the nature of business growth around the world. At one end of the scale, it’s created an unprecedented number of large corporations that are sitting on a healthy pot of funds1. These companies have become cash-rich by being extremely good at what they do – putting them in a powerful position to grow through strategic acquisition, and, thanks to the European sovereign debt crisis, acquisition opportunities are plentiful. Organizations across Europe are divesting their assets, particularly in the financial services sector, where banks and other financial institutions are seeking to remove non-core businesses in order to sharpen their efforts2. Indeed, it’s estimated that by the end of 2013, banks in the UK, France, Ireland, Germany and Spain alone will have reduced their balance sheets by €775 billion ($1.03 trillion)3. For small or medium-sized companies, however, achieving growth is far tougher. Private Equity is the only real option, and yet – in spite of having a record amount of funds – many Private Equity firms are growing increasingly cautious about how they spend it. The market for syndicated debt, meanwhile, is closed to all but the lowest risk businesses and for those in debt-stricken European countries that makes it virtually impossible to attain. Caution is key. To achieve growth in this climate – whatever the size and nature of your business – caution is key. Investors will only part with their hard-earned funds for the very best deals; lenders want reassurance that debt will be well-spent. Simply put, anyone with financial authority over a deal will expect to see a raft of detailed, accurate information about the business in question. Given the increasing cross-border nature of many deals, investors will also expect to access this business data no matter where in the world they are located. Whenever this kind of due diligence activity is required, a Virtual Data Room (VDR) can give you a crucial competitive advantage. The secret: the Virtual Data Room A VDR is a secure online document repository that gives authorized users access to due diligence information whenever they want it, wherever they are located. Designed to save time and money, the right VDR solution helps businesses complete financial transactions far more quickly, transparently and more professionally, and with a greater chance of a successful outcome.

At Merrill DataSite®, for example, we can set up a VDR for due diligence within a matter of hours. Through our flexible search capability, all documents in the VDR become entirely searchable, while our Q&A tool directs people straight to the information they are looking for. What’s more, thanks to the wider Merrill Corporation, those documents can be translated, with high accuracy, into seven languages – essential when supporting today’s global deals. In this white paper, learn how businesses can grow through tough economic times, and how VDR technology can support that growth; underpinning due diligence activities throughout the seven typical stages of a company’s financial lifecycle. From initial funding and investment through to restructuring, it will demonstrate how to compete harder, protect profitability and aim for growth in a highly challenging climate.
“GLOBAL REFERENCE GUIDE 2011: MERGERS & ACQUISITIONS”, Financier Worldwide. “Financial Services M&A in 2012: A cross-sector outlook”, Deloitte. Source: Bloomberg.

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Funding Planning to grow your business There are two ways to grow a company. The first is organic growth; you enable your company to do more of what it does and therefore sell more. The other way is to acquire other companies. To achieve either of these things, you need a strong equity base. For the vast majority of businesses, this equity is unlikely to come from within the business itself. What’s required is funding from Private Equity firms or other individuals, but, for small businesses especially, securing funding today can be extremely challenging. Many Private Equity firms have been able to generate an unprecedented amount of cash from investors, which they must spend or risk losing. However, banks are tightening the reins on debt financing, meaning the leverage within these firms has decreased. As a result, the average deal hits the Private Equity pocket harder – and that means they are taking time to scrutinize every opportunity more closely, to ensure an investment is sound. To secure funding, therefore, it’s vital to make your business look as attractive as possible from the moment investors are invited in. Profit and loss, overhead figures and a robust business plan are just some of the things that need to be prepared. Not only that, but investors may also want to become members of the board and attend regular financial meetings. You also need to be prepared for the fact that the process of securing funding may take some time. This equates to a significant undertaking – not the kind of activity a small business is always used to. How a premier VDR solution can help To secure funding for business growth, smaller and mid-market businesses should think seriously about using a virtual data room (VDR). Rather than forcing you to create endless copies of physical documents for potential investors, a VDR lets you compile information in a secure online document repository and present it to multiple potential investors quickly and easily. You can keep it open for however long the negotiation takes and, as your business develops, you can keep adding to it for future use. At Merrill DataSite, we have created BoardSite for this purpose. As a smaller, more cost-effective version of DataSite, it can help small business owners compile company files into a professional online data room for investor review, whilst providing complete transparency for all board members at a later date. Importantly, BoardSite is designed to be a sound investment. When the time comes, it’s easy to upgrade to the full version of Merrill DataSite and that means it’s easier to get ready for the next stage in the growth of your business. Merrill DataSite scenario: a social media company The challenge A US post-revenue social media company wanted to finance expansion into a geographically larger market. In order to do this, it needed to raise money from existing and new investors in a very short timeframe. The Merrill DataSite solution By using a Merrill DataSite VDR to organize due diligence information, the company was able to approach both existing and new investors, securing funding in excess of €40m in less than five weeks.

A VDR lets you compile information in a secure online document repository and present it to multiple potential investors quickly and easily.

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Growing Businesses in Tough Economic Times

Mergers and acquisitions Seizing international opportunities Has the time come for you to sell part or all of your company? Maybe you’re a corporation looking to acquire a business yourself? Whichever situation you company is in, it’s important to know that the trend towards global, cross-border deals is still going strong.

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Europe, in particular, is offering a wealth of M&A opportunities, attracting a great deal of interest from the US and Asia. In China, according to Dealogic, Europe accounted for almost 30% of all outbound M&A deals in terms of deal value in 2011. As deals continue to go global, using a physical data room for due diligence becomes completely out of the question for both buyer and seller alike. For the seller, a physical data room is costly in terms of money and time to set up. Not only that, but with buyers keen to scrutinize every last detail in a deal, the information that needs to be made available is constantly being updated. Invite global investors, and you may also need to provide a highly accurate translation of that information in multiple languages – making updates harder still. However, the practicality of managing a physical data room is actually a moot point – as today’s corporate buyer is unlikely to travel to one at all, or they may not even wait to be approached with a deal. Given the amount of cash in their businesses, many of these companies are actively scouring the market for the best deals, even from businesses that apparently have nothing to sell, and they are approaching them with a VDR in hand, asking them to populate it for due diligence How a premier VDR solution can help Today, 40% of Merrill DataSite projects are buy-side – not sell-side – VDRs. These buy-side corporations are typically repeat buyers, who are using VDRs because they know they provide an intuitive way to study due diligence data thoroughly. They also know that – with a premier virtual data room provider – there is a team of people able to translate content accurately into seven languages, making it ideal for international deals. The 60% of companies who are looking to sell, meanwhile, recognize that a VDR, like Merrill DataSite’s, is an excellent way to categorize information quickly and make it available to multiple prospective investors around the world. More and more of these sellers are using Merrill DataSite for pre-due diligence – helping them prepare information in anticipation, and thoughtfully position their company to maximize deal value should an investor come knocking. Merrill DataSite scenario: a natural resources company The challenge A South American natural resources company was looking for a 40% buyer for its business. Aware that it operated in a very attractive market, the company wanted a way to open up the deal to international investors, so as to encourage the best deal outcome. The Merrill DataSite solution By using Merrill DataSite for effective pre-due diligence activities, the company was able to open up their business to potential investors around the world in less than 24 hours, rapidly finding a successful buyer and closing the deal for US$100m.

In China, Europe accounted for almost 30% of all outbound M&A deals in terms of deal value in 2011. Deologic

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Post-deal integration Making M&A work More and more companies are realizing that a significant amount of mergers and acquisitions carried out in this new economic climate are non-accretive. From a corporate buyer’s perspective, deals may be strategically sensible for the long term, but they are not always going to make money immediately.

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For this reason, newly merged organizations must work harder than ever at post-deal integration to protect the immediate and ongoing health of their business. One key to successful integration is cultural alignment. All staff must be sure of their roles within the new company as early as possible, to prevent resentment and encourage the new organization to mesh. Yet teams within the acquiring company often have little insight into the people they are taking on, causing frustration and delaying the process. The other key to successful integration is rather more practical; understanding the operational aspects of the business. Management teams need to be immediately familiar with documents that they haven’t created – documents about processes, supplier contracts and more – so they can keep the new business running effectively from the outset and avoid making costly mistakes. How a premier VDR solution can help A VDR can be extremely valuable throughout post-deal integration. Once a sale has completed, it’s simple to provide a copy of the VDR to management teams, which helps them integrate the newly-acquired asset into their business. For international deals, a VDR is even more useful, as teams can use it to work across regions and in different languages to bring teams together. With a premier solution, such as Merrill DataSite’s VDR, intuitive search tools will facilitate this information flow. It gives HR, IT and Legal teams the power to find whatever information they need within documents that they didn’t create themselves – such as employee records, operational processes and a company’s strategy information. By being able to access this information quickly, management teams can gain insight into critical operational and contractual information, which will protect day-to-day running of the new business. They can also make the best use of individuals and their skills, building the right structure to take the organisation towards its new goals. VDRs can be kept live for years, ready to be used as a key tool for managing ongoing business operations or new financial transactions.

Management teams need to be immediately familiar with documents that they haven’t created–documents about processes, supplier contracts and more – so they can keep the new business running effectively from the outset and avoid making costly mistakes.

Merrill DataSite scenario: a large hospitality company Merrill DataSite is currently being used to support ongoing integration activities for a global hospitality business, three years post-deal. With the merger taking place across multiple geographies, the company continues to use its Merrill DataSite VDR to share information and manage a variety of national and local business operations. In fact, the business estimates it is saving in the region of US$70,000 a month by using Merrill DataSite as opposed to physically handling and storing documentation.

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Equity Turning businesses into cash There comes a time in the life of every growing business when it has to discover its own monetary value.

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Investors may be keen to see a real financial return; hard-working staff may have long been underpaid; or you may have plans for growth, which require new cash. Is the market in good shape for your type of business? If it is, it could be time to release some of your equity. Of course, there is a real risk today that your company has no equity at all. Thousands of organizations are finding themselves over-leveraged and in negative equity as a result of taking on too much debt prior to the financial crisis. However, if you do want to determine your business’ value, then there are a couple of ways to go about it. You can float on the stock market and enable anyone to buy shares. Alternatively, if you are confident your shares are worth a certain value, you can encourage an investor to lend you a percentage of that value before going public. This (somewhat risky) recapitalization dividend is typically used as a quick way for businesses to give money to their employees. Attempting any activity like this can be complex and challenging in adverse market conditions. Whichever method you use to get monetary value out of your shares, you first need to file a registration statement to the relevant securities authority covering the securities to be sold in the transaction, and that statement has got to be accurate if they are going to approve it. How a premier VDR solution can help Using a VDR to release some of your equity is becoming the norm. It can help you and your colleagues get capitalization records, minute books, material contracts and other due diligence documents in order. Then, when the time comes for inspection by government underwriters and their advisors, the documents are readily available and effectively organized. The Q&A tool in a Merrill DataSite VDR, for example, can be particularly useful. In any valuation, the ability to answer an investor’s questions quickly and accurately is essential to securing a good outcome. Through the Q&A tool, it’s possible to direct an investor to specific documents in the VDR and share those answers with other prospective investors, which saves time and helps accelerate the valuation process. What’s more, using a VDR may help secure the most money for the deal. A VDR is ideal for a dual-track process - used it to run a stock market flotation and a trade at the same time, which builds competitive tension and ideally encouraging the best-priced outcome. Merrill DataSite scenario: an oil and gas company The challenge A US oil and gas company sought an understanding of its value in order to release some of its equity. The Merrill DataSite solution The Q&A facility in its Merrill DataSite VDR enabled a number of prospective investors to carry out a detailed analysis in an extremely controlled environment. To generate an accurate valuation figure, the Q&A tool supported more than 1,200 exchanges of information. Thanks to this information, the company was rapidly able to secure closure of a transaction worth almost US$500m.
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When the time comes for inspection by government underwriters and their advisors, documents are readily available and effectively organized.

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Debt financing Getting a cash injection If you have been through a merger, acquisition, IPO or similar, then your business should be in good shape. You have assets, liabilities and (hopefully) equity, which is all there in black and white on your balance sheet. The question now is: how do you secure financing against your newly mature business – especially during uncertain times? Debt financing has been the traditional option. The interest on the loan is deductible and the financing cost is a relatively fixed expense, but just finding someone willing to give you the money today can be incredibly challenging.

The question is: how do you secure financing against your newly mature business – especially during uncertain times?

The market for syndicated funding is virtually closed to all but the largest and most successful businesses. To those in debt-stricken European countries, it’s pretty much bolted shut. If lenders are willing to offer any cash at all, they will only do so once they have pored over as much information about your business as they can, in order to determine the investment is sound. Where once you didn’t have to sacrifice any ownership interests in your business – today, practices, such as mezzanine funding4, mean you must be prepared to offer a stake in your business to get the financing you are looking for. For the best chances of success, you need to get organized and present lenders with a variety of detailed information about your business. With lenders taking their time to make a decision, you also need to be prepared for the process to take much longer, which means keeping that information up to date at all times. How a premier VDR solution can help If you already have a VDR open from previous due diligence activity, you will be one step ahead in the financing game. You can use it to present a variety of information to as many prospective financiers as you want. Alongside your business plan, banks will want to see information, such as credit history, cash flow, financial statements and income tax returns – all of which can be stored in your VDR. With a VDR solution, like Merrill DataSite’s, you also have the assurance that any changes you need to make can be made quickly and efficiently. Your site administrators would have access to almost identical functionality as Merrill DataSite staff, which means they can upload new documentation easily and as frequently as they want. In a risk-averse climate, that kind of fast, professional administration can make the difference between getting the money you need – or not. Merrill DataSite scenario: a large multinational company The challenge An ‘AA’ credit-rated multinational business was looking for a loan to the value of US$1.5bn. It opened up a Merrill DataSite VDR and invited prospective investors. The Merrill DataSite solution The company expected to secure debt from a range of investors. However, thanks to the detailed information made available to prospective lenders within their Merrill DataSite VDR, the company secured a loan from a single lender to the full amount within just 72 hours.

If you already have a VDR open from previous due diligence activity, you will be one step ahead in the funding game.

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A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. (Source: www.investopedia.com)

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Right-sizing Re-focusing on what you do best In the years following a merger or acquisition, it’s not unusual to ‘carve out’ one or more elements of the newly formed business. Perhaps you bought a company that gave you a foot in the door in a certain market or geography, but which no longer fits your business objectives. Or maybe certain parts of your business are no longer thriving the way they used to. In a difficult market it can be sensible to divest yourself of these assets. ‘Right-sizing’ can create a better, more focused company with less debt. To get the best return, it’s important to bear in mind why you are selling the assets in the first place. An asset that is no longer performing as well as it was is effectively ‘distressed’. This means prospective buyers will almost certainly be financially driven and looking for a low-cost deal. To work the deal in your favour, you need to present this asset as professionally as possible. A carve-out that simply no longer fits into your business will be attractive to corporate investors who want to bolt it onto theirs. These organizations need to see the potential from your asset, which means providing detailed information about performance, profits and more. However, given that buyers are increasingly studying a prospective investment for some time, to see how it really performs – making due diligence last longer – the chance of deal fatigue is greater, so you need to work harder to retain interest. How a premier VDR solution can help A VDR can host full and detailed information about the area of your business for sale, providing maximum exposure conveniently and cost-effectively to multiple potential buyers around the world. Because VDRs look and feel professional, as well as being easy to use, you can encourage more interest in your sale – and the best price. A Merrill DataSite VDR solution lets you analyze viewing data in great detail, which, under the guidance of your professional advisers, can give you valuable insight into buyer intent and enable you to drive up the tension in the sales process – vital when securing the best possible deal value. Plus, in a climate where due diligence is taking longer, it’s easy to keep the information in your VDR updated for as long as it takes investors to make a decision. Merrill DataSite scenario: a European fabrication business The challenge A large European component manufacturing business, with a turnover of approximately €17bn a year, wanted to sell off a small division, worth in the region of €50m a year. The Merrill DataSite solution By using a Merrill DataSite VDR as a repository of all due diligence information, the company was able to see the sale through to a successful conclusion – despite the fact that the due diligence process ran for more than 500 days. By using their Merrill DataSite VDR to keep business information up to date, the company beat deal fatigue and retained the interest of three prospective suitors until the deal was closed.

Given that buyers are increasingly studying a prospective investment for some time, to see how it really performs – making due diligence last longer – the chance of deal fatigue is much greater, so you need to work hard to retain interest.

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Bankruptcy and restructure Restructuring debt There is a big myth surrounding bankruptcy. People have a tendency to think it’s a death knell, heralding the untimely end of a company’s life. This is not true. Bankruptcy is ultimately a legal process; an inability to pay your creditors. It can be more sensible to think of it as a hefty restructuring exercise, which allows you to considerably streamline your debt. Many companies have emerged successfully from bankruptcy and gone on to flourish.

Many companies have emerged successfully from bankruptcy and gone on to flourish. The trick is to be prepared.

The trick is to be prepared. When restructuring your debt, the first question is – who do you want your owner to be? A Private Equity firm will almost certainly be more interested in the financial opportunity that your business offers. A corporate investor, meanwhile, will be more interested in what you can bring to their business and may let you retain certain elements, such as your ownership structure. There are significant cultural differences between the two, so it’s important to decide which you want. Should the time come for bankruptcy, all manner of financial information must be prepared and shared between your legal team and restructuring advisers, banks, creditors, the courts and other key parties. Needless to say, you will want to make the whole process as swift and efficient as possible. How a premier VDR solution can help VDRs can be used to centralize the information needed for a bankruptcy process. Because VDR solutions, like Merrill DataSite’s, are easy to use and completely secure, it enables the individuals involved to share information quickly and in complete confidence. If you already have a VDR in place, you are at a distinct time advantage, as much of the information needed will already be organized and ready to go. Moreover, your VDR can be used for subsequent restructuring purposes – such as a distressed asset sale. Time is of the essence in these circumstances and a VDR makes it simple and costeffective for multiple interested parties to view asset information, which drives up competition, discourages stalking-horse bids5 and helps ensure the best financial outcome for your business. Merrill DataSite scenario: a European bank Merrill DataSite has worked with a large European bank to help it unwind its assets, in the single largest project we have ever undertaken. More than five million pages – the vast majority of which are loan documents – were loaded into the bank’s Merrill DataSite VDR over a period of ten x 24-hour days. By using Merrill DataSite, the bank is able to significantly streamline the due diligence process. Scanned documents are now online and fully searchable and all information is easily accessible in an intuitive folder structure. As a result, the bank has reduced its estimated asset review period from 12-18 months to just 8 months – an extremely valuable time saving in a climate where time really does equal money. To learn more about how Merrill DataSite can help you steer through any phase of the financial lifecycle email info@datasite.com or visit www.datasite.com.

All manner of financial information must be prepared and shared between your legal team and restructuring advisers, banks, creditors, the courts and other key parties.

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An initial bid on a bankrupt company's assets from an interested buyer chosen by the bankrupt company. From a pool of bidders, the bankrupt company chooses the stalking horse to make the first bid. (Source: www.investopedia.com)

About Merrill DataSite® Merrill DataSite is a secure virtual data room (VDR) solution that optimizes the due diligence process by providing a highly efficient and secure method for sharing key business information between multiple parties. Merrill DataSite provides unlimited access for users worldwide, as well as real-time activity reports, site-wide search at the document level, enhanced communications through the Q&A feature and superior project management service – all of which help reduce transaction time and expense. Merrill DataSite’s multilingual support staff are available from anywhere in the world, 24/7, and can have your VDR up and running with thousands of pages loaded within 24 hours or less. With its deep roots in transaction and compliance services, Merrill Corporation has a cultural, organization-wide discipline in the management and processing of confidential content. Merrill DataSite is the first VDR provider to understand customer and industry needs by earning an ISO/IEC 27001:2005 certificate of registration – the highest standard for information security – and is currently the world’s only VDR certified for operations in the United States, Europe and Asia. Merrill DataSite’s ISO certification is available for review at www.datasite.com/security.htm. As the leading provider of VDR solutions, Merrill DataSite has empowered nearly two million unique visitors to perform electronic due diligence on thousands of transactions totaling trillions of dollars in asset value. Merrill DataSite VDR solution has become an essential tool in an efficient and legally defensible process for completing multiple types of financial transactions. Learn more by visiting www.datasite.com today.

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About Merrill Corporation Founded in 1968 and headquartered in St. Paul, Minn., Merrill Corporation (www.merrillcorp.com) is a leading provider of outsourced solutions for complex business communication and information management. Merrill’s services include document and data management, litigation support, language translation services, fulfillment, imaging and printing. Merrill serves the corporate, legal, financial services, insurance and real estate markets. With more than 5,000 people in over 40 domestic and 22 international locations, Merrill empowers the communications of the world’s leading organizations.

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M E R R I L L

D A T A S I T E

®