HOW TO GET ACQUIRED (FOR A PREMIUM PRICE)

William Rhys Dekle, PartnerStrategic Alternativesrhys@strategicalternatives.co

Prepared for Casual Connect Berlin 2-8-17

COMMON QUESTIONS I WILL ADDRESSo Should I use an agent to do business development for me?o How do I make my studio more valuable for acquisition?o Should I hire an investment bank to sell my company?o A publisher wants to invest in me and buy 10%-20% of my company? Good idea?o Someone gave me an offer that I think is way too low. How should I respond?o A potential acquirer is asking for all this financial and product information. How do I

respond?o I’m smart and I negotiate publishing deals myself, why can’t I negotiate an acquisition

myself?

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WHY SHOULD I KNOW• Partner at Strategic Alternatives an acquisition-focused, strategy consulting firm for the video game industry

• Other stuff I’ve done:• Senior Director, Business Development, Microsoft

Studios• Director, Merchandising Games, Hollywood

Entertainment• Engagement Manager, McKinsey & Company• Associate, Goldman Sachs• Entrepreneur• Yale University, B.A.• Wharton, M.B.A. Finance

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WHY DO PEOPLE SELL GAME STUDIOS?

Because their lives and priorities have changedBecause they realized earlier goalsBecause the opportunity presented is worth more than operating independentlyBecause they are disillusioned or tired Because there is a bigger problem

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COMMODITY VS PREMIUM EXITSCommodity exits o aka acquihireo pricing is generic, little tolerance for negotiation, o in US expect $250K or less per engineer (even $500K per engineer can

be considered commodity price)Premium exitso Valuation driven by assets and cash-flow not employee headcounto Deal is strategic to the buyer in an understandable wayo Negotiation is expected and respectedo Greater deal value drives more complex and elaborate deal structures

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SHOULD YOU SELL WHEN YOU FEEL LIKE IT?o This is a commodity pricing strategy. o Owners usually sell companies when life conditions require a sale

e.g. there is some problem driving the sale (sickness, fatigue, divorce, dissension among owners, declining business prospects)

o Buyers smell trouble when Owners say they are for sale. Nothing hurts your valuation faster than telling the world that you are for sale

o But if you must sell yourselves call an investment bank – it is what they are good at.

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ATTRACTING ORGANIC ACQUISITION INTEREST• This is a premium pricing strategy• Hold unique positioning in a valuable space• Owning valuable IP in the form of franchises or services• Reputation (Quality, Consistency, Maturity, Sanity)• Experience working with or for multiple potential acquirers

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AND NOW A WORD ON INVESTMENTS

• This is a common question lately• Considerations

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SOURCES OF ENTERPRISE VALUEo EBITDA past, present, and futureo Intellectual Property (Games, Technology)o Cross promotable userso Proven ability to consistently produce great work in a specific areao A well managed organization with strong middle managemento Patents

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RULES TO BUILDING ENTERPRISE VALUEo Always make great games – ALWAYS (with a word on polish and agents)o Always fight to retain IP and userso Always have a strategyo Avoid any gaps between paying projectso The 6 month ruleo Take as many shots on goal as you cano A.B.U. - Always Be Upgrading your teamo Hire excellent middle management as you grow and empower themo Always seek business with companies that have the means and disposition to buy you

down the line

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A MEDITATION ON VALUATIONYour company valuation is a function of expected future cash flows from the perspective of the buyer

Corporate buyers will perform several valuations on youo EBITDA x multipleo DCF (Discounted Cash Flow analysis)o Compso Build versus Buyo What they believe your “number” is

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THE L.B.O.An LBO always precedes a legitimate offer

o Trying to figure out your “exit number”

o Can delay presentation of another offer by 6 months

Respond appropriatelyo Be polite, thankful for interesto Let them know you haven’t

considered selling and that operating the business is your priority

o Let them know that if you were to ever sell, it would be at a reasonable valuation and that the LBO is too far off to consider

o Let’s stay friendso And then wait while you keep doing

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NEGOTIATING AN ACQUISITIONNever negotiate an acquisition by yourself – would you climb Everest by yourself?

Align the major shareholders before offer to avoid fracture

Things that mattero Your comfort with the acquirer

and their planso Treatment of your employeeso Offer structureo Offer sizeo Tax efficiency for shareholders

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DEAL STRUCTURE• Publicized deal value sizes are always misleading. Don’t be impressed unless

you know deal structure• Anatomy of a deal

• Assured portion• Paid up front or paid over 3-4 years• Paid in cash or in equity (public tradeable, public untradeable, private and

illiquid)• Contingent portion aka “Earnout”

• One or several IF/THEN clauses applied to the deal• Used to close the valuation gap between buyer and seller

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PROVIDING INFORMATION TO BUYERSo An Offer is not an Offer unless it is presented to you in writing with a term sheeto The buyer will ask for information prior to making an offer : BE VERY CAREFUL

o What are you worth? “Uh we are so busy we never think about it”o Show us your financials “Sure after you show me an offer as part of due

diligence”o Show us your contracts and documentation “Sure after I get an offer”o Show us your product roadmap “I can talk to it a little bit but cannot disclose

that until after I get an offer”o What is your EBITDA and is it growing, stable, shrinking? “I can’t give you our

finances on paper but I’m happy to tell you about my profit and the direction of its growth” IF you have EBITDA. Otherwise “While we are still investing in growth, we are extremely confident of our future plans”

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SOME DEAL STRUCTURE CONCERNS

1. Does the assured compensation reflect a fair base valuation for your studio?

2. Does the assured portion include private and illiquid equity?3. Is the earnout portion an appropriate size and structure?4. Is earnout entirely in your control as the developer?5. Is earnout achievable and reasonable?6. Is the deal structured to be tax efficient for the shareholders

o Does compensation from deal qualify as capital gains not earningso Is there enough cash to pay your taxes on the shares you receive?

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ILLUSTRATIVE DEAL TIMELINE & PROCESS

Typically 6 to 8 months

Written offer &Term sheet

Term sheet signed

Due Diligence

Employee slotting

Long form presented

Deal Close

Begin Post acquisition integration

Initial Discussion(Post LBO)

M1 M2 M3 M4 M6M5

Soul searching

Courtship

Back and forth talks

Analysis

Intense negotiation

Continue soul searching

Question & Answers

(No-shop period)

Fine point Negotiation

Operate as usual / contain excitement

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DID I FAIL TO TALK ABOUT THESE QUESTIONS?o Should I use an agent to do business development for me?o How do I make my studio more valuable for acquisition?o Should I hire an investment bank to sell my company?o A publisher wants to invest in me and buy 10%-20% of my company? Good

idea?o Someone gave me an offer that I think is way too low. How should I respond?o A potential acquirer is asking for all this financial and product information.

How do I respond?o I’m smart and I negotiate publishing deals myself, why can’t I negotiate an

acquisition myself?

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SPEAKER CONTACT INFO:WILLIAM RHYS DEKLE, PARTNERSTRATEGIC ALTERNATIVES

Email: rhys@strategicalternatives.coMobile: 503 799 2583Skype: dealmonkey

Follow me on:Instagram: ebugogoTwitter: @dealmonkey

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APPENDIX

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WHY DO PEOPLE START GAME STUDIOS?

For creative freedomTo make awesome gamesTo control their destinyTo make more money

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