INTRODUCTION

Founded in 2002 by David M. Williams, Williams Capital Advisors, LLC is a private investment banking firm focused on emerging growth companies.

Based in Palo Alto, California, our team of professionals includes bankers fluent in English, Mandarin, Cantonese, Korean, Hindi and other languages. We advise clients worldwide on M&A and public & private capital raising transactions.

EXPERTISE

We cover a broad range of industries, with primary sector coverage focused on Technology / Media/ Telecom, Healthcare/ Life Sciences and CleanTech.

A significant portion of our core business revolves around our relationships in the Private Equity & Venture Capital communities. Many of our clients are businesses looking to raise capital from PE funds, venture-backed companies seeking exit options, or financial sponsors themselves.

SERVICES

Williams Capital Advisors provides services for corporate clients in both developed and emerging markets worldwide. Our services include:

Sell-Side M&A Advisory Pre-IPO Valuation & Positioning Private Placement Capital Raising

Buy-Side M&A Advisory Sponsor Fund Services

Aug 12, 2010 | David Williams

Over the first two quarters of 2010, private equity fund interest in small and medium sized companies has been noticeably stronger than at almost any period on record. Some of the drivers are common to the recovery phase of past cycles. However, both the level of activity and the nature of the targets are unprecedented so early in a recovery – arguably the result of the record overhang of dry power (uncommitted capital) remaining at private equity funds.

As highlighted at recent PE industry gatherings and in the financial press, the combination of record amounts of funds raised prior to the economic crunch in the late 2008 (Exhibit 1), followed by the abrupt disappearance of available debt financing and the ensuing decline in buyout activity for the duration of downturn, has created a mountain of un-invested funds (Exhibit 2).

This supply of capital is significant, particularly so given that the clock is ticking to put it to work. Because of the typical requirement that private equity funds invest uncommitted capital within 5 years, there are a series of such anniversaries on the immediate horizon prior to which the funds must be spent or relinquished (barring extensions from limited partners). The 5–year anniversaries of the 2005 vintage funds are already here, with the expiration “cliffs” growing significantly in 2011 and 2012 (see Exhibit 3).

The incentive to put this money to work, coupled with banks’ continuing reticence to commit capital in concentrated chunks for the mega deals of years past, is fueling an environment where middle market companies are the main beneficiaries of one of the most attractive markets on record for raising expansion capital or for outright sales. The combination of (very) well funded suitors and renewed availability of complementary debt (for more modestly sized transactions) has created an opportunity for PE firms to utilize leverage to generate acceptable equity returns even while paying compelling prices to sellers.

The average buyout remains below the $100 million mark (Exhibit 4). While that may have been a reflection of distressed sellers and compressed valuations in late 2008 through 2009, valuations in 2010 have rebounded well beyond levels normally seen early in a cycle (Exhibit 5).

Some private equity firms are seeking extensions to provide for more time to invest funds with approaching anniversaries (see “Limited Partners Fear Coming ‘Distressed Buying’ Boom,” WSJ…). Some such extensions may be granted, but the overall volume of investable dollars tied to expiration dates is so large that effects will continue to be felt in the marketplace for some time.

Even as individual funds approach their 5–year anniversaries, we’re unlikely to see eye-popping valuations driven by a use-it-or-lose-it mentality. Instead, we’re likely to see a continued shift towards a sellers’ market as competition for a limited number of financeable companies continues to heat up.

For middle & lower-middle market companies, the most visible impact is already apparent in valuation multiples. Not only are valuations rising rapidly on an absolute basis, the historic gap between prices and paid by strategic acquirers relative to financial buyers is narrowing and financial buyers are increasingly the winning bidders for Silicon Valley companies (Exhibit 6 and 7).

Aug 12, 2010 | David Williams

The 2010 buyout environment combines a recovery in corporate profits with record levels of dry powder at private equity funds (see “Smaller Companies Benefit from Private Equity Overhang”) – a climate primed for deal activity. Against this backdrop, a unique series of pending deadlines for PE firms to commit such capital near-term, or relinquish it, has sparked a bonfire of deal volume, spilling well beyond the traditional universe of such targets. While total buyout volume remains shy of peak levels pre-recession, the portion of offers directed at younger companies in general, and venture-backed companies in particular, has reached new heights.

The profile of the traditional buyout target (economically less sensitive, predictable cash flow, mature industry, owner-operated, etc.) has periodically widened at times, generally at the peak of the economic cycle – as the supply of buyout capital raised exceeds the traditional pool of targets.

Silicon Valley companies, concentrated in the more volatile technology & life sciences sectors, are not ordinarily among the buyout community’s preferred prey. Venture-backed companies in particular, with owners unlikely to sell at anything less than top dollar, normally rank even lower as buyout candidates. This year, however, buyouts of firms already backed by financial sponsors (either venture capital or private equity) have reached record levels (as a percent of total buyouts) – and at an early point in the cycle.

In the first half of this year, still early in the nascent recovery, an all-time high 28% of PE buyouts involved targets with existing VC or PE investors (vs. a peak of 26% in the final innings of the previous cycle). While some such sponsor-to-sponsor transactions reflect buyouts of generally larger companies already backed by PE investors (“PE-to-PE Deals”), the predominantly smaller/ younger companies funded by VC firms comprise the vast majority (~80%) of such transactions in 2009 and 2010 year-to-date.

Another indicator of this spillover effect to non-traditional targets is illustrated in the increased sponsor demand for companies in sectors with greater risk of disruptive change such as technology and life sciences, with (percentage) levels already approaching or equaling peak levels.

Greater demand for buyout targets beyond the usual suspects is also reflected in the average age of the companies acquired (currently 19.1 years vs. 27.6 years in early ’02 amid the post-Internet-bubble retrenchment). In the wake of a meltdown far deeper than that of 2001, the decade’s trend toward increasingly younger targets has wavered little.

Strategic buyers continue to represent the bulk of the acquirers of venture-backed companies. That said, financial buyers are more willing to acquire Silicon Valley companies with existing financial investors than ever before. This demand has narrowed the valuation gap to the point where average prices paid by sponsors are once again rapidly approaching those paid by strategic acquirers. The outlook for the next year or two: sellers can expect increasing flexibility and competitive even more less prices when considering exits involving private equity buyers. We may even see private equity valuations top those of strategic acquirers – just 2 years after the same exceptional reversal occurred at the end of last decade’s record liquidity boom.

Aug 10, 2010 | David Williams

In years past, consumer web startups required significant amounts of time and capital – simply to develop and bring to market first-generation products. Over the last decade, however, continuing declines in computing & bandwidth costs, the evolution of plug-and-play development tools, and the viral-pull of social media have driven a marked decline in the resources required to advance from idea to launch. The ramp is now measured in weeks and months rather than quarters or years (Table 1).

Not only has the race to market turned into a sprint, once there, the race continues – and heats up – as the velocity of user growth can widen any lead into a chasm in the blink of an eye. Companies such as Zynga coast atop years’ worth of Facebook’s (relatively) more measured expansion of the underlying platform to blow past user milestones in half the time – despite being launched less than four years later. Many of today’s web startups have their roads paved ahead of them – in the form of established base of broadband users, an installed base of smart phones and/or social networks. An Autobahn without speed limits represents a great advantage for the first entrant, and a massive threat for those still stuck at the on-ramp (Table 2).

We may not yet have reached the era of the “divine developer” – a single coder building a market-ready product in 6 days… and on the 7th day, resting. Nevertheless, the compression in time and cost to market is significant, and has a corollary in the M&A market for young companies in Silicon Valley. When strategic acquirers consider acquisitions – particularly those on the smaller end (with tens of employees rather than hundreds) – the “Build vs. Buy” comparison has been significantly altered by this contraction.

Back when the development process, as well as the ensuing customer adoption rate, was more linear and predictable, strategic acquirers could more easily estimate the cost of foregoing an acquisition to “Build” the relevant technology in-house. Such an analysis would also factor in the delay to market itself (and any revenues foregone as a result) – a less exact science, but still a feasible exercise.

Today’s lower dollar and time requirements to engineer (or reverse engineer) a product in-house would, at first glance, seem to tip the balance away from the “Buy” option. However, such considerations are dwarfed by the negative impact of getting to market even a few months later in sectors experiencing exponential growth. Beyond the absolute level of near-term revenues foregone, there’s the risk of being too late to the game to establish a leading position – before factors such as network effects close the door to such a possibility indefinitely. The loss in terms of opportunity cost: incalculable.

The most valuable asset of technology companies in today’s M&A market is arguably time, or the lead it represents. Once it became clear the economy had bottomed out late last year, acquirers have been placing a growing premium on the value of time – as reflected in the record number of venture backed exits in the first quarter, while average deal size nearly quadrupled year-over-year (Table 3 and 4).

This effect is evident not just in acquisitions of companies with tangible progress (be it revenues, users or pure achievements in technology or platform). It is the driving force behind the “acquisition of talent” transactions so common in recent months. While such teams or individuals are often repurposed post-deal, the prices paid represent significant multiples of the cost of building equivalent teams via the recruiting path. The justification for such premiums: the value of time (including the time required to hire such teams on a engineer-by-engineer basis, as well as avoiding the trial-and-error process of creating a cohesive mix of individuals).

Once a decision has been made to play in a given market, be it social media, mobile, or online video, the cheapest – and in many cases – the only way to build the winning team is by acquisition.