Background
Cloudnine Realtime ("C9"), a leading financial services–focused cloud service provider, was exploring an acquisition and had received a term sheet from a prospective buyer. The acquirer was qualified and strategic — much larger, well capitalized, with a compelling acquisition thesis. However, the CEO of C9 was inexperienced in M&A as this was his first transaction and wanted to make sure he was getting full value for his business.
Having known Harbor Ridge Capital ("HRC") for many years, the CEO expressed interest in having an M&A specialist on board with domain expertise in cloud services to advise on the existing offer and source additional acquisition options to ensure the most optimal outcome. The offer on the table was at a strong multiple, yet was only 2/3 cash, with 1/3 in seller note.
Value Added
In advance of HRC formally engaging with C9, HRC wanted to confirm its expectation that other strategic acquirers would have an interest in C9 and proceeded to reach out to a handful of buyer contacts. After receiving positive feedback, HRC felt confident in its ability to generate additional compelling offers, as well as a better overall deal. Further, more options on the table would shift the negotiating leverage from the buyer back to C9.
Transaction Process
HRC engaged with the incumbent buyer on their offer while reaching out to a targeted strategic buyer universe, including the parties who had expressed interest previously. HRC advised C9 that the incumbent offer was not a market deal — the seller-note component should be either in all cash or more front-ended versus a balloon payment in year five. To substantiate this guidance, HRC received additional term sheets from its strategic network — one being an all-cash deal at the original valuation, which was very well received by C9 shareholders.
Results
These additional options and guidance from HRC propelled the incumbent acquirer to "sharpen their pencil" and increase their offer. In the end, they shifted their deal to all-cash, increasing the cash at closing by 50%.
Commentary
While some feel that hiring an M&A advisor may disrupt an incumbent discussion, this could not be further from the truth — the advisor is usually motivated and incentivized to close the best all-around transaction for the company. Buyers and investors may signal a desire to maintain a one-on-one discussion without an advisor, yet this is entirely motivated to achieve the best deal for them, which is inherently the case when there are no other options on the table. Optionality by way of a well-run, strategic-focused process is key to increasing value by providing negotiating leverage — which likely leads to a higher valuation, as was demonstrated with this deal.