Tech M&A Mania Hits Waltham.

Tech M&A Mania Hits Waltham.

Yesterday, Cisco announced it would acquire Waltham-based CloudLock Inc. for $293 million. Having graduated from  Bentley University, I have a special connection with Waltham. Waltham has become a hub outside “the hub” for tech companies. Home to companies like Constant Contact, Actifico, Carbon Black, Cryptzone, and Boston Dynamics watch city could consider tech city as its new nickname.

Since 2008 CloudLock has raised $35 million, the latest round being $6.7 million in Nov. 2014. With $35 million raised and a $293 million sale price, this acquisition should provide great returns to investors.

When compared to Microsoft’s  $26 billion LinkedIn acquisition and SalesForce acquiring Demandware for $2.8 billion, Cisco’s acquisition of Cloudlock is just a blip on the radar for recent tech M&A.

With tech M&A heating up and big ticket prices being paid for tech companies, many in Silicon Valley are beginning to feel better about their unicorn bets. I still see it being a difficult road out of Silicon Valley for unicorns but, at least, the recent tech M&A frenzy proves there are plenty of buyers looking for tech companies with “reasonable” valuations and modest financing histories.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.
Advertisements

Pros & Cons Of Converting Micro-Cap Debt To Equity.

Pros & Cons Of Converting Micro-Cap Debt To Equity.

It seems like more and more small investment firms in the micro-cap space are looking to convert third party debt of micro-cap public companies into equity. Most micro-cap CEOs probably get calls every day with offers to “restructure their debt”, “clean up their balance sheet”, “convert their old debt to equity”, “eliminate liabilities”, etc.

Using  rule 144 and/or the exemptions available under Section 3(a)(9) or 3(a)(10) of the Securities Act, investors usually create free trading stock quickly by eliminating an issuer’s debt. While there are instances where converting debt to equity can be truly beneficial for an issuer, the majority of micro-cap debt to equity conversions leave issuers worse off than before the restructure.

So when does converting micro-cap debt to equity make sense?  In my opinion, debt restructures are most helpful for revenue generating companies who can use cash, that would have been used to pay debt, to fuel growth. For pre-revenue companies,  a debt restructure tends to be a much riskier proposition.

Below, I break down the Pros & Cons Of Converting Micro-Cap Debt To Equity.

PROS:

1. Repurpose Cash Flows – Revenue generating companies can repurpose cash flow to fuel growth. Income that would have been slated to pay liabilities can be used for other purposes. By reducing or eliminating payables for things like inventory, marketing, R&D, and general admin, a company can temporarily increase available cash flows from operations and use those cash flows to fund growth.

2. Maintain Creditor Relationships – Converting liabilities into equity allow issuers to maintain a strong relationship with creditors. Meeting obligations to creditors (including investors, lenders, suppliers, and service providers) allow for continued access to those credit sources.

3. Speed – When creditors need to be satisfied quickly, converting debt to equity tends to be one the fastest options. With no registration statements, no extensive underwriting or due diligence, and “boilerplate” legal documentation, investors in these transactions can fund in as little as a few days with minimal upfront costs to the issuer.

CONS:

1. Little Value Creation – Debt to equity conversions usually do little in the way of creating traditional value for micro-cap issuers and their shareholders. Maintaining a strong relationship with a key creditor or supplier can be important and beneficial but the costs often outweigh the benefits.

2. Poor Reception – Investors usually view these transactions as a last ditch effort by management. Some of the standard debt to equity terms can be discouraging to market investors and future direct equity investors. With little value creation and less than ideal terms, market support for newly issued (primarily free trading) equity tends to be limited.

3. Temporary Solution – These transactions usually don’t solve long-term cash flow and/or financing problems. Rather, they tend to hamper an issuer’s ability to raise future funding and don’t provide a path to satisfying the same creditors in the future. Additionally, satisfying older liabilities, that may not have required immediate payment, only increases short-term dilution without solving the issuer’s short-term business or financing needs.

In short, converting debt to equity can be a useful tool but it is often used in the wrong situations, by the wrong companies, for the wrong reasons. In my opinion, these types of transaction best serve revenue producing companies and do more harm than good for pre-revenue micro-cap issuers.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

NASDAQ Sending Mixed Signals On Cannabis.

NASDAQ Sending Mixed Signals On Cannabis.

On May 23, MassRoots received word that its application to list on the NASDAQ had been denied. It is understood that MassRoots’ application was “denied by the exchange on the grounds that MassRoots may be deemed to be aiding and abetting the distribution of an illegal substance“.

For those of you not familiar with MassRoots, the company is “one of the largest and most active social networks for the cannabis community with 6255,000 users.” As the FaceBook of cannabis, MassRoots does not ‘touch’ actual cannabis.

While there are a number of cannabis related biotech issuers listed on the NASDAQ, the exchange seemed to make it clear that; “as long as marijuana is federally illegal, neither NASDAQ or the New York Stock Exchange is going to list a company related to recreational marijuana.” Or it was clear, until Microsoft, one of the largest companies listed on the NASDAQ, announced Thursday that they were entering the cannabis business!

Microsoft is teaming up with Kind Financial to “acquire government-facing contracts for seed to sale tracking“.  Seed to sale technology is designed to track cannabis from cultivation (seed) to final purchase by the end user (sale).

seed to sale
BioTrackTHC “The Seed-To-Sale Tracking System”
This news obviously doesn’t make Microsoft a “marijuana company” but it certainly puts it into the cannabis business. For an exchange concerned about “aiding and abetting the distribution of an illegal substance”, I would say having one of its largest issuers tracking the cultivation, harvest, production, and sale of cannabis may be considered aiding and abetting. 

As of now, MassRoots is appealing the NASDAQ’s decision and has requested a written explanation of the denial.The National Cannabis Industry Association and ArcView Group also submitted a pretty interesting  “Statement of Support of MassRoots’ Appeal” to NASDAQ.  

In the written appeal, NCIA and ArcView point out that the standard of aiding and abetting the distribution of an illegal substance is very vague. They go on to ask;

Is every power company that provides electricity to marijuana cultivation operations aiding and abetting? What about Google that shows people where to buy marijuana? Is Facebook liable for the tens of thousands of illegal drug transactions that likely occur over its network on a regular basis? The Denver Post and New York Times have publicly accepted advertising dollars from the cannabis industry – are the owners of those publications also banned from listing on Nasdaq? Several local and national banks traded on national exchanges have accepted regulated cannabis businesses as clients and conduct marijuana-related transactions on their behalf, could those banks also be perceived as aiding and abetting?

We probably won’t have a clear understanding of why MassRoots’ application was denied until we see the written response from the NASDAQ. It is also possible that MassRoots was denied for not meeting the NASDAQ listing requirements. In the meantime, cannabis companies looking to list their securities are welcome on the OTC Markets and Canadian Exchanges. I wonder if the NCIA will amend their letter to add tech giant Microsoft to its list of NASDAQ companies aiding and abetting the cannabis industry…

What do you think?

Will Microsoft’s new venture will help with MassRoots’ appeal? Is it unfair that NASDAQ is turning away tech startups in the cannabis space while allowing tech giants to remain listed and enter the industry?  Feel free to share and comment.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Start-Up Acquires Start-Up.

Start-Up Acquires Start-Up.

With LinkedIn getting most of the social media attention from the tech/finance people lately, I have an interesting story about Twitter to share.

An article on BostInno discusses “How 1 Tweet Turned into Dave Balter’s 1st Startup Acquisition“.  Dave Balter, founder of Mylestoned – a startup that is “reframing death through the transformation and discovery of dynamic, meaningful, digital memories” (think Facebook style memorial pages for deceased loved ones) tweeted at Eric Owski to set up a meeting in San Fransisco.

Start-Up Acquires Start-Up.

Owski founded a start-up called Heirloom that allows users to “easily and beautifully digitize your paper photos”. With over 100,000 users, Heirloom has significantly more users than Balter’s newly unveiled company. Not only did Heirloom have a lot of users but those users were the exact kinds of users Mylestoned was trying to attract. Both companies purpose was to preserve the memories of loved ones.

Fresh off a $1.5 million raise, Mylestoned closed its acquisition of Heirloom on June 1st (terms were not disclosed).  While we don’t know the terms of the deal, I have a feeling it was far less expensive to acquire Heirloom (and its 100,000 targeted users) than it would have been to acquire those users from scratch (not to mention the very cool and synergistic Heirloom technology) .

In my experience, synergistic start-up M&A transactions like this aren’t considered enough by founders. I often encounter management teams that are focused on building their business from the ground up and underestimate the value that can be created by acquiring other start-ups or small businesses.

Are you a start-up considering growing through acquisitions? What kind of value can a start-up or small business bring to you company? Please feel free to comment and share!


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.