February 2011 Corum Webinar

Seller's Panel, China Buyers, and Mini-Mergers

 

02/03/11

 

Ward Carter

 

Thanks for joining us and welcome to the February Corum M&A monthly. I'm Ward Carter, chairman of the Corum Group, based here in our Seattle-area headquarters.

 

In keeping with the international nature of today's topics, I see the registration list shows over 200 executives from 16 countries in North and South America, Europe, Asia, and Australia.

 

This is our agenda for the next sixty minutes. We'll start with a market overview and then a review of the mini-merger markets of 2010, cover some very interesting data on M&A in China, and reveal our recent data on technology M&A, including deals and valuations. Then we'll switch gears and have a live panel discussion with a group of software executives who recently sold their businesses.

 

Today's speakers include Bruce Milne, CEO and founder of the Corum Group, John Melotte, Corum's regional director in London, Bruce Lazenby, Corum's VP in Ottawa and Jeff Brown, Corum's VP in Houston, followed by Dougan Milne, Corum's VP of research, and Tomoki Yasuda, Senior Research Analyst. Corum's President, Nat Burgess, will moderate our Seller's Panel. I'll ask Nat to introduce each of our guest speakers on the panel as they appear.

 

We will keep this event to about 60 minutes, and you'll want to stay tuned for the Q&A session. As for the Q&A logistics, feel free to ask questions of our panelists or speakers at any time, but we'll address all questions during the Q&A session at the end. To submit a questions, please use the Q&A window on the right side of your screen and make sure to send your question to “All Panelists”. If you select host or any other option, your question will not be seen and not included in the question queue.

 

Today's conference is being recorded and will be rebroadcast this coming Thursday, February 10. Thereafter, the recorded event will also be available on the Corum Group website under Conferences and Events on the left hand side of the menu. Or, you can email a request for the archived recording to pats@corumgroup.com. 

 

With that, I'll turn the floor over to Bruce Milne. 

 

Bruce Milne

 

Good morning. We have the best seller's panel ever, so I'll be brief in my comments.

 

Internationally, we have some good news, Europe's manufacturing growth hit a nine-month high and German unemployment was the lowest since 1992. Across the channel, though, UK production numbers came in lower. I know a lot of you were watching Davos meetings last week, it was kind of a meeting marathon. The typical CEO or executive there had two to three times the number of meetings as previous, so deal making is returning.

 

Many of the economists are talking about a supercycle which left no economy behind. We've had a couple of them since just after World War 2, including in the '80s and '90s, and it looks like we may be in for another one. This has some interesting implications for raw materials, we could see some serious inflation. There was one analyst off by himself, not getting much attention, who said, “You know, the banks haven't fixed the problem, they're still way overleveraged, watch out about four or five years from now.”

 

Moving across the ocean to the US, things are good here too, with both consumer and business confidence at a three-year high. This came in over the last 48 hours, US manufacturing grew the most since 2004. You have to keep in mind that is up from an off year. Jobless claims declined. This is interesting, union membership, with all this unemployment though, is at an all time low. Moody says, though, that time is running out for the US. The S&P just cut Japan's ratings and with the US debt continuing, the concern is that we may have our rating cut as well. And Geithner said that growth is still too weak to cut unemployment, we still have a lot of that.

 

Looking at the finance and real estate sects, back at the banks, there are some concerns that bank valuations are stuck in 2009 lows. Part of this is because there is still some bad debt. For example, BofA may have $8.5 billion on their books. Some good news though is that Obama tapped GE's Immelt and he has clearly the confidence in the business community, so we hope that's a good sign.

 

Home prices declined last year. You know, we're seeing a recovery now, but that only really means it is basically flat. What is interesting is that in the last 48 hours, construction spending came in at an unexpected low for the past decade. Those of you who know anything about this industry know that this is basically due to lack of credit. 

 

Moving on to technology, our friends at EMC, we did a white paper for them last year, they posted a record rise, 61%, they've been one of the top ten buyers over the past decade, so we expect to see continued activity from them. Intel's confident, they're putting $10 billion into a stock repurchase program. Twitter's advertising revenues tripled, wow. Larry Page came back to be CEO of Google. His motivation was that he wanted to step up the attack on Facebook and Apple.

 

The pad wars are continuing as Lenovo takes on Apple with LePad and LePhone. IBM and Apple's earnings are up and they point to a tech boom and that is good for all of us, isn't it?

 

In the technology sector, looking at telecomm, Apple plans a service to let iPhone users pay with their handsets, I love that. That will, of course, be true of all handsets, it's so competitive. Speaking of which, Android is really taking hold and competing heavily with the iPad, as you all know.

 

Nokia, one of the losers with all this, over the last seven months they've fallen quite a bit, and over the last 48 hours, its debt was downgraded. Motorola has been a bit of a victim, too, of the phone wars.

 

In closing, Cisco said that smart phones will boost mobile web use will rise 26 fold by 2015. That's good for Cisco, the economy, all of use. Thank you.

 

Nat Burgess

 

Thanks, Bruce, very interesting to hear what's happening on a global scale. We often focus with this webinar on the big multinational, multi-billion dollar deals. Today we're going to switch gears a little bit and focus on some of the smaller transactions. The fact is, the last time we ran the numbers, over 90% of tech M&A deals were under $50 million in value, so in terms of volume, that's where a lot of the action is.

 

We're basically going to look at three geographies and examples of smaller transactions, but important transactions. Let's start with John Melotte, our regional director for the UK, based in London. John, over to you.

 

John Melotte

 

Thank you, Nat and hello from London.

 

In general, in Europe, we currently have a good flow of M&A deals, big and small.

 

At the high end, just a few weeks ago, the French company Atos Origin acquired the German company Siemens IT Solutions and Services, in a billion-dollar plus mega-deal. This creates the fifth largest IT services company in the world, and in Europe it is second only to IBM.

 

Atos Origin’s CEO, Thierry Breton, has said that he was expecting to reap revenue benefits from the bigger scale of the company and the move to cloud computing. Cloud-based synergies and benefits are driving a lot of deals at present. Associated with the implementation of a Cloud platform is the increasing adoption of a SaaS based business and sales model.

 

The mini-merger deal that caught my eye this month fits right in to this SaaS profile. RightNow Technologies’ announced its acquisition of Dutch-based Q-go.com, mid January in a $34m deal. What RightNow gets is a semantic search solution, based on natural language processing: The ability to understand queries, naturally said or written, interpreted in a context appropriate for the application. This is clearly a worthy addition to RightNow’s IP base, as it delivers on-demand CRM systems. Both

companies are strong advocates of Cloud services. In summary, there is the sound, strategic logic that we would normally expect to see in a good deal like this, but look at the valuation.

 

The deal was done, in cash, for 4.3x the forward projected revenues of what is still, a small early-stage acquisition. An all-cash deal, with a good multiple on projected sales; this reflects the premium that continues to be placed on companies that have a SaaS-based revenue model. The certainty of future revenues and the ongoing relationship with customers deliver strong valuations.

 

Clearly the strategic logic still needs to be there, but as this acquisition of Q-go.com shows, SaaS business models sure do help with the valuation and terms of a deal.

 

Back to you, Nat.

 

Nat Burgess

 

Thanks for that update, John. I'd not like to go to Bruce Lazenby, our regional director for Eastern Canada, and he'll walk us through a very different transaction with different dynamics, but also very important. Bruce?

 

Bruce Lazenby

 

Yes, certainly things are very active here in Canada, with lots of software M&A deals happening. Canada has a number of incentive programs for R&D, but not so much on sales and market side, so what we find is a lot of really interesting technology in a number of smaller companies. I think of this as my retro deal, it harkens back to the late '90s when people were buying small companies with small teams, trying to get a jump on the competition from a technology point of view, and I think that is what this Google/Zetawire deal turned out to be.

 

Zetawire is in the near field communications business, basically funding ways to turn your mobile phone into a credit card. That's what we think they do, as they don't have any revenue, so they don't have any customers, they don't even have a website, and as near as we can tell, they never did. But apparently they do have a patent issue which Google was very interested in. There is some question even about whether the patent was issued or not, but there are a couple of brothers who were completing their PhD programs while they were founding this company. Of note, one of the brothers wrote a paper called “Algorithms and Complexity Results for Input and Unit Resolution” and another called “A Complete Proof Theory for Propositional Logical Contingencies,” so a couple of really smart guys, and we know that Google likes to get really smart guys.

 

Is this a hot space? Absolutely. In fact, it was interesting, RIM and others have filed patents in this area, but Google decided to jump the queue and go to the top of the pile by making this acquisition, which, by the way, was in RIM's back yard. Zetawire is about an hour's drive from RIM's headquarters in Kitchener/Waterloo.

 

It's also interesting that Google wanted to keep this deal secret. They didn't want the competition to know they were as close as they were to something in the SC space. That was my favorite deal, lots more of these to happen, and my firm is happy to be participating in them.

 

Nat Burgess

 

Thank you very much, Bruce. We'll now move to Jeff Brown, our regional director based in Houston, Texas. Jeff does a lot of work in energy, as well as new technologies and SaaS. Jeff, why don't you walk us through your mini-mergers?

 

Jeff Brown

 

Certainly. Thanks, Nat, and good morning everybody. The deal I'd like to take a look at this morning is an energy deal, and it is particularly relevant given that a cold wave has hit the US. Here in Texas, we've had rolling blackouts as the demand for electricity has outpaced supply and we expect those blackouts to continue for the next day or so until it warms up. The segment that I want to talk about today is called the demand response management segment, and it is the business of cutting power usage at times when utilities are facing peak loads, such as cold winter nights or hot summer afternoons, and thereby pushing the load into low demand periods.

 

The utility industry understands today that building the new generation is so expensive and takes so long, that better use of the current infrastructure by managing demand is a much more profitable approach. Last week, one of the leaders in this sector, enerNOC of Boston, completed its 10th deal since 2001 by buying a company called M2M Communications.

 

Now, enerNOC is NASDAQ listed, they have revenues of about $280 million and they were trading at about 1.7x revenue and 14x EBITDA. But what is really interesting is that they manage about 2% of the total US peak energy load through their applications.

 

The seller was a startup in Boise, Idaho. M2M sees a growing business in remotely managing agricultural power loads. This company helps farmers shut down irrigation water pumps to meet peak demand reduction goals. Coincidentally, those peak demand periods are also the times when farmers crank up their massive water pumps to irrigate their crops. By connecting those pumps via wireless and satellite setups, farmers can remotely turn them off and on until the peaks are passed. Utilities save money with this and then they pass those savings on to farmers as rebates.

 

About 400 US utilities deliver 3% of their power for this agricultural use, but what is also really useful here is that of those utilities, the midwestern and western share gets as high as 30% of their power generation. 

 

Deal metrics: enerNOC paid $33.3 million for $10 million in revenue, a 3.3x multiple. The structure of the deal was 15 million in common stock and the rest in cash. This is an active segment and this deal has implications on national energy policy, the economy, and national security as well, but not just in the US. Energy security is an important issue for many countries. We'll see more small firms consolidated by strategic and private equity as the big guys jostle for leadership in this area.

Last May, for example, ABB bought Ventyx at 4x revenue and they have since added two more companies to their acquisitions. The Carlyle Group and Oak Tree have made recent acquisitions as well, and even Google with Powermeter and Microsoft with Home have launched consumer oriented energy-management initiatives.

 

With that, back to you, Nat.

 

Nat Burgess

 

Thanks for that update, Jeff. In these cold, cold winter days, we're all pretty focused on power, and that brings it close to home. I'd like to transition now over to Dougan Milne, our VP of research. He is going to give us an update on China. Over to you, Dougan.

 

Dougan Milne

 

Thanks, Nat. Yeah, I'm glad to be bringing the China update to you today. We've had a close eye on China for years now, and it seems like especially in the past past 12 months or so that we have been engaging more and more with Chinese companies, both buyers and sellers. So, today's briefing is actually part of a much larger report that we're developing, called China Rising, it is being prepared for a special webcast, very similar to the one that we did last spring. This is going to have some of China's newsmakers and tech leaders represented, so look for that in the next quarter or so.

 

Let's have a look here at GDP performance. As you can see from this chart, China, in blue up top, grew five times faster than the west in 2010. In 2011, they have forecasted growth of another 10% and you can compare this to the US and Europe, and Japan down there at the bottom as well, at roughly 3%. Those are pretty staggering numbers.

 

So, if we look at tech and finance in China and the numbers are even more startling. Tech growth is three times faster than the rest of the economy in China. That is being supported by the most robust IPO market in the world right now, generating lots of cash for growth, and of course that is also used for acquisitions.

 

With the bulk of these 300-odd transactions or so, we see that the majority of the deals are in the software and solutions area, represented here by green, IT services is in blue, making up about 14%, and then outsourcing and offshoring are about 19% and then telecomm services and solutions has grown quite a bit, but is still just below 13% or so.

 

While Chinese companies are certainly making strong strategic maneuvers to buy companies and technologies from around the world, most M&A activity has have been within China, for acquiring Chinese companies, both at a domestic level and a foreign investment level. There are high growth, massive market, low cost production, increased exit strategy options on the various China-based exchanges, and then once you're in China with a  local base, it is easier to make more acquisitions.

 

For these reasons, the world is increasingly recognizing the extraordinary opportunities that China offers. In terms of buyers of Chinese tech firms, the U.S. dominates by an overwhelming margin, as you can see here, with Japan in second place, but the bulk of this is certainly US foreign buyers.

 

One of the focuses of our research is the growing number of companies within China who have been able to leverage the huge size of this market and are now going public, reaching out, making international acquisitions.  Here are just a few of the Chinese giants you may not know. Hauwei is the second largest maker of phone equipment in the world.  Kingdee has 500,000 customers in enterprise software. We have Shanda, a game publisher, one of a few big ones in China, they have over 800 million registered users across their various social networks, across their various MMO games.  Another company with similarly large numbers is Tencent, who is the major social media player in China with a Facebook competitor called QQ.  And, of course, there’s Vance Info, in the outsourcing and IT services space, the fastest growing company on the NYSE currently.  They have several big competitors, but another one to note is HiSoft, another company that recently went public that is doing plenty of acquisitions.

 

So I pose the question to you, Do you know these companies?  You certainly should, as they are now part of a family of major international buyers.

 

There are a number of reasons why Chinese firms are making international acquisitions. First, China holds almost $3 trillion in currency reserves, one way to use it is simply to make acquisitions.  There are tax benefits, and other major strategic reasons including picking up brands and new technologies that can leverage China’s low cost model and their massive home consumer market.  Also, acquiring customer bases, especially for the IT outsourcing firms is key.  Finally, for Chinese buyers, foreign firms have some distinct advantages being allowed to operate under different rules than socialist China.

 

Here are just a few of the most notable transactions involving Chinese firms as buyers.  Take a look. You notice that the United States was the biggest beneficiary of China's investment?  We expect that to continue as nearly 75% of world’s leading tech companies are in the U.S.  For much more detail on all these companies and transactions, of course this was just a tidbit of the presentation that we are putting together in the coming quarter, and for more information on how your firm can tap into China’s huge market, look forward to our full report, “China Rising” in the coming quarter.  Thank you very much. Nat, back to you.

 

Nat Burgess

Thank you, Dougan. Exciting times for China, we've actually had senior management teams from several of the companies Dougan mentioned come through our offices here in Seattle and it is really a game-changing trend.

 

With that, I'd like to hand this over to Tomoki Yasuda, our senior research analyst, and he will be covering our monthly Corum M&A update.

 

Tomoki Yasuda

 

Thanks, Nat. Definitely some interesting facts coming out of China, we definitely hear more about the growth opportunities in the technology realm there. I'd also like to add some interesting statistics about that area to the end of my presentation.

 

But first we have the Corum Index, where we keep some interesting and relevant KPIs about the market. Total deals went up 14% since December of 2010 to January of 2011. We have the largest deals of the month highlighted on the right. Most notable was the acquisition of Terremark, who traditionally has been a co-location hosting provider, but they started to expand their cloud portfolio, which was of great interest to Verizon. As you can see, they paid out a hefty sum for that technology. Verizon as a company knows that they need to make a bigger splash in online service delivery and they are making their movie right here. Other KPIs are still within the same range as last month.

 

On to our valuation slides of our six broad markets. Since I won't be able explain in detail all of these, as we are a little crunched for time, I have chosen to focus on a few slides here and there, and put the rest of my detailed summary in a blog post on our website, so definitely check that out in the next few days.

 

In the Horizontal Sector, I have highlighted a deal in the learning management space, with SumTotal acquiring GeoLearning. Multiples have jumped up, partially due to research adding more companies into this sector.

 

Onto the Vertical Sector, we're highlighting a deal by GE in the energy space. You guys got a flavor of what is going on here from Jeff, and just to comment on GE, as a company they have been making smart, small acquisitions. Where are they going with these?  More on that in my summary blog post.

 

In the Consumer Sector, we have Skype's first acquisition ever, acquiring Kick, a mobile video streaming service, a very interesting deal for many reasons. The first deal since Skype was sold off from eBay to a consortium of PE firms, and second, this is, in my opinion, a much needed change for the direction of the company. Unbeknownst to most people, Skype is what I would consider the largest social network in the world, much bigger than Facebook, actually, to me, and they really need to stay on top of these new enabling technologies to stay ahead of the game, and this is a good direction for them.

 

In the Infrastructure Sector, Dell acquired SecureWorks to go online with their storage and cloud offerings. If you have noticed, in the past year Dell has been acquiring a ton of companies in the cloud and storage areas. This is a good logical step, so what's next for them after this acquisition? Will there be a mad security service provider? It seems more likely with the acquisitions they have been making lately.

 

In the Internet Sector we have LinkedIn acquiring CardMunch, a mobile business card transcription service. This is another deal we can add to the theme of the mini-mergers. This is a key play for LinkedIn, bolstering their solutions before their planned IPO. I'm actually quite excited to see how LinkedIn fairs on its opening day and how the markets will react to its offering.

 

Finally, the IT Services Sector, which is usually our most stable, but there has been more action here in recent months. The deal focus here is on Blackboard, which is interesting, a pure SaaS player in the education space, acquiring an IT services firm to fill out their maintenance and customer service needs. It's cool to see that even a pure SaaS player, once they reach a certain size, sees a need to fill out their online solutions with a more tangible and grounded offering like services.

 

As you can see, on the bottom right, I have actually included some statistics on Chinese IT firms. Look at those multiples! And these are just for pure IT services firms. If you're wondering what all the hype is about with all these Chinese IPOs that you have been reading about online, here is is pure and simple. Obviously investors are liking the gains that these companies are making, but a little caveat, I like to keep a close eye on how they do once they expand internationally, since replicating these gains will be harder across the pond or in other international settings.

 

With that, I'll had the mic back over to Nat.

 

Nat Burgess

 

Thank you, Tomoki, that is very interesting to see the IT services companies in China valued at 6, 7, or 8x the valuation of similar companies in the US. This story really is about growth and how long they can sustain that, but for the time being this is a pretty fantastic ride. 

 

That brings us to our seller's panel. We are lucky enough today to have four distinguished guests with us. These are entrepreneurs, innovators, inventors, I have a lot of respect for the people who are able to pull this off, to come up with an idea, to run a company, to grow it, and to bring it through to a successful sale. There are so many different skills and challenges along the way and interestingly, all four of our guests today find time in their schedules to pursue other interests.

 

I'm going to give you those interests now. In the course of the dialog and the conversation, you can take your best guess as to which interest goes with which panelist. We have, on our panel today, an avid spear fisherman, an archaeologist who has visited some of the most interesting and meaningful sites and digs in the world, we have a yachtsman who takes his family out for jaunts around the Pacific Northwest, and perhaps the most challenging of all, we have a father of four teenage girls! Wow. So, with that, I'd like to go to our panel. I'll give a high level introduction and then hand it over for them to introduce themselves.

 

Mike Taylor, from instantiations, now part of Google, David Geller from WhatCounts, now part of a PE-backed firm, Mansell, Laurent Otahcehe, CEO of 360 Scheduling, now part of IFS, and Rui Domingos, CEO of Altitude Software.

 

Gentlemen, let me hand it over to you, starting with Mike.

 

Mike Taylor

 

High everyone, this is Mike Taylor, co-founder and CEO of Instantiations. We started the company back in 1997, in Portland, Oregon, and our business was leading edge professional software development tools, especially focused in the Java market. Our clients were big household names, companies from all over the world that pretty much everyone has heard of. We sold Instantiations to Google in August of 2010, but we had actually been working informally with Google for about four years before that. We built a pretty strong relationship with them around some of their technology. We built a product that leveraged their stuff, it became our highest volume product pretty quickly, and here we are as part of Google.

 

Nat asked us to comment on the structure of the deal, ours was a reverse triangular merger with a small spin-out, if you know what that means, great, I'm still not sure I do.  Thanks.

 

Nat Burgess

 

Thanks, Mike. David, why don't you go next?

 

David Geller

 

Thank you, Nat. From my picture you'll see that I have too much hair to have been the father of four daughters.

 

My company, WhatCounts, is in the email service provider business, and certainly with events in Egypt today, you're all receiving news from some of our customers. We provide the email technology for news organizations such as Voice of America, MSNBC, and Fox News, but our technology offerings go far broader than that, and we drive the email messaging technology for many retail companies, including Costco, REI, and companies like that. Our customers are mostly in North America, but we do have customers in Europe, Asia and Australia as well.

 

Our deal was a straight cash deal for all of the shares of the company. As Nat noted, we were acquired by a company called the Mansell Group, of Atlanta, Georgia, with financial partnership from a large, Cleveland-based PE firm. Our deal concluded very recently, at the beginning of December of 2010, and it was a fairly straight forward process and type of acquisition, it sounds like, compared to Mike's. We thought it went off quite well.

 

Nat Burgess

 

Thanks, David. Over to you in London, Laurent.

 

Laurent Otahcehe

 

Hello, I'm the CEO and Founder of 360 Scheduling, based in England. I created my company back in 2002, specifically to do optimization of mobile workforce, with very deep mathematical algorithms which enable companies to check on a large workforce, people in the field, to optimize their movements in real time in reaction to field data, someone turning up late, getting caught in traffic, emergency work orders, etc. These things have a massive impact on operational performance. 

 

We started by focusing on the UK market, the English market, and then we moved into markets in Europe and then into the US, focusing on just the one thing, mobile workforce optimization software for the field service industry, so one software for one market. We became quite successful in that niche and made a name for ourselves. We were still privately owned and the company was growing very nicely year on year, and we reached a point where it was very clear to us that to reach the next stage, to transform what we had as a world-class technology to a world-class solutions provider, we needed to seek investment.

 

During this process of looking for investment, we met IFS who are a Swedish-based global ERP provider. They have a very comprehensive portfolio of enterprise solutions and clearly optimization and work force scheduling is something they didn't have, so it was a good match. We completed the process of the acquisition of all the shares of 360 Scheduling by IFS at the end of September, I think the deal was active on the first of October, and since that time 360 Scheduling has been part of the IFS family.

 

Nat Burgess

 

Thanks for that, Laurent. Now, I believe in Lisbon today, let's hand it over to Rui.

 

Rui Domingos

 

Hi, everyone, my name is Rui, I work in private equity, I was a large shareholder at Altitude, which is a company that produces specialized software for oil tankers. It is a company that is large by Portuguese standards in terms of software. They are famous leaders in the area and they have a strong presence in emerging markets in Latin America and Brazil.

 

There were five different shareholders in the company that were there for more than five years, they leveled up the company, which was going very well, and the financial holders decided it was time to sell. One of the shareholders, the leader of the management, he decided to stay with the company and the remaining shareholders ran a selling process to sell their stake in the company.

 

This was really a challenge because with the Portuguese environment in the context of the economy, the challenge was really high, the process took seven months to complete, but on the last day of the year we managed to sign the agreement.

 

Nat Burgess

 

Great, congratulations on getting it done.

 

I have a couple of questions for the panelists, and this is really just a round table discussion, so let's jump in and feel free to make comments when appropriate.  We often read in the Wall Street Journal about a deal that gets done and the CEO will say, “I played golf with Joe on Sunday and we closed the deal on Monday,” and I think for anyone that has been through it, deals are a lot more painful and complicated than that.

 

So, my first question to all the panelists is what surprised you the most about the M&A process?

 

Mike Taylor

 

Well, this is Mike, and I would say to follow up with your golf story, that we were quite surprised at how fast Google moved during the initial parts of the deal. As background, we were deep in negotiation with another company when Google expressed its interest in acquiring us. Because of the other discussions, we said to Google that we were really interested, but it would have to happen quickly if it were to happen, and in less than a week we had the basic terms set and approval from their operating committee, etc. They acquired something like more than 25 companies in 2010, so the rest of the deal, the actual getting to closing and such, took a number of months after, but we were pretty surprised at how fast things moved at the beginning.

 

Nat Burgess

 

Mike, just as a followup to that, how did that compare to the pace of the company that you were originally negotiating with?

 

Mike Taylor

 

Incredibly faster, especially in the beginning. We had been talking to the other company for about two years, and even the serious discussions had been, I think, ongoing for something like six months and we were still at a point where we had not done the deal and we were free to talk to Google, so when they decided to move, it was like lightning. 

 

Nat Burgess

 

Yeah, amazing. Comments from the other panelists on surprises during the M&A process?

 

David Geller

 

I think that my surprise was that there weren't a lot of long night negotiations. I think that our buyers provided us with an offer that the principle shareholders all agreed upon and liked, and I think we were surprised that there was not as much negotiation as perhaps we had anticipated or as Hollywood depicts for this type of thing. The surprise was how long and grueling the nuts and bolts of the agreement took in terms of the actual legal component of the deal. That was long and painful, frankly.

 

Laurent Otahcehe

 

With regard to our transaction, it was my third transaction, so I can compare it to the previous ones. What surprised me most was the variety of interest that our company elicited in the market, especially in comparison to previous transactions and acquisitions, where we were pretty sure who would end up buying our business. On this one, there were a lot of parties interested in us for various reasons, from different horizons, and that was a surprise for me.

 

Rui Domingos

 

The greatest surprise in our transaction was that even before we got to the market, we were still helping Corum in assembling our material, we already had one non-binding offer on the table, and that in some terms facilitated our lives, but it also complicated the process because we had to contact the process list and investors, and then we had to put it on the table. That was the biggest background distraction.

 

Nat Burgess

 

That's a great point, Rui, and I'm living it this morning. My client was literally ready to sign an LOI this afternoon and we had another buyer come in this morning with the potential of offering about 50% more and we had a similar dynamic, I won't name names, but with parties on the panel. 

 

Just briefly, how important was competition in pushing your buyer forward and getting your deal done?

 

Rui Domingos

 

Well, competition is always important. In terms of transactions there are two or three important things. One of them is price, but the other one, which I don't think is less important, is writs and warranties,  and obviously the FPA. When you add two or three buyers to compare, you have a lot of purchasing power, and it is very important to have at least two or three names, not in terms of valuation, but it terms of other variables, in the FPA, it is important to have some kind of competition.

 

Laurent Otahcehe

 

I completely back Rui on this one. We will see these deals where you have a buyer and then another offers twice the price, and then you end up at 10 times initial valuation, so great. But that is only a portion of the deal. The reality is that you will have buyers out there which will buy you for the right reason, the strategic reason, and you will get a bit of competition up to a point. But, it is essential to maintain several people to get the right shape of a deal, the writs and warranties, as Rui says, are very important, and all the little things. As soon as they feel that they are alone in a deal they think they can push you into a corner, where you will find it very difficult to get out of.

 

Mike Taylor

 

Yeah, I think I said that we found having more than one buyer was sort of critical. The company that we didn't go with had been talking to us, as I said, for years, but seriously for months. I think that when Google stepped in, the other company all of a sudden accelerated its pace. Unfortunately for them, it was too late. So, having those two companies, and actually there was a third that was there, too, made a huge difference to getting it over the goal line.

 

Nat Burgess

 

That is really a great point. When it feels like it is easier to negotiate value is when you have competition and you can name your price and a buyer basically has to meet it if they want to deal.

 

Let me move on to the to the next question, then. Were there points in the transaction where you thought the deal would fall apart, where you were certain that it was over?

 

Laurent Otahcehe

 

Personally, we were fortunate enough that it didn't happen, there was not a point where we thought the deal would fall through. However, there was one point in particular where we feared that there was the possibility of the deal falling through, it could have, in as much as we did a big chunk of our numbers right in the last couple of weeks of our financial year, a big, big chunk, and we knew that if we failed to make our numbers, then the whole deal would not go through. So that's something that was very much in our minds in the last couple of months of the financial year. Everything was going very, very well, the whole deal, the whole process, everything was perfect, but always the Damocles sword over our head was would we make our numbers?

 

David Geller

 

I saw our deal potentially collapse, probably twice, during the multi-month process. It was just related to some of the legal terms, non-compete and things like that, that both sides got bogged down in. I think what saved us, certainly, and allowed us to continue operating efficiently during the process, was the fact that we always had a contingency plan to operate the business and continue to grow the business, were the deal to actually fall through. And, in fact, I think we were alerted to the fact that many of these deals reach a number of inflection points of possible collapse, so we anticipated that and just kind of slogged through those events. 

 

Nat Burgess

 

Yes, there's a lawyer that we've done several deals with. He likes to say that every deal dies three times, and so far it seems to be true. Other comments?

 

Rui Domingos

 

Yeah, we had, in the seven month process, two and a half months initiating an FPA, I thought that deal was dead at least five times, because we were discussing such small details. Especially once I thought the deal was dead, the buyer did some tricks and wanted to deduct the working capital from the enterprise value and clearly this wasn't acceptable, we spent three weeks going over such details, but you know, finally we got through and we closed the deal.  The M&A process is what it is, the deal died three times, but the important thing was that it closed.

 

Nat Burgess

 

I'm going to move onto another question then. As Ward mentioned, we have attendees here from over 20 countries and we have panelists from three, and a variety of experience here. I'd like to try to draw on your experience for the benefit of the participants on our webinar today, many of whom will go through an M&A deal in the next 12 to 24 months. What are three dos and three don'ts, things CEOs should definitely not do and three things they should definitely avoid?

 

Mike Taylor

 

This is Mike, and I would say be persistent. Don't give up. We started our company, what, fourteen years ago, and we had thought about selling it and tried to talk to various people several times. Finally, the time was right, we ended up with multiple suitors and things went great, but if we hadn't been persistent, we never would have gotten the kind of deal that we got.

 

Nat Burgess

 

Good comment.

 

David Geller

 

Mine is very brief. It's an interesting one, because I've seen mistakes made by other management groups in selling their companies. I would recommend anyone pursuing an M&A event to keep the process as secret as possible among as much of your staff and customer base as you can. We did this and remarkably, no one in our company knew about our deal until three days after it closed, when we announced it to our customers. We had planned a very orderly release of information, not only to our employees, but also within an hour, to all of our customers, and I think if we had not maintained that level of secrecy, we would have seen that process becoming a great distraction and it would have impacted our business.

 

Laurent Otahcehe

 

I can volunteer a couple of things. From a strategy point of view, what definitely helped us was knowing our market and I would recommend to everyone to really be on top of what is happening, what is strategic and dynamic in the market. Is the market changing? Why would people want to buy you and why would they want to buy you now? Is something changing right now? Will something change in the future?  Understanding all the key players and the strategic motivations is very important. There is nothing worse when you own a business than missing the market; you have a great product, great customers, good cash flow, and you think it's the perfect time to sell your business, but no one wants to buy it from you. You've missed the market and you're left with a lifestyle business, basically. I've done that several times, so understanding the market to get the timing right is one of the big dos in my book at the strategic level.

 

Probably the key don't is much more tactical, and that is no surprises. Disclose, disclose, disclose, make sure that everything you have on the table, all the skeletons are out of the closets, that you have prepared them and disclosed them. In my experience, very rarely is a problem a deal breaker if it is managed and disclosed properly. You set expectations, you present it, and you expect to come back, because of course if there is something to disclose, they will want something against it, a warranty, or to fix the problem, etc, but no surprise. Any surprise will throw a spanner in the works, people will stand back a bit, it will introduce delays and risk the whole process. That's my number one don't.

 

David Geller

 

I would echo that completely. And I would also say that the only surprises you should do is consider peppering your buyer with good news, as new sales come across, and as new deals are formulated during the multi-month process that you're doing, have weekly calls with them and prepare two or three good items to share with them every week.

 

Nat Burgess

 

That's a very helpful comment and something you did really well. You had what you called the good news file, because during due diligence, buyers always find things that give them pause, things that aren't exactly as they expected, but you were able to balance that out with positive news dispensed to them on a regular basis, which really helped keep momentum.

 

Rui Domingos

 

I fully agree with Laurent, trust in information is very important. Another thing which I think is important is that the company should be prepared to sell. I don't think, at least in my experience, it is almost impossible to keep it confidential from everyone in the market. Even from your employees. In my experience, it is preferable to keep the key employees informed of the process. I mean, try to not communicate to people, but that's my experience.

 

Now, if there are any problem, you should not avoid or camouflage them. You should communicate if there are any problems and let the buyer know. Obviously if you have several shareholders, it is very important to keep the board or the shareholders constantly informed because otherwise it will be a mess. Keep everyone on the same level with information, it is very important.

 

Laurent Otahcehe

 

One also I think needs to go through this process several times, and I'm sure that Corum, who's day-in, day-out job is something that is important is the last few days and weeks of the process of negotiation, you don't want to let your guard down, it is a long process, and exhausting process, it is challenging, and you're going over a lot of things you've been through many times before. You become intellectually tired, and there are small details to which you might not pay enough attention, so that's something you need to be mindful of. Ideally, you should have someone on your team that is kept in reserve for the closing phase, the difficult last weeks, to go over all the documents, etc, check them line by line. After all that work, you'll want a good eye on that and when you've been looking at documents for weeks and weeks yourself, you're bound to miss a few things.

 

David Geller

 

I would echo the shareholder comment, bring them along. We made a lot of effort to do that in our deal, and even so the most difficult we had was with one significant group of external shareholders who wanted to be treated differently, and ultimately we had to refuse to do that. That ultimately probably caused as much grief and mental anguish as anything, so bring everyone along in the process.

 

Nat Burgess

 

Good comments all. I'm going to take a brief break here, first of all this is a spoiler alert, but I'm going to share the interests that I gave out earlier on, and then we're going to briefly go over some of the upcoming events that we would like you all to be aware of, and then we'll return for some final Q&A with our panelists.

 

Our resident spear fisherman is based in Lisbon, and that's Rui, our archaeologist is Mike Taylor, who's company is now part of Google, your yachtsman is David Geller, and he asked me to make it clear that he is not competing with Paul Allen in the realm of super yachts, his boat is modest but perfect for running the family around the San Juans. Finally, our brave soul with the four teenage daughters is Laurent in London. Thanks.

 

Everyone please hold on for just a moment while Ward walks us through some upcoming events.

 

Ward Carter

 

Thanks, Nat. I'd like to invite our audience to join us in person for more information on Software M&A. We're offering complimentary passes to a couple of events designed for software entrepreneurs and you'll receive those by entering a promotional code on the registration page.

 

The first event is our merge briefing, which is a focused, 90-minute event that brings software entrepreneurs current info about the M&A marketplace. You can see that we have several of those scheduled internationally in February.

 

For a more in depth look at information on planning and executing a successful liquidity event, we highly recommend the Selling Up Selling Out conference. This is an intense how-to session that we have been conducting for more than 20 year, and it really gives you a full road map to enter and execute a successful M&A transaction.

 

I can offer you a complimentary pass to either. If you go to our webpage, under Conferences and Events, you can see our full schedule and you can sign up there. We will waive the registration fee if you enter the promo code, MAFeb11, or feel free to contact me or any of the dealmakers here at Corum and we can make sure you get signed up for that.

 

Also, please reserve March 3rd for our next event, which will focus on the private equity sector, and which will feature a panel of private equity firms that are potential buyers for many of the companies in the audience today. That is a session you should not miss. We also would like to highlight our upcoming Texas tour, Nat you want to mention that?

 

Nat Burgess

 

I'll be in Texas with Jeff Brown, here, on March 1st and 3rd, visiting Dallas, Austin, and Houston. We're looking forward to meeting a number of interesting companies there. Also, Jon Scott and I, who both have a strong background in security, will both be at the RSA conference for most of the week of the 14th, so if you're in security, look us up there.

 

Finally, a quick preview of next month's M&A monthly, we'll have an international private equity panel from the UK, Europe, and the US, and some hybrid new generation funds, so that'll be a great preview on where the market is going and we'll focus on mega-mergers as well. 

 

Let's go back to the panel for one final question, we're basically out of time, but I'm always interested when I talk to entrepreneurs who have successfully built and sold a company, what is next for you?

 

Mike, why don't we start with you?

 

Mike Taylor

 

I mentioned there was a spin-out as part of the deal, so I am now CEO of that spin-out, which is called Instantiations, and I'm hoping to do more archeology and maybe go fishing.

 

Nat Burgess

 

Excellent, and we'll go fishing with you. David, what about yourself?

 

David Geller

 

Nat, I started another company called EyeJot.com, in the video mail space. I am the CEO there and trying to grow that, driving toward an M&A event there as quickly as possible.

 

Nat Burgess

For everyone listening, check it out, EyeJot.com is a really cool way of communicating and it is how I got to know David, using his technology. It is so much more personal and real and immediate than an email. Laurent, what about yourself?

 

Laurent Otahcehe

 

Well, the acquisition has been fantastic for us, we really want to give 360 wings. We came from being a niche regional player to being on the big world scene with a big investment community and massive business development worldwide, and we're really excited for what we can do with this IFS, and in my spare time I'm trying to beat off enterprising boyfriends with a big stick.

 

Nat Burgess

 

All right. Rui, what about yourself? 

 

Rui Domingos

 

We are chasing some companies in Portugal and Spain. It is a very good time to buy. We are trying to see if we can buy a new company for our portfolio.

 

Nat Burgess

 

Great, countercyclical and a great time to buy.

 

I'll hand it over to Ward to wrap up this month's M&A update. 

 

Ward Carter

 

Thanks, Nat, and thanks to all of our speakers and panelists, that was a great session and I hope everyone enjoyed it. I also hope that you will join us in person at a Corum conference soon. That concludes our monthly report for February, 2011.