July 2011 Corum WebinarMid-Year Tech M&A Report, M&A Seller's Panel

INTRO and GLOBAL ECONOMY OVERVIEW

Ward Carter

Hello and thanks for joining us. Welcome to Corum's July 2011 mid-year tech M&A report. I'm Ward Carter, chairman of the Corum Group and I'm speaking here from our headquarters in the Seattle area. You are part of a group of hundreds of software and technology execs from over 20 countries who have registered for this event today. Here is our agenda for the next 75 minutes or so. We'll start with our global market overview and then get into the midyear M&A review including data on tech deals and valuations in the 26 software and tech sectors that we track. We'll follow that with a special panel of four technology executives who recently completed M&A transactions. I think you will find their comments of great value as they reflect on the great challenges and rewards of the M&A process.

Joining us today we have Aletha Ling, CEO of Fundamo, Terry Boyle, COO of HauteLook, Majid Abal, CEO of Pringo, and T.A. McCann, Founder and CEO of Gist. Following that presentation we will open the floor to Q&A.

Our slate of speakers from the Corum side today includes Bruce Milne, CEO and Founder of Corum, Nat Burgess, Corum's President, Dougan Milne, our VP of Research, and three members of the Corum Research staff, Tomoki Yasuda, Alina Soltys, and Amber Stoner.

We'll keep this event to about 75 minutes and you will 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 only 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.

This 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?

Bruce Milne

Thank you, Ward. We have a lot to cover today. This is our most comprehensive mid-year report ever. Let me begin by looking at Asia. The story there is really about inflation. India's inflation accelerated this past month to over 9% and China's climbed to 5.5%. This new release of projects with Chinese homes that came out for sale raised 17%. Manufacturing from Asia for Europe has cooled in the midst of this inflation. China has raised it's interest rates to fight off inflation. George Soros, who we will quote in another minute as well, said China missed the window for inflation and now risks a hard landing. They have had such rocketing growth and demand that this is something they have never dealt with, so they may be behind the curve on this.

How does that effect us? Well inflation there will lead to higher prices here. Europe, as we switch over, the news there is about debt. Ireland engulfed, there was an interesting headline this morning where the prime minister was trying to get everyone buy refrigerators, it's kind of funny, because they're just not spending money, their effective unemployment is about 17%. They are feeling the fallout from Greece and we haven't heard the last of that drama.

Switzerland with that rocketing Franc, we talk about currencies a lot, that is up so Swiss expectations are down. At one point it was 1.82 to the dollar, not it is about 1.17, almost doubling in value.

Greece received the lowest credit rating by S&P and then yesterday Portugal was downgraded to junk status. George Soros again, and Europe may need an exit plan, probably inevitable, so keep a watch on that one.

The US economy, we had numbers earlier on that said we'd be at 2.5% or 3% and we're coming along at about 1.9%. Retail sales have been down due to weak auto demand. It is interesting, GM has reported that they have truck inventory at about 10 or 11 months, which is about where it was when we got into this drama with the down draft in the economy, so we have to be careful with that.

It is interesting, I stuck in this headline about the fact that employers are tweaking benefits to keep older workers. Despite all the unemployment, there are still a lot of jobs where they are hiring older workers. You know what? They show up. They need different benefits

US manufacturing is up .08%, that is faster than expected, but below forecasts. The service industry is likely growing more slowly, and consumer spending showed the slowest pace in 11 months in June.

When it comes to Finance, we'll be covering that more soon. We had the longest losing streak in commodities and the longest down draft since 2002 and we had a major run up, we'll talk about that more in a few minutes.

Treasuries advance and yields have been falling. This next point is of concern, because we have a large number of states that are basically bankrupt. Illinois is now stiffing creditors, from funeral homes to Xerox. It is interesting and we'll watch this one to see if more states and municipalities follow this trend.

Real estate and commodities are combined here. Home prices in 20 US cities declined from last year. They seem to have flattened out. Housing starts grew more than forecast, new home sales, this is an adjusted number, since April was down 5%, but they have increased 5%. The same thing is true of used home sales. Commodities have tumbled to a five-month low, we say that particularly in oil as crude fell in New York and hit a four-month low in London. It is starting to rebound now. The good news for us is that we have lower gas prices.

Some good news, they are predicting that as we are getting through some of these washouts with B&A and some others in the foreclosure marketplace, if you're starting to see some foreclosure signs around and they are actually selling, we're going to work through that, possibly by year end and we'll start to see a rise in prices, a good time to be buying.

Patents: we keep covering this whole area of patents and it kind of built up to a head this month. I won't go into all the lawsuits with Samsung, AT&T, Apple, etc, but I think that it kind of culminated in an Apple-lead group that included Microsoft that bought those Nortel patents that we talked about last month for $4.5 billion. Remember, the bidding there started at about $99 million by Google and escalated that far. Now what that does is leaves Google searching for patents. Why are patents so important? As we talked about in our last two webinars, it affects your value in some cases, you have to think about patents, not just in the US, but globally when you are looking at your value proposition.

In technology and IPOs, we have two slides for this. This is one of the themes of the mid-year report. Tech spending is up 5.6%, just about triple the US growth rate. Lots of news here. Go Daddy is in buyout talks with KKR and Silver Lake, Google said the FTC was starting a review of practices. Antitrust, guess what, they go after you.

Pandora rose in the biggest internet IPO boom since 2000. That is really the story here, IPOs have been accelerating. HomeAway is seeking as much as $260 million. The web IPO boom, this was an interesting article, it has split the haves and have nots. Some of these firms are into these deals and some are not, and it is really creating a rift in the industry relating to the Venture Capital field.

Going to the next slide, LivingSocial, Zynga and Twitter...Two days ago Twitter said would be valued at $7 billion in the next round of financing. It has been accelerating. There are a number of companies that have filed to go public and we will talk about that a bit more.

Moving on I'd like to introduce Nat Burgess, the president of Corum Group. Nat was recently on CNBC in a section called High Tech Dating Game. Nat is going to be giving our mid-year presentation. Nat, maybe you wanna talk a little bit about your appearance just 10 days ago on CNBC.

MID-YEAR MARKET OVERVIEW

Nat Burgess

Thanks, Bruce. That was a lot of fun. Every time tech M&A becomes an international story, we get calls from CNBC and in this case they were very interested in 1: who was the most acquisitive companies would be and 2: who is going to acquire some of the lonely bachelorettes like Yahoo!, RIM and Hulu. Obviously that was TV, so it was short, you'll get a lot more data today, but I'd encourage you to find that clip on the web.

Tech M&A is an international story and I'm going to basically talk about what we've seen in the first half of this year and that will set the stage for what is coming next.

The first half of 2011 was one of the most active in history, with 472 publicly disclosed transactions for a total deal value of nearly $146 billion! Let's bear in mind that these are disclosed transactions. There were a lot of additional deals, a lot of consideration that changed hands that wasn't tracked here just because terms weren't disclosed. As you can see from the comparison chart, we are up almost 60% over the first half of 2010. M&A is booming, the stock markets are up, the doomsayers are publishing books about the coming financial armageddon. Apparently we're going to have to eat our children and pets, things are going to get really bad.

Two questions immediately come to mind. Are we in a bubble? Is the tech M&A market sustainable?

Let's look at the data, starting with the stock market. M&A tends to move in lock step with the stock market and initially increased M&A activity was driven by a rocketing stock market. 27 megadeals in the first half of the year, over $1 billion each, up from 21 in 2010. If we zero in on the data and look at a weekly graph next, what we can see is that the trending wasn't quite as smooth as it appeared. It was a wild ride. The market was swinging all over the place. We had, in fact, the longest extended drop since the dot com era, followed by one of the fastest one-week point rises in history, and if you're watching the market today we have some decent job data and it is moving up again. It is highly volatile, but the overall trend has been up and I think the S&P is up 30% over a year ago.

Meanwhile, even as the stock market has slowed recently, the IPO market has picked up with the US leading the way. A lot of these firms are backed by major VC and PE firms that are looking to cash in. Now, let's recall that at this time last year we were reporting that over 70% of all IPO proceeds globally were going to Chinese issuers. My how things have changed! Looking at this chart, second down the list, Alina, you speak Russian, you're going to have to help me out here, who do we have in the number two position?

Alina Soltys

It's pronounced Yandex.

Nat Burgess

Yandex in Russia raised $1.3 billion, that's how much they raised, not enterprise value. LinkedIn raised $350 million, Pandora raised $230 million and the stock continues to rise. What is interesting here is the amounts raised, over $5 billion total, and the fact that a lot of these are not household names.

Meanwhile, we have a number of interesting deals that are slated to go out in the second half that we're all familiar with and we'll be talking about those a little bit later in the presentation.

So, LinkedIn, Yandex, Pandora, we had 18 tech IPOs in the first half of the year, the most in the last 10 years. The funds raised by these companies totaled about $5.3 billion. The Q2 volume was up 10x over a year ago.

Importantly, the tech sector counted for more than a third of the total IPO proceeds raised. These funds, another $5 billion in the kitty, combined with record cash hoards and currently publicly traded companies, and over $500 billion on the sidelines, in the PE firms, insures that there will be continued demand for good companies. They are going to continue paying cash. So there's our answer to the second question, which was is this market sustainable. There's a resounding yes. We have a lot of disruptive change, a lot of exciting things happening like Skype joining with Facebook, and there is a ton of money that people are eager to deploy on these opportunities and it is going to continue to to be a volatile but exciting ride.

As we head into the second half of the year, more firms are lining up take advantage of the IPO market. You've seen the announcements.

So, what else is happening out there? Social, Cloud, Gaming, and T.A. McCann, one of our speakers today, founded and led one of the more important social and cloud companies to a successful exit with RIM and he'll be talking about his experiences then.

As we go through the day here, this report is going to cover six markets: Horizontal, Vertical, Consumer, Internet, Infrastructure, and IT. Further, these are broken into 26 segments. I'd encourage you to pay attention during the presentation and to review the written report which will come out after this event.

There was an uptake in almost every market with global consolidation leading to record numbers of cross-border transactions. The most active sectors were social networking, cloud and gaming, with the continuation of big private firms taking an active role. Facebook, Groupon, Zynga, not private for much longer. M&A activity with them will only increase.

There is a lot of jockeying in the cloud. We're seeing a real dogfight with Amazon, Apple, Google, all providing similar services to the consumer, cloud storage, music locker storage, better integration for mobile, and on the enterprise side, in a similar way, we see the SaaS providers, all making acquisitions, all going after the SMB market, all providing cloud solutions. The most recent deal was Aeroprise, announced this morning, an acquisition by BMC to create a mobile option for their Remedy Suite.

The highest value deals were in online advertising, web conferencing and data management, including the 5to1.com acquisition by Yahoo!, DimDim by SalesForce, and these were valued at really exciting revenue multiples, 33x, 15x, not EBITDA, but revenue multiples, and Dougan will give us some more details on those transactions.

So, let's go back to the first question, are we headed for a bubble? Well, a couple of important factors here. First, rocketing valuations, booming IPOs, record cross-border deals, we're seeing the doomsayers again predicting a bear market, predicting inflation, predicting a perfect storm of fiscal crisis in the US, slowing growth in China, the debt crisis in the EU, all these adding up to armageddon. We dont' think so, however, and we can back that up with data. Revenue growth is still up. The tech sector is growing at almost triple the rate of the traditional economy at over 5%. Demand is growing. The stock market has been volatile, yes, but let's take a look at what is actually happening in tech valuations.

If you look at the PE ratios of some of the major tech companies out there, they're all between 9 and 16 times PE. Yes, we're seeing some IPOs and much higher PEs, but in fact those are really based on the growth opportunity and the growth trajectory. In terms of the traditional players out there, I'm putting Google in that basket 10 years after they started, the valuations actually look pretty good.

So, I think we've all been through enough of these cycles to know that when everyone is crying doom and the market is effectively undervalued, it may be an opportunity to step in and do something. If people are thinking that as individual investors, you know that the acquirers, the PE firms as well as the strategics, are all thinking the same thing and we're seeing that reflected in the data and in the continuing demand for acquisitions.

So, the dynamics are quite different from a bubble scenario like what we saw in 1999 and to a lesser extent in 2007-2008. Tech has matured, the customer bases and revenue sources are diversified, it is integral to corporate strategies, there is a ton of cash available, so there is not a lot of insolvency risk or crisis risk. Another $4 trillion in sovereign wealth funds are on the sidelines looking for a place to go. We're pretty bullish on tech-related M&A and the opportunity going into the second half of 2011 and 2012, barring, of course, some major issue that none of us see on the horizon.

With that, I'll hand it back over.

Bruce Milne

Thank you, Nat, great report. I know you'll be around for questions later.

Let's turn it over here. We were talking about getting into more detail in those 26 sectors, so let's turn things over to our research group, headed by Dougan Milne.

2011 TRENDS and STATISTICS

Dougan Milne

Thank you, and thanks Nat for that report. We're in total agreement. As the public markets continue their cycles of volatility, one of the few areas that really remains the best defense and the strongest growth has always been tech. We're very fortunate to be in this industry. As we move into the Corum research portion of this presentation, I'm very fortunate to be surrounded by my analysts here. I have Tomoki Yasuda, Amber Stoner and Alina Soltys joining me here today. Over the next few minutes we'll be looking at market trends that Corum watches very closely, we'll get a mid-year update covering public markets, M&A markets and who's buying and who's not, as well as the IPO surge and all the S1 filings popping up at the moment.

We'll be moving pretty quickly through this info, but don't worry, we'll have the printed mid-year report that will be available by post or as a downloadable soft copy from our website.

To start off this presentation, Tomoki will continue some of the public market points that Nat touched on, with a slightly longer historical snapshot of these comparative industries.

Tomoki?

Tomoki Yasuda

Thanks, Dougan. I'm very glad to be here today. So, to get a better picture of how we fared in the past few years, research has compiled a three-year historical graph. Despite some volatility and shocks we encountered in the past couple years, we're currently up around 35% from where we were in June, 2008. Large tech companies did take a beating in the first half of this year and I'll actually hand it over to Alina to talk about which ones were able to escape the bearish runs on them and which are still stuck in the mud.

Alina Soltys

Thanks, Tomoki. This chart shows tech company's market movements for the first half of of this year. You can see S5 Networks, which was actually our 3rd best performer last year, they rose 154%. That is now correcting and slightly down. A common thread here is the large players, Google, MS, Yahoo!, HP, and they're all in the red, which furthers the point that the traditional tech giants are relatively cheap given their current ratios. What is over valued are the newer social, cloud, ecommerce, internet companies that are continuing to see extraordinary gains.

Netflix is continuing its streak and they just announced that they are moving international into 43 countries. We have seen NetSuite performing very well as cloud computing becomes more mainstream. Then Vidoo.com, which is one of the exceptions to the Chinese stock pattern as it is actually gaining ground. Lately, Chinese stocks have been taking a beating, and in a few minutes we'll go over a deal there.

So we see small and mid cap stock gains going up, which is feeding the IPO frenzy. CafePress is actually the lone dot com survivor on this list. It wasn't a high-profile deal, but they still managed to stay in the black which is quite a feat considering that their crowd-sourcing design business really produces custom one-off items. You can compare them to a VistaPrint or Shutterfly.

Daily deal sites, Groupon is a great example of this, really a 21st century phenomenon and Groupon is the pioneer. Currently they have a $2.6 billion dollar run rate, which is extraordinary for a three or four year old company. That rate is attracting every competitor you can think of. Have you noticed the Amazon deals hitting your inbox recently? I find them a little bit annoying. I didn't sign up for them! They are definitely the most controversial competitor. They have no profits, and a foreseeable backlash from merchants in regards to terms, and really they see that consumer base splitting their attention and dollars now between five and seven deal providers rather than just the initial one. Groupon can get up to $3 billion, which would put them at a value of $30 billion.

Zillow has also seen some positive elements fall into place as they have diversified their revenue base and quickly grown. This may turn into Rich Barton's second hit after Expedia.

If we take a look at HomeAway, which is also in the real estate internet space, they had a 50% pop on their first day, if that serves as any kind of indicator.

Moving on, Zynga is also one of the first social gaming companies to go public, and especially at this massive scale. They have lots of great things going for them. As a startup they are producing cash at an extraordinary rate. By selling pink tractors and reindeer, who would have thought? They have a very symbiotic relationship with Facebook, which could cause a lot of pain for both players down the road if that relationship sours. You do have to remember that 10% of Facebook's revenue comes directly from Zynga, including the credit system and advertising. And, of course, the 280 million Zynga users spend a substantial amount of time on Facebook, which has just grown their minutes exponentially.

Zynga has about $1 billion sitting on its books. Amber, how does that compare with the other, older tech giants?

Amber Stoner

Well, you know, Alina, compared to the older tech giants, a billion dollars doesn't sound like a lot of cash. We have five of the top companies that we track sitting above $20 billion with both Cisco and Microsoft over $40 billion. In fact, four out of the five have cash stores that are growing at almost $1 billion a month. You have to think that with all this cash these companies are gearing up to either make a huge acquisition to really make a splash or a number of smaller acquisitions to build out product offerings that have holes.

Dougan Milne

Amber, you're absolutely right and so much of the cash of the balance sheet these days, it makes stockholders a little uncomfortable, especially when those stock prices are being represented with parentheses. Static or stagnation is really not an option. We're seeing such intense competition on so many fronts these days. In many cases or most cases even, the best opportunities for growth will be through acquisition.

The chart here is a quick look at the volume of transactions being done. Some of our most recognizable companies. We have Google, they just own the left side of this screen, with 15 deals so far in 2011, and they're on track to break their enormous 26 reported deals in 2010. Beyond that, certainly the most interesting trend we're seeing this year is the shift in who the buyers are. Last year and for many years past, the highest volume of transactions was always dominated by our enterprise players. Clearly from this chart we see that in 2011 the highest activity levels are coming from social and consumer focused buyers, Google, Zynga, Facebook, Twitter, etc, rounding out the top five and Cisco has always been quite active.

Let's not forget that just because these social juggernauts are doing a lot of deals, this does not mean that they are necessarily big deals. In fact, most of the deals are quite small. Our enterprise players aren't showing as many deals right now, but they do tend to make much larger acquisitions in terms of value. You won't see Facebook shelling out $8.5 billion for a single deal any time soon, but then again we've already mentioned Microsoft's purchasing of Skype. It wasn't just for the video calling technologies, was it? No, it was for the massive social ecosystem that Skype carries with it.

So, really quickly, an update of the broad software M&A market. This is annual deal volumes represented by the bar chart and the annual deal values represented by the dotted line there. If you remember back to 2010, Corum's research department managed to estimate within about 1% of 2010 actuals. We were pretty happy with that. In January of 2011, our estimates of deal volume and deal value for this year were placed at about 3500 deals, bringing in about $225 billion in announced transaction value. You can see from the update in the bubble on the right, there were over 1800 deals in the first half of the year, representing over $150 billion in transaction value. Unless we see a decent slowdown in the second half of 2011, our research department may have underestimated the strength of the market this year, but we'll be sure to keep you updated on that.

At this point, we'll shift back to Tomoki and Alina. They will walk us through the Corum Index, and this is a snapshot of some of the performance indicators that we use, both internally here at Corum, as well as publishing to our broader audience. Tomoki, I know the numbers are looking pretty good. What do you have for us?

CORUM INDEX, VALUATION and RESEARCH

Tomoki Yasuda

Yeah, as Nat stated earlier, we're seeing a clear increase in the number of deals being done in Tech M&A. Among those are the megadeals, which have increased in number and size. I want to take a minute to talk about these, particularly the AT&T and T-Mobile deal. A lot of people may think that carriers have little to do with technology, but keep in mind that AT&T is one of the biggest providers of tech services to small businesses, we're talking about managed security services, hosted solutions, VPN options that really differentiate them from just a dumb pipe. It is a point to highlight these details as carriers are also starting to evolve into more service-type players and users of their connections.

Alina Soltys

And one of the reasons why the number of megadeals is going up is proportional with the large cash reserves on hand. For example, Microsoft handed out $8.5 billion for Skype, which was a shocker for everybody. Initially everyone was saying they overpaid, but given yesterday's announcement for Skype's integration into Facebook, MS might have known something was cooking, which was why they paid so high.

We also have seen a 50% increase in PE lead deals, which has been a continuing trend as we have highlighted several times over the last six months. The values still remain pretty flat, so that isn't changing.

Tomoki Yasuda

Along with the increase in deal value, VC-backed exits have also gone up, to signal that more VCs are thinking this is an optimal time to take their companies out to market. Other key metrics below that stay relatively the same, nothing too dynamic, but I want to hand it off to Dougan, who will take another look at the data that comprises the Corum Index.

Dougan Milne

Thanks, Tomoki. Those industries are looking very healthy. As to the Corum market slides, continuing through the Index, Corum divides the industry into six broad markets, which are further broken down into 26 sub-sectors. If you're new to our webinar, you'll get a better understanding of these markets as we move through the presentation, but for the moment note the six logos on the left. Those represent the six markets, and then the chart in front of you is the aggregate of those markets. Another thing to note is that the multiples expressed in the following slides will be median values, not averages.

Quarterly aggregate over the past two years should make it quite clear that the industry as a whole has been performing very well. Q2 2009 on the far left, the beginning of the tech cycle post-recession growth, and that has remained strong throughout the last couple years. Current enterprise values have sales multiples of about 2.46x and enterprise values to EBITDA multiples a healthy 12.5x.

With that, Alina will start us off in the Horizontal Application space, and she'll break that down into the further sub-sectors. Alina?

Alina Soltys

The Horizontal space is actually the highest valued of the sectors that we highlight, partially due to the large concentration of SaaS companies that have been flying off the shelves. Of all the sub-sectors, except for communications, they have all increased over the past six months. CRM, BI and HR are outperforming and hitting above 5x revenue multiples, which is very impressive. I'm going to highlight two deals, starting with communications.

We see email marketing going through a consolidation phase, where private equity players are buying out the larger platforms and then quickly adding on with acquisitions to keep growing really quickly. We saw TA Associates buy Ecircle earlier this year and the Mantell group, which is backed by Riverside, buy our client WhatCounts late last year. The one I want to focus on today is Francisco Partners buying Email Vision for $76 million in August. With this quick start with FP backing them, they quickly went out and bought SmartFocus for $41 million. Notice that the deal was have the value that they paid for the first company, which is taking it by the horns. Now they are going to move into America and the UK, which is where Email Vision was not very strong.

Let's move on to the HR segment, focusing specifically on human capital management. Announced late April, SuccessFactors just closed a few days ago on their transaction for Plateau Systems. This cost them $290 million. The CO said that they have seen 4x the expected interest from current and new customers in just the last few months. That is clearly a positive reinforcement that even though they paid 4.8x revenue, which is a little expensive, they are gaining traction and strengthening SuccessFactors as a business.

Amber wanted to further detail at the time of announcement, but I wanted to give a brief update of what has happened in the past two months.

Amber Stoner

Yeah, Alina, I remember talking about that and I also want to quickly mention that there is still consolidation happening in the HR space. Taleo acquired Job Partners last month for approximately $38 million. This acquisition expands Taleo's ability to serve customers based in Europe. The combined strength of Taleo and Job Partners makes it now a global leader in Europe. More than 350 customers internationally use Taleo's cloud-based talent management solution for recruiting, performance management and corporate learning.

Dougan Milne

Amber, you're absolutely right, a lot of activity in that human capital management space. The corporate e-learning element has seen some significant price tags attached to it, as has the K-12 e-learning environment and Amber, I know you have a lot more info on that segment as well.

So, we're transitioning into the Vertical sector and let me give a brief overview before we hand it back. The Vertical space doesn't quite have the density of software as the service players that we just saw in the Horizontal segment. The numbers aren't quite as strong here, but certainly there are some stand out members of the vertical world and we see that our multiples, despite a subtle dip there, are still very healthy. Amber, going back to the K-12 space, I think privatization seems to be the big buzz there. Some exciting news lately, tell us about it.

Amber Stoner

Yes, Dougan, and you know corporate learning clearly isn't the only education space in consolidation as we are also seeing it in K-12. In fact, while it didn't technically happen in the first half of the year, it was announced last week that in a deal valued at approximately $1.4 billion, Providence Equity will acquire and take private Blackboard, which was the last remaining leader in the public software-centric education space after Plato was taken private last year.

That really just leaves the education publishers, McGraw-Hill, Kaplan, etc, in this space. Acquiring e-book publishers is a strategy that makes sense in this space, especially with South Korea announcing that it plans to replace textbooks in its classrooms with tablets by 2015. Although I doubt that the US will follow suit soon, I would expect education publishers to keep expanding into e-books as there will likely be increasing demand for e-textbooks here.

Tomoki Yasuda

I'm actually not surprised by the Korean government's initiative. You know, Seoul is the most wired city in the world and they are usually on the forefront of technological changes. But I do want to do a quick shift from education into the healthcare subsector. The deal I want to focus on is Advantage Healthcare picking up AMS Plus. This is a small, undisclosed deal centering around medical practice management software. You might be asking yourself why this deal is interesting. For one, it is interesting because it is the ninth such deal to be inked this year and firms everywhere are trying to get a piece of this market.

More than 75% of healthcare providers around the country with only 10 or so in staff and this represents a huge opportunity for corporations looking to expand small business solutions into different verticals. What does this mean more broadly? If you are a vendor who plays in this space or horizontally across verticals, get ready for stronger demands from smaller healthcare providers who are beginning to become more sophisticated in their IT needs. Be sure you have the pieces in place to meet those demands.

Taking a step back out again, the overall vertical sector has seen a bit of a downslope and this doesn't surprise me. The average firm size in this sector is around $6 billion, it is not really easy for these companies to generate larger growth margins in their niche and they are really put in a tough position as the markets are very hungry for growth right now.

The next sector, however, paints a very different picture in terms of growth. In the Consumer segment, lots of companies are putting strategic plans in place to increase their margins. Overall, the Consumer index appears to be fairly stable month-to-month, but I'd like to refer back to the weekly chart Nat presented. There is a lot more volatility in this space than this graph leads on, because there are a number of companies, either engaging or facing disruptive place.

The focus here centers around one of the kings of digital content distribution, Amazon, who acquired LoveFilm.com earlier in the year for $115 million. For those of you who don't know, LoveFilm is an international competitor with Netflix, they provide online DVD and video game rental services, as well as the lucrative online streaming service for users in the UK. The deal is really about international market share. Amazon has decided to expand inorganically instead of building their operations out, which is the opposite of what Netflix just did when they announced that they are expanding into Latin America and the Caribbean. This space is getting very crowded very quickly, with Google, Apple, and even Dell entering the market with their own consumer cloud services and things are getting very tight.

Looking forward, the benefit of these new distribution models is that it will drive up broadband adoption and other online services internationally. I believe that as consumers become more familiar with these offerings that they will quickly start to adopt other online services as they become more sophisticated in their needs. Definitely riding on the trend of broadband adoption will no doubt be the casual game vendors who have been blazing a trail in growth and valuation recently.

Dougan Milne

Growth indeed. Yeah, Tomoki, the gaming sector continues at such a wild pace. That has really been solidly lead by our casual and social gaming sectors. Alina already talked about Zynga a bit, we are very excited to see how the public accepts them. Kind of the first true social casual gaming company, sitting next to our traditional gaming companies like EA, Activision, etc.

I will skip talking about gaming deals here. I would love to present this to you in a live setting at the Casual Connect conference coming up in just a few weeks in Seattle at Benaroya Hall. This is the largest casual and social gaming convention of its kind, and like last year, Corum has been invited to host the growth and exit strategy session, where we have a great buyer's panel, a great seller's panel, and some very informative panels about how to best prepare your small gaming publisher or studio for an eventual strategic sale. This runs from July 19 to July 21 and we'll be up on July 21, so we'll see you there.

From here we'll move to the Infrastructure section, a consistently well-performing market segment, one I enjoy watching. Tomoki mentioned that about 70% of deals are sub-$100 million deals, they are smaller, younger, agile companies and they are going to market and being snatched up by large and mid-market players. I have a couple of deals here that happened in the past several weeks that fit the Corum profile very well. We work with small software and internet companies, generally in the $5 to $50 million in revenue area and we are seeing great returns and multiples being paid for companies of this size right now. They bring innovation to the market and positive growth characteristics.

Just a couple of weeks ago SolarWinds acquired TriGeo, bolstering their offering to existing network and systems admin customers. TriGeo had about 65 employees, roughly $1 million in angel capital, and I think they did roughly $9 million in revenues last year. That deal closed with a $35 million price tag, all cash. As we noted some months ago, SolarWinds also acquired a company called Hyper9. They were doing just $2 million in revenue and had a team of about 20 people and SolarWinds paid 11.5x trailing twelve months revenue (TTMR) for them, that was $23 million, a great deal for them.

Over in Europe, we saw SoftwareAG, one of Germany's most respected companies buy out a small British firm doing mobile application development, Matismo. They are small, a 10 man show, and 451 Group estimates they were doing around $1 million in revenue. The estimated closing cost was around $15 million in cash, so if 451's estimates are correct, that is an impressive 15x TTMR deal. Not a bad return at all.

At this point we will shift over to the Internet segment and if you want to take a closer look at these, the printed version will be available shortly.

Alina Soltys

So, looking at the Internet segment, EBITDA multiples are down a bit from their highs in December, and we see them tracking up and down slightly as the market moves along as well.

Taking a look at the deal here, following along in Google's footsteps as they acquired Akemi software, the software which runs many online travel companies, the Google of China, Baidu, acquired a 51% majority stake in Cunard, which is the most visited and sophisticated travel site in China. So, for those of you unfamiliar with Cunard, it is kind of like Kayak here in the States, where it shows flight and hotel data from multiple sources. We've seen a lot of action in the travel space recently. It is the most lucrative search advertising area, they have enormously high ad dollars at the moment. Baidu paid $306 million for their stake, which values the company at $600 million, a little less than what Google paid for ITA Software. They paid $700 million. We see that this industry is still relatively untapped in China. Only 8% of internet users have booked travel online, compared to 66% in the US. That actually provides a lot of upside for that partnership going forward. Baidu also closed another partnership with Microsoft Bing who is going to be provided the English version of search in China. There are a lot of exciting things happening for Baidu and we see their stock popping because of it.

Tomoki Yasuda

I'm really excited to see how these deals will play out in the near future and hopefully some of the economic factors I'm about to get into aren't detrimental to those plans, I hate being a wet blanket.

Looking at your screen, you see public valuations for Indian and Chinese IT services firms. They have taken a beating recently, due to some tightening monetary policies as Bruce pointed out earlier. In China, the central bank has raised interest rates for the 5th time in 8 months. The government is particularly concerned about the fluctuation of food prices which have been rising at a much higher rate than other goods.

The same goes for India, where overall inflation hovers around 9%. India seems to be in a tougher position as the central banks there just raised rates for the 10th time in the last year. That is something to think about. Will this be the last of the rate hikes? We can't say for sure, but as long as food and fuel prices are rising, I believe that we can expect to see more tightening in these two big Asian economies.

With that, I'll hand it over to Dougan to close out the sector.

Dougan Milne

Tomoki, I know we have split up the Asian IT services from the Western ones, but go ahead and take a mental snapshot of these numbers up here. Enterprise value to EBITDA numbers are about 20x, that's how we value IT service companies. These are the Western numbers her, less than half that, trading about 9x. Certainly there is still a great divide between the values of Western companies versus their Eastern counterparts.

That wraps up the Corum research section. We have some excellent speakers here today and I'm going to hand it over to Bruce.

Bruce Milne

Thank you, Dougan, a great section. What's interesting, watching this, at one time there were 200 suppliers in the clinical services area, it's great to see that consolidate. We will have upcoming a report form our Asian advisors group, it'll be interesting to hear about that. We'll hear from Charles Rim, our friend from Google who started an education company in Korea. Also, one of our profile companies coming up this fall will be Amazon. I love the fact that they have taken on Groupon and Netflix and everyone on.

Let's now shift over to our presenters. We have four special guests and Daniel Holland will give introductions. I think our first guest probably wins the award for longest distance from home ever.

SPECIAL GUEST SPEAKERS

Daniel Holland

I think you're right, Bruce. We're very happy to welcome Aletha Ling, the COO of Fundamo, based out of South Africa. She phoned in a pre-recorded section on the ins and outs of what happened with their acquisition by Visa. I believe she actually did call in from Pakistan, her company is actually doing a lot of work throughout Asia and Africa. I'd like to go ahead and cue up her recording. After that we will talk with Terry Boyle of HauteLook, Mr. Majid Abai of Pringo and one of our local friends, T.A. McCann of Gist. Here's Aletha.

Aletha Ling

My name is Aletha Ling and I am the COO of Fundamo. On the 9th of June, we announced our acquisition. We are taking a global approach in allowing next generation payment and this investment will let us deliver best in class mobile payment capabilities in emerging and growth markets. Fundamo is a leading provider of global financial services to mobile network operators, banks, and other service providers. The acquisition of Fundamo integrates our mobile financial services platform, which is widely deployed in more than 30 countries in Africa, Asia, and the Middle East, with Visa's global payment network. Adoption of mobile is changing the way people connect and transact across the globe and Visa must play a role in this.

Fundamo extends the reach of Visa's network, its payment network and services to economies that enjoy a high degree of mobile adoption, but lack traditional electronic payment infrastructure.

On the emerging market mobile money side, there are today more than 100 mobile money projects in production and about 100 in the project stages. These are in markets like Pakistan, India, Bangladesh, Vietnam and the Middle East. It is clear that we are definitely on the way to achieving the potential of this market.

Thank you.

Daniel Holland

Again, thanks to Aletha for taking the time to call us, essentially in the middle of the night.

Our next guest we are extremely happy to have, Terry Boyle, COO of HauteLook, which was recently acquired by Nordstrom. HauteLook does premium brand flash sales and they are doing a really bang up job. Terry will talk a little bit about his company and the ins and outs of the deal and we have also asked him to provide some commentary on the past six months in his sector and if possible some predictions for the next six months. Terry, thanks for joining us.

Terry Boyle

For those who don't know, HauteLook is a consumer ecommerce company, one of the leaders in the online flash sales space. We sell apparel, shoes, cosmetics, and home and travel for women, men and kids. Generally we sell for 50 to 75% off retail.

We started in late 2007. At the time we did the Nordstrom acquisition, which closed on March 23rd, 2011, we were a little over 3 years old. The transaction with Nordstrom was worth around $270 million, $180 million of which was paid up front and then $9 million was structured in a three-year earn out. It was a stock transaction. At the time of the deal, our net revenue was around $110 million a year.

In terms of what motivated the transaction on both sides, I think from the HauteLook side the flash sale business is very competitive, you're seeing larger and larger cap raises. At the time we entered into this, we had raised $41 million as a company and that wasn't even close to the most raised in our category, I think we were third on the list. Actually, around the time of our transaction, the fourth guy on the list surpassed us.

This is a very competitive market segment and as a company we thought the key was supply. If you start with a blank sheet of paper, both from a cultural standpoint and associated with a brand standpoint, Nordstrom is the ideal partner. We had been talking to them for a while for different reasons, but ultimately got serious about doing a transaction a bit before Thanksgiving, 2010. I think from our standpoint it solidifies our place in the pecking order with the brands and I think from Nordstrom's standpoint, they are definitely getting a lot more aggressive about growing their ecommerce revenue stream and they are also serving their existing customer in a format that they found was attractive to their existing customer base and I think that they also had a chance to bring a younger customer into the fold.

I think having done the transaction and since that time, Amazon has entered this space with their own offering. The space is only getting more competitive. I think as we look into the future we feel like being teamed up with Nordstrom gives us the best tool set in the industry to battle it out with Amazon and some of the guys raising a lot of money.

Daniel Holland

Thank you, Terry. Do you have any thoughts on what might be coming down the road?

Terry Boyle

Well, the category is fast-growing, so I think last year we grew over 100% and this year even though we had a much larger revenue base, we're still going to grow well above the normal pace for an ecommerce company. I think the segment itself has a long way to go. You're seeing explosive growth in the segment, but I think that you're also going to see a winnowing down of the players. That's one of the reasons why we were excited about our transaction. I think over time, both from a supply and a consumer standpoint there will be fewer players and there will be some consolidation.

Daniel Holland

Very interesting. We're very familiar with Nordstrom here in Seattle, they are the killer in customer service really across the country, so it is a very smart combination for you to join with them. We wish you all the best and we thank you for joining us.

Bruce Milne

Stick around, Terry we already have an interesting question for you.

Daniel Holland

Thanks again, Terry. Our next guest, and we're always pleased to offer these types of speakers, fresh from the trenches, with the ink often still wet on the deal. Mr. Majid Abai is the CEO of Pringo. They just merged with MobileBits. Pringo provides enterprise corporate social networking on a very interesting open source platform, which we hope he will talk a bit more about. Tell us a bit about your company, about the merger, and we'd love to hear about the open source challenges.

Majid Abai

Sure. Pringo provides a software for developing corporate portals and social networking and collaboration tools. We offer our product in a unique model where it is open source, although it is not free source. We do license it like any enterprise model product, however, we provide the source code with it so that internal members of an organization can customize it as they like.

We have been thinking about some level of emergent acquisition for the past six months and MobileBits' deal was introduced to us really through a CEO friend of another organization. We saw the technology that they have and our technology works really well together, from the standpoint that they have great advanced technology in the Q&A space. We realized that we would be able to expand our content management system into the mobile space into the web, but also to be able to introduce products that are related into social collaboration, social networking and corporate portal areas. It was a very easy understanding of where the merger would take place.

We went into the merger as partners, 50/50 from that perspective. MobileBits was a public company and as such we were able to go through that process. It is still continuing, we're going through the audit and the deal should close within the next few weeks.

From the past six months, what we have seen in the market is a tremendous growth, not only in our clients asking for a mobile space, but also with clients looking for a full digital strategy associated with their presence on the web. They are looking for having a partner who could introduce them on the technology and who would also be able to support them with marketing associated with being in various social networks. By doing this deal we would be able to provide that level of support to a number of our clients.

Back to the open source aspect, it is still an interesting concept in the enterprise market. A number of companies that we deal with are still a bit iffy on utilizing open source product. It certainly does take some level of education, especially when it comes to the aspects of licensing open source products. I think they are catching up. They realize that there isn't any hidden agenda when you license from a company that is about to provide their product open source and all the myths around it, although they do exist, there are some issues that could be easily resolved and moved on from if an open source product is used a lot.

We see a trend also continue in utilization of open source products within global enterprises as well.

Daniel Holland

Very interesting. We certainly wish you the best of luck with the final details of your merger and we thank you for joining us.

Last but not least, we are excited to introduce T.A. McCann, Founder and CEO of Gist, which was acquired by RIM, and bills itself as the ultimate social CRM solution. Please take a few minutes to tell us about Gist, about the acquisition and about what you have seen in the past six months and what you expect to see in the next six months.

T.A. McCann

By way of introduction, prior to starting Gist I used to run the Exchange business at Microsoft and so I had been thinking about the evolving email space for quite some time. I think all of us as business professionals can understand and experience the fact that we have many inboxes now, whether we're thinking about Twitter, Facebook, LinkedIn, or even a person or corporate email system and we're really overwhelmed with information. I started Gist in 2007 inside Vulcan Capital with Paul Allen as an investor and we set out to try to solve the “how do I bring all my contacts together, organize them, prioritize them and then see all their content?” Then how do you drive that back into your daily workflow?

The way that Gist works is it is really a four step process of aggregating all my contacts, and today we support Outlook, Gmail, Facebook, LinkedIn, any place where contacts live, including your mobile, including smartphones, and we then algorithmically prioritize your contacts to see who is most important, and then we go to the web and search 50,000 news sources, 20 million blogs, Facebook, and Twitter to give you your updates, and then we drive that into your daily workflow. We have a web presence, we have this integrated into your email platform, and we have it as a smartphone application, so prior to a meeting I can look at my calendar and get the gist of the people I'm meeting with, including my previous interactions, what they're talking about, news articles, etc, all without leaving the comfort of my mobile device or my email client like Outlook or Gmail.

So the transaction was really motivated for us in the sense that we really believed strongly in three categories. One was obviously mobile, then social, and the evolution of aggregation and prioritization of information as we are sure there will only be more sources or places where contacts and connections live, with more updates happening in the future.

So, we actually had multiple offers and when we looked at them, when we looked at a company like RIM, that obviously has a strong focus on mobile, a very large and growing user base, a focus on social and social applications, and RIM was very much committed to building a bridge between cloud-based services like Gist and your mobile device.

Regarding things that we find interesting and happening in the future, if you look at the investments that the large email providers have done, such as Google recently shipping Google People, which has the same goal of Gist, into Gmail. Outlook has the Outlook social connector, which is similar, and is a copy, and we would expect that someone like SalesForce will also ship something soon that will also be what we call rich social business profiles, aggregated or delivered straight into the experience. Trend wise we think that it is interesting to see how to contextualize my interactions with people in the applications that I live in every day, whether they be an HR application, a customer support application, a CRM application, and services like Gist that provide those social business profiles will become more valuable over time.

Two, I think that as we all move to a larger and larger focus on mobile devices, the need for automatic prioritization and organization of information gets higher. You'll see things like the Google Priority Inbox, which is attempting to tell me which emails I should focus my attention on, you'll see that translated into other applications and devices. I would imagine that we'll see priority inboxes on Blackberry and other mobile devices, we'll see prioritized viewing of news articles, tweets, Facebook posts, etc, driving consumption on mobile devices in the near future. Obviously we think Gist and RIM will play a significant part in that.

Bruce Milne

We'll come back to you soon, I know we have some questions with the time that is left. Before we get there, we have a little bit of housekeeping here. We have some upcoming events we want to make you aware of.

Daniel Holland

Thanks, Bruce. We're very excited about these upcoming live events and I think that we mentioned earlier that as an attendee today you're granted a complimentary VIP pass to attend one of these events for free. Keep an eye on your inbox for an invitation and just as a comment, you see the event on July 21, the Casual Connect, we don't control those tickets, so we can't get you in for free, but reach out to us and we'll try to make something happen with the event organizers.

You can see that we have our next webinar on August 4. We will be talking about optimal outcomes and deal disasters. Then closing out that month we'll be in LA, San Francisco, Portland, Oregon, and Austin, Texas. Plus, coming after that and you'll get more details on this as summer winds up, Corum Group is a proud platinum sponsor of the World Financial Symposium and we will be helping them produce actually three events, Seattle in October, and London and New York in December.

These live events, especially the Selling Up Selling Out conferences are the best education that you can get for sell side M&A. Expert presenters who have helped more companies get sold will guide you through best practices, valuations, due diligence, negotiation and more, plus they will help you avoid common pitfalls. Since selling your company is likely to be the most important transaction of your life, learn about how to achieve an optimal outcome during these events. Check out our full calendar on the events section of our website and don't hesitate to contact us if you'd like an event scheduled closer to you.

Bruce Milne

One event coming up that's not on there is that tomorrow we take our clients up to Langara Island in Canada, it's the furthest out in the Gulf of Alaska. We're all going to be trophy fishing and we'll be sharing some great times there, as we have for the last 23 years. We'll get a report and we're actually doing some interviews for a special presentation this fall called Life After The Deal. With that, let's go to a few questions, and Terry, I'm dying to present this question to you. This is someone in retail, what do you think about the Groupon phenomenon. We at Corum have been doing this for 26 years and we've done deals with almost every one of these buyers after getting an offer from them, and we're scratching our head a little about that valuation. What do you think?

Terry Boyle

I think we're all scratching our heads about a lot of the private valuations these days. They are definitely very high and I think that Groupon has a business model there without question, I think the questions tend to be around the customer and the true stickiness of the model for the customers that they have acquired. Some of that you aren't going to be able to know without actually being deep in the LTV analysis and what is going on in each particular city, but it is hard for me to believe that that kind of growth can be sustained profitably and having grown so quickly. I've been in consumer based LTV based businesses for over a decade and generally speaking you would see cohort fatigue and kind of a drop off, an early adopter effect by now, and I think they've just powered through that.

Bruce Milne

It's going to be interesting, isn't it? The Living Social phenomenon, I agree with Alina, I get a little bit tired of getting the offers for the best hamburger in Bothell, but Amazon does have the database to contact people. Good answer.

T.A., another question actually came in for you. You're about as plugged into VC, having worked with people like Paul Allen and a lot of the others, as anyone. There was a comment earlier, the first question that came in, the haves versus have-nots in PE VC. Being out there as much as you have, any thoughts on that?

Terry Boyle

I'm also fortunate that Brad Fell led my series A from the Founder Group, who also was a very early investor in Zynga, so I was the fortunate benefactor of Brad showing up at board meetings and saying, “I just came from the Zynga board meeting and this is what is going on there.” I think that there are definitely the haves and have-nots as categories, but I would say that the guys who are smart are those who have A: tried to understand social themselves, so Brad, Mark Schuster, Fred Wilson, these investors have been personally trying to understand social themselves, being bloggers, tweeters and investing in small socially-enabled companies, and therefore when they were able to sort of see these trends coming, because they were experiencing them themselves, I think you'd see a lot of direct correlation to that and I think that in the near future if you look at those IPOs, a lot of them are lead by socially-enabled investors. I think that is just a certain guy saw a trend coming much more early than others and many did it by doing it themselves.

I think that is critical for entrepreneurs as well, every business which is going to be valued is going to have some component of social about it and at least the CEOs have to understand how to utilize social to promote their products.

Bruce Milne

Okay, good. It's nice to have people on your board who have invested in other deals and who can bring the leverage of those relationships. I'll throw this question in the open to our valuation group. “Do you think the recent IPOs and private valuation will effect the valuations for future tech companies?”

Dougan Milne

Yeah, and I think that this question is also about Zynga rushing to get their IPO out. I don't know that it is an absolute rush, but they did do a very quick filing. This may have a lot to do with trying to get in ahead of the bigger players and actually being able to leverage their IPOs which are likely to be very big and could help spike Zynga's stock if they are already in the market.

Bruce Milne

To some extent this is a little bit like 1999-2000, where you had people rushing in to a marketplace. Some of these things like Groupon are overpriced and some are underpriced. I mean, there is a fundamental change, we had a segment that we dedicated in last month to social networking. It is changing everything and the month before that was the Cloud, which is changing everything too. The leaders in that area deserve premiums and a lot of the companies that are coming out now deserve a premium. How much? Well we don't know, because it is a new game.

While I've got you here, Dougan, do you think gaming is going to continue to be just as hot? You're going as an expert to this world conference, so will we see as much activity in the last half of the year and in 2012 in gaming deals?

Dougan Milne

I think it's going to get very interesting. We already have rumors around Pop Cap, locally here, either being acquired or even going public themselves. That means that you not only have Zynga potentially going public, but also Pop Cap as well. In terms of the level of activity, I don't think games are going to be disappearing and I don't think that the acquisitions are going to go away. I think you'll see what we've seen just a little bit of so far, and maybe we'll see more of it, the big Asian players in the space coming over to create some footholds in the North American market. We saw that with the acquisition of both Mochi Media and the acquisition of NGMoko as well. I think we'll continue to see really strong gaming acquisition trends through the end of the year and moving into 2012.

Bruce Milne

We're out of time, but there was one kind of fun question that came in. T.A. won the America's Cup, what was it like sailing against Larry Ellison?

T.A. McCann

I won the America's Cup in 1992 and got Larry Ellison into sailing, so after the '95 cup he hired me and some other guys to get him into sailing and after winning three world championships with him, we told him that if he really wanted to go big, he should go after the Cup, and with a lot of persistence and capital he went and was successful there. I actually have a much longer talk about how winning the Cup is a lot like doing a successful start up, there are a lot of parallels there and it's a reason why you see a lot of tech entrepreneurs getting into sailboat racing.

Bruce Milne

You know, I think we should have you, as the platinum sponsor of the WFS, if you haven't spoken there, we should bring you in. With that, I think we're out of time. Thank you TA. I'll turn it over to Daniel to close up.

Daniel Holland

Thanks, Bruce. Just a special thanks to our speakers, Aletha Ling, Terry Boyle, Majid Abay and T.A McCann. Especially thanks to T.A. for sticking around to the end. That concludes the Corum July 2011 Mid-Year World Tech M&A report. Thanks for attending.