November Webinar
Mobile Madness, Cash Glut, and Japan's Buying
INTRO and MARKET OVERVIEW
Ward Carter
Hello, thanks for joining us, and welcome to our November, 2011 M&A webinar. I'm Ward Carter, chairman of the Corum Group, speaking from our Seattle headquarters. You are part of a group of hundreds of software and tech executives from over 20 countries who have registered for this event today.
Here is our agenda for the next 60 minutes. We'll start with our market overview, before we turn to an update on the upsurge in M&A activity from Japan. Corum's research department will report on technology deals and valuation trends. We'll then move to our featured segment on mobile madness with analysis of market trends and comments from Corum and our guest speakers, including two recent sellers in the mobile space. At the end, we'll open up the floor to Q&A.
Our speakers today include Bruce Milne, CEO of the Corum Group, Miro Parizek, the managing director of Corum's international group, from Munich, Elon Gasper, senior director of our advisory board, Jon Scott, Senior VP at our Seattle office, Dougan Milne, who leads our research department, Mark Johnson, director out of our Stockholm office, and Tomoki Yasuda and Alina Soltys representing our research department here in Seattle. We also have some guest speakers, including Alan Gould, CEO of Westlake Software, Vijay Tellas, CEO of Qik, and Jonas Gyllensvaan, CEO of Conceivium, so you can look forward to their comments later in the presentation.
Now I'll turn the floor over to Corum's founder and CEO, Bruce Milne.
Bruce Milne
Thanks, Ward. It has been an eventful month. Let's start out by visiting China and Asia. The first headline kind of says it, “Asia Economic Resilience – China manufacturing, Japan exporting”. Basically the headlines are around a bit of drop in growth and a bit of increase in inflation. Australia's cut rates, China's manufacturing has slowed as Europe weighs on Asia. Everybody is worried about Greece, we'll hear about that a lot more. China's manufacturing index has declined for the first time in three months on orders. The most accurate Chinese forecaster sees no sudden ease as growth has cooled to 9.1%, when a lot of the developed world is just over 1%.
India's inflation is above 9% for the tenth month in a row, increasing pressure on rates. Singapore has shown the Asia dilemma as inflation compounds global economy risks. The yen slid the most in three years after intervention. We're going to hear about Japan shortly. Taiwan's GDP has risen the least in two years.
Let's move west to Europe and International news. The UK's economy has grown more than forecast in the last quarter, led by service and finance. Literally on the same day we saw the announcement that there was a “good chance” of a UK double-dip recession. We're getting mixed news. Part of the reason is that some of these things come out and their measuring data was a month or two prior, even back to August, and we get some new stuff in the present, so they don't match up.
The Canadian dollar declined as European concerns discourage demand for risk. The Mexican peso weakened to a low after concern for the Greek vote. What is happening in some of these developed nations, especially in the low 30 currencies, the concern about Greece filters over and reverberates concerns about them. If Greece defaults, what about these other countries?
Berkshire's Munger said that leaders were way behind the curve on the European crisis. Papandreous' power has weakened as lawmakers rebel on the vote. You'll hear more about that referendum. The Greek bailout referendum stunned Euro partners. Instead of just accepting it, they wanted to put it out to the public, and I heard this morning that they have just withdrawn that.
European area manufacturing has contracted. This came in two days ago. Yesterday German joblessness showed a surprise October rise.
The US economy? Hmm. Hiring plans at US companies have slumped to their weakest since 2010. There was a slight up tick two days ago with numbers of just over 100,000 new jobs. Consumer confidence fell to a two-year low, consumers are “scared to death” but still spending! Michigan's consumer index rose, signaling that the US recovery is intact.
Global demand for US assets has climbed more than forecast among the S&P downgrade. Well, that's because of the cheap dollar. Wholesale prices rose in the US more than was estimated, again because of the cheap dollar. It is supply side inflation.
This next slide is interesting, because these two headlines came in on the same day. ISM, the manufacturing index, probably grew faster in October, that was at 3:45 a.m. When the news came out a few hours later, it reported that the ISM index had fallen about the same amount that it had supposedly climbed.
Retail sales in September rose more than forecast. The US Michigan consumer sentiment index unexpectedly fell, oops. US import prices unexpectedly rose. It is not unexpected, they just rose more than was planned.
The news yesterday, the Fed lowered economic growth outlet for next year, and sees 8.6% unemployment. We're at about 9% now. Remember is that the real unemployment? That is still something like 16 or 17%.
Moving on to the auto industry, we were going to profile it, because it seemed to be the only area that was doing really well, with pent up demand. Nissan has topped Toyota, Chrylser's October sales rose 27%. Toyota recovered their number one status with sales increase, Honda was surprised with US sales gain to meet pent-up car demand. Edmunds expects strong US sales. Those were the numbers coming in from data in August and September. Last night: Toyota and Honda fail to record US sales gains. So things are changing.
In real estate and commodities, housing starts were up 15%, beating the forecast, and again that was from a really bad time last year. Home values insurance, I love this headline, may be too late as housing nears the bottom. Home prices in US cities fell more than forecasted to 3.8%. Crude surged to its biggest monthly increase in two years, and then kind of dropped back down. A rise in Homebuilder sentiment topped the forecast. The point here is that as we are near bottom, people are feeling more positive about moving ahead.
In finance, well, student loans, you see the president and others trying to address this, student loan debt is bigger than credit card debt, and the problem is that with the new bankruptcy laws you can't get rid of it. It is there with you until death.
The treasury is eying a new debt type since TIPS. That's another new debt type. Corzine, New Jersey's governor, got into MF Global and invested in a bunch of EU debt and guess what, it's bankrupting him. The banks are selling more insurance on Europe's debt, bonds are showing 60% odds of recession. This Europe debt thing is interesting, we got them with mortgage-backed derivatives a few years ago, it pissed off the Greek gods and now they're giving us Greek bonds and it is hurting.
Now the US lawmakers are proposing a transaction tax for finance firms. We talked about this two months ago, look out! You're going to see an increase in almost all kinds of taxes, plus the transaction tax, not just your day to day trades, but on deals. It might be better to look at the market now.
In technology, you'll love this comment from Steve Ballmer, Microsoft was lucky they didn't buy Yahoo! Oracle bought RightNow, you'll hear more about that later, Amazon's profit may halve. We profiled them, they are betting on selling the Kindle at less than cost, to release a game changer, to get market shares up. That's what they're going for.
IBM added $7 billion for buybacks. When you have too much cash, which we'll talk about later, you either buy somebody, you buy some stock back, or you pay a dividend. Hey, Microsoft and Intel are good buys right now, those dividends are 3-4%. They raised it. Yahoo! is said to now be leaning toward a dividend and buyback instead of a sale. That's interesting. Groupon IPO, there's been a bunch of news about them, but their IPO is a must as their cash needs climb. I read last night or two nights ago that some of the potential investors are getting cold feet as Groupon is trying to say that they are the next Amazon, and they're not, as you know from listening to us.
Mobile, lots of news in this area, we're going to have a mobile madness report today as well. The LG phones are playing catch up with Apple, there's a lot bad news for LG this morning. Iphone 4S sales may top 4 million this weekend. Then they ran out of supply. China has become Apple's second largest market and the CEO said the sky is the limit, until the Chinese do something. HTC has surpassed Samsung and Apple as consumers are awaiting the iPhone. RIM stock fell below book value as Blackberry's US market share shrunk. They are limping along. AT&T sought Sprint's plans to compete following the T-mobile ruling.
EUROPE FIELD REPORT
Okay. Thank you for tuning in on that and now let's move to Europe. We have a special field report from Miro Parizek. It wasn't on our agenda earlier, but there is so much happening, Miro, give us an update.
Miro Parizek
Hi, thanks, Bruce. It has been an excellent year for us here in Europe, despite all the sovereign debt volatility in the markets, etc. We started off the year with the January closing of Altitude, a 300-person strong unified communications provider. In May we saw the sale of Tific, a support systems vendor out of Sweden, and now the one-two punch in October that we highlighted last month, the Inubit sale to Bosch and just this Monday's closing of Europe's leading e-learning vendor, Edvantage to Lumesse. There are two other deals that we have in LOI that are set to close later this quarter.
We move on to the next slide and we see that the sale of Norwegian Edvantage is our third Nordic transaction in twelve months. We are committed to building our leadership position in Europe and we have opened a presence there, bringing on Mark Johnson, who was mentioned earlier, he is in Stockholm and he'll speak a bit later this hour.
Edvantage is a great example of how to expand using acquisitions. The company was founded in 1999, developed cutting edge e-learning technology, it was SaaS from the start, before the acronym even existed, and they made the strategic decision to never install behind the firewall. They needed critical mass and they needed to win new customers to their platform. After raising some venture capital, the founder and CEO proposed to his board a strategy to acquire creators of e-learning content who were serving the same customers. Then the plan was to cross sell its own high value SaaS technology and the associated recurring revenue contracts to the acquired customers. The signed off and the CEO went on to execute five acquisitions. They transferred virtually every acquired customer to their platform and they also rebuilt the business models of the acquired content delivery shops, transforming them with higher margin project management oriented model, utilizing outsourced developers instead of doing everything themselves.
The CEO successfully expanded market penetration throughout northern Europe and ultimately built the leading e-learning provider in all of Europe. On the other side was Lumesse, previously known as StepStone. A few years ago we sold them ExecuTrack, which formed the foundation of their solutions business unit. Since then they have been spun out, and changed their name, and they have evolved into the leading European talent management vendor. Here we are with another transaction in this sector, this time selling the leader in e-learning to Lumesse so they can complete their talent management suite. They had the advantage of finding a perfect home in a rapidly-consolidating market, because this one is over. We've seen that happening with lots of other folks in this field, and the consolidation in this sector should be checked off very shortly.
That is it on the M&A front, I want to move on to another topic of mine. I've been chairing this conference now that Corum is a platinum sponsor of for the last five years. It takes place once a year on each coast of the US and once a year in London. I chair the London event. The World Financial Symposium is the only event that brings together leaders of the financial community and owners and senior executives of technology companies. This conference is called Growth and Exit Strategies. The delegates and speakers get together to discuss how to maximize enterprise value and which exit and growth options are best for them, enabling attendees to develop their own strategies and action plans on how to execute their best strategy to move forward, addressing PE, VC, debt, IPO, valuations, and M&A both for the purposes of sale or expansion.
Typically there are 100 delegates, which makes it big enough to attract the best speakers, but it stays cozy enough for truly effective networking. It takes place this year on the 6th of December this year, in London. Take a look at the website, worldfinancialsymposiums.com, and you'll see the full agenda, the speaker list, we have speakers from Advent, Carlyle, London Stock Exchange, SalesForce, and many more. We look forward to seeing you in London.
Back to you, Bruce.
Bruce Milne
Thanks, Miro, I look forward to seeing you over there.
CASH FLOOD
I have a special report on the cash flood. We are dealing with almost a trillion dollars out there that is fueling technology M&A globally. A big part of that we can see is coming from the tech sector itself. You've seen this chart from us before on how tech is growing. In 2007, cash, when everybody thought things were doing great, versus 2011, having gone through recession, look at Microsoft, up 760%, Cisco up 1100%, Google up 500%, 700% for Apple, but look at the cash. It's all offshore. Microsoft 85%, Cisco 90%, that's why they're trying to get a tax holiday to bring it back because they can't invest it in US banks, they can't buy US stock, they can't invest it in their own R&D at home, so the money has to be used offshore. It's why you're seeing some of the deals that Miro was talking about and deals like Microsoft buying Skype.
This is reinforced by a recent headline by Bloomberg Businessweek. In all companies there is $70 or 80 billion dollars sitting there that could be used in the US to make acquisitions, to grow, to put people to work, but they stopped the tax holiday when the Obama administration came in, and we need that back, so talk to your Congressman.
Then, as we look at PE, they are right up there. Look at the deals they are doing. We'll talk more about this later, these are the strategic buyers, and you see the deals they are doing, a number of deals here, but the big ones here are the usual top ten. Moving to the next slide, we see that PE is right up there, again billions of dollars. If we combine them, the strategic acquirers are 13 of the top 20, financial buyers are the rest. The interesting thing is that PE dwarfs the strategic guys, they have half a trillion dollars, in uncommitted funds. Where are they putting it? Tech is number one.
We have one other player to look at, and that is the sovereign funds themselves, which are generating a staggering amount of cash. Mark Johnson, who is part of that in Nordic countries, which is one of the largest centers of cash, is reporting in.
Mark Johnson
Thanks, Bruce. As you can see from this chart of the leading sovereign wealth statistics, there is a staggering amount of funds, $4.7 trillion in assets under management for just the top ten nations. With the exception of China, most of it is generated by oil and natural gas revenue. Some nations such as China have moved assets abroad to the eventual depreciation of their currency. We estimate that overall 5% of sovereign funds will go into tech directly and that is how we reached the $250 billion number.
Being based in Stockholm, I have had significant exposure to the Nordic funds, some of the largest. They have been very active investors, their investment profile is not dissimilar to other countries. About half of the direct investments made by the Norwegian sovereign fund, for example, have gone into tech companies.
Here is an example of some of the firms that the various Nordic funds have invested in. Most of you recognize these names. Essentially, in the Nordic reason, all funded companies of noteworthy mention have taken sovereign funds via direct or indirect means. That's it from Europe. Back over to you, Bruce.
JAPAN IS BUYING
Bruce Milne
One of the most highly valued currencies out there at the moment is the yen, and Japan is a big buyer. Tell us about Tokyo, Tomoki.
Tomoki Yasuda
It is crowded as ever, Bruce, and expensive. I recently had the pleasure of visiting the most expensive piece of real estate in Japan in the financial district, where a square meter will cost you $20,000. That is astonishing, but the primary reason behind it is the skyrocketing Japanese yen, which has hit new records this year against all other currencies.
As you can see from this chart, the yen is up 80% over the last decade against the dollar, slightly less against the Euro. Conversely, this makes American and European companies relatively cheap to Japanese, who have nearly 0 interest on debt to be used on acquisitions. They, too, are experiencing a cash glut and are looking to acquire.
Not surprising, the trend is up for deals as well. The research team expects that 2011, despite having a rocky outlook, to be one of the three best years in the last decade for Japanese tech acquisitions. The trend is definitely looking up.
The buyers are huge. Many of them are household brands as you can see here. The few you might not recognize are DeNA and Rakuten. Although newer, they are giant in the internet and gaming fields. Both have made deals for hundreds of millions of dollars over the past couple of years. Corum has provided research for education to offers to all sold companies from all of these firms.
For example, here are some of the representative deals we've done with some of the giants: NTT, Hitachi, and Fujitsu. Interestingly, many of our transactions are not tombstoned are our Japanese clients don't want the publicity. Some of their reasons for buying include customer bases, domain expertise and good R&D teams.
In terms of recent deals, we see the same names showing up as buyers. One transaction I'd like to get into is the sale of Keane to NTT Data for $1.3 billion. On top of access to blue chip customers, the acquisition enables NTT to bolster their SAP service capability in the US, which is, of course, a strategic emphasis for them.
Interestingly, we actually sold a company to Keane a while back, Kara Computer. It is now part of NTT in Japan and it really perpetuates this cycle of tech M&A, the bigger fish eating, and so on, and Japan has a lot of very hungry big fish. Just to elaborate, Japan's global reach, and as a testament to the strength of their currency, half of these deals involve buying American firms and the other half involve European firms.
That wraps up our quick analysis of Japan. Be sure to brush up on your Japanese as you may find yourself a target of one of these global firms.
Back to you, Bruce.
Bruce Milne
Thanks. I love that big fish analogy from the land of sushi. These companies are monstrous in size, you have to remember that these are large parts of what used to be the old Daibatsu and they have almost unlimited capital because of their relationships with the government.
CORUM INDEX, RESEARCH, ETC
Bruce Milne
Now let's move to our Corum Index, with the research group headed by Dougan Milne, joined by Alina Soltys, and this month, by Elon Gasper. Dougan, what's happening this month?
Dougan Milne
Thank You. We just had our long-format quarterly update on Corum’s twenty-six subsectors this past month, so we’ll move quickly through the upcoming data here. If you have any questions, you are more than welcome to email/call us directly.
I’m here with Analyst Alina Soltys, a regular and fantastic contributor to our monthly webinar, and I’m please to be joined by Elon Gasper, who is actually a critical component to the research team and has spoken on many of our webinars in spotlight presentations. So we’re happy to have him contributing to the core research presentation today.
Alina, tell us what we’re seeing in the public markets lately. Is rollercoaster the new black?
Alina Soltys
It sure looks like it. The public markets have been see-sawing quite a bit in the second half of 2011. For the regulars out there, this chart is a little different than the normal weekly chart we go through. This is a daily look at the ride that we’ve all been through. The uncertainty with the Greek package during the summer months, and now facing the choice between the Euro and the Greek Drachma, this volatility is becoming the new normal.
Dougan Milne
Thanks Alina. Frankly, I look forward to seeing the Drachma again in the near future.
As we start in on the Corum Index which takes us through a number of key performance indicators pertaining to Software, Internet, and Services Mergers and Acquisitions. Here we’re looking at Year-over-Year trends, and M&A as a whole, despite the volatility in the market, has held a promising trend through it all. Cynics are quick to point out that tech deal values were a little lower in October, but they also neglect to mention that tech M&A deal volumes were actually quite high: 333 deals this past month vs. 274 in October of last year. Lots of small and mid-sized deals this past month, and the reality is, like the SMBs driving the economy, small deals are really a driving force of M&A. Still a ton of deals getting done. That said, Elon, what were some of the big deals we saw?
Elon Gasper
The headline is Oracle finally buying a big SaaS company, customer service suite business RightNow Technologies, a move widely viewed as a reaction to the challenge of SalesForce.com.
This extends Oracle’s run—Alina will cover another buy—plus highlights the cloud’s conquest of geography, since few people thought you could build a software company worth over a billion dollars in beautiful Bozeman, Montana!
Dougan Milne
Bozeman is a college town with fast internet connections, great broadband, so what more do you need, really? Let’s find out about our six individual markets. Alina, tell us about that other Oracle deal Elon mentioned that was in the Horizontal space.
Alina Soltys
Oracle is getting a two-for-one deal with their acquisition of Endeca. Endeca has the capabilities to aggregate structured and unstructured data. They provide analysis solutions for both BI, as well as creating customer intelligence for eCommerce sites to better target content and products. This is all possible due to their MDEX technology that is a hybrid of search and analytical data management. The BI solution will be combined with Oracle’s existing BI solutions and the eCommerce will be added on top of the recent acquisition of ATG Commerce, just last year. This will enhance their cross-channel commerce with online customer experience management. Oracle is a first mover with this kind of pairing and I expect to see more eCommerce players, such as eBay, adding customer information management solutions on top, especially if they want to be relevant.
Elon Gasper
As a relevant October Vertical Market deal we chose SASGAS, also known as Shanghai Advanced Software, which provides financial regulatory compliance solutions for foreign banks that have operations in China. The Financial Services arm of Holland-based global giant Wolters Kluwer made the acquisition. Its positioning as a one-stop shop for risk management solutions in the Financial Services sector fit SASGAS well, since it mitigates the risks of regulatory compliance with Chinese authorities.
The 20 employees of SASGAS will join the 20,000 at Wolters Kluwer in continuing the big company’s ambitious expansion into China that started early, more than 25 years ago. Chinese market, international regulatory compliance; this Financial Services transaction touches both trends.
Dougan, you have news of software that’s been touched by millions of us, from a company here in Seattle, right?
Dougan Milne
Absolutely, Elon. Swype has been quite the hometown hero here in Seattle: a genuinely elegant code base that translates finger gestures into text. And Nuance, a Scansoft OCR descendant, is now the undisputed Heavy-weight champion of the world for input. I'll tell you a little bit about that. Nuance is also powering the speech recognition behind Apple’s new Siri personal assistant, based on the strongest deep code base in the world around voice recognition from Dragon. They also have another Seattle-based company called Tegic, which patented T9 predictive text analytics, a standard feature on just about every mobile phone in the known universe over the past decade.
Combining Swype and Nuance we get OCR (optical character recognition), voice dictation, predictive text, and a number of other things, and now we have gesture text. Very excited about this deal, and where they go from here.
Alina, what’s happening in infrastructure these days?
Alina Soltys
The file transferring and sharing space is in a massive land grab mode as the industry is starting to rise into the next multi-billion dollar realm. In relation to the 7.5x valuation that Box.Net received during its latest funding round, ShareFile received a slightly lower value but nevertheless it was a healthy figure for somebody not in the spotlight like a Dropbox. Sharefile differentiates itself by focusing solely on the corporate market. Citrix is positioning this as a Platform as a Service play and planning on building more apps on top of it to “follow you around” in this mobile/multi device/multi platform age.
After Dropbox rejected an $800m offer from Apple and Box.Net reportedly rejected a $500m offer from Citrix, ShareFile saw the writing on the wall and decided to exit at the optimum time. To continue fighting with the big boys, they would need a lot more funding and be prepared to bleed money like Box.net is doing to the tune of $18m a year as they build their footprint.
Elon, did I hear another Internet company changed its Facebook status?
Elon Gasper
Yeah, Alina, we see that someone did, thanks to a, or rather the, Friend.ly acquisition.
Friend.ly launched just 2 years ago with 5 million mostly VC dollars, to build a Facebook app that asks you questions based on your and your friends’ “Likes”. The user base spread swiftly through the social graph, and apparently Facebook likede what it saw since it’s “acqui-hired” the Friend.ly folks. The talented 12 are being assimilated, of course, and the Friend.ly CEO’s new title is Growth Manager.
Top story? Friend.ly is just number 7 toward the potential 15 companies Facebook said it expected to buy this year, and way below top tech acquirer Google, whose tally now stands at 23 (plus a pack of patents). So, though this latest deal displays a game against Google+ invoking M&A+ for recruiting, Facebook is clearly still so picky that only a select few companies with rock star levels of software sorcery talent should even try to hurdle the Facebook walls, and it looks like they better bring along some potential core feature, too.
So this deal notwithstanding, only a rare few will find in Facebook a possible exit. Back to you, Dougan, to wrap it up and make our own exit.
Dougan Milne
In the last of Corum’s six markets, we highlight a divestiture here. Xerox's ACS picks up 1500 employee of the US payment processing operations division of Canada’s Symcor. More financial services again, outsourcing this time, and now in combination with ACS’ other business process offerings. Trends are integration of services, consolidation, and the continuing move of institutions away from paper. That concludes our Corum Research presentation. Back to Bruce.
Bruce Milne
Thanks, that was great guys. What was interesting in the data is that the number of PE deals is up 60% and that to me underscores the fact that this is a very active quarter.
MOBILE MADNESS
Bruce Milne
Let's move to our keynote presentation today, the special segment Mobile Madness. Jon Scott, our senior VP will be leading this. I'd like to than Alan Gould, who is the chairman of Westlake. He is on our Corum advisory board, the World Technology Council. He worked with Jon on this, although he won't be presenting today. Jon, what do you have on mobile madness?
Jon Scott
Bruce, it's interesting, my background is that I started in mobile computing in the mid-80s, so I have some perspective on the field, but you can't look at the topic of mobile today without thinking of it like a madness.
Adoption rates match few other technologies and the growth is really breathtaking, especially in smart phones today. The last year has been a watershed one for mobile. It marked a point where smart phones surpassed feature phones. Europeans were just ahead of the Americans in this regard, partially because they are more reliant on their mobile devices than we are. We are still shifting from landlines.
Smart phones are continuing to rocket in usage, over 5 billion are expected to be in use within a decade, essentially replacing other phones. What is fascinating is how fast smart phones have been adopted. It is approaching television adoption rates of the 1950s, which had a massive impact on society. The mobile phone revolution happened in years, the smart phones took only quarters for serious adoption rates. The iPhone, cumulatively, has 129 million users and a sales rate of over 40 million users a year. Android has 150 million cumulatively users worldwide, but is getting 140 million sales a year, and the pace is accelerating!
Now, look at how fast things can change. In 2005, Nokia was almost two-thirds of the operating system market, now it is less than 20%. Now nearly two-thirds of new sales are taken up by smart phones. It is interesting that they are now running operating systems developed mostly in the US versus less than 5% five years ago.
Running neck and neck in a two horse race are the tablets and the smart phones and as we profiled last month, the Kindle was a game changer, setting a whole new price point. Both these technologies are essentially the same, the difference is whether you have a phone or not. That is not difficult to do, so you will see all sorts of permutations of the two blurring the lines.
Again reflecting the growth of mobile, another way we can measure this is by the amount of traffic from social networks. Look at this rocket ride in just over three years from a standing start. In 2008, only 1% of Facebook traffic came from mobile devices. Today that has jumped to 30%. Twitter has gone from 25% on mobile traffic to 50% now.
Don't forget search. Queries made from mobile devices, look at the growth in Gooble mobile queries, up four-fold in the past few years.
Then we turn to the corporate world at the other end of the spectrum. This slide is a bit complicated, so I circled in red the number I want you to focus on: 250. That is the number of Fortune 1000 advertisers, 25%, that are now advertising with mobile campaigns, up from just a few firms two years ago.
How important IS mobile? 28% of the overall population, the average of various polls, is addicted to their mobile phone. I know I have a habit myself, and I know my children in their twenties do. Among youth, well over half is typical, and in some countries the number is as high as 70%.
There you have it, mobile madness is one of the most pervasive megatrends affecting us all, especially those of us in the tech fields making apps for these devices. We'll have a far deeper dive into this topic in an upcoming webcast we are co-sponsoring.
With that I'll hand it over to Bruce to introduce our speakers, who have been part of this mobile boom.
GUEST SPEAKERS
Bruce Milne
Thank you, Jon. Our first presenter today is Jonas Gyllensvaan. He has two decades of tech experience, including a full decade in mobile and wireless, so he is an expert. He holds two degrees in mechanical engineering and he now lives with his wife in Washington, DC, where he tries to play golf as often as he can. He recently sold Conceivium to Fixmo. Jonas?
Jonas Gyllensvaan
Thank you, Bruce. I was the founder and CEO of a company called Conceivium. We were acquired earlier this year, in March, by a Canadian company out of Toronto called Fixmo. I originally founded Conceivium in 2004, we were primarily focused on mobile device management and monitoring for Blackberry servers.
Before Conceivium, I had an infrastructure management company where we did Windows infrastructure management and Blackberry infrastructure management for mobile devices. This is what led to the founding of my next company. There was a big gap between understanding when you needed to manage the infrastructure and the servers and getting to the point where you could manage them and that bridge was something that Conceivium was targeting at that point.
I sold off the previous company in 2002 and that allowed me to start Conceivium without taking any external VC capital, so we were completely self-funded. During those first few years we managed to grow into becoming profitable, as we penetrated between 25-30% of Fortune 100 companies. Really around early 2009, there were some changes in the mobile market, as iOS and Android started to come into the picture. At that point that I started to feel that there was a need for me to either raise capital or try to find a strategic partner for an acquisition or merger in order to continue staying competitive and growing in the new market space where there were multiple mobile platforms coming into the picture.
Clearly, having no existing VCs in starting Conceivium, going out and raising capital not at the top of the list, so I chose to focus on a strategic partnership and that's when I engaged a local M&A firm here in DC and we started the merger/acquisition process at that point.
Looking at where we were at that point, versus where the market was, I would say we were eight to ten months too early into the process. We did get a lot of interest and inquiries, a few term sheets, but nothing that was really worth considering at that point. Those early offers were really based on a pure multiplier on revenue and with the growing market on the mobility side, I was looking for something more than just a multiplication on revenue.
I stayed with that M&A firm through my twelve month contract and when that expired, around December 2010, I went back to focusing on growing Conceivium until the market was a little more mature. It happened a lot faster than I could have expected, so some time soon after we reached the point where we got incoming calls and inquiries where we wanted to follow up with potential acquirers and so on. Early in January I was contacted by Fixmo directly, they were referred to us by a Fortune 100 customer. It was a really good strategic fit between their product line and customer base, compared to what we had. I think that within a week we had a term sheet that we had both accepted and moved on with and we had a full acquisition complete with both legal process and due diligence completed within six weeks.
I attribute all of that efficiency to the fact that I had been involved with an M&A firm earlier during the process, having that work that I did during that year with them allowed me to be ready with my packages for this process when I did it on my own. The due diligence was pretty much ready to be handed over. The process was very easy at that point.
Clearly, there are two things that I took out of this process. You can't force a sale when the market isn't ready, and waiting on the market to become ready allowed me to get both the valuation and opportunity that was good for me as well as that worked for my customers.
In addition to the importance of an M&A firm, it is hard to put a value on that. I didn't go to an M&A firm per se, but most of the work for the closure of this process was done by the firm beforehand, so I can recommend the due process with a third party.
I appreciate your time, thank you.
Bruce Milne
Thank you, Jonas, that was great. I think what's really interesting there is the experience that you went through, that was really valuable stuff, having sold and the importance of timing. Also, how critical preparation is in understanding the process that you do have to go through. Reflecting, we have the same issue sometimes, we take companies to market and the timing is wrong, but they learn from the process and get better prepared, opening up a lot of doors. That helps them position better. They take what we call a hiatus and then return to the market and they are able to be successful when the timing is right.
Now let's move to our last speaker, Vijay Tella. Vijay is an industry veteran of 20 years. Before he sold Qik to Skype, he was with Oracle, TIBCO and Teknekron Software which was acquired by Reuters, a firm we have worked with a lot. Vijay is an avid cyclist and a gourmet cook. He and his wife have built and renovated rural schools in India and support school programs both there and in the US. Vijay?
Vijay Tella
Great. Thank you, Bruce. I was CEO and Chairman of Qik until it was acquired earlier this year by Skype, a few months before its own acquisition by Microsoft. Qik was founded in 2006 and from the beginning was based in Silicone Valley and in Moscow, Russia. I was the first investor in the company and joined a few years later to run it.
The goal for Qik was to enable the two billion camera phone users globally to capture, organize and share high-quality video with family and friends anywhere, anytime, without having to connect wires or to remember to get video off their phones.
The goal was for us to support the most common things that consumers wanted, to make video calls, to capture and store videos automatically in the cloud, and to share videos with friends and family directly or via social networks, in a simple, secure and fun manner.
Building this service required us to create our own mobile streaming cloud that delivered high-quality video over inherently variable and unreliable mobile networks, and to harness the full power of the phone's resources, like CPU, GPS, camera, etc, while minimizing the battery use. We pioneered this market, created some core ideas in mobile video streaming, and applied for six patents.
When we started, just before the iPhone era, the general belief was that it was not possible to deliver a successful mobile app without the support of carriers. Carriers were slow and not generally leading the market with the socially oriented communications that the consumers wanted. So, we decided to focus instead on going directly to consumers and building the simplest and most social video product out there. The product was very well received by tech bloggers, early adopters and influencers, and then given the viral nature of the service, we achieved a lot of success growing rapidly with users in over 160 countries.
Ironically, this invited a lot of interest and attention from the carriers and so we were able to do great distribution and revenue shares with almost all the major handset majors and with several global carriers.
We grew from 750,000 users at the beginning of 2010 to around 6 million users a year later, at the time of our acquisition by Skype. There are currently over 14 million users for our service. We charged partners for distribution and sold premium versions of the app in the various app stores. We were close to break-even in 2010 and by the time of the acquisition we were on the path to more than quadrupling our revenues this year, based on the deals we had already closed.
Given this momentum, why did we sell and how did the sale come about? About a year ago, Skype, Google, and Facebook all announced that they would enter the consumer video market, or in the case of Apple, that they had already entered it. Their vision for this was limited to the video calling, like you have with Apple's Facetime, Skype, etc.
We knew from our experience that video calling was just 10% of what consumers wanted and the peer to peer architecture for video calling that these companies used would not scale to the real-time video sharing and management that Qik offered. Our conversations with Skype began as partnership discussions, but quickly transitioned into an interest in them acquiring us. This created a real discussion within the board and the founders and management team. Some of us felt that we had significant momentum and a proven, differentiated and defensible product. Others felt that with big players like Skype, Apple and Google entering the video calling space, we could be squeezed out.
Ultimately a stronger offer came along that we felt created a solid outcome for the shareholders and the employees. The management team also felt great about Skype as an acquirer, a company that also had a strong technology and Eastern European roots, like us, so we accepted the offer.
One of the keys to this outcome for us was to stay in the loop with the key players in the mobile ecosystem. We did not want to reach on TechCrunch, for example, that one of them had partnered with a competitor without us knowing about it first. We kept key people at these larger companies and partners informed. This directly led to some of the best partnerships we had and also to the acquisition.
We closed the deal fast, working through Christmas and New Years. It was three weeks from the time I shook hands with the CEO of Skype to when we closed the deal.
Qik's capabilities are a perfect fit with Skype's strategy for consumer video and the Qik team is super excited about taking our mobile video technology to hundreds of millions of Skype users globally, realizing the original vision that we had for the company.
Thank you.
Bruce Milne
Great, Vijay. I know we have a couple of questions that we'll be able to give you soon.
Before we get to the questions, I'd like to have Daniel cover the upcoming Corum events on our calendar.
Daniel Holland
Thank you, Bruce. We're very excited to announce these live events coming up in the next two months around the world. As an attendee today, you will be granted a complimentary VIP pass to attend any of these events for free. Please keep an eye out on your inbox for a message from Bruce in the next days about this. These live seminars, the half-day Selling Up Selling Out and the newly revamped 90-minute Merge Briefing are the best education that you can get for sell-side tech M&A. Expert presenters, who have helped more software companies get sold, will help guide you through the practices of valuations, due diligence, negotiations, and more, and will help you avoid pitfalls.
Since selling your company will likely be the most important transaction of your life, learn how to achieve an optimal outcome from these events. Check out our full calendar on the events section of our website, and definitely do not hesitate to let us know if you would like an event scheduled closer to you.
Back to you, Bruce.
Bruce Milne
Let's move on to our questions, while we have Vijay on. Ward, what do we have?
Ward Carter
I have a couple here, one for Vijay. Vijay, you've sold multiple companies, the question is, does it get any easier?
Vijay Tella
I think that it does help through the tough times, as people who have done startups know, that the highs are really high and the lows are really low.
Ward Carter
Another question we have, I think we're seeing a lot of expansion in Europe and in countries like Russia. One question is, based on the work that you have done in Europe, what is it like working in Russia?
Vijay Tella
It's actually pretty fantastic. The group of people that we have there are literally rocket scientists, many of them, PhDs. Russia is not seen as a big outsourcing location, a lot of people ask me why I don't do some of this stuff in India since it's where I'm from. I think this kind of really deep sort of technology is very well-suited for Eastern European skills and background. I think from the point of view of building big IP and differentiating it from technology, I am very bullish on Russia in particular.
Bruce Milne
That's good to hear, Vijay, with the old Eastern Europe, what we call Central Europe now, we're actually seeing quite a bit of activity and we'll be announcing a transaction there shortly. There's just great technology over there, as you noted.
Ward Carter
Another quick question for Vijay: We've primarily seen video sharing as a consumer application. Do you see it remaining so or are there other applications with broader enterprise that are evolving?
Vijay Tella
We see video sharing, we had something called a business offering or a commercial offering, we were really surprised at the range of usages people have for it. A lot of SMBs and areas that we haven't thought of much, like insurance, real estate, media, there are fisherman using it to keep track of where to go, all kinds of things.
We see a very long tail of opportunities. We haven't really spent much time focusing on the big enterprises, we had to focus on the consumers, but we found a lot of uptake of commercial use by a lot of smaller companies.
Ward Carter
Okay, thanks, Vijay.
Bruce Milne
Vijay, we just got this one in and having spent yesterday in a planning meeting with Microsoft about what they're looking for, this one is very appropriate. Will Microsoft be in a better position to maximize the opportunity for Qik rather than Skype on its own or do you feel that Qik will be lost inside Microsoft.
Vijay Tella
We're really excited about the opportunity with Microsoft. Skype itself was an opportunity for us to play on a much bigger canvas, with several hundred million users. Microsoft brings an even larger community with Microsoft Live and I know that the need for rich video technology for enterprises and users is very high on their priority list. We think that this was the best thing that could have happened for the Qik team.
Ward Carter
Thanks, Vijay. Here's a question I'd like to bounce to Miro. We talked earlier about the cash glut and the amount of sovereign wealth available. Here's a different take. Given the fact that you guys are very busy in Europe, how do you see the sovereign debt crisis impacting tech M&A?
Miro Parizek
Okay, very interesting. I presume you're talking about all the debt issues around Greece, etc, and its impact on the Euro and the contagion effect on other sovereign states. It has been very hectic and volatile for sure. It is interesting to watch the news in North America versus in Europe. I remember when I was at HQ in Seattle in the summer, there was a big dip in the stock markets in August because some proverbial stuff hit the fan, the 10th or so of August and I was probably the least concerned. Now, you look at the markets, they have recovered a little bit since then, but we haven't had any less volatility in this whole politically-influenced debt discussion which has not been managed optimally. I think that when you relate that to M&A, I'm seeing a couple of things.
Number one, there is no impact on the number of transactions. I'm preparing for the World Financial Symposium, and I always present some statistics. The number of transactions with European buyers or sellers has been virtually constant as a percentage of global tech M&A, since 2006. It is incredible how little volatility there has been. It has been roughly 30% of all transactions globally, that has been stable the whole time and nothing has changed in that regard.
What I have seen though, is that some buyers have been pulling back and have been saying that they need to conserve cash because they are concerned about a double dip. That is something that has been going around. The other one is that I have seen some transactions where there has been some discussion of using a new structure to, let's say, share risk between buyer and seller. Classically, that would be an earn-out, for instance.
We do see some impact on the structure of the transactions, and maybe some buyers are more reluctant, but still I think that the M&A is very, very healthy here, despite what is going on in Greece and Cannes, etc.
Bruce Milne
We're actually thinking that Q4 may be the best in a decade, since the dot-coms. What is interesting, Miro, is another client, not one of yours, where they pulled out of an LOI and they immediately got a backup offer that was better. We're seeing clearly the demand from the strategics and the financial buyers are there.
Ward Carter
We've probably got time for one more question, this is on the mobile side, maybe for Jon Scott. Jon, there are some statistics on the disruptive effect that smartphones are having on brick and mortar retailers, and it's not just online purchasing. Can you comment on this?
Jon Scott
Sure, Ward. That's an interesting question. You know, we hear about the abandoned shopping cart model for online retailers, where you go online, pick up some things, put them in a cart, and then you find a better price somewhere else, or for whatever reason, you just abandon the cart. That is seriously happening in brick and mortar stores today, people are literally abandoning a physical cart. An example is this, I read this statistic the other day, that 50% of people that walk into a store to buy an item walk out without buying it because they went online with their smartphone and found a better price somewhere else or online.
The smartphone impact is significantly going to affect retail in general.
Ward Carter
Okay, well we're just about out of time here, I want to thank all of our speakers, especially our guests and the audience for participating today. I hope you can join us in person at a live Corum conference soon. That concludes our session for today.