April 2014 - Tech M&A Monthly

April 2014 M&A Webinar

 

Bruce Milne

Welcome to our global tech M&A quarterly report for Q1 2014. I’m Bruce Milne, your moderator. We have a jam packed agenda today, starting with a special report in India, there’s a lot of growth happening there. Then we’ll move on to the World Financial Symposium report, Citytech, a company we recently sold in the heartland, and then a special report on online exchanges, then finally our Corum Group research team report.

Let’s start by going to India and hearing from Tim Goddard.

 

Bangalore Report

Timothy Goddard

Good evening from Bangalore! I spoke briefly with the Managing Director for Google India shortly after arriving, and he told me “Bangalore is buzzing!” In my time here, I can certainly confirm that this is true, for both Bangalore and the India tech scene as a whole.

I’ve spent the last two days participating in InTech50, an event honoring the top 50 Indian product technology companies. Corum was honored to be a part of the selection committee for this event. India, of course, has a long history of IT services, but has not really been known for its expertise in products. That’s starting to change. The 50 product companies, SaaS and otherwise, represented at the event were universally impressive, and a good glimpse of the potential that India’s tech sector has—and with over 4 million software engineers, a newly vibrant startup scene, plus strong support from the local and federal governments, that potential is significant, and something we’ll be watching carefully here at Corum. India already produces 40% of all Asian software product startups, and is expected to be #2 in the world after the US in the next couple years.

 

I had the opportunity earlier today to moderate the Venture Capital panel here at the event, bringing together top VCs from both India and the United States to discuss both the challenges and opportunities faced by Indian product companies, from the perspective of investors.

Before the InTech event, on Tuesday, I also was able to attend the one-year anniversary of 10000 Startups, an ambitious accelerator here in Bangalore run by NASSCOM, the Indian technology association, and backed by Google, Microsoft and many others. Their stated goal is to create 10,000 startups and ultimately displace Silicon Valley as the world’s primary technology hub. It’s a tall order, but they’re off to a great start.

One thing that has impressed me about the companies I have seen here so far is how many of them working intentionally to solve problems for their customers and partners, and doing so squarely within the technology trends Corum has identified as driving particular value, such as omni-channel marketing, digital currency and others.

I’ve truly enjoyed my time here in Bangalore, and we’re looking forward to doing more in the area. Next month we’ll be participating in Innotrek 2014, during which NASSCOM will be bringing a select group of Indian entrepreneurs on a week-long tour of Silicon Valley—Corum will be providing the M&A portion of the week’s education. Stay tuned for this and much more.

 

Bruce Milne

Thanks for the report, Tim, and congratulations on being one of the very few Americans to go over and be on the judges panel.

Actually, Corum’s relationship with India goes way back, almost 23 years ago on one of our very first transactions, that was with a principal out of Bangalore.

 

Conference Report - WFS

Now let’s move to a conference report on the World Financial Symposium, held in Silicon Valley, with our own John Simpson. John?

 

John Simpson

Thanks, and good day everyone, I’m John Simpson. I’m a relatively new member of the Corum family. Before Corum my background included more than 25 years in the software industry and another 12 years running a smaller M&A firm in the San Francisco Bay area.

Corum has always had a core mission to educate and inform its client base about trends and issues in the M&A marketplace. Recently I was very excited to participate in my first Corum informational event, the World Financial Symposium conference, held in Palo Alto in the heart of Silicon Valley, just a couple of weeks ago. There were over 70 people in the room, mostly C-level executives from software companies and they listened very hard to the conference presenters and panelist’s opinion of 2014’s exploding M&A marketplace.

The theme of the conference was growth and exit strategies and it featured some very active M&A authorities and industry veterans, including the head of M&A for Yahoo, which was 2013’s to strategic buyer, with over 30 acquisitions. Also participating were senior members of PE and VC firms organized into panels. Morgan Stanley intrigued the entire room with some impressive stats and commentary on a resurgence in 2014’s IPO market.

 

One of the most animated sessions was a panel of former owners of software companies, one of whom recently sold his revolutionary online retail technology to Staples, which is one of the largest office supply retailers in the world. Another panelist sold to Experion, one of the top three credit rating firms in the US, and they basically wanted his company’s identify theft protection software. Frankly, I find that quite comforting, I hope you do, too.

Overall, I was most impressed by the many questions from the audience that showed an acute awareness of today’s strong M&A market. For many of them, this appears to be the moment to go forward.

Good day, and back to you, Bruce.

 

Bruce Milne

Thanks, John. Good report. Welcome aboard. Interesting news about Staples, they’re part of a growing group of non-technology buyers that we’ve been talking to you about.

 

Field Report - Citytech

Now let’s move to a field report on a recent transaction in the heartland from Ed Ossie.

 

Ed Ossie

Two weeks ago we announced that ICFI, a billion-dollar Virginia-based public company had acquired our client, ten-year-old Chicago-based Citytech. Citytech is a digital interactive consultancy specializing primarily in enterprise application development, web experience management, and customer experience management solutions overall. The Citytech team has about 100 employees and revenue of about $16M.

It was a competitive process, and ICFI, a global leader in providing consulting and technology solutions for both government and commercial clients, proved to be the very best choice for Citytech.

Since the press release was published, a number of software and IT services CEOs and companies, both smaller and larger than Citytech, have asked me, “What do billion-dollar public companies find particular attractive about high-growth IT services teams?”

While every strategic buyer has their own process for screening out or screening in qualified partners, there are a few that are universal for being screened into the process.

At least in our experience, if you run one of these companies, you think about your team through four lenses. The first is culture, do you have the ability to attract, have you developed the ability to attract, retain and develop a strong team?

Are their current skill sets relevant in developing technologies with respect to performance for clients. We have some great examples of projects that have led to great client relationships. Most of these start with short pilot projects, proof of concept that can extend for many years and millions in revenue, becoming a trusted advisor to your client.

And then growth. Are you excited about scale, or is it worrisome? Buyers, at least in our experience, seek teams that want to do better, bigger, cooler software projects around the globe.

Finally, innovation. Can you put your finger on the secret sauce in this really broad but super critical ecosystem of customer experience or engagement and expectations?

We did predict in our January webinar that 2014 would be a particularly strong year for specialized IT services companies, and we’re certainly seeing that projection become a reality.

Back to you.

 

Bruce Milne

Thanks, Ed, and congratulations on the transaction. That’s wonderful advice to sellers on what buyers are looking for right now.

 

 

Top Ten Trends – Online Exchanges

We’re shifting gears a little bit here. I want to introduce our next section, which starts with a disruptive trend. Last quarter we introduced our top ten disruptive trends, and they follow two basic categories: creating and connecting.

Each month we spotlight a specific trend. Last month it was mobilization. Everyone needs a mobile strategy. You can find that webinar on our website, www.corumgroup.com.

This month we’re focusing on another connect trend, online exchanges. To give that report is our own Mark Johnson, who also recently completed a transaction that he’ll be talking about.

 

Mark Johnson

Thanks, this is Mark based in Stockholm, but currently reporting from Mexico City where we just recently closed a deal with Equifax in the fintech space.

The Internet has been a hub for exchanges disrupting traditional business models for almost two decades. Disintermediation is the term given to internet-enabled exchange business models which have shaken-up industries’ value chains. Examples of such online brokerages include Expedia and other travel vendors making the role of the travel agent virtually obsolete, iTunes, and now streaming vendors like Spotify, transforming the music industry through legal online distribution of music. Amazon and eBay in retail. Netflix in video media, Huffington Post in news media – the list goes on.

Today, the huge number of connections available means new kinds of exchanges are possible. Building the infrastructure for an exchange is now relatively straightforward and low cost, but it still takes a critical mass of buyers and sellers, consumers and creators to make an exchange viable. Google achieved this with a search audience on one side and an ad network on the other. There are similar dynamics in other markets, and fortunately, Google-level scale is not required to succeed; companies can create viable exchanges within niche markets on a much smaller scale.

An example of one of these new forms of exchanges, or industry disruptors, is our client, Nervogrid, based in Helsinki, Finland. Nervogrid provides a cloud brokerage service for businesses to acquire Cloud based applications and services. What we’ve seen is that the IT distribution model is ripe for disruption due to the prevalence of cloud based delivery of solutions. Nervogrid sells its platform as a white labeled service to IT value-added resellers, managed hosting providers, and telcos, which in turn use the brokerage service to provision and charge for cloud based solutions to their end business customers. ALSO, a $6B Swiss-based IT reseller, was the ultimate buyer of Nervogrid and is using its massive distribution channels across its markets to allow Nervogrid to make a significant impact upon its service deliveries and profitability.

Real-time ad bidding is another of these new sets of networks, and a good indicator of the potential the model holds. Twitter’s $350M acquisition of the MoPub exchange is an example of how the reliable revenue driven by a successful exchange can prove attractive to buyers in adjacent spaces. It can also attract financial buyers due to driving consistent cash flows from a wide distribution base.

The exchange model can mean earlier and higher value exits. The model can scale quickly as buyers and sellers attract each other in a virtuous cycle, while being an exchange means building out a diversified revenue base that will be more stable than it would be if relying on a few customers—this stability leads to higher valuations due to the overall scalability potential.

That’s all from me, we look forward to working with more exciting companies exploiting opportunities using this exchange distribution model such as Nervogrid.

Thanks.

 

Bruce Milne

Great, thanks, Mark, and congratulations on the sale of Nervogrid.

Interestingly, Mark and I ran conferences last week in Stockholm, Oslo and Helsinki, and I asked the audience how many of them had heard of Also. Only ONE person in all three cities raised their hand! This is one of those quiet giants that have entered the acquisition scene, and we expect to see a lot more of them.

 

 

Corum Research Report

Now let’s move to Corum’s quarterly research report, led by Elon Gasper.

 

Elon Gasper

Thanks, Bruce. We begin with the Public Markets, where major indices backtracked near to the quarter’s record starting point, and have basically jumped around that mark this month, too. The reactions to each new read on forecasting the US Fed’s policies, including the nice bounce just yesterday, all just continue to caution how important the easy money is to the sustaining the public markets. Clearly there’s a limit to how long it will last, but that and other factors’ momentum still appears to favor a fine market for tech sellers and we stand by our January prediction for it to continue the rest of the year.

On to our Corum Index, Laura.

 

Laura Duren

Keeping an eye on overall M&A activity for the last three months we saw a slightly higher number of transactions but megadeals nearly doubled year over year, plus there were more PE buyouts – all healthy signs of continuing M&A market uplift.

Facebook “bookends” our megadeals picture, capping the top of the list with their purchase of WhatsApp, which we covered last month, and appearing again at the bottom with their recent buyout of technology producer Oculus VR for $2 billion. Facebook CEO Zuckerberg hopes to use Oculus’ virtual reality headsets to create “the most social mobile platform ever” within the rising augmented reality trend.

Another notable mobile deal saw Yahoo! Japan acquire mobile internet service provider eAccess for $3.2B, the same price Google paid last quarter for Nest Labs.

With this much megadeal activity from internet moguls, PE buyers compete to keep up.  Advent, Bain and ATP bought Danish transaction processing and card management services company Nets Holding, and KKR spent $2.4 billion for Sedgwick Claims, a provider of insurance claims processing software.

 

Elon Gasper

Looking at our aggregate Six Markets index, we see that although valuations have dipped slightly since Q4 of 2013, they are still up significantly compared to the end of Q1 a year ago. 

And most of the same leading buyers from last year have clearly continued their shopping into the new year, led by the still-accelerating Yahoo corpdev juggernaut, which was last year, as John said. Laura just called out some of these among the mega-deals; we’ll be examining additional transactions as we go through our six markets, beginning with the longtime leader in value ratios, Horizontal Applications. Is that sector’s standing still holding up, Amber?

 

Horizontal Software Valuations

Amber Stoner

It is! Horizontal sector valuation multiples remain the highest of the six major sectors supported by SaaS influence and PE activity, with the human resources and contact center subsectors being especially busy for M&A in Q1.

As we said in February, PE firms continue to be active in early 2014, following a busy 2013. One of the top PE acquirers last year, Vista Equity, held to its 2013 pace, making its first acquisition of the quarter by picking up TX-based talent management SaaS company, PeopleAdmin. In another HR deal this quarter, software giant SAP acquired HR SaaS company FieldGlass, a provider of contract workforce management solutions, complementing its 2011 acquisition of SuccessFactors.

And The Corporate Executive Board (CEB) bought two companies in Q1, Talent Neuron, a provider of employee management, analytics and recruiting SaaS solutions, for $8M in February, and KnowledgeAdvisors, an HR training program management SaaS provider, for $52M in March.

In the contact center space, Golden Gate Capital made its 1st acquisition of the quarter, and 2nd in the space, purchasing California-based LiveVox, which provides contact center SaaS solutions, for an estimated $85M, a 2.4x revenue multiple.

The largest deal in the space in Q1 was Verint buying KANA Software from Accel-KKR for $514M,  a 3.8x revenue multiple, back in January, becoming the first major call-center software provider to use M&A to expand beyond the phone and into the emerging channels of social networks and online chats.

Finally, Canadian software provider Enghouse Systems  acquired German contact center software vendor,  IT Sonix for almost $10M, boosting operations in Germany and expanding into Italy.

What’s the quarterly update in the Consumer sector, Alina?

 

Consumer Software Valuations

Alina Soltys

Consumer Market multiplies show positive valuation: EBITDA multiples reaching their highest position since last year and revenue has an increase of 0.5x compared to last March.

Producers of data aggregation software and SaaS companies are trendy targets in the Consumer Sector this quarter.

Californian Lithium Technologies, a SaaS provider of social community-based marketing solutions, announced the acquisition of Klout, the company that measures user’s influence online. This will bring Lithium across the line from B2B to including consumer solutions.

Video-sharing operator Vimeo made its second acquisition, picking up Cameo, a cloud-based mobile app that allows users to shoot, style, and share their own short films.

Another social startup, Branch Media, joined the friendly family of Facebook for $15M. Branch is hosts a platform for invitation-only conversations as well as Potluck - a place where friends talk about similar interests, further adding to Facebook’s social network and connectivity offerings.

And, finally, AOL completed its 60th deal and spent $83M cash plus up to $7.7M with earnouts on Gravity. In a move to bring added value to AOL’s advertisers, Gravity tailors content per individual web visitor based on their preferences. This further enhances their position in personalized content, after the acquisition of Adap.tv late last year that was focused on the digital video side.

For IT Services we go to Corum’s team in Eastern Europe, where Eugene has news that includes one of 2013’s top acquirers, WPP, buying an IT Services company in Poland.  

 

IT Services Software Valuations

Eugene Grishenki

Thanks, Alina. This quarter saw EV to sales ratios holding near the year’s high while EBITDA multiples faded as buyers’ preferences tilted toward growth before profits.

This was evident as advertising agencies continued to buy businesses to grow their web and email marketing sides.

The French “Big Four” ad firm Publicis acquired three digital agencies in a row – starting with two South African ones, Applied Media Logic in January and Lighthouse Digital in February, plus Texas-headquartered Hawkeye in March.  Beside the geographical expansion, Hawkeye will add its data-driven marketing technologies to the Publicis portfolio.

And our number 6 top acquirer last year, London-based WPP, bought a majority stake in fellow UK company Cognifide last month, plus all of Poland’s Lemon Sky in February, likewise picking up both tech and international expansion; in this case, in our direction, toward us here in Eastern Europe, as Alina mentioned.

Back to you in Seattle. Amber?

 

Infrastructure Software Valuations

Amber Stoner

Thanks, Eugene. Moving on to the Infrastructure sector, EBITDA multiples have held relatively steady over the course of Q1, while sales multiples have rebounded from an early Q1 drop. A few subsectors have encountered a slight decline since Q4, although those subsectors with the most deal activity in Q1, Security, Virtualization and Network Management, have all seen both sales and EBITDA multiples increase in that time span.

Palo Alto Networks bought two companies in the cybersecurity space, picking up stealth startup Morta Security in January, bringing network-layer cybersecurity and anti-malware software to Palo Alto’s product suite and, in late March, it paid $200M, an incredible 200x sales multiple, to get San Francisco startup Cyvera, adding remote endpoint threat prevention software to Palo Alto’s offerings.

In the first deal in its eleven year history, Bit9 spent an estimated $40M in February and merged with Carbon Black delivering an increased range of services to prevent, detect and respond to advanced cyber-attacks on endpoints and servers.

Also in February, Sphere 3D Corporation hit the virtualization sector paying nearly $10M to get V3 Systems, a provider of desktop cloud management solutions.

Elsewhere in the virtualization space, Oracle bought Corente, a developer of software-defined networking technology for wide area networks, to complement its 2013 acquisition of Acme Packet.

And HP re-entered the M&A game for the first time since 2011 by acquiring the network virtualization assets of its partner Shunra Software to bolster its mobile capabilities and expand the growing SaaS portfolio of its Application Delivery Management business.

Elon, what’s happening in the Internet space?

 

Internet Software Valuations

Elon Gasper

Valuations here continued to maintain relatively strong levels despite a slight dip in both multiples last quarter. As Mark mentioned, one recent trend is acquisitions that provide Online Exchanges.

Turning to examples, Holland-based digital media trading firm BannerConnect was the third purchase last quarter by leading acquirer WPP, after the 2 Eugene mentioned; last month we covered details of this deal, through which WPP plans to use BannerConnect’s online exchange connecting brands to relevant audiences.

And TechMedia Network acquired BuyerZone, an online exchange for business purchasing that connects a million registered buyers with 8,500 sellers across about 150 procurement categories.

The flip side of this trend features the online exchange-related company as buyer. Here we saw Zenovia Exchange, which operates an online advertising exchange, acquire Brandscreen, a leading demand-side platform in the Asia-Pacific region that claims to receive over 7 billion ad requests daily.

We also note eBay, a classic disintermediation form of online exchange, buying PhiSix Fashion Labs, a computer graphics startup that makes 3D models of clothing. eBay is planning to integrate the technology to help offer customers a virtual fitting room, applying it across many of its properties, including the marketplace, mobile apps, and even third-party retailers that use eBay Enterprise.

Finally, besides the trend, we note that industry leader Yandex, Russia’s most popular search engine and biggest internet company, taking out e-commerce logistics company Multiship. Yandex has paid $1 million to acquire Multiship’s software, and will invest another few million to further develop the company.

Laura, I know we also saw at least one Vertical market deal related to online exchanges. Please take us through that sector.

 

Vertical Software Valuations

Laura

Vertical valuations gained force as sales and EBITDA ratios reached historic highs.  As usual, Healthcare leads the pack, with the Financial Services and A/E/C sectors competing for second place.

There’s been a lot of activity in the education software and travel app markets this year and it only continued in March, with two huge PE deals. Perennial top dog Thoma Bravo picked up TravelClick, a cloud-based online booking and CRM SaaS serving the hotel and hospitality industry, for an impressive $930 million – almost a megadeal!  Hellman & Friedman, another top acquirer, made a megadeal, buying Renaissance Learning, a Wisconsin-based education software provider, for $1.1 billion.

The Online Exchange related deal had the buyer as the exchange, and a tasty one at that. Dairy.com, a web-based business and commodities exchange and SCM SaaS for dairy markets, bought QA Studio, a California-based provider of manufacturing process food traceability software. The deal amount remains undisclosed, but we can only hope Dairy.com will be milking it for all it’s worth.

Moving on to the A/E/C space, Lockheed Martin, in its second M&A deal this year, bought BEONTRA, German provider of air traffic control planning, forecasting, and commercial airport operations management software.

Spotify’s acquisition of The Echo Nest for $100 million closes out our Verticals report.  This provider of digital music content recognition SaaS could help Spotify move beyond its subscription-based business model.

 

Elon Gasper

And that was Q1 of 2014 -- Back to you, Bruce.

 

Closing and Q&A

 

Bruce Milne

Boy, an extraordinary quarter, as we predicted at the beginning of the year. Over $40B in major transactions, split fairly evenly between the strategics and PE guys. It’s amazing. The PE guys have about $1 trillion dollars, and the strategic guys have at least half that, and most of it is offshore, so we expect to see a lot more. It’s good to see firms like Lithium and Publicis and Yandex step up, and some others some back into the market, like HP and AOL. We expect to see more, and of course there’s the non-tech buyers and those who are reinventing themselves, like Bosch, and we’ll have a special report on them next month and how they’re challenging Google.

That wraps it up. We have time just for a couple of questions, I think, before we go to closing comments.

One of the questions that came in was probably triggering a little bit on your comment, Elon, about the markets. You guys have been saying that the markets are hot, maybe topping, how long will they continue to be at a peak? I’ll turn that over to Ward Carter, chairman of Corum.

 

Ward Carter

Sure. Well, Bruce, it’s always a great question, whether we’re at a peak or in a bubble or not. There are lots of indicators to support that we’re certainly at a peak looking at valuations, M&A volumes, the IPO markets… the big question is, how long do those markets last? There are indications that they sometimes last for years, and we’re already maybe a couple of years into a pretty strong market. In some cases they may just last quarters, so it’s always a risk. We’re hopeful that 2014 will continue to be a strong M&A market, but it’s always good to test the waters. Sometimes the gap between the peaks is more than several years, and to miss that market and wait until a recovery in, let’s say, 2017, could be a very long wait for some potential sellers. It’s always good to get a deal done before that door closes.

 

Bruce Milne

One last one here. Ward, can you offer any thoughts on how the private market is looking this year so far for SaaS? You recently ran a conference on that.

 

Ward Carter

Yes, I ran a conference on that, we’ve also had some very significant closings during the past 12 months in the SaaS market, so the appetite is very, very strong, both from strategic buyers, as well as the PE firms. They love the recurring nature of the SaaS revenue, the predictability, and quite frankly, they’re paying premiums that are at least double what they might pay for a similar technology that is based upon a traditional license model, so, yes, SaaS is hot.

 

Bruce Milne

Yes, it is. It’s interesting to note that we had a special report on this from our advisory board. Thanks for the question.

That just about wraps it up, but one comment first on this timing question. I got this yesterday, meeting with some tech leaders in Silicon Valley. The biggest difference now between the dot-com era turnaround and the turnaround in ’08 is that they didn’t have $1.5 trillion sitting on the sideline that needs to make acquisitions. They have to spend that cash.

With that, we’ll go to our closing comments. Thank you very much for joining us.