January Tech M&A: Forecast 2014

Bruce Milne

Welcome to Forecast 2014, our annual tech M&A report. I’m Bruce Milne, CEO of the Corum Group. I’m dialing in from Stockholm right now. I’ve been on tour here throughout Germany, and I’ll be in the UK next week with capacity audiences, kicking off our conference series for 2014.

We have a lot to cover today in our agenda. We’ll hear predictions from the Corum Group, and then hear spotlight reports on the trends that will be shaping 2014. Then we’ll get a research report on all 26 sectors we cover, and then our panel of luminaries. We’ll wrap up with closing thoughts and Q&A.

Predictions

Let’s start with our predictions for the year, and I’ll hand it over to Timothy Goddard, our conference coordinator. Tim?

 

Timothy Goddard

Thank you, Bruce. We polled the staff here at Corum Group, in particular our deal makers, and here’s what they came up with. We don’t necessarily want to own all of these, but we’ll take the ones that end up being right.

• Privacy for consumers and security for enterprise will become the watchwords of the day. We’ve seen this with the Snowden things, with the Target breach recently, and so on.

• Innovative firms working on personal obfuscation, anonymity, encryption, and so on, will see a significant uptick in business, and therefore M&A.

• Meanwhile, Google will expand its robotics roll-up into established home robotics firms (vacuums, etc.). They’ll be consolidating them under their new Nest brand. We’ll talk a little bit more about that later.

• Yahoo!, who has been amazing this year, and who we’ll look at in detail later on, may break Google’s acquisition record with 40 software acquisitions.

• We’ll also see a takeover battle to acquire Netflix, and the ultimate victor will be Samsung.

• The US banking industry will finally get serious about credit card security. We think we’ll see at least one major card provider acquire a major security provider, partly for the tech, but also to bolster consumer confidence.

• We’ll also see other more traditional companies buying tech. We’ve seen a lot of that this year, and we think we’ll see more. Things like a fast food chain buying a robotics company, a hotel chain buying an internet travel company, and so on.

• Finally, a major US gaming firm, such as Activision or EA, will be acquired by a large Asian buyer.

Now, we’re going to go straight into our spotlight reports from Corum dealmakers around the world. Kicking us off in the heartland, our man in Kansas City, Ed Ossie.

 

Heartland Spotlight

Ed Ossie

Well, there’s plenty of interest and action out here in the Heartland, and we expect it’s going to continue. Last year we helped a number of Midwest founders succeed, and you may have read about a few of these success on our website. We’ll be announcing a number of others in the next 90 days of 2014. Also, last year we had over 400 Tech CEO/CTO join us in person one of Corum’s 15 Midwest events and conferences

While the Midwest does not command a big share of the VC dollars put to work across the US, we did once again claim a significant share of the tech M&A activity in 2012/ 2013 with sales to both strategic and financial buyers, with 503 reported transactions amounting to several billion dollars.

More importantly, as you can see, the deal values have tracked the market multiples and matched other higher profile regions of the US. These Midwest companies were from a cross section of the six segments our research team tracks every month, but at a deeper level of research, healthcare, insurance, customer experience and SaaS vertical solutions all featured prominently on the shopping list for our buyers.

The strategic and PE buyers we work with each and every day across the globe consistently ask us to find them businesses with growth, strong products and customer relationships, a solid team, and a compelling value proposition for the markets they serve. So, as you shape your 2014 resolutions and “gotta dos” for your business, we’d encourage you to include getting on radars early on your list, as it’s hard to say what may be possible for your business whether timing is today, tomorrow, or even down the road a bit.

That’s it for now from the Heartland.

 

Timothy Goddard

Thanks, Ed. Now, over to Barcelona to our VP of international business development.

 

International Buyers Spotlight

Dougan Milne

Thanks, Tim. 2014 will definitely see accelerated activity by international buyers, and I’ve got some examples for you.

Eastern European IT services firms are moving toward higher grossing projects in developing regions. To that end, Poland’s Assecco acquired Russia’s Softlab and Georgia’s Onyx Consulting. They now have sights set on sub-Saharan Africa, and they’re not the only ones.

Japan’s Softbank bought top Finnish gaming developer Supercell, and then paid $21B acquisition of 80% of Sprint. It’s rumored that T-Mobile is next, to help Softbank become the second largest mobile communications provider behind China Mobile.

Speaking of China, their gaming companies have been very active, with PerfectWorld picking up WuHu and Shanda, Giant Interactive and Tencent actively making other offers.

Chinese IPOs are back, with four new ecommerce companies raising nearly a half-billion dollars, including 500.com, AutoHome.com, Lightinthebox.com, and 58.com. Remember, a good portion of the cash raised should go towards including Western companies: Lightinthebox picked up Seattle-based Lockerz just this month.

Latin America is also making IPO news. IT Services firm Globant, based in Buenos Aires, will soon be public, shortly after acquiring the Huddle Group. Evertec of Puerto Rico raised half a billion in their public offering last year and the region’s largest IT company , Brazil’s Stefanini, made another US-based acquisition for RCG Group in Texas.

With more than two-thirds of our transactions involving a non-US party, we’re certainly keeping close tabs on the international marketplace. Back to you.

 

Timothy Goddard

Thanks, Dougan. Dougan touched on gaming, but now we’re going to go to our gaming guru, Jim Perkins, out of Phoenix.

 

Gaming Spotlight

Jim Perkins

Gaming M&A broke all records in 2013 with $6B in value, more than half mobile.  Mobile app revenues should hit $70B within two years, 70% of it from games, and China, Japan and South Korea are over half of that. No surprise, then, that Asian buyers with huge surpluses of cash drove the largest deals: 8  of the 10 largest deals, in fact. Watch Softbank, Tencent, and other Asian game, media and telecom companies to continue their buying spree.

Meanwhile, iOS and Android games make up 43% of all mobile app use, going up to 70% for apps on tablets. The domination of games on these devices is staggering and will continue, driving the Asian game companies to go global by bringing Western games to their markets, and Asian games to the West.

The entire console market declined, but the battle between the PS4 and Xbox One should  revitalize it this year, and the winner will be consumers, with superior content, innovative pricing, and better online experiences.

Other key trends that will drive M&A include microconsoles, wearable devices like Oculus Rift and Google Glass, Steam’s rapid expansion, and brick-and-mortar casinos continuing to move into the online social and for-money space through acquisitions.

Bally’s $1.3B acquisition of Shuffle Master and Scientific Games’ $1.5B acquisition of WMS further consolidated the gambling products and services space. This trend will continue with buyers more focused on smaller, highly innovative online casino services and technology companies.

 

Timothy Goddard

Now we’ll move from that very healthy sector to the healthcare sector and Rob Schram.

 

Healthcare Spotlight

Rob Schram

The healthcare industry is undergoing significant change, driving an exceptional pace of M&A that isn’t slowing down. Health IT is estimated to increase its spending by 40% over the next 2 years, from nearly $60 billion in 2013 to more than $83 billion by 2015. This explosive growth is the combined result of three fundamental changes:

• Regulatory change: Here in the US, we’ve only begun the implementation of the Affordable Care Act, with the accompanying uncertainty and complexity. Just one part has already pushed a wave of consolidation in the EHR/EMR space, with more to come.

• Technological change: Major trends like big data, analytics, security, cloud and mobile are affecting healthcare technology just like they are all sectors.

• Societal change: As the population ages, healthcare needs increase; and patients are accustomed to internet-based data access, creating demand for modernization with effective software – the troubled rollout of the insurance exchanges underscore this need for innovation. Meanwhile, the overall model of care is steadily moving from volume to value-based.

These changes continue to drive exceptional activity in the heath technology sector, including three deals for Corum clients last year. Public sector valuations are over 22x revenue, and major deals like Experian Group acquiring Passport Health Communications for $850 million and Harris Computer Corporation acquiring QuadraMed for $85 million are leading the way.

If you have a company focused on streamlining, optimizing or otherwise eliminating one of the many pain points within today’s healthcare market, then you have a unique opportunity to take advantage of an unprecedented level of interest from both strategic and financial buyers in today’s M&A market for Health IT.

 

Timothy Goddard

Alright, thanks Rob. From that high-energy sector to the energy sector itself, let’s hear from Jeff Brown, out of Houston.

 

Energy and Environment Sector

Jeff Brown

High oil prices and high carbon emissions are transforming the marketplace, driving more efficient usage and cleaner forms of energy. The challenge is finding where efficient technologies become affordable and even a competitive advantage and quality of life enhancer. Investment will be greatest around this point, with some of the strongest valuations across all of tech.

In the power sector, the economic model of utilities is evolving as IT and OT converge and the power grid morphs into a two-way system with communications, sensors and control devices for better energy management. Notably, Schneider acquired Invensys for $5.2B this year, then Siemens and Accenture announced their own joint venture. Lastly, Riverside bought SaaS vendor ARCOS, a Corum client.

There’s a lot of activity around “smart cities” as the initiative gains steam with low carbon cities showing they can be competitive, livable and attract more investment than their traditional counterparts. Advanced sensors for occupancy, CO2, thermostats and photo-sensors, each driving big data analytics and automation, are central to this change. Highlighting this shift, Google just bought Nest for $3.2B, Marlin Equity and B each bought two energy management companies, ESCO bought one, and Cisco paid 12x revenue in cash for startup JouleX at $107M.

In petroleum, better drilling intelligence is driving MWD, horizontal drilling, hydraulic fracturing, and more comprehensive reservoir description. Big data SaaS vendor, DrillingInfo sold for $165M in 2012 to Insight Venture Partners and then made two followup acquisitions. Software and data leader P2 was acquired by Advent International while IHS made four related acquisitions over 15 months.

2014 should be a great year.

 

Timothy Goddard

Thank you, Jeff. From all those key sectors, we’re going to the technologies that are driving so much of that activity: Here at Corum HQ, chairman Ward Carter on SaaS.

 

SaaS Spotlight

Ward Carter

Sure. SaaS M&A and IPO activity has now demonstrated several strong years and shows no signs of decline.  SaaS IPO valuations over the last 24 months remain exceptionally strong, with current median Revenue Multiples of 13.65x. This is exceptionally robust when compared to the multiples of the broader public markets, where the only partially SaaS horizontal sector is at 3.6x and vertical market multiples are at 2.5x.

SaaS is tracking high in M&A transactions as well, at 4.7x revenue, and these transactions represent a premium of over 200% compared to traditional legacy solutions.

SaaS has long been focused on broader horizontal applications, but examining the recent IPOs and M&A transactions, we note emergence of many hot verticals, including medical/pharma, construction management, and supply chain, along with horizontals like marketing automation, HR and digital commerce. Many of the major ERP vendors, including SAP and Oracle, continue to snap up point solutions as they round out their SaaS offerings in an increasingly cloud-based marketplace. We expect to see continued strength in SaaS valuations going forward as ISVs and end users alike continue to reap the benefits of this delivery model.

 

Timothy Goddard

Thank you, Ward. Now, to Ottawa, where Peter Andrews will speak on mobile.

 

Mobile Spotlight

Peter Andrews

Mobile continues to set the pace for technology innovation, evolution and revolution. Half of Gartner’s 2014 Ten Strategic Technology Trends are tied to mobile. Not really surprising considering that in 2014 the number of mobile internet users will outnumber desktop users globally for the first time.

Clearly, mobile is set to become even more ubiquitous in 2014, with wearable tech and ultra-efficient sensors driving new interactions, erasing the barriers between mobile and social, while opening new opportunities for ecommerce.

2013 saw Microsoft respond to mobile in a big way by acquiring Nokia’s handset business. In 2014, I think we can look forward to:

•Apple responding to Android and Windows momentum through M&A, possibly bringing significant outside IP into the walled garden for the first time.

• 2014 will not be the year of wearables, but more big companies will start placing big bets on it.

• BYOD will fade from the CTOs agenda, enabling them to focus on using mobility to transform business operations.

• Mobile technology automates more aspects of everyday life in the home and on the road pitting service providers, application developers, and device makers in three-way tug of war.

Mobile is no longer the story of the future. It’s here, it’s huge, and it’s changing at breakneck speeds, driving increasing M&A activity throughout the coming year.

 

Timothy Goddard

Thanks, Peter. Now across the pond to Stockholm, where Mark Johnson will speak on social.

 

Social Spotlight

Mark Johnson

2013 was another exciting year in the social space. Facebook usage by teens dropped, but their 2012 acquisition of Instagram has become one of the most popular social tools. Privacy has been elevated to a top concern for users, impacted by events such as the Edward Snowden revelations last summer and the current class action lawsuit against Facebook for improperly commercializing users’ messages.

Key deals over the past year by social media buyers included:

• Yahoo’s billion dollar acquisition of Tumblr to bring its blogging network and younger demographic into Yahoo’s strategy to grow ad revenues; Tumblr provides ad sponsored content to desktop and mobile.

• Google spent a billion for Waze to ensure their dominance in mapping by acquiring user generated traffic information via handsets.

• Twitter’s acquisition of MoPub enables real-time selling of ads to companies through its exchange, designed to further enhance revenue performance on mobile.

• And LinkedIn acquired Pulse to provide a news reader app, particularly for mobile and tablets.

The common thread across these deals is mobile, which will continue to be a priority in social media.

Looking forward, we foresee two important social trends. First, disappearing media features, like Snapchat offers; users are concerned with the permanence of their web presence.

Second, in-stream social ads, like promoted tweets, are proving to be much more effective than traditional forms of online advertising, like banner ads, in part because they work better on mobile devices. Companies that can convert social clicks into actual cash, whatever the method, will see significant interest in the coming year.

 

Timothy Goddard

Thank you, Mark. Now, back to HQ with Gary Beyer on Big Data.

 

Big Data Spotlight

Gary Beyer

2013 was a big year for Big Data that included some large and noteworthy acquisitions:

• Facebook acquired Tel Aviv startup Onavo specializing in mobile app analytics for an estimated $120M

• Apple acquired Topsy Labs for  $200M giving them a big jump into social media analytics

• Monsanto acquired Climate Corp for more than $1B

Big Data has also been legitimized by the public markets:

• Splunk has tripled in price to a market cap of more than $7B

• Tableau Software, which debuted in 2013, whose sales multiple is more than 21x

The value of Big Data continues to evolve in innovative ways:

• For example, Intel is mining the buying patterns of its customers to help sales reps rank market opportunities with a benefit of tens of millions to the bottom line

• This is similar to Amazon’s long-time use of psychographic profiling and collaborative filtration to help customers to discover products they didn’t even know they needed

2014 promises continued innovation with entrants moving beyond the traditional focus on analytics towards data-aware applications:

• Stealthy SFO startup Jut recently received a $20M Series B infusion to work on solutions above the big data infrastructure, re-architecting enterprise apps so they can make sense of the galactic volumes of data

• Apple’s acquisition of Topsy could enable the company to use social trends and proprietary Twitter access to improve Siri searches on iPhone.

2014 will be an exciting year for firms in the big data and analytics space. Back to you.

 

Timothy Goddard

Thanks, Gary. Now, to wrap things up, over to Amsterdam and senior VP Jon Scott.

 

Internet of Things Spotlight

Jon Scott

The internet of things, or IoT, is the latest technology megatrend to watch, the global network of physical objects with embedded technology that sense and communicate their internal states and external environments.

These connected devices range from the more mature industrial connectivity of service system sensors set report a fault, to the more advanced sensors that track your movement in a retail environment to see what displays catch your time and attention. Even more personal are the emerging smart devices you can wear for exercising that track and report your body’s physical performance and workout statistics to outside systems and even your doctor. 

The internet of things is predicted to grow to 26 billion units in 2020, an almost 30-fold increase over 10 years. Product and service suppliers to this segment will generate revenue exceeding $300 billion by 2020.

New business models are popping up quickly. You’ll soon see embedded technology in your car that will report your real-time driving patterns and behavior to your insurance company to help set your rates, as you drive by farm fields where in-ground technology transmits water and soil conditions along the supply chain to ensure the crop yields are maximized.

The opportunity for emerging software companies in IoT is big. IoT encompasses not only the hardware (the things themselves), but all the embedded software, communications services, information services and platforms associated with the Things.

PTC paid 11x sales revenue in late December 2013 for ThingWorx, an IoT platform for building and running IoT applications. In 2014, watch for companies like Cisco and others looking to dominate the IoT hardware space pick up companies that have created major IoT software or platform innovations.

Back to you.

 

Timothy Goddard

Thank you, Jon.

 

Corum Research Report

Now, from those we’re going to go to the heart of our report, which is the Corum Research Report, led by Elon Gasper, VP and director of research.

Elon Gasper

Thanks, Tim. We’ll begin with a look back at the 2013 public markets, which finished strong as all major averages set new records or hit levels not seen since the 1990s bubble. A product of low interest rates, an improving economy, tech efficiencies and cyclical rebound, this wealth plus the record cash held by corporations, clamors for M&A to enable companies to continue to compete and grow. That’s why peaks in M&A demand usually follow economic ones. It’s all setting up a great environment for sellers in 2014.

Looking deeper, all six major public market groups Corum tracks rose in 2013. We’ll examine the details of each during our individual market reports, plus in our expanded written report.

But first, reviewing our top strategic tech acquirers leaderboard, we see more than 30 percent new faces, led by Yahoo up top with 30, which we’ll examine later, though that 30 was not quite as many deals as Google did back in 2011 when Marissa Mayer was part of their team that took in 33. Still Google claimed second place for 2013, finishing strong with its announcement last month of some stealth purchases of robotics companies.

And though Google’s 26 deals are more than it made back in 2012, other top buyers accelerated even more year over year, with Apple almost tripling its pace (maybe setting a trend for the Tim Cook era?) and Hexagon, Accenture and Autodesk each doubling. Others, such as Microsoft and Oracle, slowed their pace as they undertook fewer but larger acquisitions instead, or focused on business challenges like Facebook did while fixing its mobile model. Note these numbers don’t count any of their VC arms, where Google Ventures and Intel Capital lead by far.

Alina, please take us through our Corum Index.

 

Alina Soltys

Let’s start off with the top line: 48 billion-dollar-plus transactions this year! Dell takes the top deal worth $24.8B when taken private by Silverlake Partners along with BMC’s take-private by Bain, Golden Gate & Insight, plus we see Microsoft, Cisco, IBM, Oracle, Scientific Games, SAP, Yahoo and Google all making big ticket purchases.

And Google just kicked off 2014’s megadeals with their $3.6B purchase of Nest, the innovative home thermostat company that it had venture funded previously. Nest was started by the team who designed the first iPod.

The action in the PE space has been intense: top buyers alone represent over $20 billion in reported deal values. If we look at the top PE acquirers, both acting on their own as well as  through their majority held portfolio companies, Insight takes home the gold medal with 23 acquisitions, and Silverlake, TPG, Vista and Summit round out the top 5. Corum has done two transactions with Riverside recently, and we see them on this list as well. We’ll go into more detail next month with a special panel of PEs.

To finish the remainder of the index, VC exits were down last year, meanwhile cross border transactions stayed in line with prior years at about one-third of all deals.

And let’s quickly touch on the IPO activity—it was certainly a busy year—especially for enterprise companies in marketing automation, adtech, B2B, payment services and networking, among other sectors, with a splash of consumer coming in from Twitter.

The wide range of negative and positive returns reminds us that newly public firms carry a large degree of pricing risk and not all companies are created equal. Marketing Automation, specifically Marketo posted an incredible 100% increase since opening day. The adtech firms have not fared as well, although RocketFuel is valued at about 10x revenue. Twitter and other consumer companies, including Seattle’s own Zulily, round us out.

A number of online payment processors went public, including Russia’s Qiwi, providing a nice return for all of the early investors. B2B players like event manager Cvent and networking players also IPOed.

Going public is just the beginning; M&A typically follows, as we see in the case of FireEye, who just completed their first billion dollar acquisition of Mandiant, the firm responsible for finding and removing Chinese hackers from the New York Times and other US Companies.

Elon Gasper

Thanks Alina. Drilling down now into our six markets, 26 sectors: First, Amber, please bring us up to date on the horizontal applications story.

Amber Stoner

The horizontal story is overwhelmingly positive. Still holding the top spot among our six major sectors, valuations in the broad horizontal sector are up, as are the valuations in all eight horizontal subsectors with dramatic increases in sales multiples for the Human Resources and SCM sectors as well as EBITDA multiples for the ERP and CRM sectors. SaaS is still king when it comes to these valuations and SaaS trendsetters were especially active in 2013 with some important acquisitions.

SAP’s acquisition of KXEN was especially interesting as it deals with predictive analytics, which we’ve been seeing a lot more of recently with the increasing interest in big data. Two more predictive analytics SaaS deals followed on the heels of the KXEN acquisition with PROS Holdings spending $13.5M to get SignalDemand in December and Information Control Company grabbing Farsite Group in September. As big data continues to be a big deal we analytically predict more deals in this space in 2014.

Another major trend during 2013 was in the marketing SaaS space. Last month, newly public Marketo acquired personalized marketing solution provider Insightera for just under $20M. And Salesforce.com made a huge push into market automation when they spent $2.5B to get ExactTarget. We also saw Oracle moving farther into the marketing SaaS arena with its estimated $15M acquisition of Compendium and its more recent $1.6B acquisition of Responsys to complement its 2012 Eloqua acquisition.

In a related space, there were a number of adtech deals in 2013, among them two July deals in which Yahoo picked up mobile ad creation SaaS provider AdMovate, and Criteo spent just over $7M to get AD-X Tracking, a provider of performance-based tracking SaaS for mobile advertisers.

Laura, how have the verticals performed over the past year?

Laura Duren

Vertical valuations ended 2013 as high as we've seen since the 90s. Despite a dip here and there, overall market sales multiples increased more than 20% across the entire year. The subsectors reflected this overall market growth, as each saw definitive increases over 2012. Healthcare transactions experienced the most growth, with a 60% increase in sales multiples over just one year.

All of this subsector valuation growth makes 2013 an impressive year. It becomes even more impressive when we step back and look at the multi-year trends, with nearly all subsectors showing stunning multi-year growth.

Healthcare multiples soared over those seen in 2012.  As Rob discussed, upcoming regulatory changes drummed up buyer interest and made deals in health insurance and medical and prescription claims processing particularly compelling.

Corum was the adviser to sellers in three medical deals in 2013, two acquired by top private equity firms: Francisco Partners’ Healthland bought American HealthTech and Thoma Bravo’s Mediware acquired Fasttrack Healthcare Systems. We also advised Data Strategies and its MDSuite in their sale to Integrated Solutions Group.

Rob mentioned a prime example of the resurgence of insurance IT deals, UK-based Experian Group, in its largest healthcare acquisition to date, purchasing US medical transaction management SaaS software company Passport Health Communications for 7xrevenue.

Jeff described the continuing focus on environmental sustainability that led to increased activity in the energy and environment subsector. Agribusiness in particular had a dynamic year, as software analysis tools tailored to farmers improved crop yields while reducing environmental footprints, and giants Monsanto and Land O’ Lakes made significant software acquisitions. In October, Monsanto made its first, picking up The Climate Corporation for $930M. Land O’ Lakes followed suit two months later, purchasing GEOSYS. Tech acquisitions by traditional companies like Land O’ Lakes and Monsanto reflect how all kinds of companies are finding it necessary to evolve into technology companies, often through M&A. More than ever, software entrepreneurs find the best value for their company is often outside of the technology sector, after a thorough professional search.

Valuations in the A/E/C subsector rose over 20% in 2013.  Technological advances in engineering and the rise in popularity of 3D printing led to many 3D-related acquisitions. Engineering software titans Autodesk and Dassault had very successful years. Autodesk picked up ten 3D and CAD-related companies, most notably Delcam in November at 3.3X revenue for $276M. Dassault met Autodesk head on, with seven total transactions in the A/E/C space.  Most recently it purchased Realtime Technology for $243M, a 2.1x revenue sale.

Another hot topic in A/E/C was construction management software, as following a budget is perpetually important, especially when taxpayer dollars are involved.  US-based Topcon purchased Finnish commercial construction management software company DynaRoad in Q3.  Corum led an A/E/C deal in Q1, when it sold Planswift to Textura, just before its highly successful IPO.

Artiem, what happened in IT Services in 2013?

Artiem Mamaiev

Thanks, Laura.

Sales multiples in the IT services market rose steadily throughout the year, as Corum tracked a total of 716 transactions in the space. Once again the trend focused on international deals, with the hottest market being Asia, where revenues were commanding over five times higher prices than their equivalents in North America and Europe, Since profits were viewed approximately the same for companies in all locations, this could indicate investors’ belief that Asian companies continue to be more dependably scalable.

Extending a trend from 2012, large global services providers such as Publicis, WPP, and Aegis aggressively used M&A to expand into new geographies. Of those three kingpins, WPP struck the hardest, and with the longest reach, knocking down diverse IT Services transactions around the world.

Other market activity affirmed the growing importance of mobile services, as nearly one billion smartphones were sold in 2013. Softbank Corporation proved that this huge section of the technology industry could drive huge deals in IT services, too, when it acquired a controlling stake in Brightstar for $1.25B in October.

Alina?

Alina Soltys

Thanks, Artiem.

Moving into the consumer space , there were some fluctuations in Q3, but valuations ended the year on a high note. Mobile and the broadening availability of content and applications has brought us into the modern era of curation. There has been a flurry of activity in the new, new media outlets—let’s call them 3.0—post the 2.0 acquisition of HuffPost by AOL. And it’s no surprise, mobile app analytics firm Flurry reports that news apps are the most retained and most used in the appsphere.

LinkedIn reached out and paid around $90M for Pulse, aspiring  to become a professional publisher with access to content within a social framework.

Livefire, who recently raised $15M in funding, acquired Storify—a social storytelling tool—to enhance its real-time curation and a social commenting platform.

Another well-funded firm, Vox Media, which has raised $34M, acquired Curbed Network for $20-30M - both NYC based urban lifestyle and entertainment blog networks with real estate, tech news and sports sites.

Now moving over to mobile: LifeLock, an identity theft protection service, acquired Lemon, a digital wallet platform, in December for $43M. Lemon is very similar to the Coin Card that is making news by uniting all of the various credit cards into one. Lemon does that on a mobile basis with payment, loyalty, memberships and the like easily accessible.

Another indicator of the dominance of mobile platforms was this summer’s bidding war between Google and Apple for Israel-based Waze, a location-based mobile app with real-time traffic updates that went for just shy of $1B. After Apple lost that bid, they went out to buy Embark and Hopstop, both mass transit navigation services, and WiFiSlam for indoor space mapping.

As we move geographically, into the oceans, the popular Hungry Shark mobile game, created by Future Games of London was acquired by serial buyer UbiSoft. Ubisoft is transitioning from traditional AAA games such as Assassin’s Creed into a mobile Free-to-play style of gaming.

As we heard before Softbank’s also moving into mobile gaming with the $1.5B transaction of Supercell which is the largest gaming deal since 2007 when Vivendi acquired a stake in Activision.

Softbank appears to be on a quest to become the world’s leading internet company, but it has some stiff competition from Yahoo. Speaking of Yahoo, Elon, what can you tell us about activity in the internet sector?

Elon Gasper

As a whole it showed double-digit percentage gains for 2013, with enterprise value over sales multiples up over 30%. Once again, the internet pure play sector garnered higher valuations than internet infrastructure.

The biggest story here was Yahoo, with its 30 acquisitions. Marissa Mayer took to the stage at CES in Vegas last week to boldly declare that Yahoo is now a media company, saying almost nothing about search, and her acquisitions reflect this strategic focus. Taking full advantage of the competitive position they’ve developed on content, they’ve flipped the switch on aggressive monetization of advertising. Aligning their team to it, the firing of her COO this morning just emphasizes the focus they have on that goal.

Along with additional purchases in social media and sports content, Yahoo also picked up a couple travel companies, Japan-based hotel review service Venture Republic and US-based frequent flier guidance site MileWise. Their interest in the pure play market shows that the travel industry hasn’t lost the momentum we first noted in 2012, further evidenced by US-based vacation rental classifieds site HomeAway establishing their position in the Australian travel market with their $198M purchase of Stayz Group in December.

Another internet subsector with M&A growth in 2013 was specialized online employment classifieds. Among those, OnAssignment acquired IT employment placement website CyberCoders for $94M in December, and CareerBuilder purchased OilandGasJobsSearch.com, a UK-based classifieds website operator focusing on North American oil and gas industries jobs.

Amber, that just leaves infrastructure; how’d it do?

Amber Stoner

Overall, the infrastructure market has seen increases in both sales and EBITDA multiples over the last year. Valuations were up among almost all of the eight infrastructure subsectors. We continued to see lots of consolidation in the network management and virtualization spaces, both of which saw increases in sales multiples. But 2013 also brought quite a bit of acquisition activity in the security sector to go along with an increase in EBITDA multiples from a year ago.

One of the major network management players, Cisco, did ten deals in 2013, including two security deals, picking up Cognitive Security and spending over $2.5B for Sourcefire. Both of these deals, together with 2012’s acquisition of Virtuata, are indicative of the need for network management companies to also provide security for those networks.  Cisco is clearly aiming to be the front-runner in providing protection against cyberthreats across various networks.

Following its 2012 IPO, Proofpoint went on a buying spree in 2013, spending $55M over the course of the year to pick up four companies.  We mentioned after their first acquisition, Maildistiller, that it wouldn’t be the only deal Proofpoint did in 2013 and they didn’t disappoint, picking up Abaca, Armorize, and Sendmail in the back half of the year. We’ll definitely be keeping an eye on them in 2014 to see if they can keep up that pace.

Another major player in the Security space, Thoma Bravo-backed Blue Coat Systems also made a number of consolidation plays during 2013.  Back in May they picked up the SSL Inspector appliance product line of Netronome followed in quick succession by Solera Networks, for an estimated $225M. And just last month they continued spending to get Norman Shark, an anti-malware software provider.

Like Thoma Bravo, other PEs were also active in the security space during 2013, with Vista Equity picking up Websense and Welsh, Carson, Anderson & Stowe getting Alert Logic.  But we’ll discuss the 2013 private equity deals in more depth in next month’s report.

Elon Gasper

And until then, that’s the world of tech M&A, our report for 2013, looking like a set up for a seller’s market in 2014... Back to you, Tim.

Timothy Goddard

Thanks, Elon, really great stuff, we appreciate it.

 

Guest Panel

Now we’re going to be joined by a great panel of four luminaries from across the world of tech. I’m going to start right off with Peter Coffee, VP of strategic research at Salesforce. He’s working on building a community of use with developers for cloud-based applications and he’s got some very interesting things to say. Peter?

Peter Coffee

Great to be with you again. I think one of the most fundamental anchors to what is going to be interesting in the year to come is that we really have passed the tipping point where instead of people going to their mobile device to boot their laptop, it’s really now turned around to where people only boot the laptop on the rare occasions that they can’t get done what they need to do on their mobile device. What that means is that mobile applications are going to stop being just key highlight subsets and really start to become much more general purpose in their capability, they need to be higher function tools. And something else really critical happens, which is that people are going to be touching their mobile device first thing in the morning, last thing at night, it’s going to be in their hand, essentially in their face all the time. What that means is that some behavior changes, with some very interesting value potentials, are going to emerge in online social communities. That stops being something you do episodically, it just becomes part of your environment. So when you’re working, shopping, whatever you do in the course of a day, the presence of that social community will become something that is there all the time.

Now, with all of these connected devices, the sensor and the chip sets, what Chris Anderson at Wired magazine calls the peace dividend of the smartphone wars, it is becoming so phenomenally inexpensive and simple to take an ordinary device and make it a connective device. How interesting would it be, for example, for a camera maker, assuming that you have opted into a kind of advisory service, to send you a bulletin saying “we noticed that lately you’ve been taking a lot of pictures in which you appear to be photographing moving object in low light. We don’t see your pictures, of course, but the metadata that we’re getting suggests that you might be better served by a different type of lens that what our records show you own. This might be a really good time to talk about that.”

So now, selling stops being constantly throwing things at people and hoping you’ll get lucky and offer them something that they actually want at that moment, but now can become a much more targeted proposition.

There’s another very important effect of all of this. In the past, marketing had a job of turning you into a selling opportunity. Sales had an obligation to turn you into a buyer. And service and support had an obligation to keep you from getting so unhappy that you wouldn’t consider the same company the next time.

There’s a new role for customer service now, which is the continual refreshing of customer delight, so that customer is continually reminded of how happy they are with you, because those are the customers that are out there, connecting with their social communities. They are now a critical part of your marketing posture.

There are two things that this implies:

1. Every interaction with your customer now needs to be emphasizing that opportunity to refresh their delight.

2. The old role of service was damage control. It’s now going to be possible to collect data from products that allow you to identify what you might call pre-failure signatures; patterns of behavior that suggest that a product is about to exhibit a symptom that the customer will notice, but now you can do something proactive, low cost and low urgency at the customer’s convenience to prevent that problem from even manifesting.

This turns service from damage control into customer care. The old semantics of data was the query, I know the question I want answered, and I’ll file a query into a database that will hand me all the things that match my question. This implies you know what the question is.

The new discipline of data science is fundamentally one in which you ask the data, “What do you know?” That helps you focus on the truly scarce thing, which is attention on the areas in which that kind of thing will lead to value.

That’s really what I see in the coming year, mobility enabling continuous connection, and that connection inviting a more pervasive interaction with a community’s trusted advisers and continuous interaction with the products we use, mining that data so that we find more value and more opportunity to create positive customer care, and a need for really insightful and sophisticated analysis of that data to ask it what it knows.

Timothy Goddard

Thanks, Peter. Peter and I had a chance for a prep conversation earlier, and we recorded that. We’re going to be making that available as a podcast at corumgroup.com, so if you want to hear more about that, including how privacy plays into this, I encourage you to tune into that when you have a chance.

Next we’re going to hear from Reese Jones. He’s an investor and futurist out of the Bay area. He is particularly active with Singularity University and he also had some thoughts along similar lines. Reese?

Reese Jones

I’ll offer a theoretical framework to this internet of things trend and touch on three things: exponential trends, software and dematerialization, and then biology as information.

First, most people are familiar with Moore’s law of performance doubling on an exponential pace, where computers get better in performance year after year, but they’re also getting smaller in size and more efficient in power and more capable. This dovetails in with another exponential trend which is lesser known called Cooper’s law, named after Marty Cooper, who invented the cell phone, which is also following an exponential trend. Things are getting smaller, faster, and less expensive, but they’re also communicating at higher and higher speeds, which sets up a situation where computers are no longer the size of houses or desks or laptops, they’re now phones or smaller. This trend should continue, but they’re also communicating faster and faster, creating smaller things that communicate well, leading to an internet of things with improved communication ability.

That sets the stage for software changing from something that runs on a device to a network to a cloud connecting originally people and then commerce and enterprise, and now data in the cloud or data science, as Peter mentioned. The IoT, moving from people and cars and phones, is things that move, but the other IoT is companies that move things, like Amazon or Uber. These are leading to sort of a dematerialization of what is called a thing. What used to be a thing like a CD or a flashlight or book or radio, is now software that you can get from the cloud. The competition for that is changing from what’s on TV for example, to anywhere anytime via Netflix, or services like taxis being challenged by companies like Uber delivering people and food, to the topic of data science, where once you have all these things being smart and connected to each other, you can track how they’re used and look for patterns to use the more efficiently, which gives a competitive advantage.

Finally, in the near future, the internet of living things, which is biology. That’s coded in DNA, which is information, and a data science and you can read and write DNA with companies like Illumino now sequencing human genomes for $1000. The possibility of turning biology into software is coming along really quickly here.

Timothy Goddard

Thanks, Reese, appreciate it. Our next guest, we’re happy to have Klaus Schauser, he’s the founder and chief strategist for Appfolio.

Klaus Shauser

Thanks, Tim. I completely agree with the predictions from the previous analysts, this is a very exciting time to be an entrepreneur.

I think that 2014 will be remembered as the year that SaaS, mobile and big data really take over enterprise. I know that people have predicted this before, but don’t forget that even today over 90% of enterprise IT spending is still being spent on premises-based solutions, so we’re really only at the beginning of that disruption.

This is also the case in a lot of the vertical markets, where most of the software and IT are still run from premises-based servers. At Appfolio we’re offering complete SaaS solutions for various vertical markets like management companies, law firms, and a secure virtual data room designed for startups, securing all of their signature documents for fundraising, M&A, and IPOs.

A lot of the vertical markets, like law firms, are technology laggers, but they finally see that if they want to stay competitive, they have to become more efficient, and thus have to use advanced process management and work-through solutions that automate most of their business processes, create a paperless office, and ultimately enhance productivity by radically reducing their time costs and cost of delivering service to their clients. This allows their clients to seamlessly interact with them, and that allows them to run their business from anywhere.

As an example, law firms have traditionally not trusted the cloud, but that is changing rapidly now that SaaS allow lawyers to completely run their practice from the court using an iPad, with much better security than traditional client service solution.

As a result, that is great news for startups and new companies, because they are usually built around a new paradigm. The traditional large companies like Oracle, SAP, and IBM, have to catch up, and are therefore doing a lot of acquisition of startups as Ward Carter mentioned earlier. This is great news for entrepreneurs that work hard to create these new companies.

Being a computer scientist myself, one thing I find exciting is that cloud computing enables software development to quickly deliver tremendous value by leveraging services. Instead of having to spend tremendous energy and money building up all of the infrastructure to run their services, they spend all their energy on understanding the customer requirements and building the software.

Entrepreneurs have to keep this in mind, and be deliberate about how to best build a valuable company that can go public or get acquired. Certainly the most difficult part of the equation is building an amazing, sustainable business, but you don’t want to squander all that effort with a sub-optimal exit. That’s why it’s so important that entrepreneurs educate themselves by attending webinars like this one, or the World Financial Symposium that Tim mentioned, or engage with investment bankers through Corum, even a year or two ahead of a planned exit. If you have the chance, I would encourage you to attend a WFS event, it’s a great way to prepare you mentally for what to build and how to maximize value.

To summarize, the final victory of SaaS is here.

 

Timothy Goddard

Thanks, Klaus, great stuff.

We’re going to shift gears here just a little bit in going to our next panelist. Dan Shapiro has been with us before, he’s here in a somewhat different role. He talked a bit about crowdfunding theoretically last year. Well now he’s actually done it. His first company was somewhat traditionally VC-funded. His second company was angel funded, and then most recently, he’s been crowdfunded, so he comes with a very unique perspective on the financing and running of companies, so we’re looking forward to hearing about what he sees coming down the pipe. Dan?

Dan Shapiro

Thanks, yeah I talked to you last year as a Google employee after they’d acquired my second company, and I talked about how excited I was about crowdfunding and practicing what I preached, I launched a campaign last September. I took some time off and invented a board game with my twins, just four years old at the time. The idea of the board game was a traditional cardboard tabletop game that taught kids how to code. It was called Robot Turtles, for kids 4-8, and it was kind of a surprise hit, I wasn’t expecting the reception that I got. It’s been quite the roller coaster ride, and I’ve been working on that since. We’re shipping 36 tons of cardboard to 65 different countries, it’s been quite an adventure.

Timothy Goddard

Dan, can you tell us, with the perspective you’ve got, what do you see as the implications of crowdfunding for the CEOs that are listening right now?

Dan Shapiro

Crowdfunding is an interesting addition, not substitution, to the set of options available. What I find, having worked with a number of friends before and after my own experience, is that crowdfunding works really well to bring something new into the world. It’s best conceived when it is a singular product, rather than a product lineup or rather than equity, where the thing doesn’t exist; it’s not so good for selling more of something or a line extension. There are some noted successes for people who have crowdfunded completely different products out of the same company. But the crowdfunding efforts that seem to work best are those that say, “Here’s this thing. It’s an exciting thing. You want this thing. And if you back this project, you can both bring it into the world and into your home.” That seems to work really well.

So for these sort of consumer products, whether they be…I’m actually right now, believe it or not, wearing crowdfunded blue jeans and a crowdfunded watch, and actually my shirt is from another one, also on Kickstarter. As luck would have it, just the outfit I happened to have on today. But these are all different products that didn’t exist before, that were brought into existence by the passion that is out there.

What is exciting about this, for those who are thinking about different directions, this is money that comes with no dilution, no loss of equity, it’s really sales or pre-orders, so the only thing attached to it is the obligation to deliver your product, which presumably is something you were planning to do anyway. As a launching point to do before you go out for initial funding, it’s incredibly powerful, because there is nothing that investors get more excited about than a product with proven demand revenue and model behind it already.

So, I think crowdfunding is a fantastic weapon to add to the arsenal available to early stage CEOs to bring their dreams to life.

Timothy Goddard

Thanks, Dan.

 

Q&A

We’re going to go to some Q&A right now.

Dan, here’s a question for you. You mentioned crowdfunding, and specifically Kickstarter-style crowdfunding. We have equity crowdfunding coming down the pike. What are your thoughts on that?

Dan Shapiro

I’m really excited about JOBS Act crowdfunding, where non-accredited investors, those who don’t have net worth over $1M, can purchase equity in startups for small amounts.

Now, there are some real concerns here, notably the reporting requirements and the compliance requirements on companies that accept JOBS crowdfunding are going to be significant and onerous. I think that the companies that today are out raising angel and VC funding will continue to do so. For typical high-growth tech startups, that will be the preferred path. But just as Kickstarter enabled things that weren’t possible, the watch I mentioned, the Pebble ewatch, was turned down by every VC in town. Kickstarter caused that company to exist. I think that equity-based crowdfunding is going to create new kinds of companies that couldn’t exist before.

Where I’m really excited about this is in the traditional small business rather than the startup world. It’s going to be easier to launch restaurants and bars and stores and local companies. Equity-based crowdfunding will take what before was sort of informal and quasi-legal soliciting of your friends to fund your dream company, that will become a little more formal and accountable and make it easier for these sorts of businesses to come to life, and at the end of the day, that’s a growth driver for the economy, job growth for everybody.

It remains to be seen how that’s going to be used, but I think it’s more interesting as an addition to the present options, just like Kickstarter has been, than as a replacement for traditional angel and VC investment.

Timothy Goddard

Thanks, Dan.

Another question here, I’ll toss this to Ward Carter. What are the major factors that are driving SaaS valuations?

Ward Carter

I think one of the biggest factors is simply the revenue model, the predictability that comes with ongoing subscriptions is very attractive to both investors and M&A acquirers alike. Certainly the ease of deployment is appealing, it’s a simple solution to roll out into many environments. It can be a Trojan horse which allows ISVs to enter large organizations with, perhaps an easier to deploy application. That can often have implications of lowering the length of the sales cycle, which is obviously attractive, especially for smaller ISVs. From an end-user view point, it’s a very scalable way to deploy applications and you don’t have to come up with the infrastructure that would require an in-house rollout. You can rely upon significant infrastructure providers to provide that. Overall, a very attractive model from both the standpoint of the ISV and the end-user community, and it’s one of the reasons why many of the deals we’re currently rolling out are in fact SaaS.

Timothy Goddard

Thanks, Ward. Klaus, do you have anything to add to that?

Klaus Schauser

Let me just add this: Obviously a startup can be a pretty tricky model. You might have all heard of the six Cs of the business, and customer acquisition costs and churn can be extremely tricky in this. A big problem that you can encounter is that you’re not collecting a lot of money up front to get people, but you have to pay a lot of money to reacquire them. The time until you are going to make a lot of money from the customers could be a year or more, and that’s obviously something that requires a lot of capital to get through that time. Churn is very important as customers could leave you at any time, so you’d better deliver a tremendous value and customer satisfaction.

I think ultimately that’s why this is so attractive to acquirers or when you go public, the model is so robust that if you’re actually delivering that value, you’ve built an extremely valuable company.

Timothy Goddard

We’re right up on the hour, we’ll followup with everyone that asked a question we didn’t get to. Thanks so much to our panel, Peter, Klaus, Reese, Dan, thanks to everyone at Corum and our attendees. Hopefully we’ll see you next month for our Private Equity panel, part two of our annual report, and in the months to come. Have a great year, everyone.