July 2007 webinar continued ..
Miro Parizek
Thank you, Ward.
Ill gladly transition into this section, talking also about
international activity. Some of the
reasons that you mentioned, Ward, including tapping into emerging markets and
providing pathways into global presence are certainly being demonstrated with
the transactions that are going on around the world. They are complimentary to
other issues, like gaining access to innovation, and filling product and
technology gaps, and Ill talk about a few examples of that in a moment.
In fact, the first half of this year has been
record-breaking in all industries.
People who read the papers are seeing this trend continuing. It is also very specific to the IT industry,
and in the first half of 2007 were finally seeing Europe equal to the U.S. in
deal volume, and this is up 73% compared to the first half of last year. We see that the highest amount of acquisition
volume is emanating from the U.K., and, again, Ill mention an example of that
coming up.
When we shift over to the next slide, this
international activity is demonstrated in our own experience. Corums
transactions in the past year and a half have been such that the cross-border transactions
have been 58% of the total number of deals made. Again, I will mention some specific examples
from the first half of 2007 in a minute.
To go on to the next slide, well see some of the
things that are actually driving this phenomenon. I spoke about this last time, six months ago
at our webinar, the fact that global markets have become increasing
international, and the world is now truly flat.
So, were seeing transactions going from Asia into Europe, and from
South Africa into England, etc. Were
also seeing some movements of the capital markets. Were seeing a lot of competition of the
exchanges, and very specifically, we still see issues around perhaps an
overcorrection with the SOX legislation.
A few5years back, of course, we had Enron, etc, which led the U.S. to
initiate legislation known as SOX, which is actually now a detriment to the New
York financial community, and has allowed London, perhaps, to gain some
competitive advantage.
For example, there have over 50 U.S. companies
that have been listing on the AIM exchange in London, and that amount is
continuing to increase. Parallel to
that, we see 30 companies voluntarily de-listing from the U.S. exchanges,
mostly due to the excessive reporting requirements from the Sarbanes-Oxley
legislation.
Not only is London picking up a lot of the slack
and the opportunity that this has created, were also seeing other markets
gaining huge values. The Irish Stock
Exchange has gone up 50% in the first half of this year. Weve seen the
Slovenian Stock Exchange quadruple since 2002.
We also see other exchanges such as Stockholm providing an improving
platform for IPOs. We also see in Vienna
and Warsaw, technical software companies with revenues that would be too small
and it would be too expensive for them to go on the plain old NASDAQ exchange,
taking their companies public on the Viennese exchange, for example.
During this, weve also seen that venture capital
funding has been stable in the tech sector.
Whats interesting to note is that start-up and seed financing has also
increased nearly 100% in the same period.
This leads to a couple of examples that I want to
talk about, specifically some transactions that we have been working on and
that we have closed in the first half of this year, and they are excellent
examples of what is going on in the international markets. Four of the seven transactions I will be
talking about were international, and 50% of those were intercontinental. They have been in various sectors, from
enterprise applications, to earth-measuring software for contractors, to
enterprise management, and for instance, as we see here, a company such as
StepStone, based in Norway on the Norwegian exchange, where the CEO, CFO, and
the headquarters are more or less sitting in London, acquiring a German-based
company, not just for geographical expansion, StepStone is essentially a Monster.com
of Europe, but expanding their software solutions business and to add domain
expertise and, of course, the additional management depth that ExecuTRACK
brought to the StepStone family.
Flipping onto the next page, we also see
examples, for instance in the Westcon Group transaction, of Crane, actually
Westcon, listed here as a U.S.-based company, this transaction was executed by
Datatech which is a South African parent, on behalf of Westcon Group, their
U.S.-based distribution arm that is in the value-added distribution for
telecommunications equipment and software.
So this is truly an international and global environment, and this is
being illustrated by transactions that we are seeing on a daily basis.
Flipping on to the next chart, I think this one
is a particularly interesting example.
We have the UC4 acquisitions of Appworks, which is wanted to highlight
briefly. This is an Austrian company
acquiring an American company of similar size, and how many people would have
thought this was the direction of acquisitions only a couple of years
back. The thing that is particularly
interesting about this transaction, not only that it is international or
intercontinental or that it is the U.S. company that is being acquired in this
case, but its also an example of what is possible in the private equity
markets of today, what we call a recapitalization. Franz Beranek, UC4s CEO, recapitalized his
firm in 2006, meaning that he was able to sell his shares, keep party of the
new company, to take it forward, and he was able to take some chips off the
table, replace smaller, local venture capitalists with a global player such as
Carlyle, and only 12 months later complete an acquisition of one of his major
competitors to gain not only economies of scale in R&D, but also critical
mass in North America.
Now, Im sure you should watch out for this
particular case, its not too dissimilar to what weve seen only recently as
Cartesis, a company that we had sold to a consortium a few years back, led by
Apex France, went on to build Cartesis into a global player, and was recently
acquired by Business Objects for $300 million.
Well see that UC4 and Appworks are also creating a global provider of
IT process automation and optimization solutions that well see developer very
interestingly in the next 1-2 years.
To go on to the next slide, this activity has
continued into the second half of 2007.
Its only two weeks old, and the first two transactions have already
closed, both international, one of those intercontinental, the sale of Novice
Works to Autodesk and also the sale of Aubahner? Versam, a company automating
flat glass manufacturing systems, sold to a machine manufacturing for the flat
glass industry, called Glasstron, previously known as Kyra out of Finland, with
4 other transactions in LOI, were looking at the rest of 2007 very
bullish, and these companies are doing business in IT service sector, various
vertical markets including government and financial services as well.
Moving on to the next slide, some of the driving
forces of this are, as were mentioned, the public markets are extremely strong,
and excluding Shanghai, probably not at all overheated, in fact. If we look at the charts for NASDAQ, London,
AIM, and Stockholm, theyre all trading within reasonable ranges around the
same level as they were in early 2000.
In fact, Standard and Poors price-earnings ratio is roughly around 18x
earnings versus a historical level of 23x earnings, so there is good reason to
believe that the markets are not at all overheated, and very stable, so
providing a good platform for M&A activity. The biggest question moving forward is
probably how the debt markets will continue to perform, and if the private
equity firms will continue to play such a big role in the next 1 or 2
years. Actually, they have been fairly
often outbidding strategics.
Going on to the next slide we will notice that
when you look at how the public markets are performing, you do need to get a
bit more granular about how you look at the market segments. You can see here that there is a broad
spectrum of valuations depending on which segment you look at within the
software industry, so although most of the values have increased year to year
and quarter to quarter, when you look back at the last twelve months you do
notice that in some segments it has actually gone down. IT services is also finally now recovering,
which is good news to a lot of IT services companies, and security, as we see,
has also gone up, but there are other sectors that have gone down, like
vertical market telecomm. But we are
starting to see a recovery on a quarter to quarter basis as it picks up a
notch.
Looking on to the next slide, this slide now, is
talking about the valuations of publicly-traded companies. We see a broad range depending on which niche
you are in. For instance, niche
applications trading in the 1.5-3.5x valuation range, and looking at software
as a service companies, they are trading at 3.5-9.5x their trailing revenues. Now, this 9.5 high range is thanks to Salesforce.com,
but there is still a premium for the SAS business model. We actually recently ran a webinar on that
topic in itself, and it warrants an entire hour on its own, so I dont want to
get too deep into that, but the point here is that you do need to look at every
sector specifically in order to determine how your valuation ranges are
looking.
Nevertheless, going on to the next slide, one
thing that one can definitely say is that the valuation ranges for software
companies based on the M&A transaction multiples that we have
been tracking for a decade are, excluding the first half of 2000, at a peak
after the first half of 2007. In fact,
if you consider liquidity, meaning cash and/or tradable shares, its probably at
the highest ever. The valuations, if you
think back to the first half of 2000, were often based on stock transactions
with highly overvalued stock that wasnt tradable until later dates when they
were trading at values that could be as low as 90% off their peak only 6-12
months after that high point in our history.
So, thats it for my section, I want to pass on
the baton to our vice president of research, Ryan Blakely, who will talk about
the top buyers in the first half of 2007.
Brought to you by Corums M&A advisors