Ward Carter
Hello, and thanks for joining us and welcome to Corum’s February tech M&A monthly. I’m Ward Carter, chairman of the Corum Group, speaking to you form our headquarters in Seattle, Washington. You are part of a group of hundreds of software and technology executives from over 20 countries who have registered for this event.
Here’s the agenda for the next 60 minutes : We’ll start with our global market overview, including an update from the economic forum in Davos, Switzerland, and hear about some recent deals that we have closed at Corum. Corum’s research department will provide an update on recent transactions and valuations in the major software and related technology sectors we track. We’ll follow that with a special presentation on Estate Planning, and things you as a seller should consider when selling your company, including managing estate taxes and the use of gifting, trusts and other estate planning tools. Finally, we’ll hear from our Sellers panel as they share their insights on how and why they sold their companies, and advice to other entrepreneurs looking to do the same. At the end of our session, we’ll open up the floor for Q&A
Our list of speakers today includes Corum presenters from around the world, and they will be introduced in more detail later.
We have a great group today for our Seller’s Panel that includes Thomas Bergland from Edvantage Group, Steve Peltier from Nefsis, Johan Attby from Tific, and Torsten Schmale from Inubit. I’m sure you will find their comments of great interest, as they have all just recently been through the M&A process and successfully sold their companies.
Now, I’ll turn the floor over to Corum’s founder and CEO, Bruce Milne.
Bruce Milne
Thanks, Ward. We have a great set of panelists today, so I’ll be brief in my comments.
First we move to China. They are still doing well, but there are some detractors like Roubini seeing significant slowdown, Shilling worrying about a hard landing, and we see the problems in Hong Kong with potential loans for banking, housing, and exports. But this last line really says it all, “China manufacturing holds up against global slowdown.” They are still running the fastest of any major economy in the world at over 8% this coming year.
Then we move to the rest of Asia. Japan and India are doing great, Australia is getting killed; housing crisis, jobs. Japan machine orders are up 14.8%. India is going to be tracking at 7-8% and third would be Indonesia in terms of growth there. One of the interesting things is this last line here, “Global strategists abandoning bearish views.” We’ve had a fairly bearish sentiment since the crash over the summer and everyone has been planning on some disasters happen, but they’re abandoning that.
Now we move to Europe, and the news here is the same old stuff about the debt crisis, there’s obviously some focus on Germany. I thought it was really interesting that there were multiple downgrades across the European market, this is just one headline, there are quite a few: “Fitch cuts Italian, Spanish ratings by two notches.” The Italian government reacted by raiding Fitch’s office in Milan, which is one way to handle the crisis.
In more Euro headlines, the debts have to be brought to a head, they can no longer support these money-losing government airlines, so they’re to be shutting down. Lots of focus on Germany, they’re being watched closely because they’re the ones who have to agree to pay all the bills. Poor Portugal is getting the brunt of Greek contagion.
Let’s move to the U.S., and we’re actually doing great. Consumer prices have unexpectedly decreased, we have factory production up, the U.S. economy was preferred by investors in a global poll, and we’re seeing stocks moving up. The U.S. GDP trailed at 2.8%, which disappointed, they thought it was going to be 3%, but it’s still double what it was last year. The Michigan consumer sentiment index rose as well. Confidence declined a little bit, however, in the new index coming out shortly.
U.S. manufacturing is up, but one of the problems is that Moody’s is keeping the U.S. mini-debt outlook negative. Right below that we see that California will have to borrow $1B. So, we still have a problem, we haven’t faced up to this mini-debt problem. The consumer comfort index, that was this morning, that rose, and Bernanke says that the U.S. economy is improving. That’s great, except a lot of people are still out of work.
In real estate and commodities, there are differing opinions here, it seems like we’ve hit bottom, we have the lowest mortgage rate in history recorded yesterday. What’s interesting is the smart money down below here, private equity, shows up in both foreclosure and commodities, they’re stocking up.
In technology, Google rallies, Yahoo’s Yang resigns, kind of about time. Technology stalwarts, the major companies, Cisco, Microsoft, etc, they’re doing great. SAP is doing great, and Apple, wow, they’re going to have over $100B in cash at the end of Q1. Amazon, however, missed bad, part of it was that they were trying to buy market with the Fire, but Living Social lost $558M. Apple is still fighting everyone on the patent issues. Facebook yesterday filed for IPO, bigger than Google.
The real news, though, was in Davos this past week. Tanya, you’re in Zurich, where they all had to land to get there. What’s your report there?
Tanya Froelich
Hi, this is Tanya from Corum’s international headquarters in Zurich. The World Economic Forum in Davos began last week with a blast from mother nature as we had the worst snows in 66 years! Good for the skiiers, but bad for the occupy protesters who tried to disrupt the event. Major notes from the conference, David Cameron, British PM, said the Greek situation needed to be resolved, banks recapitalize, and an agreement must be reached on the new bailout fund for troubled Eurozone countries, and that’s a tall order for 2012.
Jamie Diamond, of JP Morgan, said that he felt the $400B in Greek debt that might default wouldn’t actually impact American banks, so good use for the U.S. economy.
Tim Geitner said that it is realistic for the U.S. economy to grow about 2-3%. Some of the biggest risk of the European debt is in Iranian oil.
The president of the Asian development bank, predicted that China will continue to lead Asia’s growth in 2012 at 8%, followed by India at 7-8% and then Indonesia at 6.5%.
So, nothing here that should stand in the way for a banner year for tech M&A in 2012! Back to you at HQ.
Bruce Milne
Thanks, Tanya. Let’s stay in Europe and we’ll move over to Munich, where Miro Parizek, our managing director is. Miro, you have a brief update with highlights on European deals, which sets up our seller’s panel today.
Miro Parizek
Yes, thanks, Bruce. Corum saw excellent activity last year internationally and certainly a number of European clients as well, here are a few of our highlights. We advised Altitude, a Portuguese unified messaging vendor with over 300 employees on their sale to a financial consortium out of Spain. They may be having issues in this economy, but Spanish investors are still putting their money to work in good companies, especially in Iberia and Latin America.
We also helped Tific help a new home while advising their Nordic-based shareholder group in a sale to a U.S. PE-backed buyer looking to expand into technology leadership in the support systems market.
Speaking of which, we have Johan Attby, a founder of Tific, joining out seller’s panel, and we’re looking forward to his insights a little bit later.
We supported Inubit as well, a leading independent business process management vendor. We have a guest piece from their founder and CEO, who couldn’t make it here live.
We also have another international guest trying to get in from the U.K. today, the founder and CEO of Edvantage Group, a SaaS-based e-learning vendor based out of Norway that we advised as well. We assisted them in finding a buyer after a global process spanning from Hong Kong through India, Europe, and North America. They were ultimately purchased by Lumesse.
Our experience with international transactions is unparalleled. There is more with U.S. clients as well. I look forward to joining you in a webinar this spring with updates on two other European clients currently in LOI.
Bruce Milne
Thanks, Miro, now let’s move to North America, domestic transactions with Nat Burgess, the president of Corum Group.
Nat Burgess
It really does feel like there aren’t any borders any more, but we do have some highlights from North America in the last year that we’d like to share.
First, we have Interactive Software, based out of Virginia, that develops customer engagement software. We’ve seen a number of acquisitions in this voice of the customer area, and there will be more. This was a very successful transaction for both buyer and seller, they took a traditional IVR company and gave them a cloud customer engagement strategy.
Second, we worked with 4CS, a lifecycle-management company that focuses on post-sale service delivery, which was a gap in Parametric’s offering. This brought a bunch of blue chip clients like John Deere to the fold, and some great technology.
Looking north, Corum announced two transactions in Canada. The first was the sale of Privasoft to CSDC Systems. Privasoft developed and sold a GRC solution for government allowing for secure redactions of PDF documents. Needless to say they are also doing well in Europe where crossing out and hiding tracks in government documentation is a popular pastime these days.
The second Canadian deal was the sale of Talkswitch. This is a telephony software company that offered their technology in an appliance. Fortinet bought them. They are combining them with their data offering to create a one box solution for data and telephony to serve emerging markets. Not a surprise, Fortinet has their roots in China, and they’ll be taking this deal around the world.
Then, finally, we were retained by Revinet, a leader in remnant ad management, which we sold to Pubmatic. This brought Pubmatic’s total customer count up to 57 and gave them great technology for managing remnant ad space on websites.
Back to you, Bruce.
Bruce Milne
Thanks. It’s really interesting the range of buyers, some of these are non-tech firms, and their locations are all over the world. Moving to Ward, you just did two transactions and that was certainly true of you, wasn’t it?
Ward Carter
Yes, Bruce. The first is Nefsis, a San Diego based provider of cloud based HD video conferencing and collaboration technology. They were just acquired by Brother International, a leading Japanese computer technology company. We’ll be hearing more from Nefsis later in our sellers panel.
The second is MicroSurvey Software, based in Kelowna, British Columbia. They are a leading provider of surveying and mapping software used for land surveying, construction, and forensic markets. They were acquired last week by The Hexagon Group, a Stockholm Sweden based global technology company.
So, a California company sold to a Japanese firm, and a Canadian company to a Swedish firm. This really underscores how important it is to do a true global partner search, the buyers are everywhere. Back to you, Bruce.
Bruce Milne
Great, thanks, Ward.
That’s a good setup for our research section today. We had a full report in our last webinar, but I want to find out how we’re doing. Will 2012 be a banner year? Elon and Alina.
Elon Gasper
Thanks, Bruce.
Broad markets began 2012 with a healthy month. Tech companies’ strong performance keeps letting them build up astounding levels of cash and driving the valuations we see moving up across all Corum’s 6 markets. No groundhog shadows here, so these and other trends we laid out in Part 1 herald a banner year for M&A.
Let’s take a look at a few January deals in a couple of these sectors, ones we think hold lessons for all participants. To begin with, Alina can help us learn about an interesting strategy playing out this month in the Vertical Applications market.
Alina Soltys
There was an interesting dynamic that brought on this next transaction where InfoSpace acquired 2nd Story Software’s TaxAct for $287m. InfoSpace, a publicly traded company known for its meta search properties such as Dogpile.com had accumulated around $800m in NOLs, and that could be accelerated and used up with the right transaction. With $260m cash on the books they were able to look at some large prizes for a strategically engineered deal. TaxAct is the 2nd largest online tax solutions provider, after Intuit’s TurboTax. For a 70-person shop there were operating at more than $1M revenue per head with outstanding margins. The EBITDA they were pulling in of $38M would be the ideal way to start using some of those NOLs immediately while expanding the search business in a completely new direction. This new direction that InfoSpace was taking is actually a key reason this deal went through, the DOJ stopped the deal that was previously on the table with H&R Block from going through on anti-competitive grounds. I’m sure it’s no coincidence that InfoSpace paid exactly what H&R Block had offered.
Another newly minted public company has been going on their own acquisition streak, isn’t that right Elon?
Elon Gasper
Yes, Alina, over in Consumer Applications, top social games company Zynga, which went public in mid-December, was already tagged a serial acquirer with 10 transactions in 2011. But make that 13, now that they set the record straight by taking credit for 3 more picked up during their pre-IPO quiet period, plus one already counted because it’d leaked, ironically through employees’ social network updates.
The new revelations are in the mobile space, where as we mentioned last month rival EA is racing ahead with new vigor after beating Zynga to a big gulp of mobile M&A de-named PopCap. On the bounce from that the poor jilted red Zynga dog also appears to have tried luring that flock of angry Rovio birds into its cage. No joy there either, so Zynga’s forced to a round of relatively small deals. The takeaway is that it’s essential to anticipate the demand side of the M&A equation; when the big players need to move fast even notorious pennypinchers like Zynga’s management have to open their wallets, if only because talent is always limited in a break-out programming field – in this case, mobile code is difficult, the platforms are glitchy, tools immature and the skill sets suffused in black arts.
Later this year, and certainly next, it’ll be far more practical to assemble your own top gun mobile games teams; right now it takes M&A to keep up with the competition, an opportunity for smaller companies that anticipated the phase change and were already educated about M&A and poised for that potential. The danger is that these waves of consolidation usually move swiftly though an industry, and you don’t want to be left standing in this game of musical chairs or next you’ll find yourself squeezed between beefed up competitors who are no longer hungry for acquisitions, they’re in the mood for a sumo match instead. And it looks like this mobile games wave will be like that, too. Hey, want to bet on it, Alina?
Alina Soltys
Elon, I’m not much of a gambler but IGT is doing some of its own gambling, double its stakes by acquiring Double Down Interactive, the online casino game many facebook users are addicted to, to the tune of $5M. Actually Double Down is the 3rd most popular game on Facebook, Zynga Poker is #1 so let just say there is a lot of gambling happening under the “Social” cover.
Double Down is based here locally in Seattle, and is not even 2 years old, and they received a potential $500M payoff. They cover the entire spectrum of casino-style games like blackjack, poker and slots. But the interesting fact here is their model is entirely dependent on the sale of virtual goods NOT Gambling. Online gambling though is coming to a computer near you soon, however, as the Justice Department just opened the door to online gambling in Nevada; many states are lining up and the federal government is reconsidering their stance.
Thus, IGT has gained significant strategic assets. As a developer of all of the machines found on the floors of popular casinos with clients like Caesars Entertainment, MGM and the like, all of these casinos are all anxious to access this new crop of online gamers and IGT just opened the door for complementary cross-pollination.
And that wraps it up for this month’s quick research report. Back to you Bruce.
Bruce Milne
Great stuff, thanks. That TaxAct, I love that valuation at $287M. I built what was the largest micro-based tax product, Tax Machine, 25 years ago, and I thought that was so great to sell the whole company for $25M. It looks like I should have waited.
It would have added to my estate, which takes us to Pamela Rhodes, from U.S. Trust. We’re going to have a stellar group of presenters who have sold their companies, the problem is, once you get that money, and we’ve generated about $7B in wealth, how do you keep it from the tax man?
We have a lot of tax changes, we’re joined by Pamela today. You must be pretty busy today with these new tax laws.
Pamela Rhodes
Yes, Bruce, it is a busy time. It’s is also a very opportune time for this talk. What I want you all to come away with today is this: 2012 is a very advantageous year to be creating and executing a plan. Look at 2012. What do we have? We have low interest rates. We have low asset values, particularly with real estate. We have low tax rates. We have high exemption amounts, and favorable odds. So this is a very good moment in time to set a plan in motion.
There is some important information here on this first slide. This year, 2012, you can gift a little over $5M, tax free. And this year, the top federal tax rate is 35%, for both estate and gift. Next year it will be likely that anything over $1M will be taxed up to 55% and that is what is presently on the books. That is why this year we see smart business owners setting these planning techniques in motion.
Let’s look at some strategies. First of all, giving things away is a simple strategy in and of itself, but it’s also a key component of some more sophisticated strategies as we will see.
Looking at trusts, they are versatile, flexible, and they give you a save from the grave, which is very attractive.
Insurance is useful because it provides liquidity, which is always handy, and it’s particularly useful when your executor has to pay a big estate tax bill and he or she has just nine months to come up with the cash.
But let’s talk primarily about the last one on the list, family limited partnerships. These are great tools for people with complex balance sheets. They allow you to consolidate your major assets under one ownership and management structure, so you can retain control while you give away chunks or slices of ownership, which is what is referred to here as fractional interest.
One key thing that makes family limited partnerships pencil out is valuation discounts. Think about it, you contributed your collection of business interests to the family limited partnership you created. What’s in there? Closely held stock, commercial real estate, financial portfolios, etc. There are some restrictions on the types of things you can contribute, but as business owners, you guys tend to have balance sheets with lots of entities and shares in all sorts of things, fingers in all kinds of pies, and among those you’re bound to find appropriate contributions.
So you’ve created fractional limited interest, but by keeping the general partner shares for yourself, you’ve retained all the control. So what are those limited partner shares worth? Without control, they are not worth as much as the underlying assets that you put in. It’s almost like the whole becomes worth less than the sum of the parts.
So you discount the value of those limited partner shares and then you can give some or all of them away. Maybe it’s a trust you set up for family members. When gift exemption was low, maybe you could only give away a slice at a time, but with gift exemption being as high as it is right now, you can give away a $5M chunk of discounted limited partner shares in your family limited partnership.
If $5M doesn’t begin to cover it, some people are biting the bullet and paying that 35% tax on gifts in excess of the $5M in the belief that the rates are only going to go up and that the exemption amount is only going to go down. If you do this, you’ve transferred wealth and you’ve taken advantage of 2012’s favorable environment, and you didn’t even have to die.
Estate planning is a broad term and it applies to a lot of what are really life time strategies that you execute with an eye toward minimizing the estate tax that will come due someday. You can accomplish this all while you’re around to see it work. Much of what often fails falls to executors to sort out and deal with in whatever tax environment is in place when you passed away, and they have the whole thing to accomplish in nine months.
Planning ahead and getting it done under the current set of favorable circumstances is just plain smart. I don’t want to discount other strategies that are available, things like grantor retained annuity trusts, for example, another great strategy that benefits from the current environment, with low interest rates and low asset values. It is also something to consider, but too much to handle on this call.
Usually we see a combination of these strategies, but they only work when the business owner looks this challenge in the eye, assembles a team, and gets it done. Now, it is important to have that right team, usually your CPA and attorney are key, but I should mention that having someone like me, someone who manages money for people with complex balance sheets, can bridge the gap between what your CPA knows about your income sources and your taxes, and what your attorney knows about your entities and your cap tables.
This is a very brief, high-level overview of a short-term opportunity that exists right now. What will 2013 bring? Nobody knows, all bets are off. I’m not a CPA, so this is not, strictly speaking, tax advice, and nor am I an attorney, so please don’t consider this legal advice. My advice is to get a team together and get it done. Check it off your list and get on with building your business.
Thanks, Bruce, if anyone wants more information, I can certainly help them get started.
Bruce Milne
Thanks, Pamela. She started with Microsoft, she has built and run a number of companies, she’s definitely one of us and someone you should talk to, along with the whole U.S. Trust team.
Now let’s move to our speaker’s panel. We’re going to start with Steve Peltier of Nefsis, which was just acquired by Brother.
Steve Peltier
Thanks Bruce. Glad to join you on this special webcast.
We just sold our company, Nefsis Corporation to the Brother group of companies, one of Japan’s oldest firms, and a global technology leader in a number of areas.
When we first went to market, Corum, with their experience and offices all over the world, spent time with us going through who the potential partners could be. And, frankly they were everywhere. The tech headlines can just as easily be out of England, Germany, France, Finland, Korea, China or North America.
Some of the biggest and fastest growing firms in the tech world are not in the U.S. so we felt it imperative to do a truly global buyer search. We’re glad we did.
While there was interest from North America, Europe and Asia, our best strategic fit was with Brother. They are a strong leader in technology, with a clear global strategy where our leading video collaboration technology, and impressive user base, could be leveraged.
In terms of the negotiation and due diligence, we were dealing with an international giant, a firm with extensive experience in partnering negotiations…While we were a relatively small private company.
They could have overwhelmed us, but, we were well prepared and anticipated most of the due diligence questions they would ask… and the answers. Having other buyers talking to us helped in that regard.
Further, we had a sense what to expect in the negotiation. We’d been to the conferences and had extensive one-on-one with the Corum advisors throughout the process.
And, Brother was a fair company to deal with, sensitive to our specific shareholder requirements, as well as the nuances of our business and financial model.
My advice to my fellow entrepreneurs is to be open-minded about your partner options, leave no stone unturned in your search, and work hard to prepare well in advance. Have reasonable expectations, both in financial terms as well as your time commitment to concluding the transaction. It will never go as fast as you like; ours concluded fairly rapidly, but it still felt like a long, long time. It takes a lot of patience.
Brother’s due diligence was very thorough and professional, as you would expect from such a respected multinational firm. Their process made us really think about our strategy and tactics, and in the long run it will make us a better company.
I wish you all good luck in your partner search. I hope you find a great partner like we did in Brother.
Bruce Milne
What a fascinating deal, going all the way around the world and then finding the buyers in Japan. One of the issues to remember, we see growth in Japan, we see the yen being very strong, even though they tried to keep it down. The dollar, or the dollar-based companies are just dirt cheap for them, and that will be driving M&A in 2012.
Now let’s move on to Johan Attby. Johan joined us fishing last summer. He is not only a leader in his own field, but he’s also on the board of a number of tech companies.
Johan Attby
Thanks for the invitation to be here. I am founder of Tific, and we are the world’s leader in solutions for proactive detection and resolution of tech support problems, what Gartner Group refers to as self-healing. Last spring we got acquired by PlumChoice which is a leader in premium technical support services in North America.
I have one experience from our transaction that I want to share with you today.
That experience is a perfect example of why it is so important to have a long list of potential buyers and work with an M&A advisor that both can come up with the list of companies, some of them you’ve never heard of yourself, and later in the process has the bandwidth to handle discussions with many potential buyers at the same time. The latter is critical as it will be more important than ever that you focus on sales and hit the numbers you have in the forecast.
Our buyer was not on the shortlist of potential buyers but way down on the B-list. This because it was a medium sized private company and it was a services company and not a software company. It was not clear to us they had enough cash to make a strategic acquisition either. I also had a meeting with them a year earlier and it was one of the, if not the, worst meeting in my entire business life. Halfway into the meeting their CTO told me that we had nothing that was of interest to him or that he couldn’t develop himself within a year and he did not say it in a very nice way and that was the end of the meeting and of our discussions. A year later they acquired us and for a good multiple.
What had happened in a year were two things: They fired their CTO – I guess they figured that he could not really deliver the solution it has taken us 100 man-years of R&D to get right.
The other things was that they started to lose business as they’ve promised their customers and prospects a Tific-like solution but had nothing to deliver and that put them in a very bad position.
I’m sure it also helped that I had signed up one of their five competitors as customer and I had ongoing discussions and pilots with the other four.
When the discussions got started it went pretty quickly and the transaction was completed in about four months from the first meeting. Corum was right about their financial situation but they got strong investors behind them so they quickly raised money to fund the acquisition.
Selling your company is not very different from any other sales process and can often be a numbers game. We would not have been able to come up with the long list of potential buyers and manage the discussions with them on top of our daily business without the help of Corum. I wish you good luck with your companies.
Bruce Milne
Thanks, Johan, that’s a fascinating story, but one we see a lot. Things change with these companies, that’s why you don’t give up on them.
We now have a preview of a topic we’re going to dig into in more detail next month, when we take an in-depth look at the investor community.
Brad Feld
I’m Brad Feld, I’m one of the four partners at Foundry Group, a venture capital firm in Boulder, Colorado that invests in early stage software and internet companies. Today I’d like to talk to you about how we think about our investment themes. We’ve defined a thematic framework for investing. This is different than the traditional sector approach that a lot of VC uses, with sectors like Communications, Consumer Internet, Enterprise Software, etc. Instead, we define our themes as broadly horizontal areas in which we believe there is a 10-20 year investment rise. These horizontal areas are all in the realm of software and internet related technology, but as I’ll describe in a few minutes, they have some very unique characteristics.
All four partners at Foundry Group invest across of our themes and while we don’t keep ourselves a slave to our themes, our view is that the vast majority of our investments fit these themes. If we are approached by an experienced entrepreneur, even one we’ve worked with before, that is outside one of our themes, unless it is something extraordinary, we generally don’t engage.
The themes, I’ll talk about six of them today, these are the ones that are active for us, they don’t have any particular complication dynamic, so if we don’t make any investments in a theme for a year or two, that’s fine.
- Human Computer Interaction: With this, our premise is that the way humans and computers interact in the future will be radically different 20 years from now. The idea that it would be socially acceptable to walk down the street and type on a piece of glass to maintain your connections is nonsensical. We don’t know whether it is a computer enhanced human future or vice versa, and frankly we don’t really care. We are investing in technology like human instrumentation as well as different types of user experience and user interface technology.
- Glue: This is machine to machine communication. In the 1970s it might have been EDI, in the 80s it was middleware, and it’s really the software the glues together the different systems on the internet. We have a number of investments in this area, some of which scale very quickly and dramatically because once you have a situation where you have companies that are connecting things together, there are lots of different companies that want to piggyback on top of that.
- Adhesive: This theme grew out of Glue, this grew out of us investing in ad-related technologies, but we weren’t really focused on them broadly. Instead we were focusing on Glue for ad-tech infrastructure. Heavy technology companies that are providing the glue for the ad sector.
- Protocol: We’ve been investing in technology that has to do with protocol for a long time, examples including SMTP, RSS, XML, etc. We’re continuing to see huge opportunities in companies around this theme, companies like SendGrid or Urban Airship.
- Digital Life: We believe that people own their digital assets and should be able to access them anytime from anywhere. We made a number of investments in this early in our firm’s life, and this is an example of a theme that we still believe has huge import. But we really haven’t seen much that has excited us about this in the last year or so. In the notion of the allocation strategy, we don’t have one, and we’ll continue to think about how we interact with computers through the HCI theme, but we’re constantly looking for ways to deal with the data side of that through the Digital Life theme.
- Distribution: This is a theme in which companies are going after a huge existing online market, with an entrepreneur who is completely obsessed about disrupting the status quo in the online market, using a new distribution approach. Examples here include Zynga, StockTwits, and Cheezburger Networks.
Those are our basic six themes. We expect they will evolve over time, we’ll have new ones that come out of it, but we don’t have any particular tempo for that and as I said earlier, some themes we invest in more than others. But we use this to guide what we invest in, and if you want a deeper exploration of it, go to foundrygroup.com/themes.
Thanks for having me.
Bruce Milne
Thanks, Brad, I really like the idea of the themes.
Johan, can you talk a little bit about what you went through in choosing Corum?
Johan Attby
I would say that the number one reason we picked Corum was their international presence. As a typical Swedish company, we had an HQ in Sweden, but a lot of business in the States. We didn’t really know whether the buyer would be a U.S.-based company or somewhere else, so it was really about Corum’s international reach, that they could work with us from a local perspective and a U.S. perspective. That made a huge difference for us. We wound up selling to a North American company, which was a success.
Ward Carter
Nat, maybe this is for you. One of the Corum analysts today spoke about InfoSpace. I know you’re familiar with them and their acquisition strategy. With their huge NOLs, they sound more like an investment firm than an operating company. Is that a normal transaction, are a lot of buyers interested in financial results more than technology?
Nat Burgess
That’s a really interesting question. It was Alina, one of our senior analysts, who profiled InfoSpace. I went to high school with Bill Ruckles, their CEO, so I’ll be careful about how much I say about it. But, the short version is they had a huge net operating loss carrying forward, and they had an advantage over PE firms because if they bought a profitable company they could offset the profits and create a higher rate of return. They did think about their acquisition strategy like a financial investor, but their background and experience was really in technology and media, so they had to satisfy those two criteria.
For most of our clients, though, they’re smaller companies, they are innovative, they are under $20, $10, sometimes even under $5M in revenue, they have some strategic assets that we can find a home for. Those deals are really driven by the power and the value of what they have built, rather than the financial aspects of the transaction. Now, as the deals get bigger, and as we deal more with the PE firms, of course there is more focus on the financial engineering, but until EBITDA is at a level where you can leverage up the company, it’s less of a factor.
Ward Carter
Thanks, Nat. Elon, we have a question regarding something you said earlier, we’re going to put you on the spot. You said that waves of consolidation are usually swift, and the question is just how fast is that? Moreso, if we look at phases of consolidation, like the current one in mobile, you say it won’t last, but won’t there be another wave after that?
Elon Gasper
Good questions. The consolidation phases, in the fast software market, usually happen in less than a year. Will there be another? To set up another wave pretty much requires the advent of some disruptive technology that a large company missed. That’s where business opportunities come from and what drives buyer urgency, particularly from the talent side. The tech gets chaotic and hard to get up to speed fast on, for example mobile codes are still difficult, the platforms are glitch, the tools are immature, the skill sets are suffused in the black arts. Usually this sort of situation, and the M&A wave, happens just once, because now that it is clear that mobile, for instance, is important, other resources arrive to clean it up and more techies get involved and up to speed and able to keep up with the later changes.
Of course there will be waves in sub-categories and that’s what you should be aiming at after a wave. There are no guarantees, and even then the wait for another wave could be long. Look at the dot coms who hesitated around 2000. The web 2.0 wave followed nearly 7 years later. The M&A sell-side lesson remains. One of the basics of the M&A system, and it is a system, is to develop relationships early, think about and aim at strategic value for and trying to stay on top of mind with contact with potential buyers, keep your due diligence materials up to date as you go, and most importantly, while your head is down, keep an eye open for the chance to leave the M&A market opportunity, just like you do the tech market opportunity, by being ready and starting before you hear about your competitors making deals.
Ward Carter
Great advice from a tech pioneer, Elon Gasper.
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