April Webinar
M&A Q1 Update + Oracle and Australia
April 2011
INTRO and GLOBAL ECONOMY OVERVIEW
Ward Carter
Welcome all and thanks for joining us. Welcome to Corum's April M&A monthly, which is actually our first quarter webinar. I'm Ward Carter, chairman of Corum, based here our Seattle-area headquarters. You are part of a group of hundreds of software and technology executives from two dozen countries who have registered for this event today. Here is our agenda for the next 60 minutes. We are going to cover a broad market overview, we have an interesting segment called Hypervaluations, we'll get an update on opportunities in Australia, and review recent Corum data on technology M&A deals and valuations. Then we will move to some timely analysis on Oracle, a well-known player in the M&A markets. I know you will enjoy the insightful commentary from our guest speakers today. Following this we will open the floor to Q&A.
Our slate of speakers today from the Corum side includes Bruce Milne, CEO and founder of the Corum Group, Corum dealmakers Frank Berger from Munich, Bruce Lazenby from Ottowa, Jon Scott from our Seattle office, and then members of our research team, Dougan Milne, Tomoki Yasuda, and Alina Soltys. Then we have guest speakers that include Tim Moore from the Dorado Fund in Australia, Bob Faulkner from UBS, and Dominic O'hanlon from Ruleburst.
We'll keep this event to about 60 minutes, and you'll want to stay tuned for the Q&A session. Regarding that, feel free to ask questions at any time, but we will only answer them during the Q&A session at the end of the webinar. To submit a question, please use the Q&A window on the right side of your screen and be sure to send your question to “All Panelists”. If you select host or any other option, your question will not be seen and not included in the question queue.
The recording of this event will be available on the Corum website, via the Conferences and Events menu on the left hand side. Or, you can email a request to us at pats@corumgroup.com for an archived copy.
With that, I will turn the mic over to Bruce Milne.
Bruce Milne
Thank you, Ward. We have our most comprehensive quarter report ever, so I'm going to be fairly brief in my comments, because I want to give our research team the time that they deserve.
Internationally, you know following the earthquake and the tsunami, and there was another earthquake this morning, unfortunately, the Japanese Yen has hit its highest point since World War 2, which, of course, has some international trade impact and of course it has disrupted manufacturing.
We're seeing, in the IMF, some signs of overheating in the emerging market. What is interesting is we had an update for you a couple of months ago on Asia, China in particular, seven of the 10 biggest IPOs last year were in Asia, which beat the west. China's issue right now is that their 10% growth threatens an inflation to match. Just a few days ago China raised interest rates to counter the inflation pressure. This effects all of us, because their inflation raises prices and makes it more costly for all of us.
I thought last night's comment about Australia adding more jobs and having their currency reaching the highest ever was appropriate since we have a special section today on Australia and opportunities down under.
In Europe, factory growth has slowed a little bit, due again to momentum relying on China. European inflation unexpectedly accelerated to its fastest since October of 2008, and there are some related issues and also commodity issues.
O'Neill announced that France's finances are no better than Spain's. This is not good. UK jobless claims unexpectedly fell as the economy recovered from a cold winter, which is good news.
In Europe also, and some of these are redundant when just looking at the headlines, inflation in Europe quickened in February, and pressure was on the ECB to raise rates. Moody's downgrade pushed Greece closer to the brink, which isn't good as we're also still seeing problems in Portugal and Spain.
German business confidence has unexpectedly fallen this last month, and the Euro had its best first quarter as Trichet transformed into a hawk.
Two days ago Portugal made a request for assistance from the EU and the Euro reached a 14-month high. I don't know if you noticed, but we do a lot of international work and 60% of our transactions are international and the Euro is hovering around 1.43 to the dollar.
In terms of the United States, jobless rates dropped unexpectedly to a two-year low, but we still have an 8.8 unemployment rate. Manufacturing has expanded to almost a seven-year high, which puts us at higher than we were before the recession.
The US consumer spending has increased more than forecast last month, business activity was faster than forecast, and confidence in US small companies has climbed to a three-year high.
However, worker confidence on having enough money for retirement has dropped to a 20-year low. They are worried about things like whether the dollar will be worth anything, and the fact that we still have a lot of jobless people out there.
In real estate, housing starts have seen the biggest drop since 1984. That is not good. Rubini says we may be in a double-dip recession on housing. New home sales plunged in February to a record-low, and pending sales of existing US homes unexpectedly climbed in February, so maybe we're finally getting some good news after the deep freeze of the last few months.
I talked a lot the last couple of months about the cost of commodities creating problems and we are seeing riots around the world because pasta, tortillas, etc, are up. This month, gold advanced to a record, silver is at a 31-year high, I mentioned Rubini, his concern is about oil.
In our promotion we said there is something that could just drop us to our knees in terms of the economy and M&A, and that's oil. We're already seeing some evidence of this, US auto sales posted the first drop in seven months on gas costs, in Europe, retail sales have unexpectedly fallen as energy costs soar. As oil goes up, as it spikes, the US economy drops, it is that simple. It will shut down the economy, consumer spending, it'll hit the market, it'll hit M&A, so watch it closely.
In finance, Buffett says avoid long-term bonds tied to the eroding dollar. Gross, who is the world's largest private debt holder echoes Buffet saying that treasuries have “little value”. The Fed's response? Geithner said to raise more debt. They are obviously not on the same page. The Fed's Parkinson says that 30% of banks' ratings are unsatisfactory. Consumer credit in the US has increased, which is good actually, the banks do seem to be lightening up a little bit. B of A announced a dividend, the Fed squashed it right away and said wait a minute, you're not strong enough to have a dividend.
In technology, HP trailing in the cloud lead to the lowest tech valuation. We just were the platinum sponsor of Europe in the Cloud, we're having a major cloud conference coming up, we had to move it out to next month, we just had way too much information for you, we'll be talking more about that next month.
eBay agreed to acquire GSI commerce for about $2.4 billion. AT&T, talk about big deals, $39 billion! That's all the mobile sector is talking about these days.
Cisco, remember we talked about that if you have all this cash you either put it all in R&D or you buy somebody or you give the money back, Cisco declared its first ever quarterly payout, and of course they're under pressure to get rid of some of their low margin lines.
Google is now said to be a possible target of a potential US antitrust probe. The problem with being big and successful, there are a lot of people in the government who want to go after you. Apax Partners are buying US software markers Epicor and Activant. We just had our private equity panels. They are using their cash and investing heavily in technology.
I thought it was appropriate, Oracle made headlines a couple of days ago by topping estimates as the bought a database in a cloud push, putting them up 29%. Last night's headline: Microsoft is to spend 90% of its R&D budget on cloud technology. And that budget is over $9 billion. They're all jockeying for the cloud. Next month's webinar has the cloudscape and social networking wars next month.
Speaking of which, Facebook is now at $55 billion, LinkedIn is at $2 billion, Zynga is up to $7.5 billion, Groupon there, and Zillow is said to be hiring Citigroup to manage its IPO, and Buffett chimed in, saying that social networking site prices are overpriced ahead of IPO. Hmm.
I love this in the New York Times. Tech Bubble? Well we'll hear more from our researchers here, but let's watch this for next month.
In 1999, everyone was talking about a tech bubble, and we did have one, with 24 companies worth $71 billion. Now we have the same figure, $71 billion, with just five companies. So let's watch this. Because a lot of these firms are jockeying for position and they have the underwriting in place to go public.
We'll talk a lot more about this next month in Social Wars.
Now, speaking of valuations and the bubble, I'd like to turn to Hyper Valuations, our first presentation from Frank Berger in Munich.
HYPER VALUATIONS
Frank Berger
Thanks, Bruce. Well, I think I have an excellent example here for hyper valuations, and that is SalesForce.com, the world's leading supplier of CRM software. They are also very active in the M&A market. They did 5 transactions last year and one each month this year so far. But it is not the number of acquisition that is so interesting, it is the price that they are willing to pay for a target of high strategic importance. In January, they bought an Indian company headquartered in Massachusetts, called DimDim, I like the name, for 15.5x revenue. They paid $31 million for a firm that was founded only four years ago, that just achieved $2 million in revenue and still loses money. Remarkable. Why did they pay such a premium? It was DimDim's real time communication technology that made it so valuable to SalesForce.com. They will use it to enhance their social calibration platform Chatter. With strategic background, SalesForce.com wants to create the Facebook for the enterprise, which is clearly what they are saying in their press release.
Looking at their recent transactions from a broader perspective, one could say SalesForce.com is on the move to become a major player in the cloud, too, the new generation of cloud computing that is social, mobile, and real-time.
Bruce Milne
Thanks, Frank, I love their positioning there. Let's move way west to Toronto and Bruce Lazenby. Bruce just left Mexico, I know he is traveling right now, so we had to catch him with a recording on what his hyper valuation was. Bruce?
Bruce Lazenby
Thanks very much. The deal I wanted to highlight was the Motricity acquisition of Adenyo, but I want to look at this from the other side, because that's where we spend so much time. I love what Adenyo did right from the get-go. First of all, they're in the mobile advertising space, so back in 2005 a group of them got together and said this mobile marketing thing is going to be huge, let's put the right pieces together. So they brought six companies together to make that work a little bit, then in 2009 they brought on a new CEO with a great background, a new CTO that pulled it all together and raided $10 million in private financing. Remember, this was happening in Canada in 2009, so that's no mean trick.
In March of 2010, they raised $27 million, bought a couple of companies, so you know those were on their radar, they had a plan in place when they went to their investors that would include the acquisition of both of these companies. Then they went out and got the brand name customers, United Airlines, VW, Ford, WPP, and a bunch of others. Another great thing we tell all of our selling companies to do, make sure you get some good brand name customers in there.
Then, less than a year after they raised (xxx garbled 14:00) Motricity, and of course they're doing all the right things here, this is a $100 million sale on about $20 million in revenue, we're talking 5x, but there is a $50 million earn-out kicker on top of that, so we could be looking at 6x or 7x trailing twelve months revenue. And, because they showed some flexibility on the seller side with cash and stock, they got the maximum deal value, so I love the Adenyo story, smart right from the word go on how to build a company in a hot space and make sure that the acquisition is successful.
Bruce Milne
That's great. Now let's move further west again to headquarters and Jon Scott, VP. Jon, what do you have for us?
Jon Scott
I was really interested in the Juniper Networks acquisition of Altor last December. This was interesting since Juniper had already partnered with Altor by making a minority investment through Juniper's Unos innovation fund, basically their VC fund, about nine months prior to announcing their deal.
Juniper is a US provider of virtualization security, and they paid $95 million at 21x Altor's TTM of $3.5 million, so obviously a very healthy multiple. Given this revenue, our guess is that this was primarily for technology and people, they had a staff of about 30 people at the time of the deal. Since virtualization is forming the foundation for cloud computing, Juniper must have felt like they needed to own Altor instead of just being an investor. Essentially Altor has been working on securing the inner virtual machine communication, which is a critical need for cloud computing, and more than likely after Juniper's investment, work had been going on behind the scenes to integrate Altor into Juniper's security and enforcement products and our guess is that once this work was proven to actually be achievable, Juniper moved into acquisition mode.
There is also noise that another company may have come along with an interest in acquiring Altor, causing Juniper to take a preemptive prosition, which may also explain the substantial multiple.
Just in perspective, Altor was Juniper's 5th and final acquisition for 2010, and they spent about $400 million in acquisitions during the year, and these covered wireless LAN infrastructure, internet video content, and mobile device security as well. Lessons learned from the deal include the fact that oftentimes a strategic partnership or minority investment leads to an acquisition, however, what is more likely that not to drive this high valuation multiple was competition from a number of interested parties creating an auction type of environment, and virtually all high value deals have this dynamic.
What's also interesting is that Juniper's stock has been going up, it has been a good buy lately, a couple of the VCs there were Excel partners in Foundation.
AUSTRALIA ECONOMY UPDATE
Bruce Milne
Jon, I'm going to keep you here because we're going to the next section here on Australia, a lot is happening down there, some good technology dissections, opportunities down under, I know you were just there. Give us an update.
Jon Scott
Yes, Australia is an interesting market, I just came back from client meetings down under and I had the opportunity to also conduct one of Corum's Merge Briefings in Sydney and we had some interesting attendance, good across the board, it was attended by entrepreneurs, obviously, venture capitalists, and then some corporate development staff from some of Australia's largest technology companies. I made a number of trips down under and I am always amazed by the country, its beauty, its natural resources, and to the fact that it is so far away from the rest of the world, and I think that is the reason that the country has developed a real self-sufficiency. This helped them avoid a degree of difficulty with the recent world recession, compared to the US and Europe, and if I remember correctly, they had just one quarter of negative growth since 2008. Their economy is dominated by the services sector, yet its economic strength is based on its agricultural and mineral resources. One of their advantages is that it is such a small domestic market that they have a lot of produce export, and with their natural wealth in mineral exports, that really helps them.
A couple of final economic comments. Natural disasters, no one is immune, and the recent flooding that they suffered in December in Queensland is impacting their economy, especially at the end of 2010. Finally, the Australian dollar has increased against other currencies, and it has traded as high as $1.03 against the US dollar. It was $0.96 yesterday, but that has had a negative impact on export manufacturing and could hurt the economy in the second half of 2011.
Let me move now to the VC community in Australia. It has had some rough, rough patches, and it is estimated that their 10-year returns are substantially worse than the break-even performance of most US funds. During my trip I was told that a number of VCs really shut down and were just managing their portfolios until they were able to exit those companies. Follow-on investing for portfolios is pretty much gone and this presents a tough challenge for new and emerging companies to get funding, and that's a real shame because there is a significant technology innovation gene among Australians.
Now, the private equity market in Australia is fairing a little bit better than the VC market, there are a number of local funds operating in the country, Archer Capital and ANZ Private Equity among others, and since these firms typically invest in more mature and cash generating companies, their returns have been somewhat protected, and I think the loosening of the debt has also caused them to be able to leverage these transactions. It's interesting, you're seeing more US firms like Harborvest and Excel make investments in this market and for some reason they are setting up shop.
Now our take on tech M&A is that it will improve in Australia over 2010 and there will be more opportunities for smaller tech companies to be acquired. We also think that many interested buyers will be North American or European. In fact, in a board meeting I was in Melbourne last trip, we were reviewing potential acquirers for an Australian company, and the slide we showed indicated that more than 70% of these candidates were from North American or Europe. This clearly points out that in the international M&A process this is not just a good idea, it is an imperative.
And let me just close on a bright note, just because the VC market is in trouble, innovation is still being fostered. I met with Andrew Stead, who is the director of business development at ATP innovations, which is Australia's leading technology business incubator in Sydney, and ATP is owned by four leading Australian universities and a lot of good backing. Since they were founded in 2003, they have raised over $210 million from investors and filed over 400 trademark and patent applications. Believe it or not, they have a 95% survival rate of their own companies. So, ATP operates their own business park, support services, etc, and I was really impressed and I think our universities could learn a lot from them.
Next, to wrap up our Australian report, we have Tim Moore, from Perth. He is a serial entrepreneur and the director of Dorado Funds, an investor, and also a member of Corum's world technology council, which advises us in technology trends and issues. Tim is a great fisherman, a good friend of Corum's and since it is the middle of the night in Perth, we have his comments recorded.
Tim Moore
Good morning, this is Tim Moore in Perth, Western Australia. As a technologist and investor, I believe that there is great technology here in Australia. When we sold (xxx 21:47 sounds like Syd Pac Minix), principally for scrip, to Canadian Toronto-listed GemCom, Corum was the adviser. I then ended up with the largest private stake in GemCom and a board seat. We subsequently sold to Carlyle Group for $190 million, and we also recently used Corum to sell Sintillate, an occupational health and safety software platform, to SAR global.
I think that in Australia a high proportion of great tech companies are formed because the average Australian is such an early adopter, be it microwaves, internet browsing, or iPhones, Australia's take up rate, as a percentage of the population, is stratospheric.
I've really enjoyed my association with the Corum team and I'm looking forward to a third visit to the well. If you have any questions, don't hesitate to contact me, either through Corum or through my website www.dorado.com.au. Thank you.
Bruce Milne
Thank you, Tim. Tim will be going up to Langerra with us another time. He's all the way around the world in Perth and doing great work there with the excellent opportunities down under.
Now let's move to our Corum M&A update, the quarterly report, this is the most extensive report that we have ever made, so we're going to be covering a lot of ground quickly. I'll turn it over to Tomoki Yasuda.
Tomoki Yasuda
Thanks, Bruce. Hello, everyone, and welcome to the research portion of the webinar. Currently what you see on the screen is the overall extended exchange of some indices that we track. You can see that market is faring pretty well since the middle of 2010, and in the S&P tech index, highlighted in the red, you can see that there is about a 40% increase since March of 2007, whereas the Dow Jones is just recovered to where it was two years ago, and the NASDAQ is somewhere in the middle, trading about 15% above two years ago.
CORUM INDEX AND RESEARCH
Narrowing the focus a little bit, we have the market over the past year. We can see that hockey-stick like growth pattern for the tech index again, and as a result we've seen public buyers be more active, really utilizing that cash reserve and really fostering a better M&A environment, which kind of leads us to our next slide. Alina?
Alina Soltys
Yeah, there's definitely a positive correlation between the public markets and M&A activity. We've seen the highest amount of deal volumes since 2007. Feel free to take a look at the number of transactions, it's actually been pretty steady from Q1. The biggest change is in megadeals, which have more than doubled.
Two deals we want to take note of are Qualcomm's acquisition, which has been the largest in its history, which fills a significant product gap that it had, so they now have a wifi chip offering. This deal is actually an example of what we've been talking about for months now, which is that there is a lot of cash on balance sheets and companies just need to do something with the money. This deal actually eliminated 30% of their dry powder, so to speak.
The other deal that I want to focus on is that between IGate Global and Patni. These are two large Indian IT services players that have just combined. This could be foreshadowing of a consolidation trend that we see happening. India and China both have very strong IT services leaders because of their strategic resources, and how much bigger can they get by buying each other out?
Lastly, I want to take a look at another deal, that was the largest tech deal in a very long time, AT&T buying T-mobile for $39 billion. This will create the largest subscriber network, by a long shot.
Tomoki Yasuda
We could be seeing the next generation supercarrier here, and while people are weighing the pros and cons of this deal, what's really great about this merger, and megamergers in general, is that they have a trickle down effect, to the second and third tier players, who are also taking cues from market leaders. You can see that the percentage of the sub-$100 million deals is a little low this quarter, partly due to the higher value deals taking place, but you can expect to see a pickup in small players being acquired as they jockey for position as well.
As we continue on, PE players have also been in the same mix, trying to buy out companies that have proved themselves to be promising investments, HIG Capital, Carlyle, Golden Gate, picking up everything from digital management to wireless networking vendors. There are a lot of good opportunities out there.
Lastly, the VC-backed exits have seen a surge. We're seeing a 62% overall increase in the numbers from last year. It signals that the VCs are comfortable putting their companies out on the market and actively looking to close deals as well.
We're definitely seeing some telltale signs of a more active M&A market, which Alina will take us through on the next slide.
Alina Soltys
That's right, VC has been feeling a lot more confident, mostly due to the higher valuations that you can see on this chart. For new listeners to the webinar, Corum takes the tech sector and breaks it down into six markets, which we'll be reporting on individually in just a moment. This slide in particular shows the six combined, and on a quarterly basis. So it takes us way back to the depths of the recession in Q1 of 2009. We can see that EBITDA has doubled, now it is at more than 13x enterprise value.
The enterprise value to sales has also risen 150% to more than 2.68 times. This is a great sign. The last four quarters have also had a nice, steady increase and combining that with the general sense of optimism, a lot of cash on the balance sheets, and low interest rates, this M&A trend will be continuing throughout this year.
Going into the first of the six sectors, the horizontal space, there are eight subsectors here, three of which I will choose to highlight this month. The communications sector has actually had a really bad quarter, down 45% on both multiples. The ERP space which is part of the deal highlight, has had a fairly steady quarter. If we take a look at HR, which is heavily influenced by a lot of SaaS players. It has had a great quarter and is up 25% in both multiples.
Moving on to the deal spotlight, one trend that we have seen happening is PE players stepping up in the game, stepping up to the plate, and taking out these billion-dollar companies. Golden Gate capital and its portfolio company InforGlobal, just launched and unsolicited bid for Lawson Software. One thing to note, during our annual broadcast in January, the research department here at Corum issued some predictions, one of which was consolidation of the mid-tier ERP space. Infor and Lawson are gearing up for battle, mostly against Oracle, which has done a great job of acquiring new technology and talent. They have done over 50 transactions in the past six years, so they are a formidable competitor in this space.
Also, another interesting note, just a few days ago, another e-player, Apex Partners, announced that they will be taking Epicore and Activant and combining them. This will also create one of the largest global enterprise application providers. And, oddly enough, at a similar valuation of 2.5x sales.
Tomoki Yasuda
Really surprising, Alina, who would have thought that ERP would go through another consolidation phase, really great to see those PE firms active as well.
We're shifting focus from Horizontal to the Vertical. We have some notable subsectors here like financial services, energy and environment, and healthcare. The highlight deal here is the acquisition of Mortgagebot, who produce web-based mortgage origination software. You may notice the high multiple that the company was traded at, 6.2x, which was derived mostly from the long-term contracted subscription fees that the company holds, which account for about 75% of their business. Typically acquirers will pay a premium for companies with strong recurring revenues, it shows solid growth on revenues and profits, and it is one of the main reasons why the SaaS business model is so attractive. Now Davis + Henderson is also moving up the food chain, trying to catch a hard margin. It has typically been known to be a financial transaction processing firm in Canada, but they are also trying to gain a foot hold in the US.
Alina Soltys
Speaking of moving up, that is actualy a common motivator for a lot of acquisitions, and we see that here in this deal as Shutterfly had the same thoughts with one of their largest acquisitions ever, with TinyPrint, which they bought at 3.8x revenue multiple. For those of you who don't do the photo editing in your family, you may not be familiar with TinyPrint, which is a place where you can get customizable, high quality prints, invitations, stationary, etc, and they are actually not so tiny, pulling in $87 million last year, growing 57%. Shutterfly is looking to grow its 5% market share and its $12 billion card printing industry.
And just to zoom back out to the Consumer Applications space, two of the subsectors, video games and digital content, are of note. Video games has had a steady quarter, digital content has actually had a great quarter, its EBITDA has more than doubled, partially due to Netflix being in that category. Netflix has had a phenomenal 18 months.
Tomoki Yasuda
Oh, yes, Netflix has definitely been on a tear. It's really great how Reid Hastings has turned that company around with the digital streaming services.
Next up we have the acquisition of Teremark by Verizon, the largest pairing between a co-location provider and a telecomm company in history, coming in at $1.4 billion, but it is not the co-location business that Verizon is excited about. It is particularly excited about Teremark's cloud computing platform. With it, Verizon will be able to leverage a managed services solution to new and existing customers and it really aims to compete with AT&T on this front.
Historically, we see carriers opt to buy instead of build in house because it really takes them ages to really deploy solutions, they aren't really nimble like a startup. Verizon did pay a high multiple for the business, but if you look at the specific subsectors, notably virtualization securities, companies operating in this space are trading very well. Again, what is really great about this deal, I think is that we see Verizon evolving out of the traditional carrier mold and really actively engaging with adjacent technology centers around their core business.
Alina Soltys
Another one of the traditional players that is evolving is Walgreens. This 110-year-old company just bought an internet company, Drugstore.com. This is actually something we've seen many times before, traditional companies looking for growth and new markets, they don't want to be left behind, and they are often acquiring internet companies and sometimes even startups. Last month we saw this with Nordstrom and Hotlook, which is a flash sales platform, this month we see Drugstore.com adding 50% more unique visitors to the player which is already number one in this space, Walgreens, with 8 million new visitors. Their closest competitor, EVS, only has 4.6 million.
Zooming back out to the Internet market space, the two categories that we have here, infrastructure and pure play, have had pretty level quarters. It is down a little bit, month-to-month, but sustaining overall. Within the pure play space, Amazon has actually been encroaching on Walgreen's territory, which may have partially motivated this transaction. Amazon is starting to see more and more of their sales come from non-media items that they traditionally have not targeted.
Tomoki Yasuda
Amazon definitely has their fingers in a bunch of sectors, and we're actually starting to see response from competitors. Our last deal highlights that with the acquisition of GSI Commerce by eBay, the biggest purchase by them at over $2 billion. GSI, for those of you who don't know, provides ecommerce services for a wealth of brands, about 180 to be exact, and this acquisition will give eBay a chance to add brands like Levis, Toys R Us, and GNT, and they are really trying to woo these customers away from Amazon with their services like marketplaces and PayPal. The challenge for eBay moving forward will be to separate itself on two fronts if it really wants to be the market leader here. It will have to differentiate itself, technology wise, from the likes of ATG, which is actually now part of Oracle, and the vast warehousing services of Amazon, which has been a major draw for consumers and retailers. It will definitely be interesting to see where eBay takes this acquisition.
I believe that wraps it up for the research section. Bruce?
Bruce Milne
That was great, thanks. The next section we'll go to is our profile today of newsmakers, we try to look at a headline-making company every month and this month we are looking at Oracle. In the past we've done Google, HP, IBM, and several others. You'll see Facebook and others in the near future.
ORACLE's ACQUISITIONS
To kick off this section, let's hear from Dougan Milne.
Dougan Milne
Thank you. And, Tomoki and Alina, thank you. This has been an incredible past quarter for tech M&A and as was mentioned, this was the strongest quarter both in deal volume and value that we have seen since the recession hit back in late 2008.
I'm excited to introduce a couple of speakers to you today, but before I do that, I'd like to start putting some framework on this month's spotlight topic, which is Oracle's acquisitions and world domination. We'll look at some of the most recent transactions from Oracle, as well as a snapshot of Larry Ellison's now infamous ten-point plan.
Let's dive right into the deals.
Tomoki just got done talking about the recent eBay acquisition of GSI, he also mentioned ATG, Art Technology Group, and that was our most recent Oracle acquisition, that was back in November, and remember we also saw IBM buy Sterling Commerce, maybe 12 months ago now or so. So you have IBM with Sterling, you have eBay with GSI, and of course now Oragle with ATG, so clearly the ecommerce space is of major importance to the right buyers, a very healthy multiple was paid here.
ATG is SaaS. They are online payments, merchandising, analytics, email marketing, etc, and they have a truly valuable product portfolio with a strong customer base.
I know I'm a little short on time, so I'm going to bounce around here between deals. I'll jump down to Amber Point, a solid addition for Oracle as they extended their fusion middleware SOA reach, helping to bolster that portfolio, and also Strong has unique BTM capabilities, which are a great compliment to the application management suite that Oracle acquired back in 2008 with ClearAp.
Onto Silver Creek, obviously a very high multiple deal here, but this is what happens when you have all the right cards to play. Silver Creek has a very strong technology portfolio, of course Oracle is most interested in the various places they could integrate Silver Creek's Data Lens. This is used essentially to recognize, cleanse, match, govern, validate, correct, repurpose, etc, data from any source, including unstructured data, to any target. So this is a product that we are already seeing implemented within the agile CLM suite, but it has other touch points as well. Along with technology as I mentioned, all the right cards to play, Oracle also had an interest in some of the team members of Silver Creek, and they picked up a few big customers in the acquisition as well.
Moving on, HyperRoll was assets for data warehousing performance management, a very hot commodity in 2009 and 2010. Golden Gate focused on transactional data management and data integration. The sticking point here is that Golden Gate actually allowed Oracle to support non-Oracle environments, which makes them far more appealing when making bids against other integration competitors.
Moving down to the bottom here with Virtual Iron, definitely a solid transaction and acquisition for the server virtualization of Zen-based hyper drivers, and remember that Oracle had just acquired Sun, whose ex-VM was also Zen-based, so this was not an accident or a coincidence. Moreover, though, Oracle wants to bring the management of virtual and physical environments together to provide that full stack control, and that is something they gained with Virtual Iron. This is something that better positions them against Microsoft's Hyper V System config manager, a very interesting acquisition.
I'm going to leave the rest of these alone, I think some of the rest of them will be touched upon in a moment with some of our other speakers, but Larry Ellison has always been a very strong character and an admirable leader. He has done fantastic things with Oracle, we've all heard the ten-point plan for world domination, and in a moment we'll be joined by one of the lead analysts from UBS, who is going to give us his interpretation of those ten points, but while we're still on the topic of acquisition, something that has been such an important part of Oracle's growth story, I want to introduce Dominic O'Hanlon, he sold his company Ruleburst to Oracle and he has worked closely with Larry Ellison on the success of that acquisition. As you'll quickly understand, the time zones for today's webinar were not particularly well suited for our friends in Australia, so we had him record his story for us. However, any questions you have for Dominic about his experience, you are welcome to relay through us.
Dominic O'Hanlon
G’day from Down Under! This is Dominic Ohanlon, former President and CEO of RuleBurst Holdings, a company I sold to Oracle.
Upon joining RuleBurst in 2006, I created a 3 year strategic plan with the ultimate end-goal of a trade
sale, or a merger as you call it, to a Tier 1 multinational I.T. company. Such an exit was a big, hairy,
audacious goal for a small Australian software company. However, we knew that we had fantastic
technology, a great team, and we knew where to focus in marketing, sales and partnering to create a
differentiated value proposition; one that would separate RuleBurst from others in a highly competitive, cost-driven software marketplace.
We quickly decided on the geographies, industries and market segments we would focus on,
abandoning other opportunities which we felt didn’t play to our strengths. We added key executives
in sales & marketing, signed a global strategic partnership with SAP, and other localized relationships
with companies such as IBM, Accenture, and Deloitte. These efforts resulted in an 8 fold increase
in license and maintenance revenues in just 2 years. IDC ranked us as “the fastest growing rules
company in the world” with Forrester later recognizing us the only leader for specialized rules-based
applications.
However, despite these wins, we were still spending the revenue that we were creating. We knew that
we would never want to sell on an EBITDA, multiple but had to instead find a strategic partner who
could take what we had and make it a lot, lot bigger. The ideal candidate for us was Oracle. Our
software, connected to Seibel CRM, created a massive value proposition to government organizations
in particular. However, Oracle had an existing relationship with a very small Pittsburgh-based
company called Haley Systems that was different, but somewhat competitive to our offering. I flew to
Pittsburgh, met the owners of Haley, and over a few short months managed to acquire the company. At the same time, we partnered our RuleBurst technology with the Siebel team on a large multi-million deal that we ended up winning. Now it was clear to us, and I believe to Oracle, that they needed us in their fold.
Through persistence, I ended up meeting Larry Ellison at Oracle and pitching to him directly. I thought he was one of the smartest guys I’d ever met. Razor sharp. He just got it, asked the right questions, showed genuine interest, and then ultimately approved us going ahead.
It was Oracle’s first complete acquisition of an Asia-Pacific based company—a great deal for
RuleBurst and a great deal for Oracle.
There were a few great lessons I learned during this process:
First and foremost: Have a plan. No one is ever going to come along and buy your business by
accident. You need to understand your value proposition, who it means the most to, and why. It’s no
good just making up random numbers about how many units a buyer could ship if they owned your
business. You have to prove it and the best way of proving it is have runs on the board. A very clear
strategy.
Second, accept that it is going to be hard. An acquisition and due diligence process is very draining,
frustrating, and just plain hard work. You need a great team of people you can trust. In my case I had
a handful. Oracle had dozens and dozens of people asking questions and holding conference calls
with my very small team at all hours of the day. My guys just put their heads down and worked like
Trojans. We ended up giving one of them a significant bonus when the deal was done.
Third, really understand what the business is going to look like post-acquisition. Oracle is a big
organization. You need to understand whether you are going to be part of tech or their apps business.
You need to know if your product is going to be standalone in a Global Business Unit or if it is going
to be folded into an Oracle product line. If you don’t know this, it is difficult to pitch to the right
people and you risk bringing blockers into the process.
Finally, have great lawyers. You will need them. They cost a lot of money but they are well worth it.
We certainly got a great return out of ours.
I'd be glad to respond to any questions that you might have. You can reach me through the Corum
Group, or you can find me on LinkedIn.
Good luck in your own merger efforts.
Dougan Milne
So, certainly we have an Australian theme today. Dominic, thanks for your contributions. He has clearly been a very successful entrepreneur, and we're glad to have him as a friend of Corum's.
Now, let's shift gears a little bit. When Larry Ellison announces a strategy for world domination, he knows he's going to get some attention. We have to take a look at the past in order to speculate on the future, and to give him his interpretations of these things, we're pleased to be joined by one of UBS' lead capital market technology analysts. You may remember Bob Faulkner contributed to one of our webinars a few months ago on the topic of HP. That was just after HP announced the appointment of their new CEO, who was a former SAP exec. Bob is well-respected for his opinions, and we're very interested to see what he has for us today on Oracle. Thanks, Bob.
Bob Faulkner
Thank you. Before you look at Larry's plan for world domination, you need to take a look back. Starting in about 2005, Oracle really stepped up their acquisitions. They made seven large public acquisitions and that strategy is not really something new. It was much pioneered in the '80s and '90s by
Computer Associates, you go out and buy up companies, you leverage their product to your sales force, and over time you integrate them. What I find kind of interesting is that Chuck Philips, who used to be the co-president at Oracle, he was a south side analyst on the street, and he covered for Associates, and all of a sudden, just after Chuck gets to Oracle, they started mimicking the same strategy. Literally, those 7 companies that they acquired, represented about $15 billion worth of revenue. If you look at Oracle then versus now, what do you see? Revenue has gone from $12 billion to about $26 billion, so obviously it all did flow through.
During that period of, growth averaged about 19 percent. In terms of cash, they went from about $6 billion back in 2005 to $24 billion today. The debt was less than $500 million back then and right now it's about $15 billion. During that streak they have incurred more than $14 billion worth of stock. Investors were very happy. Steadily, the stock's valuation increased, typically trading between 15x and 16x forward earnings, about a 15% premium. Most importantly, from the investor's perspective, the market cap went from a little under $70 billion to almost $170 billion, so they're very, very happy.
Now you arrive at where are we now? The biggest acquisition, just anniversaried, of Sun, was done in the February quarter of last year, and over the last four quarters, because of that acquisition, Oracle's toy-lying growth has averaged more than 40%. But as you are going forward, now top-line growth is going to be mid to high single digits and while the stock may have traded at a premium to the S&P, companies that are growing in the high single digits generally trade at discounts. Larry has an issue of what do we do? And I think in this particular case he falls back to what worked in the past, bombast and hyperbole. He has always been great at it. If you look at those ten points, most are variations of the first, focus on the exit data phenomenon. He talks about how IBM, HP, and I'm sure he would include Dell if possible, they are not going to be able to compete with them. Look back at the last press release on earnings and what is the focal point of the commentary? It is that exit data and exit logic grew more than 50% sequentially. That sounds great, its a great number and I'm not questioning that, but what you have to look at it is what happens when they make an exit data sale? License revenue goes up and hardware sales increase. Well, if exit data and exit logic were that good and that big, why is it that hardware sales decreased 7% sequentially? I think the simple answer is that exit data and exit logic are not very large.
And therein lies the problem. He is pushing this very aggressively, but he has a limited window in that he has to start driving his top line again. Is he going to be able to do it with these types of products? I don't know. It's going to be very interesting for investors. I don't think he falls back to the let's just run out and buy more software companies, I know people would like him to put his foot in the Boston software space, but that is basically a lot of what he already owns. It would get him some additional customers, but he has put his stake in the sand with exit data and exit logic and now he is going to have to execute, and it's going to be tough, but interesting.
Dougan Milne
Bob, thank you very much, and I know that we may have some questions coming up for you here in just a moment. With that I'm going to turn this over to Ward Carter to talk a little bit about our upcoming events and move us into the Q&A.
WRAP UP and Q&A
Bruce Milne
Yeah, Ward will take over for the Q&A and we have some great questions from you guys. The upcoming Selling Up Selling Out conferences, every single page of this event has been redone. This is a definitive education on how to prepare a position, research value, structure, and negotiate for a merger. Given that we are in the most active time in a decade, that is something that a lot of you will want to go to. It is a serious, definitive treatment and it is the most attended executive tech conference in the industry. There are several coming up in New York, Boston, Montreal, Edinburgh, Boston, Denver, Paris, Austin, as well as some Merge Briefings. Don't miss those if you have the chance.
Next month we will be picking up on the cloud that we have talked about before. We'll be talking about the social wars which are now really affecting us in valuations. Each month you'll notice we try to cover some region or sector, this time was Australia. We've had a lot of activity out of Japan, so we'll touch on that briefly next month. I hope a lot of you join us next month, it will be our most aggressive agenda ever, so you don't want to miss out. Now we'll turn it over to Ward for Q&A.
Ward Carter
As far as the conferences Bruce mentioned, these are very well-attended events, both by buyers and sellers, and we'd like to offer a complimentary pass to any of our Selling Up Selling Out conferences or Merge Briefings. If you visit our webpage and look at conferences and events, you'll see a schedule of all the upcoming events, along with registration information. There is a promo code you can put in to waive registration fees, and the promo code for this month is MAAPR11, or you can contact me or any of the Corum deal makers.
With that, we've have a few questions come in from the crowd here. One was regarding areas, maybe this is for Bob Faulkner to address, any thoughts on where Oracle might expand their M&A to and specifically, is mobile an area where they have room to expand strategically?
Bob Faulkner
In terms of areas, I think one of the best was just snapped up, Radeon 6. Products that are going to enable them to leverage their exit data exit logic approach, and as I mentioned, the acquisition of Radeon 6 was beautiful for CRM, but that's the kind of thing I think Oracle should have been going after.
In the mobile space, it is still pretty small right now, but obviously growing and when you look at the interest that is being developed within the enterprise environment in tablets and smart phones, I think that is ripe for a company like Oracle, because you'd be surprised at the level of interest. People want to be able to get to their data, their applications, manipulate whatever it is they need, on the run. That is the next growth area.
Ward Carter
Thanks Bob. Yeah. Bruce Lazenby, I know you've had a lot of activity in the mobile space and you discussed a deal earlier. Is mobile software an area that you think is and will continue to be hot?
Bruce Lazenby
Absolutely. It was interesting to see the sort of second wave of consolidation in the ERP logistics space. We're heading into the first phase of consolidation in the mobility space. If you think that there are 1.2 billion new smart phones shipped every day in 2011, according to forecast, so that's just got to be huge.
I saw Google's acquisition of Zetawire, this company didn't have a website, 0 customers, 0 product, but they had a patent in a communication space that is going to be huge. The whole ability to be able to transact on the phone...I don't know about you, but how often do I get pegged on my smart phone with advertisements? Hardly ever. So there is a huge opportunity to differentiate the GPS component of that, and we're going to see the major players in this space be very aggressive, I think, in acquisitions coming forward.
Ward Carter
Thanks, Bruce. Here's a question that came in regarding the role of Asian firms. We've seen a lot of activity in Asia, especially in China, and maybe Bruce Milne can track this one. The question is, do you see Asian firms following Oracle or their strategy as far as acquisitions for growth?
Bruce Milne
I thought that Bob laid out a great overview of how these companies have been acquiring going back to the days of CA that firms like Oracle or Microsoft or Cisco or Dell are a collection of other companies, and they're using the public platform and their user base, feet on the street, trade name and financial muscle to leverage these companies, and it's just plain smart. We're seeing that the Asian firms want to try to do the same thing, we saw that 7 of the 10 largest IPOs last year were in Asia, so they're looking at a similar strategy, how can they leverage their global reach and public structure, so we're seeing them light up more as interested parties to make acquisitions. Who will emerge, we're not sure, but there are a lot of firms that want to be doing more of this and they will be increasing the bidding along with the major strategic players and of course our friends in the PE community are really going hard core after acquisitions.
Ward Carter
Thanks, Bruce. We've got time for one more. I'd like to direct this to Jon Scott, it has to do with your comments on Australia, and it really has a broader impact to all the international deals we're involved in. Jon, the question is, what is the impact of the rising Australian dollar on M&A there?
Jon Scott
Thanks, Ward, that's a great question. Earlier I addressed the fact that the US dollar and other currencies have fallen against the Australian dollar, that their export business is in trouble. But this really addresses an interesting comment I had from the CEO of an Australian company a couple of weeks ago and he said to me, with the US dollar so weak against ours, US companies were generally the acquirers of companies in Australia, and now he's not so sure he wants to sell! In other words, they wouldn't get the kind of dollar multiple against the Australian dollar they were used to. That may have an impact to a lesser degree, but the economic impact of the dollar, given their export issues, is going to be greater than that. There is so much activity right now that it makes sense to look at the M&A possibilities when there is this difference.
Ward Carter
Thanks, Jon. Thanks to all, especially Tim, Dominic, Bob, and all of our other speakers today. Thanks for participating and joining us, and I hope to see you in person at a Corum live event.