April Webinar: Social Gaming and Mega Deals

Introduction and Market Overview

Ward Carter

Hello, and thanks for joining us and welcome to Corum’s April 2012 Tech M&A Quarterly.

I’m Ward Carter, chairman of the Corum Group, speaking to you from 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 is our agenda for the next 60 minutes. We’ll start with our global market overview, followed by a special review of the recent JOBS legislation and its impact on tech M&A. Corum’s research department will give us an in-depth look at recent transactions and valuations in the six major software and related technology sectors we track, as well as the 26 subsectors. We’ll follow that with a special report on Social and Mobile gaming, and conclude with our special guest speakers who recently sold their companies. At the end of the session we’ll also open the floor up to Q&A.

Our list of speakers today includes Corum presenters from around the world, and we’ll introduce them in more detail later. Our special guests today include Charles Bell, Jr, of Intego Systems, Larry Gerdes of Transcend, and Michael Carden of Sonar6. Charles and Larry both run companies in the healthcare technology space while Michael is in the human capital management sector. I think you will find their experiences of great interest and of value to anyone concerning the sale of their company.

With that, I’ll turn the floor over to Corum’s senior VP and senior deal maker, Jon Scott. Jon?

Jon Scott

Thanks, Ward, and again, welcome everyone to our Tech M&A Quarterly. We have a lot of information to cover today, so let’s kick things off first with Corum’s founder and CEO Bruce Milne with some of the significant headlines impacting M&A over the last month.

Bruce Milne

Good morning and welcome to our largest quarterly report ever. I’ll move right through our global market report.

Going to China and Asia first, what we’re seeing is a general slowdown. Industrial company profits have fallen 5.2% on Exports. The yuan had its first quarterly drop since 2009. Arab Spring in Egypt has led to more unemployment. The only exception is Saudi Arabia, which is putting a lot of money into keeping the young employed. Japan, India, slower, Aussie raw material exports dropped, and China’s consumer prices rose faster than estimated. Again that’s due to the issue with the rising oil crisis.

Moving to Europe, not too good either, not quite out of the woods with Portugal and Spain. Concerns, just like the Greek problem. French inflation unexpectedly declined for the second month in a row as the economy slows. European Union economic gauge shows greater contraction that anticipated, UK retail sales dropped worse than forecast. The news isn’t good in Europe.

Eurozone unemployment has surged, and is now the highest rate of unemployment since 1997. German manufacturing even fell, they’ve been the stalwart there. Spain, not Greece may be the real EU test. Investor confidence is down, French confidence has stalled, Spain is on the bleeding edge of a new European crisis. That was a headline yesterday.

Here in the U.S., it’s not so bad though. Retail sales rose in February, our leading indicators are up, consumer confidence is up, people are generally positive with the few exceptions that we will see. A lot of the Fed chairs are seeing no more need for stimulus. We’re obviously becoming more of a services economy than manufacturing. Again, consumer confidence is up. This last one though, wow. Employers added only 120,000 new jobs in March, the fewest in five months. That hit the stock market hard, down almost 500 points. That will be the one to watch.

In finance, banks are buying treasury at seven times the pace of 2011! S&P rose to four-year high. We saw one of the best quarters ever. Hedge funds are capitulating and buying stock. Treasuries fell, and the S&P scored the best quarter since 1998! Again, no more need for easing.

Moving to real estate and commodities, we’re still seeing some housing prices tumble, but we seem to be climbing out of it. Existing homes near a two-year high, although it didn’t take much to get that. A fuel squeeze may fail many airlines. This is a real problem, this fuel issue. There are a lot of airlines that will just go under. Mortgage rates have risen up a bit. Home prices are falling at a slower pace in some cities, rising in others. Construction spending unexpectedly declined in February, we’ll see how March’s numbers were.

Let’s move technology, though, lots happening here. iPhone is failing to get market share in China. Lots of news about lawsuits and patents and such. Cisco is in talks to buy NDS for $5B. Dell will acquire SonicWall, we’ll hear more about these later. Oracle gains with Buoyant Business Software. Apple sold a record 3M iPads with the new tablet’s debut. This drove Apple’s stock and the tech sector up. What do you do with that $100B? You can use it to buy back stock, that’s one of the things they’re doing.

Amazon sees further price drops in the cloud. Apple’s new iPad called significantly hotter by Consumer Reports. Zynga paid $200M for Draw Something’s creator. We had IBM on our webinar in January for our kickoff panel. Their Watson will help generate $2.65B a year by 2015, and helping Sloan-Kettering. Lastly, Groupon restates due to material weakness. We haven’t been a big fan of Groupon when they went public we didn’t quite get it.

Dell is to acquire Wyse. Viacom’s copyright infringement suit against Google for Youtube has been reinstated. There are some real wars going on, we’ll have a report on that next month. SAP ventures is scouring Silicon Valley for startups as the parent ages. You have to stay competitive. Splunk IPO, $1B valuation; Facebook bought Instagram for $1B; and AOL will sell and license patents to Microsoft for another $1B. Lots of stuff happening, as we’re seeing here in the trenches at Corum as well.

The JOBS Act: Special Impact Report

With that I’ll turn this over to Jon and Elon for their special report on the JOBS Act. Thanks.

Jon Scott

Thanks, Bruce. I’m joined by Elon Gasper, Corum’s VP and Director of Research. Elon, let’s jump into the recent JOBS act. This is a very powerful piece of legislation, almost unanimously passed by Congress on both sides of the aisle and signed by the President just last week. It will have a very positive effect on the economy, innovation and tech M&A, both in the U.S. and internationally.

Now, a little bit of background: About a year ago, some executives joined a discussion in D.C. to examine the slowdown in U.S. IPOs, and to look for solutions to jump start this negative trend. Silicon Valley VC Kate Mitchell attended the meeting and led a group that came up some ideas to put on the table. What’s amazing about this is that the group recommended a number of initiative which were written into draft legislation and went on to be approved by bipartisan majorities in both Houses and signed into law in less than one year.

Now, I don’t personally know Kate Mitchell, but maybe she should be running for public office.

Elon Gasper

I’ll second that nomination, Jon. Just last month in our webinar, you mentioned a few of the problems she and her group were trying to solve, right?

Jon Scott

Yes, starting with U.S. securities laws that made it difficult for many small private companies to raise money, unless it was from a single large institutional investor, like a VC. And there were further restrictions as to the number of shareholders a private company could have. And, small emerging public companies were held to the same reporting requirements as billion dollar enterprises. All of this added up to an environment that was limiting the U.S. startup, growth and IPO eco-system – including M&A.

So Elon, given this, tell us a bit more the Jobs act…

Elon Gasper

Well, Jon, this law addresses those three problems by making it easier to raise private money, stay private longer and go public after that.

It’s divided into three Titles: We’ll cover each quickly here – oversimplified at times – and follow with a whitepaper in detail, particularly on M&A implications. Plus it’s a complex law, and an attorney must be your legal guide. That said, let’s start our business news level flyover with the first Title, the IPO Onramp.

This makes going public easier and more gradual. Jon, you talked last month about how companies had ended up stitching together their own “Facebook Effect” public private status for this purpose.

Jon Scott

That’s right, Elon, and now Congress has made it official: It is a stage between private and full-fledged public companies, called an Emerging Growth Company.

Elon Gasper

I know you hate the abbreviation, EmGroC, but you like the idea, right?

Jon Scott

I do, because it’s straightforward. Newly minted public companies with less than a billion in revenue get a jumpstart.

Elon Gasper

And that would be currently almost all of them. For up to five years, each EmGroC will have a much lower burden of accounting, disclosure, and other paperwork, plus certain other advantages, saving millions of dollars and management focus. But what’ll that mean for M&A, Jon?

Jon Scott

To start with, clearly more companies with revenues in the mid-$100Ms will chose Emerging Growth IPOs rather than sell. That will make them potential acquirers with access to capital earlier than in the past.

Elon Gasper

Plus those newly hatched EmGroCs will be faster, leaner outfits, and more in touch with the market and able to quickly appraise cutting edge tech. We expect an increased pace of M&A, too, and higher bids for smaller entities – not just in the U.S., but internationally, with U.S. firms as buyers.

Jon Scott

I agree – they’ll be closer to customer needs and global tech trends.

Now, for Title II, did I see the word “Deregulation”?

Elon Gasper

You sure did, Jon; though few in D.C. dare speak the word, that’s what this part does. Communicating with potential investors gets easier. For instance, many of those awkward disclaimers like “this does not constitute an offer to sell,” or blah blah, can vanish, because more information about an offering can legally be published on a company site, or in a research report. Angel financing can be publicized without worrying about exposing non-accredited investors to them, and some types can raise 10 times as much as before - an alternative to PE because the total number of investors is raised, too.

Jon Scott

I mentioned that 500 shareholder limit problem last month. Increasing the limit of shareholders and deregulating communicating with angel investors, is a real fundamental change and you and I have raised money before.

Elon Gasper

That we have, so we can see it will be very different now, particularly in this era of social media. I’d say more rational, and therefore easier.

Jon Scott

Which means more capital, and more demand for M&A.

Elon Gasper

And Microeconomics 101 tells us more demand means higher valuations. With faster action, too, particularly in hot markets, where I see angels even being recruited to finance more or less particular M&A opportunities.

Jon Scott

How about that last one, Title III?

Elon Gasper

To start with, Jon, you won’t believe the “backronym” Congress made up to fit the first letters of the word Crowdfunding, Jon, instead of just letting the word stand for its obvious meaning. (note: Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure) Such amusement aside, what’s important is that, finally, after 80 years, the American public is going to have an opportunity to invest in small companies.

The SEC will need to write the implementing rules, but the statute clearly intends a broad audience – even everyone, with yearly limits on amounts, including based on income. I think wait for the formal rules to settle the precise formulas, and watch too in the meantime for State-level enabling laws that may pop up in the meantime and supersede them.

Anyway, all told, from the public’s point of view, it won’t be as easy as buying lottery tickets, but still, it appears to open things up enough to transform capital formation for many early stage companies.

Now, before you run out to file, though, note that other limits may make later VC funding problematical, or complicate exit through M&A. And all crowdfunding must go through an internet “Funding Portal”.

Jon Scott

These web platforms must bear the stamp of approval of groups now being organized, like CAPS at Crowdsourcing.org. There appear to be hundreds of portals already in launch with more on the way. Helping show how to do this already are overseas outfits under other legal authorities, like CrowdCube in the UK, and non-equity US crowdfunding sites like KickStarter who’ve raised millions for projects like new video games from fans.

Elon Gasper

Though selling a crowdsourced company is likely to have special complications, some of these should mature to Buyer level. Those will mean more demand again, but moreover, a broader range of Buyers, given the increased diversity public tastes will accommodate for start-ups, or spinouts. And standard companies will want to move more quickly in M&A, since crowdfunding will lower barriers to entry and enable threats to emerge sooner than before against any new tech or recently proven models.

Jon Scott

We’ve got to wrap up – when does all this happen?

Elon Gasper

Of the 3 major changes, the onramp is immediate, nearly all the rest slated to happen by the end of the year. And let me point out here that, too, we also expect this US experimentation to set patterns leading to changes in other countries’ laws in this time frame or shortly after.

Jon Scott

And in summary?

Elon Gasper

The JOBS Act: this new US law heralds more and faster moving capital, accelerating Tech M&A below the mega level, driving greater variation and intricacies, and with unprecedented web-based financial components with potential for profound, worldwide economic and cultural consequences even beyond tech M&A.

Jon Scott

I think you can see why we devoted time to this new development in Q1.

Corum Index and Research Report

Next up on our agenda is the quarterly research report. Elon will present that with Senior Corum Analyst Amber Stoner. Elon?

Elon Gasper

Thanks, Jon. In our January webinar we said 2012 would be a banner year for M&A. We stand by that prediction, since so far, based on our data, the year’s strutting its stuff in Tech M&A.

First, let’s feast our eyes upon the Q1 public markets, which soldiered ahead singing a marching tune and carrying that banner with them, supporting M&A with soaring stock prices and general esprit de corp-orate.

What a flag to wave, I don’t see how you sew one up better than this, unless it’s by adding on the bit of consolidation pullback this month, which Bruce mentioned. That just frames the Q1 trend as real, not bubble-onian. With these increased stock prices of the public tech companies and implied value of privates, chased by continued growth of buyer cash stockpiles in the US and abroad, whipped on by the Fed’s easy money policies and now with anticipation of the JOBS act, it’s hard to imagine what a better set up for M&A would look like.

Amber, how’d the Corum Index print, are we cleared for a bit of rational exuberance by it, too?

Amber Stoner

Yeah, the numbers we track in our Corum Index look good and have held remarkably steady this quarter compared to Q1 last year with the exception of reported private equity value which has more than doubled year-on-year. Much of that value is tied up in multiple private equity mega deals this quarter, including Vista Equity’s acquisition of Misys for approximately $2B. And Vista Equity is not done yet, considering they just announced an agreement to acquire CDC Software out of bankruptcy for approximately $250M.

Elon Gasper

CDC was a very active acquirer before the parent company lost a big lawsuit for severe damages that forced it into Chapter 11 last year. It’ll be interesting to see how much Vista will pay to play the M&A game again with bolt-ons for it. Clearly Vista has the cash, even after the Misys purchase—but, look out above, that Cisco mega-deal dwarfs the rest: 5000 employees, nearly a tenth of the new company, Cisco’s largest in years, 3rd largest ever, and a major move by the networking giant deeper into software while signaling how serious the changes within the television industry are, as consumers and businesses come to expect high-quality video entertainment everywhere—particularly delivered by NDS to the amazing iPad. We consume video, video consumes the internet, forcing the likes of Cisco to consume companies that understand digital video.

Amber Stoner

Speaking of video, also among the mega deals is Youku’s acquisition of Tudou in a deal valued at approximately $1.1B and a 12.4x sales multiple. This deal combines two of the leading Chinese video-sharing websites and will capture over a third of China’s growing online video advertising market. Clearly companies are willing to pay high multiples to pick up market share.

Elon Gasper

Next we’ll dive deeper now into the markets and sectors that make up the Corum Index. For years our Corum Research staff has divided the industry into 6 broad markets with 26 sub-sectors. This chart rolls those six up together, then we’ll subsequently examine each in detail with its subsectors, beginning with the high valued Horizontal Applications and walking through the rest, calling up examples of metrics, deals or lessons in each, and finishing up with this quarter’s top performer, the IT Services market. In graphs throughout, median values will be displayed for all ratios we compute and depict, as in this 3-year quarterly aggregate chart. For the hundreds of you in today’s audience who are new to the Tech M&A webinar, you’ll gain a better understanding of this method and each market’s definition as we continue. These charts are technical in nature and will go by fast so I’d suggest you spend more time examining them later on our website, where you can refer to our complete 2012 World Tech M&A Report also, or we’ll be happy to send you a copy of each.

In this 3 year chart, the trend since last year’s EU debt crisis is clear, with overall valuations climbing steadily back. 2012 began comparable to the 2010 and 2011 averages, and on a continuing upnote. Amber, let’s roll out the sectors now, starting with Horizontal - though already the highest EV/S ratio of the 6, we still heard an upnote from it, too, right?

Amber Stoner

Yeah, the horizontal sector is trading at a healthy 3.22x sales multiple, while seeing slight increases over the course of Q1. The horizontal sector typically has the highest valuation multiples across the six main sectors that we track and that is due to the large number of SaaS companies populating the sector. The reason we see such high valuations for SaaS companies is that they have predictable, recurring revenue streams and tremendous efficiencies at scale.

The Human Resources sub-sector is one that contains a number of these SaaS companies which explains the high 4.21x sales multiple that it is currently running; and we’ve seen quite a bit of activity in this space this quarter. One of the major deals done was Saba Software acquiring HumanConcepts, a provider of workforce planning and modeling software, for $23.5M in mid-March. This acquisition highlights Saba’s continued focus on the HCM market as well as complementing its unified talent management suite. We also saw Cornerstone OnDemand pick up Sonar6, an employee performance review management SaaS provider, for $14M in early March, which we’ll hear about a little bit later from Michael Carden in our seller’s panel. Elon?

Elon Gasper

Next we note Internet issues tooling along at an overall 2x and change times sales, with our pure play sector about 10 percent higher. But for really notable ratios you need to have zero in the denominator. And that's where the buzz is coming from this week, as Bruce mentioned, with Facebook’s billion-dollar buy of Instagram, an April pre-revenue deal we’re looking forward to unearthing some interesting new tidbits about to share with you next month. Getting back to Q1, we want to call out a set of acquisitions by by Groupon, most recently its purchase of FeeFighters in late March. FeeFighters is a B2B niche comparison engine aimed at helping small businesses find the cheapest merchant account provider or credit card processor.

The deal is distinguished by, well, no, it's really not distinguished, it's basically yet another in a recent long line of what look like regular little acquisitions by Groupon—already they have made 6 acquisitions in the first three months of 2012, plus a couple back in December – that’s a deal every other week as they cash in the coupons from their IPO. But seriously, besides the consistency, we think these recent acquisitions do reveal a pattern: Groupon appears to be building a platform and database to serve small businesses, which seems a reasonable way to leverage and hedge their model. Terms weren’t disclosed for any of these or the other 8 outfits they bought in their pre-IPO days further back in 2011.

And speaking of disclosure, as Bruce mentioned, Groupon is off to a rocky start as a public company, with accounting restatement and other issues punching down their price and apparently alienating Mutual Fund managers, who aren’t reloading; that’ll affect any plans to use its stock as currency in acquisitions, and the morale of any entrepreneurs who took it in these deals. Not that any likely did pos-IPO; In these times and with over a billion bucks in the bank it’s unlikely Groupon did that, but like some people always take the time to smell the flowers, I’ll always take a moment to reflect on and remind everyone yet again of the merit of getting buyers to put cold hard cash, not coupons, on the table or in your earnout, particularly when your acquirer depends on a wild wonder of a business model.

Amber, moving on, you mentioned one of our guest speakers today; the others, rounding out our Sellers Panel today, are two men who just sold companies in the Vertical Markets, right?

Amber Stoner

Yes, and from a sector seeing activity due to legal changes. Now, Elon, you and Jon talked about the JOBS Act and what it means for future M&A activity, but that isn’t the only legal change we’ve seen lately. There have also been changes that affect the healthcare industry and those changes have certainly contributed to the activity we’ve seen in the healthcare technology space. Expect that activity to continue as new laws and regulations bolster the move from physical health records to electronic health records. Early in the year, QuadraMed acquired the healthcare solutions assets of NCR. NCR’s healthcare solutions enable patients to check in at medical facilities via kiosks, create online accounts, and pay bills electronically; the addition of those solutions to QuadraMed will improve its clients’ ability to meet the increasing demand for patients to control and self-direct their healthcare experience at medical facilities. Elon, what’s going on in the Consumer space?

Elon Gasper

Well, public comparables valuations ticked up a bit in March, but the big news has been the video game company feeding frenzy that we’ll get a frontline report on later from Corum’s own Jim Perkins of Duke Nuke’m fame. So in the meantime for your inspiration please enjoy the following sentimental video clip we’ve prepared about how the miracle of M&A can change your life.

I’m just kidding, but SpiritClips isn’t, having parlayed its video heartwarmers website and production company into an acquisition by the brand famous for feelings, Hallmark. That hundred year old private company acquired SpiritClips last month; terms were not disclosed. The acquisition of the subscription-based online video service expands Hallmark’s digital presence and capabilities. It not only increases the reach of Hallmark’s Hall of Fame videos across devices, it also enables Hallmark to offer customers the ability to send e-cards by uploading their own photos and videos or choosing content from SpiritClips. Hallmark can use the SpiritClips acquisition to make it very simple to create e-cards with user-generated content, thereby helping usher its least-tech-savvy offline customers into the modern age of digital media.

So, Amber, got anything in Infrastructure that can bring a tear to the eye?

Amber Stoner

No, no one really notices infrastructure like that, until it doesn’t work and apparently that’s not too big of a problem since infrastructure’s valuation numbers have been holding steady for the quarter. Vocus acquired iContact, an email marketing SaaS provider, for $179M at a 3.5x sales multiple. With this acquisition, email will become the latest addition to the Vocus marketing suite which already includes search marketing, social marketing, and publicity modules, centered around a recommendation engine. However, following the announcement of the deal, Vocus’ stock dropped dramatically, likely due to shareholders believing that the price Vocus paid for iContact was too high, despite Vocus’ leadership believing the deal adds significant strategic and financial value and helps position Vocus as a leader in cloud-based marketing.

Elon Gasper

Vocus was almost cut in half, dropping over 40% in a week. Vocus' enterprise value started not far above icontact's, so this pretty much wiped out all the value of the acquired company. This precipitous drop even significantly shook up the sector order and thus the ratio in our median-based index, as well as some other companies’ indices for Cloud and SaaS. More importantly, for the acquired company that is, will it shake management’s commitment to its plan for moving ahead together? And for the former investors, to whom much of this deal price was paid in stock and convertibles, can the acquirer even execute that plan after this? Here’s an example of why considering deal structure and integration can be an important matter to take into account in selecting a partner.

Amber Stoner

That’s true. Another email-centric deal in the infrastructure space is Symantec’s acquisition of LiveOffice for $115M. LiveOffice is an email archiving SaaS provider that provides features for e-discovery and compliance management. The deal extends Symantec’s intelligent information governance offering to the cloud, providing a complete cloud-based solution for messaging protection including anti-spam, security, continuity, archiving, compliance, and e-Discovery.

Which just leaves IT Services. You said it was our biggest gainer for the quarter, right?

Elon Gasper

Yes it was, look at stairstep. Plus we can revisit the Human Capital space, this time from the service side as we saw Deloitte Consulting acquired Ubermind this quarter for approximately $45M at a 2.5x sales multiple. Ubermind is a Seattle mobile agency with marketing, design and engineering talent that aim to change the way companies use mobile solutions, strengthening their brands with highly-designed mobile apps. This transaction amplifies Deloitte’s full-lifecycle professional services relating to, well, they make it sound like pretty much everything that can help clients gain business advantage in the new tech media landscape; we used to call that a one-stop-shop, back when the metaphor made sense before everyone shopped online.

Deloitte also acquired HR tech specialist company Aggressor in late March— another touchback to the Horizontal HCM product co deals you highlighted back at the start, Amber, and also continuing a pattern of Deloitte making a couple acquisitions a year ever since they got that bargain on that big KPMG cast-off of part of BearingPoint NA back at the very bottom in ’09. Looks like they “acquired” the M&A habit; we expect more companies that have stood aside to find a reason to start buying during this year, too, or to resume making acquisitions, like Hallmark; the point is that sellers searching for a partner shouldn’t limit themselves to the regular buyers, but “aggress”ively work the long tail prospects, too.

Anyway, that’s a wrap on the IT Services market, and our Q1 report. Back to you again, Jon.

Jon Scott

Any other final takeaways from the quarter? Does your research group stand by its annual predictions from January?

Elon Gasper

Absolutely. We nailed it last year and expect to again. All the drivers we talked about 3 months ago remain in place: There’s a strategic imperative for newly public international companies, traditional buyers and PE to bid against each other for hot tech in this very strong cycle. There’s record cash in corporate coffers, much of stranded abroad, chasing deals. Debt’s cheap, the economy’s recovering, and now there’s anticipation of the JOBS Act for capital acceleration, too. A lot could change in 2013—a lot will change—but we called 2012 and based on Q1 we stand by it: A banner year for Tech M&A.

Social and Mobile Gaming Spotlight

Jon Scott

Next up is a special report by Jim Perkins, Corum’s digital media specialist. Elon mentioned Jim of Duke Nukem fame a few minutes ago. Jim spent 22 years in the gaming space and is going to provide an update on the feeding frenzy in the social and mobile gaming arena. Jim?

Jim Perkins

Thanks, Jon. As predicted at Corum’s Annual Forecast Webinar in January, M&A activity is at an all-time high in the video game space, especially in social gaming where we’ve seen major acquisitions by Zynga, Big Fish, and IGT. There is a special interest in online casino game acquisitions to challenge Zynga’s lead with Zynga Poker with more than 30 million monthly active players.

IGT, the casino slot machine maker, bought Double Down for a reported $500M. Double Down is famous for its online casino game on Facebook with more than 5 million monthly active users. This is a smart move for IGT, as it expands their gaming portfolio beyond the physical gaming floor, which appears to be slowing in growth. Last year they acquired Entraction Holding AB to strengthen their position in the legalized online gaming market.

Big Fish Games bought Self Aware Games for their mobile-social casino game, Card Ace: Casino. The transaction value was not disclosed. Online casino gaming is clearly the hottest social game space on the internet with Electronic Arts’ PopCap Games division launching Lucky Gem Casino and Zynga adding more to their mix with Zynga Slingo and Zynga Bingo.

At the beginning of April, Accel Partners invested $14M in social games company Dragonplay, best known for Live Holdem Poker Pro on Android. They report more than 12 million installs and 2 million monthly active players.

What does all this mean? Clearly, online and mobile casino games are popular and additive. Big bets are being placed in the social casino games market. Here’s the homerun play: how much more will these companies be worth if and when our State and Federal governments legalize online gambling?

Let’s look at some of the other activity in social and mobile games this quarter.

With lightning speed Zynga bought OMGPOP for a whopping $200M. This is what happens when you challenge Zynga’s dominance on the gaming charts. In 6 weeks OMGPOP’s Draw Something, which is much like Pictionary, was downloaded 35 million times. Add this to 3 other acquisitions Zynga has made so far this year, and clearly this social gaming giant is on an acquisition rampage.

The pace at which these acquisitions can happen is increasing dramatically - it pays to plan ahead and be ready to sell when Zynga comes knocking!

Like OMGPOP, it took Rovio many years to finally hit the jackpot with the wildly popular hit game franchise Angry Birds. This game has well over 700M downloads so far. In March they launched Angry Bird’s Space—one of my new personal favorites, and clearly, I’m not alone—fans downloaded over 10M copies of Space in its first 3 days. It immediately went to the top of the charts, knocking out OMGPOP’s Draw Something. Rovio was also busy acquiring Futuremark Games Studio, giving them access to 3DMark, their gaming benchmark technology.

This really shows that entrepreneurial perseverance can pay off—that hit product may come at the most unexpected time, particularly in the video game business, and when it comes, you’ll want to have your company ready for acquisition offers – because timing and preparation are key to maximize the value of your company.

Social mobile and online game M&A is clearly leading in the video game space. Corum believes this wave of consolidation is just the beginning of an oncoming surge of opportunity to realize value in the video game industry. Not only is the casino sector hot, there is plenty of room for new innovative games like Draw Something to make a huge impact on the social game landscape. Plan now for your company’s optimal value outcome. Your company could be the next big acquisition.

Back to you, Jon.

Jon Scott

Thanks, Jim. The growth in this segment is absolutely incredible. I’m just amazed every time you and I have an opportunity to talk about what I hear and especially when you come back from shows and events. Angry Birds Space? I didn’t even know that was out, so that’s going to be my next download.

I’m also thinking that the new JOBS Act that Elon and I talked about earlier will be a positive driver to start growth of new gaming companies. I think it will really create a platform for new companies to come out.

Healthcare and HR Technology Sellers’ Panel

Next we have a couple of special guests who have recently sold companies in the healthcare technology space. First up, I’d like to welcome Charles Bell, Sr., CEO of Intego Systems out of Jacksonville, Florida. They recently sold to Critical Alert Systems.

Charles Bell

Thank you. I was the founder and CEO of a healthcare tech company called Intego Systems. I originally founded Intego in 1983, focused on creating a patient-centric common path communications platform called ProNet. ProNet is a software driven platform connecting patients with the appropriate care provider or department immediately. This enhances work flow and creates a better patient outcome. The ProNet platform provides faster response time for patients, better quality of care, and greater patient satisfaction.

Our goal has always been to design the best products in the industry and make a difference in the delivery of service to patience, while making their stay in a hospital a more pleasant experience. After many years of building on this, I realized that in order for me to extend my product offerings to every health care institution I would need to raise major capital or find a strategic partner.

I originally started this process on my own and quickly realized that I needed someone with this expertise. I interviewed several M&A firms and finally settled on one located in Florida. I had several important requirements of my M&A firm.

1: Experience putting the right material together and access to the right sources.
2: Someone that could maintain confidentiality throughout the process.
3: A success-based fee structure and a cap on the expenses.
4: Proven record of valuation of business and knowledge of how to structure a deal.
5: Experience in the health care industry.
6: Most importantly, chemistry with the people I would work with on a daily basis.

The M&A firm that I picked met all these requirement. I found that there are several important steps to getting a deal done.

One is that you have to pitch the deal. I did my homework on each company before my pitch. I determined why we would be a good fit and some of these pitches became very short because we didn’t fit.

Second, deciding which company aligned with my objectives the best. I found that Critical Alert fit that the best and we had good chemistry together.

Three, getting through LOI was pretty painless.

Fourth, the due diligence process took a lot of time. It was time to manage and tough to continue working in the business while managing this process.

Five, purchase and sell agreement. This was the hard part. Make sure you do your homework up front and determine with your CPA which route to take, meaning an asset deal or a stock deal. Be sure you get a good M&A attorney to help you through this process. I had my CPA and a good M&A attorney and they were both worth every penny I paid them.

In February of this year I sold the assets of Intego to Critical Alert Systems. Intego was renamed Intego Software LLC and is a wholly-owned subsidiary of Critical Alert. I became an equity partner in Critical Alert and accepted the role of chief strategy and business development officer. This process took over eight months to complete.

I appreciate your time and I hope sharing my experience has been beneficial to you.

Jon Scott

Thanks, Charles. I think what he points out, importantly, is the process, and knowing there are a lot of steps involved and it does take time. You can’t rush through these processes.

Now, our next guest is a little bit of a departure. Typically we have privately-held companies speak, but we thought this landmark transaction in the healthcare space was very instructive, so special thanks to Larry Gerdes, CEO of Transcend Services, for joining us today. Larry?

Larry Gerdes

Thanks. I’m CEO of Transcend Services, a company that is focused on medical transcription, predominantly for hospitals. Our company was recently sold to Nuance Communications, about a $1.5B company that has several areas of business. About half of their company is in healthcare, but they are known as the world’s leader in speech technology.

Transcend is a company that is publicly traded on NASDAQ. I’ve been associated with Transcend for some 18 years. We’re at about $135M current revenue run rate and Transcend is recognized as a leader in provision of medical transcription to hospitals and our reputation is for first class service and delivering great customer relations.

The healthcare industry, as many of you know, is undergoing very rapid change, not only with regulation of the Healthcare Act, but very fast movement to the electronic medical record. There is going to be a real requirement for technology throughout healthcare and Transcend’s business is no exception.

The acquisition of Transcend will bring advanced technology to its marketplace while coupling that with its services to provide support and the service aspect that goes alone with clinical documentation.

Transcend was not on the market to be sold. We had a very successful few years as one of the top ten ranked companies in the nation for growth under $1B in revenue. When Nuance approached Transcend, at first there was discussion about using Nuance’s technology and platforms for delivery of service. That moved into a deeper discussion regarding acquisition. Transcend and its board of directors hired bankers and lawyers to make sure that we did a thorough job of pursuing alternative strategies to make sure that we maximized on the return to our shareholders, customers and employees.

As a result, we held strategic discussions with other companies. We also contemplated charting our own course. The only advise I’d give others as you look at these key strategic crossroads in your corporate histories is that you keep an open mind. You understand that you have an obligation to the shareholders, employees and customers to do the best job of positioning your company to maximize on its future strategic alternatives, even if that means selling or merging with a like-sized company, or even making acquisitions yourself.

When you get to a certain size, it is important to have great advisors to be at your side, to not only render opinions on valuations, but also to make sure that the acquisition is structured in a way that handles the needs of all the constituencies.

Jon Scott

I think one of the comments that Larry made that’s very important is that a lot of times strategic M&A discussions start out as a partnering discussion, where you’re looking at licensing another company’s technology or they’re looking at licensing yours. So I think it’s an important thing to see the steps that can sometimes take place.

Next I’d like to welcome Michael Carden who is the CEO of Sonar6. Michael is recorded today because he’s down in New Zealand and we couldn’t line up our schedules. As Amber mentioned earlier, Sonar6 was recently acquired by Cornerstone OnDemand and Michael’s here to tell us a little bit more about that deal.

Michael Carden

I’m the former CEO of Sonar6, now the VP of small business operations at Cornerstone OnDemand. I will talk very briefly about our recent acquisition by Cornerstone OnDemand which just closed a couple of days ago.

Very quickly, what do we do at Sonar6? Well, we’re a performance management company, we do employee performance reviews online. We’re a software as a service business. Employee performance reviews online sounds relatively uninteresting, but the numbers are actually quite exciting. There is probably about 1B people in the world who have some kind of annual periodic performance review in their job. If you can monetize that to $20 per person per year you have a $20B total available market, and that is the market opportunity we were going after at Sonar6 for the six years.

The one thing about Sonar6 that is different from other vendors that played in that space, is that Sonar6 was a native SMB play, so we were really just going after businesses with staff between 1-1000. That was our market and we were pretty disruptive in that space. We brought a very graphical approach to the performance reviews, we tried to get engagement of all people in the business finding performance reviews useful, rather than the edict of a distant HR department. We were finding a very obvious customer paying point.

I guess our process of being acquired started about six months ago. We certainly had been attracted to a number of different vendors and there is a lot of consolidation in the human capital management space right now. We had a number of vendor discussions going on, perhaps as many as eight having approached us and talking to us about acquisition.

Late last year we decided to engage a broker to manage those discussions so we engaged Harborview Advisors who are financial advisors quite specifically with experience in SaaS and human capital management. They managed those discussions, we tried to get down to term sheets with a lot of different vendors, trying to get some actual numbers out of people. That process was going quite well. Toward the end of that process we had a late entry and that was Cornerstone OnDemand. We had talked to them for a while on a different level, but they came to the party late.

As soon as we started having those discussions with them and particularly once we were engaged with Cornerstone’s CEO Adam Miller, it was obvious that there was plenty of value in this kind of discussion. Cornerstone had been playing in the Enterprise space while we had been in the SMB space, so there wasn’t a huge overlap in our markets. We also had, apart from the obvious parts of the value equation, we had a very obvious cultural fit.

We quickly progressed that over the next few weeks, going from discussion to LOI. We had a few different LOIs at that point from different vendors, but it seemed that Cornerstone was the most likely fit, and the cleanest. As I said, the cultural fit was there. To some of the key stakeholders at Sonar6 this seemed like the key interest to pursue.

I think we spent a little over two months in diligence. All that work is hard work. Lessons learned in that, I only have a couple. The first one is that if you’re running your business really clean, it makes this sort of thing much easier. Certainly there is a lot of work and heavy lifting involved in any acquisition, but if you have a clean business in terms of governance and those elements, it makes it so much easier. Fortunately we were in that position.

Secondly, a thing I learned from the Cornerstone team is that it is very important to manage your relationships through a process like this. Clearly at the end of negotiation and the due diligence, you have things work successfully, you’ll end up working with these people, so it is critical that you actually make sure that this is the point at which you start developing those relationships, and that sets the tone for how things will progress.

Jon Scott

I think one of the interesting things that Michael mentioned is the fact that they were talking with many parties. That’s very important to making sure you find your best valuation opportunities in the market. He also pointed out that from a timing perspective, some companies are contacted at different phases of the engagement, depending on how quickly they might be able to respond. Thanks again to Michael and congratulations on the recent transaction.

Q&A

We only have a couple of minutes, but let’s turn it over to Ward Carter for the Q&A.

Ward Carter

Thanks. There was a lot of interest sparked on the JOBS Act, and I think a little bit of confusion and a number of questions. Maybe I can bounce this one to you, Jon. It’s regarding companies that go public underneath this new Act. The question is, “If a public company continues to stay under that $1B threshold, are they permanently exempt from the existing stricter SEC requirements?

Jon Scott

Yeah, that’s a good question and let me answer it by saying that when the JOBS Act passed, one of the objectives of the legislators was that they didn’t want these changes to be permanent, they wanted them to be an onramp. In other words, allowing companies to go public easier and raise money easier. Specific to that question regarding going public, if they stay under $1B, after five years they become subject to the standard SEC requirements. So it’s not a get out of jail free pass forever, just for five years.

Ward Carter

That makes sense. Elon, kind of a related question on the JOBS Act, there is some concern, is the crowd funding going to lead to a lot more fraud? Because it looks like we’re deregulating a bit and getting away from some of those safeguards we’ve had in the past.

Elon Gasper

The safeguards that prevented Enron, WorldCom, Madoff, those ones, Ward?

Seriously, we will always have the crooks with us, but remember what people said about Wikipedia? That it would never work, that there would be thousands of phony articles and no truth in any of them if you opened it up public comment and posting and content generation. We learned something from Wikipedia about the power of crowd sourcing. I believe we will find the same with crowd sourcing, and the rest of the JOBS Act experiment.

Like the best disinfectant, the more people shine a light and keep an eye out, I think we’ll actually do better.

Ward Carter

Thanks, Elon. One last question regarding the gaming sector, I’d like to direct this to Jim. Jim, the question is, “We’ve had a lot of activity and hype surrounding the gaming space. Are we in a bubble and can we expect that to burst anytime soon?

Jim Perkins

No, Ward, I don’t think so. I’d say that social gaming, especially social and mobile gaming is just getting started. The room for new innovative games and more investment, lots of M&A and expansion onto more platforms worldwide is pretty much unstoppable.

Ward Carter

Okay, that’s good to hear. We look forward to seeing that continue.

We’re right up against our time limit here. We want to thank all the speakers and our audience members for participating. I hope you can join us for one of our conferences soon. That concludes Corum’s April 2012 tech M&A report.