April Tech M&A Monthly
Nat Burgess
Good day, welcome to Tech M&A monthly, which this month is also our quarterly report.
We’re going to go into detail on the sectors that we cover on M&A trends and recent transactions, but we’re especially excited today to be focusing on international stories. We’ve been building an international team over the last 20 years. We’ve been telling the story of cash offshore, exchange rate arbitrage, and of cross-border valuation advantages for years now, and that story is moving from the back room to the front room. It is headline news. We’re happy to have one of our deal-makers reporting on a transaction recently closed with Cisco, we’ve got significant progress on our efforts in Asia, and a report from our CEO, who is currently in Shanghai en route to Korea, exciting times to be over there for a number of reasons, working on some really interesting deals and relationships.
As a kickoff today, I want to introduce one of our Senior Vice Presidents, Jon Scott. He started out in our headquarters office here in the US after multiple venture-backed CEO stints, a very successful effective deal maker. We just announced an exciting transaction with Cisco, which is especially exciting because John Chambers came out recently saying that Cisco would only be doing acquisitions internationally. We’re happy to have the team and the resources to help them achieve that. Let’s go to John.
Field Report: SolveDirect
Jon Scott
Good evening from Amsterdam. As I mentioned to you in February, here in Europe we are seeing a lot of pick up in buyer activity, as if these buyers woke up after the new year with significant new mandates for inorganic growth and some of the biggest technology firms in the world were going after some fairly small and innovative companies. Cisco has certainly been one of big technology companies leading this trend as we reported in last month's Tech M&A Monthly.
On March 25, Cisco announced that they had reached agreement to acquire Corum's client SolveDirect, a Vienna, Austria-based cloud services management firm. In this acquisition Cisco pointed out that the move towards multi-sourcing and cloud services was accelerating the development of large ecosystems of companies—from enterprise IT and manufacturing to SaaS providers—and that these companies really need to share data in a secure and scalable way.
Now a majority of the interactions between these service partners today require manual effort, increasing the cost and complexity for enterprises as their number of service partners grows. The average enterprise today is working with 3 to 4 times the number of service partners they were working with just a few years back. SolveDirect's cloud solutions offer enterprises and service providers a flexible way to integrate and automate sharing of processes, data, and workflows in real-time by eliminating manual practices. SolveDirect's solution is driving significant operational efficiencies, and these capabilities will help Cisco to extend their offerings of smart and connected IT services to their global ecosystem which includes their customers, partners, and resellers.
What this transaction really points out is the continued cycle of innovation. A lot of small and emerging companies are identifying solutions to problems that the big guys either have overlooked or felt that they didn't represent a big enough market opportunity to go after. And in SolveDirect's case, they believed that the ability to share data in a secure and scalable way among enterprises and their service providers was critical, and that no one was addressing the issue adequately. Apparently Cisco recognized this and agreed. Congratulations to Martin Bittner, SolveDirect's CEO and his team. Back to you in Seattle.
Nat Burgess
Thanks for that update, Jon, it’s an interesting story, partly because the last time Cisco made headlines internationally was with a $2.5B acquisition. Obviously this is much smaller, but it’s very important for the company and it’s an important technology, so we’re excited about that. I think as we look at the international story developing, as we look at the technology stories developing, we’re seeing exciting times overall for entrepreneurs and CEOs and a lot of opportunities.
There is a very important Corum partner, WFS, the World Financial Symposium, you can find them at WFS.com. We’re a platinum sponsor of several of their conferences, and we have some events coming up that we’re participating in that really highlight the international story and the technology story.
Along with the international stories and the bigger stories, WFS also focuses on specific market sectors with the market spotlight series. The next one coming up is Social Marketing, which will be on April 30.
Corum Research Report
Now I’m going to hand the baton over to our VP of Research, Elon Gasper and his team for an update on M&A trends, the Corum Index, and the specific details they cover on six sectors and 26 sub-sectors in the tech field. Elon?
Elon Gasper
Thanks, Nat. We begin with the public markets, which wrapped up a stellar first quarter with the S&P closing at a new high on its last trading day, surpassing its prior record from the eve of the Great Recession in 2007. Other indices soared too, with the Dow seeing record highs since early last month and up more than 11% for its best first quarter since the bubble in ‘98.
But even former Fed chairman Greenspan, who warned of “irrational exuberance” back then, said last month that stocks are still “significantly undervalued,” looking at earnings projections and multiples. Plus as far as M&A goes, most big tech buyers have such bulging balance sheets they needn’t rely on using shares as currency in transactions.
So, all of this just sets up more liquidity for tech M&A, and we at Corum are seeing record activity ourselves as the big companies lunge forward and private equity hits a new stride. Commentary on the Corum index, Alina?
Alina Soltys
With overall spending on Tech M&A keeping up with the pace being set by the public markets, we expect the quarter’s dip in number of transactions and PE deals to be momentary. The increasing numbers of multi-billion dollar transactions are extra evidence that the big companies’ smart money sees the economy improving. Among those megadeals, the gargantuan Dell story has nearly obscured the others, such as Oracle’s purchase of Acme Packet; we’ve mentioned both in prior webinars. Another interesting deal that shows up here is VTB Group, a large multinational bank and financial institution based in Russia, has acquired the Swedish Telco, Tele2’s Russian assets for $2.4B. This will be controlled under the private equity division of VTB.
Beyond immediate measures of M&A, we see the slow but ongoing implementation of the JOBS Act stirring the financing and IPO markets, a leading indicator of it bringing additional capital to M&A. The cost of the IPO transition has fallen now, since most tech IPOs qualify as emerging growth companies, or “emgrocs,” with vastly reduced SEC reporting requirements saving millions of dollars in accounting fees for the companies that go IPO, plus helping management focus and reducing legal risk. That’s the changing environment in which tech IPOs arrive from firms like Marketo and Tableau, the big data firm we brought you a panelist from in our market spotlight last month.
Alina Soltys
Tableau is a Seattle-based company hoping to capitalize on the demand for big data, analytically driven software that is capable of processing and displaying data graphically. After last year’s highly successful IPO of Splunk that is up 133% in the last 12 months, the “big data” play is expecting to see similar success. With the new JOBS Act, Tableau is on a fast launch cycle to hit the market potentially as early as May under the “DATA” ticker.
We see these cases helping bring significant new buyers into existence and making it easier for them to raise money for M&A, supporting the market and the valuations of companies across all six of our major markets, and their 26 subsectors. Let’s look at those next, beginning with our jigsaw puzzle icon on the upper left, for Horizontal Applications. Amber?
Amber Stoner
While we’ve seen a slight drop in earnings multiples since the beginning of the year, sales multiples have increased over that same span likely due to the number of SaaS companies we track in the Horizontal sector. Speaking of increasing sales multiples, the business intelligence subsector saw sales multiples increase 13%, up to 2.8x, during Q1.
We also saw a number of deals happen in the BI space this past quarter, particularly focused on BI analytics, including Peterson Partners, a private equity firm, acquiring Angoss Software, a provider of BI analytics software and SaaS, and taking them private in a deal valued at a little over $5M.
Another deal along the same lines was Nielsen’s February acquisition of G4 Analytics, which offers BI analytics software as a service for consumer goods retailers. The deal extends Nielsen’s position as a global leader in trade promotion management by combining Nielsen’s data and trade promotion modeling capabilities with G4’s applications for tactical sales planning and execution.
In our final BI analytics deal of Q1, Kofax bought Altosoft for $13.5M, enhancing Kofax’s product portfolio with near real-time process and data analytics and continuing Kofax’s work to reinvent itself and become more than just a document-capture vendor by allowing it to provide more actionable information to customers.
Finally, we continue to see SaaS deals being done in the HCM space during the first part of the year, including two just last month. Infor Global acquired CERTPOINT Systems, a provider of employee learning management software and SaaS. The acquisition will enable Infor to offer customers an end-to-end HCM solution.
On the workforce management side, Concur Technologies bought conTgo, a location-based mobile workforce management software as a service provider, allowing customers to enhance their existing corporate travel booking and expense management solutions.
How are things looking on the Consumer side, Jason?
Jason Steblay
Well, the Consumer Application market rebounded nicely in first quarter from its lull in December and January, driven by continued strength in the video game sub sector with big names like Sega, Ubisoft and Wargaming.net all making acquisitions during the first three months of 2013. However, Yahoo’s four acquisitions in Q1 grabbed the headline as Marissa Mayer begun to rev up the internet search giant’s turnaround with an aggressive appetite for young, mobile consumer app companies.
In January, Yahoo added social bookmarking service Snip.It for a reported $10M. In February it purchased geo-recommendation app Alike, then in March it acquired another recommendation app Jybe, and news skimming service Summly for a rumored $30 M. Although all four acquisitions come with promising dev teams, it is likely that Yahoo will have to make some bigger deals than four startups with a combined operating tenure of 8 years to put the $21 B company on a new course. Alina, you’re tracking another internet giant making moves in the Mobile space, right?
Alina Soltys
I sure am, a couple of giants actually. The quarterly theme in the Internet segment surrounds the social networking and collaboration space as companies begin to build out their social presence beyond the basic network sense. Facebook announced a unique partnership with Google on the Android platform to become the new home screen on their mobile devices as Facebook is the most used single app both on Androids and iOS. In an effort to drive these mobile initiatives, Facebook has turned to acquisitions of talented young teams like HotStudio among others.
With an eye going beyond the social sphere, last month’s acquisition of StoryLane was on the talent side as well. They were working on creating meaningful connections through lengthy storyboards that go beyond a wall post or status update. No transaction details were announced in either case, but typically these are valued at dollars per engineer along with other key employees.
Let’s move on to another exciting company many follow, Amazon. Now Amazon tends to think very long-term about their business organization which reflects in their unique approach to acquisitions. At times they choose to acquire vertically strong e-commerce sites like Zappos and Quidsi, otherwise known as Diapers.com. They are also open to operational efficiency gains through their many warehouses and facilitatory services acquiring warehouse robot company Kiva Systems. In a deal last month, Amazon reached out for their own social network centered around sharing good book reads, Goodreads, for an estimated $150M. Although this deal sounds rich for a six-year-old company, when assessed on a cost per user price, Amazon paid $10 per user which looks like a deal when comparing to Facebook’s current $62 price tag. Amazon’s acquisition keeps Goodreads out of the hands of Barnes and Noble who have crept up with their Nook division but still needs some extra spice to really compete at Amazon’s level.
On the sector side, the public peer group has held steady over the last 3 months, which allows these companies to keep acquiring, as long as the market is flat or heading up. 30% of CFOs surveyed by the WSJ will be participating in acquisitions but it’s always good to keep in mind how quickly public sentiment changes. And today, as we’re looking at the M&A, the market, and the publics, all the signs are pointing positively.
Elon Gasper
All signs are positive in Vertical Applications, too, for the quarter, as valuations rose for every subsector we track. The best gains were commanded by the HealthCare vertical, where we saw pops in both EV to sales and to EBITDA, a ratio which rose 40% this quarter alone to twice its ratio a year ago, as the Health IT consolidation wave continued to race along. Right behind it was the Financial Services tech sector, surging over 15% this quarter to about half again last year’s figures.
So we’ll call out some insurance-related deals in it, three of which came in a single week of March. San Francisco PE Genstar bought AQS from Grey Mountain Partners and merged it into Insurity, which they’d picked out of LexisNexis a couple years back; Applied Systems bought IVANS’ Property and Casualty software business. Just last week saw Firstmark Capital merge its portfolio company NetComp into Dovetail Insurance, and this week Ebix made its second insurance grab in six months, landing Middle East insurance placement SaaS provider Qatarlyst.
But the big surprise was the appearance of SAP as the acquirer of Camilion, a Canadian development and underwriting solutions company. Though SAP has bought one company a month this quarter, after its CEO said he wanted to invest a third of his apparently $3B capital in M&A, this is the only insurance-related purchase. It represents a declaration of strategic value that such a global tech firm saw Camilion as essential to providing the industry’s first “Super Suite.” This is how sudden waves of consolidation begin, as a large firm shows its direction and makes it OK—or imperative—for others to imitate it using M&A to catch up.
The trick is to be ready to go to market when the external factors show the time is right, even if your internal plan isn’t perfected; the acquirer will help finish that, and see it as an asset that your organization won’t need new marching orders. So if you want a ride, catch the wave when it’s moving.
Amber, how goes the Infrastructure market, and what trends there?
Amber Stoner
The Infrastructure market has remained steady during Q1 as far as sales multiples are concerned, to go along with a slight uptick in earnings multiples.
One of the major trends in the Infrastructure space to start the year was in network performance and management. The first of these deals was Procera Networks buying Vineyard Networks for approximately $28M in early January. Vineyard is a deep packet inspection software provider, complementing Procera’s current product portfolio and allowing it to broaden its reach into enterprise markets. Also in January, Help/Systems acquired Dartware, which provides network monitoring and diagnostics software, expanding Help/Systems’ solutions set for multi-platform customers.
In February, F5 Networks bought LineRate Systems, a software-defined-networking-based network traffic management and optimization software provider. And in March, private equity firm Lone Rock Technology Group spent an estimated $10.5M to get Packet Design, a provider of route analytics software for IP networks. Its technology brings unique visibility into routing and traffic behavior across the entire cloud.
Finally, in late March, Fortinet picked up Coyote Point Systems, an enterprise-class application delivery, load balancing, and acceleration solutions provider. The acquisition complements Fortinet’s Network Security strategy and allows the company to compete with F5 in the SMB and cloud segment, while having better control over its own hardware.
Jason, how did Q1 look for IT Services?
Jason Steblay
The IT Services index started the year on a positive trend, reaching highs at the end of the first quarter not seen since November of 2011 as investors value the ability of Western firms to make profits. Another factor that contributed to the sectors performance was the wave of corporate divestitures that kicked off the year. Many of those business units found new homes in IT services firms at bargain prices, such as 2e2’s European’s operations which were picked up by Logicalis for $30 million—small price to pay for instant scale in Europe.
To name a few more, also in March, Mitel Networks offloaded its DataNet CommSource business unit to EarthBend as part of its ongoing strategy to focus the company’s core business and shift to an indirect go-to-market model. Elsewhere, the publically traded Hackett Group sold off its Oracle ERP practice to KPMG which is aggressively expanding its IT management capabilities.
Turning to the Asian IT Services sub-index, valuations cooled off somewhat during the first quarter as two of China’s leading systems integrators, HiSoft and Vanc Info, recently merged to form Pactera, signaling that the industry there is beginning to mature. Nonetheless, these firms still have plenty of money to invest in growth by buying companies that move them into new geographies and verticals. For example, India’s AGC Networks acquired fellow Avaya solutions channel partner Transcend United Technologies in March to help the latter expand in North America calling it a great opportunity for the company to grow its territory.
Elon Gasper
Growth has been the trend throughout this terrific quarter. What a year so far!
Speaking of Asian tech companies, don’t we have some additional international reports on that subject, Nat?
Nat Burgess
We do, Elon. In fact, we were able to grab Bruce before he got on his flight to South Korea. First, I want to summarize what I heard. As our audience knows, we’re in the tech M&A business, this is not just theory and concept for us, this is where we live or die professionally. What I heard in the report is that we’ve got surging public market valuations, healthcare is up 40%, financial services is up 15%. We have IPOs for companies like Tableau that are growing quickly, but are not profitable. This was possible in the late ‘90s, it was briefly possible in 2006-2007, it’s happening now. It’s is funding innovation and it is also funding the next generation of buyers.
We’re seeing high value strategic deals, including smaller companies, like Cisco’s recent acquisition. Very low cost to capital, loosening credit markets, huge cash reserves, and a new generation of tech-savvy PE firms. Basically, there are a lot of factors here that are driving tech M&A and we are off to a roaring start in 2013, and I’m really excited about the balance of the year.
Special Report: Asia
With that, let’s refocus a little bit and talk about Asia. We closed a deal, selling a South Korean firm called Olaworks, a Skylight Capital and Intel Capital business last year. We’re seeing a lot of innovation out of Asia, we’re starting to see a bigger role for buyers and sellers over there. We’ve established several relationships that are important to us and I think important to the industry. Our CEO, Bruce Milne, gave a speech in Shanghai last night and afterward recorded a presentation for us that we’ll go to now.
Bruce Milne
Greetings from Shanghai. I was here today to give a speech: Growth and Exit Strategies, Lessons from the Fast Track. We had a stellar audience of CEOs, owners, venture capitalists, and PE guys who came in from all over China. I’m getting ahead of myself.
I’m staying at the JW Marriott, that’s a 70-story spaceship of a building that would be the center of most any other city in the world, but here it’s just part of the star fleet of buildings like this. I came originally at the beginning of the week to attend the wedding of Cecelia Wong, who we call our beautiful Chinese daughter.
But back to Shanghai, it is an extraordinary city of more than 20 million people and clearly one of the most powerful cities in history. You have to come here, but you’ll have to wear your mask, the smog is really bad, and the Shanghaiers will immediately tell you that you haven’t seen anything until you’ve seen Beijing.
Yesterday I visited with KOTRA, the development agency for the Korean government. They have a brand new effort in M&A, called the M&A Center, we’ll be hearing more about that from them. One of the things we discussed is the problem with M&A here in Asia. Specifically, China being a no-show over the past few years. I was here to visit my Asian advisors, and as part of a tour of conferences we’ll be having over the next few months.
The issues we addressed that are keeping things from growing and going largely came down to language. The Chinese frankly don’t speak much English, the ones educated in the US do, but few others do. It’s an issue. Of course, Americans and Europeans don’t speak Chinese. Second is visas. It’s hard for the Chinese to go to the US, you have to get a Visa to come into China, you can’t just hop on a plane.
Another issue is insularity. The Chinese are a bit like what we used to see with the French and in Brazil, where the companies thought that they would get funded internally or sell to a local firm or go public on the local exchanges. With the IPO market drying up, that will have to change, they will have to reach outside. I estimate, in some of the interviews that we have with not only Chinese but Korean and Japanese investors, there may be as much as $50B looking for investments in technology.
Of course, we’d love to be seeing more Western buyers buying into China. Most of the deals we’ve seen were where Chinese companies sold to a Chinese company could have gotten a lot more with a Western buyer.
The other thing we addressed is experience. There is a lack of management experience, they’ve just grown so fast, and experience in doing deals. And with leverage, they don’t realize that with a foreign buyer they would have a lot of leverage, not only getting access to foreign markets and low-cost development, domain expertise, but they also share that on the other side. That’s why here at Corum almost 70% of our deals are cross-border, involving non-US buyers or sellers.
Addressing these issues is education, both in management and in deals. I met with a couple of professors at one of the universities here, they just don’t have courses that address some of these things, there was huge demand for our presentation today.
Then there’s the issue of connections, which relates to the last point, trust. In China, as in most of Asia, you really have to know people. You are often times introduced as “This is my friend Bruce Milne, who knows this person, who knows this person…” It’s been great that we’ve developed an excellent group of Chinese advisors over the years, so a lot of doors are opening. Back to you in Seattle.
Nat Burgess
Thanks for the update, Bruce. It’s interesting, in many ways, things haven’t changed that much from when I was posted in Tokyo with Morgan Stanley 20 years ago. It was all about relationships and trust, and we were back and forth between Hong Kong, Shanghai and Osaka, but it was hard to get into China, you had to buy a visa, there was a lot of bureaucracy, and that hasn’t changed that much. Definitely up and coming, based the pace of inquiries that we’re getting, outbound capital is definitely increasing, and we’re starting to see the Korean model, with Samsung and other leading tech companies spinning off startups, we’re starting to see that impact China as well.
Part of our effort in Asia is to establish relationships with the governmental and quasi-governmental entities that are fostering the tech sector. We did that in Canada 20 years ago, we helped build a lot of their organizations, we’ve had similar roles in Europe with software associations, and we’re no working with KOTRA over in Korea and we’re going to give them an opportunity today, just because we’re excited about what they’re doing, to give a brief introduction to their program.
KOTRA Report
On January 1st, 2013, KOTRA, Korea’s trade investment promotion agency, launched the Global M&A Center to address the increase in cross-border M&A, the growing desire among Korean SMEs to pursue cross-border M&A transactions, and the new government pledge called KMU, to activate the M&A market in Korea.
The Global M&A Center will utilize the strong support of President Park’s new administration, along with KOTRA’s vast network to support both inbound and outbound M&A transactions. Currently the Global M&A Center works with Korean PE funds, Korean LPs, our current database of 180 domestic SMEs, our overseas network of 119 Korean business centers, or KBCs, along with foreign private advisory, to search for and screen promising targets. The Global M&A Center’s operational plan involves working with advisories to assist domestic SMEs through the entire M&A process.
Our Center will handle everything from the identification of potential buyers or investees and their needs, to deal executions for nations, where we will support pre-valuations and introduce Korean companies to advisory firms and M&A financing institutions. In addition, we will be able to support the retainer fees of private sector advisories during the deal sourcing and due diligence season, up to $30K US.
We hope to work with foreign advisories during the deal sourcing stage by introducing Korean companies and their specific needs. In addition, we would be able to introduce Korean companies that are seeking legal or financial counsel during the M&A process. In terms of inbound deals, we can support PE and VC firms by sharing our Korean market information and sourcing Korean companies that meet the firm’s criteria.
Also, many Korean companies are interested in entering foreign markets through M&A with PE and VC firms, and they can be a component of PE and VC firm’s exit strategies.
Should you have a strong candidate for a potential target or investor, or if you have any recommendations for other viable opportunities, please do not hesitate to contact one of our professionals. We look forward to partnering with you in the future.
Nat Burgess
Well, this is exciting. What you see here is a very modern, open and aggressive way of fostering international business. When we worked with the Olaworks team last year, we were so impressed with the levels of education, intelligence, discipline… They are an amazing team, they have an amazing education system there, one of the best in the world, if not the best. What that creates is really strong companies and when you couple that with the kind of best practices and knowledge base that Corum brings to the table in putting deals together and in working with international buyers, we’re going to see some fireworks, we’re excited about that, and we welcome our expanding relationship with KOTRA.
We’re reaching the end of our time here, and we appreciate you joining us today.