Corum Webinar
August 5, 2010
SOLD! Seller's Panel
Ward Carter
Hello and welcome to Corum's
August monthly webcast. I'm Ward Carter, chairman of the Corum Group. Our
special guests today include a panel of sellers who have recently sold their
companies. We think you will find their experiences of great interest.
This event is part of our
monthly global online seminar series designed to put current events and
economic news in a context relevant to software executives who are building
their companies and preparing for strategic transactions like M&A.
Today we have over 300
attendees from 20 countries and nine speakers covering a range of topics,
including an overview of the market, followed by Corum's M&A valuation
metrics, three special reports on software as a service, casual gaming, and a
China update, and then our special guest panel of four software executives who
recently sold their companies. As usual, we'll wrap up with a Q&A
session.
For our speakers today, in
addition to myself, we have Bruce Milne, CEO and founder of the Corum Group,
John Scott, VP of Corum at our headquarters here in the Seattle area, Dougan
Milne, our director of research, Tomoki Yasuda, a senior research analyst,
Cecelia Yuen, a Corum China analyst, along with our panel, which we will
introduce shortly.
Regarding logistics for today,
we'll try to keep this event to around 60 minutes and you'll want to stay tuned
till the end for the Q&A session. As for the Q&A logistics,
please feel free to ask questions at any time, but we'll hold the responses to
them to the Q&A session at the end. To submit a question, please use
the Q&A window on the right side of the screen and be sure to send your
question to all panelists. If you select host or any other option, your
question won't be seen and therefore not included.
Today's conference is also
being recorded and will be rebroadcast on August 12. Thereafter, the
recorded event will be available on the Corum Group website via the conferences
and events menu. You can also email us a request.
Bruce Milne
Thank you, Ward. We have
a lot of ground to cover today and a great panel for you, so I'm going to go
through the overview quickly. Internationally, Japan's growth is slowing
a little bit as unemployment rises and production drops. What's
interesting is that the yen right now is at an eight-month high over the
dollar. The Euro topped 132. What is interesting is that last month
we had people predicting parity. I wouldn't want to be the guy that makes
a living from making predictions like that.
There is a lot going back and
forth. After the stress test that they did, they came up with some banks
paid $120 billion in refinancing. That to me is still a huge open issue
because that created a lot of chaos in the market. Some of the biggest
down days were because of bank financing and liquidity.
Economic confidence rose in
Europe, exports improved and the Euro advanced. One of the reasons the Euro
advanced is because they believed that Europe would recover faster than the
US. Other experts are saying its now time to buy the dollar as the EU has
reached the limits of austerity, how far can you go with it and still have
growth?
In terms of the United States,
manufacturing slowed in July, but service companies expanded slightly
faster. In the housing crisis we're getting all kinds of reports, I like
the one that said in most cities housing prices are still falling. What's
interesting is that in our area here in Bellevue, they were just rated as one
of the best places to live studies as #2, primarily because of stability, only
5.8% unemployment, good housing, that sort of thing. Yet, I know that I just
read that our housing prices are still going down.
“Fed Chief Says Long Road Back
to Economic Health,” well duh. New home sales are driving the market, but
housing is still very week. We're starting to see some middling in the
market place, but there is still some concern about deflation.
ADP came out yesterday and
said that the US added 42,000 new jobs, the market went up. Today they
came out and said the number of people applying for unemployment went up and
the market went down.
Foreclosure filings have risen
75% in the last year in US cities and there is a lot of unemployment. One
of the concerns is consumer sentiment, because we are driven to 70% by consumer
consumption and purchases, so this is important. Sentiment lagged, and we
had a couple of different indicators, including the Michigan indicator, which
was the lowest since November. The Treasury has gained ground and people
are concerned.
JP Morgan forecast that the
2010-2011 prices for oil will be down as demand slows. The US economy
only grew 2.4% percent in the second quarter. The concern with that is it
was below estimates and part of that is due, frankly, to inventory rebuilding
and the government's stimulus, which is going to be running out. Consumer
bankruptcies may exceed 1.6 million.
So, we have reason to be
concerned, even though the market is going up. Startup activities are at
a record low, according to Challenger. This isn't necessarily a bad
thing, as often times a record low presages an uptake in growth.
In technology, I thought this
was very interesting, I've made points in the last couple of months about
Microsoft using this marketplace to raise debt and that is not something that
technology companies have done a lot in the past. They basically had a
zero coupon convertible. IBM raised debt with a three year note in an
offering and I think they're paying something like 0.34% of 1%, it's almost
nothing.
The EU has instituted
antitrust action against IBM for a monopoly in mainframes, so the only way they
can get money is by instituting antitrust action against somebody.
RIV is coming out with a
planned tablet for November, so is Droid, by the way. What RIV has these
days is there are countries that are banning the use of their technology for
various reasons, Saudi is at the head of the pack, India has now stated their
not going to join that. What's interesting about this economy is that you
still have a lot of unemployment and you still have low consumer spending, but
people are still out there buying iPads. Three million of those sold in
the first 80 days and now there are all kinds of knock offs coming to market, as well as
any number of apps, which is quite amazing. People are still buying $3
lattes, even though they are out of work.
I interviewed a person the
other day, I thought it was interesting, they said that they are cutting back,
they decided that they are probably not going to have a personal trainer, and
they've been unemployed for five to six months. I think my grandparents
would have had trouble with that one.
Google is ripe for stock
buyback or dividend. The reason I put this one in here is that this just
says that these companies have a lot of cash. They can do buybacks or
dividends or they can make acquisitions.
So, corporate liquidity is up
26% overall, there is a lot of cash, particularly in the tech companies, as we
have reported repeatedly. The takeover spree may point to a second half
pick up as the volume tops $1 trillion and a lot of that will be tech.
Speaking of technology and
merger mania, let me hand it over to Tomoki Yasuda, a senior analyst here at
Corum. Tomoki?
Tomoki Yasuda
Thank you, Bruce.
Welcome everyone to Corum's monthly webinar. The section I will be covering
will be dealing primarily with public market updates, valuation metrics, and
the six broad software and IT sectors that Corum covers.
In our first slide we have the
public market. You see the S&P tech index in red, the Dow in green
and the NASDAQ in blue. We saw a slow down in the equity market in from
May to July, but the markets have made a great recovery in the past month, with
the S&P technology index being our strongest performer again, which is
always a positive for our industry. This month, software stocks have
cooled down a bit, as you will see later in the presentation, but the overall
health of the market keeps us optimistic for the outlook of the industry.
Here is historic M&A
activity in the month of July. The light blue line on top signifies 2010
numbers, the orange below that is 2009 numbers, and then the line below that is
2008 and so on. Interestingly enough, we see a small downward trend from
the previous years in July, but the difference is only about 20 deals or
so. Typically during the middle to late summer months, we see a drop off
in the M&A market as people are on vacation and their ability to involve
people in the process becomes challenging. Looking forward though, we
traditionally see a comeback in transaction volume around September and a
trending upwards toward the end of the year, so look out for that.
Here we have the Corum Index,
which represents an overall view of some important totals, averages, and
metrics that we keep track of. We have a snapshot of July 2010 and 2009
so you can compare and contrast specific data points.
On the top line you see the number of transactions,
and although the number is smaller, I'm actually excited about the other
factors that indicate that we are picking up in the overall M&A
market. The number of megadeals are up from last year. Megadeals
are those with value over $1 billion. They were up by two from last year and on
the right are the specific deals, so you can see the details of the deals that
have gone down.
On the next few lines we see
the average deal size and median sell size. Both are up by a very high margin. Average deal
size has doubled since last year and the median sell size has almost
quadrupled. This signals that bigger players are still competitively
acquiring companies and either paying for bigger companies or paying out bigger
multiples for smaller companies.
Next we will be covering the
six broad markets the Corum covers, including 26 subsectors within those
markets.
Since we are on Horizontal
Applications, let me exemplify some of those subcategories. We have
things like business intelligence, content management, ERM and ERP to name a
few. Looking at the graphs here, we see that there is a slight down trend
from June. July wasn't quite as strong as June in terms of EBITDA
multiples, but we see a strong increase in sales, which has gone up from 2.23x
2.49x.
The first example to look at
is Day Software, acquired by Adobe. Day operates in the web content management
space and is a European vendor on the Swiss stock exchange. This transaction
was valued at $242 million and a 5.3x sales multiple. This was an all cash
deal. This acquisition provided a strategic fit for Adobe, who employs
content management software as well as web analytics, with their $1.8 billion
purchase of Omniture last September.
Next we have Vertical
Applications. This market's sales and EBITDA valuations have started
cooling since May and now these numbers are on a par with earlier this year,
trading at 10.89x EBITDA and 1.88x sales. The spotlight here is the ITA
Software acquisition by Google. This will be Google's 14th acquisition this year.
It is on a complete spending spree as the online giant picks up one to three
companies each month. I felt that what makes this deal interesting is
that it is a major purchase by Google and it specifically deals with the online
travel business. Previously we have talked about Google's acquisition
strategy this year and they have been focusing a lot on talent acquisitions,
picking up small technology firms. But this is a market share and
technology play, as a foray into a market they're not all that familiar with,
online travel. It will be interesting to see what Expedia, Priceline and
Travelocity think of this.
The Consumer Application
market has seen its share of ups and downs this year. There was a
turnaround period in May when Apple drove a lot of the market with their
release of the iPad and they topped Microsoft market share. Since then, the
markets have returned to the levels they were at before the surge at .74x sales
and 7.08 EBITDA.
The spotlight deal here is in
the games space, as one of the top tier players, Playdom, was acquired by
Disney. I'm actually going to hold off talking about this until later in
the webinar because our VP of research, Dougan Milne, who just spoke at the
Casual Connect gaming conference in Seattle, will talk more specifically about
the rationale behind this. This sector is definitely one in his expertise
and I'll leave it to him to give us an in-depth analysis of it. Just
briefly, the deal was for $563 million, with a $200 million earn out, which
isn't bad for a company that just started a couple of years ago.
In the Infrastructure market
you'll see the multiples stabilizing at just under 10x EBITDA and 2.14x
sales. The market has verticals in development tools, network management,
security, and systems management, to name a few. I wouldn't worry too
much about the slight turn, as this is one of the broadest markets that we keep
track of.
The focus here is the
acquisition of Greenplum by EMC. The company operates in the rapidly
rising sector of data warehousing and has generated an estimated $29 million in
sales and EMC paid $400 million for it, roughly a 13.8x sales multiple.
This is the biggest payout we've seen in the month of July. The rationale
behind this is that EMC is finally putting its muscle behind data warehousing
space and previously they just partnered and provided engineering resources for
the likes of IBM, Oracle and Sybase. It will be very interesting to see what they
do here.
Now we have the Internet
market. This market picked up a little bit, trading at about 2x sales and
11.6x EBITDA. Here we have internet pure players like Google, Yahoo!,
Amazon, and infrastructure guys like Akamai and Lime Networks, very strong
public companies with lots of cash behind them. Although we acknowledge
the prowess of public companies, we should also keep a look out for private
companies like Facebook, which is starting to make its own moves in the past
few months. The picking up of Hot Potato and Nextstop are Facebook's
fourth and fifth acquisitions for the company this year. Nextstop
operates for travel recommendation, kind of like a mini Yelp and Hot Potato
provides a microblogging service like Twitter. That is the most M&A
activity we have seen from the social network and the main drivers for these
acquisitions are talent driving with technology being the second factor.
After years of building their platform organically, Facebook is finally looking
outside company walls to look for talent elsewhere.
Lastly, we have IT Services,
which has historically been the rock of the technology industry. You can
see some fluctuation throughout the year, but altogether it remains pretty even
at .7x sales and 6.09x EBIDTA. It is not an explosive sector by any
means, but a constant and stable one.
The spotlight here focuses
more on international flair. A lot of deals presented in this webinar are
US companies, I want you all to keep in mind that the buyer universe is global
and, in fact, 60% of Corum's transactions are cross-border. The deal here
is NTT Corporation's acquisition of Dimension Data Holding for $3.1
billion. This is the largest transaction we saw last month. It was
a surprise offer from NTT for Dimension, which is one of it's major partners.
It is also surprising for the size and scale of the acquisition, because a
Japanese company does not usually acquire big. They are typically a
notoriously hard buyer to deal with, as our executive VP Mark Reed would know.
He actually just completed a deal with NTT subsidiary NTT Data for his client
Apex Systems. Unfortunately we couldn't get the CEO of Apex, as he is
doing a business road trip in India right now, so he's not available. It
would have been great to get some insight from him on what it was like to deal
with an Asian buyer.
I guess that's it for
me. In summary, we see market leaders making moves into other sectors,
lots of consolidation, buyers becoming more active, lots of good activity going
on right now, and good strategic deals to be had.
Back to you, Bruce.
Bruce Milne
Thanks, Tomoki. It is
great to see NTT and the Japanese firms making more acquisitions, we've
announced two transactions over the last year. It is good to see my
friends at (xxx 17:46) Software, years ago I spent some time with them in
strategic positioning when the company was public and the stock was way
down.
Facebook, by the way, will be
delaying their IPO for a couple of years. The reason is, they're going to make
some acquisitions, so look for a lot more from them. We have a couple of
updated reports here, first we'll go back to Ward Carter to find out what
happened at the SaaS University conference where he spoke on valuations.
Ward?
Ward Carter
Yeah, Bruce, we hosted the
M&A track at the SaaS University event hosted in Washington, DC, and it had
a good turnout of SaaS companies from around the globe. The overall
outlook by software executives was very upbeat and optimistic. Most of
those companies are experiencing good growth and seeing strong customer
acceptance and high user retention rates. As you can see from this chart,
the growth in the enterprise application market continues to be dominate by
those with a SaaS model, while the more traditional vendors, although in many
cases much larger, were unable to log any net revenue growth.
On the valuations side, we
continue to see a healthy premium paid for SaaS companies. We model this
with the so-called SaaS factor, which tracks at about a 50% premium, if you
look at the enterprise value of sales for Saas companies versus the more
traditional vendors. This, of course, varies by month and sector, but the
premium is very real. Buyers and investors are quite simply quick to
embrace the SaaS model, and this data on public companies reflects that.
But it is not just the
Vertical and Horizontal Application solutions that are getting all the
attention, but also those companies that provide support for SaaS and cloud
technology on the infrastructure side. A couple of examples include these
deals by CA and IBM. Both had significant multiples of revenue, 10.9x
revenue and 6.7x revenue. We also see strong demands for SaaS companies
in our interactions with buyers, so if you have a viable SaaS solution it is a
good time to talk to us and test the M&A market before the sizzle of SaaS
dies down. Back to you, Bruce.
Bruce Milne
Great stuff, Ward. You can see our friends concur,
we have sold both to and for SaaS companies and some of the other ones here
that we have dealt with.
Next we have a special report
on casual gaming. Dougan Milne was one of the keynote speakers here and
did his research. Dougan?
Dougan Milne
Thank you. It has been a
very busy summer. Usually things tend to slow down a bit in July and
August, but there has been so much activity in the software and internet
markets that it has been incredible. In terms of particular industries
where that activity is happening, certainly gaming would be at the top of the
heap. We've had a flood of acquisitions over the past few months and
we're going to look at that in just a moment. But first, on the show
circuit, staying on the ground and running, we were down in LA in June for the
E3 conference. If you're not familiar, that's the largest annual gaming
event in the world. There is such an amazing energy at E3, the display
booths are so intense, they're kind of over the top. Just a few weeks ago
we were at Casual Connect 2010 here in Seattle. Now, the casual games
association asked us to organize the funding and exit strategy section of this
three-day conference. They wanted Corum to help educate the smaller studios
and publishers about what their growth options were, as well as bring in our
horsepower for putting together a panel of buyers. We had the heads of
Corporate Development from all the major names of the industry do
Q&A. They were talking about what makes an attractive acquisition
candidate in today's market. It was a very successful event, a very
successful set of panels for Corum. We've done a lot of work in the
gaming sector over the years and we've very excited about the industry right
now.
On that note, I know that
Tomoki just showed us the public numbers in that Consumer space, that's where
our traditional gaming companies live, but from the looks of the public
performance over the past couple of years, its more where the gaming companies
go to die. That is a good starting point for this segment.
If you haven't stayed up to date with the gaming
industry, it is important to put some context around this, it is important to
understand that we have seen a fundamental divide occur in this market during
the past 24 months or so. This divide is between the traditional gaming
companies and the newer, casual, social gaming companies. This shift is
perhaps similar to what we have seen in the music industry over the past few
years, going digital, even books, movies, TV shows, all the primary media
industries, except in the gaming space this has evolved and changed in a
different way. I'd be happy to talk to you more about that off line in
more detail if you want to learn more. For the moment, lets move
on.
M&A volumes in the gaming
space for the first half of the year: There were over 50 transactions in a
single market in six months and we can very safely call this a very hot
sector. Perhaps what is more interesting about the sector than some others
is that it is not limited to a few dominant players, it is not limited to a
specific region, it is not even just local, it is not a Silicon Valley
bubble. Gaming activity is hot and it is global. Nearly 50% of the
transactions involved US companies, but look at where the next biggest piece of
the pie is: China, Japan and Korea. All playing a heavy hand in this
industry, perhaps no greater growth story than what we're seeing in China right
now. China dominates the Asian originated gaming deals, we're expecting to see
a lot more of that, a lot more cross-border activity in this space.
Looking at some of the
specific deals, Tomoki mentioned the Disney/Playdom deal. I want to give
you some background to give this deal some context. Disney didn't just
acquire a one-hit or one-platform wonder. Playdom is a three-year old
company, they are one of the hottest names in casual gaming. They grew
organically until about eight months ago, when they got their first round of
funding, that was just last November, not even a year ago. That was $43
million. From there they went on a shopping spree. They took a very
strategic approach to raising capital, two funding rounds in the past nine
months, raising a total of nearly $80 million and they spent all of it on
acquisitions. We'll see some of those in just a second. In fact,
they have been one of the most active acquirers across any industry in
2010. Disney got a great deal here, they bought a lot of talent spread
across a lot of platforms, extending from Facebook to Myspace to Flash to
mobile, very interesting stuff.
Over to the right, you know
you can't even whisper the term casual gaming without mentioning Zynga, truly
the big dog in social and casual gaming. Still private, dominating
Facebook with games like FarmVille, Mafia Wars, FrontierVille, etc. They
have tens of millions of players. They will be spreading to other
internet-based platforms like Locus over the next few months, and mobile.
A big part of their upcoming strategy is that they want to be huge on the
international scene. As we just saw, really our biggest growth market is in
Asia. Yesterday Zynga announced that they bought out Uno, a major
Japanese casual gaming company, and just a couple of months ago they purchased
XPD, a very well-known, Shanghai-based casual game developer with some of the
top titles in the Chinese market. You can guess that they are poised for
incredible growth.
Going the other direction, the
largest gaming company in Asia, Shanda Games, they purchased a US powerhouse in
casual gaming, Mochi Media. This is a very smart acquisition by Shanda,
they are putting a very tall flag in San Francisco, where Mochi is headquartered.
They have also started putting tens of millions of dollars into building out Mochi as
their primary gateway between east and west. I think this will be a great story
for Shanda.
Lastly, low tech to high tech,
GameStop, this is actually a retail store, you can find them in most malls
across North America. They sell tangible video games, and obviously they see
the direction of the market as it is moving with their purchase of Kongregate.
This is one of the biggest flash gaming portals on the internet, nothing
tangible about them. They have a lot of recognition here and I think this
is going to be a very smart buy for GameStop.
Lastly, I'm just going to
leave you with this to show you in further detail what the divide between the
traditional gaming companies and our nouveau casual gaming companies is.
Your traditional gaming companies, EA, Activision, Blizzard, those are some of
the top dogs, and you have traditional gaming companies like Shanda who are
making a very positive transition into the casual space. You can see that since
2009, they've made 5 deals, the bulk of them in the casual and social
markets. But, of course, the biggest acquirers over the past 18 months
are Playdom and Zynga, making a lot of acquisitions. Playdom will continue to
do that under the Disney umbrella and Zynga is continuing to raise money like
mad to make more acquisitions. This is a very exciting space, I don't have time
to get into more detail, but if you have questions about this space or are
interested in getting into it, or if you're already into it and you want to
know about exit strategies or growth might be, give us a call. With that,
I'll turn it over to Bruce.
Bruce Milne
Thanks, good stuff.
Really exciting. I had a chance to talk to some of my friends, we sold at
one time the makers of Duke Nukem, the largest selling game of any kind in the
world, we've done a lot of work over the years with these folks, and it is
exciting to see what is happening.
Be sure to give your
questions, we're all here to answer them. Now, shifting gears a little
bit, along the same track, we see a lot of activity, we saw 40% in Asia, so
lets go to Cecelia, our research analyst from Shanghai.
Cecelia Yuen
Thank you, Bruce. There
is much good news in China's software space in the last couple of months.
The industry revenue increased about 30% from January to May of 2010, since
last November, software revenue has a growth rate of more than 20% for the half
year. Among the subcategories, IT Service growth was much higher than the
average industrial level.
Among the key players, UFIDA
acquired Infoservice, a software and consulting service provider for the
automotive industry, spending $72.4 million, which is the largest domestic
M&A for the management software industry. Since 2008, UFIDA has
acquired 18 companies, spending about $150 million.
Looking at past Chinese
M&A transactions, we found that three types of software companies have
higher possibilities to be acquired: First, companies that produce software
required in a specific industry. Second, companies with unique technology in a
niche market. We believe that business intelligence, product life cycle
management, and process management will be the hot spots in the future. Third,
IT service centers will be in many industry consolidations.
In 2010, China already had
online game revenue projected to grow 30%, reaching $4.8 billion. Revenue
for home grown games will increase by 50%. In 2011, revenue from online game
exports could be above $200 million.
China has more than 400
million web users. It is the largest international market in the world. There
are already 10 online gaming companies listed in foreign exchange
markets. For years, Perfect World game exports was the number one in
China until 2009. It has already reached more than 60 countries.
Licensing fees increased from $27 million to $31 million.
Last, but not least, the 8th China Digital Entertainment
Expo, ie, China Joy, was held in Shanghai this summer. This is the third
largest gaming event in the world after E3 and the Tokyo Game Show. Thank
you very much.
Bruce Milne
Thank you, Cecelia. We
had the pleasure of having dinner with David Ken, who is the president of
VanceInfo. That is the fastest-growing technology company in the world.
It was interesting over dinner to listen to the growth numbers. You heard
Ping Lu, from our advisory board during the Asia Rising conference, how they
went from 1,000 to 2,000 employees while the rest of us were
belt-tightening. They now have 10,000 employees. They are China's
largest IT firm and their growth is just breathtaking.
My friends are coming back
from Shanghai, the Expo over there has been running for six months, so that's
really impressive, but the lines are a little bit daunting. You buy your
place in line! Cecelia is heading over there next week.
Okay, shifting gears here to
our main presentation today, Sold, our seller's panel. John Scott, VP of Corum,
is joining us, both as a presenter and as a moderator. John?
John Scott
Thanks, Bruce. This is
an interesting segment that our webinar attendees tell us they really
enjoy. Corum has helped over 240 companies successfully reach a liquidity
event for their investors and owners and behind each one of these is an
interesting story of how they decided to sell and the process they went
through, approaching the market, identifying buyers, including a letter of
intent, the due diligence process, and ultimate closing a definitive agreement.
I've been joined by three guests today to discuss some of our experiences in
the M&A process. Due to schedules and time zones, we have both
recorded and live guests on.
First we have Andy Milford of
Dorian Software Creations, a pioneer in the security event management
space. Dorian was acquired by the network management of US-based
Ipswitch, a developer of collaboration network management software.
Andy Milford
This is Andy Milford. My
company, Dorian Software Creations was sold to Ipswitch recently. We
looked toward an exit for our business because we noticed that there was
consolidation in our particular niche, which was the log management sector,
related to networking security and compliance. We also had some concerns
about tax changes on the horizon with things sunsetting at the end of 2010 and different capital gains tax
breaks, so those were considerations for us when we were looking to exit.
The sale of the business
itself was pretty conventional, what you would expect in a private company
transaction. Due diligence during this process is roughly what we
expected. We felt that our relationship with Corum helped us anticipate
ahead of time the sort of questions that would be asked in due diligence and
made sure before we started the process that we had all of our records in a row
so that the process would not get bogged down. All of that was with a
straightforward process. There are always little questions or things that
came up that they can do as a selling entity. They'll look at an LLC as a large
deal that the buying entity might see as a large deal, but everything was
pretty straightforward.
If you wanted me to give any
advice to other CEOs who are seeking to exit out of the software business, I
would say that definitely partner with an M&A firm like Corum. Obviously
we're biased, we had a really good experience with them. But this will
help you be able to focus on running your business during this process.
This is critical, because you have to make sure that your financials continue
with a strong tendency toward growth and if you take a lot of time in the
M&A process itself, and you don't have a partner to help you during that
process, it can be very tough. You can tend to neglect your business.
That would be my biggest advice.
Definitely have your (xxx
35:36) to the preparation ahead of time, for the due diligence consider either
digitizing your records, everything the buyer would want, because then it is a
lot easier to get them this info and there is a lot less clerical work involved
for you and your staff during the process.
So, that's my feedback on this
process. I hope you have a wonderful webinar and I hope this been
beneficial to the folks listening.
John Scott
Andy makes an excellent point
about anticipating the detail requirements of due diligence. It is
important to work on this with your advisers during the planning stage.
He also points out that this is an area that can really bog down an M&A
process. Typically, an effective due diligence plan will help a seller
get to a deal close much more quickly. During the letter of intent to
close phase, time is really not a seller's friend. You really want to
reduce that time.
Next we're going to hear from
Bruce Ringrose of Summit Software, a provider of industry-leading software
solutions for the biofuel, grain and agribusiness marketplace, who recently
sold his firm to iRely, an India-based enterprise management software provider
in the commodity trading supply change management space.
Bruce Ringrose
Hi, I'm Bruce Ringrose, CEO of
Summit Software, and my two partners and I recently used Corum Group to sell
our business to iRely. We've been working on preparing transition plans
for Summit Software for many years and our main interest was to bank our
retirement while continuing to work and to have outside capital to fund our
business plan expansion.
The deal was mostly cash, with
preferred compensation over the next three years based on profitability
goals. We signed non-compete and employment agreements over the next five
years. We found a strategic partner that understood the value of our
business operation, our products, our customers, our services and our people.
The entire process was, from start to end, about seven months, with three
months from the letter of intent to close. The last three months were
very intense with trying to comply with the information requests and find the
various business documents that were being asked for. Obviously, selling
your business is one of the most important events in your life, and the worry
of doing the right or wrong thing at the right or wrong time is very tough on
your own. The Corum advisers were on call to keep us on track, on
message, and advising us when to say yes and when to say no so that we could
get the best win/win deal possible.
Looking back, I did not
anticipate the amount of time needed to satisfy the documentation requests or
the effort to pin down the final contract draft. I recommend to buy a scanner
now and begin scanning all your vendor contracts, customer contracts, employment
contracts and also important business documents and licenses, to have that
ready.
My advice to CEOs who are
looking to sell their business is to plan for the sale of your company and
really understand your value to someone else. Get your trusted adviser team
ready now, you M&A adviser, your CPA, your attorney, as they will help you
with this process. Prepare for long hours, to keep your business going,
and also doing the due diligence at nights and weekends if needed, as well as
to get someone to help you with the grunt work.
We were exceptionally happy
with the outcome and frankly I would do nothing different. After
acquisition I am having more fun than I have had in many years and I am
certainly looking forward to a relaxing fishing trip in the weeks to
come.
Thank you.
John Scott
Bruce's comments on the length
of the process are fairly typical. When we are speaking with potential
sellers, we tell them to plan for six to nine months from start to
finish. Often times the initial preparation work will be 30 days before
we begin reaching out to target acquirers. Bruce's feedback on the
intensity of the process is also very accurate. During this process, you
need to manage your company at the same time and this can be very difficult to
do without the assistance of good advisers.
Next I'm pleased to have, live
with us today, David Gorman, who was the founder and CEO of Clearview Staffing,
a leading provider of staff-based business applications for the healthcare
staffing industry. Founded in 2000, Clearview grew rapidly and was
acquired by API Healthcare, the technology experts who optimize human capital
for more than 1,000 hospitals and related staffing agencies. So, Dave,
thanks for joining us today. Let me start by asking you, what was behind
the decision to seek an acquirer when you did?
David Gorman
John, thanks for having
me. I mean, aside from the personal financial goals that I think all of
us are interested in, on the professional side, in terms of realizing that in
order to continue to grow the business, for my business partner and I, we had
to kind of look outside of our traditional view. For a number of years,
as you pointed out, we grew the business successfully in a very entrepreneurial
way and that is all well and good, but I think our view was that it was only
going to take us so far. I think the last few years we really began
realizing some of our own limitations and some of the things that we had set up
in the business that needed to be addressed and to address those things, we
needed to look outside of the business and bring in additional resources
and the path that we chose to go down and to help us do that, was to help us
find a buyer for the business.
John Scott
That's interesting, because
what you're talking about are the phases of a business that you go through and
having built companies and staff myself, it's good to realize when you're going
through an additional phase. Some companies try to manage their own M&A
process, so I'm interested in why you chose an adviser to help you and also,
how did you make that selection?
David Gorman
Well, we didn't know a lot,
really anything, about how to sell the business, so from our perspective it was
not really an option to not have some type of adviser, it just would have been
foolish. I think one of the other folks pointed out that it is one of the
most important decisions that you will ever make, and so why wouldn't you want
a trusted adviser involved in the process? So, we knew that going in. I
think that the one thing that, as we looked at different firms to help
represent us, one of the things that really hooked us, and I believe was still
a big factor, was the fact that we had a firm who understood the software side
of our business, a firm specializing in software, and I think that helped us
immensely in the process because we weren't having to go in and educated a firm
or broker on how to speak our language to potential buyers. I think that
was one of the things that made an easier decision for us to select Corum in
that process.
John Scott
That makes sense. Now,
looking back and trying to provide counsel to the many CEOs listening today,
how much work goes into the M&A process for the CEO and what kind of
distractions did this create for you and the executive team?
David Gorman
Yeah, it's highly distracting
and don't let anyone else tell you otherwise. It definitely is. The other
gentlemen pointed out smart things that you do in the process, to get all your
financials in order, your documentation electronically set up, so that it
speeds the process along, but that requires work. I think understanding
what hopes you need to bring in, in terms of your management team at the right
time to help you out, is really imperative to the process. We actually
didn't have a CFO but hired one to help us get through the process. So, I think
figuring out what the resources are, who to bring in and when, and those kind
of things, are really key considerations to be made.
John Scott
That's absolutely true.
Were there any interesting dynamics in the negotiation process that surprised
you?
David Gorman
Well, the one thing we heard
at the beginning was, “Are you looking for a strategic buyer or a financial
buyer?” I think our view was that we always wanted a strategic buyer
because it would help us build more value. Where we ended up was kind of
with a hypbrid of the two. The company that acquired us is actually owned by a private
equity firm, so while it was certainly a strategic play, because our products
and solutions aligned so well, we felt like we were constantly almost in some
ways dealing with two buyers, one on the strategic side with the software
company, but also one on the financial side with the private equity firm, and
that made it pretty interesting and it kind of felt like we were kind of
constantly bouncing around between the two. That's probably the most
interesting thing.
John Scott
Yes, Dave, I've been through
that before, also. It is interesting, it is a hybrid the way you
described it. Thanks for being with us today, and why don't you hold on
because there could be some questions coming up.
Next I'm going to provide some
perspectives from my own experience. Before joining Corum, the last 20
years of my operating background were at the President, CEO, and COO level of
technology companies and these companies generally had very strong boards and
were backed by venture capital investors. During this time, I went
through one sale and two successful M&A exits. As a result, I am
often asked questions about the process.
My most recent event was as
CEO of PowerTech Group, a VC-backed security and compliance software company
that was accompanied by Help Systems and also the private equity firm, the
Audax group. Help is a provider of automated operations and business
intelligence software. Given my operating background and experience in M&A,
some might wonder where I see the value of using an outside adviser. The
reality is that no matter how much experience as a CEO you may have, a seasoned
software and technology adviser has a lot more background experience in the
area. These firms have generally been through hundreds of successful transactions
and have dealt with almost all of the issues and challenges that arise.
This simply provides me, my board and my investors with real world current
advice. An adviser knows the markets, the details of recent transactions,
and the relevant valuation models, but they also have the relationships with
the buyers and they know how to get to the right individual as a potential
acquirer. Then, really important, is having an independent adviser can help a
CEO maneuver through the difficult internal board and investor issues that you
have and if you have a complicated cap table, that is a real issue. Then,
the counsel is provided on an objective and unemotional fashion, and that is
important going through this.
Another question that comes up
is, once the letter of intent is signed, is the rest of the process pretty
straightforward? In my experience, unfortunately, the answer is not
always. It is in this period that the due diligence really begins and the
unexpected issues arise. Surprisingly enough, 70% of deals that get to
the LOI stage fail when the seller doesn't have an adviser. I think this
is because the acquirers have not been communicated to regarding what the
seller's intentions and issues are. Also an adviser can assist the CEO
and investors in the difficulties of coming to a definitive agreement. An
example might be in the reps and warranties area that a seller may ask for,
while a CEO may feel comfortable making a particular representation, a VC
investor may not. In this case I need my adviser to step me through, step
in and guide us through these issues. I can't just leave something like
this solely to attorneys.
Another question often asked
is whether there were any surprises that came up and caught me off guard.
As CEOs, most of us really like to plan and have our arms around issues, but
you can never predict everything that is going to come at you in a potential
transaction. I had one manager claim intellectual property rights to
software he had released to the company years before when he joined us.
This obviously created a big problem and we had to resolve it quickly.
And we had to inform our potential acquirer about the issue as well.
Working with my M&A adviser, they had the experience and the patience to go through
this and help create a pathway to resolve the situation. My board and I
were much too emotional and close to the issue to solve it. And you know
what, we got through it?
So, I can see that we have
many questions that came in that I would like to get to. However, I'd
like to take just a minute on something important. All of our guests who
have recently sold their companies attribute much of their success to a good
preparation process, and the best way to get that is at one of Corum's
educational conferences around the world. Ward, tell us what's coming up.
Ward Carter
Okay, thanks John. Each
year Corum hosts and sponsors educational events around the world for software
entrepreneurs. Our Merge Briefing is a focused, 90 minute regional event,
bringing software entrepreneurs current information about about the M&A
marketplace and providing an overview of the M&A process.
For a complete education on
M&A in software, internet, IT, and related technology, plan to attend a
Selling Up Selling Out conference. This is an intensive, how-to workshop
that will give you a full road map of how to prepare positions, research,
value, negotiate, and execute due diligence and contracts for a successful
M&A transaction. This is the most attended executive conference in
the history of the tech industry. Attendees have executed over a trillion
dollars in transaction value. Our next one is on August 12, here at our
headquarters in Bothell, Washington.
For you on the confrence
today, I'd like to extend a complimentary pass to any of the Selling Up Selling
Out or Merge conferences. Go to our website, corumgroup.com, and you'll
find a link to conferences and events with all the upcoming events and
schedules, as well as registration information. On the registration form you
can enter a promo code which will waive the registration fee. The code
for today is augustflash, or if you want to contact me or any of the Corum dealmakers,
they can make sure you have a space in the upcoming conference.
Also, please reserve this time
on your calendar for next month on September 2 for our Corum M&A
monthly. We will have a special M&A field update and we will also
have a report on the anatomy of a recent deal. I'm sure you won't want to
miss this very interesting session.
With that, I'd like move to
the Q&A. We have had a few questions come in from the audience.
I'd actually like to direct the first question to Dave Gorman. The question is,
how did you prepare your staff for the fact that you were selling the
company? I guess that presumes that you did advise or that it was widely
known within your company that you were looking for an acquirer. Can you
explain to us what the case was in your case, please?
David Gorman
Sure, Ward. You know,
for the most part we kept the fact that we were selling the business under
wraps. As I mentioned previously, we did bring in our management team and
let them know, because we had to get their help in the process, gathering
information and going through the whole due diligence process. For the most
part, we kept it pretty much under wraps until the point of the acquisition
being done and at that point, again, it really was just relaying the message
back in terms of what the goal was for the business and what we were looking
for in terms of doing this and to grow further and to make a bigger footprint
for growing the business. That is really about it.
Ward Carter
Okay, appreciate that,
Dave. This is a question that came in that probably could be directed to
one of our senior deal makers. Nat, maybe I can ask you to take
this. Nat Burgess is one of our senior deal makers here at Corum, as well
as being our President. Nat, the question is one that I hear quite often.
We have invested all of our cash back into growing the company.
Therefore, we show very little in the way of profit. If we are thinking
of M&A in a year, should we be trying to increase our profitability now?
Nat Burgess
That's a great question and we
do get that a lot. I think you have to ask yourself a couple of
questions. The first is, are you in a growing market? If you are in
a rapidly growing market, then operating at a loss to build market share can be
very wise, and the deal that Dougan profiled earlier, the Playdom deal, is a
classic example. They have never been profitable, they set it out as a
strategic goal to grow their headcount to 200 people in a market that is
growing explosively and the result is the $750 million transaction, which is
more...I don't know what the multiple is, but it is a very strong VC return
over a very short period of time. But, if you are in a mature market, the
frankly, you should be operating at a profit and most likely your buyers are
going to expect it, whether they are strategic or financial.
The last question that I would
ask yourself is, are you actually investing in growth? This is
interesting. When we actually dig into the financials and start picking
apart the numbers and the model, what we sometimes find is that a company
thinks that it is investing in growth, but in fact it is investing in an
unprofitable where they can continue to get bigger but they will never generate
profits, and there's just not a lot of interest in that.
So those are the three
questions: Are you in a growing market? Are you in a mature market? Is your
investment actually delivering the potential for future profits, or are you
simply growing a business that will never be profitable?
Ward Carter
Thanks, Nat. Here is a
question about utilizing a lawyer as opposed to an M&A firm. Jeff
Brown, maybe I'll ask you to answer this. Jeff is our regional VP out of
Houston. The question is this: If I have been approached by a reputable
company that I know, so shouldn't my lawyer be able to guide me through the
process?
Jeff Brown
Yeah, that's another good
question. Your lawyer, especially your attorney who is experienced in IP
business transactions, will be a key part of the process, but you really
shouldn't expect your attorney to take the place of a good M&A
adviser. They are different skill sets, different areas of expertise, and
the attorney and the M&A adviser play different roles in the process.
Those things that your M&A adviser is responsible for and should be
delivering for you, as the seller are making sure your buyers are
well-qualified, making sure your buyers actually have the resources and are
properly calibrated around valuations to do this deal, that the management and board
of the buyer are actually on board and can support the acquisition that they
have approached you on. It is sometimes challenging to keep the dialogue
with buyers at a high quality level and focused and on target. It is the
job of the M&A adviser to keep quality in that dialogue and to make sure
that deal terms, both commercial and otherwise, are reasonable and customary in
the industry.
The three most important
elements here are, as John said, your M&A adviser understands market
dynamics, strategic positioning, and the relevant valuation models for this
kind of transaction. That M&A adviser can bring competition to the
deal. Competition is a seller's best friend and if there isn't competition, at
least the illusion of it for your business is really important. Finally,
maintaining structure and focus in the process.
Ward Carter
Good, thanks, Jeff.
Bruce Lazenby, this came in and I think it may reference one of the deals that
you were involved in that is highlighted here. The question is about
earn-outs. It seems that earn-out components are becoming a more standard
part of M&A deals. Do you feel that is true or can you comment on
that please?
Bruce Lazenby
Yeah, thanks, Ward. We
are seeing a trend towards more earn-out and there are a number of reasons for
that. One is, it can be a great way to bridge the gap between valuation
and expectation. You may be able to get the buyer to $X million, the
seller wants $X+ million, and one way to bridge that is to say we do $X million
at close and then we're going to have an earn-out component. That is good
for a couple of reasons, to bridge that valuation gap. One is that buyers
are aware that sellers, once they have a few million in the bank, might be less
motivated than they would be otherwise. I can tell you from experience
that when your spouse knows there are a few million in the bank, you hear,
“Let's just take Friday off.” The trend we're seeing more and more now is
that buyers are leaving sellers' companies pretty much intact and leaving
management largely in place to run the company, which is a trend that was
different a few years ago when they used to cherry pick some of the best
executives, send them to the head office in California, and shut the rest of
the company down.
One of the careful things to
do when you're considering this is make sure there is alignment between the
seller's interest and the buyer's interest. What you're going to earn the
earn-out on is really critical, it is important to get that right. It is
very important to get the wording correct, because once, as the seller, you've
lost financial control of the company and the buyer owns it, you may be
counting on certain things for the buyer too, and if he doesn't do it, you
can't earn your earn-out, and that can be really difficult. The wording
here is critical.
The last thing I would say is
be careful of the culture. You need to think of yourself as an employee,
post acquisition and ask yourself if you can work in this environment. We
sometimes jokingly call it indentured servitude and you need to make sure that
you can be comfortable in the environment you just got into if you're going to
be hanging around for a couple of years.
Ward Carter
Thank you, Bruce. By the
way, Bruce Lazenby is our VP and regional director handling Canada, out of
Ottawa.
Okay, we're just about at the
end of our hour. I have one last question I'd like to give to Bruce
Milne. Bruce, we hear a lot about what is happening in Asia. Are we
seeing many buyers from India, China, or other Asian countries as you do
European buyers?
Bruce Milne
Well, we're seeing a growth
there, clearly. Last month we profiled a deal in Singapore with NTT and
today we just heard from one of our sellers who sold to what is basically an
Indian company. In our Asia rising report we had a number of reports in
the area. That would not have happened even five years ago. It does
not match the number of buyers from Europe, clearly it doesn't match the
US. But what is interesting is the dynamic is different. They are dealing
with very hyper growth markets. It was interesting talking to David about
that, they have a few US offices, but that 10,000 people, about 9,000 of them
are dedicated to just their own market, China. They are able to take
advantage of high growth markets that are automating rapidly in China and
India. They use that to cash generate a strong stock market, ability to
get cash strong currency, and to then go after American and European firms,
which are frankly in slower growth markets. It is a different
dynamic. In many cases they are more comfortable now dealing with the
west, they are looking for downstream companies to pick up, particularly for
their IT services businesses, and they are looking for a footprint, a base of
operation, they know it is very difficult to build distribution user base in
the US.
I think we're about out of
time here. I did try to get Langara to dial in. Guess what they
told me? They're out fishing.
Thank you guys, I'll see you
in a few weeks. Regarding fishing, they're doing very well.
Ward Carter
Thanks, Bruce. Thanks to
all the speakers, especially our seller panelists and thanks to our audience
and members.