August Tech M&A Monthly
Introduction
Bruce Milne
Welcome to our new 30-minute format. I’m Bruce Milne, your moderator. We’ll go straight to our agenda. First today we have field reports. We’re going to go to Europe for a brief update on a transaction that just closed, we have a report on the Casual Connect gaming conference, and an upcoming market spotlight.
Let’s go straight to Europe with Miro Parizek, Managing Director.
Europe Field Report
Miro Parizek
Thanks, Bruce.
As I mentioned last month, Q2 was a very busy quarter for us internationally, with deals representing clients out of New Zealand, South Korea, France, and also in the Ukraine.
In that regard, I wish to announce the final closing of the ANSYS acquisition of Esterel, the global leader in simulation of certified embedded systems code. The transaction worth $53M, closed on Aug 1 with the final approvals of the French authorities. We wish our friend Eric Bantegnie, the founder and CEO of Esterel, good luck in his new future at ANSYS and congratulate all the shareholders at Esterel on a great investment and optimal outcome with their exit last week. And as a precursor to this quarter’s activity, I am happy to announce the signing of two more LOIs from our international group just this past week. More on that in October. Back to you Bruce.
Bruce Milne
That’s a record amount of activity. Congratulations to Esterel, we look forward to seeing them fishing. Now let’s go to Jim Perkins and his gaming conference report.
Casual Connect Report
Jim Perkins
Thanks, Bruce.
Casual gaming is at the center of the video game universe these days, and there is no better place to see and hear the latest than at Casual Connect.
I was fortunate to be a featured speaker and panel host at Casual Connect Seattle a couple of weeks ago.
Of note, Big Fish Games announced their new cloud gaming service, streaming games instantly to PCs, mobile devices and TVs. Big Fish also announced a partnership with Roku, the best-selling streaming device maker.
The acquisition binge continues as the major players in Asia and North America pick up content, platforms, and gaming technology. This was highlighted at Casual Connect’s Corum Buyers Panel. The panel was standing room only, and no wonder. It featured the most prominent players in the industry. Electronic Arts, Kabam, and Big Fish Game executives shared their thoughts on what they are acquiring, what the hot trends are, and where the industry is going. Great info you would never get anywhere else.
The sellers panel gave the packed audience a view of what it’s like to be on the other side of the transaction. Executives from companies that had recently been bought by IGT, Real Networks, and Disney shared experiences growing their companies and preparing for acquisition by these media giants. It was a very revealing panel.
Tune into my WFS Market Spotlight webcast on August 28, where I’ll be presenting a detailed video game market update.
Back to you, Bruce.
Bruce Milne
Thanks, Jim. You’re getting in your frequent flier miles! He was just in Indonesia for the gaming conference there as well. Glad to see our friends at Big Fish Games are doing so well. They’re one of the primary advertisers offering the Olympics, as you may have noticed.
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Corum Index and Research Report
Elon Gasper
Now let’s go ahead and move on to our Corum research report with Elon Gasper, VP and Director of Research. Elon?
Thanks, Bruce. Following up our recent mid-year webcast we begin with the public markets, which after just a pause for breath in July resumed their climb, showing excellent gains for the year and with a fine bounce over the last couple months, too, in all three key major indices we track.
We see this banner year for M&A continuing, powered by the US recovery, cheap debt, truly disruptive technology, and record cash for acquisitions which just keeps piling up faster than it’s being spent. Last month our Corum Index showed the smart money’s taking advantage of this moment by exiting its investments at a quick clip – Alina, what’s the index say now?
Alina Soltys
Elon, its bringing to light another metric.. even though the number of transactions is dead even as compared to last year, the total value of transactions is up 50% from July of last year, hitting just over $20.6B for Tech M&A. It’s also been one of the busiest Julys in the last 5 years.
One thing that did help in that regard were the five billion-plus deals this month. Looking at those megadeals, I discussed Dell’s acquisition of Quest Software on last month’s webinar. Looking at VMWare, who acquired Nicira with $1.2B paid for a pre-revenue company that raised north of $40M. They allow companies to create a virtual network infrastructure where they not only deploy virtual servers but also deploy tens of thousands of networks.
Jason, what other interesting trends are we’re seeing?
Jason Steblay
Well, the number of PE-backed deals was up only slightly in July, but the value of those deals shot up 72% from a year ago. New research indicates that private equity firms were sitting on more than $1 trillion in ‘dry powder’ at the end of 2011.
As fund managers are forced to continue deploying their funds, too much money in the system, chasing too few deals could continue to drive up prices, making it an attractive market for sellers.
Elon Gasper
Next we’ll look at the six parts of the market from the seller’s perspective, in a streamlined format our subscribers will note as a change. We’ll still present the more detailed graphs and numbers at the quarterlies, but we’ll use this as our regular update. First the horizontal market with Alina.
Alina Soltys
Horizontal, with its heavy SaaS influence of companies has stayed relatively flat this month over Q2 figures.
The ongoing theme in Tech M&A continues to surround social media. The land grab is being propelled by tech companies like Salesforce with their Buddymedia pick up in June, and then just last week Google reached for Wildfire Interactive for a reported $450M, with a valuation roughly between 7x-10x revenues.
With this acquisition Google will have the capabilities to help deploy marketing campaigns across various social media channels like Twitter and Facebook, potentially charging a tariff for companies who advertise on these networks. Of course, with 90% of Google’s revenue coming from ads this fits in perfectly with their continued ad growth, all the while having an insider’s perspective on advertising money spent on Facebook and Twitter.
Elon Gasper
Or on specialty vertical market social media, where quite a few niche companies found exits last month amid particularly diverse activity in the healthcare sector, where we counted over a dozen transactions ranging from towering megadeal mammoths serving thousands of hospitals to scurrying little start-ups gathering shiny tech seeds to catch up.
The biggest deal came at just last week, century-old Roper Industries made a major move in the medical direction by taking lab info outfit Sunquest off PE hands for a $1.4B. Come to our healthcare software spotlight later this year to hear about some surprising players in this space like Google, and the companies they’re grabbing for applying tech like social media, DNA analysis, and speech recognition to this consolidating vertical market.
Jason Steblay
The consolidating video game sub sector continues to set a rapid pace, despite the negative change in multiples we’re seeing in the overall consumer market. As Jim described at the Casual Connect conference last month, two trends driving consolidation are the push for social/mobile gaming and online gambling.
In the first half of 2012, mobile games accounted for 29% of deals , versus just 5.2 % for the first half of 2011. In the last thirty days alone, we have seen Disney, Sony, and smaller players like TapJoy all make deals in this space. Also, Amazon launched its own gaming studio in July and we can reasonably expect it to leverage its Kindle line of tablets to target mobile games.
Meanwhile, online gambling continued to be an active space as well. In July, PokerStars acquired Full Tilt Poker as part of a Justice Department settlement. Rumors are also beginning to circulate that Zynga is in the market for a real cash poker platform.
Alina Soltys
In order to support these online gambling platforms, the right infrastructure needs to be in place, bringing us to the next segment. Although sales multiples ticked down this month, EBITDA remained flat.
In this month’s spotlight deal SolarWinds acquired Web Help Desk for $20M, estimated at 10x EV/Sales.
Web Help desk was created out of frustration at the lack of an affordable yet customizable solution to track IT help desk tickets. SolarWinds provides IT management software for network admins in Fortune 500 enterprises all the way down to SMBs. Solarwinds was looking for a solution that adequately created ticketing, asset management, along with change management in a scalable, multi-platform, web-based way.
Elon Gasper
Which it found in Web Help Desk. This also overlaps our next sector, the internet. This is hardly uncommon now that the web is part of almost everything. Years ago, before it was, investors put over $45M in the web 2.0 social news pioneer Digg. Last month they parted with Digg for far less, and for parts, with the team, IP, domain, and code all going separate ways, reportedly among Washington Post, LinkedIn, and Betaworks in a complex deal. Widely rumored to have turned down hundred-plus million dollar acquisition offers in its earlier days, Digg was then beaten down by competitor Reddit, though it delivered the final blow itself by gambling in 2010 on a substantial makeover of the site that was badly received by the users, yet again an example of how fickle online users can be.
On the other hand, we’ll also note a better-timed exit by the well-known web pioneer in crowdsourced data and social media. Weather Underground, bought by the Weather Channel, after several approaches over the years since it began in the mid-90s as a university research project to improve forecasting.
Jason, what’s our forecast for IT services?
Jason Steblay
The IT services sector continues to hold steady, consistently returning the lowest multiples of our six sectors in the Corum Index. But the fast-growing market for healthcare software solutions, mentioned by Elon in the vertical sector report, has begun to have some reverberating effects on IT services as SAIC picked up maxIT Healthcare, the largest private independent healthcare IT consulting company in North America, for $473 million in July.
Demographic shifts and the looming healthcare overhaul are driving high growth in healthcare related innovation. For more on the software M&A implications of this, tune into Corum’s new Market Spotlight series.
Elon Gasper
And that’s a July update to our midyear report. Back to you, Bruce.
Bruce Milne
Great, thank you very much. Really interesting to note that Fortune magazine said the PE guys now have one trillion dollars, where common lore only held that they had $500B. Along with that, we’ve moved the strategic buyers cash hoard from $250B to $350B! Extraordinary amount of cash and the PE guys are doing about 40% of the largest transactions right now, they want to do a lot more and we’re trying to help them. Lots more spotlight reports coming up.
Seller’s Panel
Now we’re going to turn to our Seller’s Panel for today, with a distinctly international flavor, headed by Miro Parizek. Miro?
Miro Parizek
Thanks, Bruce.
Today I’m moderating a set of interviews we’ve recorded with the CEOs of companies we’ve recently advised in sell-side transactions.
All three are very successful entrepreneurs and provide excellent insights for anyone planning on one day selling part or all of their own company.
I am going to begin in Kiev, move westward to Brighton in the UK, and then over to the US, scanning the globe analogous to our coverage and the nature of tech M&A today.
So let’s start off in Eastern Europe.
It’s my pleasure to have Torben Majgaard out of the Ukraine on the line today. We advised him on the sale of a stake in his company and that transaction closed just last quarter. Torben is a Danish entrepreneur with decades of experience in the IT industry. Ten years ago he started a new company from scratch and founded Ciklum. The purpose was to provide Western European software vendors access to highly skilled and lower cost developers in Eastern Europe. His first customer needed I think just three programmers for a specific small project. Last year his company nearly doubled in size and generated over $60M and he has over 1400 programmers working for more than 100 ISVs, providing dedicated R&D teams in a very unique outsourcing model. So, Torben, firstly are there any blanks or anything you’d like to add about Ciklum?
Torben Majgaard
Yes, today we are actually about 2000 people, we crossed that mark over the summer. For 2012, we will also make about $100M. Considering we started in 2002, you could say we did 0-100 in 10 years.
Miro Parizek
That’s great. Obviously we worked together for a while, and it was my pleasure to do that. You owned the vast majority of your company and still own 80% after selling a minority stake. What were the drivers for you to seek an institutional investor in Ciklum?
Torben Majgaard
The main driver was getting a mature partner in to kind of help monitor and care for the company health so as it grows and starts spreading across national borders, you never know what could happen, so in case I wasn’t always going to be around, I wanted someone taking responsibility for the business, the customers, the people here. In any case, I also wanted a partner, someone to talk with, and someone to plan with moving forward.
Miro Parizek
It is certainly a great asset to have a qualified partner to talk through strategic issues with. And as you and I are quite aware, the path to selecting Horizon as your partner was filled with twists and turns. What was the biggest surprise in the process?
Torben Majgaard
How long it took!
Miro Parizek
I would add to that, anyone should plan that this process takes nine to twelve months, but sometimes it takes a little bit longer than that. Finally, do you have any advice to an entrepreneur looking to sell part or all of their company?
Torben Majgaard
I think it would be very hard to give advice because every situation is going to be independent. Especially with me when I’m just one person, it’s not just a business decision, it’s also a personal decision, and mixing those things…I’ll just say that every situation is individual.
Miro Parizek
That’s true. One of our jobs it to figure that out, what everyone’s wants and needs are and how to get them there. Torben, thanks for your time and I wish you continued success with Ciklum.
Now, over to Brighton in the UK, where I recorded this interview with Thomas Berglund. Thomas is a Norwegian entrepreneur who founded Edvantage Group and grew it to become the leading Northern European provider of e-learning solutions. Edvantage was acquired by Lumesse, one of the world’s leading vendors of talent management systems in a very hot space. We’ve seen transactions by SAP and Oracle in this space as well.
Thomas has run his company for over a decade before selling, building the group both organically and inorganically with five acquisitions during his tenure as CEO. Thomas, how fitting for the founder of an e-learning company, is a fan of life-long learning. In that regard, what was the most interesting thing you learned while selling your own company last year?
Thomas Berglund
Thank you, Miro. I learned that if we had not been flexible at the end, we would not have been able to close the deal, which was the right thing to do for both of the companies.
Those really are the three learning points that I made during the transition.
Miro Parizek
Excellent. You cover half of our M&A workshop in those two minutes with your own experience.
I really like the flexibility point and that is very key. And of course focus on your targets and patience is always a virtue and certainly important when you’re selling your company because if you’re acting too urgent that sends the wrong signal to your buyer.
Going on to the next speaker, we’ll move to the US where we recorded a few words from Robert Tietjen, founder and CEO of PolicyTech describing his experience and the lessons learned while merging his company into NavEx Global.
Rob grew his company over the last 10 years to become the world’s leading provider of policy and procedure management software.
Robert Tietjen
Thank you very much. Here at PolicyTech, we actually develop leading edge policy management software, which we sell to business and institutions who are looking for ways to automate policy creation, collaboration, and distribution, and to collect those necessary attestations to prove that employees have read them.
We just recently completed a transaction where we were acquired and we merged with several other providers of compliance solutions into what is now known as NavEx Global. This has been a very exciting process.
Before that we knew that we had built a pretty successful company and that we were increasing in value quite extensively, with a lot of upside ahead. We knew that we could continue to do that and be very successful in that area. But with the amount of compliance software acquisitions happening in our space, and knowing that there is more opportunity in being part of a larger compliance platform, versus trying to build one ourselves, we arrived at the conclusion that we should probably seek out a strategic acquirer.
We’d been approached in the past, but we were kind of always faced with the challenge of not knowing if we were getting the best offer and not knowing who else might be a better fit. After several months of preparation, we went to market in a process led by Corum and we received exposure to a broad range of potential strategic buyers as well as PE firms. This dialogue gave us a much better sense of the value of our solution in a broader product set and the benefits that we could bring to an acquirer. Not just technology, but domain expertise, our customer base, our team, and our solid recurring revenue.
We were able to complete our transaction about 60 days ago and so now we are going through integration with the parent company we merged with. It has been quite extensive and very a exciting process.
Along the way there were quite a few things that I learned myself. First of all, you have to prepare well and have it all there in advance. Our buyers asked for a ton of materials and it was very helpful to be very quick and responsive.
Also, a second point would be to maintain accurate financial and contractual records. We’d always been pretty strong there, but I don’t know what we’d have done if we didn’t have it when we went through that due diligence process.
The third area is, you want to be realistic on your financial objectives. We received what I would call a very fair value for the business and probably more than we would have accepted from some of our earlier offers. You need to make sure that you get good market feedback before you decide to accept an offer.
Finally, I’d say be patient. We spent ten years building the business and the decision to sell needs to be good for everyone involved, especially the stakeholders, and not just the selling shareholders. We were very concerned that this would be a good fit for all our employees and for our partners and our clients. Finding the right buyer takes time, but it is worth the wait when it results in the right deal terms with a compatible acquirer.
I hope that has been helpful and I wish you the best if you choose to pursue this route. It was definitely very exciting for us.
Miro Parizek
Thank you Rob.
That was great. An excellent group of exceptional tech entrepreneurs. I wish all three continued success and look forward to supporting them once again in the future.
Back to you Bruce.
Bruce Milne
Thank you, Miro. Nice job and what a great set of presenters. Wonderful advice there.
Q&A
Let’s move to our Q&A session. We’ve gotten a few questions along the way, some more complex than we can answer in the minute or so that we have left.
One of the questions was, “How do you value a patent in these deals?” It turns out that what I consider to be one of the leading practical patent guys in the world is Elon Gasper, he did some of the original work in patents going back to the 70s. Elon, any thoughts there?
Elon Gasper
Valuation is a very complex matter for companies as well as for companies that have patents. Patents without companies actually are even more difficult to assess. Rather than go into the details of the situation right now, because it will depend on a number of issues. I’d be happy to take a conference call personally and delve into those things personally regarding your specific situation.
Bruce Milne
If you do have a specific question, definitely let us know.
Let’s move to another question we have. Someone mentioned that some of the sales multiples seemed pretty high, especially when they’re at 7-10X. Ward, we’ve been asked about this before, what do you think about that question?
Ward Carter
Certainly those are not what I would consider average deals. A lot of these are high-end deals, they do show you what the opportunity might be, but it certainly varies from sector to sector. Certainly you need an auction environment in order to get those kind of valuations and it needs to be generally an emerging market where there is lots of activity and lots of consolidation forcing those kinds of deals to happen.
The revenue models are, quite frankly, the most common way we value companies and the reason for that is that many of these smaller companies may lack a definitive amount of invested capital upon which to base the valuation or we may not have earnings multiples or may lack the presence of earnings, but revenue is typically the multiple we can always count on because most companies have some definable revenue.
Bruce Milne
Great, thanks. Again, the improvement from first offer to last by doing an auction with a true global search is 48% on average. Sometimes it is several hundred percent.
I just thought I’d note that regarding our first presenter and his team in the Ukraine, we do joint ventures over there, we’ve worked a lot there. Alina, your family is in the Ukraine, what can you tell us?
Alina Soltys
Yes, it’s a very beautiful country, very green, and a lot of farming activity, but there are a lot of new businesses there now, there is a lot of tax evolving in that space and the joint ventures are going well, so it’s a great country to be in right now.
Bruce Milne
Corum actually did a global search and had some software we developed there and we actually have an outpost there now doing development for our new lead system.
One other question that came in, just as we finish, is about the cash. Someone wondered how in the world anyone could spend all the cash the PEs are sitting on. What’s happening is that we are seeing strategics go outside traditional techs. For example, the Barnes & Noble deal with Microsoft putting in $300M, they will put in $600M, that’s not exactly central to tech. We’re seeing them reach out, including Google and others. The financial folk are trying to invest a lot more through their holding companies. We’re trying to help them because they can’t do these deals direct.
Somebody asked about security M&A. One of the leading security experts in the world isn’t on here today, that’d Nat Burgess who is the only M&A expert to speak at the RSA conference. We’ve done a lot of deals there, and he’ll be doing a special market spotlight this fall on security M&A.
I think that’s about it, let’s go to our sign off. Thanks for attending.