December Tech M&A Monthly: The Best of 2012
Introduction and M&A Advisors
Bruce Milne
Welcome to our December wrap-up conference, you’re really going to enjoy this today. I’m Bruce Milne, CEO of Corum Group. Let me kick off by talking a little bit about our events. You saw some intro before this. We do about 100 events a year, live and online. Last year, over 5000 people signed up for those events. We’re the world’s largest educator on how to sell software and related technology companies. One of the most frequently asked questions over the last 18 months or so, as the market has picked up, is how do you find an M&A advisor? That’s important, as the sale of your company is likely the most important transaction of your life.
Thus, we recently added a seller’s checklist at the end of our conferences on how to choose an M&A advisor. However, we have found that despite this checklist, unsuspecting owners are getting into relationships with supposed tech M&A experts where they are sorely disappointed. In some cases they are coming to us actually hurt by the bungling of the process and misrepresentations by unscrupulous firms.
These are victims of one or more of the ten deadly sins of tech M&A. If they sell, it’ll be for less than they should have gotten, but most often they don’t sell, having the value of their firm hurt in the process.
Before we cover this list of sins committed by unscrupulous tech M&A firms, let’s first review the basic checklist of what you have to look for when choosing an M&A advisor to sell your company.
First up is focus. If they aren’t in tech, don’t walk, run away. They don’t know the buyers, how to value, or even how to present your company properly.
Then, look to see if they specialize in the sale of firms like yours. Sell-side only is a very different exercise in screening sellers from the buy side, raising capital, etc. Much more focus requiring a great deal more work, research, contacts, etc.
Then, be sure they don’t have conflict. Do they represent buyers? This is a built-in conflict, because in the long term their bread and butter comes from multiple transactions on the buy side.
Further, are their efforts diluted by a lot of other extraneous commitments? Selling your company is a lot of work, generally about three to five man years for a true global search, and you need to make sure they aren’t working on a lot of other things.
You also have to have senior staff involved in a team, and insist on the team being mostly CEOs who have sold other companies. To sell your company is too important a transaction to be a training ground for juniors. They don’t have the credibility to get the response from the buyers, and they can’t carry their weight in negotiations, and forget about due diligence. Experience is the only way through that minefield.
Then, getting beyond preparation, research and valuation, do they have the contacts? The buyers are everywhere. Does the firm representing you know them? Have history with the buyers? Have the credibility to get the valuation you want?
Lastly, do they have a proven process that works with a track record to prove it? Due to time, we’re going to have to wrap up here. We have about six more speakers coming up, but I’m going to come back to this, the ten deadly sins, next month, so check back with us then to find out how to avoid being M&A roadkill.
Google Fiber Spotlight
Now, let’s move to our first presentation, some recent news from Google. Corum’s own Ed Ossie is in Kansas City reporting on the extraordinary experiment there with Google Fiber, which you’ve been reading about. Let’s hear from Ed.
Ed Ossie
We’re in Corum’s Kansas City offices today in a city that has seen more tech press in the last month than it probably has in the last 15 years. As a long-time Midwesterner, I know some really terrific technology business have come from the heartland, but we’re a pretty quiet and understated bunch, while Boston, Austin, and certainly Seattle and California command most of the attention in the industry.
But, with Google Fiber’s launch here in KC, the project has been featured in the Wall Street Journal, the NY Times, and on CNN. Imagine the internet connection in your home or office with a response time 100 times faster! It’s pretty incredible to see, and we’re going to talk about Google Fiber specifically and its potential impact on our industry and Midwest technology opportunities in general today, with two experts and top technology attorneys in the region.
That includes someone who helped actually bring Google Fiber here to the Midwest.
Greg, a couple of questions on the Google Fiber project. You’ve been closer than anyone. Can you share some of the history and your insights to date?
Greg Kratofil
Yeah, the Google Fiber project, for those of you who may not be familiar with it, is the idea of bringing 1GB symmetrical speeds to the home and what Google thinks may come from that. I think there is a lot of excitement and interest around what is happening here in KC around that project. I often get asked, “how in the world did KC of all the places in the country, end up with the Google Fiber project?” KC was one of 1100 other cities throughout the country that applied. The Kansas City, Missouri application was a crowd-sourced application. We had over 100 people from government to technology folks to educators who contributed and provided information, ideas, and insight into what Kansas City would do and how they would operate if Google Fiber was here. It was through that and my involvement with KCNext, a local technology council that had the opportunity to present to Google as part of the KC team, when they were coming around helping make selections. We were fortunate enough to be selected.
Ed Ossie
How do you think Google Fiber might change markets and where do you see it going?
Greg Kratofil
That’s really the $64M question, if you will. The way to think about where Google Fiber would go is to look back at the thinking and the view of the world at the time when we were doing dial-up modems and making the leap to 1 to 3MB connections. At that time, nobody thought there was any need for that kind of speed? What would people do? Just what they were doing before, just a bit faster. Initially that was true. But then, as you know, it has changed every market and the innovation that came out of being able to have that high speed connection led to that.
I believe that we will see that same level of innovation occur once we get universal GB speeds to the home here and hopefully across the country.
Ed Ossie
You mentioned to me before that the project has attracted plenty of new investors from out of town and the country, potential buyers to the region for tech concerns. Can you talk about that a bit?
Greg Kratofil
It’s not just the Google Fiber project, though we certainly see a lot of people taking a look at what is going to occur as that is built out, but it’s more the excitement in the technology community and the region. It is starting to attract its share of outside investors, looking at companies and opportunities in the Midwest and we think and believe that opportunity will only grow as more and more homes and businesses have access to Google Fiber.
Ed Ossie
That’s great. Thanks, Greg. Bill, you’ve been a longtime advisor to Sprint and other large footprint clients in a number of sell-side IT and technology deals for a lot of years. You were an early observer of mobile. What have you seen?
Bill Mahood
I was very lucky to join Sprint very near to the birth of Sprint PCS, and actually present at the birth of Virgin Mobile. It’s a great experience to participate in, even in just a small way, to help build those businesses. I also enjoy the back end, helping Sprint, any business, sell off the technologies that it is leaving behind, from ship to shore communication to dial up internet access, to conferencing, as well as many others. That’s a very exciting part of the process.
Ed Ossie
As an early observer of mobile, how are today’s deals different than yesterday’s?
Bill Mahood
Given the current technologies, the deal process is certainly faster and more efficient. Every participant is always available via smartphone. Data rooms are used in every deal now, everything is done virtually. I also think the deal terms are more seller friendly when you compare today’s environment to the past and I think that’s due to the influence of the PE group as seller.
I’ll give you one example: the cap on future liability. Twenty years ago that was always 100% of the purchase price and now the caps are down to between 10 and 20%.
Ed Ossie
Some great lessons in there. Corum Group is proud of our relationship with the team in the Midwest and we appreciate you coming on today and we look forward to talking to you again soon.
Bruce Milne
Thanks to Ed, Greg, and Bill. Some very interesting comments there at the end on how favorable the M&A market is for sellers. In fact, we think that 2013 is going to be the biggest year since the dot-com era for private sellers.
Corum Research
Now let’s turn to the Corum Index for deals and valuations with our own Elon Gasper and Amber Stoner.
Elon Gasper
Thanks, Bruce. For our last webinar of the year we begin with the public markets, which last month stopped their fall in the Fall by bouncing back before hitting the summer low. That’s enough to put all 3 indices we track on their way toward a reasonable annual return at the end of this month. Those Fed-blown winds of liquidity have kept the M&A banner year flag flying in tech M&A. Amber, what’d our Corum index print to compare with last year?
Amber Stoner
Well, Elon, there was an increase in the number of total transactions this month compared to this time last year, as well as a couple more mega deals. We’ll actually discuss all of these mega deals during this webcast, but right now I’d like to focus on Cisco’s $1.2B acquisition of wireless cloud networking company Meraki. Cisco sees Meraki’s business model as transformative, extensible, and a strategic fit for the company; the acquisition will enable Cisco to make simple, secure, cloud managed networks available to its customer base - and it’s a fine return to Meraki’s VCs, led by Sequoia, who had invested at least $80M in the company.
Speaking of VCs we did also see an uptick in the number of VC-backed exits in November.
Elon Gasper
That’d be a sign the smart money is selling. Next month we’ll deep dive all the rest of the macro indicators in our 2013 World Tech M&A Report. For now, we’ll just dig a bit further into November with our six sectors update, starting with the field that usually commands the highest values: Horizontal Applications. Amber, how was November there?
Amber Stoner
November was a relatively quiet month in the horizontal software market, multiples didn’t move far from where they closed at the end of Q3, and the heavy SaaS influence remained, continuing to return the highest valuations for sellers among our six sectors.
In the largest deal of the month, RedPrairie picked up JDA Software for approximately $2B. JDA’s background of pioneering market-leading supply chain planning, merchandising, and pricing solutions is a great strategic fit with RedPrairie’s experience in warehousing, workforce management, store operations and e-commerce. This merger will provide retailers and manufacturers with extraordinary capabilities to meet the needs of hyper-connected, mobile consumers.
In another consolidation play we have Vista Equity backed Bullhorn, buying both MaxHire Solutions and Sendouts. MaxHire and Sendouts are both SaaS recruiting providers and the addition of these two firms increase Bullhorn’s ability to help recruiters be more successful and develop new products. And the combined customer base will benefit from the performance, control, and agility that true software-as-a-service provides.
Turning to another constantly consolidating space, Elon how are valuations holding up in the Vertical Market?
Elon Gasper
SaaS is still supporting them too, and consolidation remains the big story in several Vertical sectors. Among them, let’s look at 3 deals announced in Financial Services.
First, the $17M acquisition of Mortech will enable Zillow to accelerate the development of its Mortgage Marketplace product. Zillow is constantly trying to expand its business through acquisitions. Apart from Mortech, the company has acquired four other companies over the last two years, and signed an agreement to acquire one more.
Second, eVestment Alliance, one of the investment industry's largest database and cloud-based analytic solutions providers, acquired PerTrac, a hedge fund software and workflow solutions developer.
And the last of the three in financial services deals occurred as big tech distributor Avnet divested a non-core asset by selling its banking application business in China to PCCW Solutions.
Amber Stoner
It’s great to see that kind of activity in the financial services sector, but one of our other vertical subsectors, healthcare, is also experiencing some movement, that crosses into the consumer market.
The consumer sector as a whole has stayed fairly steady with a drop in EBITDA multiples due to the volatility from the gaming companies and their margin worries, although that certainly hasn’t stopped deals.
It clearly didn’t stop Healthiest You from buying HealthNowMD, an online healthcare services provider that enables consumers to schedule doctor consultations as well as upload and manage personal medical information. The end of the month also brought HealthTap’s acquisition of Avvo’s health business.
For more about these consumer-related deals and the larger trends in healthcare M&A, we, in conjunction with World Financial Symposiums, will be sponsoring a special market spotlight webinar next Tuesday.
Elon Gasper
We’ve got some great panelists lined up for that. Turning now to the infrastructure market, valuations have held reasonably stable this past couple months except for some of the value of Legacy profits being whisked away as the Cloudrush continues. But there’s more than enough on the cloud side to make up for it in terms of M&A, and even turn some industry titans into serial acquirers, with Cisco in particular more than doubling its 2011 pace. So Cisco’s back, and to do this streak justice we’ll have a special report in the annual next month on Cisco. For now, Amber mentioned that Meraki megadeal already, but it’s only one of 3 this month, which like all Cisco’s purchases this year, are Infrastructure-related, as you’d expect from a firm which grew up in networking. And even November’s smallest, $125M Cloupia, was notable. Its multi-hypervisor, multi-cloud management will help Cisco furnish a unified virtual infrastructure enabling sysadmins to peer into their roiling cloudwork even as they ply its surface, like sailing a glass bottomed boat. Ever been in one of those, Amber?
Amber Stoner
I have actually. I have not however, been in a kayak, which takes us, via one very stretched metaphor to the internet sector where one of the major trends in November was consolidation among travel websites.
The largest of these deals was Priceline’s $1.8B acquisition of KAYAK.com. The deal brings an added source of customers to Priceline as it works to increase sales as well as fending off competitors by not only increasing access to customers, but in bringing one of its major competitors into the fold.
Another deal along those same lines was MakeMyTrip buying Hotel Travel Group for $25M. MakeMyTrip focuses on travel and vacation package reservation services and made this acquisition to take advantage of Hotel Travel Group’s presence in Asia.
And finally we have Switzerland-based BravoFly acquiring the Spanish company Rumbo in a consolidation of companies that provide online travel reservation services to consumers in Europe.
So…what’s the last stop on our trip, Elon?
Elon Gasper
That would be here in IT Services, where we find that as the $400 billion annual overall marketing spend in North America continues to run away from traditional general advertising toward targeted and measurable digital marketing, consolidation of the digital marketing agencies that understand how to do it rolls on, with 4 notable transactions in November:
First, the big deal, almost half a billion bucks changing hands as Alliance Data Systems corpdev cowboys ranged North from from their Dallas bunkhouse to round up the Hyper Marketing Group, who hail from Chicago. The acquired talent will be re-branded into the ADS Epsilon unit, as we bid Happy Trails to Hyper, which had been the largest remaining privately held digital marketing services agency.
And a few smaller marketing critters bit the dust last month too, as BlueGlass Interactive pastured Quaturo, Digital Net roped 4 Paws Marketing, and Bite Communications grazed upon Bourne.
Reminds me of the end of a Western, as the mavericks of digital marketing hand over the reins to big business and ride off to new horizons. And, that’s how it goes in any new field of software, as things settle down and get civilized the entrepreneurial types are ready to head off to the next frontier -- right, Bruce?
Bruce Milne
Right. We’re actually doing a new special session on where are they now, tracking some 200 entrepreneurs who have sold. Interesting thing about JDA, one of the last independent supply chain firms, one of my favorites KAYAK selling, lots of activity by the PE guys, sitting on a trillion dollars, can’t wait for that Cisco report next month, they’re back big time. They were one of the very first profiles we ever did.
Next month is our ninety minute annual report.
Best of 2012
Now let’s go to our special presentation. Rob, I know you’ve been working the last few months on what was the best of 2012.
Rob Schram
Thanks, Bruce. We’ve had a lot of great guests in 2012. We asked the World Technology Council, Corum’s 400-person advisory group, to pick the top six.
We’ll start with Johan Attby, whose company Tific was acquired by PlumChoice last year, with a great anecdote about the importance of a “B list” of buyers, and a bad start that ended well.
I can say that our buyer was not on the shortlist of potential buyers but way down on the B-list. This because it was a medium sized private company and it was a services company and not a software company. It was not clear to us they had enough cash to make a strategic acquisition either. I also had a meeting with them a year earlier and it was one of the, if not the, worst meeting in my entire business life. Halfway into the meeting their CTO told me that we had nothing that was of interest to him or that he couldn’t develop himself within a year and he did not say it in a very nice way and that was the end of the meeting and of our discussions. A year later they acquired us and for a good multiple.
What had happened in a year were two things: They fired their CTO – I guess they figured that he could not really deliver the solution it has taken us 100 man-years of R&D to get right.
The other things was that they started to lose business as they’ve promised their customers and prospects a Tific-like solution but had nothing to deliver and that put them in a very bad position.
Rob Schram
Next, Steve Peltier of Nefsis, acquired by Brother. Steve describes how important it is to anticipate negotiation and due diligence.
Steve Peltier
In terms of the negotiation and due diligence, we were dealing with an international giant, while we were still a relatively small company. It should have overwhelmed us, but we were well prepared for most of the due diligence questions they would have, and we had the answers.
Further, we had a sense of what to expect in the negotiation. We’d been through the conferences and had extensive one on one with the Corum advisors throughout the process, and Brother was a fair company to deal with, it fit our specific shareholder requirements, as well as the nuances of our business and financial model.
It will never go as fast as you like, ours went fairly rapidly, but it still felt like a long, long time. It takes a lot of patience. Brother’s due diligence was very thorough and professional, as you would expect from such a respected multinational. Their process really made us think about our strategy and tactics, and in the long run, it made us a better company.
Rob Schram
Next we have Win Sheridan, CEO of Apex Systems, describing his merger with OnAssignment, creating the second largest IT Services company in America. Win explained why they went the M&A route as an alternative to an IPO.
Win Sheridan
Like I said, we began with the end in mind and we were always thinking about what our strategic alternatives were. Number one was status quo, staying private. Number two was to be acquired at some point in a strategic acquisition and we’ve talked to the PE firms before. We also considered doing an IPO on our own. Just in our analysis, and I’m sure many people on this call know about going public, it’s a very difficult thing to do. It’s a timely, costly thing to do. You have to build your reputation from the ground up. This way we’re going into a company where we will be 55% of the revenue, and you have Peter Demaris, the CEO of On Assignment, and he has a great reputation on the street, so we’re just going to add to what they were already doing as a company.
Rob Schram
Reggie Bradford, founder of social media marketing platform Vitrue, joined us in June, discussing the importance of timing, and M&A as a method for getting scale.
Reggie Bradford
I sometimes refer to Vitrue as my seventh child, as I have six children. It was definitely an emotional decision, probably more so than the other two companies I sold. But every child and every company faces a certain stage of maturity and taking it to the next level is like sending a kid off to college. I felt like truly in the stage that Vitrue was at, and where the industry was, and how fast the space was moving, and marketers around the globe were making decisions on platforms to manage social presence that we really needed to identify and work with a partner that could scale us globally in 145 countries and Oracle has almost 400,000 customers, so it was an easy and logical step for Vitrue to stand on the shoulder of giants in this example.
Rob Schram
Thomas Berglund of Edvantage, acquired by Lumesse, shared advice on the importance of keeping focus and keeping the right expectations.
Thomas Berglund
You have to keep focus on the business while in the process. It’s all about the numbers. What I learned was to have the right expectations. We used several approaches and found a tendency to overpromise all the time. And that is extremely difficult because then you have an investment member who makes a lot of promises to create a good valuation. So setting the right expectation is key, and we managed to do that. It took us six months, and I believe one of the drivers was closing the deal.
Rob Schram
Finally, Rob Tietjen of PolicyTech, acquired by NaxEx Global, discussed playing strategic and financial player off each other, as well as his improved understanding of what it is that buyers are looking for.
Robert Tietjen
We 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.
Rob Schram
Alright, Bruce, that’s our best of 2012. Back to you!
Bruce Milne
I know it was a hard decision on the part of the WTC, there were some great presentations.
Thank you to our speakers. A lot of these gentlemen have gone with us on our annual celebration trip up to Canada, where we fish in the Gulf of Alaska, which is something we’ve been doing for the past 25 years.
We had great attendance here, and a number of questions that we’ll have to get back to you on individually, particularly about some of the markets and specific situations and commentary about what you saw in the Corum Index. There was one question about whether this is a good time or not, based, I think, on my commentary that I think 2013 is going to be an extraordinary time. I’ve been out in the field a lot toward the end of this year with some new materials, visiting with folks, we’re seeing that with these disruptive technology trends, where there is a lot of stirring in the marketplace, we’re seeing a lot of new companies who have just gotten toeholds in marketplaces, they’re deciding to go to market very early, and there’s a lot of reception on the part of the buyers, large and small. We’re also seeing a lot of baby boomers: People who have gone through and built their companies, kind of like the JDAs of the world, the last guy standing in certain vertical markets, we’re seeing consolidation at great prices, most of these deals are for cash, and they’re going to market across the board and it is truly global. My bet is that 2013 will be the best year since the dot-com era.
Thanks for joining us, and we’ll see you next month.