February 2013 Tech M&A Monthly

Corum February Webinar: Global Tech M&A for Private Equity

Introduction and Agenda

Bruce Milne

Welcome to part two of our annual forecast, Global Tech M&A for Private Equity. We have a blue ribbon panel today.

To our agenda today: Field reports, things are exploding, and then we’ll have a special research report, including an overview of private equity, and what they’ve been up to the last year. Then we’ll hear from our PE panel, then Q&A. Today we have a blue ribbon group joining us from some of the leading PE firms in the world.

Field Reports

Let’s get right to it with our field reports. We’ll start with Jon Scott in Europe.

Jon Scott

Good evening from Amsterdam, Bruce. It’s really interesting, here in Europe we’re seeing a lot of pickup and buyer activity. It’s as if some of them woke up after the new year with new mandates for inorganic growth. Some of the biggest technology firms in the world are going after some fairly small companies. In fact, we just received an additional letter of intent here in Europe from a huge technology firm on one of our clients.

We’re also seeing buyers come back to the table and re-initiating negotiations that broke down in Q4 when people were running scared. On a Nordic deal this week, the buyer came back, and in a four-hour negotiation session we reached an agreement. So, I would tell you that the activity has really picked up.

Bruce, back to you.

Bruce Milne

Great, Jon. Let’s move to Canada, and our own Peter Andrews.

Peter Andrews

Thanks, Bruce. Picking up on Jon’s comment about big companies being interested in some of the smaller players, a couple of weeks ago I introduced a small complex technology-centric company with some pretty unique intellectual properties to the market, and several of the multi-national tech giants were all over it. This just goes to show how innovative technology, effectively positioned in strategic markets, can overcome the expectations of size and scale that we typically associate with the interests of the larger players.

Now, more than ever, creative innovation in relevant markets, will demand exceptional value from the right strategic buyers. Bruce, back to you.

Bruce Milne

Thanks, Peter. Let’s move to Ed Ossie in Kansas City. Ed?

Ed Ossie

Thanks, Bruce. 2013 is certainly off to a fast start here in the Midwest. While our clients, large and small, always get serious consideration and thoughtful responses and feedback from the PE buyers that we know and work with each week. In the last few months, we’ve also seen smaller and fast-growing businesses grab unprecedented attention from strategic buyers.

In a couple of quick examples from separate clients, we’ve had both major multi-billion dollar healthcare institutions and very well known financial services giants in Boston and Manhattan express serious interest and move into the process with a few of our clients.

We’ll see how things unfold, but clearly in a number of these large strategic buyer firms, the internal conference room discussion or question is: “Should we just buy this young, small, great software team that is already in the market, with a product or products that work, and have enough early evidence of traction, or launch yet another internal build to match or beat the challenger, that may or may not deliver on time, on budget, and most importantly, on target, when finished?”

That’s it from the Midwest. Back to you, Bruce.

Bruce Milne

Thanks, Ed. Let’s move to the Southwest, and Jim Perkins.

Jim Perkins

Hi, Bruce, thanks. We’re seeing innovative entrepreneurs in the gaming sector getting immediate and intense interest from the top North American, European, and Asian media buyers. There is no question we will see gaming M&A deal records set this year, with high valuations across the board.

Bruce Milne

Thank you, Jim. Now let’s go to Rob Schram at headquarters. This was recorded, as Rob is running a Selling Up Selling Out conference in Portland, Oregon right now.

Rob Schram

Toward the end of 2012, we witnessed a bit of a logjam as buyers and sellers scrambled to put deals together in advance of the 2013 tax increases. For a particular client, the frantic pace brought a halt to due diligence negotiations in late December, but discussions with that buyer have now resumed and multiple additional contenders have additionally expressed interest as well.

In the first six weeks of 2013, I’ve seen unprecedented interest across the board from both strategic and financial buyers, within sectors that weren’t nearly as responsive eight months ago. 2013 looks like it’ll be a great year for M&A.

Bruce Milne

Thanks. Let’s finish up with Ward Carter, chairman of the Corum Group.

Ward Carter

Vertical deals are hot, but they don’t need to be SaaS applications to attract buyers. We closed several vertical software deals in late January, and we have 10-plus offers on another, which we expect to close in the spring.

We have multiple new clients that are vertical market solutions, and looking at it from my own personal experience with over 15 years in this market, this is one of the most active times ever. If you’re considering going to market, I’d encourage you to move quickly.

Bruce Milne

Thank you, Ward. I look forward to hearing from our PE panel why there is so much activity and pent-up demand.

Corum Research Report

Now, let’s hear from the Corum Research Department with Elon, Alina, and Jason.

Elon Gasper

Thanks, Bruce. In this part two of our Annual Report, we turn the spotlight on PE transactions particularly, plus we keep up with this year’s markets…

Starting with the public indices, which have painted a pretty picture recently, once a quick dip after the election set up a rally that barged across that fiscal cliff bridge to come roaring into 2013, setting a 12-year NASDAQ high yesterday after six straight weekly gains for the S&P at the start of the year, for the first time since 1971. That’s not just before Microsoft, it’s before the first microprocessor chip!

Back then there were just a handful of what we know call private equity firms, none of which had ever invested in a software company. Now there are thousands of PEs, with software, IT and related tech a prime focus for them, so let’s catch up on their M&A last year and last month. Alina, who are the leaders?

Alina Soltys

With that focus in mind, and overlooking the largest firms like TPG & Blackstone who have sizable interests across the board, the top firms making software acquisitions in 2012 were Vista, Francisco, Riverside and Apax. Vista consolidated CDC Software and Consona into Aptean for business software solutions. In the meantime, Francisco was focusing on healthcare with 6 of its 10 deals in that space. We've seen this trend of PE interest in healthcare internally as well. We are also pleased to have David Tiley speaking further about Riverside's deals and strategies.

Apax has been using some of its portfolio companies, like Trizetto and Epicor to do numerous transactions.

Looking at how the activity has changed from 2011 to 2012 on a per firm basis, we can see those that were taking a backseat in 2011 really push down on the gas pedal, like Marlin and Summit who both at least doubled their transactions. Meanwhile, those that were hot and heavy, like Silverlake and Hellman & Friedman went from very high figures of 12 and 18 respectively, down to more manageable levels. Overall, there is a significant number of firms looking for strong software companies and their valuations are coming in at market as we’ll explore next.

Jason Steblay

Turning to the Corum Index, we see it reflecting the recent strength of the public markets Elon discussed moments ago. Although the total number of transactions is off from last January, spending on tech deals is way up, with the index reporting two megadeals versus zero a year ago and disclosed spending on tech M&A is up 65% to $5 trillion this January from $3 trillion last year. This increase in higher value deals is a positive indicator for the overall health of the tech M&A market, because its takes a high level of confidence that the economy is improving for companies to place these large, multi-billion dollar bets.

Private equities, who are more sensitive to macro-trends due their tax exposure in Washington, Wall Street presence, and investment opportunities beyond technology, echoed this confidence by more than doubling their tech transactions from just nine last January to 21 this year

And one of the first tech megadeals of the year was PE-to-PE, as London’s CVC Capital caught Italian business information services provider Cerved on a pass from Bain for a billion and a half dollars, nearly a 4x multiple.

Elon Gasper

Looking at multiples in each of our six sectors now, we lead off with Horizontal Applications, where the value and SaaS action in the HCM space continue to impress, as cloud transformation there proceeds at a frenetic pace.

On the strategic side, most recently, in one of the first deals of this year, HR management systems vendor PeopleStrategy picked up another SaaS HCM provider, ERC Dataplus, and its cloud-based pre-employment systems. This move upstream includes applicant tracking systems (called ATS) and talent acquisition solutions like job boards and recruiter management software.

Last year in this space Vista Equities showed how the PE rodeo stars ride, when it wrangled SaaS recruiting firm BullHorn as that prime animal was eying the IPO chute, filed patent papers on its software the same day, then quickly folded in two SaaS-y little doggies, recruiting company Maxhire and ATS vendor Sendouts, formerly owned by fellow PE FCL. Fine herd work to build value, perhaps to set up a rumored and more robust IPO? Plus a good example of how timing the M&A moment is often driven by external factors, wouldn’t you agree, Alina?

Alina Soltys

Yes, timing is definitely an important factor in transactions, with our next deal highlight no exception. A year ago, Misys gained approval from investors to acquire and merge Temenos, a publically traded European banking giant into the global financial operations of Misys. Vista Equity quickly jumped into the middle, proposing their own bid for Misys and walked away with the company for $2B, paying a very fair 3.5x revenue.

Golden Gate Capital paid a similar multiple for Jerusalem-based library automation vendor, Ex Libris from a fellow PE firm. This acquisition fit squarely into Golden Gates’ strategy of acquiring market leaders and especially as they’ve made inroads into cloud-based applications, in this case, knowledge management that flows through on the Internet. Jason what is happening in that segment?

Jason Steblay

The Internet sector was up in January, with the Cerved content PE megadeal I mentioned earlier as one example of the action in this sector. January’s other megadeal was Scientific Games’ $1.4 billion dollar acquisition of slot machine maker WMS Gaming. As we’ve reported for months, the ongoing historic M&A wave in everything related to gaming, particularly online gambling, has driven improved valuations in the consumer sector with sales multiples posting particularly strong gains in January.

At the intersection of the consumer and internet sectors is online gambling, which had a big year in 2012 as established companies in Europe sought to extend their international presence. Among other deals, we saw William Hill, a UK bookie, pick up SportingBet’s Australian operations for nearly $740 million; Unibet sought to enter the Danish market through its acquisition of the company NordicBet; and just last month Ladbrokes bought BETDAQ, an Irish wagering service.

In the U.S., movements to legalize and regulate online gambling will generate even greater M&A activity in 2013. Already, Nevada and Delaware have passed legislation allowing online gambling operations to begin this year and New Jersey will soon join them. To leverage their established reputations, land-based casinos may look for acquisitions to bring them into the online world. Elsewhere, online companies, like Zynga may look for acquisitions to help them more effectively enter the gambling space. And with so many established online betting houses in Europe looking abroad to fuel further growth, don’t be surprised if they start making acquisitions across the pond too.

Alina Soltys

And speaking of across the pond, a Nordic PE Firm led the largest PE Infrastructure deal in the last 12 months. EQT picked up UC4 from Carlyle for $270M, or 3.3x revenue. UC4 had been in private equity hands since 2006 when Carlyle first picked it up, a transaction Corum represented, then it grew through a couple of acquisitions, including the acquisition of AppWorx, again represented by Corum and selling it at a time of gaining traction and growth. Geographic focus on the Northern European and German Markets lead EQT to favor UC4 in this deal.

Jason Steblay

Across all geographies, The IT Services index held relatively stable for the third month in a row, reporting only a slight improvement in the EBITDA multiple since December. The most notable 2012 PE deal in the sector was Bain’s October acquisition of Atento. At $1.3 billion Atento joins BallSystem’s 24 and GenPact in Bain’s portfolio of call center companies.

More recently, SilverLake Partners joined Microsoft and Michael Dell in the proposed $24.4 billion leveraged buyout of the latter’s namesake company. In its largest equity transaction ever, SilverLake is putting up $1.4 billion. A big bet considering it will be a minority partner in the deal, but a promising sign that PEs may start going after some bigger game in 2013.

Elon Gasper

And our participants who want to go after a bigger webinar but missed our Part one a few weeks ago can now access the recorded version on the Corum website, along with the many other resources there. Back to you, Bruce.

Bruce Milne

Alina, this takes us up through last month, January, but you and I were on a conference call earlier in the week and you made some stunning statements about what is already happening in February.

Alina Soltys

Just in the first few days we’ve already seen a record $45B in deal activity. If that continues through the rest of the month, we’re on pace to set another record not hit since July 2008.

Bruce Milne

Wow, that pretty much tracks with what we’re hearing from the field, as we heard from our field reports.

Private Equity Panel

Now let’s go to our blue ribbon panel moderator, Nat Burgess. Nat, you were on CNBC on Monday, weren’t you?

Nat Burgess

I was, it’s interesting how tech M&A is a global story now, as is the startup world, so I’ve been doing some commentating there and I was on Power Pitch on Monday, for a very interesting startup with a very interesting dynamic there.

But, let’s move upstream a little bit to our panel. We’re thrilled to have Michael Wand from The Carlyle Group, Dave Tiley from Riverside Company, and Rob Palumbo from ACCEL KKR. We had a chart up earlier showing the leaders in PE activity last year, so now we have the people who are actually driving that strategy.

The way we’ll proceed here, is we’ll have each panelist briefly introduce themselves and their firm, and then we have some questions for the panelists. Let’s go first, Michael, to you, with a brief introduction.

Michael Wand

Hello from London. I’m in charge of the Carlyle Group’s technology fund, that’s a fund that is investing at 530M Euros. Our ticket size is somewhere between 15 and 50M. We invest in TMT companies across the main geographies in Europe, mainly to guide them through some sort of transformation. Often we pick them up when they are founder-run and are looking for acquisitions or changes in their applications areas, business models, or obviously also further geographic growth toward the US and particularly to Asia. Those are obviously areas where Carlyle has a platform and a regional footprint in those geographies, so we are there to help as well.

Our portfolio is, as I said, TMT oriented, and within TMT I would say 70% currently is in software. You heard about UC4 earlier, which was one of our companies. We groomed them for about five years and sold them last year.

Nat Burgess

Thank you, Michael.

Our next panelist is Dave Tiley from the Riverside Group. Dave?

Dave Tiley

Thanks, Nat. Riverside is a 27-year old firm that is laser-focused on the mid-market. We are headquartered in Cleveland and New York City. We have co-CEOs, which is really interesting, but it has worked very well for us.

I’ve been with the firm for two years. I’ve been on the other side of the table here as a CEO for the last 20 years. This has been new for me, and I chose Riverside really because of the values and the way we operate and the way they go about doing business. I found that to fit very well with who I am and you can see that on our website in terms of how we operate. I have learned in my short time in the industry that all PE firms are not the same. Nor are they one size fits all for companies.

We have four funds. We have a larger fund, if you will, for larger companies, that is $5M EBITDA minimum. We have an Asia fund, a European fund, and an RNCF fund, which is the micro cap, we’ll do deals as small as $1M EBITDA.

Our market focus has really been on healthcare, training and franchising. Over the last five years, though, we’ve really seen that shift. Healthcare will always be a strong focus for us, but we really build a software practice, and now a consumer products practice as well.

We’ve got a really heavy operating model, and that has been tremendous support for the side companies that we work with. Again, what we’re interested in for our investors, we tell them that it’s a 5-7 year hold, so they’re very patient, to give the time to really go to work and try to work together with the management team to really build the companies, although we do see that our hottest companies are certainly going much quicker than that.

Nat Burgess

Thanks, Dave.

Certainly our experience with you reflects just that ethos. Last time you and I met you were rolling up your sleeves and working through the integration of one of our clients.

Rob, from ACCEL KKR, over to you now.

Rob Palumbo

I’m one of the managing partners at ACCEL KKR. We are an independent firm, ACCEL, a fairly well known VC firm and KKR the buy out firm are actually investors and partners in the fund, but the team and I operate independently and focus exclusively on software and IT-enabled services businesses in what I would describe as the lower middle market businesses that are, let’s say $15-$25M in revenues. Generally, but not always, founder owned.

We have a pretty concentrated portfolio. Like my other colleagues, we see a lot of opportunities every year, but we only make two to three investments a year. We’re much more active, actually, once we have what I would call a platform company, in making follow-on acquisitions in using that business as a vehicle to try to create a leader in the space.

We’ve been in business 12 years now, our focus has almost always been software, our geographical focus is North America and Western Europe. I’m actually in Atlanta, and our other office, our headquarters, is in Menlo Park, CA.

Nat Burgess

Thanks, Rob.

A couple of interesting points of connection. All three of you are very focused and ware of international and your funds are investing that way. All three are very focused on the software markets. I want to start with a question, really around market dynamics and timing. What we heard earlier in the report is that the stock market is setting records, twelve year highs, M&A volumes are up, valuations are up, you guys are building companies over five, seven, sometimes even ten years, in any given market. I wonder if you have to adapt your strategy. Is everything getting too expensive? Are you going to have to sit on the sidelines now and wait for the next downcycle? Or are you able to do deals today?

I’m going to hand that one to you first, Rob.

Rob Palumbo

Sure. Good question. I do think that it forces us to be a little bit more creative, although I don’t think it actually changes the way we think about investments and the velocity of investments. In fact, I was on the phone last night with my partner on the west coast, where hopefully we’ll be signing on a deal today. We’re actually bringing together a couple of different assets and working with another investment firm on one of those assets, so we’re kind of aggregating a few different businesses to create a business and to pull some assets out of a larger business.

I only point that out for the complexity there, but in an environment like this, I do think it forces you to be a little bit more creative and that often entails more complexity.

But, as we kind of look forward, we’re somewhat macro agnostic, if we find good businesses at fair prices, we’re less interested in really where the stock market is, or frankly what the state of the economy is, as we have the perspective of planning to own a business for a long time, as other have alluded. There was a frenzy of activity last year with tax law changes. A lot of that didn’t get done, so we have not seen that abate at all. It continues to be a pretty frenetic market right now.

Nat Burgess

Thank you. Michael, any comments from you?

Michael Wand

I would actually agree very much with Rob. We’re having a similar strategy, as it looks like, and we’re doing about three to four deals a year. I would say to my team, if we can’t find that many deals a year in Europe, with a team of about 12 people, then we probably shouldn’t be in the business. I don’t think there is a massive up and down in terms of deal flow, or the attractiveness of the marketplace. I would agree as well that this is something we have pursued as well, going after more creative structures and you could even extend that in some cases to say we’ve pursued deals that might even be quirky.

A case example would be a transaction in the second half of last year, a company called VWD, which is kind of a mini-Bloomberg, predominantly focused on the German-speaking market, a listed business with two major shareholder groups which were at each other’s necks, and after spending quite a lot of time in coaching these people, that the transaction would probably be the best for everyone, we got them all to the table and signed a deal, installed a new management team, and were able to get to the de-listing level. So obviously there is complexity around those things, but you can then make use of these locations and the market, and I do think you will always find those kinds of opportunities.

Nat Burgess

So, a quick comment on that, it’s interesting, you guys are pragmatic, you’re thinking long term, a lot of the strategic buyers we’re talking to are actually pretty hyped up. If you think about it, if your division is suddenly very profitable, if your parent company’s stock price is up 40%, if you’ve added $10B to the balance sheet over a quarter, you’re not thinking about three or five year cycles, you’re wondering how you can take advantage of the momentum right now to get stuff done right now. In talking with strategics, we definitely see a difference in how they’re looking at the market and how you are. I’m sure you’ll keep doing what you do successfully as we ebb and flow.

We have time for one more discussion point, and I want to direct this one first to you, Dave. All of you mentioned international. You are all dedicated to international, you’re doing cross-border acquisitions for portfolio companies… is it possible to build a world-class technology company now without crossing borders?

David Tiley

I would say, I think it’s possible to build, but I think obviously your customer base is an international base for sure. I think you can still build one, but there’s also ways to do it globally much easier than it has ever been. At the end of the day, I guess we don’t really think about global or not as the reality is all of our companies are selling to customers all over the world. We kind of look at every business we see as global reach, at least in today’s world.

Nat Burgess

Rob, I know your guys have been racking up some frequent flier miles crossing the Atlantic lately, so it sounds like you’d have a similar perspective.

Rob Palumbo

We do. I’m sure it’s similar for my colleagues. A lot of the businesses we are investing in, they are actually looking to us to either execute on a more global strategy because they have a footprint in North America and want to get into other markets, or alternatively they are outside the US and we have a business like that in Australia and one in Europe, and they’re trying to get into the US market and hoping we can help them with that.

Most business, especially software businesses of a modest size, are thinking globally these days, and they have looked to their partners to help them execute that strategy.

Nat Burgess

I agree with that, and if you’re looking for high quality assets in Europe, make sure you give Michael a call.

We’re at the end of our panel now and I’m going to hand it back over to Bruce.

Bruce Milne

Thank you gentlemen, that was wonderful. We’re also seeing similar activity, down to the smallest size firms.

I would encourage everyone to try to get to one of our live events. We sponsor or co-sponsor almost 100 events a year.