January 2013 Tech M&A Monthly

January Tech M&A: Forecast 2013

Introduction and Market Overview

Bruce Milne

Hello, and welcome to Forecast 2013, global tech M&A review and predictions. We have the largest number of guests and slides ever, and great data for you. We have a panel of luminaries giving their presentations, and then we’ll take questions at the end.

I’m Bruce Milne, your moderator today. We’ll start right off with the agenda. We’re going to do a global market overview, get field reports on what is happening around the world, then we’re going to have specific Market Spotlights on social, SaaS, mobile, gaming, and big data. Then we’ll hear from our research department with the Corum Index, our annual research report on 26 market sectors, what’s happening with deals, valuations, what’s the information you need to know?

Then we’ll go to our tech luminary panel, managed by Nat Burgess. We have Peter Coffee with us, Reese Jones, and Dan Shapiro. After that we’ll get to the Q&A.

Let’s start off by taking a look at a top view of the world. Actually, things are doing very well. The EU is not doing that well, Germany just had a slight retraction in Q4, but generally things are looking pretty good. The US is coming along, we had not a great Q4, but the forecast is fairly good. The growth, however, will be in Asia.

We went back, and I said let’s look at the reasons tech was strong last year, the last couple of years, let’s look at those and see how we stand.

 

 

1. Extraordinary change and interrelated mega trends You’re going to see even deeper into some of these mega trends in our special reports. 
2. Strategic buyers have record cash. They have more than they did a year ago. We’ll hear more about that, not only today, but also in a special presentation next month when we hear from the private equity guys.
3. Debt is at the lowest cost ever. It looks like it’s staying that way. 
4. Private equity is over $1T available, almost three times what the strategic buyers have. 
5. The new public buyers, foreign buyers, and generally you’ll hear this theme about Asia. We saw a number of surprise transactions involving large Asian buyers. 
6. The entrance of non-tech buyers into the market. We’re going to hear about this in big data, the internet of everything, they’re coming into play with firms like Bosch, they’re continuing to be bidders.
7. Crowdfunded buyers, and this term is a bit dated, we don’t call them crowdfunded necessarily, these are the folks that originally started the theme, we hear about the JOBS act and that some of these firms are going to be funded by that, and they’re going to be making major inroads in the coming year. 
8. American companies are still cheap for foreign investors. The dollar really hasn’t changed, right around $1.30 to the Euro, basically hasn’t moved much, American firms are still relatively cheap to foreign buyers. 
9. Most US buyers’ cash is international, and with the present administration it’s going to stay that way. You’re going to see a lot of firms spending money overseas, since over 70% of high tech companies have their money abroad. 
10. Finally, software is rising in importance. This trend is continuing. 

I asked the World Technology Council, and our past presenters from the last year to give us some of their thoughts, and here some of them are. This should be fodder for our speakers later on, thoughts to consider, questions to answer.

The mobile wallet will break out and Google, wireless carriers, and device manufacturers will battle for control. We’re seeing that in the news every day.

Rise of smart home appliances, integrated via Android technology over wifi. We’ll hear more about that later.

Fortune 2000 firms will open to solutions from smaller software suppliers for the first time. Actually, not really for the first time, this is part of a trend of acceptance here.

Enterprise technology picks up the friendly-relational-database-search gauntlet thrown by Facebook.
Health insurance transparency software becomes the hot point for health tech firms.

Clever software plus small smartphone attachments will help medical innovators avoid the Obamacare medical device tax.

The first significant crowdsourced/social media driven biomedical discoveries arrive. We’re getting back to the crowdsourcing.

Apple continues to flag, then preps to revitalize with major M&A in late 2013/early 2014. I hope so with that $120B they’re sitting on.

Nokia and RIM are both acquired by Asian firms. We saw this last year with Soft Bank betting on Sprint.

A major tech player will buy a major wireless carrier, such as Apple, MS, or Google acquiring AT&T, Sprint, Vodafone, or Deutsche Telecom. Seems to be a definite trend here with tech in the mobile space.

Generally speaking, we saw the data this morning, it looks good, we had a good Q4 for consumers, we’re at a five-year top on the market, and also on new home starts and a four-year best situation on jobless claims. The data is good.

Global Field Reports

Now, let’s go across to Europe and a field report from Jon Scott. What do you have for us?

Jon Scott

Here in Europe, Corum recently represented Glaston Corporation, the global leader in glass production machinery and software solutions, based out of Finland. We advised the board and the management of its 200-person strong Software Solutions Business, Albat +Wirsom, regarding the unit’s divestiture. A+W is the world’s leading software solutions provider for controlling and optimizing the entire flat glass, window, and door manufacturing process.

This was a “dual process” addressing both financial and strategic buyers worldwide. We garnered interest from multiple buyers in Europe, North America, and Asia. In the end, a sale agreement was signed with Canadian-based Constellation Software, a multinational provider of software and services. The purchase agreement was signed in November with closing scheduled for later this month upon receipt of German government approval.

It’s interesting to point out that we had organized four bidders. The process was managed such that all bidders were kept in the game despite one party’s significantly better proposition. That buyer was itself acquired as we were launching the due diligence process and the new owners declined proceeding with the acquisition. If Glaston had only that one option, they would have been back to square one. We continued our process with the other bidders and Constellation was ultimately the best suitor.

We had teed up a number of potential buyers; providing our client, not only a good market valuation, but in the end, more importantly, with alternatives.

This recent experience once again points out how important it is to have multiple suitors in running an optimal process. Back to you.

Bruce Milne

We’ll be back to you in a few minutes for a Market Spotlight, Jon. Now we’ll go down to Texas and hear from Jeff Brown. Jeff?

Jeff Brown

Thanks, Bruce.

ASCO is based in Scotland and backed by Doughty Hansen, one of Europe’s leading private equity firms. They acquired a controlling interest in our client Oniqua, based in Brisbane, in a cross-border transaction.

ASCO is the world’s leading oil and gas logistics service company. Oniqua is the world’s leading MRO (Maintenance, Repair and Operations) analytics software company. Their software extracts data from the ERP applies proprietary analytics to find inefficiencies and ensure that the MRO supply chain and asset management operations are optimized.

Oniqua is headquartered in Brisbane, with offices in Denver, Santiago and Johannesburg. It sells to asset-intensive companies in oil and gas, mining, utilities, process manufacturing and transportation. Customers include 8 of the top 10 mining companies and several of the world’s super major oil and gas companies. The Oniqua founders will stay in their executive roles and as shareholders. ASCO will join the board.

This is an optimal outcome for both companies. Oniqua gains the resources of global services company with committed private equity backing and access to their global client base.

ASCO gains a powerful, value-added solution and important differentiation, competitive advantage and margin improvement in their logistics services contracts. A major part of ASCO’s service includes optimizing materials, inventory and warehouse management. With Oniqua analytics, ASCO now has greater scope to standardize the data they collect about client operations, analyze it to uncover opportunities for improvement, and then take actionable to optimize supply chain and asset performance.

In a global industry where technology and innovation rules, this strategic acquisition will really stand both Oniqua and ASCO apart from their competitors.

Market Spotlight Reports

Bruce Milne

Now we’ll move to our market spotlight reports. Each year we ask our industry experts here at Corum to opine on various markets, the ones that are particularly undergoing disruptive change. This year, we have segments on five different markets. Let’s start with our own chairman, Ward Carter, on SaaS.

Ward Carter

Thanks, Bruce.

SaaS M&A activity remained hot in 2012, with growth rates projected through 2015 as twice that of on-premise software solutions. There are many perceived advantages of SaaS over on-premise solutions. SaaS is understandably where everyone wants to be, and almost every ISB is either offering SaaS or developing it.

On-premise applications, however, are not going away, with expenditures last year over 9 times those for SaaS and projected to still be over 6x in 2015. So, the on-premise model continues to have a very long tail.

From a valuations perspective, our SaaS public market universe is valued richly at over 4.4x revenue, almost double the comparable market index for traditional software. Average SaaS transaction multiples in 2012 were 3.6x revenue, again almost double that of traditional vendors.

But, you have to show growth in order to hit those multiples. Data shows that revenue multiples for publicly-traded SaaS companies correlate closely with their year over year revenue growth. Take Websense, for example, showing almost no growth, and valued at only 1.4x revenue, a fraction of Concur, Ultimate Software, and Salesforce.com. They delivered 25-30% year over year growth, resulting in multiples of over 7x revenue.

So, the valuation penalty for lower growth is dramatic, with even a minor drop in nominal growth rates resulting in a severe hit in valuation.

Back to you, Bruce.

Bruce Milne

Thanks, Ward. I know SaaS is growing, we have Peter Coffee and one of the founders of Salesforce on and things are going great in that area.

Now we move to a spotlight report in social, with Nat Burgess, who was recently on CNBC.

Nat Burgess

Yes, I was on CNBC yesterday, on Power Pitch. We were talking with Elias Roman from Songza. Very cool company, and definitely a social angle to it.

We’re going to be doing Market Spotlight soon on social media marketing, but today I just wanted to highlight a couple of things.

Madison Avenue figured out how to seduce customers into buying cigarettes, clothing, whiskey through magazine ads. What happens when the magazines are all gone? Can major brands market effectively through the current social networking channels? How do we extract the viable business models from the current buzzword arms race?

The average email address gets 10 spams for every legitimate email. Consumers are numbed to banner ads and get spooked when the ads seem to follow them. We have global reputations made overnight like Psy's Gangnam Style, and then shattered again by a negative clip, as is happening with Psy's anti-American video. Meanwhile consumers are spending most of their Internet time on activities that are not easily monetized. They are looking at photos of Aunt Edna's new dog on Facebook. We are connecting with people we already know, for reasons that have nothing to do with shopping . For media houses, these factors add up to a disaster - an internet of chaos, unpredictable trends, clumsy advertising, and wasted marketing spend. How can brands regain control of the minds of their customers?

Personally, I believe that the next wave of the internet will focus on interests, rather than connections. This simple idea, combined with real-time location data, will drive a revolution in consumer behavior.

Marketers will need to understand sentiment. Oracle already bought Radiant6 to help solve this problem, but there is more work ahead.

Marketers will be able to automate their campaigns. Oracle bought Eloqua, but there is more work here as well.

Marketers will engage customers by reaching out in the context of real, current interests. This is the next frontier, the area where we will see the most interesting developments in social in 2013.

Just in passing, I just flew home from Europe last night. I visited five European cities in five days, and I encountered an innovative social marketing firm in every single one. That’s exciting. The world is definitely flat in this area, so stay tuned.

Bruce Milne

Good stuff for some of our presenters later on. The internet of chaos and interest versus connection. Now we’ll go back to Jon to hear about mobile. Jon, so much is about mobile, what’s your take.

Jon Scott

Some say we’re in the middle of a “mobile evolution,” but I see it as a yearly revolution, driving virtually all tech sectors. It’s creating “big data,” and requiring new analytics to harvest it.

We’re seeing mobile applications that are more than extensions of on-line services, and the multi-screen trend is driving telcos to develop innovative solutions to reduce bandwidth use. Today, more than 60% of us use smartphones, and 15% have tablets. Here are three trends to watch out for:

Bring your own device, or BYOD will continue to challenge enterprises. Mobile malware, up by more than 300% in 2012, will force chief information security officers to rethink their mobile security strategy and look for new tools to vet the trustworthiness of employee-used apps. BYOD will also drive new security implementations to ensure that corporate data is not at risk when users have access to it on their personal mobile devices.

A personal cloud will become the center of a mobile user’s world, driven by apps, content, preferences and data synchronization. Data is becoming more important than the device and cloud providers will have very sticky customers over the next two to three years.

Location will be a huge enabler of delivering context related services, combining location and personal preferences with purchase patterns, gender, age, profession and intention, offering a more intelligent user experience than today’s basic location services. These mobile trends create huge opportunities for start-ups. Looking at M&A in the mobile segment, you see many companies creating point solutions that the big players haven’t thought of, or considered too “niche-y” to pursue. Watch these trends in 2013.

Back to you, Bruce.

Bruce Milne

One of the biggest applications we see in mobile is gaming. You get online to play and you see people plugged in everywhere. Onto gaming, our own Jim Perkins, an industry legend, is here with a look at the gaming market.

Jim Perkins

Thanks, Bruce.

As Jon and you mentioned, mobile is driving just about everything, and gaming is no exception. Casual, mobile, and tablet gaming, as well as online casino gaming drove M&A in the gaming space in 2012. IGT’s half-billion dollar acquisition of Doubledown was the most high-profile deal of the many in this space last year.

This will accelerate in 2013, driven by changes in gambling regulations in the US and Zynga’s application for an online gambling license. That move could be the cure for Zynga’s IPO blues. Though their value is down by 75%, this decline won’t continue, due in part to the tremendous upside that casino gaming holds for them.

In the rest of the industry, online downloads continue to shift numbers away from traditional retail. Digital revenue will surpass packaged goods revenue in 2013. Valve, Apple, Google, and Microsoft are among the key players here. Nintendo’s WiiU will not come close to meeting Nintendo’s expectations, forcing them to rethink their entire gaming strategy. They could become a software only gaming company in 2014.

Smart TV gaming will make a significant move this year, fueling better game controllers, more voice recognition, focused games, and vastly improved gesture technologies for games. Innovative and successful firms in these spaces will be M&A targets for sure.

There will be a shift to higher-quality casual, mobile, and tablet games and growth in mobile and tablets will be dominant.

Video games in sports, lifestyle, and casino franchise leaders will make mobile game customer loyalty and engagement a top priority, especially in the online casino space. This will be the sometimes hidden driver in many deals this year.

Meanwhile, true social monetization is still elusive, but real money casino gaming will change everything here as well, significantly altering the revenue per user paradigm. Watch for acquisitions in the areas of security, customer retention, brand awareness and loyalty technologies, and analytics software to boost online revenue.

We’ll see more gaming IPOs as well, and many will ask why, as Wall Street still doesn’t understand this business. These newly minted public firms will be looking for acquisitions as well.

Back to you, Bruce.

Bruce Milne

Yeah, lots of opportunity for consolidation and change. Internet of chaos, internet of things, 10 to 1 debt ratio, that leads us to a lot of data, which leads us to big data, and Rob Schram.

Rob Schram

Thanks, Bruce.

Every 48 hours, we generate the amount of data created from the dawn of civilization until 2003, and that rate’s accelerating. A fifty-fold increase is expected by 2020, with (according to IBM’s research) as many as a trillion connected “things”: cars, home security systems, manufacturing systems, medical devices and much, much more.

New tools are needed to manage this “Big Data,” creating new opportunities in traditional data management—storage, security, compliance and more—plus new value propositions from healthcare to manufacturing to web tech.

A primary focus of Big Data is consumer analytics, with new tools to analyze and act upon the petabytes of data generated by billions of connected consumers, interacting using Web applications, SMS, mobile email, Wi-Fi, Bluetooth-enabled signage opt-ins, and the latest generation of proximity detection.

The evolution of Big Data has also made enterprise-class capability available to the middle market. Selling analytical systems to small and medium-sized enterprises (SMEs) is now one of the hottest segments in the IT industry. Smart organizations of all sizes can now manage tremendous data volumes to profile customers, determine pricing strategies, target advertising, maintain real-time snapshots of the business and much more,

Big Data revenue will jump from $5 billion at the beginning of 2012 to over $50 billion in 2016, driving M&A. Some examples:

Opera Solutions, a data vendor, purchased BIQ, Lexington Analytics and Commendo Research & Consulting last year.

Actian Corp targeted database management software with Pervasive Software for $164M and Versant for $37M.

Business intelligence/analytics are in huge demand and acquisitions by companies such as Actuate, IBM and VMware should remain strong.

Next generation data warehouses are being picked up by the large players – EMC purchased Greenplum for $400M; HP bought Vertica Systems at $275M; and Teradata acquired Aster Data Systems for $263M.

Stay tuned! Bruce?

Bruce Milne

Great stuff. Thank you.

Corum Index and Research Report

Now let’s look at these topics with a bit more focus, with Corum’s own magnifying glass, our research department, and all 26 sectors. Elon Gasper is the head of our research department. Elon?

Elon Gasper

Thanks, Bruce. We’ll begin with a look back at the 2012 public markets, which delivered solid performance, despite a couple pullbacks at the summer economic crisis and then in anticipation of the U.S. election, with the Dow and NASDAQ up and S&P Tech exceeding them both to close ahead 17%! And for the first time in years none of these indices dropped into significant negative territory. Plus, 2013 is off to a fine start now, too.

Looking deeper, among the major public market groups that Corum tracks: Infrastructure, Consumer, Vertical, Horizontal, Internet and IT Services, aggregate value eked out a gain in its more important EV to sales Ratio, though overall our weighting of sectors seeing continued commoditization, particularly the always volatile games and now maturing horizontal subsectors ERP and CRM, offset the EBITDA metric for higher-flyers like infrastructure. We’ll dig into those details in individual market reports, later in this broadcast and in our expanded written report.

Reviewing the strategic tech acquirers of 2012, we see most of the leaderboard in place from last year, in terms of number of deals, with but a few top dogs missing: Zynga, for instance, top three last year, top six in 2010, cut its buys in half, so its fell off the board. Other rotation shows many rookie climbers, such as IHS and Publicis, and some fledglings like Twitter migrating back on. Note Google hung on for a third year at the top of the former chart despite hitting the bottom of this one, having bought far fewer companies last year.

Jockeying among PE acquirers has also been intense and illuminating; we’ll need some time to guide you through details of that, a tour we’ll lead in our March report on activity in the PE universe. In the meantime, Alina, please update us on changes in and to our Corum Index.

Alina Soltys

We have expanded the Corum Index to a larger overview of the financial metrics that apply to Software companies. Starting with the transactions, which are down slightly from last year... they track their slowdown in activity to Q3 and Q4 as macro events like the Fiscal Cliff talks and the US election took hold. To touch on a few megadeals, those exceeding $1B, Dell was busy this last year making 2 $1B+ deals for Quest and Wyse and is itself is in take-private talks as we speak, with early estimates of $15B offered by Silver Lake Partners.

There was quite a drop in the number of PE deals but they are picked right back up with an equal increase in IPOs.

One of the underlying fundamentals that drives IPO activity is the VIX index shown here from 2008 thru 2012. 2012 saw a calm lull in volatility that drove a strong number of new companies to be publically listed. We actually ended the year at a four-year low, positioned for more IPO activity. Are Square, Twitter and Box lining up to bat next?

Start-ups are certainly playing the field, representing every 11th transaction. These start-ups are being driven by the $20B raised in VC funds & don’t forget the healthy number of exits of VC backed companies.

From their own deal flow, top public PE Carlyle Group has seen an increase in valuations for Buyouts up 17% and Growth equity up 12%. And we are seeing funds take a more studious approach. Union Square Ventures, who’s backed hotshots like Etsy, Tumblr and Twitter made 0 investments in 2012. Well-funded VCs and increasing valuations are positive forces for tech entrepreneurs.

Looking ahead to a banner year. Elon?

Elon Gasper

Good news, and more to come in 2013, including the major impact we see from the continuing implementation of the JOBS Act. A few days after Obama signed it, we described this historic change and the profound effects it would have on funding and tech M&A. We predicted then that the SEC would drag its feet – they admitted as much last week, blaming Mary Shapiro’s resignation – and that’d it be this year, 2013, before the biggest overhaul of US Securities Laws in 80 years hit.

We’ll keep you posted as it does, and on the many positive factors from last year as they remain in effect: strategic acquirers and PEs both with record cash levels, breathtaking technology changes driving more emphasis on software enmeshed in every sector, the overseas structures…all this added to that historic change in legal structure of the capital markets for innovation. Add it up and we see a banner year of tech M&A in 2013.

OK, back to the past as prologue: six markets, 26 sectors: First, Amber, please bring us up to date on the infrastructure story.

Amber Stoner

Thanks, Elon. Overall, the infrastructure market has held fairly steady over the last year, with an increase in EBITDA multiples.

Two of our subsectors with the highest sales and earnings multiples, network management and virtualization, have seen a lot of acquisition activity in the past year, including some crossover with network virtualization emerging in the second half as an ongoing trend.

In July, Nicira, a pioneer in software-defined networking and a leader in network virtualization for open source initiatives, was acquired by VMware for $1.3B. The acquisition expands VMware's networking portfolio allowing customers to create a pool of network capacity on top of any network infrastructure from which they can easily support isolated virtual networks. VMware will continue to support the open principles and technologies that have made Nicira solutions successful, including the Open vSwitch allowing enterprises and service providers to create the most flexible network topologies to seamlessly span any cloud environment.

In a similar deal, Oracle acquired Xsigo Systems, a network I/O virtualization vendor, for an estimated $220M. The combination of Xsigo for network virtualization and Oracle VM for server virtualization is expected to deliver a complete set of virtualization capabilities for cloud environments, allowing Oracle to better compete with Dell, HP and IBM; Xsigo's technology strengthens Oracle's management capabilities, enabling the easier creation and migration of VMs across the fabric as well as reducing both networking equipment and power consumption.

Cisco also jumped into the virtual network pool with their acquisition of vCider in October, continuing an acquisition spree that the company has been on for the last year. vCider will ultimately be integrated into Cisco’s Cloud Computing organization and will play an important role in the Cisco Open Network Environment strategy going forward. We’ll go more in-depth regarding Cisco’s acquisition strategy and the deals they’ve completed in the last year in a special report next month.

Finally, in December, Juniper Networks acquired Contrail Systems for a reported $176M. The acquisition gives Juniper a virtual networking control engine which will aid the company in its efforts in network virtualization and automation, allowing Juniper to compete in this ever increasing crowd of companies involved in the virtual networking arena.

These acquisitions are a reflection of how networking is once again becoming important as well as a continuing M&A trend going forward in 2013. Jason, what kind of trends are we seeing in the consumer space?

Jason Steblay

Well, despite the despite the drop in public valuations, the consumer market has been a hot sector for M&A. As Jim Perkins mentioned earlier, and as we’ve reported on here many times before, M&A activity in gaming subsector set a breakneck pace in 2012 that we expect to carry forward into 2013. But I’m going to switch gears and talk about M&A activity in our other consumer subsector, digital content, and specifically digital music.

While the most popular music streaming services, Pandora and Spotify, still struggling with profits, several companies from inside the industry and out placed their bets in 2012. I’ll focus on a couple of deals, first back in June, Tesco, the massive British retailer picked up WE7, a streaming music service co-founded by Peter Gabriel that offers personalized radio stations to users for $17 million dollars. The company already owns a music download store and a movie streaming start-up. Tesco has been targeting digital content services in a bid to keep its retail customers away from Amazon’s website.

In late 2012, we also witnessed Dropbox’s acquire-hire the AudioGalaxy team of digital music streaming experts. Given the popularity of storing music on Dropbox, it is expected that the acquisition will result in a Dropbox streaming service. Considering many existing users already use the service to stream music and videos with the help of third party apps, it makes sense for Dropbox to move in this direction. However, it could put them into more direct competition with companies like Amazon, Apple and Google.

With both transactions featuring acquirers from outside the seller’s primary industry, and in the case of Tesco and WE7, from a non-tech sector, these deals highlight the importance of conducting thorough, professional search when you decide to sell your company. Elon, a broad search is just as important for vertical application providers as well, isn’t it?

Elon Gasper

Particularly so, Jason, so it's been a very international year in its M&A, where the continuing transition to SaaS attracts far-flung buyer interest since it reduces their risk and improves management flexibility. That’s also help keep vertical ratios relatively high, and among them energy and healthcare have done particularly well.

In the former, a growing focus on energy prices has led to increased integration between financial trading and the energy and utility industry, bringing on intense consolidation among energy, logistics, and commodity management software providers. Examples include Norway-based Brady purchasing UK energy trading systems developer Navita Systems for $27M. Given normal policy evolution plus historic changes to compliance and control regs, we expect energy and risk management innovators to be prime acquisition targets, especially for PEs keen on arranging more marriages between the finance and energy clans.

Like the energy sector, healthcare related vertical market transactions have done well. Policy, tech and cultural changes all converged to help the transaction count related to electronic health records adoption climb another M&A peak last year, with the last quarter alone populated by at least ten significant match-ups, including the major purchase of MED3000 by McKesson, by far the most active acquirer in this space.

Finally, mobility moves healthcare M&A now too: Athenahealth just picked up pioneer mobile med player Epocrates for nearly a quarter billion, and no tricorders yet, but keep an eye on Axial Exchange, which picked up a vital signs app associated with Mayo Clinic.

Alina, can you give us a read-out on the vital signs in the horizontal market?

Alina Soltys

This sector is driven to higher valuation multiples with the SaaS companies such as NetSuite and Salesforce included in the index although down a bit for this year.

Microsoft has slowed down its M&A activity, falling behind the sprees that Google, Facebook and the like have been on but in the process become very focused. Two strong acquisitions to shore up their office division stand out: Skype in 2011 & Yammer in 2012.

Yammer is a smart and calculated response to the Olympic-sized craze surrounding social media acquisitions. The $1.2B deal is anticipated to be slated into the Productivity suite to allow enterprise workers to communicate via IM like messages on project status updates.

Pretty Strategic when you consider the billions of captive Office eyeballs...

We can’t leave the wave in social media without talking about Salesforce and their substantial acquisition of BuddyMedia, paying 27x Revenue or double that of Oracle’s similar acquisition of competitor Vitrue. Salesforce has taken one billion dollars and spent that on acquisitions to build up its Marketing Cloud. With the recent acquisitions of Radian6, Heroku, and Site.com, a customer can build a mobile app, incorporate a promotion on Facebook, or Youtube and measure its effectiveness, later push promising leads into CRM. Salesforce focused on B2B and grew its run rate up to $3Bn, now BuddyMedia brings in the B2C approach, expanding their overall target customer base.

Quickly switching gears but staying on the cloud topic, SAP’s stated objective of hitting $2B in cloud revenue by 2015 has been helped significantly by the Acquisition of Ariba, a provider of the largest B2B collaboration network for suppliers. About $320B of spending processes through their network & SAP has 190,000 more customers that can be added. With $1.5B in NOL carry-forwards, the acquisition price of $4.3B is a little easier to swallow.

To further the cloud theme and network effects, RedPrairie acquired JDA software to couple JDA’s supply chain planning & pricing platform with RedPrairie’s operational focus, creating a $1bn company in the process. The vision is similar to Salesforce Marketing cloud, bringing together all moving parts into 1 assembly line - from product concept to flying off the store shelf.

Amber, I heard you’ve been flying around the internet space...

Amber Stoner

You heard correctly. The internet sector as a whole has remained steady with a slight uptick in sales multiples compared to last year, while over the course of the year we saw a developing trend in the internet pure play sub-sector involving consolidation among online travel reservation services providers.

Just last month, Expedia paid $632M to get Germany’s trivago; the acquisition adds to Expedia’s European business, which it expects to grow going into 2013. Going forward, it’s important for Expedia to expand internationally in order for them to continue to compete with players like Priceline, Orbitz and Travelocity, as well as a growing number of local Chinese players that could make expansion in the fast-growing Chinese market difficult.

The Expedia purchase was in line with Priceline’s $1.8B acquisition of Kayak.com earlier in the year. Kayak will continue to operate independently following the acquisition, but will also be able to use the partnership to expand internationally and get deeper into the hotel business. The deal keeps Kayak.com competitive in the online-travel market against Google and Microsoft, which have both made acquisitions to expand their own businesses.

In June, Yatra.com, India’s leading online travel company bought Travelguru in a deal that will strengthen Yatra’s position in the Indian online travel space and extend its position as an aggregator and seller of domestic hotels and holidays in India, adding to its already strong offerings for flights and outbound holidays.

In November, another Indian online travel company, MakeMyTrip, acquired Hotel Travel Group for $25M strengthening its presence in South East Asia. And in a similar deal, Dubai-based dnata acquired UK-based Travel Republic continuing dnata’s international expansion.

It seems that travel players are planning to use acquisitions to extend their positions globally, with a definite focus on the Asian market. Companies like Groupon and Travelzoo could also be acquisition targets in 2013. We know about Groupon’s problems, but it still has a large active user base and Travelzoo could find itself taken by a larger player in the industry.

Jason, how has the IT Services sector performed over the past year?

Jason Steblay

In the fourth quarter, valuations in the IT services index held relatively stable with a slight bump up in the earnings multiple. Over the year, Corum tracked 820 IT services transactions. Even though the vast majority of deal values weren’t published, we still see an interesting trend in the data; mainly, the international dimension of many of this year’s transactions.

North America still leads in terms of the total number of deals as the US economy began to hum back to life, but its IT services were less targeted in 2012 with just 35 cross border transactions, down from 55 a year earlier. This may be a symptom of Europe’s distress.

However, that economic distress created ideal shopping conditions in Europe for services companies as we saw the number of inter-continental deals involving a European target shoot up from roughly a dozen to 58. As Corum previously reported, the CGI group took advantage of Europe’s debt crisis by acquiring UK-based Logica for $2.6 billion dollars, and we continued to see that trend throughout the rest of the year with strategic acquirers like Xerox and financial acquirers like Bain Capital making big deals over there.

Elsewhere, Asia was a popular target as companies from mature markets sought to capture some of the region’s growth. This likely buoyed valuations of Asian IT services firms, which continued to vastly outperform their western counterparts throwing up an average sales multiple of 2.6 versus just 0.5 for the rest of the world.

Elon Gasper

And that’s the world of tech M&A in 2012, setting up for a banner 2013. Back to you, Bruce.

Bruce Milne

Thank you, great report. This will also be in a printed form coming out in the next few weeks, so look for your copy.

It’s interesting to note that we’re seeing some of the top players, traditional top ten and top twenty buyers, coming back in to compete with the likes of Google. Cisco, for example, had the highest growth in terms of numbers of deals, and they’re showing back up in the top ten. We talked to them yesterday and they’re on the warpath. They’re making a lot of transactions, and you’ll see a lot more from them. We’re having a special report on Cisco as representative of this whole group of traditional buyers, because they’re sitting on a mountain of cash, and with all these megatrends and destructive changes going on, they have to make acquisitions.

Also a continuing trend as we saw on this morning’s news about Dell, the PE guys sitting on about one trillion dollars, they’re big players, they accounted for about 40% of the largest deals last year. Thanks again to Elon, Amber, Alina, and Jason for their insights.

Before we got to our panelists, moderated by Nat Burgess, let’s look at our upcoming conferences, where you can get more detail on what is happened from us in a personal way, insights into the marketplaces, and also how you can take advantage of today’s M&A environment. Tim?

Timothy Goddard

Thank you, Bruce. The upcoming conference calendar is packed with events both in North America and Europe. We offer two different educational conferences for tech executives regularly.

The Merge Briefing is a 90-minute overview of the current tech M&A market and also a look at the eight stages to an optimal outcome in the tech M&A process. Then, Selling Up Selling Out is an intensive half-day boot camp that takes you through the process in detail. You can register for any of these events on our website, corumgroup.com.

Corum is also the platinum sponsor of the World Financial Symposiums. They have a number of their Growth and Exit Strategies conferences coming up in London, New York, and Silicon Valley this year. By the time you read this, I’ll have met many of our regular listeners at the WFS conference in Seattle at the end of January. The WFS also puts out monthly Market Spotlight webcasts focusing on trends and opportunities in particular market sectors. Their big data webcast is coming out at the end of February. You can learn more at their website and register for events at worldfinancialsymposiums.com

Bruce Milne

I concur, we look forward to meeting many of you at upcoming events throughout the year. Also, those of you who have asked us about big data, or started conversations about it, we’re drilling down on that on our next WFC spotlight conference on February 26th.

Now, let’s look to our panel of tech leaders, who are globally some of the top leaders and luminaries in our industry, led by panel moderator Nat Burgess.

Guest Speakers

Nat Burgess

Thanks, Bruce. I’m excited about our panel today. We have with us today Peter Coffee, Reese Jones, and Dan Shapiro. They will each introduce themselves shortly, but I’d also like to introduce the segment, and give you some of the intent behind the composition of the panel.

As we look ahead to 2013, we’re very intrigued by who will be buying, who will be investing, and why. We’re intrigued by the continuing revolution in how enterprise software is consumed and we’re also keenly interested in the technology that is changing patterns and behaviors in making new things possible. Our panel today will address all those issues.

Peter Coffee is a long-time journalist and observer of the industry, but he’s also a hard core tech guy. He’s written books on Java, he has a degree from MIT, and he is currently the VP and head of platform research at Salesforce.com. Secondly, we have Reese Jones, from Singularity University. You’ve seen his name over the years associated with some really cool startups that became game-changing companies, like Netopia, and he’s with us today to talk about his view of the future of technologies. Finally, Dan Shapiro, Dan and I have known each other for a long time, he’s been an innovative startup guy here in Seattle, his most recent company, Sparkbuy, was acquired by Google and Dan is currently with them, so we’ll avoid asking insider questions about what’s happening there.

Why don’t we go ahead and kick off our panel with Peter.

Peter Coffee

Hey, how is everybody? I tell you, the key quote for me from the time since we talked last was something that our CEO, Mark Benioff, said to us. We’d just moved into some new office space in San Francisco, we’re growing at a very rapid pace, and he said, “Here we’ve just put state of the art wifi infrastructure into this new office space, and yet, my 4G connection is competitive on bandwidth.” What you’re going to see is the notion that wireless is in some way second rate connectivity compared to a wired connection, that is really going to fade from view. Qualcomm, at CES last week, was showing a chipset that has some Mylocity silicon on it as well as the Qualcomm chip in a plug-in card that will span coverage on 802.11 AC and AD so you have up to 7Gbits per second in the 60Ghz band. This is ridiculous, it’s absurd conductivity, and it means that people’s expectations for being able to have full access to services, content, social graphs, which of course you can now search directly, consumer expectations are going to rise enormously.

One of the huge impacts this is going to have is on the automotive infotainment industry, where there is a decisive shift in power now, where the devices that people bring into their vehicles, and the services that Ford says people have “beamed in” to their vehicle, are going to be innovating at a rate far more rapid than what the in-car built in systems can achieve. This will really change the balance of power in that industry. It’s going to have an enormous impact on traditional influencer mechanisms for creating brand awareness and preference. The traditional print and media campaigns that were once used to build brand and product awareness in the marketplace are going to be radically supplanted by access to new influencer networks that will be built and will proliferate through the fact that you’re always connected, always able to access this current information.

This is obviously going to affect consumer marketing hugely, but it’s also going to affect the enterprise very substantially because the ability of a business unit now to evaluate and adopt high-end enterprise services in a SaaS model, is going to change in a very fundamental way the ability to defend turf and do what used to be called account protection, by the traditional IT providers. The kind of dynamic that you’ve seen for going on ten years, in terms of very straightforward functionality like consumer relationship management tools, sales force automation tools… You’ve already heard some discussion of what we’re doing at Salesforce.com with creating a complete closed feedback loop in which you can place a message in the marketplace, listen for reaction to that message, fine tune the messaging, deliver the message more precisely, deliver it to people while they’re mobile, while they’re in a retail store, at the point of purchase, deliver while they’re in their vehicle and open to input on recreational dining and entertainment opportunities, you’ll be able to correlate information on where someone is, what their calendar says about where they’re going and why, what their social graph says about who they might be meeting there and that kind of interaction that might suggest…

The bandwidth and the raw data, those are all there now, waiting to have value extracted from them, so clearly the ability to give access to that data in a way that gives insight into business value, that is going to be absolutely key, it’s where we’re putting a tremendous amount of our investment and our acquisition effort.

If anyone thinks this is fanciful, I want you to look back I guess 20 years ago or so, to when the spreadsheet first came aboard, and instead of having to go hat in hand to your IT department and ask them to author a new customer report for you, you could now start exploring rather sophisticated relationships among rather large collections of data in a very interactive and ad hoc way. Now it is possible to set up a big data warehouse on the Horoku platform as a service in a matter of minutes. It’s become as straightforward to offer a big data exploration in the Gbytes and Tbytes range as it used to be to author a spreadsheet. I think this is going to have a significant impact on the way that businesspeople think about how they’re going to explore new markets, what kind of relationships they’re going to see as being key to that exploration, what kinds of visualizations will be required to make that accessible to people without Ph.ds in statistics and what it’s going to say about changing the way that companies go to market to create awareness of product, awareness of brand, and preference in key influencer networks.

Nat Burgess

Thanks for the comments, Peter. Very dense with interesting points and as someone who wrestled with gigantic Lotus spreadsheets on Wall Street in the late 80s and waiting an hour for an account to feed through the entire thing, I welcome the changes that you’re talking about. I also think it’s interesting with Salesforce, as a pioneer with millions of customers using SaaS, this ubiquitous bandwidth, it’s an exponential increase in your incumbent advantage in the market, so that’s exciting news for all of us, but also for Salesforce.

I’d like to go next to our special guest Reese Jones. Reese spoke on a Market Spotlight recently on healthcare, and gave us some really interesting insights and comments there, that was for a narrow audience, and our perspective is always that this information deserves a broader hearing. We’ll get into that a little in the Q&A, but first Reese, I wanted to welcome you and get your opening comments.

Reese Jones

Thanks, Nat. I’ll address longer-term major changes that are happening in an exponential way. Mostly, as mobile internet software and devices get smarter, with the ability to learn as machines and the ability to understand and process natural language, it affects the concepts of five things I’ll touch on: robots, distribution, crowds, devices, and services.

The concept of a robot is not the TV humanoid idea that we have, but the type of car that was mentioned earlier, that is in essence a kind of robot. One of the trends at CES this year was self-driving cars. There are already self-flying airplanes and when you look deep inside, what a 3D printer is, basically, is a specialized form of robot that is able to take information from the internet and construct matter. An interesting trend is that 3D printers don’t just print things in plastic, it is small manufacturing that can print not only physical things but also biological things, including tissue, organs, foods, and other sorts of things that are alive as opposed to just material things.

These devices are able to be an extension of the internet that becomes more intelligent and disrupts a lot of industries that are used by humans. There is an interesting little book out called Robots are Taking our Jobs Away But it’s Okay. This is because the type of jobs that are becoming automated are tedious jobs that people generally don’t like doing anyway.

Distribution is one of the areas that is started to be affected by that, where on-demand, local delivery of personalized things is extending, not just from news and entertainment, but into physical things like food and products. That is a trend that will continue as well.

Briefly, I’ll touch on the automation of things that were traditionally done by humans. For example, there is a company that automates the process of writing books and has over 700,000 books on Amazon now. It can write a book on most any topic in 15 minutes, including the time it takes to write the book, format the book, translate it into many languages, publish it on Amazon and build the Google ad words campaign! It costs about $0.05, covers most any book topic, and will be rather disruptive for those people in the publishing industry or the information creation industry and the same type of thing is happening with TV programming and games. The process of creating them is becoming increasingly done by intelligent machines and automated.

On the opposite side from that, things that we’re used to being done centralized by corporations or by people are becoming crowdsourced. Most people are familiar with Wikipedia and Kickstarter and Facebook and things where the news and information is distributed among a crowd of people who gather it and organize it in a sense of peer review, just like open sourced or peer reviewed information. This is a structured form of data the way it is organized, but there is a new field emerging called data science, which is how do you look across the types of data that people have organized one way to look for new patterns that aren’t normally visible to humans. Facebook’s new search engine, also the newer things from Google, are looking at data science, how you might look at health data or traffic patterns that aren’t necessarily organized in a pre-structured data way and one example is this: Those people who have smart phones, a recent study showed that over half of them checked their health condition via their phone on the internet, before they ever consulted a doctor. Some of those people then chose not to see someone in traditional medical care because of what they were able to find in terms of managing their own health via the internet.

The obvious trends in the industry are devices, like phones and cameras and TVs, effectively becoming free and that the service is what matters, the service has ways to monetize giving away the device and subsidizing that. Such devices are becoming ubiquitous. Peter mentioned Qualcomm, and they are estimating they will sell 50 billion wireless chips, and of course with only 7 billion people on the planet, the vast majority of those chips won’t be for phones, they’ll be for cars or vending machines or robots or sensors of many types, all interconnected in a larger, smarter system.

Finally, on the topic of services, the services that go with these increasingly free devices will put pressure on companies to make devices where the phones, TVs and tablets (Apple’s tablet alone is about to surpass Dell in revenue) and these devices are basically a battery, a display and a chip, and a chip, basically no matter what it does, costs about a dollar. So as chips get smarter, the costs remains relatively constant and the capabilities improve. The types of things that can be done in terms of services and content, which is the reason that people will pay money to get the free device, obviously things like Google and Facebook for news, but also things that will be disruptive in a dramatic way, things like TV being disrupted by YouTube, music being disrupted by iTunes, et al, and Amazon, who has disrupted so many markets, they are moving into local delivery, aided by increasingly smart, learning systems.

So, that’s a sense of things coming in the near future.

Really interesting, Reese, and I wish we had another couple of hours to investigate these topics. One thing for sure, I’m going to buy that book about the robots and encourage my kids to read it! Just to make sure they’re thinking about the right jobs.

Now I’d like to welcome Dan Shapiro. As I mentioned, he’s on Google and can talk about things that are general and relate to his other interests outside Google. Dan, welcome.

Dan Shapiro

Thank you, it’s good to be here.

Nat Burgess

I know you have some comments for us, but out of some of the questions that we’re already getting and some of the things we’ve been wondering around the table…You are a mentor at Techstars and 500 Startups and you’re involved in some investing. You’re very close to what is happening at Kickstarter. I just wanted to get your assessment as what some of the major changes happening right now in the investment community specifically for startups, and what you think the right strategy is for an entrepreneur.

Well, it’s a fascinating time to be raising money, particularly in the early stages. From the angel perspective, I see deals getting done for just a few reasons. They get done because of fear and excitement, basically because something is happening so fast that you have to jump on board, you don’t have time to pay attention. You see these angel deals just run away where people don’t have time to do diligence, but everyone else is doing it, so there they go.

You see these deals done for social bonds, where people are traditionally the family and friends, but even past co-workers, folks with rock solid reputations who raise money based on those social bonds, and you find these angel investments happening because of love of the product. The investor has really done the time and energy and understands the product, the space, and wants to place a bet there.

All these things are going to continue, fundamentally unchanged, but the mechanisms are going to be very different. As we go into 2013, we’re seeing the rise of a whole new system for investors to be able to look at and consider products.

I’ll start with Kickstarter because you mentioned it. It’s actually not a new way to raise money, but it’s the first time that startups could actually fund themselves with pre-orders, which is a truly amazing phenomenon. Just flipping through some of the top funded Kickstarter products, you have Nomico for $600k, the elevation iPhone dock, $1.5M, the Oculus Rift virtual reality headset raised $2.5M, the Android game console $8.6M, and the Pebble e-ink watch got $10M!

Now, what’s interesting about these is that things that inspire passion in their backers and they’re things that you can almost guarantee when you find the best buy, at least if it weren’t for Kickstarter. So they are creating a way for customers to build amazing product concepts and go and get those pre-ordered and actually get the money with no sharing of equity before it is ever started. This is really amazing, but I think it’s also going to create another interesting trend for 2013 of what we should call the Kick-quisition, which is the company that has gone and raised more than $1M for a product, has delivered it after huge delays (the elevation dock was delayed so long that the iPhone 5 shipped while they were still working on it), and likely cost overruns, and is now looking at a world where they don’t necessarily have access to Kickstarter to bring customers in and they’ve just come off a death march to do the product, and on the flip side, traditional consumer electronics companies are looking and seeing these upstarts who have more joy and passion about each of their products than they’ve seen in the past 10 years. It’s hard to imagine anything that Sony or JVC or any traditional CE companies have produced that had half the excitement surrounding the Pebble e-ink watch, which I believe is currently the highest grossing Kickstarter ever.

So I think you’re going to see the larger consumer electronics companies partnering up and acquiring these smaller Kickstarter products, and providing exits for them as a way to bring innovation and creativity to their product line on one side, and lower costs and bring reliability of manufacturing on the other.

Nat Burgess

So now we have a new term to add to our lexicon, Kick-quisition.

Dan Shapiro

Yes.

Nat Burgess

We’ll make sure you get a nickel every time we use it. The other thing we’ll wait for, maybe Reese will have an opinion on it, the Kickstarter-funded experimental drug treatment. But I don’t think we have time to go into that today.

Q&A

We’re actually near the end of our time today, but I’d like to just close, Reese, if you don’t mind, I’d like to come back to you, because I think there’s a lot of press and a lot of buzz and a lot of fear around the changes in healthcare, in the ways that it is being regulated and delivered and consumed. I think when you last spoke with us, you weren’t speaking out of anxiety, you were speaking out of opportunity, and basically looking at ways that technology will ultimately improve the way that we can consume healthcare and the way it can be delivered. So can you give us a quick summary of your thoughts in that area?

Reese Jones

Yeah. The healthcare infrastructure system in the US in particular is basically calcified and broken. The complexity of the insurance and regulation and litigation and just the complexity of the medical system is broken in such a way that it’s the most costly medical system in the world, without delivering the best results.

The technologies allowing people to bypass the system to some extent and take care of themselves, so self-health is becoming something that, if people can’t afford or can’t work within a broken system, they tend to go around it. The technology between phones, tricorders, and the internet and the ability to do things yourself is making that much more possible and it’s an optimistic outcome, even if the healthcare system can’t be fixed, there are alternatives to take care of yourself.

Peter Coffee

Could I expand on that for just a moment? Healthcare, financial services, and education, are all big institutions that are all arguably choking on their own, I love the word calcification. Incumbent players will try to streamline and reduce the costs of the way these things have been done. This will not succeed compared to disruptive entrance into these spaces, which will turn the model inside out. You’ll see, for example, in healthcare, instead of making the hospital more efficient, you’ll see people using in-home sensors and distributed services, to radically reduce the number of hospital visits that are even required, because a cheap diagnostic tool in your house will tell you that nothing has really changed, you don’t need to see a 90% likelihood of telling you that you didn’t need to go in at all.

In education, the university is going to be turned inside out. You already hear about people “flipping” the classroom experience, where lectures are consumed at your own convenience remotely, and you only go into the classroom for actual interaction with small groups. You’ll see much more opportunity for internship and apprenticeship models instead of today’s model of the monolithic universities.

Financial services, where the gate keepers have been, the people who run the pension plans have wound up being the proxy shoppers for vast number of people. More and more companies now of course are moving to self-planned, self-administered 401k type programs, which radically increases the number of individual decision makers that financial product and service providers have to reach and deliver content to, and so the large incumbent dinosaurs will try to run faster, but a dinosaur trying to run fast is never going to really be competitive with the cheetah. The people who enter marketplaces from a connectivity rich dispersed decision point of view will change the rules of the game much more quickly than large incumbents will be able to adapt.

Nat Burgess

Peter, this is great news for our clients. We work globally with technology companies and we’re seeing innovation everywhere and opportunity everywhere.

On that note, I’d like to wrap up our panel. Thank you again to our guests for joining us, it has been insightful and exciting, and now I’ll hand it back to Bruce.

Bruce Milne

Wonderful stuff, guys, all of you. Great as usual and very thought provoking. Reese, I went online and started a new company called Instantthesis.com. I hope you’re right about that $0.05 to get a report on anything, because I just got offers to do theses at $500 each.

And Peter, I have to say you’re spot on about these institutions, all the big stuff, and we didn’t mention government, but who can expect change there, but hospitals and universities, I have a planning meeting soon where we’re going to take a private school and as you said, change it from the inside out. They have old technology from more than five years ago, the dinosaur comparison is apt. Fascinating stuff.

Peter Coffee

Automating and digitizing a broken model does not actually fix that model. The tag line that I’ve used to a number of our customers is that it is fatal to optimize while your competitors revolutionize.

Bruce Milne

Great stuff. If you have questions, please send them in and we’ll pass those on to our speakers.

Thanks to all our presenters today. I think this is the first time we’ve had all our presenters live and I really appreciated it. Now let’s go to our close.