July Webinar: Mid-Year Tech M&A Report

Introduction and Market Overview

Ward Carter

Hello, and thanks for joining us and welcome to Corum’s 2012 Mid-Year Tech M&A Report.

I’m Ward Carter, chairman of the Corum Group, speaking to you from our headquarters in Seattle, Washington. You are part of a group of hundreds of software and technology executives who have registered for this event.

Here is our agenda for the next 60 minutes. We’ll start with our global market overview, followed by some technology predictions for 2012 and beyond. We’ll hear a market spotlight update on some of the hottest markets, including cloud, social, mobile, gaming and SaaS. Corum’s research department will provide an in-depth look at recent transactions and valuations in the six major software and related tech sectors that we track, along with some of the 26 subsectors. We’ll follow that with our special guest speakers on our tech leader panel. At the end of our session we’ll open the floor to Q&A.

Our list of speakers today includes Corum presenters from around the world, and we’ll introduce them in detail later. Our special guests today include Peter Coffee from SalesForce.com and Reese Jones of Singularity University. Both of these individuals have presented for us before and are among our most highly-rated speakers, so we’re very pleased to have them back with us today.

We’ll keep the event to about an hour and we hope you’ll stay tuned for the Q&A session.

With that, I’ll turn the floor over to Corum’s CEO, Bruce Milne.

Bruce Milne

Thanks, Ward. I see that we have attendees on from over 30 countries right now. I’ll be brief in my comments because we have a really jam-packed agenda for you today.

Market Overview

Let’s start out today by looking at Asia. There are some signs of weakness in China’s manufacturing and Japan’s economic activity dropped. Singapore, Korea, Australia… Japanese machine orders had a record drop in June. However, let’s caution that China’s slowness, which is being broadcast across the board, they’re debating whether it’s 7.6% or 8.2%. That’s still spectacular growth.

Moving on to Europe, German retail sales dropped unexpectedly. In June, German business confidence dropped to a two-year low. We worry about Germany because they are the one strong one over there. Euro area unemployment climbed to a record high. As Alon comes into office in France, they’re starting to realize it may be worse than they thought.

Europe’s profit estimates were cut the most since 2009. Brazil’s loan defaults are the highest in 30 months. Billionaire Carlos Slim is taking advantage of this by moving into Europe. Smart guy.

In the US, manufacturing contracts, they’re not that bad, we’re still on the positive side. Consumer confidence sank to a five-month low. Berkshire’s Pederson said that the US is just scaling back and being cautious. New York Fed’s Dudley sees “disappointing recovery” and US consumer spending has remained unchanged. It is the weakest in six months, so we’re still watching it.

In finance and real estate, we have a haven here in the US. We were calling for the Euro to drop after the Greek debt problems and the rest of the issues in the Eurozone. The dollar is strong, we’re at $1.20 against the Euro right now. Buffet thinks the Euro may fail without reform, they’re just not getting enough leadership. Oil dropped as US manufacturing shrank in June. US home prices decreased, they’re kind of flat right now. There was a headline earlier this week, we had the best new home sales in June, although permits were a bit down. This morning it came out there was a big drop in secondary home sales. Buffet said that muni bankruptcy is set to climb as stigma lifts.

In technology, Dell is buying, Micron is buying. Intel cut 2012 estimates. Let’s be careful on that, that’s for PCs. As we’ll see in our reports, a lot of the growth is in mobile and laptops, down to 75% in terms of parts. That’s still 3-5% growth, though. Amazon’s cloud outage took down Netflix and Instagram. Keep that one in your mind here for a minute.

Microsoft to buy Perceptive Pixel for large touch screens. Apple paid $60M to end the Chinese iPad fight with Proview. Lots in the patent wars too, which we won’t get into right now.

Predictions for 2012

Okay, 10 predictions for the rest of the year from our Corum staff from around the world and our World Technology Counsel board of advisors.

1. Signs of “long lines at the bandwidth pump” for the first time and the prospect of rationing appears on the horizon.
2. Cloud backlash: biggest consumers of cloud resources begin building in-house data centers (Zynga has already done so); cloud begins to depend on startups and prototypes.
3. Facebook declines as ‘Enterprise Social’ becomes the next big drive in social, as systems like Yammer and others that will be consolidated in M&A or quickly launched begin to surprise a tangible ROI.
4. Under pressure, HP spins off a number of operating divisions to unlock value and restore innovation.
5. Marissa Mayer announces a Yahoo! phone optimized for ad networks, coming in 2013.
6. Windows 8, Surface and startups fielding serious Kinect API products revive Microsoft’s growth and reputation as a cutting edge tech player; they buy Vivendi’s Activision/Blizzard stake.
7. Apple TV and the rumored iTV fail just as Microsoft and Google become serious challengers in consumer hardware. The loss of Steve Jobs begins to worry investors, having stock price impact.
8. Google acquires electric vehicle automaker Tesla Motors as a platform for further transportation automation plays.
9. Amazon buys Coinstar, as Google and others jockey for retail presence, seeking to repeat the Apple Store breakthrough.
10. Also in retail, JCPenney’s CEO Ron Johnson, the man behind Apple Stores, allies with a hardware manufacturer like Dell to launch a store-within-a-store.

That’s our top ten predictions for the second half of 2012. Now let’s turn to our spotlight reports from our own experts who wrote in our annual report on SaaS and the various markets. Let’s start with Jon Scott who is in Amsterdam, so he recorded for us on social. Jon?

Spotlight Report: Enterprise Social

Jon Scott

Thank you. I just wanted to give you an update on social and the extraordinary growth and change since January. I told you in January that social networking had reached 82% of the world’s online population and 98% of America’s. We discussed what this meant to technology companies in 2012 and beyond. The opportunities ranged from creative software such as online gaming, to business intelligence solutions that analyze consumer behaviors and sentiments, all the way to infrastructure that speeds up traffic.

Today I want to talk about the impact social is having on enterprise applications. It’s being called “enterprise social”. This is a trend that is worth watching and was clearly called out in Microsoft’s recent $1.2B acquisition of Yammer.

Enterprise software tools are the rock solid applications that have been around for years and used by companies to automate all of the legacy manual processes like payroll, monitoring customer leads, inventory management and financial spreadsheets. According to some authorities enterprise software is now in the midst of an unprecedented “full-blown reawakening.”

Think about what happens when a generation raised using on-line, intuitive, multimedia networks like Facebook—tools that are easily understandable and accessible from day-one—enters the work environment? Suddenly, traditional tools and enterprise software, like those monster spreadsheets on Excel, seem positively archaic by comparison. Today's new business users expect a sexy , easy-to-use user interface, and access to any information, anytime and anywhere without having to make a career out of it. This next generation of business software, think Dropbox, Yammer, Box , increasingly provide this, while also providing the security and compliance features traditionally demanded by enterprises.

Because the large enterprise software providers aren’t typically the most innovative and creative, they are moving away from developing their own to acquire outside resources for enterprise social. Large information-tech companies like Microsoft, Oracle, and SAP shelled out $17B on enterprise-software acquisitions in 2011, up from $716M in 2009. Some recent names here are Radian 6 and Buddy Media (acquired by SalesForce.com) and Vitrue (acquired by Oracle).

So what about Yammer? They are accurately self-described as “The First and Most Powerful Enterprise Social Network”. Their goal is to bring the power of social networking to the enterprise in a private and secure environment. And as compared to legacy enterprise software Yammer is as easy to use as consumer software like Facebook and Twitter, but is designed for company collaboration, file sharing, knowledge exchange and team efficiency.

So, my prediction for the next six months is that we should continue to watch corporations embrace using social networks to advertise and to communicate their brand positioning, but also look to legacy application providers continue to acquire emerging companies that will give them Enterprise social tools to add to their existing applications.

Back to you.

Bruce Milne

Interesting food for thought, especially as Facebook just got the worst in class review for customer experience in the social arena. Interesting. We’ll hear more about some of those deals later.

Spotlight Report: Cloud

Now let’s move from Europe to the US and hear from Rob Schram at headquarters on the cloud.

Rob Schram

Thanks, Bruce. Well, cloud computing continues its rapid ascent! Recent industry surveys confirm the top-3 value drivers as: Scalability, business agility, and lower costs. Security concerns remain the top reason companies haven’t made the switch.

As Ward Carter will discuss in a moment, software-as-a-service leads in cloud revenues and continues to expand broadly. According to Gartner, worldwide SaaS revenue is predicted to reach $14.5B this year, an 18% percent increase over 2011. And worldwide revenue is projected to exceed $22B by 2015 – equating to compounded annual growth rates of over 15% during the next three years for the this segment.

But, augmenting the rapid uptake of SaaS and the surging performance by platform-as-a-service and infrastructure-as-a-service at the enterprise level is increased adoption of cloud offerings in the middle market. According to keynotes delivered at the eighth annual HostingCon, which wrapped up its Hosted Services Industry Conference in Boston yesterday, there will be fierce competition to fulfill the under-tapped needs of SMBs and SMEs looking to off-load non-essential, cost-constrained IT functionality.

According to Frost and Sullivan, a year ago only 12% of the middle market was using cloud services, with an additional 16% planning to start in 2013. This leaves a whopping 72% of the market unserved – obviously an attractive opportunity for existing and emergent cloud service providers.

So, cloud technology company valuations will remain strong as providers strategically position themselves, and major software players will snap up the “rainmaker” candidates as the race to the cloud continues.

Back to you, Bruce.

Bruce Milne

Thanks, Rob.

Spotlight Report: Mobile

Now let’s move to Canada to hear from our own Peter Andrews on mobile.

Peter Andrews

Thanks, Bruce.

With 6 billion mobile subscribers worldwide, smart phone sales growing at 33% per year and the tablet market exploding with 81% year over year growth, mobile is the defining trend in technology today. This explosion is driving innovation, growth, and consolidation in mobile devices, network capacity, applications, video, mobile transactions, mobile analytics and everything mobile.

Top mobile trends like location based services, social networking; mobile search, mobile commerce and retail, and mobile gaming are creating increasing opportunities for new products, applications and solutions. eBay and PayPal will both do over $10 billion in transactions on mobile devices this year!

New solutions and applications are being created by not only the leading mobile technology companies but equally, if not more so, by new, creative, and agile upstarts. This in turn is driving acquisitions to enhance market share, acquire new technology, stay one step ahead and develop mobile knowledge and skills.

In the past 6 months we’ve seen the following:

IBM acquired Israel-based Worklight, moving them into the cross platform mobile development space. A clear signal that mobile is now a key part of the enterprise technology strategy and platform.

Apple acquired San Francisco-based Chomp, who developed a search engine that helps users find mobile apps based on function, and not just name, a natural fit for Apple’s assorted app stores.

Facebook’s string of mobile acquisitions includes Instagram for photo sharing, Karma for mobile gift cards, and just last week the acquisition of the San Fran-based startup team for Spool, which focuses on making mobile content easier to consume. They acquired the team, not the end product.

We haven’t yet seen a deal for RIM and Blackberry, which we predicted earlier in the year, but despite challenges it still represents a strategic asset and suitors could include Facebook, Google, Apple, Amazon, Microsoft, Samsung, SK Telecom, LG, HTC and Nokia. The list is long but time may be short. If RIM continues its downward spiral with losses of $500M per quarter plus the recent $147M patent litigation judgment, it won’t take long to chew up their $2B or so in cash reserves.

Another mobile giant, Nokia, is facing similar losses, announcing a quarterly loss of 1.4B Euro and facing a 19% decline in sales, they are clearly under cash pressure.

Despite that, everything mobile is as hot as the mid-west summer weather, but unlike the weather it will only get hotter as fall and winter approach.

Back to you, Bruce.

Bruce Milne

Thanks, Peter. I’m glad you mentioned Nokia there, the word around here lately is that maybe Microsoft will make a move there.

I’m glad you mentioned eBay and Paypal as well, there’s a lot of interesting stuff going on there. We’ll pick up on that with our research group. They are now strategic buyers, jockeying for position sometimes just buying development teams and domain expertise.

Spotlight Report: Gaming

Now, just back from Asia, Jim Perkins, who chaired the World Gaming Conference in Singapore will bring us up to date on the world of gaming. Jim?

Jim Perkins

Gaming M&A continues at a feverish pitch.

It’s no surprise that Zynga is leading in acquisitions, especially in social mobile, despite their stock dropping in half from their late 2011 IPO. Nexon continues its buying spree – their stock is fairing much better than Zynga’s.

Activity is particularly high in Asia, with Gree, Nexon WeMade and others making buys in their own region and in North America. Tencent, based in China, bought 10% of US-based Epic Games, the highly successful game studio and Unreal engine developer.

M&A by the traditional video game companies has been almost non-existent so far. However, in a very smart move, Sony recently acquired Gaikai, a provider of cloud-based gaming, for $380 million. Vivendi’s $8B stake in Activision looks to be up for sale – rumored buyers include Microsoft, EA, Nexon and Tencent.

As Corum predicted, gambling in gaming, whether for fun or pure profit, is gaining significant momentum. There are billions at stake here, and IGT, Big Fish, Aristocrat, Bally, and Shufflemaster are powering up to challenge Zynga’s dominance, with strategic acquisitions worldwide.

Back to you, Bruce.

Spotlight Report: SaaS

Bruce Milne

Back to headquarters now for Corum’s chairman, Ward Carter, on SaaS.

Ward Carter

Thanks, Bruce.

Two quarters into 2012 we’ve tracked over 230 SaaS deals, with a market value of $17.5B for those deals where terms were announced, with a median deal value of $54M. And, there’s little sign of the trend slowing given current incoming deal flow.

The continued migration to the SaaS model is putting pressure on the traditional application vendors to offer SaaS options, leading to cannibalization in some cases of historic license and services revenues as customers demand SaaS offerings, and to heighten M&A activity to capture leading edge solutions.

Witness the strength of the pure play public SaaS companies, with Corum’s SaaS Index now trading at a median of over 5x revenues and 18x EBITDA, far above the 3.5x revenue valuations of traditional ERP vendors.

We’ve seen some staggering transaction valuations during this past quarter, including Intuit’s acquisition of Demandforce, offering marketing automation for SMBs, for $423M, at a lofty 11.4x revenue. Giant SAP continues on their acquisition path, taking out business commerce solutions provider Ariba for $4.5B, or 9x revenues. Francisco Partners picked up manufacturing solutions vendor and prior Corum client Plex Systems for a reported $160M, or 4x revenues, while Blackbaud acquires fundraising software provider Convio for $325M, at 4.5x revenues

We’re optimistic for the outlook for 2012 and beyond for SaaS as the virtues of applications in the cloud gain further momentum, and the well-funded larger vendors continue to scoop up attractive smaller SaaS targets.

Back to you, Bruce.

Bruce Milne

Glad to see that happened with Plex. We’re going to move on and drill down into some of these now specifically with the Corum research time. An FYI here, you’ll be seeing upcoming market spotlight reports in collaboration with the World Financial Symposium, we’ll be hearing from industry leaders in major sectors. These will be much more limited conferences, by invitation only, and you can look for those and related white papers and research reports coming up.

Corum Index and Research Report

Here’s our research team.

Elon Gasper

Thanks, Bruce. Our team will review events of the first half of 2012, revisit our January forecast, give an updated report on our 26 subsectors valuations and present our analysis of what it all means.

We begin with public markets, which finished fine, though a pullback early last month took some metrics momentarily below January starting points, and July now has had a step back too, there’s still ample cushion since all three key major indices we track printed H1 gains above 4% with the S&P Tech rising 13%.

In January we predicted a banner year for M&A, and our forecast hasn’t changed, because we see all its fundamental underpinnings still in place: the US economy continues to recover, debt is cheap, and tech innovation is in a very strong ascendant cycle driven by cloud, mobile and enmeshed systems applications. Just as important, private equity and corporate cash stockpiles have continued to soar to new record levels, plus a host of new buyers keeps coming on. These include a fresh cohort of public companies minted in the states as well as internationally. How about a quick update on some of these IPOs in the class of 2012, Alina?

Alina Soltys

Thanks Elon. Yes, we’ve had a pretty healthy amount of IPO filings and opening days so far this year. Here is a list of tech-focused IPOs and their performance as of earlier this week. The distributions in performance has been scattered both between halving in value to doubling in value as well as a couple that are relatively flat. The biggest standout was Guidewire Software who provides a very specialized software solution for property and casualty insurers. Of course, we cannot forget the star company many awaited, Facebook, hitting the markets with much drama.

Elon Gasper

Drama that Corum characterized successfully in Nat Burgess’ radio appearance and Corum's blog postings the day of the IPO, based on skeptical valuation analysis which was borne out over the next few weeks. The metrics we use to analyze and project such market matters and of course for actual M&A matchmaking, begins with the Corum Index.

Using it to compare the first half of 2012 with last year, and bypassing items only nominally changed, we note first there have been a few less megadeals this half, but this didn’t appear significant to us when examining the detail, from which we did surface some top valued megadeals for your attention, including, the Oracle buy of Taleo, which exemplifies the special role the Human Capital Management space plays in SaaS M&A, as we’ll delve into more later today.

Also, in an emerging theme we’ll come back to, both the CGI and Zayo deals seemed to have much to do with geographic balance. One more not to miss is how SAP continued to transform its M&A strategy by rounding up the largest B2B collaboration network into a growing stable of high-priced thoroughbreds as it races toward a corporate goal of $2B in cloud revenue by 2015.

But our top megadeal target during H1 was Cisco’s third largest deal ever, wolfing down NDS, but we expect no hiccups since Cisco is known for its expertise in the integration stage, something both buyers and sellers often overlook the importance of. Note that last year’s top sale is now Skype, though back then we listed T-mobile, which never closed because AT&T abandoned it after running into some difficulties. That revision, erasing a $39B deal, seems a good cue to remind execs of much smaller companies of the need for aggressive management of the post-agreement but pre-closing process.

Finally we’ll speculate that the increased PE action and decreased public buyers are two sides of the same coin, plus VC exits show them taking advantage of high M&A liquidity and valuations to move assets into forced PE hands as the latter really must keep deploying funds throughout the cycle.

Having brought up revisions I’ll note a couple others we’ll launch today including reporting mods on how we separate diverging IT services company valuations, particularly for Asia, and roll them into up our full six-market index. That showed a small decline for another quarter but no significant technical signal, as it remained bound in its two year range. Again, all in all here at the halfway mark we hold to our prediction of a banner year for M&A.

On now to deconstruct these six market sectors and their 26 constituent sub-sectors in detail, beginning with the one that consistently returns the highest value ratios to its entrepreneuring teams. Alina, Horizontal Applications still holds that distinction, right?

Alina Soltys

Yes, the Horizontal sector continues to outperform the other sectors and it picked up slightly from the drop in April. These valuations are propped up by some of the SaaS companies such as those in the Human Capital Space. Jason has more detail for us.

Jason Steblay

The HCM space was one of the first large sectors to prove the strength of the SaaS platform. As such, there have been some large acquisitions in the space by traditional enterprise players. In December, SAP came out to do its largest deal ever acquiring SuccessFactors. Oracle, quickly on its trail and desiring a massively scaled cloud play of its own acquired Taleo in February for a tidy $2B.

Smaller add-ons in this subsector are also being done. For example, CornerStone OnDemand picked up Sonar6, a $4 million dollar company whose CEO we had on the webinar back in April, for 3.5x revenue. Good news for tech entrepreneurs with companies that are not yet in bringing in over $100 million in revenue

Alina Soltys

Moving on to the CRM Subsector. Salesforce has a gift in spotting unique companies and acquiring them, gambling that diversifying its product base through M&A will sustain its high valuations into the future. They did that last year with Radian6,acquiring a vast social media monitoring platform. They’ve gone out and acquired another innovative, one of a kind company, Buddy Media, for just shy of $700M. This gives them the ability to provide social media marketing functions on top of the monitoring platform that came with Radian6. So now, in addition to selling to the Chief Sales Officer, they can go in to the Chief Marketing Officer with an effective social media creation, management and monitoring toolset.

But Salesforce has not taken their eye of the little guy, acquiring a couple of smaller companies mostly for their teams that have created collaborative solutions for document and project management. And of course we will hear more from our special guest Peter Coffee coming up next.

As mentioned in the beginning there is some trending with geography. This first half of 2012 is really at an inflection point for deals in Latin America. Last year we saw PE pouring huge sums of money across all industries in countries like Brazil. This year we’ve seen some sizeable transactions by strategic acquirers. Sage Group reached out for Folhamatic Group, a SaaS accounting software provider for $260M or 3.6x revenue. Certainly timely news for our listeners in Latin America. Other multinational companies like Schneider Electric, Thompson-Reuters and NCR all have done deals there in the last 6 months.

Amber Stoner

Speaking of continuing trends, in the vertical market, which, while down a little from the beginning of the year, did see a modest uptick in both EBITDA and sales multiples over last month, we’re still seeing acquisitions by PE firms as well as PE-backed companies. For example, in the healthcare sector, Emdeon, backed by Blackstone Group, recently acquired TC3 Health, a provider of cost containment solutions back in May. The addition of TC3’s solutions to Emdeon’s existing suite of payment integrity solutions will help healthcare payers control costs by identifying, processing, and accurately paying only valid claims. Considering the changes going forward with healthcare reform, especially in the US, I would look for deals in the healthcare space to continue at a healthy pace for the remainder of the year.

Jason Steblay

In the education space we see PLATO Learning, backed by Thoma Bravo, making yet another acquisition in March, snapping up Archipelago Learning, as SaaS provider of supplemental education products, for $292M. Since picking up PLATO in 2010, Thoma has actively helping PLATO expand its product portfolio with complementary acquisitions to make it into a truly competitive platform. Just as it did with INfoVista in the Network performance Space, Thoma is one of those unique PEs that continue to drive M&A through their platforms, actively looking at all relevant deals in consideration for add-ons.

Amber Stoner

We also have, in the energy and environment sector, Apax Partners and JMI Equity acquiring Paradigm Ltd. for approximately $1B. Apax plans to continue to gain market share in a growing market as they see the intersection between energy and software as an exciting area for investment. I would expect that we will see more deals, especially with PE firms in the energy and environment space as others decide it’s worth stepping up their game there in the second half of 2012.

Jason Steblay

Speaking of game, though valuations in the consumer applications market are still coming off lows seen at the beginning of the year, we’ve continued to see lots of M&A activity in the video-gaming subsector as the proliferation of social networking and mobile computing has forced leading gaming companies to adopt crossover strategies aimed at acquiring new users and increasing their existing ones.

As Jim mentioned earlier in the webcast, Zynga, Gree, Sony and others have all made acquisitions toward these goals. As this market is still unfolding, we expect mobile/social game studios and companies with platform with enabling technologies to continue to attracting interest from acquirers in the second half of 2012.

Amber Stoner

In the other consumer sub-sector, the prospect of a booming mobile payments market has seemed to captivate the attention of many major players. Apple and Microsoft both jumped into the mobile payments market in June, following Google, countless startups, and most mobile network operators.

With global mobile payments expected to top $1 trillion in 2015 it’s not hard to understand why so many companies are unveiling eWallets and other mobile payment tools now. To continue building out its offering, Google picked up TxVia in April, which will add several security features and about 100 million prepaid debit card accounts to Google Wallet allowing it to scale up quickly with a flexible and reliable platform, as well as adding talent to the Google Wallet team.

Jason Steblay

Also in April, Intuit purchased AisleBuyers, makers of a virtual shopping assistant app that lets in-store customers bypass checkout lines by paying directly on their mobile phones. Intuit will use the technology to transition its existing GoPayment point-of-sale solutions to the cloud. The stakes have clearly touched off a wave of acquisitions as the various players seek to build about their mobile payment solutions and gain a sustaining competitive advantage.

Alina Soltys

We’ve been talking about cloud in a lot of these sectors and also earlier in the webinar. It is definitely a recurring theme attracting a lot of attention. Before I speak some more to that, taking a look at the infrastructure sector in general; there was a nice uptick this month. The EBITDA multiple is lower than a year ago but the sales multiple is comparable.

The story in the infrastructure segment really is all about Dell. Continuing its acquisition streak, Dell picked up Make Technologies and Clerity Solutions in April. Dell has been plotting its move out of consumer electronics for many years. In fact both of these transactions tie into its strategic acquisition of Perot Systems for $3.9B back in 2009. Perot helped form the Dell Services Division, comparable to the likes of an IBM Global Services. Both of these acquisitions include software that transitions and migrates enterprise legacy apps into the cloud environment. And the beauty here is there is a lot of consulting work to be done to migrate the data which will allow both companies to flourish under the Dell umbrella.

This may be cheating a little bit because Dell officially announced their interest in Quest Software just two days after the quarter’s end, but nonetheless I’ll mention this deal as well. Just as with Perot Systems, Dell is beginning to build a software division on top of the Quest Software backbone of systems management. Competing with Insight Venture Partners, Dell sweetened the deal to be the top suitor at $2.4B. They’ve already indicated further M&A activity in the software space will follow as they continue building out this division.

Jason Steblay

But enough with Dell, another large trend that continues to spread is virtualization. BMC, Citrix, and VMWare, all the heavy cloud infrastructure players picked up desktop virtualization companies over the last 6 months.

The ability to provision desktops and servers across virtual, physical, and cloud resources is gaining complexity and all previously mentioned companies are filling in obvious puzzle gaps with acquisitions.

Alina Soltys

And lastly, to refer back to the Latin America trend I mentioned earlier, they are credible buyers as well. Cielo, a huge public Brazilian credit card processor , similar to a Visa or Mastercard, reached out for Merchant e-Solutions, a California-based company. They paid $670M for this transaction processing service where more than half of the revenues originate from e-commerce transactions. Merchant e-Solutions has been praised for their complete solutions as well as a strong mobile processing service. Both US-based competitors, Visa and Mastercard have done their own deals for the next generation mobile angle as well, and other players like Google are circling the space as Amber mentioned earlier.

Amber Stoner

Alina, you mentioned the trend we’ve seen lately in deals involving the cloud; well, that trend holds true in the internet sector, where there’s been an increase in EBITDA and sales multiples over last month, with Microsoft’s $1.2B acquisition of Yammer to add to its growing portfolio of complementary cloud services. As Jon mentioned earlier, Yammer is an enterprise social networking site that allows employees of businesses to collaborate privately and is used by over 200,000 companies. Prior to the acquisition, Yammer had raised $142M and was considered a candidate to go public in the near term. Microsoft plans to accelerate Yammer’s adoption alongside complementary offerings like SharePoint, Dynamics, and Skype.

According to 451 Research, this deal will allow Microsoft to essentially match the capabilities of longtime rivals IBM and Salesforce.com. But 451 also cautions that Microsoft may struggle to integrate Yammer into its other software programs, which will be something to keep an eye on as they seem to have had similar problems following the Skype acquisition.

Alina Soltys

In another social networking deal, we have LinkedIn, with its largest acquisition to date, buying SlideShare, a professional content sharing community, in a deal valued at approximately $119M. The LinkedIn team believes that adding SlideShare will “enable professionals to discover new connections and gain the insights needed to become more productive and successful in their careers” and deliver even more value for LinkedIn members. LinkedIn has been on a tear since their IPO in May of last year after successfully posting surprisingly positive earnings reports quarter after quarter.

Jason Steblay

The cloud megatrend has been driving deals in the services sector too as we’ll discuss in a moment. . First though, we have segregated the Asian IT services firms from the US & Europe-based firms on the following charts. The divergence of valuations is very clear as Asian firms are valued higher with their better margins.

This may be because Asian firms appear to be focusing more on strategic needs than their western counterparts. In particular, two trends are emerging from their recent transactions.

In the first, larger IT services companies are plugging gaps in their domain expertise by picking up smaller niche players. Infosys kicked things off this year with a $37M acquisition of Australia’s Portland Group. Even though Infosys is a bit wary of acquisitions, now having completed just four in its 30-plus year history, this was a rather small purchase. But Portland Group fills a critical need for Infosys with its global sourcing and procurement platform. In a similar move, China’s ISoftStone strengthened its energy solutions portfolio by acquiring Jiangchen Science & Technology Co., a leading provider of GIS and smart grid software solutions, back in April.

Alina Soltys

The second pattern has been for services firms to purchase products that help bring them into the cloud. Not to be left out of the fun, Infosys’s Indian rival Wipro purchased an Australian analytics firm Promax Applications Group in May. Promax offers cloud-based analytics tools for food and beverage, and wine and beer companies. Wipro plans on packaging Promax’s tools as part of cloud-based analytics platform it can offer to its clients in other verticals. In the acquisition, the firm was valued at more than two times its topline, selling for about $35M AUS over revenues of about 16 million.

Jason Steblay

Meanwhile, we’ve seen western firms engage in some classic land grabs. In one of last month's mega-deals for example, the Canadian firm CGI group picked up UK based Logica for $2.6B. No particular tech angles were at play here, however it is an example of a North American firm being opportunistic and taking advantage of Europe’s debt crisis to snap up a competitor's client base at discount prices.

Elon Gasper

And that's our report, halfway through a banner year for M&A.

Back to you, Bruce.

Bruce Milne

Great stuff, strong Canadian dollar, weaker Euro, buy up the European companies, I love it. We sold a bunch of companies to Logica, and now they’re being bought. We see Dell making acquisitions following IBM and HP; software is hot.

If you want the annual report that a lot of this is based upon, let us know and we’ll get you the hard copy. From the research report I picked up a few key points.

One, VC-backed deals are up three times! That’s huge, that’s smart money. PE deals doubled! Remember, these guys have almost half a trillion dollars in uncommitted funds and they are active, so we expect that to be strong going forward.

Tech Leaders: The Next Six Months

Now, let’s wrap up with our tech leader panel for the rest of the year ahead with Nat Burgess and the rest of our guest speakers.

Nat Burgess

Thanks, Bruce. Recent market activity is a great predictor of the near future, but twice a year at our annual and semi-annual reports we cut the tie to the past and look ahead. Here to help us with our look to the future are Peter Coffee, from Salesforce.com, and successful entrepreneur and futurist Reese Jones.

Peter Coffee is currently director of platform research at Salesforce, he was technology editor for industry journals PC Week and eWeek from 1989 to 2007, so he has a long history of watching the industry, predicting trends, and we’re very happy to have him here with us today.

Peter, why don’t you kick us off with your thoughts on where we’re going with SaaS and with the cloud?

Peter Coffee

Well, it’s great to have the chance to join you again and I certainly appreciate the context provided by the earlier speakers in key areas including social, which is the set of behaviors that people have demonstrated that they prefer when they are given the environment that enables them; mobile, which is the set of devices, technologies, protocols, etc, which is what allows social behavior to happen in the moment when people are prepared to make a decision, take an action, and so on; and of course the cloud which is the elastic and readily adapted bundle of services and capabilities that allow for low barriers to entry into the industry and for dramatic opportunity to scale and grow when entrepreneurial initiative does catch fire, instead of merely proving the existence of a market for a better capitalized legacy company to come in and take away from the startup. For all of those reasons, I see this as a very virtuous cycle environment.

I want to stress one particular point that I find resonates with a lot of people once they think about it. It is common to use the word social to describe an application, such as a Facebook or a Twitter, etc. It is even common to perceive an offering like Salesforce.com’s own Chatter as being primarily a medium for conversation, an alternative to and very often a rapidly adopted supplanting of traditional email, and yet that is really just the tip of the iceberg.

It is much more valuable to see social as a bundle of behaviors, which I see as sensitivity to context, where the behavior or the system is different depending on the environment of the person who is making the request on that system; adaptive to past behaviors, the answers you get and the recommendations you get are continually shaped by the things you’ve found relevant, and the actions you’ve taken in the past; and it is driven by events rather than being repetitive and rote in behavior.

Now, the thing about these three behaviors is that we quickly realize that people can be social or not, algorithms can be social or not, and processes can be social or not. If you merely think of social as providing a conversational tool for people to talk to people, it’s interesting, it’s useful, it’s not scalable, it’s not consistently governable, it’s not a platform on which you can make continuous improvements in performance. It is vital to see social as a means by which the enterprise, whether that is the startup or the established company, can become more in tune and adaptive to a very rapidly changing environment.

We talk about mobility. One of the most important aspects of the mobile device marketplace is that the time scale of innovation now has shrunk from years or even decades, with Windows XP as an example, had more than 50% market share on its tenth birthday, while in the mobile device marketplace, the time scale of device turnover is more like 5 months. That means that opportunities arise in a more rapid fashion and competition is going to emerge in a much more rapid way.

I think it is interesting to notice the recent furor over the LIBOR manipulation as an example of what people are going to increasingly demand from a social approach to the basic mechanisms and framework in which they do business, instead of an opaque and manipulable environment, people are going to be looking for levels of transparency and candor and opportunity to assure themselves of the veracity of the feedback that they are getting. I think this is really going to be something that we look back on and say this really was an existence proof for why old ways of doing things are not going to cut it.

Finally, there was a brief reference to service interruptions in some of the large providers. I think it’s also useful to appreciate that when you see one of those, it’s a high profile incident, but it is also an opportunity for focused learning and a failure mode that will not occur again, at least not in the same way.

When you look at the aggregate of all the individual opportunities for error in traditional IT, we realize that we have been being nibbled to death by ducks for the last few decades. The concentration of attention on an anomaly in service delivery from a large scale provider rapidly leads to the adoption of improved practices so that when a company takes full advantage of the resilience and the full tolerance that are available in cloud architecture, they wind up with rapid acceleration and improvement of scalability, reliability, security and governability.

I really see the cloud as the new normal. I see the mobile devices as rapidly becoming the majority means of those cloud resources, and I see social behaviors and the desire of people for the processes and institutions that they engage with to behave in a social manner as being absolutely the context for the opportunities and challenges that we face.

Nat Burgess

That’s interesting Peter, thanks for the insight that the concentration of computing resources and the cloud can actually accelerate innovation and improvement.

Next I’d like to welcome our other panelist, Reese Jones. He is a predictor of the future who has often put his money where his thoughts are. He took Farallon Computing public, sold it, he’s been involved in several other successful startups, he’s a venture partner at several leading venture firms, including Accel, August, and TelesoftVC. He is involved in all sorts of fascinating, forward-looking, innovative companies.

Reese, where do you think we’re going?

Reese Jones

I think looking at the pass is useful in that we’re in the fifth year since the iPhone was introduced, and 30 years since the Walkman was introduced, and we’re 35 years since the Apple 1, which was basically a keyboard attached to a TV. The kind of capabilities you can put in your pocket with the smartphone of today would have cost a million dollars in the mid-seventies. So the capability that the technology has brought is effectively a million-fold improvement from when the computers were first introduced.

Things have changed from being a keyboard and a TV to something that you can carry with you all the time, that is always on, and that keeps you always connected. This is changing the way the new millennial generation of people think of what is important in life in that their internet connection and their phone is much more important to a younger person than, say, furniture or a car or other things that would have been important to people of earlier generations.

The increased capabilities of the internet and phones have changed the way products and services are thought of and delivered in that products are becoming services. Things that used to be products, like music, movies, news, photos, etc, are all moving to the cloud. The hundred or so channels of TV are changing to millions of channels on YouTube with billions of users around the world creating content.

The delivery of these existing products, from shoes to books is changing, too. There is a group of companies like Amazon, WalMart, Coke, McDonalds, that are willing to operate their business at a 1% profit margin to deliver you anything you want at the location you want at the time you want. Their competitive advantage is that they will deliver what you want at almost no overall profit. To compete with that, someone either has to be better, since it’s hard to be cheaper. They are at risk still of 3D printing and synthetic technology that can create what you want where you want it, but delivering physical goods is changing because of the technology.

Entertainment is changing to be mobile and to be on a larger scale, with approximate 5 billion people coming on line with phones and additional 3 billion people that have been online recently, and these people not only have the ability to consume electronic media, but they have the ability to create it. The number of choices and the number of consumers is going to increase very dramatically worldwide in just the next year or so. That will change the dynamic of the markets.

Things that are not are not designed for worldwide distribution will have a hard time competing with media that is, like YouTube content that is intrinsicly designed for uniform worldwide distribution.

The final thing I’ll mention is the change in the internet affecting healthcare. As the 5 billion people come online to the internet, health is something that, while it has always been an individual responsibility, where we used to assume someone else would be in charge of our health, employer, parent, etc, with access to information through Google and Wikipedia and smartphones that can gauge individual health specifics such as pulse, the ability of an individual to take care of their personal health is rising exponentially. With the recent supreme court rulings and healthcare reform, it is now established in the US that it is not the government that will take care of our health, we have to do it ourselves, or employers that view the value of caring for their employees can help with that. As the population ages in the US and other countries, the only solution to that healthcare need is really using technology to help aging populations take care of themselves.

Nat Burgess

It’s interesting to hear your perspective along with Peter’s about the processing power that is now in our pockets and the empowerment that creates.

Q&A

I’m looking at the questions that have come in and we’re continuing with some of the themes here. Peter, I want to go first to you. Here’s a fundamental question for you. Are we entering a post-SaaS generation. We see big companies pulling apps and data off the cloud, bringing them back into proprietary data centers, we see huge data that is too big to move, so we have to move processing to the data…do we need to consider a post-SaaS era, or is it time to redefine cloud and SaaS to reflect these new realities?

Peter Coffee

Certainly the siloing of function in an application is not a future trend, regardless of where the application runs. When you look at the massive volume of the data sets and the fact that many of them now originate externally to the data center and emerge with enormous volatility and enormous peak to average workloads, all of the fundamental economics of dealing with those data sets in the cloud as opposed to funneling them at great expense into the data center to be handled there, I think make it clear that the cloud as the source of and the domain of analysis of big data is probably, if anything, going to complete the final transition to the cloud as the environment of first resort. Certainly if a company is trying to do any kind of real-time analysis of global reaction to a news development or to a marketing campaign, using something like our own Radian6, for example, and then funneling down the analysis and insight from that is going to make enormous sense compared to gathering in all the raw data and then trying to analyze it locally.

To amplify on the earlier comment about health, I see this as a pattern in every industry, financial services, where it used to be if you sold your offering to the pension managers of the world’s 2000 biggest companies you inherited an enormous number of customers. If you sold a health care package to the benefits managers of the world’s largest companies, you have all those customers. Now with health and finance with much more individual retirement planning, in education, in travel, in any number of industries, you have to go out and get the appropriate content and the appropriate means of interaction and decision making, into the hand of a tremendously larger number of individual decision makers, and I see all these things as reasons why mobile delivery of a social behavior, empowered by an elastic cloud scalable resource, is absolutely the three-legged stool of future enterprise success.

Nat Burgess

So maybe it’s time for us to stop following the processor and start following the data and follow the customer.

Peter Coffee

When I talk to the world’s largest data centers, they tell me that dealing with the volume of data moving in and out of their facility is now the far greater challenge than execution of analysis and algorithms on that volume. Super computers can crunch it much more quickly than today’s networks can move it.

Nat Burgess

Exactly, if you want to put big data on Amazon, they’ll still have you FedEx a hard drive, we haven’t sold that problem.

Reese, I have a similar question for you, one that follows on earlier comments. Now that mobile connected devices outnumber PCs, it seems like we’re evolving toward a market where the mobile device is about consuming content, but not creating it, and we still haven’t solved the input problem. A lot of people see email on their device, but they wait until they get to a PC before they respond to it. How are we going to solve that problem?

Reese Jones

Well, it’s an easy enough problem to solve in that people are somewhat focused on PCs, of which there are perhaps a billion, but there are already 3 billion phones that can deal with email, soon to be 5 billion. It’ll be almost a 5-to-1 ratio of mobile devices to computers. Phones intrinsically have many different inputs and outputs, sensors, and radios, so you can talk to your phone, you can take pictures, your phone can watch you. According to the chairman of Qualcomm, the average phone this year should have approximately 12 radios in it, plus microphones, multiple cameras, inputs, etc. You can certainly plug a keyboard into your phone to answer an email, but you could just answer it by verbally answering and have dialog not by text but by phone or video. The need for communications on the internet and the nature of communications through mobile devices is changing to be more human than keyboard.

Further, life is essentially information and information is data and what’s important to communicate between people is information and it doesn’t have to be forced into the form of a qwerty keyboard and traditional email.

Nat Burgess

That, then, implies a change in behavior, as opposed to a new generation of technology or a new technology. What are the changes that an individual experiences in life when they are constantly connected, when if they wanted to they could carry and analyze the human genome on their phone?

Reese Jones

The most profound change is that for the most part we’re always connected wherever we are, unless we intentionally try to disconnect. We just had the CTO of Xerox speak last night at Singularity, and her comment was that the future of work does not include an office. It does include continuous always-on connections wherever you are and your choice of what your work is and when and where you’re working has more to do with your intention of what you define as work. The connection to the internet and to other people becomes continuous all the time, both conscious and subconscious in your daily life.

Nat Burgess

That just makes this for all of us who have been in this industry for a long time, it makes this maybe the most exciting time to be in this industry, to be working with startups, to be identifying new opportunities in growing because the fundamental change here is going to drive revenue and innovation and we’re excited about that.

We’re right on the hour, so that wraps it up. Thank you so much for joining us today and for your insights. Everyone, please stay tuned for our next events.

Back to you, Bruce.

Bruce Milne

Thank you, Nat. Thank you to our presenters, great questions, I’ll turn it over to Ward to close.

Ward Carter

We hope to see you at an upcoming Corum conference. That concludes our tech report for this month. Thank you.