June Tech M&A Monthly: Hypervaluations and Megadebt
Field Reports
Bruce Milne
Good morning, afternoon or evening, wherever you are in the world. We are broadcasting to thirty-six countries. Welcome to Global Tech M&A Monthly. Today is a special presentation on Megadebt and Hypervaluation. I’m your moderator and the CEO of Corum Group, Bruce Milne.
The agenda today includes special field reports on deals being done. This will be the best quarter for Corum since the dot com era. That speaks of the industry, there’s a lot of activity happening here and we’ll be talking about a couple of transactions that just closed. Then we’ll have a special report on the various events that Corum hosts around the world, and then we’ll go to our research group for a month of research reports, and then finally two special reports on hypervaluations and megadebts.
Let’s first go to our field reports. Ward Carter, Chairman of the Corum Group, and a transaction we just completed with American HealthTech. Ward?
Ward Carter
Thanks, Bruce. We’re very happy to announce a transaction we closed just two weeks ago with one of our healthcare clients, American HealthTech. Based in Jackson, Mississippi, American HealthTech had grown to be the largest solutions provider to post-acute, skilled nursing care facilities in the United States, with over 4500 locations and roughly 22% market share. The company is 30 years old, and the founders, having developed a stellar management team, were ready for an exit.
After an extensive search, we negotiated a transaction with Minneapolis-based Heathland, a leading provider of solutions to the community hospital market. Healthland is backed by Francisco Partners and sees American HealthTech’s solutions as a natural way to expand into adjacent markets. We’re excited for the founders and the teams at AHT and Healthland, and in the process we further bolstered our significant insight into the M&A market for healthcare software solutions. If you’d like to leverage our recent experience, please call or email me to arrange a confidential discussion.
Bruce Milne
Thanks, Ward, that’s a great idea. If you have something happening in one of these markets, now is the time. We sponsor a number of conferences and I’ve never seen a better time to go to market.
Let’s cross the Atlantic now to Mark Johnson, and a report on the sale of RapidBlue. Mark?
Mark Johnson
Thanks, good evening from Stockholm. Corum International is having a very good 2013, having recently closed our 5th deal in Europe for the year.
Last month I reported on our sale of Expert Systems, a Swedish ebusiness company, to Readsoft, a Swedish listed company that develops, markets and supports software that automates the processing of documents within organizations. The Founders of Expert Systems achieved a very healthy multiple at approximately 4x revenue.
Our latest closing is the sale of RapidBlue to Shoppertrak, based in Chicago. Our client, RapidBlue, is a small startup out of Helsinki, Finland that has innovated world leading solutions in the hot space of Location based analytics.
The location analytics space is growing phenomenally and going to reach $9bn by ‘2016. RapidBlue’s patented SaaS solutions have revolutionized locations analytics for the offline retail segment by anonymously collecting consumer location data transmitted by their mobile phones, linked together with in-store payment terminals. Our client effectively solves the “big data” challenge to retailers, enabling them to make adjustments to their physical environments based on actual consumer flow and dwell patterns to drive sales and profitability.
This was a competitive deal with Shoppertrak winning out in the end. The result was a true win-win for the entrepreneurs, investors, and buyers.
In addition to our 5 closed deals this year in Europe, we have 2 currently in LOI with closings anticipated for Q3. I look forward to keeping you up to date. Thanks!
Bruce Milne
Thanks, Mark, great report.
Corum does over one hundred conferences or events around the world every year. Last month was one of our most active, involving a number of outside reports. One of those was the SaaS University, where Ward Carter was a keynote presenter.
Ward Carter
Lots of activity in the SaaS space. I had a chance last week to meet with dozens of SaaS executives at Softletter’s SaaS University conference in Seattle. The agenda included two days packed with informative sessions covering all aspects of building and growing your SaaS business. Topics ranged from how to price your subscriptions and manage sales compensation, to managing and minimizing customer churn, building successful selling models and of course, I presented Corum data on SaaS valuations, and how to build and position your SaaS company to maximize the potential value. If anyone in our audience in interested in seeing my slide deck from that conference, send an email to me at wardc@corumgroup.com and I will make sure you receive a copy. That deck also includes recent SaaS transactions and valuation data. Thanks.
Bruce Milne
Thanks again, Ward. As we’re going to see in a few minutes, SaaS valuations are going through the roof.
Now, let’s go to Jim Perkins, who hosted the Casual Connect conference internationally.
Jim Perkins
Hi, everyone. My travels to Singapore and Hong Kong were extraordinary. I started in Hong Kong, meeting a large group of local developers, and some of the most active and wealthy Chinese buyers on the planet. China has a vibrant community of game studios that are breaking barriers worldwide in the game industry. Chinese buyers are rapidly moving into North America and Europe with acquisitions as a priority.
Now, let’s go to Singapore for Casual Connect Asia. Casual Connect is the meeting place for buyers and sellers of casual-focus game companies. The casual games industry entertains over 300 million people every month on smartphones, tablets, and social networks. Over 1000 industry executives came to hear what was happening in the Asian market and abroad. I helped them see the event and hosted market update and strategy briefings, followed by a buyers and sellers panel, at which CEOs shared their experiences, war stories, and lessons learned in buying and selling their companies.
Of particular note was Michael Pole, CEO of Gloops. He shared his experience in selling Gloops to Nexon for $486M. Check out all these Casual Connect briefings at asia.casualconnect.org.
Bruce Milne
Great report, Jim. Corum is a leader in the digital media M&A sectors. Now let’s go to New York and the World Financial Symposium with Rob Schram.
Rob Schram
Thanks, Bruce.
Last week in New York City, Corum had the opportunity to sponsor the World Financial Symposium, along with Dentons, the multinational law firm and Grant Thorton. This full-day conference provided insights from major buyers, private equity investors, venture capitalists, angel investors, analysts, and CEOs who have recently sold their companies. Among the many notable presentations and panels, highlights included a fascinating look at upcoming technology trends from Tom Austin, VP & Gartner Fellow, and a very engaging keynote address given in tag-team fashion by Klaus Schauser and Albert Oaten, entitled “Start with the End in Mind.” Their high-energy discussion encompassed building Expertcity, the company that created tools such as GoToMyPC and GoToMeeting, then selling it to Citrix for $230M.
Klaus and Albert underscored the importance of validating the market in advance of product development and of engaging consumer experience throughout the product lifecycle. These principals are amply illustrated in the impressive market footprint of their current company, Appfolio/SecureDocs.
I had the pleasure of moderating the Strategic Buyers Panel, which included Jon Rosman, VP Business Development from Honeywell Security Group, Richard Sadowsky, Chief Administrative Officer and General Counsel of Voltari, formerly Motricity, and Andrew Stern, VP of Corporate Development at F5 Networks. Their industry knowledge and insightful comments made for a fun and informative panel, providing a solid feel for what’s important to the strategic buyer community. They also gave an interesting contrast to the perspectives of Financial Buyers Panel, presented earlier in the session.
We look forward to participating in further WFS events, both live conferences and webcasts and hope you can join us. Learn more at wfs.com.
Bruce Milne
Thanks for that report, Rob. Two dozen speakers, and that event was very highly rated. So, look for the next World Financial Symposium coming up.
Research Report
Now let’s move back to headquarters for our Corum Research Report. Let’s see what’s been happening in this past month with Elon Gasper, Alina Soltys, Amber Stoner, and Jason Steblay.
Elon Gasper
Thanks, Nat. We begin with the public markets...which took just a moment to catch a breath in April before sprinting ahead once again to new records in May and six consecutive monthly gains on the Dow. This bull market is one of the pillars continuing to support tech M&A in a way not seen since we were pouring bubbly in the roaring ‘90s. We’ll look at a couple other pillars later in this broadcast, but first, the Corum Index. Alina?
Alina Soltys
For the first half of the year, M&A activity has lagged a bit behind 2012 but industry experts agree that 2013 will have a strong backend. The megadeals did not disappoint this month with BMC finding a dancing partner after a number of years of speculation...finally finding a home in the PE consortium that paid 3.2x revenue.
It was a homecoming for Lender Processing Services, which was spun off from a related division at Fidelity in 2008. Returning to Fidelity, it will add a more diversified recurring revenue base &&& there’s an estimated $100M in cost synergies too. I’ll mention the Yahoo /Tumblr deal in the special report coming up.
Other interesting moves, cross-border transactions, characterized as buyer and target from different countries are down slightly, meanwhile startup activity is up.
Elon Gasper
And we must mention one megadeal from June, the SalesForce-ExactTarget acquisition. For $2.5B Salesforce bridges from its base in sales automation to marketing automation in the largest of 40 Salesforce acquisitions that tally up a 5 year total of over 4 billion. SalesForce also gets Exact's 6,000 customer list including Gap, Coke and Nike. This bold move at an aggressive 7x sales multiple rearranges the landscape, clearly positioning Salesforce for a break-out into cloud-based marketing. Competitors must counter; good news for small players, since entrepreneurs often get their best value from such an opportunity to take advantage of the big guys’ conflicts. The flip side is that hesitation can be fatal—you don’t want to end up the last small company without a partner.
Moving along, Amber, how’s the market for Verticals?
Amber Stoner
It remains one of our highest trading sectors with valuation multiples holding steady in the month of May. We did see some movement as far as deals being done in the Energy and Environment subsector.
In mid-May, exploration and production (E&P) software provider petroWEB bought the NeuraDB assets from Neuralog, which provide oil well data management software in the petroleum industry. With the acquisition, petroWEB is positioned to deliver the next generation of easy to use, web-based E&P data management solutions.
Although not technically a May deal, last week energy industry software provider P2 Energy Solutions announced its acquisition of ISS Group, an Australian resources software company, for $43M.
Both deals are evidence of a trend in the Energy and Environment sector of E&P data management companies moving to meet demand fueled by the big data revolution.
Any significant trends in the Consumer sector, Jason?
Jason Steblay
Well, valuations in the consumer sector continued to hold steady in May, with little change in the sales or EBITDA multiples since the beginning of the year. Of course, most of the big stories this month are coming out of Apple’s developer conference and E3 in LA. Since Jim Perkins covered some of the gaming news in his Casual Connect Report, I’ll highlight a few deals on the consumer application side today.
Starting with Amazon, who has been a thorn in Apple’s side more than usual lately. In late April, it snapped up Goodreads for a tidy $200M before Apple could integrate the social book recommendation service into its iBookstore. And in May, Amazon acquired Siri Competitor EVI for $26M to further the Kindle’s personal assistant app, which it also acquired in its January purchase of Ivona software.
In another hot area of the consumer sector, location based services, Google agreed to buy social traffic navigation App Waze for over a billion dollars, in another hyper-valuation which Alina will talk about later. The price tag, for a company that is rumored only to have a million dollars in revenue is likely to inspire new competitors, and gives us a good idea why Spry Logics may have also just ponied up $2.5 million for the defunct location-based search platform Poynt. Alina, what’s going on in the internet sector?
Alina Soltys
One of this month’s trends in the Internet segment has been the acquisition of online educational videogames and software companies worldwide.
The first such deal involves an investment firm, Feel Golf through its portfolio company Intelligent Living buying out Mind360 which focuses on developing cognitive skills and memory functionality through scientifically developed games.
Moving on to firms we are all well aware of, global education leader Houghton Mifflin Harcourt acquired Montreal based Tribal Nova, breaking a 7 year tech acquisition drought. Tribal Nova brings unique digital gaming products for preschoolers—going after the youngest of the digital native population just as it enters its educational years; long term strategy moves allowing this giant to be in on the ground floor of the monumental shift coming.
Bangalore based Nucleus, a two-year-old start up acquired its slightly younger neighbor X2PN. The combo of the 2 will offer educational apps for teachers and mobile gaming.
And lastly, Rosetta Stone acquired Seattle-based Livemocha, one of the world’s largest online language-learning communities, for $8.5M in cash. This adds a compelling network with high concentrations of users in China, Russia and South America—particularly Brazil.
Elon how is our next sector fairing?
Elon Gasper
Horizontal’s a dependable performer again as this month with valuations more than retaining their claim as the highest in the Corum Index.
A distinct trend is the acquisition of CRM and marketing automation companies. Besides the SalesForce-ExactTarget megadeal previously mentioned, we saw customer engagement and contact center solutions provider Genesys Telecom buy Boston’s SoundBite Communications for $100M. Soundbite’s cloud-based mobile marketing and customer care solutions make this move clearly counter to SalesForce’s aims.
And just up Route 128 a few miles, another marketing automation company, SmartSource, sold to Boston’s venture-backed Extraprise, provider of customer intelligence and multi-channel marketing software, building out their platform for B2B&C lifecycle marketing capabilities.
Finally, French multi-channel marketing solutions vendor NP6 acquired SOCIO to apply its SaaS statistics modeling software and other marketing tools.
Looks like a marketing software consolidation wave starting to curl...Amber, how goes Infrastructure, and what trends can you make out there?
Amber Stoner
The infrastructure market is doing quite well, sales and EBITDA multiples are both up for the month and May brought us a number of security deals that indicate an ongoing trend of consolidation within the space allowing mid-tier companies to compete with their top-tier rivals.
Since being bought by Thoma Bravo in 2011, Blue Coat has been determined to grow through acquisitions, doing two deals in the month of May alone. The first was the early May grab for the SSL assets of Netronome for an undisclosed amount. Blue Coat followed that up by snagging Solera Networks for an estimated $225M.
Also in early May, antivirus maker McAfee acquired Finnish security firm Stonesoft for a hearty $389M in cash, in order to bolster its position in the network security market. With the pending addition of Stonesoft’s products and services, McAfee is making an investment in next-generation firewall technology.
Jason, how did May look for IT Services?
Jason Steblay
May looked good, with valuations holding their ground and even gaining some.
Perhaps encouraged by Oracle’s and Salesforces’ recent blockbuster deals, IT services companies seemed to catch the marketing automation fever in May. Accenture added two digital marketing and ecommerce companies during the month, including the Acuity Group for $316M, at a healthy 2.2x sales multiple. Ernst & Young also got into the marketing game in May with Semphonic, which provides measurement and data analytics to help manage the customer experience across digital channels.
Elsewhere in the world, cash rich Indian firms continued to take advantage of Europe’s economic distress to expand their global footprint with the Tata group buying French Systems integrator Alti SA for $97M. With local suitors bogged down by the continent’s uncertainty, the deal again emphasizes the importance of a global buyer search.
Elon Gasper
Yeah, the world keeps getting flatter—not unexpected with one-eighth of the 21st century already over at the end of this month. We’ll put it in perspective with a report on the first half of 2013 next month, including trends in our 6 markets, stats and values for all our 26 subsectors, Corum Index analysis and more. Back to you, Bruce.
Hypervaluations
Bruce Milne
Now let’s drill down and put a magnifying glass on this and look at hypervaluations with Alina Soltys.
Alina Soltys
In our overview of Hypervaluations, we’ll take a look at what both public and private companies are experiencing during their acquisition events in regards to valuations. We have talked in depth about the tremendous treasure chests that corporations have built up over the last few years - this directly impacts their ability to do very sizable transactions and pay hefty multiples as well.
Management, Board and investor sentiment regard M&A is very different today as compared to the high-tech boom of the last decade. In the past, skepticism abounded around the viability and profit generation potential of tech startups, with investors applying heavy discounts - and rightly so.
According to the latest McKinsey research regarding M&A deals, expectations of deal value creation is at all-time highs, the anticipated value creation stands at 17% increase from current values for deals done in the Tech and Telecom spaces.
The anticipated additional deal value added is directly translated to the offer prices - as we can see here, publically traded companies are seeing all-time highs for the valuation premiums they receive relative to their trading value of 1 week prior.
In its recent acquisition of Eloqua, Oracle paid a 33% premium while Salesforce paid a 47% premium for ExactTarget just last week.
Although in the spotlight quite a bit lately for their aggressive acquisitions, they are not new to paying lofty valuations for deemed “critical tech,” Yahoo paying 8x revenue for Maven Networks in early 2008 to bring video technology and advertising expertise to its network platform.
Most recently, Tumblr was taken over for $1.1B in cash which blows any sort of revenue multiples out of the water - they were reported at $13M last year, so if we do the math on this, it comes out to 85x revenue. Projected forward the revenues are expected to increase almost 8-Fold to Anticipated to bring in $100M this year would put them at 11x forward revenue multiple.
Megatrends act together to transform industries creating a feeding frenzy for the parties involved as they actively form the next play arena. We see that here when Cisco paid 15.8x revenue for IntuCell to provide telco operators network intelligence on current traffic patterns as well as predicting future traffic patterns due to the huge influx of video constraining current day networks. Opera Software bought Skyfire Labs for 10.2x revenue a few months ago to cater to the video optimization space as well - but from the front end, browser perspective.
And before signing off, both Jason and I have been keeping an eye on the battle raging between Facebook and Google over Waze, the Israeli social network centered around sharing live, real-time traffic information living within a navigation app. Having a real-time pulse on movement of people is extremely strategic and valuable to both companies, Google reportedly offered up to $1.3B as of earlier this week.
The final offer looks to be just north of $1B with Waze taking a haircut to remain in Israel rather than the almost mandatory move to Mountain View that goes along with an acquisition by Google. With $1B for this company, their estimated revenue was $1M, so the revenue multiple is just astronomical.
And if we turn to the other ongoing battle, Hulu is talks with a number of buyers. DirectTV is allegedly one of the three that has put in an offer, and there are a few guesses out there as to what the latest offers are. Currently they are running at over $1B, so we will see where that ends up. It’s really starting to feel like the wild, wild west out there.
Bruce Milne
It reminds me of the dot com era, even those with zero revenue are getting extraordinary offers, in fact we’re seeing that now, we’re getting multiple offers right now for clients, some of whom have nominal revenue. Google is clearly backing a leadership position as they have for the last three years and they’re forcing the others to respond. We’re glad to see Cisco back in the top ten, we announced a deal with them just two months ago.
Thank you, Alina.
Megadebt
Now let’s take a look at megadebt and how that ties into hypervaluation.
Elon Gasper
Thanks, Bruce.
Even with the treasure troves of cash Alina talked about, tech company buyers are taking on unprecedented debt, much of it to address M&A at high and even the “hyper” valuations she mentioned. Why? Reasons include demand for blue-chip bonds, due to declining trust in sovereign debt and policy concerns as the largest economies, US and Japan, run up their own public megadebts, low rates for the issuers, and tax avoidance to apply them domestically anyway, due to an unusual US law situation dubbed a repatriation tax sometimes.
Countries mainly tax business profits on the money they report earning in that country. But the US also hits its corporations with an additional tax upon return of the cash stateside. Deferring it has always caused some build-up of funds overseas. But growing overseas sales and profits and tax haven strategies plus anticipation of another tax holiday like in 2004 have punched up tremendous growth of these overseas cash hordes, but companies can still tap them for domestic acquisitions via megadebt.
At this point almost one trillion dollars could address tech M&A, with at least $600B in the hands of technology firms proper, all lies over the ocean waiting for another tax holiday. Apple’s overseas accounts even led to congressional hearings last month! In big tech companies that need to buy growth through M&A, this must either be used overseas for that purpose, as Cisco prefers, or used implicitly to secure domestic debt, hypothecating those funds back onshore to avoid tax via megadebt.
So companies like Apple borrow in the US, for expenses, buybacks and M&A expansion domestically, while never walking any greenbacks past the tax collector at the border. Last month Apple issued a record-setting amount with a $17B issue. Such debt maneuvers have saved it as much as $9B in repatriation taxes this year, plus hundreds of millions in interest is deductible! Google has typically avoided debt offerings, but has sold $3B worth of bonds so far. Other tech companies are in the game too.
The liquidity is great news for M&A sellers while it lasts. How long will that be? 3 potential endgames:
· Another US Repatriation tax holiday, unlikely with a divided congress, and probably even better news than megadebt if it did happen;
· US tax law change, for instance to a harmonized international territorial system. Again, the US political gridlock makes this unlikely for years;
· That just leaves interest rate increases, but there are strong indications that central bank “tapering” to withdraw their bond bids, QE2 etc., won’t be till end of this year at the earliest. And even as rates rise, they have a long ways to reach modern historical averages and, more importantly, anything close to the repatriation tax rates.
In conclusion, corporate megadebt is creating real impact on tech M&A through additional liquidity, and will continue to do so at least into next year. We anticipate Google going next with a megadebt offering to offset their overseas cash, and help them keep buying US companies. We see Cisco as an exception, bent on doing M&A overseas instead.
So this megadebt pillar of the tech M&A demand side remains intact, helping prop open a great window of opportunity for tech sellers.
Bruce Milne
Great stuff, Elon. Leveraging $350B overseas to get debt at home. My view is that Cisco will change their attitude, because the interest rates are so low. Coupon rates are now close to zero for convertibles, and Cisco has perhaps the highest single percentage of anybody overseas approaching 85-90%. Let’s watch that in the future. We’ll see.
We only have a minute, we had so much to get into here. We had one really great question that came in, it kind of ties things together. “You said several times that you think timing is the best now ever. Why?”
First, look at the megadeals. Megadeals set the trends. If people are paying a lot of money at the high end, that trickles down to all the other deals. Look at the valuations. Those are up, and they’re going to go up. Why? Because the public multiples just hit record highs. The M&A market, the private deals, follow the multiples. Look at the number of sellers, there’s a lot of them out there. We’re seeing more buyers than ever, and a lot of foreign buyers, and a lot of cash because the dollar is cheap. We have extraordinary cash out here. $350B in cash treasure troves, $50B pretty much for sure on the debt side, but potentially as much as $75B-$100B in that debt that Elon talked about. Then our friends in PE that do 40% of the biggest deals: $1T in uncommitted funds.
And also some insider stuff. What we see is number of offers. Ward talked about a transaction, extraordinary number of offers, we had to limit the number of bidders on that one. The other thing we’re seeing, and this is something not often tracked because the data is not available, and that is what we call fallout. When you go into LOI, how much of the time is it delayed or does the deal fall apart for whatever reason? That’s always a certain percentage.
Among privately-held deals where you try to sell your own company, the fallout can be as high as 80%. Those that are done professionally, where you have an auction environment, and we see the value of that in the Hulu deal, clearly, get out and get your partners lined up, get an auction, and you can get two or three times the price.
What we’re seeing now is the fallout is nearly zero. The last ten transactions we’ve done here at Corum did not fall out. Minor delays, but they’re all getting done. That, to us on the inside, is a real sign that we’re heading up and now it’s time to go to market and you don’t want to miss that window. Because going to market too late, we have lots of stories about that, we’ll tell them another time.
With that, I think we have to sign off.