March Webinar
M&A Update, Pitchbook, PE panel
03/03/11
Ward Carter
Thanks for joining us and welcome to the March Corum M&A monthly. I'm Ward Carter, Chairman of the Corum Group, based here in our Seattle headquarters. We have a wide range of software and technology companies from around the globe represented today, with several hundred executives from 20 countries registered for this event.
Here's our agenda for the next 60 minutes. We'll start with a market overview, cover some recent Corum data on technology M&A deals and valuations, and then move to some timely analysis on private equity activity and trends, from Pitchbook.com, an industry leading research firm. Then we'll move to our live panel discussion with a group of four executives from leading private equity firms. Following that, we will open the floor for Q&A.
Our slate of speakers today from the Corum side includes Bruce Milne, CEO and founder of the Corum Group, Nat Burgess, Corum's president, Dougan Milne, Corum's VP of research, and Tomoki Yasuda, senior research analyst. Nat will moderate our panel discussion, and he will introduce our guest speakers when we get to the panel.
From the standpoint of logistics, we will keep this event to about 60 minutes and you will want to stay tuned for the Q&A. Regarding that, feel free to ask questions of our panelists or speakers at any time, but we will only answer them during the Q&A session at the end of the webinar. To submit a question, please use the Q&A window on the right side of your screen and be sure to send your question to “All Panelists”. If you select host or any other option, your question will not be seen and not included in the question queue.
With that, I'll turn the floor over to Bruce Milne.
Bruce Milne
Thanks, Ward. Before I give my market update, I just got back from Europe, visiting our offices there, and I had the privilege of doing conferences and merge briefings in Zurich, Madrid and Lisbon, and a Selling Up Selling Out in London two days ago. I can tell you things are very buoyant. As an observation, I spent a few days in Spain and Portugal, visiting with some tech leaders there, and we had just done a transaction with Altitude in Lisbon, and what came out is that these areas are home to some great technology companies and they represent an excellent opportunity, not just in terms of technology, but as a lower-cost footprint into the EU, and also a kind of backdoor entry into the Latin American market. Some of you may remember Ortsbo was on our annual meeting, their company does language translations, number one was Chinese and second was Spanish. There are thirty-two Spanish-speaking countries and Latin American is growing at three times the rate of Europe, so Spain and to a great degree Portugal as well, because 250 million people speak Portuguese, these nations can be an entree into Latin America.
A couple of comments, we see that Asian economies are shrinking a bit in China and Japan, but less than expected. China's inflation, which is what happens with demand, there is a problem right now that China's largest mobile company is buying assets, and three times now the US government has rejected that, it will be interesting to see how that pans out and it's an important thing for other Chinese buyers to notice.
Japanese consumer prices have fallen at the slowest pace since 2009, I wish I could say this is true for the rest of us.
On the European and International fronts, the European economy expanded a little less than forecasted, the German economy is doing well, but the UK is having a little trouble, both with the economy and consumer confidence. The Russians have been moving, and we keep kind of ignoring them, but they have had an open opportunity for auto companies to come in before a deadline, and Ford is moving in very rapidly.
Returning to the Iberian peninsula, Telefonica profit dropped 45%. There are still some concerns there in the Southern European countries.
On the currency side, this is interesting, the Canadian dollar rallied to the strongest in three years, it is now just above the US dollar. We just booked for July 8 and 12 to take our clients fishing on the Canada/Alaska border, and our costs are up 15% from last year, 50% from about six years ago. These currencies, including the Swiss franc, are going up very strongly against the dollar. This will affect us long term.
Here in the US, this morning initial jobless claims dropped and the market went up 180. That's good to see.
Liberty Mutual's CEO said that the US policymakers are debasing the dollar. Having just visited a number of European countries, a lot of people believe that the dollar, within a decade, will not be the standard for business and that always leads a reduction, so I'd pay attention to that.
Factory production has increased while housing has stagnated, so kind of a mixed signal there, and we'll talk a bit more about that in a minute. Geithner said that the debt to GDP cost is pointed to increase to a record, which is not good.
Retail sales have climbed less than forecast, but the airlines are doing well. In general, things seem to be up. One area of concern is in commodities, the US consumer prices have been going up and cotton topped $2 for the first time ever in New York. US crop values have jumped 22%, farmland prices are going up, and Roubini is calling for the next crisis to be the cost of food, and this morning the UN reported that world food prices have increased to a record. You remember what lead to part of the downturn last time which was oil going up to a record, which always effects the US economy, and we had all of these problems with riots around the world on food prices. One of the things that we need to think about is that we may have a whole new wave of consumers coming in with a tectonic change in the Arab world.
In real estate, foreclosures tied a record last year. There is kind of mixed news though. New homes sales hit a low, but housing starts went up. Distressed sales were at a high, there is a lot of demand because the laws they put in place aren't working, they're trying to change those. Note that sales of existing homes have grown to an eight-month high, and you know what that is? That's not primary demand, that's people paying cash for opportunities. Warren Buffet said two days ago that he thinks we'll move through the inventory in a year, and I think we will move through it, but I don't think it will be in a year.
On the finance side, what is really interesting is what is happening in some of these privately held tech companies. Bank of America said confidence in equities is at a record, cash hoards are shrinking, which is good, it means they're making acquisitions. Look at this, Zynga, Twitter and Groupon in the next three headlines getting funding, and as you'll recall from just a while ago, one of the biggest buyers for these privately-held, well funded companies, is Facebook.
Buffet, I love this, has an itchy trigger finger to buy, with $38 billion to use. The oracle of Omaha, if it's good for him, it'll be good for the rest of us, but we expect to see more acquisitions.
In technology, there's been a boost in apps due to Nokia and Microsoft's deal, Apple has started a subscription and Google announced an app subscription service practically the next day. Apple is ready to release the iPad2, not standing still, and Microsoft's Bing is starting to gain on Google.
Just an interesting comment, we don't usually bother to get into politics, but what is happening in the Arab world is a tectonic change. When you hang out in Spain and Lisbon for a few days and the next stop south is Morocco, Tunisia, Libya, etc, all they could talk about was Libya and there was a lot of discussion going on. I had the pleasure of flying next to someone from Iraq last night who spent some time in Dubai. He's been a citizen here for years, but what came out of that discussion were two things: One is that the images we're seeing on TV about people dialing in on their cell phones with their concerns and such is that they're all just like us. That's a lot of what the Arab world has been trying to get across to us since 9/11. They have the same concerns and desires for their families as we do. That's something I don't think we've been exposed to a lot. The other thing that is happening there, in Libya and across the Arab world, is that there's this change toward democracy and freedom, and imagine that rather than funneling $1.5 trillion to dictators around the world, which has happened, this money went into building the countries instead. It would create another billion new consumers.
Anyway, speaking of Dubai and the Arab world, Dougan actually went to school there and represented Corum there for a while, and he'll now take over with the Corum index.
Dougan Milne
Thank you. I think about the Arab world and I think about the immense amount of consumption that could come out of there as the economy starts to turn around. Looking at some of the headlines you put up there with the Microsoft and Nokia partnership, and I find it fascinating. I wrote a blog post recently and the basic gist was that in 10 to 15 years, I hope that business school students will be reading case studies about the turnaround of Nokia and some of those tough love decisions that CEO Stephen Elop had to make. Nokia is a wonderful brand and a wonderful company and they are sitting at the pinnacle of an incredibly challenged industry right now.
Welcome to Corum's M&A update, brought to you by the good folks here at Corum's research department. We've received a lot of Q&A in the past seminars about how to get in touch with us directly, so we've listed just about every form of contact we've got here next to our names. The point being that if you have any questions regarding your company, your specific market or some of the broad trends we present here today, by all means we'd love to make a connection and help you out with any other ideas or questions you may have.
Sitting next to me is one of my senior analysts, Tomoki Yasuda, and at this point I'm pretty sure he has a greater knowledge of the tech M&A market and landscape than I do, which is a frightening thought. Tomoki, I know you've updated these public market charts here, so why don't you tell us what we're looking at here.
Tomoki Yasuda
Thanks, Dougan. I can only hope that I know as much as you do. On our first slide here, we have the overall percentage change in the market since January of 2007. For avid listeners out there, they will recognize this graph from the annual webinar we hosted back in January of this year. What is staggering here is not only the visual representation of how our economy has been fluctuating in the past four years, but how much better tech has been weathering the storm. As Dougan mentioned, we can see a clear distinction between the S&P Tech 500 versus broader industries.
Continuing on, we have a closer look at how the markets have been performing since this time last year. We note that there is a surge again in tech as it reaches gains of 40%, definitely an encouraing sign for investors in the future.
Dougan Milne
Yes, Tomoki, that's great news for our industry and tech really has maintained a leading position across the broad market.
We're starting on the Corum Index and this takes us through a number of the KPIs pertaining to software, internet and services M&A. Here we are looking at year over year trends, and the blanket statement is that we're currently sitting in a very healthy M&A market. In fact, this market has been accelerating for about a year now.
Something of note, February of 2010 was our first surge month, the first month that we really experienced that pent up buyer demand coming out of the recession of 2008 and '09. The M&A market quickly subsided after that, leveled off in March, and then it was dropping until about June when we saw the market re-emerge and it has stayed on a positive trend since then.
261 deals this past month, which is pretty good, and the most notable was the acquisition of Mentor Graphics. This one has still not officially closed yet, as I understand it, but Carl Iken, a truly frightening but brilliant financier, I think they make movies about guys like this. Also a majority shareholder in Biogen, XO Communications, Marvel Comics and the list goes on. He was also a part owner in Blockbuster and lets just hope Mentor doesn't go that route.
Tomoki, what else are we seeing?
Tomoki Yasuda
Well, we've seen private equity revving up the M&A growth engine, we see that they have done double digit deals this month with 11, compared to last year with 7, probably at 40% overall growth. Mostly there are good returns on the public market, but I also assume there is more urgency for the PE firms to acquire companies now as sectors start consolidating and get more attention. Just a few off the top of my head that have been pretty hot are carrier infrastructure and communications.
Similarly we can see the same urgency for VC firms to start selling their portfolio companies, especially at a time when buyers have the cash to do so. Clocking in with 48 deals this months, which is quite above the average that we are used to seeing.
Dougan Milne
Yes, it is. VC exit is up nearly 30% and the companies that are exiting today are much healthier than those we saw last year.
Tomoki Yasuda
They are. We had a lot of VC fire sales around this time last year, VCs then needed to dump their bleeding portfolio companies toward the end of the recession, but the picture here is different, thankfully.
Dougan Milne
Yeah, it is. As we move on, looking at cash, last year's cash number was a bit of a fluke, again those big buyers had a lot of pent up cash coming out of the recession, 50-60% is a far more normal metric, like what we're seeing today. We did have an interesting percentage of public targets this last month, right?
Tomoki Yasuda
Yes, we had a number of small, even penny stocks taken out this past month. There was Navsat acquired by Time Warner, which wasn't so small, Goonet was bought by a PE firm, their technology has finally picked up after struggling for a while, and then of course as we already mentioned, Mentor Graphics, but I think there were 40 public companies or at least access to public companies sold off in the past month.
Dougan Milne
As we move into the specific markets, a quick tutorial for those of you who are joining us for the first time today, Corum divides the software industry into six broad markets, with an additional 26 sub-sectors that we report on every quarter during our monthly webinars. As we just reported on the 26 sub-sectors for our annual report in January, we would be more than happy to send you a hard copy of our full research report at your request. Just send an email to research@corumgroup.com and we'll have that hard copy sent to you immediately.
Our first slide here is, as advertised, an aggregate of those six markets. These are the combined averages of all the publicly traded companies in the software industry, and the metrics your seeing below are those that, in general, are most important in how a software company is valued, enterprise value to EBITDA or enterprise value to revenue or sales. To exemplify that, we can see that the average software company is worth roughly 2.5x its trailing 12 months revenue, you can see that there, or roughly 13x EBITDA.
Now, as a reminder, with these big public companies with access to a lot of cash and liquidity, the general rule of thumb here is that if you are a small private company you need to take about a 25% liquidity discount if you're trying to calculate your own company's value off of these.
Let's jump into the first of these 6 broad markets, Horizontal Applications. There are a number of sub-sectors here, like HR and CRM and ERP, etc. Horizontal is certainly hour highest valued broad market, and that is generally due to the large number of SaaS companies, like SalesForce, RightNow Techologies, etc. As you can see, those high multiples here are trending up over the past several months and currently they are sitting at nearly 3.4x trailing 12 months revenue, which is remarkable.
In our deal spotlight this month is Metastorm in the content management space, a company from Canada. OpenText, a historically very smart buyer, we've dealt with them in the past and also sold them some of their biggest competitors, including FileNet before they went to IBM. OpenText this month finally picked up Metastorm. We know they've had their eye on them for quite some time now, a very strong presence in the BPM space, and this is a very intelligent acquisition. OpenText did 10% of their revenue through SAP as a reseller last year, and the deal with Metastorm only strengthens their ability to integrate and cooperate with the likes of SAP, Oracle, IBM, who in one sense are some of their biggest competitors, but who in another sense are some of their best partners. A healthy 2.4x Metastorm's revenue run, $182 million, all cash.
Tomoki, where are you taking us next?
Tomoki Yasuda
We'll be landing in Financial Services, more specifically mobile finance, with Fiserv's acquisition of Mobile Commerce, a provider of fund payment and transaction processing in the mobile space. It is no secret, now that we're seeing more of online usage patterns converge, that as we enter this new medium of mobile, it is really critical for these financial services players to offer services through these new channels. To highlight this trend, take all the aspects that we enjoy in the online environment and funnel it into this new mobile medium. On the financial front, this will include anything from making walls converge with our cell phones, stocks, transaction processing, etc. You have it all there. They are really becoming more available at our fingertips. Overall this feels like a good bet Fiserv and it should be time for others to follow.
Dougan Milne
Yeah, those mobile applications have been incredibly popular on the M&A front, especially in the consumer space, which is what we're looking at next here. This sector has been very hot lately, and I think you have a hot deal for us in the spotlight as well. Tell us about it.
Tomoki Yasuda
This is indeed a hot deal for a more traditional brick and mortar company like Nordstrom. They have finally decided to throw their hat into the ring and join the flash discount groups like Groupon. To be honest, why shouldn't they? There are little to no barriers to entry in this space, and Nordstrom already employs an excellent sales and marketing team. Which to me is basically the main component of this kind of program. Coupled with their built out online shopping service, plugging this in will help them sell more inventory that they previously couldn't with traditional means. On a side note, we can furthermore expect Nordstrom to invest more in other online options, as they have been a real leader in this space for traditional retailers. Other venues would be social commerce and possibly integrating themselves into social networking, like Facebook, but leveraging solutions like the ones provided by a local shop, Wishpot.
Back to the point, there will be more deals like this coming as traditional retailers try to capture more of that lucrative high-margin growth coming from new internet business models.
Dougan Milne
Yes, that was a hot deal indeed. Infrastructure space, a personal favorite of mine, and look at those public metrics, there is a lot of innovation here, a lot of very smart CEOs running these companies, and they are currently sitting at about 3x trailing 12 months revenues metrics, and those are for the public players in this space, so life is good at the top. Now I happen to be a big HP fan, their new CEO has been in office for less than six months now. He was appointed back in October, but remember he is an ex-SAP man, he's a man who is very serious about his software and that is exactly what we're seeing in his acquisition strategy. The most recent acquisition for Vertica, data warehousing and analytics software. But the big story here is, if any of you remember NeoView, Mark Hurd's baby. He came out of NCR and Teradata, he had a long-standing noncompete with them when he took the CEO position at HP. He has been sort of secretly developing NeoView inhouse at HP, which is really direct competition, so as soon as the noncompete expired, he let NeoView run wild, unfortunately it did not have the wild success he had hoped for. With the new Vertica acquisition, NeoView has been officially discontinued. Data warehousing and analytics is a high revenue space, we saw a number of other acquisitions in this space over the past 18 months, and I won't be surprised to see even more in 2011. We're happy to see them step up to the forefront of that battle with that purchase.
Tomoki, what's happening on the Internet these days?
Tomoki Yasuda
Well on that front we have the acquisition of Opodo by ASA private equity. Interestingly enough, Opodo was actually a subsidiary of Amadeus IT, a provider or transaction processing for numerous travel sellers and providers, people like Expedia and the like. The interesting factoid here in the deal is that ASA has agreed to a 10 year contract to let Amadeus continue to provide transaction processing services to its former subsidiary. Coupled with that, the transaction price and the contract, the deal was around 500 million Euros, which is around 13x EBITDA.
On another note, I also find this deal interesting on the heels of the Google and ICA deal, making big waves in the travel community. I'm interested to see how ASA plans to grow Opodo into a successful investment.
Dougan Milne
Thanks, Tomoki. So this is the last of our broad markets, the IT Services market, and it is actually getting harder to measure. As you can see, we have the little information bubble down there, which separates Western IT services companies from the Eastern ones because the two of them do not mesh well when it comes to metrics. Western companies are trading somewhere between 1 to 1.5x TTM, and Chinese and Indian companies are 5.5 to 6x TTM and huge enterprise value to EBITDA values.
So, in the deal spotlight, this is a smart one where Equinix and Riverwood Capital have picked up ALOG data, sort of a BPO deal, there is also some datacenter play in here as well. ALOG is based in Brazil, so there is a big market down there and a lot of the big PE companies have been seeing great opportunities in these BRIC countries, that's Brazil, Russia, India and China, and we expect to see a lot more acquisitions in these areas in 2011 and 2012 as those markets continue to flourish.
With that, next up we'll transition out of the Corum monthly material. I'm pleased to introduce our first guest speaker for today. John Gabbert is founder and CEO of Pitchbook Data, a leading PE research data firm. His company tracks and maintains all of the collective deals, trends and activity in the PE world, which is then delivered through their rather unique web platform.
John, if you're online, we're glad to have you here with us today.
John Gabber
Thank you, Dougan. As Dougan said, I'm the CEO and founder of Pitchbook Data. We focus primarily on US private equity, the transactions, the firms, the funds, the service providers, and pretty much the whole life cycle of the industry. What we're doing today is we're going to take a look at PE investing in the IT industry as well as software. Private Equity for those of you who aren't super familiar, is made up of three major components, the fundraising part, the investment part, and then the exit part. We're only going to focus on the investment portion, specifically in IT and software.
We're going to cover a few main points today, we'll look at deal flow compared to overall private equity, then we'll zoom in and break out PE activity in the IT industry and software sectors, and then one that I think is particularly interesting is looking at the number of IT and software companies currently sitting in PE portfolios and the ages of some of those investments. Then, finally we'll wrap up with who are the most active players in the industry over the past few years.
Here is the chart showing overall PE investment for the last 10 years. The trends to note here are the rapid rise we saw in the middle part of the decade in deal flow, represented by the red line, and then the rise in investment capital as well. We all know this story well, the bubble burst with the financial crisis of 2008 and 2009. What is particularly interesting if you compare this to IT, which we'll see in a second, is this huge drop in deal flow and total method capital. Less than half of what it was at the peak.
If you contrast that with PE investments in the IT industry, which is what this chart is displaying, you'll see that deal flow has actually held up fairly well, compared to overall PE. Total method capital did drop significantly, but the good news here is that from 2009 to 2010, we did see an increase of about one-third. But if you think back to the last slide, with that steep decline in deal flow, the IT industry hasn't seen that, the last three years have been fairly steady.
If you zoom in a little bit further to just the Software sector, you can again see fairly steady deal flow over the last three years. We do have a big drop in investment capital, which largely came from those big megadeals and for the middle smaller software companies, there's still plenty of activity out there.
So what portion does IT represent of PE investment? IT is still a relatively young industry, if you will. PE tends to play in more mature, older companies and leave IT and software to VC. But it has been growing pretty steadily over the last 10 years, and it currently makes up about 7% of the capital invested and about 12% of overall deal flow. Then, with a closer look her at the actual IT technology breakout, you can see software is the largest sector in terms of capital method and deal flow. Other big sectors in the IT industry for PE are communications and networking. That has been a long time activating for PE, with all those companies out there. Another that has been growing fairly rapidly as well is IT Services.
I should back up one second and say that these breakouts are for just last year, for investments in 2010 by US PE firms. Semiconductors is not a big area, hardware is also not very big, it's just the focus on software, communications and networking that dominates IT activity in the PE space.
As far as what parts of the software industry in particular are seeing PE investment, it is mainly this application software sub-sector. For us that is general software, anything that is designed for a specific application or purpose. This is about 56% of the capital invested and it is attracting about 75% of the actual deal flow. Internet software, companies coming out with services and software just for the internet, that's 34%, 3% of the deals.
Another interesting note on PE investment, in this space exists real growth deals, minority funding to get these companies to the next stage, post late stage venture, or even kind of combining with late stage venture firms to try and help these still relatively young companies grow.
So, as we look at actual PE portfolios, it is kind of interesting, but there are currently 589 companies in PE portfolios that are in the IT industry. A full 270 of them are 5 years and older, which means that PE firms are sitting on them a little long, over the average hold length, and they will need to be sold in the coming years to generate liquidity for their investors.
The same kind of things is true for software, we have 223 companies in PE portfolios, you can see the years they've sat here. 100+ are five years and older, and batches that are three and four years old as well. This is going to drive from exit activity in the industry, which was have seen has come up recently, and which we can expect will continue to do so.
So who are the most active players in terms of PE investment in the IT industry? Here is the list, we broke it out by different AUNs, but in general the most active are Francisco Partners, Thoma Bravo, Silverlake, pretty common names in terms of software investment for PE. I should also say we ran through those slides pretty quick, but I know they'll be in the rebroadcast and available to anyone later who wants to see them in more detail.
Dougan Milne
Great, John, thank you very much for that. There was some really excellent information in there. As he mentioned, if you'd like to get your hands on those slides, you're welcome to email him directly or email his research team.
With that we're going to turn it over to our private equity panel and I'll go ahead and let Nat Burgess, Corum's president, talk you a little bit about who we're speaking with today.
Nat Burgess
Thanks, Dougan. So what we've heard so far from your section is that a lot of the major exits lately have been PE deals. Good news for them. What we've also heard is that this is an incredibly complicated business that takes patience and a long time and is pretty risky. If you think about technology by itself, it's probably the most complicated business in the world, adding marketing, trends, channels and branding in addition to the tech itself, and you have major trends running you over all the time. Layer in investing on top of that, and it gets really hard, you're dealing with Human Resources and management teams with mis-aligned adaptations and overall market trends. Once you've navigated through all that you have a bunch of investments in companies that maybe you can't sell or take public, which means they really have no value to your investors. Basically, one of the most complex investment areas in the world is also the most lucrative for the people who really can make it work and some of the recent exits are a great example of this model working really well.
So, that's a great segue to introduce our panelists, and we have a very strong group of four individuals who each bring a different perspective to the market, a different investment model, a different geography, but between them I think we'll get a very thorough picture of how PE works in the tech sector and what some of the trends are today. We're going to start by having our panelists introduce themselves. We'll go through the introductions and then get into the Q&A.
Alex King
So I'm Alex King and I run the T and T practice at HG Capital. We're a London-based firm investing primarily in Europe, but elsewhere on occasion. We operate in what we think of as the mid-market, which is deals worth between $75 million to $750 million. In Europe we're the number one investor in technology by number of deals, number of exits, value of exits, pretty much any measurement you like, in our segment. Most of our investments are application software businesses, consistent with what the previous speaker was saying. We've dabbled with hardware deals and such and done okay, but we've really built our practice on software.
Doug Alexander
This is Doug Alexander, president of ICG. We're a little bit of a different animal because we're actually a publicly-traded holding company, focused in the SaaS, tech-enabled detail and online marketing sectors. We target companies that are a little more mature, essentially doing $10 million revenue or higher. As a public company, we have companies that actually generate cash for us and we invest that excess cash from either exits or operations into acquiring different companies that meet our target. Our model is different from the traditional PE model, since we are not a fund or series of funds, we don't have a specific time horizon, our investment structures tend to be simpler, we think more mangement-friendly, and we do it in a way that can facilitate M&A.
Recent deals are sort of a good case study. We acquired a company called (xxx 37:52) Delivery, which is in the e-government space, which we like. It was doing around $10 million in revenue, about to break even, just slightly profitable. It had been around for a while, constrained by cap table, and investors had been in for ten years, they were looking for an exit, and management felt that they were starting to hit their stride and most of their wealth creation was going forward. We came in, bought out the existing investors, gave management some liquidity after being there for 10 years, simplified the cap table to one security, which management rolled into, gave the team capital to aggressively grow the business, and then one of the things we do is look for businesses we can use as a platform to do other acquisitions, so as part of this process we set up a joint sub delivery ICG M&A team, looking for acquisitions now to build out the platform. It's a good model for companies that have sort of gone through the venture phase of their funding but aren't necessarily looking to completely sell out.
Nat Burgess
Thanks for that background, that actually helps us understand your model. Ian?
Ian Blasco
Sure. I'm Ian Blasco from Riverside Partners. We are a PE firm focused on what we consider the lower-middle market which for us, we think of these things in terms of equity, we're comfortable writing checks from $15 million to $50 million, which probably translates to companies with total enterprise values of between $50 and $150 million.
We are exclusively focused on technology and healthcare. We've been around for 20 years, and probably half of our investments in technology and half in healthcare. Always growth oriented, but usually in a down the middle of the fairway type of deal would be a profitable founder-owned company where we can work with that founder to provide liquidity and help drive growth going forward.
As an example of a transaction that we might do, we recently invested in a company by the name of Welocalize. Our technology investment will run the gamut from more traditional software investments to what I call technology-enabled services businesses or even, in some cases, manufacturers selling into high tech verticals. We localize that middle category. They provide localization-related services, they have a software platform, but at its core this is really service as a business. We provided some liquidity to an institutional investor that they had. We also provided some capital that facilitated an investment in the company's technology in its team. The business, just to give people a flavor, the total value of the company was probably just under $100 million. It is a profitable business that is growing about 20% per year, so it's not a venture oriented business, but still really good growth going forward, and the founder continues to own a very significant stake in it.
Rob Arditi
This is Rob Arditi with Norwest. I'm on our growth equity team, and Norwest has actually been around for about fifty years, mostly in a venture capacity, and they have invested in companies like PeopleSoft and Rackspace and Documentum and others, and a couple of years ago launched the growth equity team that I am on.
We focus on companies that are bootstrap, founder-owned, usually in the majority of the cases, they have not taken any institutional capital before. We are ownership agnostic, so we will buy 10% of a business or 90% of it, we'll do transactions with or without leverage. Typical opportunities for us are companies where we can write a check for somewhere between $10 and $75 million, so generally speaking that will translate into enterprise value of $50 to $300 million and we are comfortable providing full liquidity, partial liquidity, growth capital, capital for acquisitions, it's really about finding great businesses and then figuring out a way to make a transaction happen.
One recent example that would be relevant was a company called 1010 Data. It is a web-based platform, fully SaaS, recurring revenue model in dating analytics, so they compete with all Greenplum, Netezza, all those folks that have been recently acquired, and we built a relationship with them over a period of time and eventually they saw the value that we could bring to their business and they invited us to partner with them. So we did, we invested $35 million for a minority piece of the business, which is growing very rapidly and is very profitable. They didn't need to do a transaction. That is representative of the kinds of investments we will make.
Nat Burgess
Great, good background. Your name is next to a lot of the icons in the tech industry and it is interesting to see you move upstream and take on some of the later-stage privately-held firms.
We talked about some areas for exploration today, but we actually had a really interesting question come in from our audience, and I'm going to pose it and ask you not to answer it, but to think about it as we go into some of the other questions. Then we'll come back to it.
The question is basically this: “We're a small company, we're not a $750 million or even $50 million company. Where do we play with you? Are we a smaller acquisition that one of your portfolio companies would make? I think this was prompted, Doug, by your comment that you bought a company and now you established a team to go out and make some followup acquisitions. We'll come back to that. I think a lot of our participants today are CEOs of emerging companies that are smaller, and that's going to be a very interesting area to explore.
Now I feel a little bit like we're talking to the guy who said smoking is bad for you back in the '50s and then he lived long enough for that to be apparent to everybody. Doug, with ICG, you've been on the AST bandwagon, the SaaS bandwagon, and at some point you guys had a $60 billion market cap, went through the dot-com crash along with everyone else, and now you're back and doing the same thing and it turns out you were right about the SaaS business model, whatever that means today. My question is, you guys are focused on SaaS, what does that mean to you, what defines a SaaS company and what are the advantages of that business model that are created for your portfolio companies.
Doug
Yeah, I mean it's now sort of old hat, there is clearly a movement to move computer resources and capabilities to the cloud. There are a lot of benefits from that, I could probably talk about it for an hour. From an investment standpoint, what we like about it is that it tends to provide a lot of predictability, good cash flow once you get to scale on these things, and the other thing that we focus on is vertical market apps, where you combine buyers and sellers in a market through technology. One of the secondary benefits you get by focusing on that is you start to collect data within the vertical in ways that you could never do before, which leads to a whole set of products and services you can use to drive efficiencies to the market. We have a lot of examples of that in the verticals that we play in. Just to use government sub-delivery as one example, we have a digital communication platform for 400 government agencies, which is the largest player. We have detailed interest information on over 20 million citizens in terms of their interactions with government, cross agency, and their level of interest, which is pretty valuable to the government in terms of helping them communicate better to citizens and that number is growing pretty quickly. We never had that before because this information, if it existed, was in a bunch of silos across state, local and federal agencies.
The other things is, I think we are at the very beginning states of that dramatic shift, even though you're seeing a lot of rapidly growing companies, for every one you read about there are 20 or 30 that you've never heard of that are at earlier stages in development in whatever market they're playing in right now.
Nat Burgess
I think that's a really interesting response, because the typical dialogue goes around you have one code base to update, you have delivery efficiencies and so on, but you take it to another dimension which is we have giant cloud-based information sharing and we have, for example, in security, zero-day threats are known to everybody because it propagates in the cloud and it is a whole different element.
A question for Ian, and this is something that all of us as investors in one way or another, we like to invest against the cycle, we like to buy BofA stock in December of 2008, for example, but a lot of us were putting money under our mattress at that time. Ian, for you how important is it, as a PE guy who is investing in companies and trying to anticipate trends, to invest against the cycle and how successful can you be investing with the cycle. I'll add some context to that by saying that everyone seems to invest with the cycle, no one was investing in December of 2008.
Ian
No, I think that's fair commentary. I guess I would say, as I think about our industry, I think the point you just made is a critical one. As I think back on the deals that I have done and I've been in the business for close to 15 years, probably the number one predictor of a deal and an investment's long term success, is the year in which you do the deal. And that's sort of something that we all acknowledge as investors, timing can be a critical determiner in where you end up in your investment. The irony there is, to be quite candid, at Riverside we probably spend 90% of our time looking at the specific circumstances of the company that we are investing in, developing specific theses around things that we want to do from an offering point of view, and yet the cycle can often override the specific circumstances of an individual company.
I think the point that you made about December 2008 being a wonderful time to invest is something that most of us in the investment community acknowledge. I think there was a wide-spread view as the public markets went south, within private equity we circled. The investments that were done in late 2008 and 2009 post that decline were likely to be good investments. But the challenge you have as an investor is while you may want to deploy funds, the deal environment is not always hospitable to doing so. In that era in particular, although valuations had come down, it's not that dissimilar from the housing market, if you think about it, where prices of houses may come down, but then many people wind up holding on to their houses and not selling. You certainly saw that. Again, we're buying private businesses, that the founders have spent their lifetimes building up, and for most founders, when they saw the public markets dropping 30 or 40%, they recognized this valuation level may not hold, and we certainly saw a decrease in people who were coming to market, other than the sort of fire sale scenario that was described, which for us is not typically when we're looking to invest.
Then you couple that with what I'll call the overall environment, what financing sources are available to put together the deal, the risks to putting things through, and what you find is that it is typically much harder to put together investments in down cycles as opposed to up, although from an investment point of view, especially because we're very long term investors at Riverside, we typically hold our investments 5-8 years, we love profile and we try to think hard about if this will likely be a good time to invest or not, where we come out is it leads us to stretch a little bit in down economic times and to be a little more conservative in boom times, but at the end of the day you have to react to the investments as they present themselves.
Nat Burgess
That makes a lot of sense. Hey, I'm going to go back to a question that came in from one of our participants and basically this is a jump ball. “For a smaller company that may be an acquisition target of one of your portfolio companies, what is the dynamic?” I'll editorialize a little bit. Maybe they have a competitor who is doing $50 million in revenue and they are only doing $5 million, and then suddenly you buy that competitor, and now they're a viable acquirer. This is what we do all day at Corum, we sell a lot of companies to PE firms directly and to their portfolio companies, so to the participants, 1: What are the dynamics of buying these smaller companies, what makes them attractive?What makes them scary? 2: What is your process for supporting your portfolio companies in making followup acquisitions?
Alex
Okay, well although we manage sizable funds, the current fund is $3 billion and typically our deals are relatively large control deals, we actually spend a lot of time working with smaller businesses, either as long-term investment opportunities for ourselves, because smaller businesses these days, typically SaaS companies, can grow very quickly, and particularly they can go from nothing or $5 million in EBITDA up to $20 million very quickly.
But from the perspective of working with our portfolio companies, there is sort of really three things that smaller companies can do. The first is partner with our companies, typically engage in our company's distribution channel. I'll give you an example of a UK-based SaaS accounting software called Free Agent Central. This company has very advanced products for accounting, but that market is pretty difficult to get into and one of the companies that we sold recently, but rolled a small stake into an Irish software company, really is a dominant player in this market. So the smaller business, Free Agent, uses Irish to basically get its product to market. Irish has less product development skills, frankly, so the companies work together very well, helped by the fact that the guy running the Irish business is very experienced in the startup world, he came up in SalesForce.com from when it was pretty small, and actually that works very well. Most of our companies have a very large number of customers, so there are a lot of opportunities there for a small business.
The second thing is that we are prolific acquirers of small companies through our portfolio businesses, and that might mean a small strategic investment or it might mean an outright acquisition. In effect we are a trade buyer, so that means we may pay trade prices for the appropriate business. The thing that appeals to us is very simple, it's one or more of three things. Number one is customer base. Very often a smaller company will have a very attractive customer base that we struggle to reach for some reason. It could be product, that's very common, or it could be people. It could be that the entrepreneur and their team are just very strong individuals that would be difficult to hire, but by acquiring the company or some part of it, we can fold them into the bigger businesses that we invest in.
This is something we spend a great deal of time doing.
Nat Burgess
That's helpful and I think that's probably somewhat universal among the group we're talking about. I'd like to go on to another question, and I'll address this one to Rob. Rob, how do you currently think about exits for the companies that you acquire? The IPO market has been sputtering, the M&A market has been very active right now, but we don't know how long that's going to last. How are you thinking about exits for companies that you are investing in today?
Rob
We typically sit down and really make sure that everyone's interest and goals are aligned at the onset. Some CEOs don't ever want to run a public company, and for some that is their aspiration. So we sit down and try to outline those objectives up front and then we try to put the infrastructure processes strategy in place to obtain that, whether the goal is to achieve that 3, 5 or 7 years down the line. In this current environment, the majority of our exits have been strategic sales. We are comfortable doing IPOs, strategic sales, sales to other financial sponsors, the far majority of which, I think the quote is that in the last two years we've had something like $3 billion in exits and the far majority of those have been to strategic acquirers and I just think that's the function of having a lot of cash in the coffers, but for some of our portfolio companies, we are now evaluating the public markets, but I think for the forseeable future the majority of exits will go to strategic acquirers.
Nat Burgess
That makes sense and that aligns with our views as well. We're going to take a quick break here. Thanks to our panelists, we'll come back for another question if we can. That was great commentary and if anyone who is participating in the call today wants to reach out directly to any of the panelists, please come back to us and we can arrange that.
Now we'll talk about some of the upcoming events that we're hosting.
Ward Carter
Okay, great, thanks, Nat and thanks to the panel, that was great. I'd like to invite our audience to join us in person for more detailed information about software M&A. Today we're offering complimentary passes to a couple of events specifically designed for software entrepreneurs, which you'll receive by entering a promo code on the registration page of our website. Each year we host a number of events, including our Merge Briefing, which is a focused, 90-minute event that brings software entrepreneurs current information about the M&A marketplace. The other event I'd recommend is Corum's Selling Up Selling Out conference. This is an intensive how-to session, giving a full road map to prepare and execute a successful M&A transaction. This is a half day event that we conduct around the world about 20 times a year. Both of these events are well-attended by both sellers and buyers and all of the biggest software companies have sent business development staff to these events in the recent past.
If you'd like to attend, please go to our web page under conferences and events, on that page you can enter a promo code, the code for today is MAMAR11. Or you can contact me or any of the Corum deal makers and we can make sure you get registered.
Bruce Milne
Ward, just to add to that, we are going to be co-sponsoring the World Financial Symposium. Some of you may have been to that, that is where the financial community, investment bankers and venture capitalists come together with the tech community in Silicon Valley, New York, London, and soon in India and China. There is a new conference, the market spotlight series that we just agreed to co-sponsor with 451, a conference on the European cloud, which will be March 24, a great group of speakers. You don't want to miss that. I also want to give you a personal invite for the Seattle Selling Up Selling Out. This is our updated conference, I just gave the same presentation two days ago in London, we had speakers over in Europe, but the interesting thing was I had an attendee from the Czech Republic, who had attended years ago, and he said it was even better now. We'll be having an open house, I'd encourage you to visit that and meet us.
Next month we'll do megamergers and then Oracle. We've done Google, Microsoft, IBM, HP, all the big players, by demand we're now getting to Oracle next month.
Ward Carter
Thanks, Bruce. Thanks to all the audience members and our panelists for attending today. We're at the end of our scheduled session. If there are questions we didn't get to, we will answer those directly. Please join us for a conference in the future, and that concludes our webinar for March, 2011.