March 2013 Tech M&A Monthly

Ten Deadly Sins

Bruce Milne

Welcome to global Tech M&A monthly. This month we have a special report on Cisco and Scandinavia, as well as our usual research report.

We get a lot of questions from people, what should I look for when I get an overture from someone who wants to represent me in selling my company? These are the things you definitely want to avoid.

 

 

1. The “interested buyer” trap. I’m sure you’ve all heard this, someone calls you and says that they have someone interested in your firm. There are a couple of problems with that. First, if they’re representing a buyer, then they’re not representing you! In almost all cases, what they’re telling you isn’t true anyway, they’re fishing, trying to find if you’re interested, then they’ll go find buyers. Every time there are layoffs in the financial community, we see a lot of new shingles go up for people who want to be deal makers. 
    
2. “Yes, we know all the strategic firms.” How in the world can you do that? Have you done that many deals? Have you done research, have you educated firms? It’s hard to create relationships outside the crucible of M&A. They need to know these firms, that’s what you pay them for. 
    
3. “We work with firms in your space.” Really? Have you actually done a deal, were you an analyst on a deal in the space? Or did you just do some research? How current is your relationship with those firms?
    
4. “We know the private equity guys.” Same issue with the strategic firms. The PE firms today account for 40% of the biggest deals, they’re really driving deals worldwide with over a trillion in excess cash. You should know them, but they’re not easy to get to know. Corum, by the way, runs over 100 events a year, and if you’ve been looking at our schedule, we have almost all the top PE firms in the last two months at our various events. You need to know them if you’re going to approach them for an offer.
    
5. “We’ve done lots of international deals.” You’ll see today that there is a clear trend toward international deals. Up to 70% of the transactions involve a non-US or non-North American buyer or seller. You have to be international. We’ve reported recently on deals in China, India, Indonesia, Japan, all around the world, and you have to be international, with offices and relationships to support that. 
    
6. “We are current and connected.” You know how easy it is to get disconnected? You look away for just a little bit, and how good are your contacts? The error rate in databases is staggering. People change, they move, company trends change. You have to be current and connected, what you pay an advisor for is that currency and credibility. 
    
7. Bait and switching with dealmakers. This is classic. A lot of you would recognize this from service firms. Somebody who is very good at what they do sells you on working with them and then you find that the person working your account is a much more junior person. That’s not what you want for the most important transaction of your life! 
    
8. “We’ll shortcut the process.” Everyone would like to go to that one name in the book, make that one call and just push the deal through. That doesn’t happen. It’s work. You need to do a global search, there has to be a process. If you try to shortcut it, take a soft approach with just a few names, you miss the opportunity to find out all the potential buyers that might be interested in you. That’s how you get the maximum price.
    
9. “Go ahead, sell to the rabbit, the first bidder.” The first offer comes in, they get excited, you get excited, but very rarely is the first bidder the one you want to sell to. They come to you quickly because they’re trying to get a quick deal. One of the first things they try to do is wrap you up in an exclusive negotiation. We call them rabbits. That doesn’t mean you shouldn’t talk to them, they teach you, they ask you the questions that you may want to have better answers for when you find the right buyer. But you don’t want to sell to the first buyer you hear from.
    
10. Finally, settlement fees without success. Some of these contracts have you paying fees if they just make contact or get you an offer. Nope. When the money’s in the bank, and you’re rich, then you pay the fee. 

Special Report: Cisco

Now, let’s move on to a special report on Cisco. Our friend Rob Adams was with us a while back, head of acquisitions for Cisco. We saw the major players, the top ten traditional buyers, kind of move away. They gave the leader boards over to folks like Google and others. Well, now they’re back. Most representative of that is Cisco. Amber?

Amber Stoner

Thanks, Bruce. 2011 brought intense market scrutiny to Cisco in regards to its falling margins and bouncing competition. So, Cisco regrouped, and starting in early 2012, began making acquisitions. Thirteen deals in one year, to help stimulate market growth and confidence. This includes the $5B acquisition of NDS, Cisco’s second-largest deal in a decade, to expand its global video footprint. The acquisition placed Cisco in a better position to serve customer interests, both in existing businesses, and TV everywhere type businesses and technology, especially as it followed on the heels of the Lightwire deal. That saw Cisco spend $271M to be able to deliver comprehensive high-speed networks for the next generation of optical connectivity, allowing service provider and data center customers to meet the growing demands of video, data, voice, mobility, and cloud services.

Speaking of mobility, Cisco made three acquisitions to build out its service provider mobility group. The most recent switch was the $475M deal for Israeli startup Intucell in January 2013. They provide self-optimizing network software, enabling mobile carriers to plan, configure and optimize cellular networks automatically. This enhances Cisco’s ability to deliver next-generation solutions with a platform that lets service providers manage operational costs and make better use of infrastructure investments.

This deal directly followed and complimented Cisco’s acquisition of Broadhop, which provides policy control and service management technology for both mobile and fixed networks. Cisco also acquired ClearAccess in March 2012 to augment Cisco Prime, as ClearAccess offers service providers a set of tools for managing the connected home, including monitoring and managing bandwidth use, parental controls, and analytics.

Connected to those mobility moves are two analytics scale systems from the last year, including Truviso, which was also brought in to bolster Cisco Prime. The addition of Truviso has the potential to provide real-time analytics capabilities from within Prime. By also bringing ThinkSmart into the fold, which delivers location data analytics using wifi technology, Cisco’s mobility solution strategy can be accelerated.

The cloud is another important focus for Cisco, as indicated by four more acquisitions dealing specifically with cloud strategy.

Cisco spent $1.2B acquiring Meraki, enabling it to make simple, secure, cloud managed networks available to its customer base. $140M was spent on Cariden, to help Cisco strengthen and facilitate the transport of cloud managed networks. The third buy was Cloupia for $125M for multi-cloud management which will help Cisco furnish a unified virtual infrastructure which will allow customers to move more easily in a cloud environment. Part of that virtual infrastructure will come from their acquisition of Vcider, which brings a technology that Cisco use to create and manage high level network connections to link application components, and will ultimately be integrated into Cisco’s cloud organization.

In order to protect all of these various networks, Cisco has also been buying security, acquiring Virtuata in July to provide consistent and enhanced security for virtual machines. Most recently, they picked up Prague-based Cognitive Security in January. Cognitive’s technology identifies and detects security anomalies using advanced behavioral analysis of real-time data. Combined with their cloud-based global threat intelligence, Cognitive’s real time analytics will integrate with a common policy engine that controls distributed network enforcement and mitigates advanced cyber threats.

Cisco has stated that M&A will be a key part of its strategy going forward, although CEO John Chambers recently made the comment that Cisco is no longer willing to use its $46B cash source to acquire US companies, as 80% of the cash is in overseas accounts and would result in a steep tax bill should the cash be brought back stateside.

We still think Cisco will continue on their acquisition tear, albeit with a certain international focus, which will ultimately allow Cisco to extend its reach globally and its quest to be the company setting the pace in this industry.

Back to you, Bruce.

Bruce Milne

Thanks. We’re going to see Cisco moving ahead on a lot of fronts with that $46B. All that cash, that’s what’s driving M&A, making this the best quarter since 2000.

Corum Research Report

Now, let’s hear from our research department, led by Elon Gasper, our Vice President in charge of research. Elon?

Elon Gasper

Thanks, Bruce. Let’s start with the public markets and their record setting performance this February, as they climbed steadily- -and not irrationally--on improved economic data and corporate profits. And now in March the Dow hasn’t seen a single day of declines, setting a new record high again yesterday after rising 9 days in a row, the longest winning streak since the ‘90s. Broad indices are up over 10% already this year, the S&P Tech nearly twice that, and many top tech stocks including IBM are at all-time highs. So, how’s Tech M&A running with this bull?

Well, turning to our Corum Index, we see spending on Tech M&A also reached a new record in February, keeping up with this ferocious pace being set by the public markets. Led by the largest deal since the Great Recession, the $24B proposed buyout of Dell, combined with four other mega deals including Oracle’s $2B acquisition of Acme Packet, disclosed spending on tech M&A topped $47 billion in February--an all-time record despite the short month.

This increase in multi-billion dollar bets is a confirming indicator for the overall health of the tech M&A market, because it shows big companies with smart money have a high degree of confidence that the economy is improving. Given that backdrop we expect last month’s dip in the number of transactions and PE deals to be momentary only, plus from our own vantage we see clients across the markets tapping pent-up deal demand. Alina?

Alina Soltys

Let’s take a look at some key deals this month, starting with the Horizontal sector--always a good performer with higher than average valuations as some SaaS companies tracked here. Just days before Facebook’s IPO last May, GM announced they would be dropping their ad spend within Facebook. In an effort to strengthen their position, Facebook has acquired Atlas Advertiser Suite out of Microsoft’s $6.2B purchase of aQuantive in 2007. With this symbiotic relationship, gains were made for both sides. Microsoft divested an unneeded ad suite and Facebook filled a hole.

Atlas will allow marketers and agencies to place, manage and measure digital advertising campaigns and provide ROI measures on these spends--this analytical piece was missing. In the past, marketers had to get creative to show actual returns on the advertising spend.

Ad Age estimated the deal value between $30-$50M.

The next deal I’m highlighting exhibits the same amount of strategic initiative: SAP’s acquisition of SmartOps, a provider of inventory and service-level optimization solutions slated to fit into the Supply Chain offering.

SAP’s HANA platform, cultivated after many years of research has finally been released. It has the unique ability to process high volumes of data in real time, essentially a solution for a part of the big data question. If you couple that with SmartOps large-scale, “stochastic” algorithms aimed to limit the uncertainty in the supply chain, for example as it relates to KPIs around capacity, inventory, demand, lead time and the like, with algorithms that can take a big bite out of the big data and SAP’s ability to process the results in real time, this has really created a one of a kind, powerful offering.

Amber Stoner

While SaaS companies are typically a driver of the high valuations in the horizontal sector, SaaS deals have also become prominent in the vertical sector.

In the financial services subsector we saw two SaaS deals done in February. Rubrik Financial acquired Provisio Limited, an investment portfolio and financial planning SaaS company and Linedata Services bought Capital Stream for $45M, adding loan origination and processing software, SaaS and systems integration services to its current product portfolio.

And in the education sector we have Haiku Learning acquiring ActiveGrade adding student gradebook management software as a service for the K-12 education space to its cloud-based learning management system, providing schools with a full-featured standards-ready learning platform.

Games have even found their way into the education space, isn’t that right Jason?

Jason Steblay

True Amber, but the games I’m going to talk about here are more of the “fun” variety.

The story in the consumer segment continues to be the consolidation of gaming studios. One of the world’s fastest growing studios, Wargaming.net, makers of the tremendously popular World of Tanks series completed its second US acquisition this year with purchase of Gas Powered Games in February. The acquisition will further bolster Wargaming’s multi-platform expansion, complementing its $20M January purchase of Day 1 Studios and its earlier acquisition of middleware provider Big World.

In the other consumer sub-sector, digital content, French telecom provider Orange purchased the remaining 51% percent of DailyMotion, upping its investment in the popular online video service from $78 to $168M. Orange has been building up the content side of its business to offset commoditization of its core wireless and web connectivity service. Fearful that this trend will accelerate, service providers of all types have embarked on similar efforts. Listeners in North America may recall the Comcast takeover of NBC universal, or DirecTV’s recent announcement that it will soon begin airing its own original content for the first time as further evidence of this trend.

Amber Stoner

As online content keeps growing and taking a larger chunk of our downtime, infrastructure has to keep up in an effort to support all the streaming.

Notable transactions in February include virtualization titan VMware announcing its 7th transaction in a year with its acquisition of Virsto Software for an unconfirmed $200M. Virsto provides storage hypervisor and optimization software in support of several platforms including VMware, Citrix and Microsoft.

Another vendor in the virtualization space, Radware, bought British Columbia-based Strangeloop Networks for $8.4M. Radware plans to integrate Strangeloop’s optimizer technology into its Alteon application delivery controller to increase performance.

Finally, Norwegian browser developer, Opera Software will be paying up to $150M to purchase California’s Skyfire Labs, whose Rocket Optimizer software compresses video and other content for faster network delivery.

Alina Soltys

In the Bay Area we saw SaaS company information provider Montclair pick up DreamSimplicity, an educational portal on the SaaS industry, expected to enrich the SaaS Top 250 Report published by the buyer.

In the typical SoCal style we’ve come to expect, a newly formed joint venture named after the nearest freeway, formed by a few publishing execs, bought a pack of pet content magazines, websites and reference data from nearby BowTie Inc, and started talking to leading brands to leverage it with marketing partnerships.

With another increase this month, Internet valuations continued their climb for the 6th month, with profits particularly finding a bid as price/EBITDA ratios hit 20-month highs.

Continuing the Analysis & Reference trend, the headlining deal this month was Ziff Davis buying IGN.com from News Corp. IGN Entertainment adds video games, entertainment and men’s lifestyle content.

As we’ve heard PEs are very active in all sectors, with internet no exception. A hop and skip across the pond, Electra Partners, a London firm focused on e-commerce, B2B and B2C, went shopping locally and acquired a divested portfolio of data services businesses from United Business Media for £160M, call it a quarter billion dollars, which was about their annual sales and 5.6x EBITDA – both low for the Internet space, but it’s a divestiture, essentially a fixer-upper for the PEs.

Jason Steblay

Turning to IT services, valuations in the Segment continue to hold steady with a slight bump up in EBITDA multiple. In our February report, we talked about Michael Dell’s blockbuster bid to take his namesake company, dell computers private, but the month still produced a number of smaller deals worth highlighting today.

GENPACT, the giant business process outsourcer started by GE, picked up medical ERP maker Felix Software and US healthcare systems integrator JAWOOD in February for $2M and $50M respectively. Both acquisitions are in line with the trend we’ve discussed on previous webinars of larger, diversified services firms acquiring smaller, highly focused companies, to move them into high growth verticals.

Another trend we’ve discussed recently is the acquisition of small, rapidly growing, and high margin businesses by Asian IT services firms to sustain their strong valuations vis-a-vis their western counterparts. Prime targets include services firms in other rapidly growing emerging markets. Not surprisingly, MAHINDRA SATYAM announced plans to eventually pay up to $23M for a controlling stake in Brazilian systems integrator Complex IT. Complex IT brings 500 staff members, and annual revenues of about $50M to Satyam. Critically, it also opens up the $36B Brazilian IT services market for the Indian provider.

Elon Gasper

What a month, and what a year so far! Come back in April when we’ll present our first quarterly report of 2013, with reviews of all 26 sectors covered by Corum’s research team. Back to you, Bruce.

Bruce Milne

Thank you, Elon. What’s interesting is that we’re hitting records in the stock market, one of the questions we get is how that impacts tech M&A. Generally, tech M&A maps directly to activity in the market and we only saw a hiccup here at the end of last year, in Q4, everyone was waiting to see what would happen politically and such. We’re catching up very fast. We have a record marketplace and we expect to have record activity in tech M&A.

You saw that over half the transactions mentioned were outside the US, buyers outside the US. Interestingly, the last one Jason mentioned was in India. We’re going to be running, we just agreed this morning, in Shanghai April 11. You’ll hear more about that soon. And regarding gaming, Corum just agreed to to be the sponsor as in the past, of the international Casual Gaming Conference.

Special Report: Nordic Region

So, with so much focus internationally, it’s worth noting that presently one of the hottest places on Earth for tech M&A is the coldest place in the developed world. The Nordic region. Here is our own Mark Johnson to tell us about this dynamic region.

Mark Johnson

Hi, I’m Mark, senior director with Corum at our Stockholm office. I’m going to go through a few slides presenting the Tech M&A situation in the Nordic region, and why I think this region is producing a disproportionate amount of big winners.

Corum has been increasingly active in the Nordic region, having closed five deals in the past few years. We sold 360 Scheduling, a mobile workforce management company to the Scandinavian enterprise software leader IFS out of Sweden. We just closed on a divestment from Glaston Corporation out of Finland, an enterprise software company, A&W, to US vertical enterprise software Friedman Corporation, a subsidiary of Constellation Software.

Lumesse, the global talent management provider, acquired Edvantage Group, a Norwegian e-learning provider. And just a couple of months ago, we sold Fastrax, the Finnish-based global leader in GPS integrated circuit solutions, to a competitive firm, Swiss-based uBlox. Finally, we sold Sweden-based Tific to Plum Choice, a US PE backed firm providing remote technology services and solutions.

I want to go through some quick stats, which will identify how the Nordics have really been punching above their weight in the Tech M&A sector, and how this market has matured.

Firstly, when looking at the number of tech exits surpassing $1B since 2005, the Nordics represent 8% globally, these being REC, a Norwegian company in the clean tech sector, and Skype, QlikTech, and MySQL, all Swedish companies. When comparing the Nordics to the rest of Europe, even though the population is only 3.5% of the European total, the Nordics represent 14% of VC invested, primarily going into IT, telecoms and software, 33% of the $1B exits, over a quarter of the Deloitte SaaS 500 companies, and over 20% of Europe’s largest software companies.

Why is this? Well, firstly there is the long tradition in the Nordics of building world leading brands, including household brands like Ikea and Nokia. Today, there is a new generation of technology entrepreneurs building global winners, particularly in the gaming and content distribution spaces.

These successes are backed up by overall success of Scandinavian countries in competitiveness, in areas like best countries to start a business, global innovation index, R&D as a percentage of GDP, researchers per 1000 employed, global competitiveness, and the corruption perception index. When looking at technology that is larger than $100M since the dot-com boom, there was a heavy focus on early stage companies, with small revenues from about 1998 to 2005 as noted here. However, in the past seven years or so, the market has matured, where most of the local $100M+ exits, are much more mature companies, having needed to solidly prove themselves before being acquired or listed on a public exchange.

When looking at who is buying the Nordic winners, the exit market has been very dependent on US buyers, particularly since the IDL market has dried up since the dot-com bust. A significant portion of the buyers have come from abroad, and also from the US, especially when prices have exceeded $50M.

After running through several stats and slides, I would say in summary that the Nordics are an area in which we are placing heavy emphasis. They have excellent, globally-competitive tech companies being founded and grown here, and buyers have taken notice and are increasingly competing for deals in this region.

That’s all from me, thanks.

Bruce Milne

Thanks, Mark, great report.

It’s interesting that over the last few years, we’ve done a number of transactions where the buyers are in the Nordic region. Our clients sort of scratch their heads and asked why they would want to put these companies on the buyer list if they haven’t heard of them. The Nordic buyers have cash, but people don’t realize that the sovereign treasuries are closely tied to investment. They have over $3T from their COL and they know how to spread it around. You’ll see a lot more activity there. In fact, just as we were going, with a minute to go here, I just got a note that we received an LOI on a Nordic company just thirty minutes ago.

That brings us to the end of our conference. Thanks for joining us!