May 2011 Tech M&A Monthly

 

May 2011

Corum Webinar Cloud Strategy and Patent Power

INTRO and GLOBAL ECONOMY OVERVIEW

Ward Carter
Thanks for joining us and welcome to the May Corum M&A monthly. I'm Ward Carter, chairman of the Corum Group, speaking to you from our Seattle-area headquarters. You are part of a group of hundreds of software and technology executives from over 20 countries who have registered for this event today. Here is our agenda for the next 60 minutes. We'll start with a market overview, move to a discussion on the power and value of patents to a technology company, review recent Corum data on technology M&A deals and valuations, take a look at the recent cloud valuations, and hear from guest speakers reflecting on the Cloud market and Cloud applications. We'll end the session with Q&A.

Our speakers today include Bruce Milne, CEO and founder of the Corum Group, Elon Gasper who is the director of the World Technology Counsel, Amber Stoner, senior analyst with Corum, Alina Soltys, another analysts with Corum, John Melotte, who was recently chair of a major European conference on the Cloud, guest speaker William Fellows, who is VP of research for 451 Group, Dougan Milne who is VP of research here at Corum, followed by Nigel Thompson, founder and CEO of CloudSpace and Jeff Hook, with Fellowship Technologies, so we have a very full agenda today.

From a standpoint of logistics, we are encouraging our participants to join our Q&A session. There is a Q&A window on the right side of your screen, please submit to the queue at any time and we will answer your questions at the conclusion of the conference. With that, I'd like to hand things over to Bruce Milne.

Bruce Milne

Thank you, Ward. We have 10 speakers for you today, and a lot of ground to cover. I'll begin my section today by speaking a little bit about Asia, inflation concerns according to George Soros, he's in the news a lot lately as we're going to see. He thinks it is somewhat out of control. A lot of the Asian countries that are sitting on a lot of cash are trying to diversify their exchange as the dollar has been falling so much. We'll hear more about that in a minute.

“China's growth may moderate as manufacturing index slips.”

Huawei is getting a giant $30 billion credit from China in order to open doors in Brazil and Mexico. You have to remember that China has almost $3 trillion in foreign currency, and that makes them the world's biggest investor because of that.

Industrial output in India has unexpectedly slowed to 3.6%, and we'll see if that is just a glitch or not.

Internationally, the Euro is approaching an 18 month high versus the dollar, there were a lot of announcements today by Trouchet. Germany reignited a debt concern with warnings. Portugal actually got their money, up to $90 billion in the last couple of days, and now there is some backlash on that.

Russia's manufacturing has had its biggest drop since 2008, again because of the ruble's strength, particularly compared to the dollar. Again, currency is in the news.

In the United States, this wasn't good. S&P put a negative outlook on the US' AAA rating. Last month we had some comments by Buffet and Gross on this issue that we're just spending way too much, racking up way too much debt, our economy has risen for 21 straight months, consumer confidence is growing, but back to the deficit issue. The IMF says that the US deficit will expand to be the largest among major economies. The IMF also cut the US growth rate because of, guess what, oil and lackluster job pace. Then, just this morning we saw that the unemployment rate spiked and was worse than expected. But, oil, as we said last time, is the one thing that is going to cut us off at the knees in terms of growth and M&A.

Industrial production was up in March, more than estimated, so we're getting generally positive indicators, but concerned about oil and the dollar and overspending.

Real estate prices, boy, this isn't really great. Housing prices dipped further, they are down year over year, they might be ticking up a little bit in some areas in certain sectors, premium homes are going back up a little bit. New home sales spiked up a little bit in March, in April builder's sentiment was lower, and homebuilder confidence fell. Foreclosure activity is up, they are finally starting to get through this mess, I know a lot of you are seeing the signs for foreclosures coming down, they've been up for a year and a half in some cases. They are predicting that this will last for a while because they still have a lot of inventory to work through.

In commodities and currencies, I wanted to put a spotlight on this because this is a huge issue. We have the dollar weakness persisting as the Fed stimulates. I always used to pick on Chavez because he was kind of wrecking his country, and those of you that know about every two month's I'd have another Chavez story. Well he is wrecking his country, food costs are going up 48%, we're having some of the same problems down in Argentina.

Inflation has cooled a bit outside of food and fuel. Canada is rebounding, their currency is now a currency of choice. Paying the bills for our trip this year up to Canada, with the Canadian dollar worth $1.5 US, it has gotten a lot more expensive, it used to only a few years ago it was $0.65 on the dollar!

Silver and gold futures are dropping, again Soros reported to have sold, so they think we're going to see a big adjustment in both silver and gold and this morning's news seems to echo that.

Again Pimco, Gross, betting on a weaker Euro, with a stronger won, Aussie dollar and Singapore dollar, that's where he's making his bets.

In technology, Cisco is to close the flip camera business as part of a revamp, and then we saw this morning where they are actually doing some major reorganization. Paul Allen came out and said that Microsoft needs to accelerate product development, and you saw earlier that we reported that Microsoft is at the bottom end of the scale of major acquirers. I think they only made two acquisitions last year.

The Apple iPad, this isn't news really, they are set to dominate the tablet field until 2015 according to Gardner.

The Renren IPO that just came out yesterday yielded a 90x sales multiple. Think about that when the average merger is maybe 2 or 3x, and Facebook is at 25x sales multiple.

Google is facing some Android antitrust complaints in South Korea, which is what you get for being popular.

In our webinar headlines, those of you who follow us monthly know that we have a prediction section at the beginning of the year and various speakers and newsmakers on. One of the things that came up was the potential for disaster in the cloud, when one of the services shuts not, which may take other companies with it, causing them to be hurt. That is exactly what happened to Amazon a couple of weeks ago, and they are the big dog in this space, as we'll see. It was portentous that we talked about that, and we picked “Cloud Roadkill” as a headline a couple of months ago, and then this Amazon headline just happened a few weeks ago. That will be an interesting story to follow.

In the patent area, Cisco was told to pay $63 million on a patent verdict. Google offered $900m for Nortel's wireless patents, Samsung countersued Apple in that whole dispute, and then just this morning...yesterday SAP came out and said that the Amazon crash has hampered their late push into the cloud and they say that clients are now reluctant to commit mission-critical applications and data in the cloud. What happened when Amazon melted down, there were people that lost, forever, data, at least 11 hours of it. Interestingly, on this bid for patents, RPX came into the play yesterday, concerning Bedford-Nortel's nuclear weapon of technology patents, 6000 patents! RPX is a group we know of and you've probably heard us report on them before. They have put together a fund or a group to buy patent and IT assets, and they have already spent $250 million.

That is a great segue to our patent presentation today. Elon Gasper is going to give the report. In thinking about who I wanted to give this report, he came right to the top of the list. A little history here, Elon was one of our first clients in 1987, and I remember taking a trip with him down to Monterey, California, and I asked him why we were going there and he told me, “The best IT patent lawyer in the world is here.” Even back then he was fascinated and working closely in the area of patents. He himself owns 9 patents. We funded his company and sold it and he is, like you, a serial entrepreneur and an expert on patents. Elon?

PATENT POWER

Elon Gasper

Back then software patents were a speculative area, it was difficult to find out anything about the field, let alone how it could influence M&A, but since then we have seen patents and IT in general be viewed more as a business asset and becoming much more of an M&A driver.

Back then there were no famously important software patents like Google Page Rank or Amazon OneClick. Now there are billion-dollar patent estate sales, like Nortel's, and numerous million dollar patent battles raging. Smaller companies risk being caught in that crossfire, but they also have the opportunity to create great value by building patent portfolios themselves. Particularly in this last year, we've seen patents accelerating their influence and visibility in M&A with effects on valuation, negotiation, and due diligence, phases, including in international settings. Let's look at each.

We'll start with some recent examples of patent valuing transactions. M&A leader Google gives us two strong examples of this trend. We mentioned one here, their acquisition of Zetawire in what was clearly a patent grab, as Zetawire had no website and only a handful of employees. Their published patent application applies to using an electronic wallet to monetize the mobile space, something Google is clearly committed to. Google's acquisition of WideVine was also clearly aimed at acquiring patents, as this company had more than 60 US and international patents, with over 100 pending, mostly in the online video segment.

Moving on to Facebook, Q3 last year saw an acquisition that seems to have had a strong patent value component with Facebook's purchase of Friendster, which brought Zuckerburg 18 patents for $40 million.

Finally, take note of Microsoft's purchase of a 3D control chip maker, Canesta. While logically perceived as a defensive acquisition, it also bolstered a veritable brigade of patents, with 44 granted and more pending, providing Redmond with freedom to operate and advancing their Kinect technology. These patents may also help cement Xbox's lead in the market by inhibiting early ISV investments in alternative platforms. Canesta's tech may have arisen in areas like airbag deployment and flight controls, but beginning to invest in the video game space, put their patent's relevance on Microsoft's radar.

So what are the keys to patent value in M&A and how can you not get trampled by the thundering herd? Well, just like with products, a small company needs to nimbly anticipate areas of strategic value and create a structure which impedes competitive entry. With patents that means allowing you to legally control a substantive part of your market, plus impose significant overhead costs to competitors even thinking about getting near your space. These means of erecting barriers to entry are even more important now as it continues to get cheaper to develop software. Thus the foundational value of patents as a means to defend a market position. This still has to be won with product, because patent prosecution as a profit center itself, requires such deep pockets, it is so slow and so seldom successful, that it almost never drives significant M&A value for you.

In the negotiation stages of M&A, lack of patents is no longer just a 0 item in valuation, it can actively beg a lower valuation argument from potential acquirers on the grounds that your core tech hasn't proven itself, at least in this way, to be innovative and valuable. Not that you can't argue that successfully, but it doesn't help that you need to.

M&A due diligence has also changed regarding patents. One important thing in this M&A phase is to not just provide information now, but to make sure that the business utility of the patents that you represented during negotiations, what you said the patents were good for, is supported by due diligence that doesn't undermine that use. Of course you must still be sure of your related IP contracts, your assignments, your patent maintenance fees and your paid up records at each office are in order, but lately we've even seen acquirers, particularly the foreign ones, hiring outside council to pick through your claims and construct mock lines of challenge, based on further research. So, unless you're willing to exert that expertise on the spot, having some depth of organized support material, in advance during due diligence, would also be prudent.

And across all these stages, there is the valuation, negotiation and due diligence that we talked about.

International patent issues are still in ascendance. In part, just as Corum is continuing to see that the M&A earth has flattened, with almost half the deals now cross border and really all finding significant international play, and we see this international trend continuing for patents for other reasons as well.

For the sake of time I better not delve into this in this quick venue, but I'll do a whitepaper, we'll post it on CorumGroup.com. I will mention one take away. Buyers are no longer going to be viewing your Chinese patents as novelties, they are real components of M&A value at this point, particularly mainland buyers responding to Beijing's emphasis on Chinese companies having Chinese patents.

In a final note, countries have different rules for these patent filings, they have different deadlines, they have different what and how you can claim, and it is all changing faster than anyone can write books about it, so good legal counsel is essential, you will need translators too, and as I'm sure you'll realize this all costs a fortune. Ironically, as software gets cheaper to write, in some cases, you might end up spending more on the legal than on the code, which I guess brings us back to a reason why acquirers are seeing increased value in patents.

Bruce Milne

Good stuff. I look forward to the whitepaper. We just gave an overview, but the whitepaper will be far more extensive, that should be up on our website shortly. Now let's move to the Corum Index on valuations, the Corum M&A update, the heart of our valuation section, with Alina Soltys and Amber Stoner. Alina?

CORUM INDEX, VALUATION and RESEARCH

Alina Soltys

Thanks, Bruce. This month Amber and I will be covering the Corum Index, where we track monthly stats for a variety of different data points.

Taking a look at the three-year public market performance, April brought in continued increases in the NASDAQ, S&P Tech, and the Dow Jones. The S&P Tech continues to pull away. If we move to the twelve-month view, it shows the continuing trend from let's say October, for all three indices. The S&P Tech is up more or less 20% over the others.

If we move forward, taking a look at the six market segments that we track, this is on a quarterly basis. Take a look at both metrics, they are up more than 200% since the depth of the recession in Q1 of 2009. We all know that positive market movement typically translates into positive deal activity. Amber, what are we seeing on that front?

Amber Stoner

What we are seeing is that the number of deals is up nearly 11.5% year on year for the month of April, with megadeals increasing 75%. We've also seen the largest deal size increase from $2 billion to $6.5 billion. Digging into that Texas Instruments-National Semiconductor deal, we find that TI has targeted analog chips as a key growth area and expects the deal to accelerate its expansion into the industrial market. Clearly the deal rationale is based on growth and opportunity, which would explain TI paying 78% premium over the valuation at the time the deal was announced.

Another interesting megadeal that we saw in the last month was Providence Equity Partners investing $1.8 billion in SRI International. Providence has noted that the government information services market is a highly-attractive area of investment for them. It will be interesting to see what investments they make in the future to continue expanding into that space. I know that deal is probably of particular interest to you, Alina, as you and I were just talking about the changes in private equity deal numbers.

Alina Soltys

Yes, private equity has really come out of the wordwork, more than doubling monthly deals year over year, and make a note of the deal values. $6.7 billion private equity dollars traded in just the month of April. That is more than 8x last year. If you add up the two megadeals, it certainly makes an impressive total.

There has been a lot of activity on the PE front in both liquidating certain assets, as well as raising additional funds, making these kind of megadeals possible. In a low interest environment, cash moves a lot more freely.

Speaking of more cash, VCs are exiting at an increased pace over last year, up 44%, which means that they are more comfortable with today's valuations for their portfolio companies. Speaking of valuations, Amber, what are we seeing in our first market sector?

Amber Stoner

Well, the Horizontal Applications software valuations are holding steady with slight increases across the board. Subsectors with robust revenue multiples include CRM, business intelligence, and human resources. As some of you may remember from our annual report back in January, we mentioned that SuccessFactors have been growing through acquisition in the past year and we expected that to continue throughout 2011. Well, they're off to a good start. Just last week, SuccessFactors acquired Plateau, the leading learning management system, for $290 million. The acquisition increases SuccessFactors' customer base to a combined 15 million users, and their now largest domain expertise allows SuccessFactors' to compete more effectively with the incumbent HCM vendors total and positions the company in the HCM cloud-based SaaS market.

In addition to the Plateau deal, SuccessFactors has also acquired Jambok a couple of months ago and has made five acquisitions in the last year, all in an effort to continue building on its physics solution.

Similar to the Horizontal Applications valuations, Vertical Applications software valuations are holding steady with a slight uptick in revenue multiples. We're continuing to see acquisitions in the education space. For example, Pearson recently acquired SchoolNet, an education technology company that aligns assessment, curriculum, and other services to help individual instruction and improve teacher effectiveness, for $230 million. This acquisition compliments Pearson's available products and services that help boost student achievement through diagnostic tools and tailored instruction. It also increases Pearson's reach in the US market, with the addition of more than 5 million US student users in roughly one-third of America's largest urban cities. In addition to consolidating the education administration software space, Pearson also invested in Inkling back in March and said that creating interactive ebooks is a central and critical part of its strategies going forward.

Alina Soltys

So, when you're done studying and looking at all those textbooks and you're ready for some downtime, mobile gaming of any sort is a great way to relax. The deal spotlight of the Consumer Application sector features OpenFeing being acquired by GREE. Now, OpenFeint is the leading US-based mobile social network and global gaming ecosystem. Think of it as an Xbox Live for your phone. GREE is a Japanese company with a $3 billion market cap and 25 million users, acquiring a Bay Area mobile start up. If this sounds familiar, think back to when DeNA acquired Ngmoco. This is a smiliar profile. Revenue multiples in this case are not even worth mentioning, as they are meaningless for comparison. OpenFeint only had $283,000 in revenue. This deal is all about the user base. Paying $104 million, GREE got 75 million more gamers, 3x their original user base, spread over Android and the iOS platform. GREE is planning to turn this into the next-gen social gaming monster, and they have some really cool features coming out. They have cross-platform, real time gameplay enabled with video chat, so now you can play with your friends and video chat at the same time.

They are also testing out a new concept, joining anyone who is everyone in the space by creating new and improved dollars.

You'll need those dollars to spend in the Infrastructure space, which has seen yearly highs with EBITDA multiples jumping up to nearly 15x on average. This brings up BMC, who typically pay healthy multiples, acquiring Coradiant last month fro 4.8x sales. Now, with this acquisition, they have the ability to do real user monitoring through virtual environments, which is a step up from the previous monitoring abilities, which they OEMed.

This brings up their competitive position, matching the leaders in the space, CA and HP, who already have this real user management system in place.

So, if we take a look at the leaders in the Internet space, we've seen a slight uptick in the multiples, which is trending toward the highs of the past twelve months, but not quite there yet.

Our deal spotlight focuses on the real estate listing giant LoopNet, being acquired by commercial real estate information database CoStar, which has doubled their subscriber base to 160,000 users and also brought combined earnings to $320 million.

In the real estate space, there are really two extremes of the spectrum, the whales and the minnows. Both of these are the giants in this field. They are the biggest competitors in this field. CoStar focuses on leasing and LoopNet focuses on commercial listings. This deal completely makes sense. It is highly strategic, all the user bases have complimentary needs to present significant cross selling opportunities and they are expected to save about $20 million in the cost of synergy on an annual basis.

Coming out of historic lows in the real estate market, this is a strong indicator of confidence in recovery and they are positioning to gain further market share.

We are also seeing IT Services companies positioning to gain market shares with consolidation, as the valuation multiples slowly but surely grow. GenPact's acquisition of Headstrong for $550 million at a 2.5x revenue valuation is of particular note, considering that it is around 1.5x the public valuation revenue multiple for the IT services sector as a whole. With this acquisition, GenPact is gaining critical domain and technology expertise in both the capital markets industry and healthcare verticals, allowing it to more broadly deliver end to end solutions to clients.

It also helps the Indian-based company expand operations in the US, with the addition of 3700 employees, many on-site with employees in the US.

That wraps up the Corum Index.

Bruce Milne

Thanks a lot, Amber. I think it is really interesting to be ending on this IT services sector and ending on China and India, because we're seeing an uptick in both of those nation's companies acquiring businesses both in America and in Europe, who have domain expertise, good customer bases, and a strong reputation, picking them up and we'll see more deals in that area from those countries.

Let's move on to our report on the cloud. We'll start out with John Melotte. John was chosen to be chairman of Cloud in Europe, and he's our VP in Europe. John, let's hear what happened with your presentation there.

EUROPE IN THE CLOUD

John Melotte

Thank you, Bruce. Corum is a platinum sponsor for the World Financial Symposiums, which run conferences three times a year in Silicon Valley, New York, and London. These events have always received great reviews from delegates, leaders of technology companies, smaller sellers and larger buyers, and executives from investment banks, PE, VC, funders and buyers of tech businesses.

A month ago, I chaired the first in a series of new webinars, each of which will turn a spotlight on a different topical technology subject. The first was on the Cloud. WFS has always been able to attract top notch speakers, and this webinar was no exception. We first heard from UK-based William Fellows, founder of the leading technology analysts, the 451 Group, picking up on some specific work he had recently done on the Cloud. We'll hear from him in a moment. Next we had a great view on the Cloud, as seen by Kristoff Despiegeler, a Belgium-based serial entrepreneur, working in Cloud infrastructure play.

He spoke convincingly on the emergence of new cloud data centers, shifting the cost of traditional data centers to a pay as you go cost.

IFS is a leading, Nordic-based company and a buyer of cloud business. Frederic Bonhoff and Dan Matthews gave an insight into IFS' gradual evolution of their existing technology platform and business models into the cloud, providing customers with more flexible payment and deployment models.

Finally, my Corum colleague, Miro Parizek, based in Germany, brought us up to speed with cloud-based M&A deals that are taking place. There was tremendous feedback from the webinar attendees, with a very lively Q&A session. All in all, a great webinar, the first in a series of what I expect to be a very popular series of WFS spotlights. Back to you, Bruce.

Bruce Milne

Thanks, John. I know they are queuing up to do market spotlights and we have agreed to support them in mobile and security, and another in drilling down some aspects of social networking. For those of you who didn't have a chance to hear it, it was at 2 a.m. our time, I think we have it up on our website for rebroadcast. It was a great conference.

Let's move on now to William Fellows. He gave a great overview of the Cloud. He is with the 451 Group, they have done presentations with us before on these M&A monthlies. He is also the head of their group called CloudScape. Let's hear from him. I think this is one of the best overviews I've heard on the cloud.

THE CLOUD: PLAYERS AND TRENDS

William Fellows

For those of you who don't know who we are, we are an analyst organization and the research practice called CloudScape is the point of intellectual convergence for our organization is much the same way the industry is converging on cloud from IT vendors, service providers, integrators, and end users, of course.

So, John already referenced Amazon, we're 3.5 years in, 350 billion objects stored, revenue of about $400 million, doubling every year. The important thing here is that Amazon is still in a rising tide that is floating all boats. It is moving fast, the market is growing quickly, and Amazon itself is moving its retail back onto AWS and talking about the opportunity being as big as its retail business, which we know is $25 billion.

How do we see Cloud computing, not just past SaaS, but as IT as a service. Here the IT infrastructure is delivered as a virtual machine, automation moves those machines around and provides a delivery system for them and users help themselves to services by an access API and per user pricing model. The point here is, I think, that the users don't have to know or care where the service is coming from and whether the service provider is internal or external doesn't matter as long as the experience delivers on the expectations that the user has in terms of information, functionality and processing quality.

In the conventional model, most of the things you can see here, the majority of the iceberg under the water, these functions were typically hard wired. With the cloud these become abstracted so they can be evaporated into the cloud and pretty much delivered from anywhere, and the pointy end of the iceberg is still the utility computing aspect which is all the end user sees.

In our research, and I'm happy to share more details with folks on the call here, we have taken a look at some of the applications in terms of what is best suited to move onto the cloud, moving through the low hanging fruit of test and dev and web apps and so on and moving on to things like data and transactional rich areas, as you can see on this axis here.

I'll take you one step back. We're an analyst organization and we obviously provide market sizing here. In our estimates of the market, we reckon that it is getting on for a $9 billion market last year, rising to about $60.5 billion in 2013. That includes revenue from SaaS, which is the key driver of this sector at the moment. We see that almost 90% of the revenue accrues through that.

Here, we've looked at the types of workloads which are being adopted in the cloud, what I was talking about earlier, but we can see that cloud is becoming a first class citizen for the execution of workload, especially things like collaborative environments, where there is a combined messaging portal, collaboration, and other things, instead of individual discrete SaaS offerings.

If we discount, if we leave SaaS to one side, the market for the infrastructure as a service and platform as a service and software infrastructure as a service, these are the supporting tools that enable those categories that are typically seen or consumed by the end user directly, were getting on for about $1 billion last year. Amazon's clearly the market leader here, and it is their market to lose. If Amazon is Coke, then there really isn't a Pepsi at the moment, we can't see anyone catching them in short order unless by combination, such as Verizon taking out Terremark, already, and I shouldn't be surprised to see additional consolidation going forward. In the IaaS market, the compute element is bigger than storage, just, we think going forward storage will be bigger. We count 160 vendors in the as a service segment, across infrastructure, platform, and software infrastructure. You can see the breakdown in terms of geography here, which reflects our Europe and the Cloud theme here today.

Bruce Milne

It is interesting to note how important Amazon is here in this case, with 59%, and the crash that happened two weeks ago is particularly relevant to all of us. He continued to talk about Europe, and a couple of interesting slides from that are the number of IaaS vendors, mostly in the US, and when you get to revenues, it is even more pronounced, with 89% here.

Moving on, this is a nice setup for our Cloud presentation next where we talk about companies, deals, valuations, who got the stratospheric multiples, and we'll hear from Dougan Milne, vice president of research.

CLOUD M&A TRENDS

Dougan Milne

Thank you. We thank William Fellows for his contribution. The data that their analysts put together are about the most cutting edge you will find on the cloud today.

We just had a broad but detailed look at the cloud landscape and the market as a whole, and in a moment we'll listen to a couple of great interviews from CEOs who recently sold their cloud-based software companies, but right now we're going to look at transactions and M&A trends in the cloud.

We first introduced this slide back in January for our annual M&A report, but I'm bringing it back today to set the tone of M&A with some of our most familiar buyers. These are acquisition counts over the past 17 months or so, and as you can see some have been more active than others. In general, acquisition activity from the largest players in the industry, those that we see here, has actually slowed down a bit this year, but please do not misinterpret that, the M&A market as a whole this year has greatly outperformed 2010, 2009, and 2008, on both volume and the value of deals. You'll remember that Amber and Alina showed us that in the index.

Google, our most active acquirer, finished out last year with 26 acquisitions. In 2011 they are just breaking the 10 deal barrier now, which is not shabby by any means, and as you can see with the rest of the group, there's still a very healthy level of M&A activity. I made predictions back in January that we'd see Microsoft return to the plate and make a number of headline acquisitions in 2011. Certainly that has yet to happen.

We just looked at total transactions from our familiar buyers. How many of those were cloud-based, SaaS, IaaS, storage, computing, etc. Clearly, as you can see from this chart, many of those deals fit that profile. When SAP announced the Sybase deal, they were quick to point out the importance of how this would help them enable enterprises to become more unwired. Of course we get that. Amazon, classically, has built their own infrastructure technologies, but it has still been placing bets on SaaS applications as we see here. Apple, on the other hand, a mix of application vendor and infrastructure acquisitions. Google, we really don't have to dig too deep to understand their interest in hosted and cloud-based solutions, but our strongest buyers here, the ones who spent the most money, who paid the highest multiples and clearly aimed to move the needle, really progress their product offerings, its IBM, Oracle, and HP. Their deals in 2010 and 2011 so far have been headline grabbers. I feel like that 3PAR deal, that was a battle and a news story for weeks, and I can't believe how high that escalated, but that is what happens when you have scarcity, competitive bidders, and cutting edge cloud technologies.

We can't exit this page without mentioning our friends from Round Rock, Texas, Dell, remember them posting their new head of M&A back in Q4 2009? While that controversy was still going on, a spokesman came out and said, “you will see acquisitions from us.” And indeed they have had a very healthy acquisition cycle over the past 18 months. They have lost some deals, too, they lost a lot, actually. They were bidders on the 3PAR deal, they were bidders on Palm, I think they were bidders on CastIron, but for all the deals they have lost, they have also had some very successful ones, and they are a very aggressive company, and I like that.

I've grabbed a few cloud infrastructure deals here, and not to dive into them in great detail, but I want to give us an understanding of the values and the spread of metrics that we see in this space, deals ranging from low double digits, like RackSpace's acquisition of CloudKick, that was a $29 million deal, into the megadeals. William Fellows just talked about the Verizon and Terremark deal, the $1.4 billion dollar deal. This has been talked about a lot and it is a very strategic transaction. It positions Verizon to compete directly with Amazon's cloud, and as William also mentioned, this is Amazon's market to lose, they are the undisputed leader in the IaaS space, but this was a smart one by Verizon.

We look over at Savvis, they paid what we would consider more on the traditional side of valuation, 2.6x trailing twelve-months revenue (TTMR), this was a market share play, they didn't gain the high multiples they are used to seeing in the cloud, and then we look at the opposite side of the spectrum, a huge multiple paid by Computer Associates for 3tera. I almost feel like Dell was a bidder here as well, but I might be wrong. 3tera, another very strategic deal, a company that allow applications to run, to be scaled across multiple servers simultaneously. This deal was for $100 million at 33x 3tera's TTMR, which is just wild.

As we look at application deals, in the bottom right hand corner, this was a Corum deal. We were the advisers to 360 Scheduling out of the UK. They had developed a suite of cloud application servicing the field work force management space. John Melotte mentioned them earlier and he was the guy who worked on this deal. Essentially they do scheduling products for remote work force, and IFS is a more traditional ERP company, a global company headquartered in Sweden, but this was a great opportunity for them to pick up a cloud-based offering to compliment their more traditional ERP and supply chain.

Again, looking at more traditional companies, Johnson Control there on the top left is a well-known automation vendor, they acquired EnergyConnect, which provides them with SaaS based energy demand response management, which bodes well for Johnson's energy solutions and services.

CDC, another ERP company, on the bottom left, spun out of China.com a few years back, and they are now publicly traded. They acquired TradeBeam about one year ago, not a huge deal but a solid one nonetheless.

Then, on this page, we've seen a few traditional license companies with IFS, CDC, Johnson, but we are seeing SaaS companies as well, see SumTotal up there, they already have an existing SaaS platform as a talent management vendor, in fact, 80% of their existing revenue is recurring, so they understand this model well. They paid nearly 4x for Geo Learning's TTMR and that was acquiring a SaaS e-learning suite. Highly complimentary deal to round up and complete their product portfolio.

Disruptive is probably not the perfect title for this slide, but I chose these deals because they were, to me, interesing. Dell acquired Boomi. What makes this deal interesting is not that it is a huge deal or even all that disruptive, but it addresses a very significant issue in the world of cloud-based applications and that is that customers, when they move from their legacy systems to the cloud, they bring a lot of data, a lot of legacy applications, and they run into the problem that many of those resources are still sitting behind the firewall. Dell has originally been partnering with other integration providers, they have even been partnering with their competitors on this, who have been helping with that transition, but it has been of no help to Dell's bottom line.

Boomi has developed a series of solutions to navigate these integration problems and this transition between legacy and the cloud, a very smart acquisition.

On the left, Visa. Everyone on the planet knows them, except possibly little kids coming home, playing video games, learning how to use social networks, so what makes this so special is that Visa is now competing directly with the likes of Facebook, Google and Zynga. Playspan, the company they acquired, develops social transaction processing, in-app transaction processing, gaming credit systems, and virtual token solutions, so essentially microtransactions for social and gaming, which is a seriously hot ticket right now. We saw Google acquire SocialGold last year for their token and credit system, Facebook launched their credit solution for in-app transactions and micropurchasing, and Zynga is actually sitting on top of that same Facebook platform for the credit.

Now Visa joins those ranks and they will compete in this very fast-paced market that is getting big, quick. Remember, we still haven't heard anything from the potential elephant in this space, and by that I mean PayPal. We haven't heard any big announcements from them yet, but I don't think it will be long before we see them making some strides in the microtransaction space. We'll keep an eye on that one as well.

Quickly here I just want to put some clarity on these numbers. We've already seen the top chart, earlier today, which was based on public trading multiples, and this spans the entire spectrum of the software and web industry, not specific to the cloud. However, the bubble at the bottom there shows a different set of multiples, which is Cloud transaction metrics. Both of these are very important variables in the valuation process, but you can see the shocking difference between the multiples in the standard industry versus those that are specific to the cloud.

CLOUD SELLERS

Bruce Milne

Let's move on. We have some great guests with us today and I will use this opportunity to transition in into the next section of our webinar, which is cloud sellers. Over the past few months, I've been communicating with Nigel Thompson, who is the founder and CEO of CloudSync, a mobile device management company, based in Colorado. Last year he sold his company to Good Technology on a very healthy valuation. We're pleased that he was able to give us a few quick words about the transaction. He has extensive experience and has advice other CEOs who may be looking at the M&A process in their future.

Nigel Thompson

Hi, this is Nigel Thompson, former CEO of CloudSync, a Colorado company and now VP of Cloud Services for Good Technology. Earlier this year I sold my company to California-based Good Technology, and so far the integration has gone really well, both from a technical and personal level. My company developed a suite of products, primarily for developing, securing, and supporting mobile devices over the web, that was a SaaS offering and it was actually very synergistic and a compliment to Good's product portfolio for the mobile enterprise.

At CloudSync we decided early on not to take any venture capital, but rather to bootstrap the company into profitability by building a really solid product and getting it to market quickly, getting a pilot customer going, and to start to really build sales momentum. We focused also on a channel sales program, which was a lower cost for us, and we certainly utilized the web to get the word out. Ultimately I believe that this made us quite attractive. As a boot strap there was no outstanding debt for an acquirer to pay off and no additional investors to get past the acquisition.

This was my first time going through the M&A process, and I would imagine that like any other CEO who sold their company, the transaction process, no matter the outcome, has its obstacles, challenges and hurdles. However, I was told by my attorneys that this transaction went very smoothly and I think a lot of it had to do with the fit. It was a very strong product fit. From a corporate perspective, we didn't have any debt, and we didn't have any investors to negotiate with. We had a really good relationship with the buyer from the start.

In the end I suppose my advice to CEOs out there who may be considering an eventual M&A is to think through these three key things:

One, it is all about the product. You have to have that functional product with a market that is sufficient to attract the right customers if you want to attract the right buyers or investors. You have to build that momentum.

Two, do your best to boot strap. It is hard, but again the less that you have borrowed, the more attractive you are. Once you are ready you can really use the funding to accelerate growth in your company.

Lastly, find the right match. Whether it is an investor, a VC or a potential buyer, there must be product synergy and it has to feel like this is the right thing to do for the company and your employees.

With that said, I wish all the CEOs out there all the best and hopefully it will be a profitable company for you. Thanks.

Bruce Milne

Thank you, Nigel. Nigel's a native of Colorado where he founded CloudSync and we appreciate his contributions here today and wish him the best of luck with his new position as VP of Cloud Services for Good Technology.

Now, our next seller is Jeff Hook, and we have him on the line today and I can honestly say that this was a transaction made in heaven. Jeff was the founder of Fellowship Technologies, which provides a SaaS solution suite for church management. He experienced great growth over the past five or six years and ultimately was acquired by the Active Network just a couple of months back. Jeff, we're glad to have you with us here today to share your story.

Jeff Hook

I want to say thank you to Corum for this opportunity to tell the Fellowship Technologies story. For a little bit of background about our business, Fellowship Technologies is a SaaS for churches. We are subscription based, or an application in the cloud, if you prefer. We do own and operate our own servers in a co-location site that provides us power, HVAC and bandwidth.

So, we pretty much are in control of our own destiny. We started the company in 2004 with a total investment of $3.1 million from a group of not VC, but VRC, Very Rich Christians. We became cash flow positive in year three and then last year we did right around $9.9 million in revenue. We currently have around 1800 churches in more than 11 countries now, we currently have about 90 employees and we had a unique start for the company in that we bought some IP from a large church here in Dallas. We have grown in revenue between 15% and 25% every year since inception, even through the great recession, so the company that we sold to thought that we were a pretty good target.

But we believe that we are much more than just the re-platforming of a traditional church management system. Instead we are using the web to really transform the church into a more process-based organization that can serve its congregation and its community better. Really utilizing the power of the internet to go across platforms, if you will.

As for our acquirer, Active Network is a software company that helps organizations with web-based registrations and other types of web-based software to power the world's activities and connect people with the things they want, love, and need to do. You may know them as Active.com and if you're registered for a marathon or race or done a corporate event you have probably used their software.

Last year, Active did around $280 million in revenue with business all over the world. They have primarily been VC-backed with a rather large investment from ESPN several years ago. Now we filed our S1 in February, about two weeks after they purchased us and we are preparing to go public. Like good comedy, timing is everything, so I think it will be very good for our owners.

As a matter of fact, recently Active was named one of the top 11 tech company IPOs in 2011 by the Business Insider Group.

Active had wanted to get into the faith-based arena for quite some time and they had been knocking down my door since 2007. Instead of saying no, I just kept saying no, not now. Then, in 2010, I started to seriously listen and tentatively agreed to sell for what I knew was a very good valuation. As the stock market had begun to improve, I really started to believe their story and that it would make sense to do an IPO. I also had more leverage to negotiate our valuations, due to the market improvement.

However, as the due diligence progressed, we chose to back off of the LOIs. This was due to a couple of reasons, the most important of which was how to deal with our employee ownership and the problems associated with them being uncredited investors. We also knew that Active wouldn't go away and we finally agreed to another offer about 9 months later that took care of the issues from the previous offer. We're now about three months into the integration and it is going very well. I recently commented to both the CEO and President that in five years this acquisition will be perceived by the church market as ingenious.

My three big takeaways are:

One, if possible, look for a strategic acquirer. To us, this was not the end but instead just a point at the crossroads for us to move onto another path.

Two, when you're ready to sell, be prepared. Based on the original due diligence, we learned some things and moved to GAP accounting and made other process changes that the active due diligence process had brought to the surface. This actually prepared us better for the integration and made it much smoother.

Three, don't fall in love with the deal emotionally. Look at it as a business deal so that you can keep your head about you.

That's it for me, I'll be happy to take any questions if there are any.

Bruce Milne

Jeff, thank you. We'll get to your questions in just a minute. One just came in, “I'm a christian, can I get the list of those VRCs?”

Before we move on to the questions, and we have a bunch, just a quick announcement. As a lot of you know from this webcast, Corum is the leading educator in the world on tech M&A topics. We do over a hundred events a year, online and live, we sell more companies than anyone, and those educational events and co-sponsorships and constant transactions provide a wealth of experience and information draw to help you in your own efforts to harvest your wealth, as we just saw in these presentations. Wonderful stuff. Now you can better access that information with the new Corum iPhone app. It is free from the Apple Apps store. You can message our staff globally, check weekly education schedules, follow the software M&A market, specific deals, our blog, sample tech M&A monthly webinars, and access recent transactions, whitepapers, and so on. There will even be language versions coming. This is a great app and we're very proud of it. It was developed by our friends at Nanaimo Studios in Canada. Nanaimo are the makers of the award-winning idea organizer and other great products.

As we saw in Jeff's presentation, we're seeing a shift, and he went through the dynamics of thinking about the market, not now to an offer, and then another offer. Things are shifting from a buyer's to a seller's market, and in that regard education is increasingly important. With that idea, let's hear from Daniel Holland, who is our conference chairman about our upcoming schedule.

Daniel Holland

Thank you, Bruce. We're very excited to announce 10 live events coming up in the next two months in five different countries. As attendees today you are granted a complimentary VIP pass to attend any one of these events for free. Please keep an eye on your inbox for a message from Bruce about this in the next few days.

Check out our full calendar in the events section of our website and please don't hesitate to let us know if you'd like a calendar for events closer to you. Thanks very much.

Bruce Milne

Thanks, Daniel. Having done this for 20 years, I can say that the better educated you are, the higher your chances for success and the better your value. Ward, let's turn it over to you for a little bit of time on questions.

Ward Carter

Thanks, Bruce. Just a couple here. This is a question I'd like to bounce to Jeff Hook. Jeff, a lot of press on the recent outages experienced by Amazon. Are any of your users feeling nervous about the reliability of the platform or is it impacting your sales process in new clients?

Jeff Hook

Not really. The software as a service, when we first started back in 2004, people were concerned about putting things in the cloud, but recently it has not appeared to even be an issue any more and I think that part of that comes from the fact that our uptime is so great. We can actually deploy new code during the day while the system is up, we've written some stuff to do that. We're real believers in being able to deploy often, so even though the church environment is slow to embrace some of that, we've seen a big switch in the last two or three years that it is not even an issue.

Ward Carter

Thanks, Jeff. We had a questions regarding patents, and Elon's comments. Elon, you said that M&A due diligence needs to support the business utility of patents. The question is how could it not?

Elon Gasper

Well, one example Ward would be that if you said your patent rights were valuable, because, say, they could be enforced against an infringer, and you figured that you had that pinned down with assignments from the inventors, but in due diligence you have to be sure, do you still have the inventors under hire? Do you have them under contract for future support in a trial? Acquirers know that when it comes to actually enforcing a patent, it is possible to do it without the inventors, but they can make the argument that it is harder and that your valuation should be reduced accordingly.

Ward Carter

Okay, appreciate that Elon. That concludes our May M&A monthly. Thanks for attending and thanks to all of our speakers.