May 2013 Tech M&A Monthly

May Tech M&A Monthly

Bruce Milne

Welcome, I’m Bruce Milne, CEO of the Corum Group. We have quite an agenda for you today. Our theme for this month’s Global Tech M&A Monthly is Ten Steps to Successfully Sell Now. As we’re going to see, it’s a very hot market, so how do you take advantage of it?

Our agenda: We’ll have a Field Report, get updates on some transactions, we’ll look at what’s happening in research and deals, and then we’ll go to our special presentation, with multiple speakers, Ten Steps to Successfully Sell Now.

Field Report from Stockholm

Let’s first move to Stockholm and hear from Mark Johnson, who recently completed a transaction. Mark?

Mark Johnson

Thanks Bruce, and good evening from Stockholm. In spite of all of the negative economic news surrounding Europe such as the shrinking GDP, weakening Euro, and disparities between the core economies and the periphery nations, we at Corum and seeing excellent M&A activity in the tech sector internationally.

Here are a few of our highlights:

• At the beginning of the year we closed the sale of A+W, a divestment of Glaston corporation out of Finland, to Friedman Corporation in the US

• This was followed by our sale of Resonate, out of the UK, to OpenText, the NASDAQ listed Canadian enterprise information management company

• Discussed last month by Jon Scott was our sale of SolveDirect, out of Vienna, which is being acquired by technology giant, Cisco

• And here in the Nordics, we just closed a deal selling Expert Systems, out of Stockholm, to Readsoft, a Swedish listed company that develops, markets and supports software that automates the processing of documents, such as invoices, in different business processes and ERP environments within organizations.

Our client, Expert Systems is a supplier of SaaS solutions for eb-usiness. It has one of the leading cloud based networks for exchanging e-invoices and other electronic documents in the Nordics. It was interesting because the best acquisition partner for our client ended up being a domestic market leader in its industry. However, our global process attracted significant interest from other European and blobally leading e-business, ERP players, and IT solutions providers.

The deal metrics were very positive for our client at about 4 and a half times revenue.

For the buyer, this acquisition helps them tremendously at building out their cloud offerings and provides excellent upselling opportunities to its international client base.

All in all, a great deal for buyer and seller.

I look forward to updating you again soon as we have another European client currently in LOI, with other engagements ongoing attracting significant interest from global tech buyers. Thanks!

Bruce Milne

Thanks, Mark. We’ll have a number of further transactions to mention over the next sixty days.

Tim, we have a bunch of upcoming webcasts, why don’t you tell us about those?

Tim Goddard

Yeah, we’re looking forward to the next three months. In June we’ll be looking at hypervaluations and megadebt. Hypervaluations, how you get them, who is giving them, and what they’re giving them for…and megadebts, the flip side of that, which is sort of driving it.

On July 18 we’ll have our mid-year report, and it’ll be one of the most interesting mid-year reports we’ve ever given in tech M&A, so you won’t want to miss that.

Then, on August 8, where the rubber meets the road, we’ll be hearing from the folks that have sold in this hot market, and we’re really looking forward to hearing those stories.

Bruce Milne

We have a record number of closings coming up, and we’re going to hear from people how they got maximum value in today’s environment.

Corum Research Report

Now, let’s move to Corum’s Research Report. We had our quarterly last month, with all 26 sectors covered. Let’s get the highlights from the last month from Elon Gasper.

Elon Gasper

Thanks, Bruce. A lot’s happened in Q2 tech M&A already, as the soaring public markets reached new heights. Their record breaking performance, cash in the strategics’ coffers, and PEs eagerly chasing platforms, bolt-ons, and buyouts whipped up a frenzy of tech M&A activity we’d not seen since the giddy days of the ‘90s bubble.

At the megadeal level a $25 billion bidding war continues between DISH and Softbank for Sprint, while Bain and Golden Gate led a PE buyout of longstanding enterprise software provider BMC.

Other highlights from our 6 sectors include:

• Another billion dollar PE deal, for systems integrator Compucom, two multi-hundred million deals for Stonesoft and BGC, companies that commanded 7 plus multiples from Intel and NASDAQ

• A teen YouTube channel picked up by Dreamworks just before Google announced it’d start charging for some channels

• A sale by us here at Corum of Sweden’s Expert Systems to Readsoft this week, as Mark described, plus others in Q2 we can’t announce yet

• And, in the consumer sector a brilliant augmented reality driver safety app where you stick your smartphone to your windshield so its camera can watch traffic ahead and warn you of hazards brought in $8 million from Harmon. Not bad for 6 guys in Israel who won funding in Qualcomm's QPrize last year.

Across all sectors, Intel and Facebook, who tied for second in our top acquirers last year, kept up their blistering pace with development and mobile related dealflow; France’s Dassault returned to M&A with a vengeance after a year off, suddenly rolling up 3 more simulation and modeling companies; and TripAdvisor continued to consolidate travel websites. Exciting times, Bruce…

Bruce Milne

Very exciting. We’re in discussions with all those folks! Nat, you were just in France last week talking to Dassault?

Nat Burgess

I was, I was just outside Paris in the suburb where all the military and quasi-governmental industry is located. Very, very smart teams there, very active in tech. I think we have two deals we’ll be highlighting today that they have recently closed and we’re continuing to see a really strong surge of activity in Europe, just as Mark described.

Bruce Milne

As well as here in the US. Elon, I’m looking forward to next month: Hypervaluations and Megadebts, how that’s affecting M&A.

Ten Steps for Successful Selling

Now let’s move to our special report. My voice kind of left me in Asia, where I was meeting with entrepreneurs in Shanghai, so I don’t trust myself, so I’ve asked a few of my friends to join me on this segment.

The ten steps that we’re going to be talking about are these:

1. Decision
2. Preparation
3. Research
4. Contact
5. Discovery
6. Negotiation
7. Due Diligence
8. Closing
9. Integration
10. Living with the Deal

To help me start out, we’re going to turn this over to Jim Perkins, who will tell us about the Decision.

Jim Perkins

Thanks, Bruce. The decision to sell your company involves many factors. First, how is your software sector doing? Is there growth in your business and in those in your market? Are buyers active in that market?

You need to determine what valuations have been realized in deals in your market/sector, and what other factors are determining value. Research and intelligence are vital to making your decision to sell.

In addition, you don’t want to miss the opportunity to sell at the optimal time. If you miss this window, your value may decrease dramatically. What happens if your competitor sells? Will it put you out of business if they do? You should be in the market selling your company before your competitors are, to avoid this potential disaster. Keep your eye on the market, deal activity, and valuations to keep you from avoiding that window that may never appear again. Timing is key to your decision to sell.

Bruce Milne

Selling your company may be the most important transaction in your life, so timing is critical. One of the reason we’re having this special conference today, we here at Corum have been at this for 27 years and we haven’t seen a better time, maybe only exceeded by the dot com period in 2000, it’s just extraordinary.

Now, let’s move to Jim Allen down in Portland, Oregon. Tell us about Preparation, Jim.

Jim Allen

When we talk about preparation, we’re talking about setting tasks and a timeline. You have to allocate resources, and start your own internal due diligence before they start asking questions.

Buyers have a due diligence check list of items they will ask for before completing a deal—everything from articles of incorporation to tax returns, to organizational charts to IP documentation, plus much more. Sometimes much, much more.

You should also compile a business and marketing plan. Have your financials and projections updated and presentation materials for all of them.

It’s important to have all these key items kept in a secure electronic repository or data room. There are many inexpensive solutions to choose from.

There are a few other things to be prepared for:

• Correct any irregularities in your financial reporting – it can cost you in your valuation.

• Format financial statements to match those of other public companies in your market.

• Be prepared to provide updated financials quickly on short notice.

• Be aware that audits are almost always required.

• Prepare projections on a stand-alone basis. Don’t rely upon the Buyer’s resources to make your numbers.

• Be realistic in your projections as often times earn-outs can be tied to them.

• Lastly, we have a due diligence checklist we use with our clients that includes 99% of what the buyers ask for-- if you would like a copy, please drop us an email and we’ll send you one.

Bruce Milne

Thanks, Jim. There’s an old axiom in our business: The better prepared you are, the better your chances, to find the right buyer, get the deal you want, and so on.

Now, let’s go to Research with Ed Ossie in Kansas City.

Ed Ossie

Step two in the process is research, research on the buyers and frankly, through the eyes of buyers. We compile an A and a B list.

M&A for technology has changed, non-tech companies have been moving into the mix for years.

It is rarely just the usual suspects these days that take a detailed look at the companies we bring to market.

So what happens in the research phase? Well, we prepare a strategic analysis on each buyer, we also prepare a preliminary valuation, and determine proper contacts. Determining the right contact is a critical step. Off-target phone calls and emails are a waste of time for everyone.

We don’t think that’s effective, it’s a discredit to the seller and it is not how you develop a reputation for quality with the buyers as we have across 27 years of service.

We also try to walk in the buyer shoes to the extent that we can and prepare a specific position statement for each buyer.

Back to the A & B list because the results of the process are important

The A list are the logical players you might easily rattle off as probable interested parties. But we always put together a B list of companies who are well qualified, have been making tangential acquisitions that are not really obvious or easily understood. In completing the research step, we find that interest still actually comes from the A list buyers most of the time, but barely most. 40% of the time it is a buyer from the B list or long list that expresses interest as well. 

As you’d expect different buyers have different reasons for buying you. While research is the 2nd step it gets a continual real time update throughout all of the steps in the Optimal Outcome Process.

Bruce Milne

Excellent stuff, Ed. Now, let’s go to the next step in the process. Jeff Brown, down in Texas, tell us about Contact.

Jeff Brown

Thank you, Bruce. This is the stage where the fun really begins, when we step into the market and start to engage buyers.

Once again our goal here is to create a market for the shares of a private software company, your company. We do this by once again being well-prepared, by educating buyers, and building a sense of urgency. We rely on direct personal contact and our message fits your company into theirs, highlighting the big impact we can have on their business.

Our disclosures are discreet and confidential, backed by NDA agreements. Remember, buyers are busy, and it will take several contacts to reach the right folks and get their attention. Typically it takes six contacts to get to the first meaningful discussion and 29 to get to negotiation.

From the start, we want to understand how each buyer will assess this opportunity, the interest level, and of course, how they approach valuation and deal structure. We continually assess whether their expectations and ours stay in alignment, and of course we’re constantly listening, learning, and fine-tuning our approach.

Most of the likely buyer are on our A list, but a good number of interested parties will come from the B list. Successful sellers are open-minded about a broad process, we learn a lot about our strategy, positioning, and messaging from our discussions with the B listers, and we want to put those lessons to work with each new buyer contact we make.

Thanks, Bruce.

Bruce Milne

It’s interesting, we keep track of all the work we do for every client, and keep all that information on everything we learn about the offers and due diligence and so on. There is between 700-1000 contacts on average per engagement, sometimes up to 2000. It’s amazing who the buyers are, going back to Ed’s comment, we’re seeing new buyers every day, many companies you’ve never heard of, with extraordinary wealth, and they want to spend it.

Let’s go to the next stage here. Rob Schram, Director here at Corum HQ, tell us about Discovery.

Rob Schram

Discovery is where you and potential buyers learn about each other’s position. As the famed philosopher, Yogi Berra, commented, “You can observe a lot just by watching.” Put differently “you can learn a lot by asking the right questions – and listening.” Remember, if you want an optimal outcome, you control the process.

Initial buyer qualification is accomplished in the Contact phase, so in Discover the goal is to explore serious buyer interest and fit, and select a short list of candidates suitable to acquire your company. Process efficiency in this stage is important because as the buyer interest increases, so does the load on your management team for calls, presentations, and visits.

You’ll want to establish and refine your technology review process, prepare your formal valuation report, develop synergy and contribution analysis, put NDAs in place with customers and other parties as appropriate, and complete your due diligence on buyers.

During this phase it’s important to build and maintain a sense of urgency and increasing focus with the buyers, so be careful to bring qualified candidates up-to-speed in parallel, orchestrate and support their evaluation of your company, and then move the process forward energetically.
 
Bruce Milne

I love Yogi Berra, that’s great, thank you. One of the things we teach in our Selling Up Selling Out conference, which is the most-attended conference in history on the topic of how to sell your company, is active listening. You learn a lot just by listening, people spend too much time talking. They’ll tell you why they want to buy you, they’ll tell you what’s important, and you can leverage that knowledge in your final negotiations and valuation structure.

Now, let’s move to the next stage, a critical one, Negotiation, and we’ll go back to Mark Johnson.

Mark Johnson

Negotiation is all about balancing the diametrically opposed positions of buyer and seller, essentially broken down to price and risk. When it comes to price, you want the buyer to pay at least the intrinsic value of the company, that is, the actual or true value of the company based on all aspects of the business, plus you want the buyer to pay for those synergistic values as well, which will differ from buyer to buyer and is where the real salesmanship comes into play.

With risk, you want the buyer to take most if not all. Logically, the buyer wants you to assume all the risk for an infinite amount of time. Our job in advising the seller is to work toward achieving the best possible outcome according to their objectives.

Tactics we employ in the negotiation phase include

• Creating competition through an auction process. Nothing improves your negotiation power more than having better options.

• Reveal problems early while leverage is highest.

• Be specific in the LOI. We drive the buyer to spell out reps and warranties in the LOI to gain the clearest understanding of the level of risk being shared.

• Avoid or limit the no-shop. Once in exclusivity the power shifts dramatically to the buyer.

• Tie exclusivity to buyer achieving milestones. We do this by detailing a schedule to closing throughout the LOI phase.

• Be willing to negotiate a creative structure to close the valuation gap.

• Lastly, close as quickly as possible. As we often say, nothing good happens between LOI and closing.

In closing, I’ll say that negotiation is a process, not an event. Negotiation takes place from first contact with the buyer through closing and it takes place every step along the way. Early and personal contact is essential. Use your intermediaries, especially as a way of taking the head during contentious discussions. Thank you.

Bruce Milne

Great stuff. It’s crucial to create an auction environment. Way too often we’ve had people say, “Let’s just work with this one company that approached me”. You have to remember that the first approach is usually someone who just wants to buy you cheap. Seventy-five percent of the time there’s someone willing to buy you that will pay more. If you go through the process properly with a global search, your value will improve by an average of 48%.

Let’s stay in Europe and go to Jon Scott in Amsterdam for information on the critical process of Due Diligence, getting the deal done. Jon?

Jon Scott

After you complete negotiation and have a letter of intent in place, you actively enter the due diligence space. At the simplest level, due diligence is a confirmation of what you’ve presented during the process, and it allows the buyer to confirm their assumptions of what they expect after the deal closes. This can be a difficult stage, and it is where a lot of deals die. If mishandled, it can be a minefield.

At this stage, the buyer verifies financial statements and digs into your financial projects, and will make the call as to whether they may need outside opinions to complete the transaction. Here you will establish a confidential data room where diligence materials will be placed, they will be technical, leadership, and ownership due diligence. For example, do you have ownership of all the intellectual property? Do shareholders have the rights to share their stock? Are there any pending lawsuits faced by the company. The buyer will often want written explanations and flows of the business model and the methodologies to understand how you do business.

Finally, the initial drafts of the complete definitive agreement are provided, and then the final agreement is negotiated. As was mentioned in the preparation stage earlier, a lot of the mystery and risk in due diligence can be removed by simply planning for this at the start of the selling process.

Now, let’s move on to closing.

Bruce Milne

Let me make a comment before we move on. It’s absolutely essential that you do your preparation, know what they’re going to ask in due diligence, know the questions that are going to be asked, that’s why we keep every due diligence checklist from every buyer in the world and we’ve done more transactions, sold more businesses, than anybody.

Now let’s go to Ward Carter, our Chairman, to talk about closing.

Ward Carter

Thanks, Bruce. This is my favorite part of the process. After a multi-month effort, you are ready for this all to end. Due diligence is complete, the legal agreements need to be finalized, along with last minute items like final disclosure schedules, employment agreements for key people, and maybe a tax opinion. The signing is generally accomplished when the lawyers release electronic copies of signature pages for buyer and seller.

Ideally the signing and the closing take place simultaneous, but in many cases the closing may be delayed until regulatory approvals are complete, or while other shareholders approve the deal.

The closing is often anticlimactic as the sellers and buyers are really at the same locations, and the exchange of funds occurs electronically with a wire transfer to the account of the seller. Now everyone lets out a sigh of relief as the deal is completed and the sellers are rewarded for the years spent building the company. Now it is time to make this merger work.

Bruce Milne

So, let’s talk about how you make it work. We’ll go to Peter Andrews in Ottawa for Integration.

Peter Andrews

It would be great if the last step were closing, but it’s not; 52% of M&A deals don’t meet the expectations of the buyer or seller. There is a lack of advanced planning, a lack of resources, or the synergies and execution plans haven’t been clearly identified and communicated.

The roles and retention plans for key resources have not been thought through and planned. We see companies do a great job at valuing the deal, structuring the transaction, identifying the synergies, negotiating the deal, and getting it closed. But when it comes to integration, where are they?

Everyone feels a little bit abandoned. At a critical time when plans should be clear, roles well-defined, and communications at their highest level it just doesn’t happen and enthusiasm quickly wanes leaving key employees at risk. Great integration planning and execution just doesn’t happen often enough.

By the way, in integration negotiation, Europeans are different from Americans. Europeans like to get to know who they’re buying, because you’re going to be living and working together and relationships are really important. Some German guy who is buying a company will ask individuals at the company in question if they would like to go sailing with him and his wife over the weekend. And that seems normal because they’re going to be working together.

American sellers can be put off by this; they’re used to doing things with a couple of emails and phone calls and maybe never even seeing each other!

Getting integration right starts with clear expectations and dialogue during the Discovery and Negotiation stages and continues for long past the Closing with well defined, communicated and executed integration plans.

Bruce Milne

That’s a great point about the international buyers. Around 70% of our transactions these days involve a non-US buyer or seller. We have a broad effort in Asia, the Arab world, Latin America… We’re finding that one of the key ingredients in these areas is in the building of relationships. They handle the negotiation, the getting to know you, much differently. You need to be patient. But those transactions can be the best ones, as we’re seeing today in our tombstones.

Let me go on to step number ten, Living With the Deal.

What we’re talking about here, is, well, first you go fishing with Corum. For twenty-three years, we take our clients to celebrate and give them a thank you by going fishing.

Be sure there are no deal regrets. What this means is, did you sell to the right buyer? Are they carrying your dream forward? Are you comfortable with price and structure?

The only way you get this, by the way, is going through a full global process professionally. Contacting just a few firms, you won’t find the right buyer, you won’t have the leverage, you won’t be able to create an auction environment to get an optimal outcome: Best price, best structure.

What Peter was talking about, were the employees taken care of in the integration? This is where we find both buyers and sellers don’t quite do their job. And who is the big loser? Not the employees as much as you, because your reputation stays with them. These may be your friends, they go to your church, their kids go to school with yours, whatever. You don’t want them looking at you or hearing behind your back about what you got and how you didn’t take care of them. You don’t want that. Figure out how to take care of them.

Also, think about wealth management. Selling your company is about changing your life. What are you going to do with the money? A lot of people just become very conservative. Think about where you want to make some investments, public or private. Are there things you want to do? People you can help out? What role will you now play?

Maybe you’ll join the World Technology Council if you’ve worked with us. These are leading experts and futurists and former clients, in the process of spotting new technology and working with us around the world. We hope that you become a client and join the WTC.

We’re just at one minute to go, but we’re going to answer a critical question before we go.

“Any sense of how long this market might continue? Have we got six months, two years…?”

That’s a tough question because no one knows for sure. Let me tell you, we’ve been at this longer than anybody, sold more companies than anybody. In 1987, we remember a peak, then it crashed. We felt that in 1990, 1992, a little in 1996…From 1999 to 2000, it was a run-up. But it was actually a spike in 2000 with a lot of pent-up demand because of Y2K. Then we had a bottom a very slow period through 2003, 2004, 2005, and then it started to pick up again, 2006, 2007, it ran about 18 months, like the 1999-2000 thing. Then, of course, we saw the great “recession” come along and everything just crashed. We were still busy because companies in trouble have to sell, buyers still have to do strategic buying, the PE guys still have a lot of money, but the valuations go down, there’s not as many buyers, it’s not as active.

Right now we are seeing a confluence of cheap money, lots of buyers with lots of cash, PE guys with record amounts, there’s about $1.5T out there, lots of new buyers, lots of disruptive trends, high stock market…it’s all the elements that make the markets go up. So, I ask you back, how long do those things stay? If we have a crash in Europe or problems with Iran or North Korea, or suddenly all this debt comes back to haunt us with inflation or whatever, I can guarantee you it will drop off.

What I do know is this: Don’t wait to go to market. Everyone worries about timing. I tell you, it doesn’t hurt to go to market early. We find that if people go to market early, and it doesn’t work out, you at least build some bridges, you learn a lot, you may not find a buyer, but you’ll find those who are interested in doing joint ventures, and you will create more value. It never hurts to go to market, I wouldn’t wait, because the market can consolidate.

Good question! We’ll get back to you individually to answer the other questions we received during the webinar. Or email us directly at info@corumgroup.com and we’ll put you together with one of our deal experts.

Thanks for joining us.