October
7, 2010
Ward
Carter
Hello
and welcome to Corum's October monthly report.
This monthly event puts current events and economic news in a context
relevant to software executives who are building their companies and preparing
for strategic transactions like M&A.
Thanks
for joining us. I see that the registration list shows over 240 software
executives from more than 20 companies, both in North and South America, as
well as Europe, Asia and Australia. We
have some of our first representatives from Romania, Estonia and Argentina on
the call today. This is truly a very
diversified, international group.
This is
our agenda for today, for the next sixty minutes, including an update on
Google's recent M&A activities. I'm
Ward Carter, chairman of the Corum Group, based here in our Seattle, Washington
headquarters.
Our
slated speakers today including Miro Parizek, managing director of the Corum
Group Internationa, which is based in Munich.
He'll start off, followed by Tomoki Yasuda, Corum's senior research analyst,
who is providing an update on the current M&A market, and then we'll turn
the floor over to Dougan Milne, our VP of research, who will be leading a
review of Google's recent buying spree, followed by interviews with Google
corporate development staff, as well as CEOs who recently completed deals with
Google.
As
usual, we will wrap up with a Q&A session.
Regarding
logistics for today, we'll try to keep this event to around 60 minutes and
you'll want to stay tuned till the end for the Q&A session. As for the Q&A logistics, please feel
free to ask questions at any time, but we'll hold the responses to them to the
Q&A session at the end. To submit a
question, please use the Q&A window on the right side of the screen and be
sure to send your question to all panelists.
If you select host or any other option, your question won't be seen and
therefore not included.
Today's
conference is also being recorded and will be rebroadcast on October 14. Thereafter, the recorded event will be
available on the Corum Group website via the conferences and events menu on the
left hand side. You can also email a
request to me or look for the archive, or send an email to
pats@corumgroup.com.
With
that, I'll turn the floor over to Miro.
Miro?
Miro
Parizek
Thanks,
Ward. Good morning and good afternoon to
everyone in the US and Canada and also those of you from Latin America. Good evening to our visitors from Europe,
Ward you mentioned some of those countries, and thanks to those of you from
Asia for staying up this late.
I'm
speaking to you today from Munich, where I head up our international
practice. I will be giving you a quick
overview before passing the mic back to HQ.
Our
research group monitors headlines from business press all around the world.
Each month, we pick out those that we wish to highlight to help frame and put
in context what is going on around the world and how it is related to our
industry.
Let me
start off Asia. There are actually
headlines from Bloomberg, Wall Street Journal, business journals around the
world. The yen is still at a high to the
dollar. This is despite their intense
efforts to weaken the yen in the middle of last month. In China, we highlighted
this in April, warning of an upcoming currency and trade collision course,
“China's Solid Demand May Weaken Case for Holding Back Yuan.” The yuan/dollar relationship has become a
widescreen public issue and the politicians throughout the US are making it
into a major campaign issue as well, as mid term elections are approaching.
At the
same time, China is reducing US holdings because of concern over dollar debt
and some of that is earmarked for Greek Euro-denominated bonds, and we'll get
to that on the next slide.
“Asian
IPO Volume Now 69% of of Global IPO Market.” This is extreme. This next one is interesting as well, adding
more salt to the wound: “Technology-related Growth Stories and Chinese ADRs
Drive US Performance.” In fact, five of the top ten American IPO performers in
the third quarter were US-listed ADRs of Asian entities such as China-based
Country Style Cooking restaurant chain, India-based online travel company Make
My Trip and Camelot Information Systems, a Chinese provider of outsourced IC
services. This makes the 69% even higher
if you include those because these foreign entities that are trading on
American or European exchanges are not included in that total volume, in fact,
in Europe, Indian-based iEnergizer went public on the London Exchange last
month.
They
aren't really doing it just yet, but Asian companies will be a driving force in
M&A very soon, regardless of where they are listed.
Moving
westward, onto Europe, where we have come a long way in a few months.
“Europe
Debt Crisis Abates as Traders See Yield Spreads Narrow.” That's good news. A stable Euro is important. China certainly thinks so as its premier said
this past week that their country will continue to support both the Euro and
Euro government bonds. China wishes to
reduce exposure to the dollar, for one, but also Europe is an important market
for them and they wish to make sure that it's stable. As we also saw, the regulators are helping
stability and able to set a reasonable balance for bank's capital reserves in
Basel.
Meanwhile,
German industrial orders surged 3.4% while German business and consumer
confidence is up. In addition, Germany
is producing more jobs than ever and on track to bring unemployment down to
levels not seen since 1992. Many are
hoping that Germany will be driving European growth. In fact, EU lifted Europe's growth forecast,
and now sees a moderate second half.
However,
European inflation has risen the highest in two years, so there always seems to
be a cloud somewhere on the horizon.
Speaking
of clouds, in the US, the recession is over but weakness remains.
As for,
ADP, 39,000 jobs were shed last month in the private sector, despite
inventories in the US rising at the fastest pace in two years and retail sales
in the US increasing for the second month in a row. But the job losses and pressure on household
debt continues unabated as home seizures reach a record for the third time in
five months. That is not being helped by
the forecast of home prices facing a three-year drop as inventory search looms. So, the 28% drop we've seen already isn't
even the bottom according to some experts.
However,
there is a sunny side to the story and that is technology. As we continue to see growth in revenues and
profits generated by innovation and also large consumer and corporate demands,
we read headlines such as these, where Nokia says that preorders for their N8
smart phone are the strongest ever seen, Microsoft tests their supersize
wireless hot spot in TV gaps, and Best Buy is to start selling the iPad
tablet. Proving that no market position
is sacred, the Android has overtaken the iPhone for mobile internet usage. Meanwhile, RIM unveiled a tablet as the
Blackberry maker chases the iPad, as well as Dell, HP and Samsung.
The
demand for these cool products is helping the vendors build up hoards of
cash. Speaking of which, let me speak a
little bit about tech finance and look at what is going on here.
What do
you do with billions of dollars? Well
Cisco is initiating a dividend that may yield one or two percent. This is certainly the sign of a maturing
industry, they have never done that before.
I find the next one intriguing, you have to find it quite interesting to
see a firm with over $30 billion in treasury going out to borrow money to use
for dividends and stock buy backs, with Microsoft set to plan a debt sale.
FYI,
the official reason is that too much of their cash is overseas. Despite Microsoft finally doing a deal this
year, they did one, they just snapped up AVIcode, a $5-10 million company just
yesterday or the day before. Others are
putting their money to use in the more traditional way, making acquisitions to
build out products and service portfolios and to create competitive
advantage. We saw last month acquisition
of 3PAR by HP, this month HP is following that with their purchase of
Arcsite. I didn't highlight it here,
IBM's own billion plus acquisition of Netezza.
I wanted to point out that it is also some of the double and triple
digit deals that are being done as well.
We have the $400 million transaction of IBM buying Blade Network and a
$27 million acquisition by Apple to buy a 15-person Swedish Vendor of facial
recognition software. All of this is
part of what we are seeing, as well as Bloomberg, with their headline, “M&A
snaps back as Intel Drives Busiest Quarter in 2 Years.”
On that
note of good news, I'll pass the baton back to the US and Tomoki will go
through our monthly Corum Index. Back to
you at headquarters.
Tomoki
Yasuda
Thank
you, Miro. As part of the research team
here at Corum, we have been collecting and analyzing data year around and we
have seen numerous developments in the M&A market. As I am flying through these slides, if you
realize that you may need some more additional information or data particular
to your line of business, we're only a phone call or email away and our team
would be more than happy to speak to you about specifics.
Getting
right into it, on our first slide we have public markets. We saw a slight slow down in equity markets
in August, but markets are steadily trending up throughout September, with the
NASDAQ making the strongest gains over the S&P and the Dow Jones
Industrial. However, we see that
historically the S&P's tech index has held the least. Overall, techs have
been making good gains.
Next we
have total deal volume versus total deal value.
This graph compares these factors in each year and as you can see, the
two metrics correlate with each other pretty closely. The green bar and dot at the end represent
our estimates for 2010 based on knowledge we have on data from the first three
quarters of 2010.
What's
encouraging is that 2010 is looking much brighter in terms of M&A, although
we are not at the 2006 or 2007 numbers in terms of estimated deal volume, but
estimated deal value does show rebounding back to close to those numbers.
Next we
have the Corum index. This represents
the overall view of some important totals, averages and metrics that we keep
records of, and since Q3 has just passed, we thought it would be pertinent to
include Q3 of 2009 and 2010 data points so you can compare and contrast
them.
Furthest
to the right we see the September 2010 numbers.
Overall, the number of transactions between 2009 and 2010 have
increased. On a monthly basis we are
definitely seeing more growth, deal volume and deal value. Just in the past month we have put up a
steady and growing number of deals not seen in the past two years.
Megadeals,
on the second row, refer to deals worth $1 billion plus. The largest deal this
quarter was Intel's acquisition of McAfee for $7.6 billion. That is probably
the largest we've seen in two or three years for a software company.
Further
down we see the average deal size has gone up from $82 million to $145 million
and to $224 million this month. It is
always an encouraging size when averages are up, but not only are the averages
up but median sale size has increased as well from $42 million to $58 million
and September it sits up top at $63 million.
Other
data points here: All cash deals are up, signaling that buyers are ready to
throw some cash around in acquiring strategic companies. Percent targets have gone down from 19% to
14%, possibly indicating that companies are stabilizing and are not in fire
sale mode any more. Percent public has
historically remained around 50% and probably will still continue to do
so.
Moving
on. On our next few slides, we will
cover the six broad markets that Corum traditionally covers. Due to time constraints, we can't get too
deeply into the subsectors of these broad markets, but if you have interest in
talking about them more or learning more about one sector, please give us a
call or email.
With
the first slide we're looking at the Horizontal Market. On the graph, we see that there is a trending
up from August to September. It is not
quite as strong as March in terms of sales and EBITDA multiples, but still
trading well at 10.7x EBITDA and 2.9x sales.
The multiples are strong and continue to look that way, moving forward.
The
deal I would like to highlight here is the acquisition of Salary.com by Kenexa,
for $80 million, all cash, 1.6x enterprise value over sales. Just a little background info, Salary.com is
a compensation management vendor for the HR space. The primary driver for this acquisition for
Kenexa was that it was a good deal and it was a filling of a strategic
gap.
What is
interesting here is that Salary.com entered the NASDAQ with an IPO in 2007,
right before that window of opportunity to launch IPOs closed during the
recession. All things considered, for how
the company was performing while it was public, valuation at 1.6x trailing
twelve months (TTM) isn't too bad. One
should note that probably the cast it raised at the beginning of the IPO really
helped it get through the credit crisis, the crunch, and probably added value
to their valuation when Kenexa was acquiring them.
Next we
have the Vertical Application market.
This segment's sales and EBITDA valuations are starting to lift up a
little, trailing that 9.9x EBITDA and close to 2.0x sales. This steady increase in growth can be
particularly attributed to the stronger healthcare and financial services
verticals as people are starting to regain confidence in them.
In the
deal spotlight I would like to focus on the Odyssey Group acquisition by Temenos. The transactions was valued at $81 million,
an all cash deal at 1.4x projected revenues.
The deal hear has more of an international flair, focusing on companies
in Europe with Odyssey out of Luxembourg and Temenos out of Switzerland. With the pickup of Odyssey, Temenos broadens
its product portfolio and enters into wealth and portfolio management software
for financial services globally. Within
the banking application market, the wealth and portfolio management market is
expected to grow more strongly, at around 25% in the next three years or
so. The reason for this is, there is a
strong push for banks to switch from in-house vetting to third party licenses
in order to improve business responsiveness and organizational
efficiencies. Since the credit crunch,
there have been a lot drive for transparency for these banks and the wealth and
portfolio management vendors are able to acquire a lot of customers through
this switch and translate that to solid growth and revenues.
The
Consumer Application market has seen its shares of ups and downs throughout the
year, but it hit its second highest mark in September at 10.2x EBITDA and .72x
sales, which is a solid increase from the general trending down of May and the
summer months.
The
spotlight deal here focuses on Open Table's acquisition of Toptable.com in the
UK for $55 million in cash. For those of
you not familiar, Open Table is a SaaS reservation management vendor that helps
diners make appointments at their favorite digs, and Toptable is a similar
service that provides reservations and reviews online. I've been following Open Table for a while,
since their IPO in 2009. Interestingly,
they were one of two tech IPOs at the end of the recession that year. Since then, the company has grown miraculously,
trading at 82% higher than its IPO price and the company has a market cap now
of approximately $1.2 billion. Their
success really relies on their solid business model, rooted in SaaS. Basically they lease their equipment to
restaurants and charge them $1 per seat fee for each reservation booked through
the site. It is great, because much like other SaaS vendors that market toward
enterprise, Open Table represents one of the most recent examples of enterprise
capabilities merging with consumer apps in the cloud. I am surprised that they are finally getting
into M&A. The company has been
struggling with their foreign operations and will probably start to pick up
local foreign sites that understand the business and marketing approach for
each specific country. Plus, they're
sitting on all that cash.
Next we
have the Infrastructure market. You'll
see a slight rise in the sales multiple at 2.5x as well as EBITDA multiples at
10.67x. The market has verticals in data
management, network management, security, systems management and virtualization
to name a few. An increase in multiples
in this sector is a good sign of overall health of the tech markets that
provide a very wide array of companies.
The
deal I'd like to focus on here is the acquisition of Netezza by IBM for $1.8
billion, cash, and that 7.6x TTM. Very
big deal. As one of the blockbuster
deals of the quarter, Netezza gets captured by the big blue wave after a little
more than three years on the NYSE. The
valuation they are getting is twice the valuation at the time of their
IPO. Under terms, IBM is offering $27
per share for Netezza, which went public at $12 a share in July of 2007. Strategically, the idea makes a lot of sense
as IBM has always considered data warehousing to be important. The primary reason for Netezza's candidacy is
their growth is going to outpace that of their data warehousing market, so they
are a shining star in that area.
More
importantly, the reason for acquisition is about gaining momentum in
technology. Back in 2009, Netezza
announced a shift to IBM Blade servers with Intel processors and the company is
focused on improving its database software to take advantage of that new
architecture. The fit just seemed right
for IBM and most likely Netezza's
technology and team will transfer to IBM's Infosphere warehouse team.
The
Internet market was in a downward trend in the summer months, but like many of
our other markets, September seems to be looking slightly upwards with
multiples trading at 12.6x EBIDTA and 2.5x sales. In this sector we have internet pure players
like Google, Yahoo!, Amazon and infrastructure guys like Akamai and Lime
Networks, very strong public companies with lots of cash behind them.
The
deal I want to focus on here is the acquisition of Tech Crunch by AOL. The transaction value was not disclosed, but
the buzz on the internet is saying anywhere from $25 to $60 million for this
blogging site. Tech Crunch will add to
the AOL brand that already includes familiar brands like Engadget, Moviefone,
and Mapquest, just to name a few. If you
aren't familiar with the site, you should be, its a technology news blog that
has great insight into the market and it is a good read for anyone involved in
the tech field, especially for those of you interested in the business aspect
of it.
The
acquisition strategy for AOL right now is to invest in as many brands as they
can, mostly brands that cut across devices and distribution channels. They are basically looking to establish these
grand beach heads on the internet that people will associate them with. In addition, AOL's CEO Tim Armstrong has
noted that AOL has a two tier business model, one focused on brands and the
other focused on content platforms. They
want to establish a platform where content companies can come and utilize that
and add value. Also, to try to distance
themselves from the dial-up business and...yeah. I can't believe people still use that.
Lastly,
we have our IT Services. Historically,
this has been a flat and stable sector.
As you can see, the EBITDA multiples have stayed constant around 5x or
6x and sales multiples have mainly fluctuated between 0.6x and 0.7x. The sector has been trading in September at
0.7x sales and 6.5x EBITDA, nothing too drastic.
The
spotlight for IT Services focuses again on an international. The deal is the acquisition of CPM Braxis by
Capgemini Group. That was valued at $293
million for a 55% stake in the company.
If you don't know, Capgemini Group is a French IT services company
involved the typical IT consulting, software development and BPO
businesses. CPM Braxis does much of the
same, they are an IT services company out of Sao Paolo, Brazil, providing the
same sort of services, but more specific to Oracle systems.
What I
want to highlight about this deal is the fact that we are starting to see
technology companies invest more and more into the BRIC countries, and by that
Brazil, Russia, India, China. The big
four up and coming countries that are starting to gain world space due to their
economic prowess. Previously, we have
seen a lot more direct investment, but they have done things like real estate,
manufacturing, oil and gas energy, more traditional markets, I guess. Nowadays
we are starting to see a wave of investments from the technology fields into
these countries. Obviously there are
exceptions like India where IT services has been synonymous with the country's
tech industry, but we really haven't heard much in terms of big investments from
First World countries and now we are starting to. Lastly, the deal generally highlights the
facts that IT services companies are always looking for talent on a global
scale to enhance coverage, cost effectiveness and reliability of the current
services and strengthen their abilities to meet growing needs of
customers.
With
that, I'd like to hand the mic back to HQ and Ward Carter.
Ward
Carter
Thanks,
Tomoki, for a great update. Next we're
going to move into the portion of the presentation on selling to Google. I'd like to invite Dougan Milne, our VP of
research to lead that, please.
Dougan
Milne
Thank
you Ward and Tomoki. Great presentation
there about our markets and some really interesting deals.
It is
funny, this time right now, this past quarter, I feel like it's been really dramatic.
We've had a massive fluctuation in some of the markets, coming up from a tough
time earlier in the summer and markets have really swung back in a positive
way, which is great. We've only seen on
the M&A side some pretty intense bidding wars and some very high
valuations, so an interesting time for sure.
Corum
was just the platinum sponsor this past Tuesday, so just a couple of days ago,
at the World Financial Symposium's Growth and Exit Strategy conference in
downtown Seattle. This is the first time
that the WFS has been in Seattle. To be
honest, we were a little nervous about what the turnout would be, it turned out
to be fantastic, as a matter of fact, we had the greatest attendees and a great
level of attendees, a lot of entrepreneurs with excellent start ups. Then, our speakers, our participants, our
content was all really high level stuff.
Steve Singh from Concur was a keynote speaker, Peter Coffee from Salesforce,
all the big Corp Dev guys from most of the major companies and a lot of the big
VCs were there as well. It was a great
day for everybody that was around.
We're
going to jump right in here, I mentioned that WFS because I had a chance to sit
down with (xxx 26:13) and ask a couple of questions regarding Google's
acquisition strategy. He is Corp Dev
with Google, so we're going to get to his slides here in a moment, and those
questions. We also had a chance to sit
down with some of the sellers, those that Corum has represented, and others
that we have been involved with, in terms of selling to Google, so we'll look
at those in a moment, too.
But,
before we do that, I want to take a quick snapshot of 2010 here. We're looking at, call them the run of the
mill, if you will, but these are our standard big buyers across the big board,
and what you can see on the far right side is Microsoft, having just announced
their first transaction of 2010. Their
first transaction of the year! As an
analyst myself, that makes me really uncomfortable. Going down the line here, we have Twitter, Amazon,
Dell at four, Zynga and Facebook, our big social and casual gaming movers, two
of the fastest-growing companies in the world, both with 7 transactions so far
in 2010. Remember that Facebook hasn't
actually been doing transactions previous to this, they've really just started
this transaction spree in the past six months or so, so keep an eye on them,
we're interested to see where this spree takes them. Oracle and HP both have 8 acquisitions, IBM
has 13, and then Google... I mean,
they're going for a new land speed record here.
Twenty-five acquisitions as of at least two days ago, was the most
recent one, and I haven't spent enough time on the newsreels this morning to
know if something else happened. They're
just moving so fast. So, that is an average
of about 2.5 acquisitions per month.
Let's
put some perspective on that. We have
seen rates like this before. Both IBM
and Microsoft have been involved so that they would have, say, six deals in the
course of two months. But we haven't
seen this kind of a rate, as Google has now, for this long of a period of
time. After talking to Corp Dev at
Google, it seems very clear that this pace is going to continue.
Before
we jump into some of the more recent transactions, I want to take a short historical
snapshot. I picked out about 10 deals
here that happened over the past decade and how they have really shaped and
formed Google as a consumer company, as an enterprise company, and as a piece
of fiber of the internet structure.
Let's
start down at the bottom. Back in 2003,
Pyra Labs had been very much into the weblogs, which if course became blogs as
we know them today. They had developed
one of the most used blogging services on the internet, that was Blogger. Google bought that back in February of
2003. I suppose versus today where most
things are done in phrases of about 140 characters, the blogs are less popular
than they were even just a few years ago, but Blogger certainly has a
tremendous stance in that space.
Applied
Semantics. Now, you may no know the name
of this company, but I assure you, you know what they do, or what they did
before Google acquired them. Applied
Semantics developed two vital pieces of software, one was Adsense and the other
was Keyword. You know them now as Google
Adsense and Google Keyword. Essentially
what this is, I mean, this is some of the foundation for when you're surfing
the internet and ads follow you around or target you based on some of your
preferences and some of the other sites that you visit, that's what these
do.
Picasa,
web photo albums, competes with Photobucket, Flickr, etc, and God bless them,
they even have the same colors in their logo as Google, so it was a perfect
match.
Then,
speaking of logos, if you look at October, 2004, that Keyhole logo, if you were
to change the color of it, can you think of what that might be? That is actually the Google Earth logo. Google kept the logo but changed the color
when they acquired Keyhole. That was the
foundation for Google Earth and much of Google Maps as well.
August,
2005, a small company that was doing a lot of mobile UI, mobile search, and
mobile applications, Google saw something there and I tell you I know they got
their money's worth when they acquired Android, because it is now just on fire
in terms of adoption rate.
One of
the more disputed acquisitions Google made was for YouTube and I saw disputed
because it was, I believe, $1.8 billion, but they have also had to use about $2
billion in legal services because of all the content creators being the TV
media and the private content creators as well.
Everybody has tried to sue YouTube at some point and Google had to step
in and pay for those legal fees. In the
end though, I think this has been a great transaction for Google. YouTube, the largest video platform on the
internet, creates an enormous amount of impressions, and that's really what
Google's core business is, is those impressions, those viewers.
In
April of 2007, Double Click, the most expensive acquisition to date for Google,
$3.1 billion, I believe it was, and it has certainly paid itself back in
spades. Double Click is the foundation
for Google's broad web advertising platform.
That is where Google gets the majority of their revenue, so Double Click
was certainly a good acquisition.
Now, in
July of 2007, Google acquired Grand Central and immediately shut it down to any
more users coming aboard and went quite for basically two years. They re-launched Grand Central in the middle
of about 2009 under the new name Google Voice.
Grand Central became Google Voice.
It took them about two years to get all the tweaks and to get it to
Google-ize, so to speak, full integrated with Gmail and a lot of the Google
enterprise services as well. That one
has been an excellent purchase for them.
A
little more recently, Admob made major headlines when Google acquired them,
primarily because of the multiple that Google paid. This was the highest one, at least reported
that we've seen for Google, I think it
was 37.5x TTM. Admob, similar to what I
said about Double Click, was a foundation and platform for the web
advertising. Admob is their platform for
mobile advertising. That was a flip of
the switch type transaction, with revenue generating out of there immediately
after that acquisition happened.
I want
to talk about a couple of interesting investments. A lot of people don't know this, but Google,
along with doing a lot of acquisitions, also does a lot of investments. They tend to be a little bit quieter, but are
each significant in their own right. We
remember that for the past 12 to 18 months, there has been so much turmoil
between Google and China, with Google not necessarily agreeing with a lot of
the Chinese regulations when it comes to IP, things from IP and technology all
the way through to some of the human rights things. Back in 2004, that certainly didn't stop them
from investing in Bai Du, they had nearly 3% of that company. Bai Du went public in 2005, they currently
have a $34 billion market cap. After
Google left mainland China, Bai Du's market share skyrocketed. They were already the leader in searching in
China, Google never did officially take that crown, but Bai Du certainly took
off since Google left China and has re-established themselves in Hong Kong.
Oddly
enough, going with another competitor here, because that's really what it is,
Google also invested in AOL, a $1 billion investment for a 5% stake. That is why when AOL was still under the
control of Time-Warner, the dark ages, so to speak, I'm not 100% certain
they've left the dark ages, but let's hope so.
Especially what this deal did for Google is give them the right to power
AOL's search engine and also gave them a lot of advertising rights through the
AOL portal, so probably a good deal in the long run.
Let's
move down to the bottom left there. I
don't know the exact figure that Google invested, but we know that they have
about a 4% stake in Xunlei, which is a Shenzhen-based file sharing site, social
file sharing, maybe similar to something more like The Pirate Bay or something
along those lines. It is a heavily
traveled site, though, and Google powers their search engine, sort of a bit
torrent, FTP, eDonkey type site, and this one, I assume with the growth on this
company as well, is going to work out very well for Google in the long run.
Perhaps
one of the more recent investments, and another headline grabber, the exact
amount here is still a bit ambiguous, a bit vague. I've heard reports of $100 million invested
or $200 million. The point is they have
invested a substantial amount in what is the fastest-growing internet company
on the planet, that is Zenga. Zenga's
social and casual gaming network plugs in through Facebook and Myspace, they do
stand-alone games as well. They are
making cash hand over foot. The point is
they have been doing a lot of acquisitions themselves and this investment into
them from Google was specifically to help Zenga get the ball rolling to get
them to participate in building out what will be Google Games. We are expecting that to roll out sometime in
the next 12 to 18 months. Certainly a
very interesting investment and it will be great to see how that one pans
out.
Some of
our more recent transactions, and again, with 25 transactions to date in 2010,
staying on this pace, they will break 30 transactions no problem before the end
of the year, and as they told us specifically, and we will hear this in just a
moment, they do plan to stay on this cycle of intense transactions, this spree,
but just a few of the companies on here, I can't go into too much detail on all
of them, but they acquired reMail. That
was a very hot email program that was built for iOS, Apple's iPhone and iPad,
etc. They bought reMail simply just to
shut it down, which I thought was kind of interesting as it was taking out the
competition. Picnik, a Seattle-based
company, actually John (xxx 37:57) was at the WFS with us just a couple of days
ago, very cool guy, this is the second company that he has founded and sold to
Google. He comes up here to Seattle, he
starts these companies, and then he goes back down to the Valley to sell them
to Google. Very interesting guy.
Pump
Top is in the touchscreen space.
Labpixies does widgets for mobile and for web. There is a lot of talent there, but this
acquisition was actually in part due to the geography. They are a Tel Aviv, Israel based company. A
ton of talent in Israel, in fact, pound for pound, the greatest talent pool in
the (xxx 38:48) district. This gave
Google the extra presence they needed to expand into Israel and to tap into
that talent pool.
Simplify
Media, I actually used to use them ages ago when they first came out, this is
essentially a way for you to take your existing music collection and turn it
into a stream that you can run to any mobile device or anything like that.
Ruba is
an interesting transaction because it was essentially a competitor with
something like Kayak or Orbitz, something like that. Google has not yet exploited that
transaction, it will be interesting to see if they get seriously into the
travel space.
Other
ones on here, Plannr was just acquired, another Seattle-based company,
Instantiations we're going to move on to in just a second, Social Gold as well
we'll talk about in just a second. Blind
Type, down there in the bottom right corner, is a new and more efficient way to
use your mobile keyboard.
Let's
jump ahead here. Last month on our
webinar we had the announcement that Google had acquired our client
Instantiations. We represented the seller
there, out of Portland, Oregon. As most
of you know, the Corum Group is involved and has been involved in several
aspects, on several different transactions that have occurred with Google. This is our most recent one and so what we
wanted to do, while we were at the WFS, we had both the buyer, Google, and the
seller, Mike Taylor, and we wanted to sit down with both of them and kind of
interview them, grill them a little bit and see if we couldn't talk a bit about
the transaction and how it has worked out for both of them.
I'm
going to go ahead and start with Tom Duterme, who is with Corp Dev at Google, a
really great guy. He gave me a few
minutes of his time. I was actually
hosting his buyer panel for him and then I took him off stage after the buyer's
panel and was able to get a few minutes with him. So, we're going to play that
recording for you right now.
Begin
Recording
Tom
Duterme
Hi, my
name is Tom Duterme, I'm from Google and I work with the Corporate Development
group. I'm here today in Seattle as the
Growth and Exit Strategy conference representing Google.
Q1:
With over 20 deals so far in 2010, how is Google's Corp Dev group able to keep
the pace?
That's
a great question. It is a lot of hard
work is really the simple answer there.
We have a fantastic team which is based primarily in Mountain View, but
also with groups in New York and London.
Everyone is kind of working around the clock, these days for sure. We're excited about the pace of what we've
accomplished this year and that is continuing, certainly for the rest of the
year. So, hopefully we'll get to take a
vacation some time, but we're looking forward for the rest of the year.
Q2: Is
Google focused solely on talent and team acquisitions?
That's
a great question. I think that first and
foremost, every deal is different. Each
is unique, obviously. Technology and
technical innovation is extremely important, obviously. It is an important factor to Google and to
the companies that we look at. That
would be number one. Two, in terms of
the people and the talent, really what we're looking at is cultural fit. Google has a very strong and unique culture
and each of these companies has a strong and unique culture as well. We look at that as the happy marriage and a
meld to work well for both parties, that is incredibly important. That is certainly a factor in every deal that
we look at. We ascribe an importance to
that.
Q3: How
creative is Google's Corp Dev group? Is
there Google Formula or a standard M&A structure?
So
deals can certainly vary, we don't have a cookie cutter deal. Largely, I think that like a lot of other
companies, we look in terms of consideration portion and also looking at the
teams, as you mentioned before, the line of the company and we need to retain
those, so we have components on both ends.
Obviously we do see every deal as very unique and so it is hard to have
a generic rule of thumb on all our deals.
Every deal is uniquely packaged from our perspective, there is
definitely not some special Google formula for making a deal.
Q4: Who
originates deals with Google? Are deals
proposed by the product groups or does Corp Dev bring the deals to the product
group?
That's
a great question. Google is a very
bottoms-up company, so we get deals inside the company from really
anywhere. Obviously products and
engineering, we're a very engineering-focused company, a lot of potential deal
ideas will come from those partners inside the company, but we also can get
deals from development, from sales, really anyone who has a good idea can reach
out internally to our group. Conversely,
we may have ideas ourselves through our connections, through our knowledge of
the community, that we may filter with our engineering or product
partners. So that is a very organic
conversation that happens inside Google.
Dougan
Milne
It was
a pleasure talking with Tom, he's a very sharp fellow. I'm glad we got to catch up with him after
the panel. I'm going to jump ahead and
we're going to go on to Mike Taylor.
Obviously we have a very close relationship with Mike, having worked
with him over a number of months in selling his company Instantiations. There were multiple bidders for his company
and he talks a little bit here in this piece about why he chose Google. Let's go ahead and roll that and hear what he
had to say.
Mike
Taylor
Hi, I'm
Mike Taylor, I'm the CEO of Instantiations and my company was recently acquired
by Google. I'm here in Seattle at the
Growth and Exit Strategies conference to talk about that a little bit and share
some of our experiences.
Q1:
With multiple bidders for Instantiations, what made Google stand out as an
acquirer?
Google,
I would say, was...not that the other companies weren't professional, but
Google has so much experience at acquisitions that they were extremely
professional and organized and they had a core set of values that they approach
the world with that made them much easier to work with that the other companies
that we were seriously talking to. I
don't mean that they weren't tough negotiators, because they were. You can pretty much count on what they said
staying true in the long run. It was a
very good company to deal with and for our company, Google was the top of the
heap. The other companies were excellent
companies and we would have been happy with any of them. Google was the pinacle. We're very happy with our deal.
Q2:
Instantiations' core product line was immediately made FREE by Google after the
acquisition...was this a surprise? Were
there any other surprises there?
I don't
think there were any surprises in that area.
We did know with quite a bit of a headstart that the product was going
to be free, I think that we didn't realize the full effect of the Google brand
and free would have on the volume of our product since that relaunch. So everybody at Google, including my team,
which is part of Google, are really happy right now, since the product, which
was pretty good volume before, is now up by something like an order of
magnitude increase, which is pretty dramatic.
Q3:
What are your opinions about the Pacific Northwest as a location for building a
software or internet technology startup?
I think
that the Pacific Northwest in general, Portland specifically, if I can say
that, is an excellent place to build a software company. We have all the quality of life things going
for us and honestly one of the core things in our deal was, literally in the
letter of intent, was that our technical team would not have to relocate out of
Portland, because they wouldn't have gone, even to Google, if they had to move,
a number of them, anyway, some of the key ones.
It is a great environment, we have, in the Portland area, Intel,
Tektronix, a really strong technology... and so, to me, Portland I can speak to
for sure, is a great place to build a software company. There are a lot of software people
there. Seattle, I know, second hand is
also quite dynamic, maybe even more so than Portland. Maybe neither one or even
the two together are equal to the Valley, but they are still really good places
to build a software company and honestly recruiting from the Valley these days
isn't nearly as hard as it used to be.
Because we have that quality of life going for us and we have enough of
a technology aura that people don't think they're coming to the backwoods
anymore.
Dougan
Milne
We
appreciate the time that Mike had to take for us. Just being acquired, he's actually even
gotten busier, if you can believe it.
Like he said, their software downloads have absolutely taken off since
they were acquired by Google, and I think he used the term order or magnitude
greater and that really has been the case.
Our
last interviewee was Reza Hussein, who started Jambool, and Jambool created the
product of Social Gold. You guys may
know Social Gold, it is a virtual currency company and virtual goods
company. It has been a pretty serious
acquisition for Google. You remember just a few moments ago, I was talking
about the investment they made in Zynga, and this whole social casual gaming
phenomenon, a lot of the big companies out there believe that there is a lot of
money to be made in this space and certainly Zynga and Facebook together have
been proving that is absolutely true.
This acquisition is an interesting one and we'll go head and hear from
Reza now.
Q1:
What was the structuring of your deal?
What were the incentives to sell?
Q2:
What were the key drivers for Google?
Why did they want to buy Jambool?
Q3: Do
you have any words of wisdom for other entrepreneurs who are anticipating an
exit strategy in the near future?
Our
company was acquired in August of 2010 and our deal was that we had a lot of
financial incentives to retain employees over several years. The entire process took about five months
from the first time we got a phone call and about three months from the time
that we filed an LOI to close. We were a
little hesitant to sell because we didn't want to lose control of the business,
but as we started speaking with Google, we realized that they were a very good
partner, they had similar intentions with us, as you know we do payments and
virtual currency. They were looking for
expertise and connections in the gaming industry, which we had. So, we spent time with our team trying to
figure out whether we wanted to make the decision to sell and move on as part
of a larger company. We decided to do
that. I think one of the most stressful
times in the whole process was the due diligence. In the final three months, a lot of things
happen. They looked at our paperwork and
I would advise anyone who is considering a sale of a company to consider
keeping good records and all documents, including employment agreements, vendor
agreements, anything which has the signature of the company and terms, because
it will become very useful and save you a lot of stress when the due diligence
takes place.
We also
went through a series of interviews and, fortunately for us, we had a very good
team that passed with flying colors, so I suggest that if you have a company,
then insure you have the right talent so that it doesn't pull you down during
the final stages.
Finally,
I would also recommend that you prepare or have a team of advisers at hand if
you are in the due diligence, they can become really useful. In our case, we had VCs who were very well-versed
in M&A and had connections and experience negotiating prior deals. Get a lawyer as well, because they are going
to be the one to tell you if the term sheets and the LOI have any hidden
clauses or not.
I think
that looking back, there was a common vision with Google, we enjoyed the
transition and made it very smoothly.
They have been very helpful post-acquisition in helping us get
integrated.
Dougan
Milne
Reza's
actually a great guy. He's having a
fantastic time working for Google, which is great to see.
That
about does it here. I'm going to pass
the ball back over to Ward who will talk to us a little bit about upcoming
events with Corum and he's going to start up our Q&A session here. It looks like we might have just a few
minutes to take some questions.
Ward
Carter
Thanks,
Dougan. Before we go to Q&A, I'd
like to invite our audience to join us in person for more detailed information
about software M&A. Today we're
going to offer complimentary passes to several events we have specifically
designed for software entrepreneurs. You
will receive these by entering a promo code on our registration page.
Each
year Corum hosts and sponsors educational events around the world for software
entrepreneurs. Our Merge Briefing is a
focused, 90 minute regional event, bringing software entrepreneurs current
information about about the M&A marketplace and providing an overview of
the M&A process.
For a
more in-depth look at information on planning and executing a successful
liquidity event, I'd recommend you look at our Selling Up Selling Out
conference. This is an intensive, how-to
workshop that will give you a full road map of how to prepare positions,
research, value, negotiate, and execute due diligence and contracts for a
successful M&A transaction. This is
the most attended executive conference in the history of the tech
industry. We offer about 20 of these a
year.
Both of
these are very well attended and are great networking events, and all of the
biggest software companies have sent business development people to our past
events.
I'd
like to extend a complimentary pass to any of the Selling Up Selling Out
conference or Merge briefing. Go to our
website, corumgroup.com, and you'll find a link to conferences and events with
all the upcoming events and schedules, as well as registration information. On
the registration form you can enter a promo code which will waive the
registration fee. The code for today is
maoctober10, or if you want to contact me or any of the Corum dealmakers, they
can make sure you have a space in the upcoming conference.
I have
a few moments we can use for covering some of the questions that have come
in. I did see one question that came in
regarding the potential impact of the recently passed Small Business Jobs Act,
which was a bill signed, I guess just last week here in the US, providing
expansion of credit to create jobs and it is directed specifically at small
businesses. This is like most bills,
very complex. It includes a lot of
provisions and I would suggest that anyone who is considering how this impacts
them to get good advice from their tax advisers.
I would
say in general that we are seeing some tax incentives that are going to play a
factor in anyone's decision to sell a company and we have been bombarded with
questions about whether you should go to market now or should I take advantage
of potentially lower capital gains rates here in the US during 2010, versus
exposing myself to higher tax rates in 2011?
To the extent that you have a chance to do a deal in 2010, it can
potentially make a significant difference in your after tax proceeds, but
certainly is not going to drive whether you should be in the market. That is driven by a lot of other factors,
timing, what you situation is, and what your opportunity is for a successful
transaction and taxes are but one part of that overall equation.
We're
happy to discuss with any of you your individual situations and give you some
guidance about what might be the current opportunity for you and your sector,
valuations and so on.
I had
another question here which I would like to direct to Dougan. Dougan, you mentioned that, I think you said
you were uncomfortable with the fact that Microsoft had only done one deal this
year. Can you explain what you meant by
that?
Dougan
Milne
Yeah. I love it that we're doing a Google special
today and the question is about Microsoft.
Of course, from an analysts perspective I'm just used to them doing far
more acquisitions. As to why they
aren't, that gets tricky. As Miro
mentioned, they recently announced that they are looking at raising some debts,
they have also recently announced that they are going to be bumping dividends
by 25%, they have roughly $30 billion in cash sitting on the balance sheet, and
so why aren't they spending that? Part
of their excuse is that a lot of that cash is overseas and they can't be using
it on US-based transactions, and that's great, but why aren't they using it on
international transactions then? I don't understand that part.
Financial
aspect aside, I think, in all honesty, the greater issues here are not
financial, but are, in fact, on the business management side of things. I know there has been some turnover at the
upper management levels, I think that they probably, and of course I know
nothing for certain, but I think there is probably a bit of a freeze within the
management decision making up there in terms of going forward with certain
acquisition activities.
But we
did just see the little acquisition a couple of days ago. I can only hope that this is the start of
plenty more to come, throughout the rest of 2010 and into 2011.
Ward
Carter
Thanks
a lot, Dougan. Okay, we're bumping
against the end of our time, so I want to thank all of the speakers and our
audience members for participating today.
We will have this conference recording available on our website next
week and I apologize, there may have been some audio difficulties and I invite
you to check out parts that perhaps weren't clear and I invite you to attend
our M&A webinar next month on the first Thursday of November. We look
forward to having you then, and we thank you for your participation today.