October Webinar
Q3 Update, Amazon on Fire, M&A Report
October 2011
INTRO and MARKET OVERVIEW
Daniel Holland
Thank you for joining us and welcome to the October 2011 Q3 world M&A report. I'm Daniel Holland, the director of marketing here at the Corum Group speaking from our headquarters here in Seattle. You are part of a group of hundreds of software and tech executives from over 20 countries who registered for this event today.
Here is our agenda. We'll start with a global market overview, then get into the ten reasons that tech deals will continue. Following that, the Corum Q3 report will be next, with Corum Index data on tech deals and valuations in the 26 software and tech sectors that we track. We'll follow that with our special report, Amazon on Fire, with Raju Gulabani, VP of Amazon Web Services (AWS). We'll also hear from two CEOs who recently sold their companies in our Seller's Panel. I think you'll find their comments of great value as they reflect on selling their companies in this volatile market.
Our presenters today include Bruce Milne, CEO and Founder of Corum Group, Nat Burgess, Corum's President, Dougan Milne, Corum's VP of Research with his Corum analytics team, Rob Schram, Corum Director, Mark Johnson, CEO of Zite which was acquired by CNN, and Mansour Salame, chairman of Contactual, which was just acquired by 8X8.
With that, I'll turn the floor over the Bruce Milne, who is participating today from Europe. Over to you, Bruce.
Bruce Milne
Thank you, Daniel. I'm dialing in from London. We have a lot of ground to cover, so let's get right to China.
The news isn't good. China is having the largest contraction since 2009, their stocks sunk to a 14 month low, and the economists' consensus is that they will drop growth by about half by 2016 and the IMF agreed.
We also see that this effect is happening in New Delhi and Australia. They are being hit with a general slow down there.
One of the things that is very interesting in our report is that Brazil slapped a 30% tariff on Asian imports. Traditionally they have been a very self-reliant company, building their own planes, cars, even washing machines, so they are feeling the effect of cheap Asian imports. This will affect Korea and China, and may trigger a trade war.
In general, the Asian economies are weak and they are worried about the debt crisis like the rest of us.
Moving to Europe, German retail sales declined the most in 4 years. A world slump has been triggered by the economic breakdown according to European economists. In Italy, debt was downgraded and confidence fell.
Mohammed El-Erian of Pimco forecasted a European recession next year. He's a smart guy, we should pay attention.
Moving over to the US, they revised upwards slightly for Q2, with 1.3% growth, versus the predicted 1.2. That's not much though. Eighteen months ago it was 3.6%, so we're down to a third of that.
Roubini who predicted the last recession said that the US is in the throes of an economic contraction, but he is not saying recession.
I usually don't pick companies but FedEx is a leading indicator. Things are slowing. Retail sales are unexpectedly stagnant. 72% feel that the US is on the wrong course.
But what is interesting is that despite all this, US inflation is edging up. That is because of the supply side and the weak dollar.
Some good news here, we see that manufacturing grew in August, as did auto sales, and construction spending. Only slightly, and you have to be careful with this data, because sometimes it bumps up in August and then we saw the service industry numbers come in and they grew at a slower pace in September. We'll see how September plays out going into the next quarter.
Next are jobs and real estate. No good news here. Employment is still flat, effectively 9% unemployment, they're calling it an effective 16-17% unemployment. US home sales are at a 6 month low, we're rolling along the bottom. You can take advantage of the lowest interest rate ever, but you have to work through the mortgage defaults which are surging and clogging up the banking system.
I added this section on banks and sovereign debt because you can't go a day without seeing some headlines regarding the great debt situation and that is really important. The reason for that is the banks hold the paper for Greece and all these other countries that are potentially in trouble, and that effects us as we'll see in a minute.
Lloyd's of London has pulled their Euro bank deposits. They're perhaps the most conservative group in the world, the EU is expecting a risk as high as $419 billion. What's interesting is that last night in London an analyst said it might be closer to $2 trillion!
We're getting some sovereign debt woes affecting credit elsewhere and the reason is this: If the banks have the debt and they have to make reserves, then they will get very conservative and get very tough on loans. So that is going to be very difficult on the rest of us.
Moving on we have a section here on currencies and commodities. I have lumped them together. Commodities have fallen to a nine-month low, Asian currencies have dropped the most since 1998, the Yuan dropped the most in four months. And this is interesting, gold dropped a record $100 in a single day. They went up to over $1900, back down to $1600 and they are still there. Meanwhile the Euro dropped to the lowest level since 2001. A decade. They just hit their lowest level against the dollar, too, this year.
In finance and IPOs, IPOs are effectively frozen, I'm in Europe talking to investment bankers, and UBS just got hit with a $2.3 billion dollar loss. You can borrow money, but they'll loan it to you at very low rates. People are pulling money out of the investment arena, $75 billion last month!
The VIX is a volatility index. We watch that and it's the reason that stocks have been moving so rapidly. It has been going down, but the good news is that sometimes record VIX, hitting 33-34, that indicates that a potential rise.
I added this bottom line here, I added this yesterday, the democrats in the US are seeking a 5% millionaire tax for a job plan. You may say it won't affect you, and maybe it won't, but if you go to sell your company, part of the transaction may be deemed ordinary income and then you'll be affected, as you may be affected by capital gains increases or financial transaction taxes, as well as asset taxes, which they're talking about. It may be better to sell now.
Past litigation, wow. Same players, Google working with IBM and HTC on their defense. SAP just overturned that $1.3 billion award, but that's not over though. Then we seen Samsung and Apple are continuing their fight. It is interesting, I was in Paris yesterday. Samsung, the Galaxy, is doing pretty well, but it is not sold in a lot of countries.
We'll wrap up with tech. Today we have Amazon on our show, it's great to have them join us, I think the Kindle Fire is a gamechanging release. Is it an iPad killer or will it expand the market? Well, let's see.
Meg Whitman is the new HP CEO, that just happened. RIM is getting killed by the iPad. There was also an interesting note by Gartner. Chip sales dropped from growing to flat or slightly down.
Moving ahead in tech, Oracle beat estimates. Back to Gartner's PC sales forecast, this isn't a slight adjustment. Not at all, from 9.3% to 3.8%. We have to pay attention to that.
I hope you don't own Netflix stock. It rose based on their cloud luster, now they've dropped.
Some news that Microsoft is sitting on so much cash, up 743% since 2007, and what are they doing with it? You can buy people and give a dividend. Some good news, their phone may be exceeding forecast.
Yesterday, India jumped into the tablet wars with a $22 tablet. I can't wait for the details on that one.
Moving on in tech, we look at GroupOn. We had some concerns about this and now suddenly they're recording income a little bit differently than they should. So they may have to pare back their IPO. We're not surprised.
Good news from IBM, they announced they're going to be doing more acquisitions in the software business. Lots of people are going after Yahoo!, maybe Microsoft, and while they say no, who knows?
This next one is important, tech stocks are outperforming as excess cash beats the US' cyclical risk. There is a cash glut, and it is effecting all of us. We're going to have a special report on that along with patents in Japan next month.
No more big software deals, said Meg Whitman, and of course, a tech luminary has passed, Steve Jobs. Perhaps the greatest visionary of our age. We'll miss his leadership.
We'll be a little bit out of sync because we're going to go to Nat Burgess for a look at why tech M&A will prevail before our report. Fresh from CNBC where he predicted that Oracle should buy HP. Nat?
WHY TECH M&A WILL PREVAIL: TEN REASONS
Nat Burgess
Thanks, Bruce. We've looked at some statistics that show a rocky path for different economies, we see some financial turmoil, and later our research team will talk about volatility in the markets, but as Steve Jobs once said, you have to trust in something. I'll invite everyone to Google that and get the full quote.
What we see is tremendous opportunity within tech and we see the tech M&A market continuing to steam along. The good news is, if we have markets that are growing slower than expected, at 3 or 5%, and meanwhile we have markets that Gartner predicts will grow 100%, and they slow down slightly, guess what? They're still growing fast and they are changing the world.
1. Cloud computing. We see Amazon, Apple, Microsoft, and other moving the brains of computing into the cloud, reshaping the tech landscape, and that is creating a lot of opportunities for entrepreneurs like you to innovate and build companies.
2. Advanced Analytics. What do we do with all this data? How do we leverage it. We're just scratching the surface of what is possible and innovative companies are growing up now, helping companies reach consumers, helping them in their BtoB, and again we're just scratching the surface. What we're going to see in the next decade is going to be amazing.
3. Client Computing Platform. How do we access the cloud, how do we access this processing power? It won't be through your dad's PC, it'll be through connective devices, pads, tablets, phones. If you look at the stats, within just a few more years, the minority of visits will come from traditional PCs. That changes interfaces, how we move data, everything. That creates opportunity.
4. IT for Green. We're creating these ultra-dense data centers, the brains of computing, so how do we reduce power consumption and increase efficiency. How do we enter the next age without having to burn more fossil fuels?
5. A lot of money is being made and there is a lot of innovation there in reshaping the data center. Along the same lines, that is where the brains reside, that creates opportunities for innovation.
6. Social Computing. This is entering enterprise now. SalesForce was early here, Amazon is there now, a lot of excitement is around making technology frictionless and useful instead of a chore.
7. Security and Compliance. Now that we are in the cloud, everything changes. We have to re-think how we secure systems and how we secure users.
8. Flash Memory. This is in every device now. There is persistent data store and then synchronization becomes a challenge, memory becomes a challenge, again innovation and opportunity for growing companies today.
9. Virtualization Availability. We're still under, I believe, 20% virtualization in the data center. More opportunity there.
10. Mobile Applications. I'm sure many of you as you are engaging in the webinar have some kind of device in hand and are now engaged in the cloud, not through a traditional PC and that is an important opportunity for all of us.
So why will tech M&A remain strong in spite of some of the financial road bumps we're having? The fact is, different geographies are performing differently and on different growth trends. Companies that are smart about acquiring assets offshore, that are smart about acquiring revenue in BRIC territory and not relying just on the US and Europe, have a diversification opportunity that will carry them through this financial turmoil.
1. We have inter-related mega trends that are creating opportunity everywhere.
2. There is record cash in the hands of buyers. We'll talk about this a little more later, but the fact is that there has never been this much cash on balance sheets. Oracle is up almost 400%. Four years ago they were at $6 million and now they're at $30 million, I believe. That money has to be put to work.
3. The cost of debt is at its lowest ever. It was announced today that 30 year mortgages are now below 4%.
4. There is over half a trillion in PE to spend and those guys are calling us every day looking for deals.
5. There are new foreign buyers coming out of China and India.
6. The private buyers are making acquisitions and paying cash and good valuations. They're almost better off still being private, because they can make good, long-term investments without the scrutiny of a public company and they are doing it.
7. For offshore investors, with the currency arbitrage, they can buy everything in the US. It's on sale, and they're taking advantage of that.
8. A lot of the US corporate cash is off shore. When Microsoft bought Skype, they paid $8.5 billion, but they used offshore funds. They would have had to pay tax if they repatriated it, so that is effectively a discount on the deal. We're seeing a lot of that, big US companies making strategic offshore deals so they don't have to bring the cash here.
9. Software's importance continues to rise. HP just killed their web OS initiative, they are de-emphasizing servers. They realize that to survive into the next generation, they have to focus on software.
10. Finally, I think this is really important. We have more on Amazon later on, but they are predicting 5 billion users of connected devices in 10 years. What does that mean for all of us? We'll dig into that when we reach the Amazon section.
Q3 REPORT
Nat Burgess
Our VP of research and his analysts are going to take us through the current state of the market. Over to you, Dougan.
Dougan Milne
Thanks, Nat.
As we shift to the Corum research, I’m very fortunate to be surrounded by some of my analysts here who keep their finger on the pulse of the industry. Tomoki Yasuda, Amber Stoner, and Alina Soltys are joining me here today. Over the next several minutes, we’ll be looking at the market trends that Corum watches very closely. This is our Q3 update and we'll be covering the public markets, their roller coaster fiasco, the IPO stall-outs, and of course, the M&A market. Who’s still buying, who’s not, and which sectors in the software and internet industry are still strong and healthy?
We’ll be moving quickly through this information, but don't worry, we will have a printed report available by post, or a downloadable softcopy off our website in the next week or two.
To start us off in this section of the presentation, actually you know, Bruce and Nat dipped into some of what we’ve been seeing as a part of, and the results of, the public market rockinghorse, but Tomoki will actually be showing us a 2011 snapshot of our comparative indices. So, by all means Mr. Yasuda.
Tomoki Yasuda
Thanks, Dougan. The first slide we'll start off with is the overall market performance of 2011 on a weekly basis. If you haven't been living under a rock then you're privy to the fact that the markets are experiencing some turbulence with concerns over sovereign debt in Europe and a general slow down of expected growth in the US.
What strikes me in this graph is the amount of volatility in just one quarter. We had really high hopes of growth entering into Q3, reaching the highest point in market performance since the recession, only to have the market bottom out and erase all the gains we made in 2011.
In the outlook on the near future, it looks uncertain. How are investors responding, Alina?
Alina Soltys
The way that investors measure volatility is through the VIX index, which has been trading in a danger zone for most of this quarter. In the danger zone for IPOs, they need the volatility to drop below 30 in order for bankers to feel comfortable taking their clients into the public market. Earlier this year, when we had a number of IPOs, like Linkedin, VIX was trading between 15 and 20. This is translated directly into the chart we see at the bottom of the screen. US filed IPOs that are in backlog, I almost want to apologize for putting this up, it's a bit of an eyechart because it spans 10 years, but the number we see in the last quarter is 498 companies filed that are still in backlog, which is a record high in 10 years.
Dougan Milne
Alina, I think that's been depictive of the difference between M&A and IPOs. The value and timing of the IPOs can be so quickly crushed with a turn in the market.
Alina Soltys
Yes, and IPO weakness does not translate to weak M&A activity or PE buyouts. If we look at this last quarter, there are only five venture-backed companies that went public. Compare that to 101 venture-backed companies that were bought out. This does not correlate directly. We'll come back to this slide in January of 2012 with updated 2011 numbers and see how the year ended off.
Dougan Milne
And certainly there has been a lot of value, cash and liquidity realized through both IPO and M&A. But speaking of cash and liquidity, Amber, the numbers we're seeing here are...I don't know, outrageous, daunting, frightening. I’m not exactly sure what the right adjective is for these cash stockpiles.
Amber Stoner
First I want to point out that our comparison here current numbers is matched against 2007, which was the last major spending peak we saw. There are a number of companies with large reserves of cash, and as Nat mentioned, for many of these companies that cash is off shore, so it will be interesting to see how they use it, whether it will be big deals to consolidate the market or multiple smaller deals to build out product offerings.
Dougan Milne
That brings us to the point of, “What do they do with all this cash?” On the screen now is a snapshot of the top strategic acquirers for 2011. Some of these companies are to expected, others are not exactly household names.
Schneider Electric for example is a historically strong acquirer, but we don’t tend to immediately think of them as a software buyer. In fact, they recently acquired Telvent, a publicly traded company from Madrid, Spain who focuses on GIS and utility software. This is actually one of the bigger deals of the year so far at $1.6 billion dollars. Schneider also picked up Summit Energy Services for $270 million for their online energy monitoring and procurement solutions.
Likewise, Qualcomm, while traditionally more semiconductor focused, has come to realize over the past couple years the value that they can extend beyond the chip directly effects the bottom line and their brand.They acquired the assets of GestureTek for their embedded gesture recognition software, and GPSNet Technologies for SaaS fleet monitoring solutions.
But, the more recognizables, Google is on a tear with 26 announced acquisitions last year and they are already at 23 this year, so they're likely to eclipse that number. Zynga is still as powerful as ever. And Thomson Reuters is both buying and selling divisions of companies. They're the second company next to Google there. They recently divested their risk and asset management division. Who'd have thought that would happen. Alongside that they had their corporate solutions group which they divested and their treasury software assets. Their new focus is on legal, on tax and accounting. In the legal sense they picked up Flowsuite recently, as well as Jurisoft and KleinMundo. In tax and accounting with CorpSmart, Monatron and Mastersef.
But let me ask you this. What are we missing from this slide? Where is IBM and where is SAP or HP? Certainly those companies have been doing some very high value deals, but we aren’t seeing the deal volume from them, but they are acquiring companies that take more time to digest. The argument is made, is innovation and market share gained with higher volume and smaller transactions, or is it with the larger, land-shift, bottom line-effecting deals?
Regardless, the combination of all these transactions, these buyers, their volumes, and their values have boosted the 2011 M&A market.
Amber, honestly, September was a small blip on the radar, I don't think even the most scrutizing analyst would say it was a horrible month, but on the whole, even Corum wouldn't have predicted that 2011 would have done so well for M&A.
Amber Stoner
Yes, Dougan, companies like Google, Zynga and ENC have buoyed M&A activity and at this rate the volume and value numbers are set to eclipse our January predictions of 3500 deals with $225 billion in value. In fact, it is looking to be closer to $300 billion in value by the end of the year.
I think I can speak for the research department here when I saw that we're okay with having underestimated that.
Dougan Milne
At this point, we’re going to jump into the Corum Index. Tomoki and Alina will be walking us through this. Corum has been tracking these numbers over the past couple decades, and these are metrics we both publish and use internally to better understand the market comparables. Alina, can you start us off, please?
Alina Soltys
Yeah, sure. Let's look at the first line, number of transactions. They have increased 20%, quarter over quarter from last year, almost hitting 1000 deals, actually, which is great. The interesting thing here is for this quarter, about 2/3rds of the deals happened early on in July and August. September was really quiet.
Listed on the very right we have the top six deals based on value. We've seen a number of mega deals, 11, in fact, with $1bn plus values. There are a few of them that I want to touch on. Google set the record here for the quarter with their acquisition of Motorola for their patents and for hardware expertise. Google is not done doing this, either, they just bought IBM's patents yesterday. HP bought Autonomy, jumping into software in a major way, and I'll touch on that in a little bit.
We're also seeing a lot more PE deals, right Tomoki?
Tomoki Yasuda
Yes, we are, Alina. As Nat alluded to, the financial buyers have started to put their idle cash to work by investing in some growth opportunities. We see that compared to the previous Q3, PE deals have gone up about 10%, but deal value itself has gone up over 75%. I'll go more granular on what exactly they have been investing in on the next slide, but before I do, I wanted to also note that the number of VC-backed exits have doubled as well, signaling that venture investors have been feeling that Q3 of 2011 was a better time to capitalize on their investments than the previous Q3.
The research team here wanted to do a deeper analysis of the financial buyers and the specific opportunities they see in the market. The slide you see in front of you profiles the total number of deals done by the top ten PE firms for 2010 and 2011. Leading them is Silverlake, which has been a prolific acquirer. Some notable firms they own are Sabre Holdings, Sunguard, and Avia. The former was sold to IBM at the end of Q3 and the latter filed for an IPO this year. As Bruce mentioned as well, Silverlake is also said to be in a joint bid to acquire Yahoo!, so there's some pretty exciting stuff there.
Then, following Silverlake are other famous firms like Carlyle, Apax and Thoma Bravo. Carlyle just filed for an IPO itself this year. Apax has seen some good successes as well, actively engaging in the mid tier ERP sector, acquiring Epicorp and Activant and merged them together, bringing a new contender to the traditionally locked-out tier one ERP players. The firm also saw a successful exit for one of its portfolio companies.
But, the real interesting story here is how much the PEs have been paying for certain companies. This slide shows a different landscape, who has been spending the most cash. Carlyle spearheads here with two major acquisitions they did in 2010, Synoverse Technologies for $2.6 billion and Comscope for $3.9 billion. Both companies operate in the carrier infrastructure space and Carlyle has been actively picking up companies to bolt onto their solutions.
Regarding Apax, they are not the only one making a big splash in the mid tier ERP space, Golden Gate has also done the same.
This past year and a half has been a very exciting time for PEs. I'm very interesting in seeing where they take their deals.
Dougan Milne
Private Equity is definitely back in the game. Thanks for the insights there Tomoki.
CORUM INDEX, VALUATION and STATISTICS
Continuing through the Corum index, Corum divides the industry into 6 broad markets, further broken down into 26 sub-sectors. If you are new to our webinar, you’ll get a better understanding of those markets as we move through the presentation, but for the moment, you’ll note the 6 logos to the left there, which represent our 6 markets: Horizontal Software, Vertical Software, Consumer, Infrastructure, Internet, and IT/BPO, and the chart in front of you is an aggregate of those markets. Another thing to note is that all the multiples you’ll see expressed in the following slides are “median” values, not averages.
Quarterly aggregate over the past 2-1/2 years should make it clear that our industry as a whole has been performing quite well.
With that, Alina is going to start us off with the Horizontal Application space. She’ll break that down further into the subsectors. I’ll note that Horizontal has been a particularly strong performing sector, in large part due to the high volume of SaaS and recurring revenue companies that we see coming from this space. But please, Alina, take it away.
Alina Soltys
Thanks, Dougan. Before I get in any further, all the charts that you will see, the the last three bars on the right are monthly for the last quarter. Everything else is quarterly, so that really shows the kind of drop off that we have seen over the past two months.
Horizontal, as Dougan said, was one of our best performing segments, with 20x EBITDA in July. That is very healthy. Right now we're sitting at 13x. As we know, volatility goes up and down so it could just as well rebound up soon.
Let's jump into the deals. HP announced that they finally closed their deal with Autonomy this week. After a quick but interesting circus show, Oracle's Larry Ellison got involved with some back and forth about whether they were pitched the deal. Meg Whitman is now the proud owner of Autonomy at a cost of $11.7 million. This is placing a very big bet that HP will be able to steer their ship to a more software-centric strategy, and I know that we're all going to be looking to see what they do.
OpenText acquired Global 360 for $260 million. They are now combining BPM solutions and their ECM focus. This is just months after their another BPM pickup. OpenText is angling to provide more process, structure and automation around content management for enterprises and we have seen a lot of BPM consolidation. A lot of different sectors have picked that up.
Dougan Milne
Salesforce has really been pushing the customer facing and social angle. OpenText has really been buying out that BPM market with Global360 and MetaStorm before that.
As we look at vertical software, and I know these broad market trends don’t look great, but as we see the individual subsectors, we start to realize that there are some very positively performing groups here and then some real pain points.
Amber, you’ve been our in-house expert for the education space, which has all but disappeared as a public group, but despite having done so well on the public markets, what are we seeing in the education space?
Amber Stoner
What we're seeing is a trend in the last 18 months that has PE firms buying up education software companies. Two big deals in last quarter follow that trend. Renaissance Learning was acquired by Premera, a PE firm in Europe with a deal valued at $455 million. Sungar Higher Education was acquired by Datatel, a Hellman and Friedman company with a deal valued at $1.8 billion.
Clearly there is a wrinkle to say the least in the Renaissance deal, and that was Plato's unsolicited bid valued at roughly $471 million. It will be interesting to see how this plays out as Renaissance's founders seem to prefer the Premera deal, but however it shakes out, Renaissance Learning will be a private company under the umbrella of a private PE firm.
Datatel's deal was more straightforward when it took place in August. The strategic combination of these companies provides customers with a broader portfolio solution, accelerated innovation and an expanded knowledge-sharing community.
It is interesting to note that this acquisition deals with companies in the higher learning space, as most of the deals we've seen lately have been in either the K-12 or the corporate learning spaces.
Tomoki Yasuda
We've definitely seen a lot of big deals comes out of the education space, Amber, and I think we'll see more as PE gets into the game.
But, I'd like to now switch to the Government Vertical and profile a deal that I briefly mentioned, the IBM acquisition of I2 Group. They provide master data management for government intelligence and local law enforcement. While IBM will add more revenue and market share with this acquisition, the bigger story here is with I2's platform which IBM can appropriate so they can go after different verticals like banking and insurance.
Dougan Milne
Thanks Tomoki. Now, one of the sectors that seems to get hit the hardest, and the fastest, by turns in the public indices is our Consumer space. Alina, I know you and I have been talking about a number of interesting deals in this broad space, but tell us about your CNN deal.
Alina Soltys
Yes, CNN is actually a new name being mentioned on Corum webinars regularly for news feeds and updates, but this is the first time that we have announced a tech transaction that they did. This is a first for them as well. Late in August they acquired Zite for a rumored $20-25 million. It is a handy news aggregator that is custom-built for iPad users. They like to bill themselves as curators and the back end is a smart algorithm that runs and learns your interests and finds relevant stories of interest for you.
Luckily, being under CNN's umbrella means there is no immediate pressure for them to extrapolate revenue. Their sole goal remains to develop technology without any VC-like pressure. For CNN this is a diversification of their portfolio. They are not looking at just hardcore news junkies that check back several times a day, now they have more casual users that read the Friday Journal and the weekend editions. By the way, we are very excited to have Mark Johnson joining us on our webinar in just a few minutes. He is the CEO of Zite.
Tomoki Yasuda
We're definitely eager to hear from Mark about his experiences.
I'd like to shift gears and focus on a local deal that was done in Q3, the acquisition of Popcap games by Electronic Arts for $750 million. Popcap, for those of you who don't know, is a casual games developer similar to Zynga and Playdom. The deal was the largest of its kind in the casual gaming space. Casual games offer low cost, higher-margin businesses that are different from traditional console games. Companies can monetize titles more effectively and broadly on a global scale thanks to internet distribution to PCs, consoles and mobile consumer devices.
Dougan Milne
Thanks, Tomoki. We're going to shift over to the Infrastructure market right now. We look at these casual gaming companies like Popcap, Playdom and Zynga, they're all completely hosted in the cloud. Zynga is running on facebook, and entirely hosted on Amazon Web Services. That's a lot of data they are pushing through there every single day.
We’ll get to the Big Data dillema in a moment with Amber, and we’ve got even more with Raju from Amazon coming up here in a few minutes, but we have a bit more first.
A couple quick deals here. Intertainment Media is a company Corum knows well, they are publicly traded on the TSX in Canada, and they’ve done a pretty smart job of consolidating technology services and solutions, particularly in their home terrain to the Great North.
Their most recent acquisition was for a company called SaaS Technologies, generic name, right? But SaaS Technologies has built some very comprehensive data migration utilities for the legacy and data migration field, and Intertainment Media was willing to pay $27 million for this domain expertise and product portfolio.
Another little deal: NetScout, one of our hot up-and-coming network performance and systems management companies has acquired FoxReplay out of the Netherlands. Netscout has kept a focused offering around network monitoring and network intelligence and the FoxReplay deal gives them a security edge that builds upon their core strategy of advanced packet-flow intelligence and the 451 Group estimates their transaction value at around $20 million.
Of course, keeping an intelligent data flow is becoming more and more important these days, certainly a buzz of the industry is the realm of Big Data, including storage, management and computation, but Amber, I know you’ve cited a storage deal here with Hitachi.
Amber Stoner
Hitachi Data Systems acquired BlueArc for $600 million with a valuation of 6.5x TTM. With this acquisition HDS is making a significant move to address the fastest growing segment of the storage market and executing on its strategy to transform traditional data centers into information centers, allowing customers to store and access all data, content and information.
Dougan Milne
Hitachi has done some great deals in the past few years. Corum represented a company called Wenco that was sold to Hitachi’s heavy machinery technologies division just a couple years ago and that transaction went very smoothly.
Now, as we launch ourselves into the Internet space, again, we see the consumer and end-user impact on this market as well, though this space is not nearly as volatile as our Consumer technologies space.
A deal that caught my eye in the Internet sector was RealPage’s acquisition of MyNewPlace.com. RealPage comes from a property management pedigree, a class-leading SaaS solution for property managers of multi-family properties and real estate agents. With MyNewPlace, they are getting a well-respected online apartment and house hunting website that was pulling in about $16.5 million revenue over the twelve-month's trailing. RealPages paid a total of $74.4 million for the company in a mix of mostly cash and some stock. That’s nearly a 5x revenue multiple, so clearly RealPage is looking to build some tremendous value from MyNewPlace.
What do you think about that one, Tomoki?
Tomoki Yasuda
I think they're also taking a gamble on that deal, due to the fact that the acquisition will lower earnings at that company in the short term. But essentially they are focused on the long term and they are really investing in their core strengths, which is great. This deal also leads to our next acquisition, that of Zong by Ebay. Zong was acquired for $240 million. They allow mobile users on social networks and retail websites to make online purchases and directly bill them to a mobile account. This is a smart play for Ebay, who has been trying to differentiate itself beyond just being an auction site, but who have failed in trying to compete directly with the likes of Amazon as an online retailer. The question is, where can Ebay go to capture market share?
Dougan Milne
Ebay really has repositioned themselves as a true ecommerce player, especially with all the acquisitions in the past 24 months.
We jump now to the IT Services space and I know Alina has a deal for us here.
Alina Soltys
Yes. So, this isn't your typical IT Services deal, which are usually based on acqui-hire. Usually, from India, China, Central Europe, the companies here, Global Logic and Method, are more like brain trusts or talent centers. Global Logic provides high value advisory services that revolve around R&D. They provide the talent to identify what you need and create it on a project basis.
Method is probably a company that you are familiar with based on their work rather than the name. They have done creative work for Nordstrom's website, they created the really great conference website for TED, and so on. With these combined companies, the complete life cycle of R&D services will be one solution, from idea creation to delivery.
At this point, we wrap up the Corum Research portion of the webinar, but we have two very interesting guests with us today. In a few minutes we'll be talking to two CEOs who just sold their companies in a hot market here to share their war stories.
AMAZON ON FIRE
I'm actually going to turn the stage over to Corum Director Rob Schram for the introduction. Rob has a shockingly long history in software and technology and maybe I'm just giving him a hard time there, but he has recently joined us as a deal manager and needless to say he is off to a very strong start and we've very glad to have him. Rob, over to you.
Rob Schram
Thank you, Dougan, I appreciate that.
It’s my pleasure to introduce Raju Gulabani, Vice President and General Manager at Amazon and part of the AWS leadership team.
Raju, we’re delighted to have you join us to share your perspective on Amazon Web Services, one of the most popular “Infrastructure as a Service” cloud platforms in the world. After Raju’s remarks, I’ll comment on how the Kindle Fire Tablet and will accelerate Amazon’s growth and its position as a dominant digital content supplier. By the way, I should mention that my remarks are not to be attributed either to Raju or Amazon.
Raju Gulabani
Thank you, Rob. You know Amazon has become an interesting brand name. When I talk to my wife about it, to her it just means an awesome store on the internet where she shops all the time. When I talk to my neighbor, who just came back after spending two weeks in Hawaii, it means Kindle, the device that she used to catch up on all her reading. If you talk to a CIO in a Fortune 500 company, more and more it means AWS, the cloud where they are building new applications. I'm going to spend a few minutes giving you details of what AWS is and what it means to your business.
In 2000, at the height of the dot-com bubble, I started a Voice Over IP company. I raised millions of dollars and in fact used a lot of that money to buy servers from Dell and set them up so that I could get my VOIP service going. I was not an expert in buying or installing servers, in fact for me it was really a hassle which was distracting me from the core business of running the VOIP service. But I had no choice and I had to do it. In fact, Gartner says that in a typical IT environment, 80% of time and resources, dollars really, goes toward keeping the lights on. This 80% doesn't really add any differentiated value to the core business that the company is in.
In 2011, thanks to AWS, there is a better way. You can use the Amazon Cloud, AWS, this is exactly what the Zynga founders did when they started a company to offer games on Facebook. Instead of buying servers or renting space using their money, they just came to AWS and in a self-service kind of way they found the capacity of servers and storage that they needed. We charged them something like $0.085 an hour for the servers they used and if they needed more they paid for them, and if they needed less, they paid less. They paid for what they used and they could easily scale up and down based on the number of users. For example, they might have more users in the evenings and less users during the day when people are at work and school.
In Zynga's case, the applications became widely popular and instead of them trying to raise more money, taking 6-8 months to get everything set up for their demand, they just came to us and through an API call requested more server capacity and were able to get it in a few minutes. Then their business kept scaling. This is the benefit of the AWS cloud, it gives you the agility and time-to-market because you don't have to build infrastructure and data centers, etc.
AWS is a platform for delivering application. It offers low-level building blocks, such as a storage service or a database. We also offer higher level building blocks, like email delivery services, and you just use all the components that we can provide for you to build applications.
If you've used SmugMug to store your photos, they are in fact stored in AWS on something like S3. Our solution makes it easy for you to build applications using the different blocks we give you.
Today AWS has a massive global footprint. We have lots of servers that we run for our customers. In fact, in terms of the capacity that we have, one way to think of it is that on a single day we add enough new server capacity to run a company the size of Amazon when it was a $2.76 billion company. So when, in the fifth year, at that scale, all the servers that we used to run Amazon.com, that is the kind of capacity that we add each day on average. It's a massive scale and it gives you the benefits, both from the cost and availability perspectives.
Because of the massive scale and the value that we provide, we now run and support hundreds of thousands of businesses worldwide, such as you see listed here. In fact, if you ask me how we're doing, I would say that as of last week the business is on Fire and I mean that literally.
Last week we announced the Kindle Fire and we are very excited about it. In fact, one of the reasons that I am excited about it is that it has this new browser called Silk which uses the AWS infrastructure to run part of the browser on a massive EC2 fleet and thereby gives you significant performance and latency improvement over the traditional browser which run just on the device. This is a whole new kind of architecture that AWS enables.
Let me end my remarks here and pass it off to Rob.
Rob Schram
Thank you, Raju. Wow, what an impressive array of Enterprise services. Clearly, AWS will play a pivotal role in Amazon’s expanding universe of digital content as well.
When Amazon started in 1994 with online book sales, they were already on a mission to be “Earth's most customer centric company; to build a place where people can come to find and discover anything they might want to buy online.” Today, Amazon is the “world’s largest online retailer of any kind” and is preparing for another quantum leap: To control the $30 Billion global digital media market. And they are leveraging their entire arsenal of technologies and services to do so.
Amazon’s latest strategic advance in this direction is the Kindle Fire. But don’t get confused by the topical media coverage of this device. Amazon is not just another me too hardware manufacturer entering the fray: they are in the content business, and Fire is an enabling device tablet to help them sell digital content, just as the original Kindle did in the e-book market.
Apple has a 66% share of the online video on-demand content market, and owns 70% of the digital music market, so they’re Amazon’s primary competitor. But Apple is in the hardware business and supplies content to leverage the sale of their devices. With the Fire this formula is reversed, and Amazon will use its tremendous resources to make a major advance on where they have been headed all along: Controlling distribution of digital content. At 40% of the price of the cheapest iPad, Fire tablet is a “razor/razorblades” marketing strategy. Amazon can even afford to subsidize tablet sales, because the real margins and massive growth are in content and cloud services, not the device. So, Amazon isn’t taking direct aim at Apple’s market-dominating iPad, but is leveraging Fire in a deeply disruptive strategy to capture digital media consumption from Apple.
The Fire is optimized for Amazon’s Android App Store. It will give users a private portal to the Amazon “cloud,” where all their books, magazines, songs, movies, games, TV shows and photos can reside for free. Not strictly for media, users can also email, voicemail and download apps. Talk about a fully-integrated content delivery and consumer retention strategy.
And this isn’t the first time Amazon has used a platform to leverage content. In just 5 years the Kindle e-reader helped Amazon capture 90% of the e-book content market. This will account for almost 10% of Amazon's total revenue next year – approximately $12.2 billion. That’s according to Mark Mahaney at Citigroup, who estimates about half of that revenue will be from sales of the device, with the other half from e-books.
Amazon fully intends to run this play again: This time positioning the game-changing potential of the Fire tablet to capture a significant portion of the tablet market, which is currently dominated by the iPad, with nearly 80% market share.
And again, and most importantly, Fire doesn’t need to be an “iPad Killer” to be really successful. By establishing itself as the leader in Android tablets, Amazon can stimulate demand for the company’s digital content, boost sales of physical goods on its e-commerce websites AND take significant market share from Apple, where other device manufacturers like HP and RIM have failed. This strategy will also accelerate adoption of Amazon Prime, which is the real mother lode for this juggernaut Internet content provider: a reliable, increasing, and persistent source of recurring revenue.
This head-to-head competition between the two leading Customer experience companies will cause devices to get better; content to become more relevant and be consumed at a greater pace. To our constituency, this means larger numbers of devices, more users, more applications, and more cloud storage services.
Amazon, the quiet giant, is systematically executing what may be the most successful strategy in the technology ecosphere. And to achieve its plan to become the world’s largest source of digital media they won’t have to move heaven & earth, they just have to continue their strategic control of the clouds.
Dougan Milne
Rob and Raju, thank you both very much for your time and insight into the strength of Amazon and the truly incredible company that has become. We've been seeing pre-sales figures on the Kindle Fire and it looks like it will be a very merry Christmas for Amazon.
M&A SELLER'S PANEL
We move now to our seller's panel. We have some great company leaders here who have just gone through M&A events with success. Our first speaker today is Mark Johnson of Zite. If the name seems familiar it is probably because you have his app on your iPad or it could be because Alina highlighted his deal a few minutes ago. Either way, CEO Mark Johnson is no stranger to the startup world or the world of M&A. Mark, we're glad you could be with us today. We'd love an introduction from you and to hear the story of Zite.
Mark Johnson
Sure! Hi, I'm Mark Johnson, I'm the CEO of Zite and as alluded to, I'm no stranger to M&A. The last company I was with, Powerset, was sold to Microsoft. I spent a few years there and then became CEO of Zite in Apirl.
Let me tell you a little bit about Zite in case you don't have an iPad. Zite is a personalized iPad magazine that gets smarter as you read it. The idea behind it is that as you read articles, it will try to deliver more of what you like. We launched on March 9 of this year, so that means that since we were acquired on August 30, from launch to acquisition was less than six months, which is pretty incredible. That being said, the company's technology has actually be around for about six years.
I became an advisor to the company about two-and-a-half years ago now. I was brought on to figure out how to take this great technology and turn it into a product. I spent about a year with Zite trying to transform their tech into something that was product-izable and what we finally came up with was Zite.
I think one of the smartest things we did was to not launch on the web. We built a very early prototype of Zite which got smarter when you read it and it was web-based and I think that just wasn't the right kind of reading experience for people. If you look at typical web applications, like a ecommerce site or even a news site like CNN.com, most of the activity happens during the day. At night it sort of drops off. With Zite, most of our activity is on the weekends and in the evenings. As alluded to earlier, we're more of a casual reading experience, the kind of thing you do before bed or when you have some time on the weekends to catch up on things that you really care about.
This generated a huge amount of interest when we launched, because even though there are things that look like competitors to us, we have this wonderful tech behind us that deliver people really interesting articles. On the day of launch we had about 50,000 downloads, and we were featured in print in the Wall Street Journal and USA Today. We had over 50 articles written about us in total.
I mention this because it was critical to the fact that we had an acquisition event so quickly. We actually weren't looking to be acquired. I was also brought on board to launch the product and to get VC for the company. I was making the trip to Sandhill Road to try to capitalize the company in Series A funding, but over the course of that happening, we got several calls from people who had seen the app on the news, gotten it, used it, and loved it. One of those calls was from CNN, from an executive who was really interested in the product. When we first talked to him he was just a big fan, asking how we could work together.
This turned into how can we have a strategic partnership and eventually into how can we acquire you, because they were so excited about how Zite could be used in the long term for CNN.
Now, from our perspective there were certain advantages to going it alone. We believed we could build a really big company, we had a really unique offering, but there were a lot of challenges ahead of us also. I think one of the things that made the CNN offer very attractive is that we continue to run as an independent company. I will continue to run the company as CEO. I am not a VP here at CNN, I'm actually the CEO of this company. We are remaining relatively independent from CNN, we don't preference their content.
We worked this out all prior to term sheet. It made the deal really attractive because it solved several problems for us. We essentially get the best of both worlds. We are well-capitalized for long-term success and we run really independently, however we still get to take a lot of the advantages from CNN.
For example, distribution was always a big problem for us. When people download Zite they tend to really like it and come back to the application. But distribution is really hard for an iPad app these days with so many other apps on the market. So CNN had incredible reach with their site, 13 million mobile products in market, and that really excited us. Some other things they had expertise in that we did not were areas like media and scale. Obviously CNN is a very large media company associated with Time-Warner, and we are a group of technologists with expertise in search. About two weeks after we launched we got a cease and desist from a major publisher. We looked to CNN for their knowledge in how to navigate this market.
So, what is great about this partnership is that we retained our independence, we can run on our own, but we can leverage CNN at the right points. We had a very long due diligence period, which I think was very good, because during that period we looked at business goals and made sure we were aligned and why they were buying us, and that they understood what we could do for them. I think that was actually a really healthy exercise. Even though the due diligence took longer than we would have liked, I think that the fact that we had so many people in the room, so many heads in the room, when we actually announced the deal I think that everybody at CNN who had participated in the deal was really excited about it.
The last thing I would like to touch on is actually the success of the announcement itself. There were more articles written on the day of the announcement of our acquisition than there were during the announcement of our launch. I think that is really important, because when you do one of these deals it is not just about getting the paper signed, it is really about what happens afterward and setting yourself up for success. We were really concerned, for example, with what it would be like if a large media company bought Zite, who was supposed to be agnostic to content, and started forcing content in. We made sure that message was delivered loud and clear, in multiple ways, like personal blog posts form me. I did a video with the CNN executive who discovered us the day after we launched where we talked very candidly to each other about what this meant, the new world, where he saw us going, and I think that translated into a really solid message.
So, CNN gets out of this that they are seen as a really strategic player in the media world. Zite seems like we're really smart because we solved a lot of the problems that a startup has and we are running toward successful acquisition.
That is the story of Zite and how we were acquired by CNN.
Dougan Milne
Thank you so much, Mark. We do love the Zite story, it is fun to see the juggernaut of traditional media and this hot startup for the iPad, it's a great combination.
If you have any questions, we're hoping to have time for Q&A, but we're running up against the clock. I will go ahead and introduce our next seller's panelist, Mansour Salame, chairman and founder of Contactual. His deal closed less than a month ago with 8X8, they are a publicly traded VOIP and video conferencing solutions provider. Mansour, thank you for joining us.
Mansour Salame
Thank you. My name is Mansour Salame, I'm the founder and chairman of Contactual until very recently. I'm going to tell you about the experience we went through and the logic we went through in deciding to sell the company.
Before we do that I'm going to quickly give you a high level of what Contactual was and what space it played in. Contactual had pioneered the cloud/SaaS contact center tech space, starting back in 2000. What is a SaaS contact center provider? It is a tech provider than can offer all the technology that a call center needs to run through the cloud or over the internet. The only thing our customers needed was really a web browser and a web connection and they could have their call center agents and operators anywhere they had access to the internet.
We spent a lot of time on technology. By the time we were sold we had filed 8 patents, one was granted and 7 were on the way. We had about 150 man years in the product, so it was a very high bar to entry to play in this space. There is a very high level technology required to run all the call center applications.
We were selling direct to a telesales team, but we were also scaling, through partners and channel sales distribution. 8X8 was one of our resale partners, but we also had Bell Canada, we had CenturyLink, SAASTEL, etc. By the time we were acquired, we had provisioned over 500 call centers and organizations pretty much around the world, virtually on all continents. One important point was that we were profitable and growing. We had not raised a lot of VC, but we had focused on being profitable and we had been for a while, and we had growth in healthy double digits.
The question was, if we were doing well, why did we decide to sell? Well, back in June of 2000, Cisco made and announcement with a competing product, in fact a broader suite of products that addressed all the communications needs of an enterprise and it was going to be offered over the cloud with partnerships with a lot of telco providers. Those Telco providers were actually our channel partners.
The second thing that happened is that shortly after this announcement, within just a few weeks, all of the major call center providers made similar cloud announcements. The market started to heat up and that created both a threat and an opportunity. Obviously it was a threat because we were very concerned that a lot of those providers were going to go after channel partners which was really our growth strategy and would lock us out and we already saw that we were in conversation with a large telecom provider and a couple of weeks after the Cisco announcement, they put everything on hold. We were actually in the process of signing a contract and on-boarding a joint customer and they put everything on hold and it is still on hold today.
However, it created an opportunity because we realized that most of the players in the space were old, traditional on-premise providers who would ship boxes and software. We knew that their assumption that it was an evolution to go from that to SaaS technology was in some cases overly optimistic and in others totally naïve. We knew that they didn't have the tech so we thought it might be a good time to go out.
We really had two options, either to raise a lot of money and go fast because we couldn't stay small even though we were profitable and growing, and that would have taken us out for 5-7 years and a lot of our investors didn't have that time on their horizon, or we could look at partnering and having an exit in the short term.
We hired a banker and we went and talked to a number of people. As we had anticipated there was a significant level of interest. We had received multiple LOIs, and the discussions were going quite well. However, at the beginning of the M&A process, our board had very high expectations. They knew we had built a very good company, they knew we were profitable and they were really on the top range, maybe even beyond that, when it came to valuation. They had asked us to guide some of these prospects and potential acquirers and maybe that overly high expectations maybe turned off some people.
However, in the end, the acquisition by 8X8 was the best possible outcome, I'm sure. We are still in the game, so we have 8X8, we have stock, and we do believe that the best years of Contactual products and the 8X8 products are behind us, so by having stock we can participate in the outside and with 8X8 we're obviously part of a larger company, but they have a much larger product portfolio. We are excited for the acquisition and we're looking forward to seeing what 8X8 will do in the cloud communication space.
Dougan Milne
Mansour, thank you so much for sharing your story, I really appreciate that. And congrats on a successful exit to both of our panelists today.
We did get a lot of great questions through Q&A, unfortunately we don't have time to do them online today, we'll have to answer them offline. I do want to turn it back to Daniel to really quickly talk about our upcoming events.
Daniel Holland
Thanks, Dougan. I just wanted to overview our upcoming conferences. We will be all over the world in the next 45 days, from London to Oslo. We'd like to invite you as guests attendees of this webinar complimentary passes to these events. These are the most up to date and informed educational seminars you can attend for tech M&A. We'll send you an email with the passcode for your free entry.
Next month we will be talking about the cash flood, how US corporate dollars are locked up overseas, we'll talk about mobile madness and new tech M&A activity in Japan.
Thanks to all the speakers and thanks for participating. Hopefully you can join us in person at an upcoming conference. That concludes our Q3 world tech M&A report.