October Corum Webinar
September 2, 2010
European Buyers + Mega Mergers + Deal Survival
Mark Reed
Hello and welcome to the Corum M&A monthly report for
September of 2010. 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 took a look at the attendance roster and I see that we
have about 20 countries represented through their software execs for today's
event.
This is our agenda for today. We'll be going through the market overview as
we usually do. We'll then move into a
special section highlighting European buyers,
we'll transition there to the Corum index and talk about M&A metrics
and the six sectors we cover every month and we also have a few new sections
just for this month's webinar, Mega mergers, a number of which have happened
recently, and also surviving the deal, what happens after the transaction
closes.
As usual, we'll go over the Q&A right at the end.
Moving to the speaker list, we have a great slate of
speakers today, Bruce Milne, CEO and founder of Corum Group will start off,
we'll then go to Miro Parizek, managing director of the Corum Group
Internationa, which is based in Munich, and he'll introduce the Corum
dealmakers from Europe. We also have Nat
Burgess, president of Corum Group and Dougan Milne, VP of research, speaking
today. Then we'll wrap up with
Q&A.
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 Bruce Milne.
Bruce Milne
Thank you, Mark. We
have a lot of ground to cover today. It
has been a very active time. I suppose
all of you are feeling like you are on a roller coaster ride with the stock
market.
Let's kick off with Asia, what's happening there. China's
manufacturing picked up from 2009.
India's growth is the most since 2007 and the other emerging Asian
countries are blistering along at a very fast pace.
So what does that mean?
Well, the dollar slid to a 15-year low against the yen.
Next month, I'm going to go into what this means to you in a
little more detail. But a couple of
things are happening. One is that there
is a net capital outflow from Western countries to Eastern countries and it is
fairly significant. We'll talk about
that more next time. The new companies
that are coming along and going public are in the east, not the west. Here's an interesting statistic for you. The number of listed companies in the US has
reduced by 39% from peak. They're simply
not going public because of regulation and other reasons. We'll cover that next time, too.
Let's look at Europe.
Scandinavian banks are pushing back at Basel. That's a word you're going
to memorize. The Basel bank agreement,
which came about some years ago, said that all the banks would agree on some
international standard. The
international standard, when they finally come up and are flustered to see how
they're doing, a lot of banks are realizing they're going to have trouble. We've been going through these bank stress
tests in the US and Europe, you hear a lot of press about that, but as an
international standard, the Basel bank agreement that says that you have to
meet a much more stringent standard, is coming up soon. Some of the strongest banks happen to be the
Scandinavian ones, and they are already pushing back.
We have UK consumer confidence bumped up a bit, although it
is still down overall. The Eurozone
austerity has taken its toll. You see
especially in Germany where they have had these measures to really cut back
rather than to provide stimulus, and this is obviously affecting growth. A couple of other headlines indicate that the
UK economy is seeing signs of strength and then we see that the UK economy is
set to take a pounding as traders turn bearish.
We have a real mixed bag. While
the overall real estate market may be down, there will be a kick up for one month,
for example, very slightly. Sweden,
though, is doing quite well.
Shifting to the US, we dropped from over 3% growth to 1.6%
in Q2. That's not good, because we had
been living a bit off the stimulus, inventory build ups and a couple of other
things. It is down, so that's why
they're now talking about more stimulus.
“US existing home sales plummet.” I think the stats were the worst drop in
history or in 43 years or something like that.
Mortgage rates are at a record low, I put this on there a couple of days
ago, it might be even lower than that now.
There has been a bit of bumping around with home prices, the reality is that we
have a lot of homes, I think I mentioned this in the last webcast and we'll
cover it more in the next one, there are around 10 million homes that are
actually technically in default.
Consumer confidence rose a bit last month and that helped
the stock market stay up a bit. We saw a
jump in the market a bit yesterday because of the manufacturing index. It was at 56 and they'd been figuring from 49
to 56.
A couple of other things, though, if you want to use these
indicators. Summer box office is at the
lowest in 13 years. Consumer confidence
continues to be down. Last month we
talked about the single largest drop in one month and that still continues
down, although we see week to week pick ups and upticks.
Auto sales, we saw where GM dropped 25%, there's that
headline. Auto sales, they believe, will
end up at a 28 year low. This is a time
where GM is restructuring under their fourth CEO in the last couple of years
and they are trying to go public.
So, also as a result of the lower home marketplace, we're
seeing that treasury two-year yields have dropped to a two-year low. Money is cheap, and that actually helps us as
we'll see in the M&A field. The
housing sector people are worried about this because it continues to be a crimp
on credit. Banks won't loan on homes,
and I know some of you are trying to sell houses and it has led to some
interesting email exchanges here.
Fuel stocks are at a 20-year high, so we're obviously not drawing
down our oil stocks, we're building them up.
I have mentioned this a few times before, in sluicing
through data for this presentation, I thought this was very interesting for a
major research group, how of the $1.4 trillion of commercial real estate debt
coming due by 2014, roughly 52% is attached to properties that are under
water. It takes a while, its not an
individual defaulting on a mortgage, and it takes a while to work these things
through because of the cycle, but 52% of the properties are underwater. This, to me, is something to really worry
about.
In technology, Microsoft founder Paul Allen sues Google,
Apple, eBay, over web-based patents.
That's going to be fun to watch; he obviously has the money to fight
it.
We're seeing kind of a summer chill for PC makers as sales
wilt, but the reality is that technology is just roaring along, it's still
generating a lot of cash as we will see.
Amazon, as of two days ago, is now discussing online
subscription movies and TV services with studios. What's interesting is that
you'd think that would hit like Netflix, as their stock just roared. All this is doing is underscoring what a
great position they have out there. I
wouldn't be surprised if they were acquired.
Intel cut their Q3 forecast, but as you will see they were
voracious with acquisitions.
Salesforce beat estimates after adding customers and this is
interesting, the HP board, after dumping the previous CEO, authorized $10
billion in share buyback. That is one of
these issues, when you have all this cash, what do you do with it? Well you can buy shares back, offer a
dividend or you could buy somebody.
We have companies overall sitting on $3 trillion in
cash. Are you going to put it in the
bank and get 1%? I don't think so.
Intel bet its chips on McAfee, later on Infineon, they were
the big dog this past month.
The other headline said we saw August as a big M&A
revival, even Fujitsu stepped in and said count us in too.
We talked about the Japanese coming back, the recent deal
that Mark did was with a Japanese company that are flexing their muscles.
3PAR, that was fun to watch.
The headlines said HP and Dell back and forth until we said enough
already. Dell went out for 3PAR and they
went back and forth, up to $2 billion and then this morning HP said $33 a
share, trumping Dell. So, what's this
about, why are they doing this? You have
a company at $235 million with $21 million in profit selling for over $2
billion. Well, there is a history of
these companies battling, there are some corporate egos going on. HP bought EDS for $14 billion, Dell bought
PERL for $4 billion. There is a battle
for supremacy in this sector and basically what they are using is a warchest to
beat out each other. It is very hard to
build another major player in this sector, so they are using their caches to
bludgeon each other.
HP is going after Dell, you had Intel going after AMD for
example. Dell needs a deal, they don't
want to sell EMC systems, they want their own systems, and they're kind of
following the lead of Intel, Intel is considered smart guys and they are being
very aggressive with their acquisitions and we're going to see more about this
in our special presentation by Dougan Milne on the mega mergers.
Speaking of mergers, we completed one this last month with
our friends at Google for Instantiations, a Java and Apex development tools
division. We'll have more about that in
upcoming months.
With that, let me shift over to a special presentation on
European buyers. Miro Parizek is
managing director of CGI, Corum Group International based in Munich.
Miro Parizek
Thank you, Bruce, and hello everyone. This section here is about European
buyers. Obviously, you hear the names
Google, Intel, HP and it sounds very US oriented, but there are a lot of buyers
here in Europe, and that is what we will be talking about today, me and my team
here. We'll do a quick introduction, we
don't have as much time as we'd like to have.
Today we will start off in the UK.
It is my pleasure to introduce John Melotte. He has been in IT for three decades before
joining Corum in 2007 to head up our UK presence. Over to you, John.
John Melotte
Hello, this is John Melotte speaking from London. The UK has an active M&A market in
Europe, as well as being home to the European headquarters and research centers
for many US and international IT players, it also has a good number of its own
global businesses. While we at Corum
have a more complete list for you to look at, let me highlight just a few. BT, the giant British Telecom, with revenues
of over $35 billion, invests heavily through M&A. During the 2007 peak, it completed 13
acquisitions, one a month, buying international businesses in comms, networking
and integration services.
Pearson, a publishing conglomerate, recently acquired a
number of US-based education media companies and is actively looking at
more.
Logica, a firm I used to work for, provides EPOs to
government finance and enterprises. It
has made several acquisitions, including Corum clients in banking.
QinetiQ regularly acquire (xxx 13:29) and defense companies
in Europe and the US. Right now this is
a very hot company.
Sage is a leading vendor of business management
software. It is one of Europe's most
acquisitive companies, including some firms that Corum represented in CRM and
enterprise technology.
Autonomy, a leader in the analysis of unstructured data, is
interested in acquiring content, information, and document management
businesses.
Finally, don't forget that London is the largest European
center for venture capital and private equity.
These guys are in active buys.
There are European partnerships based here in London looking for US and
global investment opportunities and US firms with European funds. Back to you, Miro.
Miro Parizek
Thank you. Without a
doubt, London is the hub of activity in European M&A. In fact, over the years, Corum has sold
dozens of firms to UK buyers such as those like Logica and Sage that John just
mentioned, but also Macro4 and Kewill and others that have since been acquired
like Reuters. So, lets take a moment now
and move across the channel now to France.
It is my pleasure to introduce Jérôme Fougerat,
who had nearly two decades of experiene in the software industry before joining
Corum four years ago. Jérôme, please tell us about Southern Europe.
Jérôme Fougerat
Hello, this is Jérôme is
Paris. France is the third largest
software market in Europe and doing well with more than 10% growth last
year. While our research has a
completeness for you, let me profile a few of the most active acquirers that
Corum has dealt with recently.
At the top is Dassault Systemes,
who's revenues are more than € 1.2 billion.
Last year their acquisitions ran from small software to a big IBM PRM
for $600 million. This June they paid more than €135 for a semantics search
engine who's revenues were less than €80 million. They are currently looking at
acquisitions in life, health and technology that can improve their
collaborative solutions.
GFI Informatique is a leading IT
services firm with revenues of €665 million.
According to their head of software, GFI is looking to strengthen their
offerings in HR and public (xxx 16:04) in Europe as well as North America.
Cegid, with €260 million in
revenue has made at least two acquisitions per year over the last five years,
including the dual acquisition of HR firms and a web-based platform for
HR. They are currently looking to
acquire software companies in the US in retail sector.
To finish this out, I'd like to mention two more buyers in
Southern Europe. Reply is an Italian IT services company with €340 million.
They jumped to acquire 75% of (xxx 16:43) Solutions at €12 million
revenue. They are a (xxx 16:46) based
company, specializing in consulting and systems integration and Oracle.
Finally, in Spain, Service Point Solutions, with €220
million in document management, just announced they are in the process of doing
six international possible transactions.
At the peak of 2010, there are four deals a year, so they are excited
for acquisitions, like so many others in Europe have increased.
In summary, definitely consider France and Southern Europe
in your search. They represent almost
30% of the buyers in Europe. Back to
you, Miro.
Miro Parizek
Thanks. An important
thing to note here is that these right-hand columns are the dollar revenue
numbers, maybe you were able to catch that based on what people were saying
when referring to specific firms. In
fact, we ourselves have had experience in France, selling to private and public
companies and PE firms like Ever and Sword Group. These lists are just highlighting some of the
names of buyers, there are many others you may have never even heard of.
So, let's continue eastward to Eastern Europe. It is my pleasure to introduce to you Frank
Berger, who recently completed one of the largest IT deals in the region. He has been in the business for four decades,
joining Corum in 2006. Over to you,
Frank.
Frank Berger
Thanks, Miro, and hello to everybody. With the emerging free market and
Western-oriented policies, Central Europe is the fastest-growing region for IT
services and software. The reasons are many,
including a highly-skilled, multi-lingual labor force, a technology oriented
education system and a competitive structure.
Double digit growth is the norm among the many early stage technology
leaders. I call it Central and Eastern
Europe or CEE, by the way, because countries like Czech Republic and Poland see
themselves as belonging to Central, rather than Eastern, Europe. Here are a few of the major players in this
geography.
Asseco Poland provides our bank management software with
revenues over $100 million US dollars.
The company has made six international acquisitions over the past twelve
months and is looking to do more.
ESET, an anti-virus vendor from Slovakia, with revenues over
$75 million US dollars, is looking at M&A for their global growth strategy,
especially in the US. They made their
second acquisition since 2008 last May, the anti-spam software firm
Comdom.
There is a good number of very interesting companies in CEE,
well positioned in the market and poised for growth. Many are still private, like the security
specialist AVG in the Czech Republic.
They are aggressively aimed for growth by acquisition. AVG just bought the US distributor Walling
Data.
One other example I want to mention here is the IT services
provider Ness, formerly number 2 in Czech Republic, Corum sold them Logos,
another major Czech IT services firm in 2008, to become the largest IT services
supplier in the country. As Ness is
headquartered in Israel, this example misses today's topic a bit I'm
afraid. We will be talking about Israel
in some more detail next time.
Before I finish, two more points. One with its superior proximity, CEE is
gaining traction in sales and customers as global companies look to branch out
from traditional Indian IT services suppliers.
Two, the biggest country in the CEE, the Ukraine, has the highest IT
industry growth rate among all European countries and we expect new buyers to
emerge here in particular.
Thanks for your attention, back to you Miro.
Miro Parizek
Thank you, Frank. You know, if participating in the
Eurovision Song Contest means anything, then Israel is part of Europe as well,
so maybe it's not that far off the mark, Frank.
Anyway, speaking of AVG, I noticed that four of their last
seven acquisitions were US targets. They
have now also filed their IPO. That
should be in the next couple of months and I'm sure we'll be seeing more from
them in the coming months.
Moving back west to what is often referred to as the DACH
region, it is my pleasure to introduce Tanya Froehlich, in our Swiss
office. Tanya is multilingual, speaking
English, Thai, and German. She joined
Corum in 2006 and was appointed branch manager in 2007. Tanya?
Tanya Froehlich
Thanks, Miro. DACH
refers to the region containing Germany, Austria and Switzerland. Germany in particular is known for having
some of Europe's biggest software companies including SAP and Software AG. SAP has closed 36 transactions since 2002 and
recently signed a landmark deal with Sybase for $6.1 billion. Out of 36 deals, over half the targets were
US companies.
Software AG has made a number of acquisitions in the US,
focusing on service-oriented architecture and database management, totaling
well over $100 million in deal value.
Buyers outside of Germany include ABB, a huge industrial
player out of Switzerland who recently purchased Ventyx, a massive management
and mobile workforce management vendor for $1 billion, that is four times
trailing revenues. Although focused on
automation technology, this giant has its eye on software as well.
Corum is very active in the DACH region and keeps regular
contact with these major buyers, so when thinking about an M&A process in
Europe, the DACH region should be one of the first areas to consider for
potential acquirers. Back to you, Miro.
Miro Parizek
Thank you, Tanya.
Thirty-six acquisitions in the last eight years. That certainly puts SAP in the ranks of the
most prolific buyers list, for sure.
Let me wrap up our European tour, heading due north, with
the Nordic region. I have also included
here the Benelux area in my overview.
Obviously the Nordic countries are pretty well known for mobile, having
global players like Nokia and Skype, now one for a lot of discussion as
well. After the $1 billion Fast Search
and MySQL deals, it became clear that the region is not just about mobile
tech. Before they were bought, they both
were very active acquirers. MySQL made two acquisitions, one in America, before
Sun snapped them up,and Fast Search made eight acquisitions before their deal
with Microsoft, and five of those were in the US.
In all, Nordic buyers have completed over 650 transactions
in the past five years with one in ten being a US target and, of course, dynamo
Nokia leads the pack with about 25 acquisitions I see, and over two-thirds of
those were US-based companies and they continue to stay active this year as
well. But smalle Nordic players are also
busy, for example, Opera Software, the Norwegian browser specialist, acquired
for roughly 3x revenues, a small California-based vendor of mobile advertising
software earlier this year.
While a lesser-known, TGS-NOPEC purchased three American
firms in the past 36 months with $100 million in their sector.
Buyers in the Benelux region were even more US oriented,
making 1 in 5 of their 290 tech acquisitions in the US.
To close up my update I wish to spotlight one of those
lesser-known software giants out of Europe, Wolters Klower. An almost $5 billion Dutch-based publisher
known for its tech packs and regulatory products. It has a software business
worth almost $1 billion within the group.
It has made 19 acquisitions over the last five years and 80% of those
were in the US, so they are a very acquisitive group.
In summary, over 20% of all tech M&A was driven by
European buyers, from east to west, from south to north. As a seller, Europe cannot be ignored. As a buyer, beware your competition.
There you have it from Corum's team in Europe. Thanks for staying tuned, and back to you,
Bruce.
Bruce Milne
Thank you, Miro, that was great. A lot of activity over there, we do about 60%
of our business with buyers and sellers outside the US. Eric, thank you for that correction, SimCorp
is in Denmark, not the Netherlands.
Also, a couple of you noticed that we posted these revenues in dollars,
and obviously with the people that we're talking with they can be off by a
little bit.
Let's move ahead with the section on M&A, the Corum
index. Dougan Milne, the VP of research,
will cover that, as well as a special report on mega mergers and what they mean
to you. Dougan?
Dougan Milne
Thank you very much. August was actually a shockingly
positive month for software M&A. I'm
acting shocked here because August has traditionally been a slow month for
activity and acquisitions and normally a lot of folks are on vacation, away from
work, and things tend to be a little bit slow.
You remember that back in July I was a little concerned about the slight
slowdown in M&A for the month. But
that was coupled with the free-diving market that we saw and it seems like
things have turned around quite a bit and we are not headed in the wrong
direction any more.
There were a lot of analysts who were forecasting that there
would be further decline moving into this quarter, but, in fact, August helped
us recover quite a bit and we are on par with our historical Q3 numbers. Assuming that September runs course as
anticipated.
With that, here are the public markets. Note that I have Dow in green, the NASDAQ in
blue and the S&P tech index in red.
The fact is that our tech index is back to out performing the broad
market, which makes me a little more comfortable than I've been for the past
couple of months where it seemed to be nose diving, there.
In our month over month volumes for software and IT M&A
transactions, we can see that August was up about 10 to 15% in deal volume
compared to what we've had the past couple of years in this month. It is still not where we were in 2006 or
2007, but I think that is okay, we're on a good track here.
Moving on to the Corum index. Now, remember, this is a
bird's eye view of some of the important totals, those averages and percentages
that we have in software M&A. Here
you have a brief snapshot. Some of the takeaway point, high value megadeals
here, there were four in the month of August.
Of course the ones of note were the two huge Intel deals, the big, big
one being for McAfee for $7.68 billion, and that HP/Dell deal which I guess is
not quite finished yet, but it is inching its way over $2 billion.
Some other things to look at here, VC-backed exits are way
up, and then of course our percentage of public buyers is getting back into a
very healthy zone, which we expect to be over 50%, for a normal running.
We're going to move on to Corum's six broad markets. Remember, these are broken down in turn into
a total of 26 subsectors, so for example, those subsectors in the Horizontal
Applications include things like business intelligence, content management,
CRM, ERP, HR, supply chain, and so on.
As a note, before we jump into this, if you're looking for
more information on your specific market sub category, please visit our
website, send us an email or give us a call and we'd be happy to chat with you
about your space and your company.
Our public performance moved up a bit here in the Horizontal
Applications space. We had a little bump in enterprise value to sales at 2.69x
at the end of the month.
Moving over to our deal spotlight, we're looking at the
marketing automation deal and Unica was a big company in this space. This is a
really interesting deal, IBM has really been on a tear of late, doing a lot of
deals. They recently announced that they
were going to be building out over the next few years what they are calling
Project Northstar. This is a suite that
is going to be heavily directed in web content management and web analytics,
sort of everything surrounding content being distributed and understood on the
web. The Unica deal is definitely
filling a strategic gap there, they recently also had that Coremetrics deal,
which was on the analytics side of the web.
$523 million, that was 4.4x enterprise value to sale, that was an all
cash deal.
Moving onto our Vertical Market, here some of the subsectors
are government, energy, and healthcare, etc.
We had a little bit of a dip here in enterprise value to sales, but
looking at our deal, the deals that are happening in this space are still very
healthy, in terms of the multiples that we are seeing. We saw Thomson Reuters, who essentially have
six divisions in their software and services, and the scientific/healthcare
division is one of those. They have been building that out over the past couple
of years to make that more robust. This
is a big deal with the Healthcare Data MGMT group. We didn't happen to get the numbers on that
one, but we do know it was an all cash deal.
Moving on to the Consumer Applications sector, Zynga, these
guys are growing like mad, they've been doing so many deals, I think this is
their fourth or fifth deal of the summer, I think something like six or
seven deals for the year, I'm not sure, I'll have to check. But Conduit Labs
was an interesting purchase. Zynga has
been known for making interesting purchases of late. Conduit Labs is a
music-based gaming company, but Zynga came out quite clearly and said they made
this deal because they needed a position in Boston, on the east coast
there. As you can see in the quote there
at the bottom, “Boston is an epicenter for technology and has a strong talent
in the market...an ideal location for us to expand.” Here we have one of those footprint type
deals, an interesting deal.
Moving on to the Infrastructure market, still at a very
healthy clip in this market, our enterprise value to sales is a very healthy
number and of course the biggest deal of the past two months is Intel's
acquisition of McAfee. You know, there are a bunch of spins here in terms of
what the analysts are saying, but when we start to break down where the true
value of this deal was, you can slice it up if you want, if you look at where
Intel is getting the immediate value, McAfee had a security firm, but that was,
from what I understood, only about a $300 million business line within
McAfee. I think what Intel is really
doing here is trying to export the portfolio and diversify themselves a little
bit from beyond just a semiconductor/chip company, and getting into some other
spaces. I think this is a very smart
deal by Intel and as we have seen they are doing a lot of deals in the software
space and we expect they will do some more before the year is done.
Jumping now over to the Internet space, Google actually made
a couple of acquisitions this month, surprise, surprise. I think they had two or three in August. This
one is another talent deal, from what we understood. They also had another gaming deal in this
space, and then of course we wrap up our deal with them and Instantiations just
a few weeks back. In general, this space
is still doing really well, I'm not too concerned here with the public players
and what we have seen in terms of private acquisitions in this space has been
very healthy.
Our last group here, IT Services, dropped off a bit in the
public numbers, but as we can see with our enterprise value to EBITDA, that's
really how we judge the performance of the IT Services and VPO space. Those stay pretty much the same, and it is in
a healthy place right there, so we're comfortable with that.
For our deal spotlight, this to me is a good, strategic
deal, because Visa has been going up and buying a lot of companies over the
last several months. What we've seen
from them is a deal and a half per quarter.
This is Mastercard getting back into the acquisition cycle here, and I
assume they're going to be spending a lot more money over the next several
quarters, on performance, on outsourcing, and business process out sourcing as
we saw with DataCash here. $520 million deal, all cash.
We're going to shift gears a little bit and move on to one
of our trending topics, one of the topics for this broadcast, and that is mega
mergers. Before we jump in, I want to
take this slide to remind everybody what a megadeal is, what a mega merger
is. As a general rule of thumb, they are
M&A transactions in excess of $1 billion.
I like to be a little more flexible than that. They can also be high $800-$900 million deals
that happen to be highly strategic.
Those numbers are not set in stone.
In general they are highly strategic deals. They may not always be strategic at face
value, they may not bear fruit for years or even decades in some cases, whereas
other deals can be direct plug and play for market share or profitability. There are some reasons and motivations to do
these deals, whereas we see with some of the smaller and mid-tier deals, you
get a lot of deals for talent. We just
saw that Zynga deal where they wanted an office on the east coast in the Boston
area. You don't see talent deals so much
when you look at megadeals, you don't see we wanted an office in Boston deals
in megadeals. What you see a lot more is a big, broad vertical where a company
already has a commanding stance and what they need is to fill in some of that
vertical, so they make a big acquisition to do that. What you will see is market share, buying out
big chunks of market share, you'll see that our big buyers are buying into new
markets, and of course they have to acquire the infrastructure around that, to
have that new market. Then, in the case
of, say, 3PAR, as Nat talked about in one of his recent interviews, the idea of
scarcity really drives up the value in a lot of these deals as well. Of course we also have the option of
offensive or defensive type transactions, on both sides of the table, and these
can really move up the option process.
I want to give you a couple of examples of that kind of long
term versus short term process. I like
to pick on Google, they're fun to pick on because they have done a lot of big
transactions that fit both of these models.
You remember back in 2007, Google spent $3.1 billion on a
PE-owned company called Double Click. There were actually a lot of motivations
behind this deal, but some of them really stand out. This was a very defensive deal. Microsoft was also a big bidder on this deal,
so there's the defensive side. The other
side is that Google immediately gained a controlling force in the world of
online advertising. If they weren't
already considered a giant in the space, now they suddenly have a strangehold
on the market with the acquisition of Double Click. As a reminder, they did almost the exact same
thing this last fall with mobile advertising.
They spent $750 million on Admob, another flip of the switch type deal
that bore a lot of fruit, even within a few weeks. And, lest we forget, they spent nearly 40x
TTM for that.
On the flip side, if we think back to 2006, Google spent
$1.65 billion, or 110x TTM on YouTube.
Now, YouTube has been one of those love/hate things for Google, I assume
it's been a lot more love than anything.
It generates an enormous level of traffic, clicks, views, impressions,
etc, but Google is still very challenged in finding a revenue delivery model
for YouTube. Needless to day, Google has
announced that coming up here in the fall they will be launching Google TV, of
which YouTube will be a big part. I
wouldn't be surprised if they find some revenue and value with YouTube during
that time.
Let's jump slides, now that I think we have an understanding
of what megadeals are.
Here are megadeals by quarters. Corum tracks every transaction that takes
place in the software, internet and IT world, but here you can see that we
filtered out those acquisitions to the ones that make the megadeals
happen. They are broken down by quarter,
going back to the beginning of 2008, and I think it paints a pretty clear picture
as to the trends that followed with kind of the brute force of the recession
there in the middle of this chart. Then,
we look at Q3 2010, we still have a month to go, and we're certainly on a solid
path to maintain, even surpass, our previous quarters for deal value. Big thanks to Intel on that, who created
almost half of the value in the past few weeks here.
Jumping slides, some of the reasons for these megamergers,
and this is another little shift, let's try to understand what is spurring or
escalating this trend over the past several months in particular. Our top ten, even top twenty buyers are
hoarding hundreds of billions in cash, it is just sitting on the balance sheet
and it is waiting for...what? This makes
our share holders anxious. They don't
like to see that much cash on reserve and they want to see it put to use. Nat Burgess always likes to point out that
during a recession our software companies did an amazing job of scaling back,
of ratcheting down and finding out how to be profitable in that rough
environment, but now it is a slightly more accessible economy and they have to
remember how to grow again. They
certainly have the money to do it.
This brings me to another point here, it is an idea that
somewhat revolves around, I guess natural selection. Our recession could have, and frankly should
have, destroyed a lot more companies than it did. There are a lot of industries out there that
were completely shut down and some of the world's largest financial
institutions, a lot of small businesses, ma and pa shops, more than that,
entire industries were brought to their knees.
But, in the tech industry you have a lot of highly educated, highly
motivated, very smart individuals running this industry and we actually fared
much better than most. We didn't lose
nearly as many companies as we could have.
Then, what we're left with here, as the economy is slowly
resurfacing, is kind of a congestion of players in our industry. Some of these players are in a better place
than others and some are hurting more than others, but they are still kicking,
so what we are left with is a number of industry leaders with large stockpiles
of cash who are presented with an interesting and kind of rare opportunity to
make some serious consolidation maneuvers.
That is what we have been seeing happening over the past several months,
that's what we will continue to witness into 2011, and the effects of that
consolidation will reverberate to the mid market. We will talk about that in a couple of
slides.
But first, there are some significant cash reserves beyond
just the strategic buyers. I want to
point out some very interesting groups of potential buyers here. I think all CEOs and all entrepreneurs should
be keeping them in mind.
Private equity, for one.
Nearly a half a trillion dollars raised at their fingertips here, and
their investors have been getting very pushy that they start spending some of
that money. I'm very happy to note that
over the past few quarters that we have seen a tremendous showing by some of
the PEs, notably Thoma Bravo has been very active, Vista Equity, Francisco
Partners, all of them making strong moves for the leaders in the software and
internet markets.
Here is another interesting one. In the last decade or decade and a half, I
suppose, US debt has been heavily funded by international markets, heavily
funded by governments, international investors, and perhaps one of the most
notable ones is China, and what we're hearing recently is that the Chinese
government in many of the Chinese provinces are encouraging local CEOs to go
out and make US acquisitions so that those provincial governments and banks can
actually off load some of these enormous reserves of US credit and cash that
they have on hand. If we stop and think
about that for a minute, this could have major affect on cross-border M&A
in the coming quarters and years, so this is certainly something we're paying
attention to.
Wrapping up, I know that the bulk of attendees in today's
seminar are not in the position to be involved with a megadeal of any
sort. Most of our attendees are
entrepreneurs, CEOs, directors of these small to mid-size software companies,
software and internet IT firms, what have you, but there is plenty of reason
why these software deals are important to you and your company. When the big boys are buying with big price
tags, it sends signals to those mid tier players that all is clear to start
spending money again. This is important
because most of the buyers for those smaller firms are not, in fact, from that
top ten list of buyers, but rather they are some of those mid level buyers and
that further increases that trickle down effect, that frenzy that we have been
seeing and that frenzy and that momentum is always maintained by a continuous
series of megadeals.
Lastly, when the big players are taking swings with their
money bags, they are bidding off each other, they are raising option prices,
those numbers that they end up spending, those numbers get translated directly
back into higher valuations and multiples for those smaller firms that are
looking to sell. You'd be surprised the
effect it has.
That about does it for my section. If you have any questions about your
company's value or the performance of your industry, please don't hesitate to
contact us here at Corum.
Bruce Milne
That's great, thank you, Dougan. Moving ahead, our next speaker will be Nat
Burgess, on surviving a deal. What happens is that most transactions,
particularly those that are not professionally managed, don't make it between
LOI to final close. The mortality rate
on deals that are done without council is about 70%. Statistically those deals that get closed,
according to a recent accounting firm report, I think it was Ernst and Young,
they said 53% of transactions don't meet the objectives of the buyer or seller,
so how do you survive the deal, how do you get from LOI to close and then make
sure that the deal works?
A couple of comments
before I introduce Nat. It is
fascinating the money that is being put into play by China and this year we
have had Cisco, Microsoft and the PE guys in presentations, they have the most
cash, I suspect that we know they're going to make some big announcements soon
and that will have a trickle-down effect. What happens with McAfee now and
Symantec? Watch for them to make
acquisitions. It is fascinating to see
the reasons why people buy. On our
level, we're not doing megadeals, our clients are privately held firms that are
looking for a strategic partner, and in many cases, those buyers,
internationally, like the fact that you have a user base, you have
distribution, you have a footprint in North America or Europe, such as the
situation with Zynga.
Moving on, we wanted to have a guest presenter. Nat is
probably one of the best qualified guys in the country right now for this. He's on a roll, you may have seen him in the
press, he was recently profiled in the Google Acquisition Binge by Time
magazine in the business and tech sector.
Then, in the last month, USA Today talking about tech mergers on an upswing,
he was also quoted as an industry expert, speaking for Corum. Then, just in the
last week or so, he was on Market Watch, and based on that he was invited on
CNBC with Trish Regan just a couple of
days ago to talk as an expert about what is happening with the next tech
targets and what is happening in mega mergers.
Moving ahead, Nat Burgess.
Nat Burgess
Thanks for the introduction, Bruce. As Bruce mentioned, we have been getting a
lot of inquiries from the press. We are
the world's leading seller of privately-held technology companies, we have done
over 240 transactions and we have strong opinions on both the tech M&A boom
that is happening right now, but also on how best to approach these deals. So, from our standpoint, it is not enough to
just get the deal done, we want it to succeed.
That is how we end up doing six deals with Microsoft, five deals with
Symantec, because we have that quality dialogue, we've helped them put together
deals that work.
So, as we've been hammered by the press here and spending
time with journalists who are thinking through these issues, we're hearing,
again and again, the same short list of questions. Why did company X buy
company Y? How much did they pay? Which company will get bought next? Now these are interesting questions and of
course everyone wants to know the answer, but are they the right
questions? Questions they may be should
be asking are: Why do some acquisitions succeed and others fail? How can an acquirer insure successful
outcome? How can a seller help make a
transaction work? In other words, can we
simply rely on a buyer to make all the right decisions and make this happen?
Can we have an influence on the outcome, even if you are a small tech company? We care a lot about this, because after we get
a wave of consolidation or activity, everyone is digesting and starting to
think through next steps and strategy, they focus on which deals worked and
which deals didn't and obviously which advisers brought us the deals that work
and the ones that didn't.
We have been pursuing this dialogue as well, and one of the
things that we have done in conjunction with EMC is to put together a
whitepaper on tech M&A, the deals that succeed, the deals that fail,
surviving the deal, but more importantly, making the deal work. I would encourage you all to go to our
website and download the whitepaper, there is a lot of great information there,
buy side and sell side. Today what I'm
going to do is just basically walk through some of the key findings and then
again, feel free to get it yourself and explore these questions in greater
detail.
First of all, how do you define a successful
acquisition? There are statistics out
there from Ernst and Young saying 80% of deals fail, from KPNT saying 75% of
deals fail, but what is failure? I think
the broad definition is that the acquisition failed to meet the parameters or
the plans that drove the deal. You can
measure that with return on assets.
Another measure of success and failure might be volatility. If your company is at risk as you make an
acquisition and the stock price solidifies and stops fluctuating, that is a
success, now you have a platform to build on and confidence from the
analysts.
Another key benchmark is growth. When we sold Ghost to Symantec, it was a
couple of guys in a garage in New Zealand, and then within a couple of years it
was $100 million plus business, so clearly a success.
Another benchmark is competitive advantage, basically having
new technology or people that can help establish a leadership position against
competitors.
Then, finally, one that is hard to measure, but that is
really critical in our industry, is acquisitions that build cultural confidence
in companies, they buy a leader, they become a leader, and they can take that
position against their competitors and that confidence actually does a lot to
move companies forward. But again, that one is hard to measure, but critical.
So that's how you measure success, how do you achieve
it? From the standpoint of a buyer,
there is one key element that matters more than just about any other. The reason we did this study in conjunction
with EMC is they know how to do this.
What they understand is that tech acquisition doesn't just succeed on
its own. One of the fatal mistakes that
buyers make is they somehow think that someone else's business is easier to run
than their own and that drove, I would say, most of the consolidation during
the dot com boom. A CEO was looking
around and said, “hey, those guys are growing fast, that must be easy, let's go
buy them.” They buy them, they don't
invest in integration and launch and the thing falls over, every single
time.
EMC on the smaller deals, a couple of numbers they put out
in the past, they will invest up to 25% or ever 50% of the acquisition cost in
integration and execution. A second
factor is accountability. If you buy a
company, you want to set a plan for what you expect it to achieve and obviously
put the resources behind it to achieve those goals, but then measure every month,
are you achieving the plan, are you failing, if you're failing, why? Make it work.
Another key element is leveraging synergies. If you buy a couple companies and now you
have systems and different products that are almost competing with each other,
you get failure. If you basically pull
together a consolidated, synergistic strategy, you can achieve success, and
that is painful for everyone involved, but it is necessary.
Then, finally, you can't assume that it will just work out,
because it won't. You have to make an
effort to make it work.
What about from the standpoint of the seller? You're going to be negotiating a budget for
your now division and you will be help accountable for that, so be
realistic. If you require resources to
hit the numbers, ask for them, but set something achievable, not simply
aspirational. Invest synergies and best
practices. The buyer knows how to do
things you don't know how to do, so learn from them. Adopt the bigger
vision. Maybe you were a $5 million
company that was excited about achieving $1 million in EBITDA and that's great
when you're a $5 million company, but if Microsoft wants you to be part of
Virtual Earth, you've got bigger fish to fry, so expand your vision, adopt the
buyer's vision and work with them.
Avoid earn-outs that define strategy. If you're agreeing to do certain things or
achieve certain milestones that lock you into a strategy, think carefully about
whether that might be in conflict with the right strategy six months or 12
months down the road, if you want to be working together with the buyer for
success.
Finally, culture clash seems painful at first, but it can be
an opportunity in disguise. One of our
clients just signed an LOI on Tuesday of this week. They are a very R&D focused firm, they
probably have 75% of their staff in R&D.
The buyer is very much a sales and marketing oriented firm, it is just
core to their DNA. Get these guys in the same room and it is oil and water,
they are having trouble kind of seeing eye to eye or even having conversations
that are aligned. But, the opportunity
is fantastic because together they could easily triple in the next few
months. So they need to figure out a way
to make this work, so they can actually achieve those goals.
That is just a quick summary, I encourage you all to
download the EMC whitepaper and explore these in more detail.
Bruce Milne
Great stuff. It is
perfect that we end up at the Corum events, I'll just briefly turn this over to
Mark to give us an overview before the Q&A.
But those issues about how you get through due diligence, how you
prepare to get to the point of getting to due diligence, and to make sure this
is a deal that is going to work, that is covered in detail in our Selling Up
Selling Out conference, which is the most attended executive conference in the
history of the technology field. They
have run every week since October of 1990. Mark, before we go to the Q&A
here, he's going to tell you about the conferences that we have coming up.
Mark Reed
We have our Merge Briefing, which is about a 90 minute
event, a high level focus on M&A and it gives an overview of what is in the
Selling Up Selling Out conference. For
that, all of our attendees on today's event can receive a complimentary
pass. When you go to our registration
page, you will find it at the link on our webpage called Conferences and
Events. You will be able to go to a
registration form. The promo code for
today is 31BC. This is the promo code
and that will waive the fee for both the Merge Briefing and the Selling Up
Selling Out conference.
Bruce Milne
Great, thank you.
Let's go to Q&A. Mark, if you
want to queue up those questions and I'll close with the Corum event that I
like the most every year. It happened
just two days ago, we went up to Langara to go fishing with some of our
clients. It is a thank you from us, we
take them fishing for having done a successful transaction. This year was extraordinary. The only time I can recall catching more fish
was in 1987. We've been doing this a
long time. That 28-pounder that I have
there was just 48 hours ago and it was indicative. This is the morning's catch there, with two
guys on the left. Wow, the ling cod were
crazy. Big halibut, 200 pound
halibut. Right here we have Bruce Ringrose
and Andy Milford on the right, and in
the center is Bruce Lazenby. The thumbs
up is for a great catch, but what is interesting is that the smallest one there
is the cause for the celebration. You catch five different kinds of salmon,
Chub, King, Coho, Pink and Sockeye, but you don't catch Sockeye when they're
spawning, because they don't bite on bait.
However, they caught the first Sockeye in 23 years, that's the fat one
at the bottom, there. So,
congratulations. The Sockeye run going
into the Frazier river is the largest since 1913. We like fishing, so we're happy about that.
Mark, let's go to the questions.
Mark Reed
Thanks, Bruce. The
first question, I'm going to direct back to you, Nat. It is short.
Where do people find the whitepaper that you referenced, what's the URL?
Nat Burgess
Good question, sorry I didn't mention that before. If you just go to corumgroup.com, on our
landing page you'll see that there is actually a video of the interview we did
the other day with Trish Regan on CNBC and then right below that is a live link
to the whitepaper. You can also just
Google bucking the trend Corum EMC and that will take you right there as
well.
Dougan Milne
And, Nat, just to make it even easier on our attendees
today, our IT guy just put up a link in the chat window, so if you're on the
Webex interface right now you can go to the chat window and the link should be
there.
Mark Reed
Thanks, Dougan, thanks Nat.
I see we're approaching the top of the hour here, so we're going to have
a to have a couple of short questions, but these are both on the European
theme. John Melotte, I think I'll direct
the first one to you. It comes from the
perspective of the US company. The
question is, “My business is based in the US.
How does Corum's process get me in front of European buyers that you
have mentioned?”
John Melotte
An interesting question, Mark. To put it into context, 60%
of Corum's deals are cross-border and many are cross-continent. For us at Corum, looking for buyers across the
world, not just in the US and Europe is very much normal business for us. So to answer the question, for a start, Corum
works very much with a team, right from the earliest contact with a client. For example, last night my time, I was on a
conference call for a kickoff meeting with a new US client. Physically the meeting was being held in our
US offices. I or one of my European
colleagues will be involved with the list of potential buyers and the messaging
that develops. On top of this, every
week, all Corum staff run through all active projects on a Webex call, so if I
overlook a European angle on a client, then one of my colleagues will pick it
up.
Secondly, there is our knowledge. Just as my US colleagues spend much of their
time seeking and meeting potential buyers, so we do in Europe. This knowledge is captured in our proprietary
database, it is coupled with the ongoing analysis of (xxx 59:18) across the
world, hammered out by Corum's research teams, involving people like Dougan,
whom you heard speak today. It means
that Corum has unmatched insight into potential buyers on every continent. For many of these buyers, there will be a
existing personal relationship with Corum's staff. This compact helps open doors for my US
colleagues approaching a European buyer, and of course, in some cases, I will
get directly involved if I have a particularly strong relationship with a
European buyer or if a local meeting in Europe is needed to help (xxx 59:49)
for US-based clients.
So, in summary, team work, global research, and people on
the ground. Oh, and of course, a lot of
good, honest hard work.
Mark Reed
Thank you, John, I appreciate that.
Frank, I have another question here that is probably best
directed to you. Here it is. You mentioned a deal that Corum did in the
Czech Republic. The question is this:
Would you say that valuations for transactions in Central and Eastern Europe
are in line with those in the Western hemisphere?
Frank Berger
Well, Mark, thanks for the questions, it's a good one, I
like it. Generally I would say that
valuations of transactions in CEE are following the trends in the Western
world. I should add a word about
averages. Here individual transactions
will certainly be done significantly above averages, reflecting the value
enhancement on the seller's side, usually.
I'm happy to say that the deal we are referring to here was one of
those, well above average.
Mark Reed
Okay, thank you Frank. I see that we are at the top of the
hour. We like to keep these to 60
minutes. Let me pass the mic back to
Bruce to talk about an event that we are platinum sponsors of.
Bruce Milne
I'll turn it over to Nat, who is the chair of the World
Financial Symposium, which is a must-attend event. Nat, can you tell us what is happening with
that?
Nat Burgess
For the first time ever, this event, which is co-sponsored
by Morgan Stanley and a number of others, historically has been in London, New
York, and San Francisco. Now it is
coming to Seattle on October 5th, and we're going to have experts in
PE, VC, angel funding, ICOs, and then a lot of the local heroes from the local
tech community, guys who have sold for hundreds of millions of dollars and
actually a couple of speakers who's deals will be announced...one's going to be
announced today! A really interesting
transaction, a great speaker, and a lot of great information for any
entrepreneur who is trying to figure out how to grow a company, how to fund it,
how to exit. That is October 5 in
Seattle, check worldfinancialsymposium.com for more information.
Bruce Milne
That's great, Nat, I know it will be a great event. For those of you who are flying in, let us
know, we'll set aside some time for you to come meet our staff. Mark?
Mark Reed
Thank you, Bruce and Nat, for that, and also thank you to
all of our other speakers. That is it
for today. Thank you for joining us and
hopefully you can join us at either Seattle for the World Financial Symposium
or for another conference in person.