July Tech M&A/Half-Year Update
Introduction and Spotlight Reports
Bruce Milne
Welcome to Tech M&A Monthly, our special mid-year report on 26 markets. I’m Bruce Milne, your moderator for today, coming off the best quarter in our history. We have a lot to talk about.
Our agenda today includes special updates on SaaS, Mobile, Big Data, Social and Gaming. For those of you who tuned in to our annual report in January, we’ll be doing a mid-year report that follows up on those.
We also have a special research report with a briefing on the healthcare market by Rob Schram.
Let’s first hear about SaaS from Ward Carter, chairman of Corum.
Ward Carter
In the SaaS markets, we continue to see high interest levels from both strategic and financial buyers for our SaaS clients. Looking at announced deal transactions, the median purchase price multiple for SaaS companies for the first half of this year was 3.4x revenue, up slightly from 2012.
Taking a look at some of the larger deals announced, the top transactions were in the vertical markets, including two healthcare solutions deals. AllScripts acquired dbMotion for $235M, or 9.4x revenue, while Cerner acquired PureWellness for $50M at 7.2x revenue.
Salesforce acquired market automation vendor ExactTarget for $2.5B at 7.6x revenue, and Trulia acquired Market Leader which is in the real estate vertical, for $355M or 7.4x revenue. All in all, staggering statistics.
We remain bullish on our M&A outlook for SaaS companies, and this business model continues to attract strong attentions in the lower middle market companies we represent.
Back to you, Bruce.
Bruce Milne
Thanks, Ward. Ward was a special presenter at the SaaS University recently.
Now let’s move to Ed Ossie on Social.
Ed Ossie
The market for M&A in social is maturing. The real interest now is in those tools which are actually finding ways to create and extract real value from the world’s day to day social interactions online. This includes social monitoring and analytic schools for input. It also includes social platforms that better manage social output. As we look at the marketplace and interact with everyone from brilliant founders and entrepreneurs to major public buyers, we see a third generation of tools emerging, focused on customer engagement.
Much like the dot-com era, many firms focused on eyeballs first, and now is the time when firms need to turn those eyeballs into an actual ROI by mobilizing and driving action among fans and followers.
A number of deals this year have been driven at least in part by this goal, from TripAdvisor acquiring TinyPost, Facebook acquiring Pulse, and Salesforce acquiring Clipboard, these are mostly small deals, but as these engagement and mobilization tools mature and grow, we think you’re going to see a lot more money move around in this segment. Social megadeals like Yahoo/Tumblr and marketing megadeals like Salesforce and ExactTarget give an indication of the opportunities that are really out there for innovative companies that can bring spaces together effectively.
Bruce Milne
Thanks, Ed. Now let’s hear from Jon Scott in Europe.
Jon Scott
This week I’m in Paris, not my usual Amsterdam location. I’m traveling this week and meeting with software execs in Berlin, Munich, Rotterdamn and Paris at Corum’s Merge Briefing events. You’ll recall last January I spoke about the world being in a mobile revolution year in and year out. That is affecting all tech sectors.
Security and navigation are no exception to this mobile explosion. In June Google acquired social navigation company Waze for a whopping $1.3B, beating out both Apple and Facebook. Google plans to integrate Waze’s traffic features into Google Maps.
In May, Vista Equity Partners agreed to pay $1B to acquire Websense, the makers of software and services designed to help protect companies against cyber thieves trying to steal corporate information. Websense received a 53% premium over their average closing price over the past 60 days.
Finally, in May, Intel offered to buy Finland’s publicly traded Stonesoft for almost $400M in cash to expand the offering of its McAfee security software business. Stonesoft’s investors received more than double their May closing price and McAfee expands its network firewall and invasion prevention offerings.
Mobile M&A just keeps on rolling. Back to you in Seattle.
Bruce Milne
Let’s keep on rolling and hear from Jim Perkins, who just returned from Asia, where he chaired the casual gaming conference.
Jim Perkins
Hi, everyone.
A number of developments are preparing the Gaming sector for a strong second half of the year. Microsoft and Sony’s new console announcements and even the upstart Ouya release will shake things up in that market, bringing new talent to the top and requiring buyers to act. With the JOBS Act and equity crowdfunding rules due from the SEC, gaming is in a great spot to build on the $50M Kickstarter crowdfunding already pressuring the market. And the US Android gaming market is continuing to mature, bolstered by the new Google Play games services, with lots of growth ahead as they catch up to Asian dollar-per user numbers.
Speaking of Google, they’re part of the biggest story you’ll see in gaming in the next 18 months—the arrival in force of top-tier, sophisticated buyers internationally. Yahoo has led the way recently with their acquisitions of Loki Studios and PlayerScale, but we expect firms like Google, Amazon and Chinese web giant Tencent to accelerate their acquisition of gaming tech and talent as well. These are sophisticated firms with deep expertise, and a realistic understanding about their need to buy. They have disciplined, established processes, deep pockets and a long-term, strategic outlook.
Thank you very much.
Bruce Milne
Thanks, Jim. We’ll have a special report from Casual Connect. Now let’s go back to our HQ and hear from Rob Schram on Big Data.
Rob Schram
The increasing amounts of information captured by enterprises, combined with the rise in social media and the Internet of Things is not only driving exponential data growth but underpinning a new frontier in innovation, competition, and productivity.
Here are some recent market highlights on the evolving BD landscape:
• Big Data analytics specialist Tableau Software Raised $254M in a recent IPO. The stock’s up 83% since its debut in mid-May, validating the BD market and adding a well-heeled buyer to the mix.
• On the consumer analytics side, Wal-Mart just acquired predictive analytics startup Inkiru, while ShopperTrak nabbed Corum client RapidBlue for their in-house analytics technology.
• Enterprise analytics is also going strong. In the last 30 days Tibco acquired Streambase to bring real-time analytics and algorithmic trading to Wall Street and Datawatch picked up PanOpticon for their Big Data Visual Discovery Solutions.
This market is hot right now—if you’re in the BigData space, I’d invite you to send me an email to discuss your situation and review M&A options for your company.
Bruce Milne
Thanks, Rob.
Corum Research Report
Now let’s move on to the heart of our presentation today, Corum’s research report with Elon Gasper, Amber Stoner, and Jason Steblay.
Elon Gasper
Thanks, Bruce. We’ll present our Corum Research team’s review of the events of the first half of 2013, revisit our January forecasts, report our updated 26 subsector valuations, and present our analysis of what it all means to software execs, entrepreneurs and investors. We begin with the public markets, which after briefly pulling back from highs reached in May, have resumed their climb, with all major indices now up double digits Year to date and Year over Year.
The public markets are sustaining their strongest performance since the economic crisis and that, as we predicted in January, has underpinned what continues to be another banner year for tech M&A. Last year, companies were making multiples by cutting expenses, but now with their shareholders seeking greater gains, and money cheap, companies are again investing in growth, particularly through M&A.
Initial public offering from technology companies in 2013 are also helping to create a favorable climate of exit opportunities for entrepreneurs. Can you give a quick update on this year’s IPOs, Jason?
Jason Steblay
Sure, Elon. Tech IPO’s increased 50% in Q2 2013 versus the 2nd quarter of last year. Tech IPOs were also particularly well received on the street this quarter, rising an average of 35% on the first day of trading with Marketo, Tableau, and Gigamon leading the way.
Through their recent IPOs, the class of 2013 has raised billions of dollars they can apply directly to M&A, pulling through more exit opportunities for tech entrepreneurs as they seek new growth opportunities.
Elon Gasper
Speaking of companies seeking growth through acquisitions, Yahoo, wow! It vaulted to the top of our acquirers leader board, easily clearing the bar by closing 16 deals already this year—13 in the first 6 months, plus 3 this month—with CEO Marissa Mayer pulling a page from Google’s playbook. Meanwhile, many of the leaders in prior years—Oracle, Dell, IBM and even Google itself—have taken a step back so far in 2013. As we projected in January, this has brought absentee classic top acquirers like SAP, AutoDesk and Dassault back to the leaderboard.
Jason, who do they buy?
Jason Steblay
A Corum analysis of the 81 deals done be the top acquirers so far this year shows they aren’t afraid of going small. Despite the belief by some that top acquirers only buy large, highly-profitable companies, over three fourths of their deals so far this year have involved a target with less than $10M in revenue, (and many even smaller). The top buyers’ keen interest in early stage firms is an excellent reminder that regardless of size, the market is highly receptive to growing technology innovators with disruptive business models.
Amber, what have the PE’s been up to so far this year?
Amber Stoner
Changes on the PE leaderboard were considerably less dramatic, though Boston’s THL broke into the top 4 with flair with its megadeal for Compucom, and Catterton sees its first appearance here. We’ll discuss the trends and patterns we’re seeing in more depth in our 3rd quarter report on Private Equity tech M&A.
Elon Gasper
Moving on now we see the Corum Index reflects the vibrant finance and tech landscape. While H1 2012 saw a higher transaction number, 2013’s impressively long list of mega-deals and hyper-valuations give it a shot at beating our 21st century records. Of the 20 mega-deals so far this year, SilverLake’s $24B bid to take Dell private blows last year’s largest deal of $5B out of the water. For that matter, so too would Bain’s $7B offer to take out BMC.
Amber Stoner
And hypervaluations? Look no further than SalesForce’s $2.3B dollar acquisition of ExactTarget just last month at a 47% premium. And Google’s billion dollar purchase of the traffic mapping startup Waze carried an estimated 1,000x revenue multiple, which made SAP’s billion-dollar acquisition of e-commerce provider HYBRIS seem modest at 8.8x revenue.
Elon Gasper
On a global scale the demand for deals by North American companies drove activity all around the world. With US tax law stranding billions of dollars off-shore, its not surprising to see American firms acting aggressively abroad, like Google, which put a spotlight on Consumer Internet innovation in the Mideast region when it bought Israel’s Waze.
And Latin America’s another region seeing growing interest from US companies: you can join us later this month as Corum will be part of a bilingual World Financial Symposiums event on tech M&A there.
Within our North America region itself, the notable imbalances are the preponderance of buyers in the NE, and that the only region with less Buyers than Sellers was the SE, where one of those sellers was Corum client American HealthTech, out of Jackson Mississippi, recently sold to Midwest-based HealthLand, a Francisco Partners company.
Jason Steblay
Hopping across the pond to Europe, the Nordics continue to punch above their weight in terms of M&A activity, attracting plenty of international attention with Chicago-based ShopperTrak picking up Corum’s Helsinki based client RapidBlue. There was also plenty of intra-regional action too as Corum’s stockholm Client Expert Systems was acquired by fellow Swedish invoice automator ReadSoft.
Western Europe was a popular target for North American firms as well with Cisco taking out Corum’s Austrian Client SolveDirect. Eastern European companies were also more often sellers than buyers, but Wargaming.net bucked the trend by acquiring two American gaming studios during the first half of the year.
Meanwhile, Asian M&A remains dominated by IT Services consolidations, such as VanceInfo and HiSoft’s merger to form Pactera. However, Gaming and other product companies are starting to account for a significant share here as well.
Elon Gasper
Not surprisingly, our Aggregate index, which tracks value multiples for publically traded companies in 26 technology subsectors, closed the first half of 2013 on multiyear highs reporting about 2x sales and 11x EBITDA multiples, up from 1.7x and 9.8x (respectively) a year ago today.
With valuations continuing to climb, we stand by our prediction that 2013 will be another banner year for tech M&A. On now to deconstruct these 6 market sectors and their 26 components in detail, beginning with the one which consistently returns the highest value ratios to its entrepreneuring teams. Amber, Horizontal Applications retains its crown, right?
Amber Stoner
It definitely does, Elon. Consistently our highest trading sector, it was also home to one of our major megadeals.
We mentioned Salesforce’s acquisition of ExactTarget last month, specifically talking about Salesforce’s push into cloud-based marketing. But the CRM players aren’t the only ones pushing the combination of CRM and marketing, the social marketing guys are getting in on the action as well, with Jive Software buying two companies in the first half.
Jive’s acquisitions of StreamOnce, a team collaboration SaaS provider, and CLARA, an online community analytics SaaS provider, highlight a move to integrate multiple business applications into one social collaboration hub, pulling from multiple platforms, including email, CRM and CMS systems. Considering what a natural fit social and cloud-based marketing are with CRM systems, we expect to see more consolidation among these companies in the second half.
Speaking of consolidation, we’ve also seen quite a bit of movement in the BI subsector over the first six months of the year. Last month, TIBCO grabbed event processing and analytics software provider, StreamBase Systems for an estimated $50M. TIBCO sees event processing as fundamental to solving big data challenges. And they won’t be the only ones. As the focus on big data increases, the BI guys are going to be fighting to find the best ways to analyze all that data.
One of those options will certainly be through visualization and QlikTech made a move in that direction in May by spending $8M to get one of its partners, NComVA. Of course, it’s not unheard of for partnerships to move into acquisitions and, like in the case of QlikTech and NComVA, sometimes partners make the best buyers.
How are things looking in the vertical sector, Elon?
Elon Gasper
In a word, Amber? Up, as valuations have increased across all 6 subsectors of the Vertical applications M&A market.
In particular, with the implementation of health care reform looming here in the states, and unpredictable delays and new regulations to deal with, healthcare IT multiples are way up, with the deals coming fast and furious. Here at Corum, we’ve closed three different healthcare related deals in the last couple months, and we’re joined now by Corum director Rob Schram who closed two of those deals just in the last couple weeks, with a field report on those two deals. Rob?
Rob Schram
As Elon just mentioned, Corum has seen exceptional activity in the health technology sector this year—with multiple deals closing and several more queued for acquisition in the upcoming months.
Right on the heels of our recently announced sale of American Health Technology to Healthland (EHR for post-acute facilities), I’m pleased to announce the sale of 2 more Corum clients in the medical technology sector:
The first is Fastrack Healthcare Systems, which has been acquired by Thoma Bravo-backed Mediware Information Systems. Fastrack’s expertise in software solutions for Home Medical Equipment and Home Infusion Therapy complements Mediware’s established position in the homecare market - adding more than 300 new customers and the related expertise, products, services and contracts.
My second recently concluded sale is a soon-to-be announced transaction in the Electronic Health Records / Practice Management arena. Our client’s comprehensive, well-integrated suite of ambulatory care products presents an opportunity for the buyer to capitalize on a 46% projected growth rate, which relates to an $8 billion market for small-practice EHR systems by 2016.
Of particular note concerning to the 3 above-mentioned medical technology companies - and for other tech sectors as well—is the high level of interest shown from financial buyers. Private Equity have an unprecedented amount of cash and are very competitive with strategic buyers. We’ll be sure to keep you updated on the high dynamic in medical technology M&A.
Elon Gasper
Thanks Rob. And PE firms like Thoma Bravo and Francisco aren’t the only ones extending their healthcare portfolios. For example, Canada’s Constellation software has been busily building out its healthcare solutions, with two such acquisitions in the second quarter. Through its Harris subsidiary, Constellation picked up Quadramed just last month—this time with Francisco the seller. That followed just weeks after Constellation’s acquisition of Quantitative Medical Systems, a dialysis billing and reimbursement specialist.
Also in the Healthcare sector, trendsetter Cerner acquired PureWellness in February for $50M. Cerner’s now prepared to serve both hospitals and ambulatory outfits in the field of population health management.
Separating 2013 Healthcare M&A transactions by main deal drivers reveals trends among major Buyers’ M&A—new businesses’ growth and control, expansion to the new market segments, and an increase in market share. In particular it seems like market players are preparing to deal with changes in the system by getting larger. Plus it’s clear that acquisitions as a component of strategy for dealing with healthcare delivery system changes still command value and will for the remainder of this year. It’s all a setting up a classic wave of consolidation moving to a crescendo, so if you are in the healthcare IT business now we recommend you consider your options carefully again at this time in light of these and other changes in the M&A market. Don’t wait for, but do come to, our special market spotlight on this sector in September -- plus you can give us a call with questions or just to talk about this changing market.
Moving along to another Vertical area, the Financial subsector has also seen strong deal flow this year, driven by the demand for increasingly specialized software in the investment industry. In February, Paris-based Linedata agreed to acquire a portion of Seattle-based CapitalStream business for $45m from HCL Technologies.
Within our architecture/engineering/construction subsector falls the construction industry, another arena where Corum’s clients lead the industry. One was Corum client PlanSwift, a rapidly-growing digital takeoff and estimating solutions developer in Utah, sold this year to Textura Corporation, a provider of construction collaboration software.
Finally, in the Education subsector, growing competition is forcing the providers of e-learning platforms to offer cutting edge solutions by buying startups. Several recent deals here addressed transforming school information systems into interactive platforms and standards, as well as moving them into the mobile space.
Amber, could you take us through the Infrastructure market?
Amber Stoner
Sure. To begin with, overall Infrastructure market valuations remained in line with the first six months of 2013, though there was considerable variation among the subsectors. Most rose double digit percentages tracking the public markets, though a few retrenched, the maximum among them a regression toward the mean in the earnings multiple for Infrastructure Communications; at over 14 it is still well above the average of 10.8. There was also a slight drop in valuations in the Network Management subsector, but that didn’t cause Cisco to slow down any.
In fact, since our special report in March, Cisco has made four acquisitions, spending more than $600M, not all of it internationally despite earlier comments that they would be focusing on international acquisitions to spend their overseas cash hordes. Clearly they’re willing to spend money stateside if an acquisition makes sense. However, they did go international to pick up Austria-based SolveDirect, a provider of IT service management integration software and we expect them to continue to focus on international acquisitions in the second half of the year.
Cisco’s not the only network management company making moves into the IT services management space either. In May, SolarWinds spent $120M to get IT systems management software provider N-able Technologies. And in June, Software AG acquired alfabet, an IT infrastructure planning and management software company, for an estimated $65M.
Even the security guys are expressing an interest in IT, with AVG buying remote IT infrastructure and network monitoring software provider LPI Level Platforms last month. It’s definitely an interesting move for an anti-virus software company, but makes sense as AVG will use it to complement its existing CloudCare product. Other security software companies are also on the move, with Websense being taken private by Vista Equity in a deal valued at over $900M, similar to Thoma Bravo’s acquisition of Blue Coat in late 2011.
We also saw Proofpoint make its first acquisition since going public last year, when it bought Maildistiller in April. We expect the 2013 crop of tech IPOs to follow the same trend. Finally, back in February, Intel subsidiary, McAfee picked up the ValidEdge technology assets from LynuxWorks to broaden its anti-malware portfolio.
Any big news in the Consumer sector, Jason?
Jason Steblay
The biggest story here has been Yahoo’s shopping spree, which has helped push valuations in our consume index up near the highs achieved last summer.. Yahoo will certainly challenge Google for the top spot on the buyer leaderboard this year, with 16 deals done so far, compared with the 18 Google booked for all of last year, I’d say it already well on its way.
Since its landmark $1.1B Tumblr acquisition, Yahoo has made 6 more acquisitions including 3 in July starting most recently With Xobni, a contact-management software provider. Days before that, Yahoo acquired fantasy sports leagues appmaker Bignoggins Productions, and mobile videomaking app Qwiki
These, and Yahoos 10 other acquisitions of everything from gaming studios to travel services, are all part of Yahoo’s on becoming the consumers first touch point where ever they go on the web. Yahoo should have a plenty of fuel to keep up the pace up to the end of the year but we’ll know more after its Q2 earnings report. I imagine one big to-do left on Yahoo’s 2013 acquisition wish list is location based technology for marketing and search. There has been quite a run on these companies as industry giants seek more ways to stay in front of consumers on the go.
In June, Twitter acquired Boston-based Spindle Labs, a location-based social content discovery startup. Elsewhere, Sprylogics acquired Poynt, a GPS enable mobile search app to help users locate nearby restaurants, movies and events.
The biggest location-based news, of course, was Google’s $1B acquisition of Waze, which, as mentioned earlier, indicates the premium buyers will pay for high quality realtime consumer location data.
We expect strong demand for mobile and location based capabilities to continue driving valuations in both consumer subsectors, including video games throughout the rest of the year.
Amber, how has the Internet sector done so far this year?
Amber Stoner
The Internet sector is holding steady and continues to trade at healthy multiples through the first six months of 2013.
In our Annual Report back in January, we talked about the consolidation we were seeing in the travel space and while we haven’t seen our big potential targets, Groupon and Travelzoo, acquired yet, we have seen plenty of consolidation with TripAdvisor going on an acquisition tear in the first half of the year.
It started in March with the pick-up of Tiny Post, followed by Jetsetter, a membership-based online service that enables users to obtain discounts on hotel and resort reservations. In May, TripAdvisor bought the technology and talent assets of Cruisewise and Spanish vacation rental website Niumba.com, expanding its international footprint. Finally, last month they acquired GateGuru.
The acquisitions of Tiny Post and GateGuru are similar in that they are both mobile app providers, but where GateGuru has a more practical application, enabling users to coordinate day-of-travel activities through access to detailed airport maps, Tiny Post enables users to insert text into photos and upload those photos to social networking sites. Which leads one to wonder, are these travel companies starting to move into the social networking arena? It seems to be a logical combination and should be an interesting trend to watch in the coming months.
How does the IT services sector look, Jason?
Jason Steblay
The IT Services sector hasn’t been immune to the strength of the public markets either. Before taking a moment to catch their breath in June, sales and EBITDA multiples sustained from January to May not seen since the financial crisis.
Following valuations, deal activity in June backed off the blistering pace the sector had set with just 33 announcements versus an average of 62 for the first 5 months of the year. Key deals from the month include DuneDin’s $67M dollar reach for Trustmarque Solutions, the UK based systems integrator, and Mitel Networks acquisition of call center integrator prairieFyre Software.
Despite the slowdown in deal activity, IT service firms have been a frequent target of take private or spinout bids by PE’s so far in 2013. Such deals include Bain’s $1.3B spin out of call center integrator Atento from Telefonica, and Silver Lake’s $24B offer to take Dell private.
Take out bids may have held back valuations in the Asian IT services sub-index which we saw recede from astronomical highs posted in January. Since May, three of China’s leading services firms—Pactera, ISoftStone, and AsiaInfo-Linkage—all received takeover bids from PE-led consortiums, matching the western trend.
However, with valuations in the broader sector holding up and even beating their 12-month averages, Corum views this PE activity as a good thing, gearing up a new cadre of buyers who will boost M&A activity going forward.
Elon Gasper
And that's our report, halfway through a banner year for M&A. Back to you, Bruce.
Bruce Milne
Thank you, Elon. With nearly $1.5T out there to be spent, we expect the trend to continue.
We’re right at the 30 minute mark, but we have one question that came in that we want to address. The question asker mentions that they have been approached, they’re a small startup, is now the time to go to market?
It’s a good time to test out the market, there are a lot of disruptive trends going on as we reported before. If you want to get an idea of what you’re worth, be sure to give us a call, and we can see if the market timing is right for you now.
Thanks for joining us, now we’ll go to our close.