Introduction
Bruce Milne
Good morning, afternoon or evening as the case may be, wherever you are in the world. Welcome to our Global Tech M&A report, 2015 Q1, a record quarter. I’m Bruce Milne, your moderator for today, CEO of the Corum Group. We have a jam-packed agenda, starting with a special report, then event spotlight, our research report, and then a special seller conversation with Joe Sanda.
Let’s start with a special report on our recent transactions in the healthcare field. Let’s go to Nat Burgess.
Special Report: e-MDs
Nat Burgess
This is Nat Burgess, president of the Corum Group, with a field report on our most recent closing: The sale of Austin-based e-MDs, a Corum premier account, to Marlin Equity Partners in LA. This is a transaction that really showcases the strength of PE in the current marketplace. We’re seeing more than half of transactions now with PE backers and we’re seeing a new level of expertise and funding.
The Marlin transaction is a good example of this. Marlin brought in Jim Brady, who has operating experience building a successful health tech company and selling it, and who is now the interim CEO of e-MDs. This also reflects a synergistic merger between e-MDs and MD Everywhere, which is an RCM company that Marlin had previously acquired. Thirdly, this is an example of a company that has built a great customer base in premise software. They grew up at a time when small practices wanted to buy and own and manage their own software platform. Those days are coming to an end. e-MDs has done a great job of building a product where they are consistently ranked number one in the class surveys in terms of user interface and usability, but clearly the market was moving to SaaS and the customers wanted to get there quickly and this merger with MD Everywhere allows the combined entity to do that quickly, because MD Everywhere already has the RCM infrastructure built out to take the clients into a cloud and into an RCM model.
So we’re very excited about the potential of this business. Obviously they did well to get to this point, they had almost 10,000 customers, they were profitable and they had a fantastic team on board, which has been retained now to contribute to the new combined entity. The next chapter will be very exciting and we think it will be a good one for Marlin and for the team at e-MDs.
I should also mention that e-MDs founder, Dr. David Winn, he started this business as a lab attached to his practice. He knew there was a better way to do practice management, a better way to do eHR, and so he built it, and out of that evolved this company.
But like a lot of entrepreneurs and CEOs of his generation, he also had to keep an eye on the clock, and at some point he was going to need to retire, spend time with kids and grandkids, really build a new chapter in his life, and this transaction has allowed him to do that while leaving the company on really good footing with excellent management and a bright future ahead of him.
Corum was retained by e-MDs as the exclusive M&A advisor, we helped the company position, we helped really create the strategy in the context of potential partners and acquirers, took them to market and worked through a process that involved a lot of interested parties, but also a very careful selection process to make sure that we ended up with the right partner that would achieve Dr. Winn’s goals of liquidity and an opportunity for exit, but also a stable growing platform going forward, so that the company could continue to thrive and that the team would continue to have a place in that growing entity. Marlin satisfied those criterias, they were very effective at moving the deal forward and building a relationship and a partnership and getting through to closing.
So, we congratulate Dr. Winn on his success and also on Marlin and MD Everywhere in creating a great growth platform.
Event Spotlight
Bruce Milne
Great, thanks, Nat. Again, congratulations to Dr. Winn, we’ll be seeing you at our annual celebration fishing trip, where you’ll be joining the other CEOs who have recently sold as our guests.
We’ll be co-sponsoring a special Market Spotlight with the World Financial Symposium on Healthtech M&A. Register now.
Attendance lately at our live events has been amazing. I have spoken to record crowds across the US and through Europe. There is an eager audience of people hoping to cash in on a record marketplace that is buying even the smallest companies these days. We have many conferences coming up, I hope to see you at one of those.
Tech M&A Research Report
Now let’s go to our Corum Research Report for Q1, led by Elon Gasper and his team.
Elon Gasper
Thanks, Bruce. Overall public market indices spent Q1 consolidating last year’s gains, with the S&P and NASDAQ logging increases for this quarter, too. Internals diverged among sectors amid economic and geopolitical crosscurrents; but the continued low interest rates, record cash reserves and buyers needing growth mean the marketplace remains extraordinarily tech M&A-friendly, bull market slide with just one month to go till this bull market climbs to be the 3rd longest. We like the odds for that but are also betting this won’t go on forever; entrepreneurs and execs who aren’t taking advantage of opportunity to calibrate their value under conditions this favorable aren’t being prudent.
Looking back across a few years’ tech sector valuations, Consumer stand outs for how fast its EBITDA multiples have risen, more than doubling since 2012. And all sectors continued their trends from last quarter except Infrastructure, whose ratios each reversed field. Sales multiples for the 3 core business applications sectors gathered at almost 4x revenue, up from 3 a few years back; with a rise of nearly the same proportion for their EBITDA value metrics.
Our Q1 Corum Index showed a 24% increase in deal number to over a thousand, which combined with the drop in PE deals shows strategics did proportionately more of the deals this quarter, understandable at these high valuations, as is the lower megadeal activity. Other components were notably stable year over year, including cross-border plays coming in about 1 in 3.
Stacking the megadeals by market, we note Consumer missing, the opposite of last year when it stood highest, with Infrastructure taking that prize while Vertical stacked up its dependably tall pile, which included some of the higher multiples, such as the 8x revenue and 17x EBITDA, that Verisk reached to buy out Wood Mackenzie, a Scottish energy market intelligence specialist. The potential for a Mackenzie IPO helping spur Verisk to action shows another case of a strategic competing with the public markets.
In the payments industry NY-based Fundtech cost Davis + Henderson $1.25B in the largest-ever purchase for the Toronto company, expanding its portfolio of solutions and aiming upmarket toward larger financial institutions including American banks. We’ll consider other deals in this active space when reviewing the other Verticals as we move through our 6 markets and 29 subsectors, starting with the one that racked up the most megadeals: Infrastructure. Amber?
Infrastructure Software Valuation Metrics
Amber Stoner
Sales and EBITDA multiples in the overall Infrastructure space are up from this time last year with nearly all subsectors increasing in valuations. Security still leads the pack in sales valuations, and while there was a drop in multiples in the endpoint subsector, its EBITDA multiples are still the highest among Infratructure’s six subsectors.
In one of the larger mega deals of the quarter, HP spent $3B to get wireless networking provider, Aruba Networks, at a 3.7x revenue multiple. The deal combines Aruba’s wireless mobility solutions with HP’s switching portfolio, enabling HP to provide simple, secure networking solutions to its enterprise customers.
Over the last quarter, both PE and strategic buyers have shown an increased appetite for cybersecurity providers. Thoma Bravo sold networking and security provider, Blue Coat, founded by successful Corum client Joe Pruskowski, to Bain Capital for $2.4B, a 3.7x revenue multiple. And Proofpoint gobbled up Emerging Threats, a network anti-malware and threat detection SaaS provider, for $40M, bolstering its advanced threat detection capabilities.
Israeli companies stood out as both buyers and sellers in Q1. Israeli enterprise networking company, Allot Communications acquired Spanish security as a service company Optenet for $12M. And Bottomline Technologies grabbed Intellinx, an Israeli behavior tracking security software company, for nearly $85M, to combat cyber fraud.
And in an example of two of our top 10 tech trends overlapping, we have a deal highlighting security software for IoT devices. British chip designer ARM bought Dutch internet of things security software provider, Offspark, for nearly $2M. As security concerns continue to be a barrier to IoT adoption, expect more deals in the space in the upcoming months.
Ivan, what’s happening in the Vertical market?
Vertical Software Valuation Metrics
Ivan Snook
Wavering Vertical multiples have climbed since the dip in January, with EBITDA multiples at 12 month highs thanks in large part to healthcare, automotive and real estate subsectors. Real estate jumped to the top valuations among strategics as well.
Within this sector is Rodacom, who provides software for managing real estate companies, and was bought by Concept Media, owner of French real estate listing site, logic-immo.com. In a similar deal, Auction.com made the winning bid for Channel and its real estate liquidation, asset and workflow management SaaS.
Related to real estate are the subsectors AEC and Energy/Environment, where we saw two deals in energy use management for buildings. Utilities provider Centrica British Gas purchased AlertMe.com for $100 million for its home-oriented energy monitoring, and Diss tech Controls, who covers intelligent energy use for major facilities, was bought by Acuity Brands, a lightbulb manufacturer in Atlanta, for $252 million.
Stepping away from building-related software, we’ve seen several acquisitions related to our top ten trend, digital currency flow -- which is proving to be international in scope.
In what was nearly a megadeal spotlight at $927 million, London-based Skrill, known for its Moneybookers online payment service, was bought by rival Optimal Payments to create a global player in the digital wallet category. Back in the States, Paypal bought mobile payments tech provider Paydiant for $280 million. And in Tokyo, messaging app LINE also expanded its mobile payments tech in its acquisition of WebPay Holdings.
For software processing somewhat larger sums of money, there were several other deals in financial services sector. TwoFour Systems, whose software processes transactions on the ForEx, was bought by Broadridge Financial for $32 million. Swiss-based Temenos, who offers a broad range of software to the financial sector, made two moves to enter the SaaS market:
First to Pennsylvania for Akcelerant for $50 million in cash, and then to Luxembourg for Multifonds at $263 million, a valuation of 17 and a half times EBITDA. In 2014, only 5% of Temenos’ revenue was from SaaS products, whereas Akcelerant and Multifonds each had over 75% of their sales in SaaS. This move reflects Temenos’ goal to increase its recurring revenue and to extend its reach into North America.
Speaking of organizations needing better financial management is our government subsector, where Opus Inspection bought Drew Technologies and their vehicle inspection instruments and software for $30 million cash plus a $4.4 million earnout.
And that brings us to the consumer market. Alina?
Consumer Software Valuation Metrics
Alina Soltys
Divergent buyers’ interests were tracking in the Consumer market as rising EBITDA multiples compensated for the decline in Sales multiples, driven particularly by the split in gaming as markets continued to favor profitability.
Under Armour picked up two exercise tracking apps within the same day: California’s MyFitnessPal for $475m and Endomondo from Denmark for $85m. Under Armour added more than 100 million subscribers, including some Asian users who came in from MyFitnessPal, growing to become the largest health and fitness community.
To add on to this trend, FitStar, an exercising video app starring Tony Gonzalez, formerly of the Atlanta Falcons, was acquired by FitBit. Sunrise Atelier, a New York-based Mobile & Web calendar app, joined Microsoft’s family of products for an estimated $100M. The Redmond giant moves deeper into the mobile productivity space, trying to repeat its success with mobile email client Accompli, acquired last year.
How did IT Services perform, Yasmin?
IT Services Software Valuation Metrics
Yasmin Khodamoradi
Looking at public valuation multiples for IT Services in Emerging markets, sales multiples reached a 12 month high, while EBITDA multiples returned to October 2014 levels.
Public valuation multiples in developed markets have remained relatively stable this quarter and despite a small dip in March, we have seen a nice increase in Sales and EBITDA multiples from Q4 of last year and we expect this trend to continue.
Megadeals in the IT Services sector are on the rise and one notable deal that happened in March was the acquisition of Dutch colocation and hosting company Interxion by TelecityGroup for $2.2B at a 6.3x revenue multiple. This deal was a significant milestone for consolidation in the colocation industry, as it made Telecity the leading provider in the EMEA retail colocation market and better equips them for future expansion in Asia and the US.
IT Services M&A activity continues its rebound towards the highs of 2008, with 2014 seeing the highest total transaction count and 2015 is on track to meet or exceed these levels.
Among the areas in IT Services showing consolidation, Microsoft Dynamics solutions providers have seen a lot of activity recently, with 6 transactions happening in Q1 alone. KPMG recently made the leap to become one of Europe’s largest providers of Microsoft Dynamics’ consulting and implementation services by acquiring London-based Crimsonwing, for $28M at a 1x revenue multiple. InterDyn BMI, a leading Microsoft Dynamics Partner, was recently picked up by Danish company Columbus for nearly $12M with a $2M earnout contingent on revenue an EBITDA milestones being reached.
Zero2Ten was acquired by Boston-based technical consultancy Edgewater Technology for $5M. By joining forces, Edgewater and Zero2Ten will try to target manufacturers of all sizes and leverage the US Microsoft stack.
In mobility, Chicago-based consultancy Solstice Mobile was acquired by international marketing services provider St. Ives Group for $36.5M at a 1.4x revenue multiple.
And one notable deal in the government space was SAIC’s purchase of Scitor for $790M at a 1.3x revenue multiple and 10.6 times EBITDA multiple. Scitor’s classified contracts within the intelligence sector and Air Force, coupled with limited integration risk, were seen as synergistic strengths.
For more information, watch last week’s Market Spotlight on IT Services at wfs.com
Internet Software Valuation Metrics
Elon Gasper
Overall, Internet market multiples reversed their Q4 losses, growing again each month this year, though smaller high-flying sectors saw some small declines, they were more than offset by the already diversified players that hold the bulk of this market.
M&A activity amid the social network ecosystems included moves by several major players. Perhaps the most visible was Twitter adding live video mobile app Periscope by buying Bounty Labs for a rumored $50 to 100M. Delivering this live video streaming platform across the immense Twitter user base is a clear power play against the soaring use of competing service Meerkat. Though Periscope was weeks away from activation on Twitter, it restricted access to several of its own features within hours of announcing the deal, a hasty attempt to curb the Meerkat’s dangerously fast growth.
Twitter also bought Niche, a New York based social media talent agency, for $30M+; as an added-value service to its advertisers this, too, represents pursuit of growth, and the importance of the value it drives at this point in time, throughout the public markets and tech M&A.
Toronto-based HR startup Careerify was purchased by LinkedIn to boost its recruitment business with a big data platform, as it tries to scale its referral software based on connections in
Facebook, Twitter, and of course LinkedIn itself. Its German competitor “Ksing” bought job search engine Intelligence Competence Center for $7.3M plus 2 in earn-out.
Finally, Japanese social network mixi purchased 2 Tokyo-based internet companies - P2P ticket marketplace Hunza for $95M and fashion e-commerce startup Muse for $15M. Both companies might help mixi to diversify its business away from anticipated declines in sales of its hit game Monster Strike.
Horizontal Software Valuation Metrics
Amber Stoner
Overall horizontal sector valuations went up in the first quarter of 2015, with sales multiples roughly in line with a year ago and EBITDA multiples reaching historic highs. SCM leads the horizontal subsectors with the highest sales multiple. And even with a slight dip in multiples, HR remains one of the highest trading subsectors with lots of deal activity as well.
In early March, Kofax paid $19.5M to get Dutch customer communication SaaS provider, Aia Holding. And two weeks later, Kofax was picked up by printer giant Lexmark for $1B in its largest deal ever. The acquisition expands Lexmark’s reach to the midmarket and doubles its enterprise software business as Kofax’s solutions complement its Perceptive Software business unit.
Over in the HR subsector, Intuit bought contracted workforce management SaaS provider, Playbook HR. And Thoma Bravo-backed Deltek acquired Texas workforce management SaaS provider, HRsmart.
Thoma Bravo made a platform acquisition as well, spending an estimated $430M, a 4.3x sales multiple, to get Atlanta-based PowerPlan, a provider of accounting, budgeting and forecasting ERP and BI analytics software.
Elsewhere in the analytics Israeli customer data management and analytics firm eXelate was purchased by Nielsen for an estimated $195M, a 5.6x revenue multiple, following last year’s acquisitions of BlueKai by Oracle and x+1 by Rocket Fuel. The addition of eXelate enables Nielsen to provide real-time audience intelligence and segmenting insights to marketers. And Attunity paid $18M, a 5.5x revenue multiple to acquire data usage analytics firm, Appfluent, expanding its big data offerings.
Elon Gasper
A busy quarter in a booming market. Back to you, Bruce.
Bruce Milne
Thanks to Elon and the whole research team. Thanks very much for that touch on the DL stack presentation. It’s not unusual for you not to recognize the sellers, but what’s interesting is all these new international buyers that you may not recognize doing very large deals like mixi out of Japan. So many new, active buyers, and did I hear about a lightbulb manufacturer? Wow. And the whole move by Under Armour changing that whole space. A special shout out to our old friend Joe Pruskowski, who founded Blue Coat after we sold his company Interconnections and we helped him fund Blue Coat. Interesting to see that selling to Bain Capital for $2.4B.
Annual Report
Tim, your annual report, nice job. Tell us about that.
Timothy Goddard
Yes, our annual report should be hitting mailboxes soon. If you don’t see it in the next couple of weeks, please do reach out and we’ll send you a copy. You can also register for digital access at our website. It’s an overview of the valuation metrics and deals that we discussed in our annual report, also with reports from private equity and luminary panels, including folks from Salesforce, Microsoft, SAP and others.
Bruce Milne
That’s great. Timothy Goddard, our vice president of marketing who does these conferences and our printed materials as well. Good insight from our luminary advisors, and we also included PE firms Riverside, Rubicon, and Marlin.
Seller Conversation: Joe Sanda [Astute Solutions]
Speaking of PE firms, we recently had a special interview with Joe Sanda, a client who we did a recapitalization with last year, with his PE firm. Let’s go back to Nat Burgess for that report.
Nat Burgess
Welcome Joe Sanda, we really appreciate you taking time to talk with us about your transaction. Let’s talk a little bit about the market. We’re in one of the longest-running bull markets since World War 2, and we’ve been having dialogues about whether we’re in a bubble now, frankly for a couple of years. People are wondering how much runway is left in the market.
What drove your decision to do a transaction now?
Joe Sanda
First of all, it’s a good point about the bull market, but I always feel like you have to drive your business based on trying to grow it, regardless of what is happening in the market, you try to grow it as fast as you can, build market share and I felt that regardless of the fact that we were in a bull market, our company was at a point where we had great products, but not enough investment behind sales and marketing and felt that was the right time to invest in strengthening our sales and marketing and the globalization of our company and product. So to me, PE made sense from the standpoint of bringing additional investment resources and giving me the opportunity to take a second bite later.
Nat Burgess
Has that vision been realized? Have you been able to build out sales and marketing and distribution?
Joe Sanda
We’re still at an early stage because we’re less than a year into it, but we have, we hired about a half dozen sales folks already, a couple of great sales managers in the US, hired a new managing director in Europe, so on the sales side, certainly we’ve made some very strong investments. On the marketing side, we hired a guy who has experience with P&G running a million-dollar product line and then went on to a SaaS startup and helped them grow to about $100M. He built out a very strong marketing team around him, who was available to do that kind of expansion without the additional capital.
Nat Burgess
Do you feel that your appetite for risk has changed? Is there a psychological dimension to this where you’ve taken some money off the table from this company, you’ve remained a shareholder, and now the emphasis is on growing that SaaS revenue. With backing do you feel like you have a different approach to strategy and different priorities?
Joe Sanda
Absolutely, it makes a huge difference. When you’re running a self-funded, as I did, you tend to be a little more conservative if you’re the only source you have. With the outside investment, not just our PE partner, but they have a co-investor, a large bank, that allowed us to take the company and make investments and even run the bottom line negative for a short period of time, which we were comfortable making those investments, knowing that in the long run it would help us grow faster. We certainly wouldn’t have been able to do that without them.
Nat Burgess
Joe, that partially answers my next question, which is in your view what are the primary differences between doing a deal with a PE firm versus a strategic buyer?
Joe Sanda
Well, from my experience, because I have sold out a couple of times prior, with a strategic buyer, they simply buy the whole thing. You have some period of time to transition, maybe in or out or whatever, but that’s pretty much it, what you got on the deal. With the PE maintaining a large piece of ownership, I’m able to take that investment and I believe that if I do what I think I can do, I’ll have a bigger return on the final exit that I did on the first bite.
Nat Burgess
I’m confident you will. I’ve been watching you guys execute.
In terms of selecting a PE partner, the general understanding is that they’re financial engineers and they’re going to crunch numbers and then see how things work out, but my impression is you guys made your decision based on more factors than purely financial factors. Can you talk a little bit about your criteria and your experience selecting Rubicon?
Joe Sanda
Certainly the standard way of looking at PE is financial engineering, but there’s a lot more to it. The culture seemed to fit and I really liked the folks at Rubicon, I think they were interested in fully backing and partnering, and so far I’ve seen them be true to that. They really want to contribute and I think they bring the kind of experience to the table. Certainly a lot of folks say they have the experience, but you don’t always get the time of day, if you will. They bring a lot of experience to the table, both from a financial and an operating perspective. That kind of experience was very valuable to me as coaches and mentors and that’s why I say they’re more than just financial engineers.
Nat Burgess
That’s great, and we were very impressed with that team as well.
Joe, congratulations again on your transaction and good luck on the next iteration here in your growth.
Joe Sanda
Thank you, we’re looking forward to it. I hope I can complete another deal somewhere down the road.
Q&A
Bruce Milne
Thanks to Nat and Joe, congratulations again, we look forward to seeing you on our fishing trip as well.
We have just a couple of minutes before we hit the 30 minute mark, so we have time for questions. “I am a small firm, you have told me that if I’m the right company I can sell with this market, but should I talk to the PE firms? The companies you’re talking about today are much larger than me.”
The answer is absolutely. We’re seeing secondary PE firms doing smaller deals, but more importantly they’re buying a lot of these companies through their portfolio companies, doing what we call bolt-ons. That’s why last year the top ten PE firms actually did more deals than the top ten strategic buyers, because they’re buying through their portfolio companies, so don’t be shy about talking to the PE firms. In almost every engagement now, we’ve talked to both.
One more question… Elon, I’ll throw this to you. “I don’t want to go out too early. I’m worried about that.”
Elon?
Elon Gasper
My response to a person asking that question is of course you can get in too early in terms of the internal of your company, you have to be in a saleable position with enough of a business developed or a growth story that you can take it to market. But if you’re in that position, in terms of the externalities as opposed to the internal, this is an extraordinarily good market. If we look at things on a cyclical basis, this is one of the longest bull market runs, the longest expansion like this in the last century. Right now it’s the fourth longest, next month it’ll be the third longest, and by this time next year it’ll be the second longest. I think there are really good odds that we’ll make it through another month in this part of the cycle. I think there are decent odds that we’ll make it to a year from now, and that’s enough of a window, and the type of window that you need to allow for, in order to take a company to market. The odds of becoming the longest ever? I think that’s a lot longer odds.
Bruce Milne
Thanks, Elon. We’re in a business where timing is everything; we’ve been at this for 30 years, we’ve sold more companies than anybody. We’ve seen the ups and the downs, and this is definitely an up.
One last thought here, this annual report just came out, we’ve mailed I believe 7000 copies to those of you who have asked about it. If you didn’t get it, be sure to, because one of the things that’s in there are our top ten disruptive trends that will affect how you should position yourself, how you can increase your value… There are also special reports on majority mobilization, online exchanges, omnichannel marketing, digital currency flow, internet of things software, enmeshed systems, digital force multipliers, positioning intelligence, sports and gaming, and data security. Must read, either get it from us in print or we’ll get it to you digitally. We look forward to whatever questions you may have about that. If you want to talk to any of those specialists, we have transactions happening in every single one of those sectors.
I see we’re right at the end. Thank you.