Introduction
Bruce Milne
Good day. I’m Bruce Milne, CEO of the Corum Group and your moderator for today. We have quite a packed agenda. We’re going to have some special reports from the World Financial Symposiums in Silicon Valley and Vancouver, BC, where we are platinum sponsors. Also special reports on the connected car market, patents, and mobile messaging. And our 2016 Q1 detailed research report.
Special Report: WFS Silicon Valley & Vancouver BC
Let’s start with a special report by Peri Pierone.
Peri Pierone
Last week Corum was the platinum sponsor of the 13th Annual Silicon Valley Growth and Exit Strategy conference presented by World Financial Symposiums. Other speakers included Google, Intel Capital, Morgan Stanley, Francisco Partners, and host law firm Morgan Lewis. I chaired the sellers’ panel which included two of Corum’s clients who recently sold: Emobus and Decade Software. For more information, go to wfs.com.
Bruce Milne
Now let’s hear from Dave Levine, who went to a WFS conference educating technology leaders in Vancouver, BC, the first ever there.
Dave Levine
Last month we hosted a WFS event in Vancouver. There were some interesting presentations about the venture capitalists' views on the M&A process, corporate buyer insights regarding what buyers look for in a company to acquire, and some war stories from entrepreneurs and CEOs that recently sold their companies in the last twelve months.
The buyers reinforced that they see hundreds of possible deals every year and move forward with due diligence on only a small percentage of the deals that they see. The sellers provided examples of their due diligence process and the length of time it takes to get a deal done. It was a well-attended event and future Growth and Exit strategy conferences are scheduled for Austin and Helsinki in the coming months.
Bruce Milne
There are a lot of transactions being reviewed by the buyers, and the common theme among the sellers is that the better prepared you are, the better your chances for getting their attention and getting through the transaction through due diligence.
Special Report: Market Spotlights review
Now a special report from Nat Burgess on the connected car market.
Nat Burgess
This is Nat Burgess, president of the Corum Group. I recently moderated a connected car market spotlight, where I brought in Bryan Trussel, who is the CEO of Glympse and senior execs from Ansys, Inrix and CalAmp, all of whom have roles in the various aspects of the connected car. We looked at this as part of the internet of things, but with the added complexity of the automobile communication, the idea that a lot of the functionality that we take for granted in our phones will become embedded in our cars. The role of OEMs in building new technologies that get incorporated into vehicles and really a look ahead at what is going to happen in the future, where this market is going and then what opportunities that will create for emerging companies.
We also looked back at recent acquisitions in the space; there have been many. I would encourage you to take a look online and also read through Corum’s research on the subject.
Bruce Milne
A lot happening in this space, as you’ll see in our expanded research report today.
Then we have a special report on patents. Elon?
Elon Gasper
Last month I joined a market spotlight webcast focused on the value of software patents and tech M&A. I was joined by noted patent attorney Dave LaRiviere. We examined current software patent trends, we looked at examples of recent deals that were driven by software patents, and gave advise for CEOs with patents or who just have patented or patentable technology.
Due to the popularity of the event, the WFS will rebroadcast it on May 3. You can register at the WFS website and we hope you will attend.
Bruce Milne
Dave LaRiviere is an old friend and a member of the World Technology Counsel. We’re glad he was able to join us as a recurring speaking.
Now to the SMS market spotlight and Daniel Bernstein.
Daniel Bernstein
On Tuesday Corum joined WFS for a market spotlight for Mobile Messaging, a space that is hot and rapidly consolidating around companies that more effectively retain, market and upsell consumers using the ubiquitous device they have in their pocket.
I moderated a discussion between Upland Software, a public company and leading provider of cloud-based enterprise work management software, and Mobile Commons, a leading enterprise mobile messaging platform, acquired by Upland this year.
We also had a report from Jay Alpert of OpenMarket, a division of Amdocs, about the consolidation in the Enterprise to Person messaging market, projected to grow to $60B in 2018.
Finally, we discussed what happens when a market consolidates around you, how you reassess and reposition your business, and decide to buy or sell to acquire greater market share.
The session recording is available online. Please visit wfs.com/mobile-messaging to listen to the valuable webcast.
Bruce Milne
Hot sector!
Corum Research Report Q1: Big Blue on top
Now let’s go to our Corum Research Report. Elon is joined by Amber and Aaron and a couple of new faces, Thomas Wright, Micaela Pearson and Valeriya.
Elon Gasper
Thanks, Bruce.
Thanks, Bruce. As you mentioned, public markets performed well last month to finish the quarter with some bounce from their January pullback after the Fed tightened monetary policy with a rate hike. The Dow made its biggest quarterly comeback since 1933; the tech-heavy NASDAQ was close behind, though it still printed a quarterly loss for the first time this decade. And though frothier startups are seeing reduced financing opportunities, there were no tech IPOs in the quarter.
Record tech M&A continued with our Corum Index showing the total volume of deals and the PE-backed exits among them hitting new highs in Q1, plus an over 50% year-over-year increase in megadeals, which we’ll dive into shortly. First, a look at the biggest acquirers this quarter presents a bit of a surprise, as IBM tops our leaderboard with nine deals in Q1 putting it on pace to nearly double last year’s top buyer, with a year-over-year increase of 140%; IBM’s Watson shopping spree last year appears to have given the company a taste for M&A, and it’s been filling in gaps across sectors. We’ll discuss each throughout our report.
We also saw billion-dollar megadeals across all sectors, from the single consumer megadeal to nearly $20 billion in Vertical. Some highlights include Korean internet giant Kakao kicking off the year’s megadeals, grabbing K-pop streamer Loen for $1.5B.
Alibaba made its first overseas megadeal with the Singaporean online retailer Lazada, expanding into the underdeveloped southeast Asian ecommerce market.
And NASDAQ, Inc., paid over $1B and nearly 7x revenue for International Securities Exchange and its three electronic options exchanges.
In Infrastructure, Brocade tied up a $1.5B deal for wireless optimizer Ruckus with an eye towards emerging IoT opportunities
IHS merged with London-based Markit Group in a deal worth nearly $6B to shake up the world of Bloomberg and Thomson Reuters.
We’ll take a look at a few other mega transactions as we overview our 30 sectors, which we divide into 6 markets, starting with Horizontal. Amber?
Horizontal Software Market Valuations
Amber Stoner
The horizontal sector showed good traction in Q1, with sales multiples returning to November 2015 levels. And though sales multiples in the marketing and HR subsectors have dipped since the end of 2015, consolidation continued in those spaces as well as others in the sector.
Danish customer experience management SaaS company Sitecore was purchased by PE firm EQT for $1.1B, over 5x revenue and 20x EBITDA. The acquisition should help Sitecore extend its reach in the digital marketing software space.
Elsewhere in the CEM space, there were 3 market research and survey creation SaaS acquisitions: icanmakeitbetter was picked up by ISA, Survey Sampling bought Instantly, and Kinesis Survey was snapped up by FocusVision.
In the related customer analytics space, Revee was acquired by content recommendation engine Outbrain and UK customer analytics company marketingQED merged with Dutch analytics and marketing automation firm Scanmar.
Nielsen made two acquisitions in the quarter, including picking up marketing analytics firm Pointlogic, adding marketing decision support to its Watch and Buy platform, and, after a decade of partnerships, Nielsen also acquired Mumbai-based mobile usage measurement solutions provider Informate Mobile Intelligence.
Consolidation dominated the horizontal SMS market as Dan mentioned earlier. Upland acquired Seattle-based Hipcricket for over $6M to combine it with Upland’s Mobile Commons messaging solution. And enterprise multi-channel messaging SaaS company, Alert Solutions, was picked up by New Jersey-based SwiftReach in an attempt to broaden its presence in the education and healthcare markets. We also saw regional consolidation in the international SMS market.
Big data acquisitions continued in Q1 with cloud analytics startup Sense being acquired by Cloudera, which could help Cloudera distinguish itself from other Hadoop vendors such as Hortonworks and MapR. Earlier in the quarter, another cloud data provider, DataHero, was bought by Cloudability, potentially building off its 2015 analytics SaaS acquisitions of RipFog and CloudVertical’s Copper.io assets.
HR consolidation was an ongoing theme, where workforce management firm Empower Software Solutions was grabbed by PE-backed Kronos, HR & benefits management SaaS provider Mangrove Software was bought for $17.5M by Asure Software, and Linkedin bought a direct competitor in the sourcing product category, picking up Connectifier, which builds search technology drawing on artificial intelligence and profiles for more than 400 million job candidates.
Elsewhere in HR, Virgin wants to help companies concerned with employee health, buying two workforce wellness SaaS companies through its Virgin Pulse division: US-based ShapeUp and Melbourne-based Global Corporate Challenge. And over in the UK, employee health startup Yomp was picked up by PE-backed Reward Gateway.
Speaking of health & wellness, Micaela, we’ve been seeing a tremendous number of fitness tracking deals in the consumer sector lately, right?
Consumer Software Market Valuations
Micaela Pearson
That’s correct Amber. The wearable tech consolidation race is heating up, typified by the recent $85M acquisition of RunKeeper by Japanese footwear retailer ASICS. An influx of buyers from the athletic, fashion and tech sectors have triggered a wave of acquisitions totaling over one billion dollars.
In gaming, Korea’s premier RPG developer Fiesta Online was bought by its longtime German publisher, Gamigo. In addition to proprietary language versions and global rights, Fiesta also offers a strong foothold in the Korean market.
Meanwhile, in California, Zynga reinforced its casual offerings by paying $15M for free-to-play game maker Zindagi.
Fantasy sports remain active, as Rivalry Games sold to You42, which plans to launch a fantasy platform tailored to the local sports of Europe, while Michigan’s Kountermove was purchased by DraftKings to expand into combat sports.
Selfie innovation drove several social media deals, as Snapchat picked up Bitstrips, the company behind the Bitmoji app, for an estimated $100M. Determined to contest the popularity of Snapchat, Facebook acquired Belarusian selfie lens and face-swapping firm, Masquerade.
Contact management tech made a reappearance in the consumer sector last month. San Francisco’s Humin was acquired by the dating app Tinder to connect consumers with social contact categorization and prioritization tools. To solidify its market share, FullContact picked up rival Brewster, a startup focusing on cross-platform contact management.
Aaron, what’s happening in the internet market?
Internet Software Market Valuations
Aaron King
After a nasty dip in January, both Internet multiples are almost fully recovered with EBITDA multiples recouping faster than Sales. Diversified Internet is gaining in valuations compared to the rest of Internet subsectors; Travel & Leisure follows in terms of sales ratio as online ticketing operators have been punching in plenty of deals this quarter. For example, Vivid Seats was added to Vista Equity’s portfolio, while Pandora of Ticketfly took a shot at buying up TicketBreak, a Toronto-based online ticket retailer, in its third Canadian acquisition trying to overtake local rival The Tragically Hip.
Queue Ticketing, a provider of ticketing & venue management SaaS, was snapped up by Eventbrite. Queue aims to benefit from Eventbrite’s scale and to focus on the primary mission of providing promoter tools.
Moving further into travel, we saw Las-Vegas-headquartered Bucket, which manages a trip and vacation planning website, join San Francisco-based Galavantier, a travel and nightclub booking website.
In Europe rail services steam into the digital realm as Captain Train, French rail booking website operator, teamed up with KKR-backed Trainline out of UK for a reported $189M.
And Base7booking, a Swiss hotel booking and management SaaS startup, became a part of Expedia’s German subsidiary trivago in order to drive direct bookings from users to hotels.
Our top acquirer IBM picked up Ustream for $130M, supplementing three previous online video deals.
In social networking, global political forum Parlio became the first acquisition of question-and-answer website Quora. The company will absorb Parlio’s operations and bring its content to more than 100M monthly users. Kickstarter also made its first acquisition: the crowdfunding site snapped up Drip, a service that lets musicians engage with fans via new work and previews while drawing revenue from the platform.
How did IT Services fare, Valeriya?
IT Services Software Market Valuations
Valeriya Chumachenko
In the IT services sector, sales multiples trended upwards during the last quarter, and even though EBITDA multiples stayed constant in emerging markets, we continued to see acquisitions from the largest companies. That included the quarter’s top buyer, IBM started the year with a shopping spree of 5 IT services companies: 3 digital marketing firms, a Salesforce integrator, and a Microsoft Dynamics integrator.
Japanese giant NTT Data paid $3.1 billion to acquire Dell’s IT services business, at 1.1x revenue, to expand its presence in the US and strengthen its healthcare, insurance, and other vertical capabilities.
Cybersecurity remains a major concern in 2016, with security consulting firms Dalmatian and Halberd Group acquired by CSC and Horne respectively.
Finally, data centers are seeing notable consolidation. Zayo acquired two companies in Texas to boost its operations in the state. In the Midwest, suburban Chicago datacenter CME Group was purchased by CyrusOne for $130M. In the UK, City Lifeline, a provider of colocation and hosted services, was snapped up by Redcentric for almost $7M and nearly 8 times EBITDA.
Moving onwards, what’s the news in the Infrastructure sector, Amber?
Infrastructure Software Market Valuations
Amber Stoner
Infrastructure valuations dropped early in the year, but are now climbing back to November levels. A drop in sales and EBITDA multiples across subsectors reflected the volatile market in Q1, apart from relatively strong valuations in Security, though we still saw a number of remarkable deals in the last quarter.
Demand for more efficient application lifecycle management resulted in M&A activity across the Atlantic. In the Bay area, app lifecycle management company Serena Software was scooped up by UK-based Micro Focus for $288M, over 3x revenue. Serena should complement Micro Focus’ capabilities in software development and IT operations, enhancing its core offerings.
In a related deal, mobile app development company Xamarin was bought by Microsoft for $400M, at nearly 11x sales. The move should help the Redmond giant push its mobile development boundaries.
Boston-based cloud provisioning company Verilume was sold to Intralinks to help Intralinks ease deployment and management of Open-Stack-powered clouds, and scale up its existing offerings.
The IoT space remained active throughout the first quarter of the year. Wyless Group was bought by KORE Wireless for $190M, a 3.2x revenue multiple, to create one of the largest IoT services providers globally as Wyless adds a wealth of European and South American customers to Kore’s existing base.
BlueKloud, another IoT tech provider, was snapped up by Advantix. The deal should allow Advantix to expand its expense management solutions to all assets within an organization whether they’re connected to the cloud or not.
German startup Movilizer was picked up by Honeywell in a deal that could project Honeywell’s Industrial Internet of Things strategy onto workforce distribution to help make mobile teams more connected.
Moving on to the IT performance and storage arena, GroundWork was acquired by Fox Technologies. GroundWork offers open source cloud monitoring solutions with respect to legacy IT tools, which should align with Fox’ ambitions in the infrastructure and security management space.
NexGen Storage, a provider of hybrid storage solutions, was bought by Pivot3 in an attempt to cover a broader array of customer workloads. Another storage vendor, SmartVault, was grabbed by Australian accounting SaaS company, Reckon, which could potentially use SmartVault’s expertise in online document management to complement its portal solution.
Top Q1 acquirer, IBM, tapped into the security space with a couple of acquisitions: the German fraud detection firm IRIS Analytics and US-based Resilient Systems, an incident-response platform provider.
Security for connected cars was a prominent theme in Q1. TowerSec was acquired by Harman International for $70M. TowerSec develops embedded solutions to protect vehicles from hacking and asserts it could have prevented Harman’s embarrassingly high-profile Jeep hack last year.
Thomas, you’ve been tracking a number of automotive deals in the vertical space, right?
Vertical Software Market Valuations
Thomas Wright
Yes, and we will discuss the automotive space momentarily, but first we should note the general state of the Vertical market. While EBITDA and sales multiples fell at the start of the quarter, they have since rebounded: trending towards their October highs. Notably, EBITDA and sales multiples have been diverging across many of the market subsectors, particularly the Healthcare and Automotive spaces, implying that the market is paying for profits, rather than growth.
In January, we predicted that vehicles would become the central hub of the IoT, and already, surging interest in vehicle-to-vehicle communications and intelligent transportation systems has triggered a series of deals. Boston-area LoJack, in many ways the original producer of vehicle tracking and anti-theft solutions, was acquired by CalAmp for $134M. Meanwhile Polish fleet management service provider Finder was bought by TomTom, adding more than 60,000 subscriptions to its Telematics installed base.
Here in Seattle, OpenCar was scooped up by Inrix, a pioneer in connected car data and services. India’s AllGo, an automotive multimedia solutions provider, was picked up by Visteon, bringing the capabilities of the mobile app to the Detroit area electronics vendor.
GM reinforced its position in the autonomous car industry by striking a megadeal of over $1B with Cruise Automation. The century-old carmaker also continued its drive into the future by acquiring SideCar to combat the market domination of Uber. Elon, you unpacked that deal in our WFS patent market spotlight, right?
Elon Gasper
Yes we did. Elsewhere in the vertical, the Energy subsector produced several noteworthy deals: ESP/SurgeX and its power conditioning solutions acquired by Ametek for $130M, or 3.3x revenue. Japan’s Yokogawa Electric paid $261M, or 2.2x revenue, to outbid AspenTech in an auction for England’s KBC, a hydrocarbon process simulation software provider. Yokogawa also acquired Industrial Evolution in order to solidify its IoT offerings in the industrial automation field.
Finally, in healthcare, IBM purchased Truven Health Analytics for $2.6B, saying it’s operating under the principle “when it comes to big data analytics, the more data, the better.”
And that’s enough data for our quarterly report on Tech M&A. Back to you, Bruce.
Bruce Milne
Thank you, all of you.
It’s interesting, you look through that and listen to it and a lot of you may not recognize a lot of the sellers. But our surveys show that you actually also recognize only half the buyers. That’s how big and fast-growing the market place is. There are companies out there you’ve never heard of. The Asian companies are coming on like a freight train, and we’ll have a special report on them coming up here.
And who would have thought that we’d have GM or Yokogawa beating out all the tech giants? We’ve been telling you for a while with things like Bosch beating Google or Brother’s beating out everyone. We’re going to keep seeing more and more of the traditional companies reinvent themselves by making major acquisitions in technology. Indeed, we’re seeing that and they have massive cash available. And all those deals were for cash, by the way.
A couple of interesting comments. One is that you saw the largest buyers, IBM was number one and Microsoft was number four. IBM, the head of Watson co-sponsored our annual report a couple of years ago and he said, “Watch out for IBM making acquisitions in healthcare.” And indeed they are. And Microsoft getting back up there and making lots of acquisitions. What’s interesting about these companies, both IBM and Microsoft have been attending our events, the head of IBM’s acquisitions group, the whole biz dev group, attended our Selling Up Selling Out that I personally ran. Every says a lot of sellers come to our conferences, but a lot of buyers come as well. You may find your future partner at one of these. So I would encourage you to come to one of our conferences and get educated.
Q&A
We have a few minutes here for questions. Elon, how long is this market going to last? What do you think?
Elon Gasper
Well, that’s the perpetual question that keeps coming back. It’s something that is very hard to address because of externalities that influence it. The one thing we do know is that cycles come and cycles go and we’re going to be in a position eventually that it will end. Right now, it’s the second-longest bull market that there has ever been, it’s driven by factors that range from what the Fed does to international geopolitics. So we’re not certain how long it will last, but we are certain that if you have a software company, if you’re an executive at one, or you’re an entrepreneur, that you need to think about when the cycle ends, will you be in a position to make it through to when the next one starts? In our opinion, there’s some runway left yet, but you never know what’s going to come down the pike.
In terms of tech M&A, as Bruce mentioned, there are a lot of reasons to suspect that tech M&A will have some additional runway because of the buildup of cash reserves that the large companies have and the continuing need for them to show growth and do it by inorganic means—M&A—if they have to. But the valuations are where there may be an earlier impact and already we’re seeing that as some of the unicorns are getting their horns knocked off. That’s the frothier stuff, but the real business, the companies that are generating real revenue and profitability, they’re still in a good position to take advantage of this market and lead the possibility that it might be coming to the end of the cycle at some point.
Bruce Milne
We do have to be careful. I remember that when we had our annual report there was a panic because we saw enormous volatility in the stock markets. Our view then was don’t worry. Part of it is that when you’re at the grassroots level, when you’re talking to people every day at our conferences, we saw 5000 companies at our conferences over the last five quarters, you get a pretty good idea. You’re talking to buyers every day.
I’ll tell you what gives me some pause, I just got a notice to go to the airport two hours early to go to the airport, because the lines are that long these days. I’m having trouble booking a hotel in San Francisco. At 5 a.m. a couple of weeks ago I was trying to get to LA and there were a bunch of people who didn’t make their flight because of the lines. That’s an indicator to us, and I think it’s a strong one, but you’re right, it could turn at any time.
We have a bunch of questions that have come in. Someone asked me about the higher education market, another one asking about the HR market. Do we expect them to be hot? Actually we’re seeing activity in every single market right now. I’d say the hottest markets, I’ll throw that open for discussion, but probably the hottest one globally is gaming right now. We have almost $1B in deals going along in gaming, but every single market right now is active.
An interesting question from a firm that’s in the $10-30M range, profitable, “Are we big enough to go to market right now?” Absolutely. Because I just got another question from a small firm of $2-3M and they think they’re smaller than what we’re talking about. But of course we talk about the headline deals. If you’re a billion deal, you’re going to get our attention in terms of reports. But on a day-to-day basis, we have clients at 0 revenue. Our clients are exclusively privately-held software and IT related tech companies. That’s all we do. We only do that with sellers. We have clients with 0 revenue.
That leads to a followup question someone had, they’re worried about going to market too early. There’s no such thing. You don’t want to miss markets, and we have lots of examples of that in our conferences. I would encourage you to join us at a Selling Up Selling Out conference, so check out our website for more info on that.
We have a few more questions, and we’ll have to get back to you offline. Right now my view is that we’re in the best market I’ve ever seen. It seems to continue, but we don’t know how long. My concern right now is something no one is talking about, which is interest rates and inflation. If those go up, you’ll see the related markets go down and the M&A markets are tied to the financial markets. Be cautious about that.
Thank you for joining us for Q1 2016 and we’ll see you next month for our report on “The Worst Thing You Can Do To Destroy Your Value.” You won’t want to miss that.