Introduction
Bruce Milne
Welcome to our Global Tech M&A Monthly. This month’s theme is ten ways to increase value. This is our last conference of the year, and I’m your moderator, Bruce Milne. The agenda today will be covering some field reports on recent transactions, and then some special conferences around the world. Then we’ll hear from our research group, and then we’ll present ten ways to increase value.
Canadian Field Report: SolutionQ Acquired by Upland Software
Let’s begin by going to Eastern Canada for a field report on two transactions. Peter Andrews?
Peter Andrews
Although the weather is getting rough here in Canada, M&A activity remains hot. Three weeks ago today, Toronto-based SolutionQ, a SaaS project portfolio management company, was acquired by Austin-based Upland software, who are focusing on enterprise workspace solutions. They themselves just completed their IPO two weeks prior.
In October, it was announced that another Corum client, Toronto-based Filemobile, would be acquired by Australia-based Newzulu software in a deal expected to close by year end.
Winter may be settling in, but it won’t cool the appetite for exciting companies.
Bruce Milne
That’s great. Thanks, Peter. Cold climates, hot deals. With that, let’s go to the Nordics and hear from Mark Johnson.
Nordic Field Report: Nets Acquires Paytrail
Mark Johnson
Thanks. This is Mark in Stockholm. The trend of Digital Currency Flow refers not only to the flow of digital currencies such as Bitcoin, but the overall movement of currency through digital pipes. The trend of currency flow has been towards fewer and fewer barriers since the first credit cards in the mid-20th century, and that trend is accelerating. Innovations that add speed and remove or go around barriers have significant opportunity to be valuable, and this is driving big players in banking, telco, and payments to acquire IP and teams to add to their competitiveness.
The same concepts that make currencies like Bitcoin attractive are proving valuable to buyers when working with traditional currencies. There is significant opportunity to build valuable companies around innovation that increases the speed and decreases friction.
The primary driver is the acceleration of e-commerce. Today e-commerce accounts for about 6% of total retail sales. There are many predictors on how that proportion will climb in the next few years – 20%, 30%, 50%.
Payment innovators like Apple Pay, which is working together with large banks like Bank of America, and all the major card vendors are going to make a significant impact. We also see technology upstarts like Klarna and iZettle transforming the payments space in Europe and moving abroad.
These transformations are driving M&A as banks, telcos, and payment services providers are all both concerned about their viabilities and see opportunity in this disruption.
This brings us to Paytrail, our client in Finland that has about 60% market share of the Finnish ecommerce market. Just last week we closed the sale of Paytrail to Danish based Nets, a large Payments Services Provider which was recently bought out by Advent and Bain in one of the largest European PE buyouts of the year.
Nets valued Paytrail’s marketshare in Finland, but more importantly it valued the opportunity to apply Paytrail’s platform, team and innovation capabilities across its other markets in e-commerce and mobile payments.
Consolidation in the payments sector will continue over 2015. We look forward to watching Nets, which is making bold steps, continue in its growth in sales and services. Thanks.
Bruce Milne
Congratulations, Mark. With giants like Advent in PE, and billions behind them, we anticipate hearing more about Nets going global.
Now, let’s move to our conference report. It’s been a very busy month in Europe. We recently co-sponsored an event with our friends at SAP. Jon?
European Field Report
Jon Scott
It’s interesting to look at the ecosystems that software companies play in. This is the ecosystem tied to research, development, partnerships, all the way through to customers and how they come together.
I was a keynote speaker yesterday at the annual European Workshop on Software Ecosystems. This event was hosted at SAP’s world headquarters in Walldorf, Germany. The conference brought together academic and business participants to discuss software ecosystems: how they work, how different components and companies are dependent on one another for success. Discussions included Salesforce app exchange, Google apps, iTunes, and how these systems work for developers, customers and the companies behind them.
I spoke on software M&A and what drives acquisitions and partnerships and how the ecosystems and buyers working together impact successful transactions. We had speakers there also from Salesforce, Ernst & Young, SAP, and several key universities in Germany. Very interesting conference. Back to you.
Bruce Milne
Thank you. SAP finally closed their transaction with Concur here in the US, they raised $23B. I look forward to hearing about that, we hope to have more for you on that deal in the following months.
Last month we had a special report from India, from a conference there. We recently sold a company to Yahoo there. This month, we go to China to hear from Hong Kong with Jim Perkins.
Asian Field Report
Jim Perkins
I was honored to be invited to Hong Kong last week to speak at the APAC Innovation Summit 2014 and Business of IP Asia Forum, a gathering of thousands of Chinese and other Asian executives and leading government officials. I presented Corum’s experience with M&A and the value of Intellectual Property, and was also part of an expert panel with Jones Day, the Hong Kong Science & Technology Corporation, and Deloitte to share our knowledge on the importance of IP and Patents in the region. This also extended to discussions regarding the Hong Kong Stock Exchanges, and the tremendous value growth being realized there. It was clear from the conference that China is taking the value of IP and Patents very seriously, and investing significantly to establish a world class system that protects these rights for companies in the region and investors in China. We’re seeing very active buyers, and valuable sellers quickly emerging from this region. China, and specifically Hong Kong is where the action is.
Bruce Milne
Indeed. Jim is currently involved in an LOI on the Hong Kong stock exchange which will be announced shortly.
Our own Dougan Milne was one of the organizers of this conference and he stayed in Asia. Dougan?
Dougan Milne
Just after finishing last week in Hong Kong and China, Corum has spent the current week in Singapore. We’ve been meeting with VCs, accelerators, IP lawyers, and plenty of great software and tech companies. Just a few years ago, we sold our client Apex Systems to NTT Data of Japan, and since then the small island state has continued to punch above its weight as a tech exporter.
Remember, Singapore is widely recognized as the hub or gateway to East Asia. They have direct access to the markets of Indonesia, Thailand, Malaysia, etc, all of which are currently experiencing tremendous GDP growth, rising levels of middle class and consumerism, and a very strong domestic market.
Then, on the M&A side, strategic buyers like eBay, Google, and King Digital Media, many other top tier tech companies have made acquisitions in Singapore in the past few years. We believe this is a trend that will continue, and we’re excited to be a part of it.
Bruce Milne
Thanks, Dougan. Congratulations on a great conference.
Tech M&A Research Report
Now, let’s hear from our research department. Pay close attention to who is buying. Elon and Alina?
Elon Gasper
Thanks, Bruce. We begin with the Public Markets, which showed dramatic gains last month, leaping ahead alongside improved US economic data, including the oil price slump, and easy money policies spreading around the world to grow the money-supply. That cash finds its way into the markets, where the S&P Tech Index has gained almost 14% this year. To keep up, public companies increasingly must turn to M&A, and they have the cash to do it. Entrepreneurial entities prepared to go to market are the beneficiaries. Our Corum Index gives us a closer look.
Alina Soltys
The end of the year has come with heated M&A activity. Compared to a year ago, the Corum Index sports a higher transaction volume with an increase of 24% in total transactions. Plus, a third more PE deals. And VC backed exits also increasing by almost 30%. All in all, almost all of the stats have gone up which points to a healthy and gushing pipeline of activity that we’ve been enjoying.
Publicis, after its failed attempt at merging with Omnicom, acquired Boston-based marketing and IT services provider, Sapient, for $3.7 billion or 2.5x revenue. The all-cash deal shows the importance of a company’s size when talking about digital technology consulting as the larger agencies get access to more advantageous projects with larger contracts and top tier clients.
ACS followed the trend of going private when Vista Equity spent more than a billion or 3.3x revenue for the company. The UK-based ERP software provider is known for its healthcare, business management and learning software offerings.
Turning now to our six markets, this month we highlight the other three not mentioned in November. Elon, what have we been seeing in the Internet space?
Internet Software Valuation Metrics
Elon Gasper
Well, metrics there stayed consistent last month, with steady activity in its pure play subsector, with some interesting transaction sets occurring in advertising and the online recruitment space.
For instance, Yahoo didn't wait long to deploy its newfound riches from the Alibaba IPO, buying San Francisco video-advertising service BrightRoll for $640M. With this second-largest acquisition under Marissa Mayer, Yahoo’s playing a bit of catch-up to competitors like AOL, which acquired Adap.TV last year, and like Facebook, which grabbed LiveRail last quarter, both for similar video ad capabilities. Yahoo also acquired two other California companies last month: photo app-maker Cool iris and multimedia mobile messaging developer LittleInc Labs.
In another matched set, Chegg added student-focused marketplace Internships.com to its collection for $11M, following its acquisition of two other companies in the same space in Q2, paying 17 for Corum client Campus Special and 30 for online video tutoring company InstaEDU. Within a year of going public Chegg has assembled growing Online Exchanges and positioned itself to move toward maturing as a Data Connected Network, tracking two Corum 2014 Top Ten Trends, and all showing how IPO money can swiftly flow through to M&A.
Overseas, in a $212M divestment, growing Russian online recruitment company Headhunter was acquired by Moscow PE firm Elbrus Capital, whose limiteds include western firms like Credit Suisse and JP Morgan Chase, in a divestment from Mail.ru, which also sold some other assets, plus used its US subsidiary My.com to buy Zurich-and-Byelorus-based MapsWithMe, maker of offline mobile maps applying OpenStreetMap data, with potential to expand into the larger mapping market. All appears part of Mail.ru’s active realignment after buying vKontacte, the Russian Facebook, in a Q2 megadeal.
On to the consumer market, Alina.
Consumer Software Valuation Metrics
Alina Soltys
The companies in the Consumer segment are becoming more attractive with increased competition among financial buyers, reflected in historically high EBITDA multiples while the revenue multiples floated down this month.
More action appeared in the games space as perhaps the largest and most well-known social casino gaming company, Big Fish Games out of Seattle was picked up by Churchill Downs. Yes, that Churchill Downs famous for the Kentucky Derby. Few would have suspected Churchill Downs of being interested in any mobile gaming company, let alone spending nearly $1B, but it certainly is a great example of our “New World of Buyers,” which we highlighted in the September webinar. Looks like a good bet down the stretch as legalization for online gambling continues to gain traction which could drive significant market share in the near future.
In South Korea, the gaming giant who aggressively uses M&A to drive record growth, GAMEVIL, reached out again and grabbed Waplesoft, a mobile gaming studio specializing in the RPG category. Together they just launched in Asia a hybrid mobile game and plan to develop many more.
Nearby, AGTech Holdings, the Hong Kong-listed gaming investor, boosted its market expansion with its acquisition of Score Value, a Chinese producer of lottery gaming systems, valued at $63M. With Score Value’s smartphone lottery offering, AGTech expands its presence in the Chinese lottery market. As Jim mentioned in his report from Hong Kong, there is a lot of hot action with Chinese and Hong Kong listed companies. .
During our extended Annual report next month, we’ll touch on another growing trend -- food delivery acquisitions. And now, Elon what do we have in IT Services?
IT Services Software Valuation Metrics
Elon Gasper
IT services remain at relatively high values as companies prefer to do acquisitions to fill gaps in this notoriously difficult-to-scale market.
In addition to the Publicis-Sapient megadeal Alina mentioned, financial services giant Mastercard bought London consultancy 5 One Marketing, whose staff supports retailers in transition to Omnichannel Marketing with strategy, analysis, and other customer-centric decision support resources.
Amid rising information security threats, another Top 10, security companies are eager to staff up their solutions provisioning capacity. PE firm Blackstone paid 350M or 0.5x Rev to bring together two information security companies - its Accuvant and new acquisition FishNet Consulting, creating a $1.5B CyberSecurity vendor better able to cope with modern security challenges, where enterprise-needs clearly include more than off-the-shelf software. Finally, KPMG made two related services acquisitions: P3 Consulting, a German cyber-security firm; and Qubera Solutions, in Silicon Valley.
Elon Gasper
And that’s our final monthly report for the year -- we’ll cover December as part of our annual report on January 15th. Back to you, Bruce.
Bruce Milne
Thanks, Elon and Alina. We’ll refresh our top ten next month and we’ll hear from our advisory board. 2015 is going to be an amazing year. What is incredible, and you mentioned this, is the range of buyers, pre-public, post-public, PE, foreign, non-traditional buyers, and I think you mentioned that in September we had a report on the new world of buyers. Tune in and take a look at that from our website.
Ten Ways to Increase the Value of Your Company
Now let’s turn to our keynote presentation, ten ways to increase the value of your company. Our presenters today are not only the world’s best deal makers, but they’re also all former CEOs who have successfully sold their companies. There is wisdom here.
Let’s start with Jon Scott.
Jon Scott
We've worked with lots of serial entrepreneurs on the sale of multiple companies. They differ from first time company founders in one key way: they nearly always have an exit plan. In other words they begin with the end in mind. From the moment they start the company they not only have a vision of the products and technologies but also the business model, management team, revenue and support structure the company needs to get the highest value in an M&A event from either a strategic or financial partner. Of course those same attributes may lead to an IPO as well, but over 95% of all exits are through merger.
The difference is they make this an integral part of their plan and strategy from day one and this brings significant value when they decide it's time to exit. Beginning with the end in mind can be one of the most important steps an entrepreneurial founder takes to increase value. Back to you...
Bruce Milne
Great, thanks Jon. Now let’s go to Ward Carter, chairman of the Corum Group.
Ward Carter
One of the best ways to boost value is to increase your recurring revenue. Historically, that meant increasing Support and Maintenance revenue. Today, the answer is SaaS. That means several things:
- Move your customers from a perpetual license to a subscription. Ideally, that includes both existing and new customers.
- Move your customers from on-premise to hosted. Here, you gain all the benefits of SaaS, including ease of deployment to all customers on a common code base, eliminating version control issues, while gaining greater insight into how your customers use your application and how it can be improved, increasing user satisfaction and retention rates.
- By deferring revenue through subscriptions, you eliminate the lumpy revenue of perpetual licenses, and gain predictability. You’ll be more attractive to acquirers or investors, and likely see a big change in your valuation.
Bruce Milne
Thank you. Now back to Jim Perkins.
Jim Perkins
Hi, everyone. A well rounded, experienced and cohesive management team increases the value of your company. When starting and building your company, always be thinking about what buyers and investors will be looking for in terms of experience, credentials, ability to work well together, and how your team complements each other in terms of skills and disciplines.
Buyers can sense the way your team works together almost immediately. When selling, be sure to highlight the experience of each executive on your team and their achievements, and relate these back to real world examples of their contributions to the company.
Also, focus on how well the team works together to get things done: give examples of the team being able to solve problems and achieve targets together. A great management team gives buyers confidence in the future of your company and therefore increases its value.
Bruce Milne
Thanks, Jim. Mark Johnson?
Mark Johnson
Customer churn is the percentage of customers that do not continue buying the solution in a following year. This is especially important for companies with SaaS businesses and is a principal factor in valuation. While the financials, team, IP, markets, and customers also need to fit with the buyer’s strategy, churn primarily indicates how good and scalable the product is. As a SaaS company becomes larger, the size of the subscription base becomes large enough that any kind of churn against that base becomes a big number. That loss of revenue requires more and more bookings from new customers just to replace the churn. As a result, growth slows. It depends business to business, but the real churn of a SaaS acquisition target needs to be lower than 5-10% to be considered attractive, and consequently command a premium in valuation.
Bruce Milne
Thank you, Mark, good stuff. Now to the heartland, and Ed Ossie.
Ed Ossie
Another way to increase your value is with discipline and process. Specifically in the area of product design, planning actual development tests. It’s important to not only have a clear, repeatable release process, but also a compelling road map that is going to resonate with prospects, not just current customers. A lot of times the entire focus can be on the current punch list of features and fixes for current customers. Satisfying current customers is absolutely critical, but as a growth business, a road map has to include innovation for customers you hope to win to underpin that growth in the future. We see plenty of vertical market software businesses with a marquis but short client list and not much traction outside of those deep relationships.
Once you become an extension of a few large clients, you may have increased your profits, but diminished your value, at least in the realm of tech M&A.
Bruce Milne
Thank you. Now to HQ and John Simpson.
John Simpson
Good day. Too much customer concentration is a value depressant. Too many eggs in one basket is a significant risk that can seriously limit a buyer’s interest and may even kill an M&A deal.
Let’s say 20% or more of your business comes from the same long-term loyal customer. Is that a safe source of revenue? Maybe. But what if they switch IT strategies, file for bankruptcy, or are acquired by someone who uses a competitor’s products? You could be hit very hard by the loss of that income, and it takes a lot of time to make it up. Keep your best customers happy, but diversify your base long before you’re ready to sell.
Bruce Milne
Yes. One comment on that, John’s right, but sometimes people look at this diversification and they go to different markets, often success in one market will not give you traction in another, so be very careful to stay focused.
Now to Russ Riggins on improving your cash flow.
Russ Riggins
A primary driver of value is the free cash flow that your business can create, tightly related to the rate at which customers are acquired: highly profitable customers generate strong cash flows. More and more entrepreneurs are embracing “lean manufacturing” concepts to achieve these goals, maximizing customer value for your offerings and minimizing waste when delivering to the customer. What costs are we incurring that don’t support an efficient, customer-focused organization?
Ask your management team: How do our customers define the value they receive for the products and services we deliver? Are there elements to our offerings that are nice to have? Are there any costs we can eliminate or reduce? How can we make our delivery of our more efficient?
Focusing on these concepts can be an important method to maximize the value of your company.
Bruce Milne
Good advice. Russ has worked with some of the most successful companies in the world. Now to Texas to hear from Jeff Brown.
Jeff Brown
It’s really important to build partnerships and alliances. Many growing companies forget to play well with others because they are so focused on building product, growing the platform, and winning sales. Certainly these are critical, but don’t overlook the benefits of building an ecosystem of business alliances, companies invested in your success. The old adage, “We are judged by the company we keep,” holds true.
Sure, alliances take time to build and need effort to keep healthy, but that’s exactly why they create validation. A partner ecosystem expands your value proposition and improves stickiness. It will generate leads, extend your sales team, strengthen your competitiveness, and make you an easier, safer decision for the customer. This is the result of what I call weaving your business into the fabric of the industry.
Bruce Milne
Great, Jeff, thank you. Now to Rob Schram, who recently sold to Yahoo.
Rob Schram
Year-over-year growth is a primary driver for how companies are valued in today’s M&A. Growth factor gives buyers a solid metric of how well your company is run, how well the markets are receiving your products and how efficiently your sales and marketing organizations are operating. For companies with SaaS offerings, most buyers will determine the purchase price using revenue multiples based strictly on year-over-year growth rates – irrespective of EBITDA. In other words, if you’re investing your earnings into expanding geographically, increasing market share, and beating out the competition, then for buyers your year-over-year revenue growth is clearly reflective of future performance and, after all, the future is what they’re buying.
Bruce Milne
Great, thank you. Finally, let’s go to Daniel Bernstein, who recently ran a conference in one of the hottest tech markets in the world, Israel. Daniel?
Dan Bernstein
Timing is a critical factor for knowing when to sell your company. Sometimes timing is driven by macroeconomic trends - recession, bull market, or sometimes by changes within your own sector or industry. A lot of times you don't know what the future may bring. When I sold my company in 2011 I had my main develop ent office in St. Petersburg, Russia. I would not be able to sell today given current complicated geopolitical issues. So what's the answer? When things are going well for your company - that's the best time to sell.
Bruce Milne
Absolutely. We’re probably in the best market we’ve ever seen and we’ve been at this for 30 years. A voice of experience there with Daniel, in fact all of our advisors and speakers are the voice of experience. Thank you very much.
Closing Thoughts
Now let’s go to our wrap-up and hear from our president, Nat Burgess.
Nat Burgess
Thanks, Bruce. Great to hear all these tips, and very timely as well, because we are living in a historical time. I encourage everyone to come back in January for our annual report and predictions. The fact is, we go through these market cycles, and the pundits all let us know when we’re at the bottom and when things are tough, but it’s often more difficult to tell if we’re at or nearing a peak and right now we’re clearly on the upslope. There is a lot of excitement around the markets and there is a lot of opportunity.
I wanted to make a couple of points that I think relate to best practices and value creation tips we’ve heard today.
When I started out at Morgan Stanley in the 80s, I remember going through Black Monday and watching the market melt down and seeing the whole floor melt down. We’ve been through multiple cycles since then. I was part of a group of analysts within Morgan Stanley, brought in from all over the world for training in New York and then redistributed around the world. If you wanted to know what was happening at Morgan Stanley, you’d be better off talking to an analyst, not a managing director, because these are the people who talked to each other and created an organization around the world that kept things moving.
A lot of people don’t realize this, but there’s something like that organization between all the large leading tech companies and all the PE firms. These people are talking to each other, they’re moving between companies, and I bring this up because this morning, before this conference, I was on the phone with four different corporate development people at four different companies who have all worked together at different times, they’ve worked at many companies you’ve definitely heard of. They talk to each other, they compare notes on deals. It’s similar dynamic in PE. I’ll tell you, the telegraphs are on fire right now. It’s a deal environment. These guys are suddenly on red alert, chasing stuff, making stuff happen. It’s a highly transactional environment. Everything you heard today in terms of value creation is critical, as you think about how to present your company in the best possible light, how do I present my company in the best possible light, how do I take advantage of the market?
We’re here to help our clients do that, and we’re also here to answer any questions that you have about your own situation, so I’d encourage you to check in with us, and let’s have that conversation.
Bruce Milne
Thank you, Nat. We have one question, and that is about how long this is going to last. I’d say tune in next month. We think 2015, the market we’re in right now, is the hottest market ever, and come and listen to our experts.
Ward Carter
We just had a question come in about the valuation of Hubspot at 10x revenue on negative earnings. This is a perfect example of building a SaaS business with recurring revenue on topline growth. What we saw a few years ago was Oracle trying to buy Eloqua, and Oracle didn’t buy into the valuation, Eloqua threatened to go public, Oracle called their bluff, Eloqua went public, and Oracle wound up paying 10x revenue, because the public market supported the valuation. Buyers now realize that IS the right valuation for a high-growth, recurring revenue SaaS business in a hot market like marketing automation. We saw RightNow go, we saw Eloqua go, SilverPop, it’s a good place to be. What you see reflected here also are the same value creation tips you just heard during this webinar, these guys did that.
Bruce Milne
Indeed they did. That was an excellent question to close out on. We look forward to you joining us next month for our annual report.