Timothy Goddard
Welcome to tech M&A monthly. Today we’re going to be looking at what to do when you are approached. This is a hot topic. It looks like this is going to be our best attended webinar since our annual report, and that’s because people are being approached all over in this hot market.
My name is Timothy Goddard, VP of Marketing here at Corum Group. I’ll be your moderator today. We have a great agenda lined up. We’re going to start with a look at some international events that we’ve been doing globally. We’re seeing the same interests in these events everywhere. Then we’ll dive into what to do when you’ve been approached, with a focus on your personal liability in the selling process. It may not be something that you’ve thought about, but you should. Then we’ll go to our research report, looking back at the last month of tech M&A, including a special report from a data center conference in Last Vegas. Then, the second half of our “When you’ve been approached” report, the six things to do after being approached. You won’t want to miss that. Then we’ll hear from a seller who was approached, and the process he went through. Finally, our president Nat Burgess will close us out with some closing thoughts and we’ll go to Q&A.
Without further ado, let’s jump in and join Dougan Milne in Barcelona.
International Conference Report
Dougan Milne
Thanks, Tim. Indeed our international team has been on quite the roadshow over the past couple weeks. My colleagues and myself have hosted really successful events in Vienna, Zurich, Stockholm, and then just a few days ago in Moscow. It was bitterly cold and it was snowing cats and dogs, but the Russians still know how to get to a conference on time, regardless of the snow. I have to stay attendance is at record levels recently, but beyond that it is the level of participation that we are seeing that is extraordinary, even seeing buyers like Google and Lenovo in the audience last week. We’ve seen them plenty before, but I think it is a real testament to the market that we’re currently in. Are a lot of these companies being approached? Perhaps so, and certainly the record deal volumes and values, everyone just wants to get a better understanding of what their company might be worth, or in the case of the buyers, what they should be paying for companies. We’ll hear from Elon and the research team a little later with more information on that.
Back to you, Tim.
Your Personal Liability
Timothy Goddard
Thanks, Dougan. Now we’re going to go to Rob Schram here at headquarters, talking about your personal liability when selling your company.
Rob Schram
About 70% of the private tech firms we work with here at Corum have been approached—often unsolicited—and sometimes with a signed offer in hand. This kind of inbound interest is exciting, and the instinct to pursue the offer is strong. But then questions start to emerge. Is this the right time to sell? The right buyer? Is this the right price? Can we make it through due diligence without hurting the company? Would someone else pay more?
Jon will detail later in this session why a well-orchestrated global search will always produce better results. Suffice it to say, dealing with one buyer is definitely not the path to get the value you deserve.
Furthermore, although many CEOs still try to drive this one-buyer overture to conclusion, they may be ignoring the biggest question of all: personal liability. What is their fiduciary responsibility? What are the consequences if they sell to the first party that comes along without getting competing offers?
The consequences can be personal bankruptcy.
In this day and age, with all of the shenanigans of public CEOs during the dot-com crash, and the recent recession caused by irresponsible actions in the financial community, there are a number of laws that have been passed by the US Congress, and strengthening of minority shareholder rights in nearly all states and foreign countries.
Simply stated, if you don’t calibrate the value of the firm by approaching multiple potential acquirers, and you engage with the first interested party, you can be liable to other shareholders and stakeholders who may claim that you acted irresponsibly in not seeking, and achieving, a higher value. This is essentially the “fairness opinion” argument that plagues public companies in mergers. The same logic applies to private firms now, especially where there are multiple stock and debt holders. In the end, courts have ruled that the selling CEO can be liable to make up the difference to shareholders if they neglected to calibrate value and sold too low to the first bidder.
So, when a buyer approaches you, and assuming they are not just “bottom fishing” (which is often the case), be mindful of your own liability, and whatever you do, never sign an exclusive negotiating agreement locking out discussions with other parties. Too many buyers will try to force this on you; and it’s a huge mistake – with potentially devastating personal outcomes.
On the positive side, there are five significant benefits to making sure you do a wide and thorough buyer search. The question “Do you want to buy my company?” gets you straight to the top, providing a unique opportunity to interact with the CEOs of major corporations. It’s a privilege you don’t want to miss, and can lead to number of benefits.
- First, you’ll build a better business model from this interaction, and from the overall processes of self-checking and due diligence.
- Second, you’ll have stronger strategic positioning derived from your research on buyers and competitors.
- Then, there’s invaluable market feedback – you’ll be surprised at what you learn from potential buyers who spend millions of dollars on market research related to your business.
- Your conversations with potential buyers will also open doors for commercial partnering opportunities – not everyone under NDA can buy you, but many will want to be a customer or partner.
- And finally, of course, the ultimate goal is selling your company, with full confidence that you conclude the best deal possible for yourself, investors, customers and employees.
Timothy Goddard
Thank you, Rob, that’s good stuff.
Corum Research Report
We’re looking forward to hearing from Jon Scott later in this event on how to get to that point, but before that, we’re going to hear from Corum’s research team, with Elon Gasper, joined by Alina Soltys, Amber Stoner, and Jason Steblay. Elon?
Elon Gasper
Thanks, Tim. We begin with the public markets, where once again major averages added to their robust year-to-date gains as the Dow hit a new record above 16K, even then lagging the rise in the more tech-heavy indices’ performance. These valuations and the cheap money driving them combine with the immense capital reserves held by major tech companies to produce perfect climate for tech M&A. I see that’s reflected in the Corum Index megadeals, Jason.
Jason Steblay
Yes, and those include Canadian content management and collaboration powerhouse OpenText, which took advantage of low interest rates to make its largest acquisition ever, laying out mostly borrowed bucks plus over half its cash to pry GXS away from Francisco Partners and into its Enterprise Information Management embrace. This doubles OpenText’s cloud revenues and may herald additional, smaller scale M&A to fill gaps, as often occurs around major moves like this.
Elon Gasper
We saw them acquire enhancements provider Resonate, a Corum client, earlier this year.
We’ll examine the other November megadeals later, noting now the increasing trends of growing cross-border and startup acquisitions, and a decrease in VC-backed exits in November, as clogged corporate dev groups put larger deals in an express lane, plus some sellers chanced delays to continue growth. With the Fed talking a bit tougher now about its coming taper, it could be a risky play to try to time the cycle that tightly, as Bruce mentioned last month. Anyway, turning now to our six markets, we begin with Horizontal Applications. Amber, what have we been seeing there?
Amber Stoner
The Horizontal sector continues to hold the top spot among our six major sectors with the highest valuations for both sales and earnings multiples hitting 24-month highs in November.
In one of the largest deals in the sector this month, Boston PE firm Advent International acquired Dutch ERP vendor Unit4 for $1.6B, at a 2.7x revenue multiple. Advent’s investment money will be used for both research & development and add-on M&A to expand Unit4’s existing SaaS business.
Unit4 and salesforce.com-backed FinancialForce.com also made two acquisitions in November picking up Vana Workforce, an Ontario-based provider of human capital management software, and the assets of Less Software, a provider of supply chain management SaaS.
On to the next of our six markets—Elon?
Elon Gasper
That’d be the Verticals, where both Private Equity and strategic investors made significant moves last month, bidding up for business models with scalable profits.
For example, Bain sold its portfolio company Applied Systems, provider of insurance ERP software and SaaS, for $1.8 billion to two other PEs: JMI and Hellman & Friedman, making them Applied’s third set of PE owners, since it started back at Vista in 2006. For H&F in particular, it’s a timely addition to their existing portfolio of other software and insurance-related companies.
Over at the nexus of payment processing and healthcare, Experian acquired Passport Health Communications for $850m, about 7x revenue, a fine multiple even for an established, profitable health IT company and the access it delivers to the difficult-to-enter US healthcare market.
Amber, in contrast, the Internet sector is relatively easy to enter, right?
Amber Stoner
Yeah, and to exit; we see continuing cross-border demand there, and with increasing valuations for revenues since monetization models are now viewed as more predictably added and optimized. Another trend in the Internet sector this month is the acquisition of companies that offer classifieds with employment opportunities. Texas-based onTargetjobs was acquired by Dice Holdings for $50M. The deal moves Dice’s online recruiting business into the hospitality market and further expands its reach into the healthcare market.
Meanwhile, Hellman & Friedman did a little more spending in November, picking up a 70 percent stake in Scout24 for over $2 billion in cash. Owned by Deutsche Telekom, Scout24 is Germany’s largest portal of real estate, automobile, dating, and employment classifieds.
Financial media and marketing research tools have been driving M&A activity in November as well. London-based BC Partners paid $617M for Mergermarket Group, which delivers financial analysis and data. And Nielsen supplemented its marketing research solutions by acquiring Harris Interactive for $116M.
Jason Steblay
The consumer market stayed stable with support from components related to mobile ecommerce. Just like every other sector in the Corum index, the burgeoning internet of things is having a pervasive effect here as well, where its highest profile application is wearable tech.
Its growth is bringing some interesting buyers to the party too. Last month, athletic apparel maker Under Armour acquired MapMyFitness, paying $150 million for the workout tracking and sharing technology provider. Nike and Addidas are also building digital fitness platforms using the internet of things to track workouts.
Elsewhere in the consumer sector, Groupon made its 5th acquisition of the year, and it was a monster: TicketMonster to be exact, its largest acquisition ever at $260M, catching the divestment by its Amazon-backed rival Living Social. It was also a key diversification play for Groupon, which gained a significant presence in the South Korean market.
A week after Groupon’s acquisition, travel guidebook publisher Lonely Planet, which itself was bought earlier this year by mysterious Kentucky billionaire Brad Kelly’s new NC2 Media operation, made its first acquisition with Spanish mobile travel planning app, TouristEye.
Think we’ll see more consumer mobile purchases funded by NC2, Amber?
Amber Stoner
I wouldn’t be surprised! But turning now to the Infrastructure sector, it maintains its strong year with EBITDA multiples hitting two year highs in November and we continue to see a trend of acquisitions in the enterprise networking space.
In its first deal of 2013, Akamai Technologies acquired performance optimization provider Velocius Networks, expanding its reach into enterprise networking as well as getting experienced engineering talent to add to its engineering group in India. Quickly followed with its second deal in 2013, just last week Akamai also acquired cloud-based security provider Prolexic Technologies for $370M.
In mid-November, CenturyLink bought Tier 3, a cloud management software and hosting services company, for an estimated $150M, in order to drive revenue growth in its data-hosting segment. Tier 3’s CEO, Matthew Schiltz, will be joining us at the Seattle World Financial Symposium held in January; we hope you can join us as well, for more information visit wfs.com.
Elon, why don’t you close us out with IT Services?
Elon Gasper
IT Services EBITDA multiples continued their growth, now having added more than a half point a month three times in a row.
Hosted services companies were in the spotlight as the UK’s Redcentric made a domestic move for the managed services sub of InTechnology for about 100 million dollars, making it 1.7x revenue.
Another UK hosted services company, Telecity, continues expanding eastward with acquisitions of Poland’s PLIX and Bulgaria’s 3DC, for a combined value of $24m for both datacenter operators. Telecity started its conquest of markets in this direction with an acquisition of two Helsinki-based hosted providers last year, with a total deal value of $42m, and an Istanbul company bought this year for almost $40m.
But speaking of Data Centers, our Senior Analyst Alina Soltys has been in Las Vegas at the Gartner Data Center conference, and has a report on that hot area: data centers that is, not Vegas. Alina?
Alina Soltys
Vegas has been unseasonably cold but the conference is been packed with Vendor Presentations and Gartner Analyst talks covering everything from software-defined networks to private cloud setups and GoDaddy’s experience of building a data center from scratch and the trials they faced along the way, a fascinating case study for largest web hosting company.
The overriding message from all of these talks is that it’s time for the Data Center to get smarter. With just an 8% Data Center Utilization rate now, The huge influx of continuous data creation and collection brings a compelling need for smarter tools to archive, de-dupe, integrate with other services and create a global federated data architecture.
To address this, the smart companies that everyone’s talking about here today—Amazon, Facebook, Google—are increasingly building their own systems and infrastructure. In fact, Facebook even assembles its own servers rather than buying brand name Dells and HPs!
The word here, going forward, will be the intelligent datacenter which is defined as a dynamic model based upon business needs and requirements. This broad concept seeks to move beyond the current siloed approach within database development to an unified orchestration across all stakeholder groups with rich management layer to optimize resource utilization and allocation.
Although the big 4 IT operations management providers—BMC, CA, HP, and IBM—each of whom are making a $1B+ annually managing datacenter deployments, don’t have all the pieces yet and are scrambling to keep pace with their customers’ demands.
One of the fastest ways for these guys to add that functionality is through M&A, which we believe will continue to fuel strong exit opportunities for software companies doing anything related to, or in, the datacenter.
In fact, the big name buyers aren’t letting companies like Nimbula and Cloupia get any bigger rather picking them up quickly to fill out their cloud & big data portfolios.
Exciting developments continue — watch our Blog posts for more
Back to you in Seattle.
Elon Gasper
And that’s our final monthly report for the year. We’ll cover December as part of the Annual in January. Back to you, Tim.
Timothy Goddard
Thanks, Elon, that should be a great conference in January. Elon’s research team look back at the last twelve months with analysis of our six sectors and 26 subsectors, and then our luminary panel will look ahead, this will include some of the folks we had last year, great luminaries from Google, Salesforce and others, you definitely won’t want to miss this.
Six Steps After The Approach
You also won’t want to miss this next segment, as Senior VP Jon Scott looks at the six most important things to do after you’ve been approached. Jon?
Jon Scott
Hi and good evening from Amsterdam. It’s always nice to be approached by an interested party. And as we heard earlier in Rob’s discussion, you need be careful about only talking to just one bidder. But what do you do?
Of course, thank the buyer and tell them you are flattered by the interest and will speak to your stakeholders to review what they have put forth. Then take the following six steps:
1. Protect yourself and your company and get an NDA and non-solicitation agreement in place immediately in case they are just out looking to pick your brain and take key talent from you.
2. Qualify the buyer. Are they serious and can they do the deal? Many buyers who run around making offers are bottom fishing and are looking to buy you only if you are willing to accept a value well below market.
3. Ask for a due diligence checklist to determine whether you’re in a position to do a transaction without the volume of diligence burying your executives and distracting them from their daily jobs and harming the company.
4. If buyer is serious, you can buy time asking for an independent valuation to be done. You need this anyway, and it allows time to contact other logical parties.
5. Plan to make high level overtures to other potential suitors, telling them you’ve been approached, but you always felt they would be good partners, and would they be interested in speaking with you.”
6. If you don’t already have them prepared, get your three-year projections together as soon as possible – few buyers can get final approval without it, and nearly all valuations require it.
Remember, 75% of the time someone else will pay more than the first bidder. Further, if you do a global search your value will improve an average of 48% if you leverage other discussions. So consider getting an experienced advisor who already knows the buyers, what the due diligence bottlenecks will be and can do a valuation, to help you get the value you deserve. Back to you, Tim.
Timothy Goddard
Thank you, Jon.
Seller Story
Now, we’re going to hear from someone who went through those six steps and how that turned out. To introduce that CEO, I’d like to welcome Corum CEO Nat Burgess.
Nat Burgess
Thanks, Tim. Really excited to hear from our client Gavin from RapidBlue. I just want to remind everyone here that Corum Group is in the business of selling software companies. We’ve closed more than 300 transactions now, more than anyone else in the marketplace, and when we engage in these conferences and updates, we’re really doing it to raise the level of awareness in the industry, we’re doing it to start healthy dialogue with buyers and sellers, and we’re also doing it to really extract what we’ve learned, so when Jon gives you his six steps to take, that’s not theoretical, that’s a dealmaker showing off some battle scars, because we’ve been there and done that.
Now we’re going to hear from a client who has been through it with our assistance. Again, this is real world experience extracted and put on the table for your benefit as you think through your strategy. So let’s go ahead and hear from Gavin.
Gavin Weigh
Hello. My name is Gavin Weigh, I was the CEO and cofounder of RapidBlue Solutions, a Helsinki-based retail analytics firm acquired in 2013 by ShopperTrak of Chicago.
At the end of 2012, RapidBlue was approached by a large market research firm who had a great interest in our technology platform and the business that was built around it. It became clear to us quite quickly that we would be attractive to a multitude of different companies in different industries.
With this in mind, we approached Corum, who helped us build an auction process a secondary process around how to navigate through, not just due diligence, but also through receiving successful offers. We followed Corum’s process around building an auction for RapidBlue. This involved a series of approximately 20 management presentations to a variety of companies including IBM, WalMart, and Microsoft.
We were at the table with some of the key players, not just in technology, but also branching out into our own industry. ShopperTrak quickly, for us, became the most attractive company, as they are a direct industry leader. What we noticed was that, in our experience, the first to approach is unlikely to be the first to buy. We found that our original possible acquirer, came in with offers that were not as attractive for us as some of the others we received later.
So, we went forward with ShopperTrak and we entered into due diligence. It took approximately two-and-a-half months. There were very limited delays and I think both parties feel afterward that the process was relatively smooth. I would put a lot of that down to us having a clear template to follow provided by Corum and also by ShopperTrak having their own process. My advice to any CEO going into or considering going into an acquisition process is to engage in an auction. If you are attractive to one industry player, there is a high likelihood that you will be able to engage several other players who will be interested in acquiring your firm and ultimately receive better terms. Focus on maintaining normal business and insure that your books remain healthy. It’s one less thing to worry about. If business is growing and the sales are coming in, you will find that due diligence and the whole acquisition process is perhaps a less stressful event.
Be prepared for extremely long days and high stress levels. Running the business in itself requires a lot of effort. Running a business and selling it in parallel requires that you are entirely focused on only that. It can take anywhere from weeks to many months, so it’s about digging in, insuring the business is highly functional, and getting yourself out to as many different companies as you possibly can.
Having been successfully acquired by ShopperTrak, we were very glad now to see that the technology that we have built here in Helsinki is now being pushed onto a global scale. We found that our way of operating is way more streamlined. We’ve managed to adopt a lot of the highly-developed processes of a larger company. We’ve also been able to maintain our entrepreneurial freedom. We are able to run our unit as it was with higher budgets and on a larger scale.
From RapidBlue, it’s been an extremely successful acquisition. It will continue to be a successful acquisition for ShopperTrak. Despite the stress and the long hours, it’s an excellent process to go through and to complete.
Nat Burgess
It’s interesting, and I hope you’ll forgive me, Gavin, for talking a little bit more about what happened after the deal, but I was at a closing dinner with Gavin in Helsinki a couple of months ago. If you haven’t been to Helsinki lately, there’s a real renaissance in Helsinki, we were at a Michelin star restaurant, and there’s an exciting entrepreneurial environment there. We were having dinner and Gavin mentioned that after they had been approached and they were talking with us, they sat down with the board and the board said, “Gavin we have an offer, let’s just close it.” Gavin convinced them that they needed to run a proper process: for the protection of their shareholders, to make sure they were getting fair market value, to insure a successful outcome…
Two weeks after they engaged us, that buyer dropped out. We had already initiated dialog with four others and ultimately we had more than that in the process before we closed the deal. So Gavin is just a perfect case study of how the process is supposed to work and achieve the goals of the shareholders.
I want to quickly close with a last comment here. I know we have buyers on with us today, we typically have Google, IBM and Microsoft joining us, guys I know your job is to pay the right price and not overpay, but I think you’ll agree with me that if given the choice in paying the low price for a company and taking a lot of risks and not knowing if it was the right price, versus paying a relatively full price for a business, where you understand the risk and it is a proper process and you control those unknowns, you’ll generally take the later; if you’re a high quality buyer, you’ll opt for that, because ultimately you’re doing these deals for strategic value, you’re doing it for the upside, but you can take a ton of risk if the company is not properly prepared, if the process isn’t properly run, and that can create all sorts of problems. We tend to find that buyers generally speaking welcome us into the process as well.
I’d also like to mention, we profiled the OpenText deal earlier today, and as we are tracking M&A activity and as we are figuring out where to go, we pay very close attention to the people as well as the companies. Companies don’t make acquisitions, people drive acquisitions. In that particular case, there is a very senior dealmaker at SAP, Jim Mackie, who switched over to OpenText, and we knew then that it was going to get quite serious, quite quickly, and that’s when we closed the Resonate deal with OpenText and it’s great to see the Francisco buyout as a followup, congratulations there.
With that, I’ll wrap and go back to you, Tim.
Timothy Goddard
Thank you, Nat.
Q&A
We have a couple of questions that came in. This first one can probably go to Nat. “Gavin mentioned that other buyers were approached. Did he do that or did Corum do that?”
Nat Burgess
The answer there is that Corum did that. There were several companies that Gavin had relationships with RapidBlue had relationships with, and in a couple of cases, we actually orchestrated a conversation where Gavin made the first call and basically said “We’ve been approached, we’re in play, we think we might be a better fit for you, and we have a firm managing the process, we’d like to put a call together.”
So sometimes there was that first call from Gavin, but our goal was to be on the phone as soon as possible and that was true for two out of about 20, but the rest of the time we made the first call and had them moving ahead very quickly. Bearing in mind that we know these guys, they’re not strangers to us, and we can get in at the right level very quickly.
Timothy Goddard
Thanks, Nat. Another question that, Elon, I’ll toss to you. Someone is curious about what mobile multiples are looking like right now, particularly in relation to firms like Publicis and WPP?
Elon Gasper
We’re seeing high multiples across the board in lots of the segments that we’re tracking. We’ll go through a full history on them when we do the annual report. I can say for one thing that we’re happy to talk about the particular situation of any company, give us a call here and we’ll walk down into the particular subsectors and talk about the factors that might influence a judgment call.
Timothy Goddard
We have a lot of great questions coming in, so we’re going to go a little bit over time.
Great question here, “What is the most polite way to decline and not engage in an offer, just because we’re not considering initiating a process at this time?” Nat?
Nat Burgess
Thanks for that question, it’s a great one. I’m going to answer it from two perspectives: one as an M&A guy who has been working on deals for 25 years now, but also as an angel investor, because often when I’m involved in early-stage companies that haven’t even launched a product yet, we get approaches and the question always comes back to me, “How do we respond?”
The answer is, you basically tell them that you’re flattered, but you’re so excited and focused on the value that you’re going to be building over the next year or two, that you just couldn’t consider selling now because the valuation wouldn’t reflect the value. What that does is give the buyer the option of looking forward, leaning forward from a valuation perspective and realizing that this situation may be strategic enough that they should come in with an aggressive offer and try to shake you loose. That is a very different dialog than that which just comes from, “We’re busy, we’re not interested.” Let them react to that.
Timothy Goddard
Another one for you, Elon. You were recently in a healthcare spotlight webcast, so maybe you can speak to this. “Healthcare is undergoing incredible change, you have companies that can provide innovative technology, is that enough, or do you also need market traction?”
Elon Gasper
Well in normal times my reply would be that market traction was almost certainly necessary, but these aren’t normal times. With what is going on in the markets right now and with the tremendous disruption that is occurring in healthcare on an almost day by day basis, as the significant forces that are changing it keep pushing and pulling, if there was ever a time to take a minimal or even zero revenue company to market and get an attractive valuation for it, that time is right now. That said, you’re going to have to have some other things besides market traction to get over the first barrier of consideration. That means some sort of barrier to entry, some sort of, if you will, competitive advantage, sometimes I like to call it an unfair advantage, that you’re bringing to the table; whether that is a strong patent position or whether that is a particular partnership or a way that you prove out your value even before having market traction, something like that to bring to the table, that you can hang your hat on when making an approach or being approached, that’s needed.
Given that, this is something that can be considered, and again, I’d encourage you to give us a call and we’ll walk through the particular situation.
Timothy Goddard
We have another question along the same lines. Is this true in just something like healthcare, what about something like Enterprise Apps?
Elon Gasper
It’s a little harder in the Enterprise Apps space to push something without traction, because the disruption is not as significant there. Still, with the things that are going on in the mobile space, with BYOD impact on IT support within particular corporations and the impact of this incredibly strong cycle of replacement of technology across the board and the generational changes, there are opportunities there, too, but I’d say a bit less than in the healthcare space. However, again, both these markets are so fragmented into particular subsectors, I’d enjoy talking about it with you, especially if you have a particular situation, I’d love to address it in a detailed fashion.
Timothy Goddard
These are great questions, we’re going to end with this one.
“Are there any other viable options to sell my company beyond using an auction format?” Nat?
Nat Burgess
Yes, use the threat of an auction format. To flesh that out a little bit, if someone’s approached you and they want to be pre-emptive and they really want to move fast, then you should give them the opportunity to do that. Realistically, there is a time lag in spinning up other buyers and it is important, then, that you at least hold that out as something you can do to drive more value. What can be the result of that is the buyer has to get honest very quickly, figure out what they can pay and what they are willing to do to be pre-emptive and take that auction option off the table.
Timothy Goddard
Thank you very much. That’s all the time we have today. Thanks for staying with us. We hope to have you with us next time, on January 16th, for our annual report.