Nat Burgess
Welcome to our February update. We have an exciting agenda today. We actually have a blockbuster month coming together for our clients, with four closings scheduled before the end of February and we look forward to talk about those transactions in our March update. But today, stay tuned, because we’re going to go through a brief field report on a recent transaction that we closed in Mexico City, with a multi-billion dollar US buyer; we’re going to go through Corum’s monthly update from our Research team, and then we have a private equity panel of very seasoned, very senior PE pros who have billions of dollars in dry powder and visions for creating the next generation of software companies, so stay tuned. We have John Hodge from Rubicon, Devin Matthews from Chicago Growth, Mark Taber from Grade Hill, and Sebastian Briens from HG Capital will all be joining us here in a few minutes for a panel moderated by our own Ward Carter.
Field Report
Let’s start, however, with our field report. I’ve been spending a lot of time lately in Mexico City and specifically in the Santa Fe neighborhood, which is about 7000 feet above sea level. It takes a full 24 hours before you start to feel normal at that elevation, especially if the air is a little thick with smog. We’ve run into some really high quality companies down there, and that’s the neighborhood where Microsoft, HP, and others are housed.
We had a chance to work recently with a business called Inffinix. We met them back in 2008, they were building and growing, they serve the financial services industry, mostly in Latin and Central America, but also in Asia now as well. Something happened last year, the Mexican economy started to recover, international attention started to focus there, and they got approached by a couple of buyers who were interested, but not urgently so. We stepped in, helped them build out a data room, helped them get organized, and then we went to market and contacted several dozen companies globally. We ended up in a bidding war with four interested parties from Italy to the US, and PE guys were in there as well. Really that urgency, that process, that competition resulted in strong offers and a transaction that just closed in December with Equifax, who is going to be a great partner with these guys. They value the Mexico presence, they value the team, they value the business, they paid a fair price, a good price, and they’re going to go on to do great things. So congrats to our clients in Mexico City and we actually have three follow-on transactions that we’re working on now down there, so we’ll have to get used to the altitude.
That’s our field report from Mexico City.
Research Report
Now let’s turn things over to Elon Gasper and the Research team with their report.
Elon Gasper
Thanks, Nat. In part two of our Annual Report, we turn the spotlight on PE transactions, plus keep up with this year’s action, beginning with the public markets, where major indices, particularly the Dow, dropped back in January as the US Federal Reserve began to taper its QE support of easy money, though they’ve rebounded some this month amid a sense the correction may be over. Back in our November webinar we asked, “Will you miss the window?” and we’d be remiss not to mention again that tech M&A generally follows the economy in cycles, and that tech companies take significant time, often six to nine months, to sell.
But there are still unprecedented cash stockpiles in US tech companies, particularly overseas, to support M&A this year, plus softer talk this week from the Fed, and robust trends in technology, so we stand by our prediction of a good year for tech M&A sellers.
I see that’s reflected in our Corum Index, Laura.
Laura Duren
Yes, spending on tech deals is way up, with the index showing four mega-deals versus two a year ago. This increase in higher value transactions is another positive indicator for the overall health of the tech M&A market. Google’s acquisition of Nest Labs for $3.2B, a deal we covered in our annual report, gives them the largest transaction of the year so far.
Elon Gasper
China’s Lenovo already has two megadeals this year, buying both Google’s Motorola Mobility and IBM’s x86 Server business, each for nearly 3 billion, taking this ambitious acquirer beyond PCs and tablets to now join Apple as an all-3-device-markets vendor.
Laura, let’s take a look back now at the year 2013 in Private Equity.
Laura Duren
Well, the “investment Oscar” goes to Insight Venture Partners, with an impressive 23 software acquisitions in 2013. They joined Bain and Golden Gate in purchasing BMC for nearly seven billion.
SilverLake was right on Insight’s heels, with 20 total transactions. As we mentioned in our annual webinar last month, their biggest move of 2013 was their mega-deal buyout of Dell, which finally closed in Q4.
Vista Equity’s two November purchases – Active Network for $1B and Omnitracs for $800M – put them ahead of Summit Partners to tie TPG Capital for third place with 18 deals each.
TPG had a busy year, more than doubling their 2012 deal count. In particular, they used their portfolio company IMS Health in six of their 18 total transactions, continuing the focus on healthcare PE firms have had since 2012.
Elon Gasper
Overall, capital invested quarterly last year passed $86B, half-again 2012’s pace. The PE space continues to be active, with firms looking for strong software companies to add to their portfolios. Though some may hesitate on the sidelines, among top PEs we see consensus broadening that increased competition is a legitimate driver of today’s valuations. This week, even the New York Times noted this trend -- which we see extending to strategics, too.
Turning now to our six markets, we begin with Horizontal Applications. Amber, what have we been seeing there?
Amber Stoner
Valuations in the horizontal sector dipped slightly, while still retaining the top spot among our six sectors. In spite of the drop in valuations, we still saw quite a bit of M&A activity, particularly in the HCM space.
In early January, Infor, a Golden Gate Capital portfolio company, bought PeopleAnswers, a SaaS HCM software provider with the ability to measure the behavioral traits for job candidates and rate them, adding to Infor’s existing HCM suite, along with Big Data talent management capabilities. Another PE firm Sageview Capital picked up Reflexis Systems, a SaaS workforce management and business intelligence vendor.
Microsoft continued to strengthen its key competencies spending $100M to get Parature, a self-service customer service SaaS provider, following the purchases of marketing software vendor MarketingPilot and social media monitoring provider Netbreeze.
On to the next of our six markets -- Laura?
Laura Duren
That’d be the Verticals, where, the beginning of the year kept the sales multiples bar high with strong demand for cloud models.
In its first purchase since 2012, California-based digital video tech company TiVo bought Digitalsmiths, a video search and recommendation SaaS provider, for $135 M. Digitalsmiths’ rapid revenue growth and talented team mean new opportunities for TiVo to commercialize and deploy their cloud-based services to operators, furthering Tivo’s apparent aim of becoming a software business .
In our largest verticals deal of the month, French 3D design software vendor, Dassault, which had an impressive seven acquisitions in 2013, continued its spending spree by purchasing U.S. competitor Accelrys for $750M. With this deal, Dassault adds scientific software to its PLM portfolio, putting them in a great position to expand into the biotech and pharmaceutical sectors.
Elon, what trends have we observed in the Internet sector?
Elon Gasper
January valuation multiples retrenched in this market, but are still near the multi-year highs set in December.
PE firm Permira invested more than $200M for a control stake in LegalZoom, the online provider of legal documents and services. Permira apparently wanted to buy all of the company, but ran up against resistance from some of LegalZoom’s VC backers.
Now to Olga Prodan at our research center in Kharkiv, Ukraine, for the IT Services market.
Olga Prodan
Thanks, Elon. IT Services was the only one of our six markets showing valuation growth in January, with sales multiples even reaching new 24 month highs.
One of its largest transactions was the $820M-acquisition of Stream Global Services by Convergys. With combined revenue likely to exceed three billion dollars, it expects to be the second largest provider of customer management services.
Accenture, a top 2013 acquirer, bought ClientHouse, a Germany-based provider of SalesForce and Veeva solutions, to strengthen its SalesForce implementation services business in Europe. Over the last 12 months Accenture has acquired 9 IT companies, including Procurian and Acquity Group.
Back to you, Elon.
Elon Gasper
Thanks, Olga. Now for the Consumer Market we’ll head to Amsterdam for a special report from Alina Soltys, who was invited to address Casual Connect Europe. Alina, the inclement weather didn’t keep the gamers home, did it?
Alina Soltys
Elon, the weather has been wet and windy but that the conference has had a record turnout, with over 2,000 professional attendees. Jim Perkins and I led the finance track, presenting the update on market trends and forecasting, with buyer and seller panels to gaming CEOs.
As we move into the transactions that happened in the last month, Zynga’s new CEO, an ex Microsoftie made an entrance, with his first acquisition last month--the $527M purchase of NaturalMotion, the UK developer of popular games such as Clumsy Ninja as well as sophisticated game engines.
After the release of Xbox One, Microsoft bought the rights to Gears of War, the well-known Xbox-exclusive franchise from Epic Games.
Finally, Amazon acquired game software developer Double Helix, a 75-person strong team with IP experience developing on Xbox One. This certainly continues to bolster rumors that Amazon plans on releasing its own Android-based console.
Back to you in Seattle.
Amber Stoner
Thanks, Alina. The Infrastructure sector showed a steady M&A pace to start the year, with a slight decrease in public valuations last month, although that hasn’t stopped infrastructure companies from spending big bucks to fill holes in their existing offerings.
In a January megadeal, VMware bought mobile device management vendor, AirWatch, for $1.5B, continuing its recent trend of endpoint acquisitions. And FireEye made its first acquisition since going public in 2013, spending almost $1B to get Mandiant Corporation, a cybersecurity incident response management solutions provider.
The PE firms remained active in the infrastructure space as well, with Marlin Equity acquiring Compuware's Changepoint, Professional Services and Uniface business units for $160M.
Elon Gasper
And that’s our update for the start of 2014 -- Back to you, Nat.
Nat Burgess
Thanks for that, lots of deal activity. The market is a little bit volatile, but clearly the megatrends that we’ve been talking about for years now are continuing to drive innovation, deals, and the investment community.
PE Panel
On that note, I’d like to hand this over to Ward Carter who has put together an elite panel of private equity professionals to speak with us today.
Ward Carter
Thanks, Nat. I’m very pleased to host this conversation today, with four experienced PE execs, all of which we’ve had the pleasure of working with on past Corum deals.
We’d always recommend that technology companies seeking an exit should take a very balanced view when considering which acquirers to approach. Interest may come from a strategic buyer or it could be a financial investor, or in many cases, a combination of both strategic and financial players. So, with that in mind I wanted to give our audience some exposure to these four firms, all of which have significant portfolios and experience in the software and tech space, as well as being geographically diverse.
Starting from the west coast of the US, we have John Hodge, partner from Rubicon Technology Partners in California. In the Midwest we have Devin Matthews, managing partner from Chicago Growth Partners, Mark Taber from Great Hill Partners in Boston, and representing Europe, we have Sebastian Briens, associate director with HG Capital out of London. Gentlemen, welcome to you all and thank you for joining us.
To give our audience some flavor for your investment preferences, I’d like to start off by giving each of you a chance to talk about a recent deal that excites you or perhaps a sector or technology that you find particularly attractive for investment.
John, shall we start with you?
John Hodge
Sure, and thank you, I’ll be quick. Our firm is focused exclusively on enterprise software assets in the lower-middle market, because we believe fundamentally in the management teams there. They have great focus on their markets there as well as there’s great technology there, and the ability for us in PE for us to add value, fundamentally.
We’ve just invested in a business, and we like to look at industries where there is an ability to go and consolidate and operationally build a market…in the associated management space, which is a very protected space. The management team is fantastic, we took control of the business with a thesis, helping them fundamentally mature their operations and consolidate the industry to become a leader and ultimately, in a three to five year period, to exit strategically.
There are fantastic enterprise software companies in fragmented and protected markets with great intellectual property, great customer relationships, and a private equity partner who has expertise and value can be really helpful to accelerate growth and create a better exit option, long term, for a strategic exit. So that’s a bit of an overview of what we do.
Ward Carter
Great, thanks, John. Next we’ll go to Devin.
Devin Matthews
Thanks, Ward, I appreciate being on here.
At CGP I focus on the technology area, and we take two approaches to our technology practice. One is companies that can dominate a niche and so can be the dominant market share player in a relatively small industry, or two, a company that has a better mouse trap in a massive industry, so low market share, but premiere product.
We only acquire software businesses from founders, so we don’t do secondary buy outs. We want to work with the founders and the management team of owners of the business. We take control positions in those companies at a time when the business is profitable and stable, but has lots of growth left and when the management team need help taking the business to the next level. In doing that, we have resources in house for tech, sales and marketing, strategic planning, team development, and so on. Generally, we’re buying companies with profits less than $10M and have grown organically since their founding.
Ward Carter
Interesting, thank you. Mark, let’s switch over to you.
Mark Taber
Thanks, Ward and thanks for having me here.
Similar to Devin, we look for companies in the tech and software sector where there are good opportunities for growth and that can be both organically or inorganically through M&A. But what we look for in companies, generally speaking, is being a leader in a vertical market or, again, being in a large market opportunity where there is significant room for you to grow the business.
I’ll try to use a recent example of an investment we made in the past year. We invested in a business called Indap. It is one of the leading players in the legal software market, so targeting both law firms and corporate law departments. This was a SaaS based business growing very nicely in the past year, growing its revenue about 30%. We thought that there were great opportunities to help them continue to invest organically by building out their sales and marketing teams, as well as inorganically, and there we’ve already helped them by one small acquisition to add to their product line and cross-sell to their customers.
A key ingredient for us is a good management team, so that we’re looking to continue to invest and build in the business. Indap certainly had that. John Hall, the founder and CEO was one of the co-founders of VA Linux, with a very strong background, and built a tremendous amount of knowledge in the legal space. We liked all of that and we’re looking for more opportunities in other verticals similar to that.
Ward Carter
Okay, thanks, Mark. Now let’s switch over to Sebastian Briens. I understand you just hopped off an airplane, so I’m glad you could join us.
Sebastian Briens
Indeed. Hi, everyone. We’re also very focused on software, it’s a major vertical for the firm. For us the opportunity to invest in software hinges on the continued conversion of work flows to electronic or online sources across a range of industries including automotive, healthcare, financial services, etc. Within those industries, we focus on a number of investment themes, one of which is regulatory-drive software.
A good example of this theme is our July 2013 investment in Intelliflow. Intelliflow is a provider of SaaS solutions to the financial advice sector in the UK. What it does is allow a financial advisor to support core workflows like CRM, assessing customer risk profiles, portfolio construction, ordering financial products, etc, through a web interface. That allows them to save an enormous amount of time and substantial cost savings.
The business really has the characteristics of a number of other successful HG investments: a subscription based model, mission critical software, diversified customer base, and a track record of providing new features to a loyal customer base.
Ward Carter
Thanks, Sebastian. I know a lot of our audience is looking at the differences between bringing in a financial investor versus a strategic investor. I was wondering if the panel could offer their views on some of the relative merits of a PE choice versus seeking a buyout from a strategic buyer. Devin, do you want to address that first?
Devin Matthews
Sure. I think it’s a really tough decision, especially if you’re a founder-owned business and have not raised outside capital, have run the business for the last 5 to 15 years, you own largely 100% of it. The chances of you doing this again successfully are relatively low, so looking for liquidity and trying to find a partner to help you in that is one of the biggest decisions you will make in your life. So, it shouldn’t be taken lightly or jumped into quickly. You need a lot of good advice around the table, either from a firm like Corum or from a financial advisor, or a friend who has been through the situation before. There are a lot of great CEO organizations where you can be in a group of peers and talk to them about their experiences. When PE works versus a strategic sale is when the owner wants to stay involved in the business, but not necessarily be responsible for the delivery of the results day to day. We are generally upgrading certain areas of the team where there need to be people filled in, bringing new people to the business, or promoting people from within to take on more responsibility. So, you want to stay involved in the business to some degree, whether in an operating role or a board role. You want to diversify your wealth by taking money off the table, but you also want to keep money in the business so the next transaction (because if you’re selling to PE, there will be a next transaction) where you can do well and participate in the success.
If you sell to a strategic, it’s probably a one-shot deal. They’re likely going to integrate your business into their operations, which means a lot of your team may be let go. Your involvement and impact in the business inside a much larger organization will probably be diminished. But there’s the chance or opportunity that a strategic may be able to pay more than a financial provider, though I think those spreads have declined, especially in the technology sector where you have big upside and lots of growth.
I think it is a super personal decision that you need a lot of advice around, but PE, if it’s a good fit culturally for you, can be very rewarding in that you can de-risk your life by taking money off the table and still participate in the upside and have the satisfaction of seeing your team grow and be successful as well.
Ward Carter
Good thoughts, Devin. We’ve certainly seen a lot of deals that we’ve been involved in this year where the opportunities were very strong under the PE players and we closed some major deals there and I know you’ve been involved with some of those.
Further thoughts on that, Mark?
Mark Taber
Sure. I think Devin said well that it’s a very personal decision and all cases are not the same, but I do agree with his comments that I think you start with what you’re trying to accomplish in the transaction. I think when you’re considering selling to a strategic buyer, the opportunity for further value creation is vastly diminished, not to mention the management day to day control. Again, very often strategic buyers can bring an enhanced price, but that’s often due to the cost synergies of things that they’ll be taking out of their business and folding into theirs.
In most cases I look at a sale to the strategic as the ultimate financial exit for the founder or shareholders, whereas I think that for a PE transaction, the motivations may be different, it may be to take some money off the table and diversify your interests while continuing to invest and grow the business, it also may be to raise capital to augment your existing operations, enter new markets, perhaps grow the sales and management team or other growth investments that might be a little more nerve-wracking to do yourself when you’re the sole shareholder and sole source of capital.
I don’t think they have to be mutually exclusive, but I think it starts with what you are trying to accomplish with looking at an outside transaction, and I 100% agree with Devin’s comments that when taking on a partner, PE or otherwise, the cultural fit and agreement on a shared vision for the business, is probably of paramount importance, more so than valuation, in my opinion.
Ward Carter
Well said. Anything that you might want to add to that, John or Sebastian?
John Hodge
I’ll add one comment, which is that I think there is the PE product, specifically focused on the software business, has evolved. The market has evolved, so when you’re looking at selling your business, the one thing that has changed is that the buyer universe is much more sophisticated than it was just five or six years ago. So, if you’re talking about very large players, the Oracles or IBMs of the world, or even the smaller consolidators of the world, those buyers have become much more sophisticated. What we have seen, we’ve had quite a few conversations with these companies, they will pay a better premium for a company that has operations maturity. It depends on the PE firm that you’re looking at, what value they think you add. If that PE firm adds operational maturity and stability to the business, you have the ability to get a better exit at the end also. That has changed before, where before the buyers were looking for exclusively revenue growth and ultimately that’s what they were looking for in their synergies; today they are looking for companies that can be integrated seamlessly with operational maturity as well as processes that adhere to that corporation. So that is something that has changed, and that takes us back to the comments that were made before on the decision you were making. PE can be a very important tool for increasing value over the long term.
Ward Carter
Thanks for those comments. I did have one final question we could ask the panel to address. It gets down to the kind of metrics that might be used to screen potential PE investments. Can you give us any feel for terms such as revenue or profitability that you generally look for when you’re considering smaller companies?
John Hodge
For us, we have a very operational focus and a lot of experience helping companies, profitability is not a requirement ultimately for what we’re looking at. I think some of the comments that were made about the market, the product stability, the customer relationships, play much more into the business.
I would say though, that for a PE controlled transaction, the metrics you should look for, at least for us, should be a business that is between $10M depending on business model, all the way up to $75M. We don’t have an exact criteria, it depends on the business and the business model you have, it’s more around the fundamentals of the business, the IP, and the customer relationships in the businesses that you’re in.
Ward Carter
Certainly if it’s a platform investment versus an add-on to an existing portfolio company, that would make a difference as well.
Any other thoughts, Devin?
Devin Matthews
Unlike John, we are profit buyers. We buy companies that are profitable, that have had profit discipline since the founding, because they haven’t had access to outside capital. We are generally buying companies that are growing organically 20% a year that have 20% profit margins when we have a transaction, have high diversity of revenue, so no one customer or group of customers has a dominant or even meaningful percentage of revenue. We like companies that have non-linear upsides, by which I mean if you can build what we think we can build over the 5-7 year investment period that we’re looking for, that we’re getting in somebody’s way, another company has to own the business because of its uniqueness in product, its market position, or its financial profile. We’re buying Steady Eddie, good growth, good profitability businesses with very good positions in their market, and we bring in our operational expertise in sales or marketing to add more predictability to the growth and then in technology to add more differentiation to the product.
Ward Carter
Thanks, Devin. I’d like to thank all of our panelists for taking the time today. It was great to have you on and I hope that our audience will feel free to reach out, either directly to me, and I can help you with an introduction to our panelists, or feel free to reach out to them directly. I’ll turn it back to you, Nat.
Nat Burgess
Thanks to the panelists. I certainly hope everyone was paying attention because this really highlights one of the most important trends in our market, and that is reflected in a conversation that I had yesterday with a CEO that I’ve known for 10 years. He said, “Nat, isn’t private equity my last resort? Don’t they buy broken companies and then try to salvage some value?” I could point him to three or four CEOs that we worked with last year that maybe had that presumption coming into the deal, but after looking at all the options, they found out that their best option was PE, because these guys are building significant companies and next time you see a billion-dollar acquisition by Oracle or an IPO, read the fine print at the bottom and you’ll probably see Rubicon or Chicago Growth, Great Hills, or HG Capital, because they’re coming to the party with vision and with great aspiration.
Thanks again for joining us guys, and this concludes our February M&A update. Thank you.