Introduction

 

Bruce Milne

Welcome to our mid-year report, our largest ever. I’m Bruce Milne, the CEO of the Corum Group and your moderator for today. We have quite an agenda! We have a field report on a recent transaction, we’re going to talk about another recent transaction in the UK, also one that falls under our Top Ten disruptive tech trends: Enmeshed Systems. Then a special report on the UK, followed by our mid-year research report, updating all 26 sectors. Then, what are we worried about? Six global concerns that you should be worried about, and six personal company concerns that could take you out of today’s hot market. Then we’ll have some closing thoughts and Q&A.

With that, let’s move to Ed Ossie, regional director of Corum Group, with a recent transaction.

 

Field Report - Astute

 

Ed Ossie

Greetings from our Midwest offices. We’re absolutely delighted to announce a new deal in the red-hot customer experience management segment with our Columbus, Ohio-based client, Astute Solutions.

Astute provides SaaS-based customer experience management solutions to global Fortune 1000 firms. Frankly, some of the biggest brands and companies on the planet are Astute clients.

In this particular deal, Astute received a significant strategic investment from Rubicon Technology Partners, a PE firm investing in enterprise software and technology-enabled services companies.

We were really proud to work with the Astute team and the Rubicon team through the process. This was a highly competitive situation, but in the end Rubicon’s focus on operational value creation and their extensive software industry experience really helped make them the best partner for Astute. There really was a shared sense of purpose and vision for the future. Astute’s innovative CEM solutions enable consumer-centric brands around the world to leverage the contact center as a strategic asset for customer engagement. Rubicon’s strategic investment in Astute will enable them to deliver more rapid innovation and actually accelerate building out Astute’s global infrastructure and better serve its growing international customer base, so congratulations to everyone involved. Back to you in Seattle.

 

Bruce Milne

Congratulations to you, too, Ed.

 

Top Ten Tech Trends – Enmeshed Systems

Now, let’s look internationally to a major transaction in Europe with Nat Burgess.

 

Nat Burgess

Hi, this is Nat, president of Corum Group, and I’m very pleased to announce our latest transaction in the tools segment, and that is the sale of Atego in Cheltenham, England, to Parametric Technologies in Boston. Now, this is a transaction that we’ve been engaged in for quite a while. There was a lot of interest internationally, and it’s been a very competitive process, a lot of large companies with strategy that aligned with what Atego had built. It was a hard-fought battle, but ultimately Parametric emerged on top.

When I say this is the latest in a line of tool deals, I’m thinking specifically of our sale of Esterel Technologies in France, which went to Ansys, our sale of Instantiations to Google in the area of Java GUI, our sale of Inubit to Bosch, and others. The reason this is interesting to us, is frankly we all interact with technology more every day than we realize.

One simple example would be when we press on the brake pedal in our car, we’re not actually pushing a piston directly in most cases, especially when ABS gets involved. What we’re really doing is sending a signal to a computer saying we’d like to brake, the computer assesses the speed of the vehicle, the reaction of the road surface to the friction on the brake pad, and many other inputs, and then decides how to brake, whether to oscillate or apply steady pressure, etc. It’s really brake by wire. The software that controls that, obviously, has to be very reliable and effective and that is what we call a critical embedded system.

Similarly, when you press the button on an airplane to lower the landing gear, it has to go down every time, and Esterel Technologies, our client in Paris, made a model-based software development IDE that allowed you to build software to run airframes and it would be bulletproof, deterministic, and certified based on the model being certified. It is now in use by the major Chinese, Brazilian, Indian, and Russian airframers, because they are looking for new modern ways to build this sort of technology. Now EAS, Boeing, and others are catching up.

So, the tools market for us has been lucrative lately for us and for our clients as well, because we’ve been able to find an angle or an edge. The edge here with Atego is really the move toward system-level design and what we call enmeshed systems, where systems don’t exist in a vacuum. When you build software that goes into a vehicle, there may be two million lines of code in the entire vehicle, hundreds of different components interacting with each other, they all have to be aware of what the other components are doing, they have to work together. You need tools that allow you to design that at a system level. That’s exactly what Atego did. Likewise, you need to do it in a model, ideally, so you can build the software model out on how it should work and spit out the code on the other end. Atego and Esteral did that.

You also need an angle on the market to make it relevant. With the Instantiations deal with Google what started out as a Java GUI development tool kit quickly morphed into the Google Chrome OS web development toolkit, riding on the coattails of Google’s Chrome OS ecosystem strategy. That drove interest from the independent tool vendors vying with Google to own the kit. Ultimately Google prevailed and essentially open sourced it.

We’re going to see a huge amount of deal flow in the area of Enmeshed Systems. There’s a lot of money at stake because everything has software in it now. In fact, as HP and IBM and others are constantly reminding us, software is the most important thing. So, great opportunities for emerging companies and start-ups, and for established companies that are looking for an exit where the interest is high, and we’ve had very competitive processes recently in this sector.

 

Bruce Milne

Thanks for that great report, Nat.

 

Field Report – UK Tech M&A

While we’re still in the UK, we have a special report here by John Simpson, our VP at the British HQ, and Jon Scott, our Senior VP in Europe. John?

 

John Simpson

Yes, thank you Bruce. This is John Simpson and I wanted to talk about some of the chief points about the UK recently. The Atego deal that Nat announced is certainly the most recent deal we have done in the UK, but Corum has a long history there. Last year, for example, we sold Resonate Knowledge Technologies to OpenText, and have done deals in mobile workforce scheduling, 3D design, consumer content and many other sectors.

 

Jon Scott

We’ve also had a very active events schedule, with an exclusive Private Equity/Venture Capital breakfast earlier this year, the largest ever World Financial Symposiums Growth and Exits conference in June, and we’ll be holding events in Reading, Edinburgh and London coming up.

 

John Simpson

The tech M&A scene in the UK is certainly moving quickly, with more deals done in Q2 than any other quarter since 2012. Notably, 54% of all announced deals in the UK this year have been cross-border, and 81% of those have been with a US acquirer.

 

Jon Scott

That US acquirer component is certainly worth noting, but the largest UK software deal this year was Zynga’s January acquisition of Oxford-based social-mobile game maker Natural Motion and their popular “Clumsy Ninja” for a half-billion dollars. The 7.6x revenue multiple is the highest valuation multiple of the year so far as well.

 

John Simpson

Absolutely, and while gaming saw the largest single deal, Financial Services was the top vertical. Equifax acquired debt collection and revenue management SaaS firm TDX out of Nottingham for $327M, a 3.6x revenue multiple. Financial information and services company Markit bought fellow Londoner thinkFolio for its portfolio management software for investment professionals.

 

Jon Scott

We continue to be extremely active in the UK; I have a client that is about to go into an LOI, so we’re looking forward to more announcements in the coming months, and we’ll be sure to keep you posted on that. Bruce, back to you.

 

Bruce Milne

Thank you Jon and John. That’s interesting, 81% of the cross-border buyers of UK companies are from the US. We’re seeing that across the industries, as we’ll see now in our research report, with Elon’s team. Elon Gasper is our VP and director of research. Elon?

 

Corum Research Report

 

Elon Gasper

Thanks, Bruce. We begin with the public markets, where indices continue to set records, on the rebound from their pullback earlier this year, as most central banks aligned with the US Fed’s unprecedented loose money policies. That and generally growing world economies, the first-quarter US GDP drop notwithstanding, combined with robust tech innovation cycles to stretch buyers’ stocks up and fill their coffers with cash, a substantial amount of which flows through to M&A. So far so good on our January prediction of a fine year for tech M&A sellers.

Looking at the leaderboard, strategic buyers’ numbers are beating records, too, particularly Google, which took back the top spot as it reeled in a very diverse catch. WPP surged past its total of 13 for ALL last year already. The majority of Yahoo’s relatively light 9 transactions involved mobility applications. Dropbox DOUBLED its prior full-year count, and Microsoft appeared on the chart again while Intuit was crowded out of it.

We also note Apple’s big year-over-year change, having sprung into action in second half last year, and Oracle, though conversely it basically skipped that half. Many of these dramatic rotations show just how quickly the big guys can move when they see a need for M&A – and how quickly they get over it, too. The lesson is to not let the arc of internal company progress preclude you from obeying market urgency – the window can open and close suddenly.

It’s certainly open at Google, whose decade-plus of aggressive M&A history is clearly making another lurch forward. At this rate it will set a new record for the year, and is poised to be exhibit A confirming our January prediction that top companies will view this year as a key moment to support winning against smaller, more agile competitors via M&A strategies.

The financial buyers had similar pressing concerns. Vista led the PE parade at almost three times last year’s first half pace, with Insight’s rise even steeper. Much of this activity in the booming and complex PE universe comprised bolt-ons, tuck-ins and other care and feeding of existing platform plays, showing that small companies should not neglect PE possibilities.

The Corum Index displays increased transaction count with a growing number of VC backed exits, when the major buyers were especially busy harvesting mega-deals. Let’s see, we covered Facebook and Whatsapp before, we covered Apple Beats last month, we’ll talk more about Amaya Gaming’s deal and the SanDisk-Fusion-io transaction when we talk about those markets. And please note that all prior webinars are archived on our Corum website, with free access.

The most recent and largest megadeal is Oracle’s MICROS transaction at a spectacular $5.3B. This largest purchase of the last 4-and-half-years by Oracle will bring it integrated solutions and customer base in hospitality and retail.

We also previously covered a bit on Zebra’s amazing buy out from Motorola's Business for a huge borrowed sum, and how that reflects the low cost of cash supporting the M&A market.

Internet travel market consolidation continued with online travel agency Priceline paying $2.5B for OpenTable and its majority market share position in North American restaurant reservations.

And AutoNavi, the leading Chinese mobile map service was valued by Alibaba at $1.6B, as the ecommerce giant upped its ownership stake from 28% to 100%, ahead of its possible—likely—IPO next month, which could be the world’s largest ever.

Traveling around that world now, North America continued to host the majority of deals this year, but its Southern “sisters” growth is accelerating – we at Corum are seeing signs increasing development there this last decade is about to yield a harvest of M&A. The Mideast and Africa have also brought more attractive companies for sale to the world arena.

As usual, US buyers outnumber sellers in all regions, as we witness a major increase in volumes and shift from NE to West during this year. The most rapid growth occurred in the Midwest which contributed a megadeal with Chicago’s Fieldglass, a 15-year-old provider of Vendor Management services, now deployed in the cloud and sold to SAP. This confirmed the trend Corum saw and talked about in our Heartland sidebar of the Annual Report.

In Western Europe over a hundred more tech companies were sold during the first half this year than during the first half last year. The leader here is the UK, with its WPP sub JWT, one of those hungry revenue-hunters swallowing digital media agencies.

At Corum we’re seeing increased interest from EU buyers in Latin America. Sweden’s Hexagon made 2 of its 6 transactions in Brazil, iLab Sistemas and Arvus, both specializing in optimization solutions for the agro-business sector.

In India, Facebook made its first Bangalore-based purchase, breaking 8 figures for Little Eye Labs, an Android performance analyzer startup. US companies also showed interest toward sellers Down Under; Microsoft picked up GreenButton, a Kiwi “cloud burst” vendor destined for its Azure group.

A final call has to go out for Israel’s vibrant tech sector, where for about 8 million dollars Russian Internet giant Yandex snapped up a mobile geoloc start-up that reduces battery consumption.

Our aggregate Six Market valuations index caught the spring updraft and managed stay in flight, defying gravity for now to keep us on track with our January prediction. Now to deconstruct these 6 market sectors and their 26 components in detail, we turn now to Amber Stoner.

 

Horizontal Software Valuations

 

Amber Stoner

Multiples for the Horizontal sector as a whole remain strong with fluctuations among the subsectors as the market seeks long-term direction. Understanding customer behavior is a core element of any business, consequently buyers in the first half have been targeting companies that provide effective customer analytics solutions.

In early May, Google spent an estimated $150 million to buy Adometry, a provider of online advertising and customer analytics SaaS, at a strong 7.5x revenue multiple. Adometry’s solution allows users to track consumers through the Internet to find out what motivates them to make purchases.

Also in May, Brandify was picked up by Where2GetIt. Both companies are involved in providing marketing solutions, but unlike Where2GetIt, which provides location-based digital marketing solutions for local retailers, Brandify offers a SaaS solution that evaluates the online footprint of brands and their interaction with customers.

Last month, Amobee, a subsidiary of Singapore-based SingTel, bought Kontera for $150 million, a 5.8x revenue multiple. Kontera’s platform analyzes data across mobile, web and social networks enabling businesses to make real-time decisions about their consumer trends. With this acquisition, Amobee gains a technology that improves contextual understanding of where and how ads should be placed on the Web and mobile devices. 

To bolster development of its mapping services, Nokia company HERE, acquired predictive customer analytics SaaS company, Medio Systems. Medio’s solutions will facilitate the creation of contextual maps and location services that change according to the situation, providing personalized and predictive experiences for people and businesses.

Alina, there’s something interesting going on with the Consumer sector’s valuations, right?

 

Consumer Software Valuation

 

Alina Soltys

We’ve had phenomenal growth in valuations over the last 12 months. Revenue multiples have increased almost 60% to 2.54x revenue and EBITDA has not been shy to follow with 30% increase landing just under of 10x. This has certainly translated into a record first half in M&A activity – especially when looking at the gaming sector.

Years of work within the gambling community have finally created a framework for online gaming and gambling to become official – at least on a limited basis in certain states like Delaware, New Jersey and Nevada. A high level of M&A activity has followed in its wake as seen by the breathtaking $4.9B acquisition of PokerStars and Full Tilt Poker by the Canadian publicly traded Amaya Gaming Group. Originally Amaya lined up significant debt underwriters but the newest plan that they are working is to separately list PokerStars publically. And yesterday, an even larger transaction was announced of GTECH acquiring IGT for $6.4BN!

Casual game maker GSN Games bought BashGaming, the maker of the hit social casino game Bingo Bash for an estimated $160-170M. Bash’s Revenues have been estimated at $60-$70m, placing them at around a 2.5x multiple.  With this acquisition, GSN Games will get 4.4million active monthly users, and a very strong position in the social casino gaming space. And speaking of the gaming space, I’ve been invited to speak at Casual Connect San Francisco next week. If you are in the area, feel free to reach out to me to chat further.

The next two companies are also based in the city, Kabam, one of the largest Western free-to-play game companies acquired game studio Phoenix Age for around $90m. The acquisition bolsters Kabam’s games catalog with strong franchises in the RPG genre across mobile and web platforms.

A lot has been said and written about the $2B pick up of Oculus Rift by Facebook. To counter many fears of becoming a corporate asset hidden within the Facebook vault, Oculus remains independent, doing acquisitions to prepare for primetime.

The first acquisition is Carbon Design Group – the design firm responsible for collaborating with MSFT on the award winning Xbox controller. They will work on beautifying the currently heavy headpiece.

Just over a week ago Oculus’ second acquisition went through of RakNet. They are a middleware tool that powers cross-platform voice chat, connectivity and other features used by indie developers and large shops alike.

Taking a page out of the Google playbook that Nat overviewed with our client Instantiations becoming open sourced, RakNet has since become open-sourced as well in an effort to grow the developer network and provide them with tools to create on the Oculus platform.

Moving on to the next sector, how does IT Services look Tyler?

 

IT Services Software Valuations

 

Tyler Vickers

As large companies seek to expand through acquisitions, providing an innovative solution remains the strongest driver of a high multiple. The IT Services sector has seen relatively stable, if modest, growth in sales multiples over the last six months, with a small 2% dip in EBITDA by the end of June.  The modest growth in sales multiples in the North American and European markets isn't quite reflected in the Asian market, which, after enjoying considerable increases in the last half of 2013, has decreased slightly during the first half of 2014. That being said, overall sales and EBITDA values in the Asian market are higher – by a factor of 4 and 1.5, respectively.

Looking at the deals, international aerospace giant Boeing acquired Ventura Solutions, a hardware and software developer specialized in radio systems and signal processing. Leading the development of RedHawk, a software-defined radio framework, Ventura Solutions provides a perfect example of the blurring lines between hardware and software utilization. The movement toward this type of enmeshed system is an increasingly common occurrence in the IT services industry, as continued improvements in the capability of electronic components makes this transition possible.

In one of the biggest IT services purchases of the last six months, French giant Atos picked up Bull for a total cost of nearly $850M. This is Atos's first significant purchase since 2011, when it spent just over a billion dollars for Siemen's IT services arm.

Last month, Vodafone Group bought Cobra Automotive Technologies, an Italian telematics R&D company that serves automotive OEMs at the healthy valuation of 1.3x revenue and 10.9x EBITDA. Cobra commanded this valuation by capitalizing on the ever-growing demand for the Internet of Things with their machine-to-machine solutions.

Finally, Big Four auditor KPMG snapped up 3 companies since the beginning of the year. In March they acquired Cynergy Systems, and in June they bought both Safira and Zanett. Through these purchases, KPMG has expanded its experience with IBM's business process management solutions, improved its web and mobile creation strategies, and gained valuable domain expertise in Oracle-based technology consulting.

Amber, could you take us through the Infrastructure market?

 

Infrastructure Software Valuations

 

Amber Stoner

The first half of the year yielded robust multiples for the Infrastructure sector, with sales and EBITDA multiples up from the beginning of 2014. The security, network management and development tools subsectors all saw increased multiples from Q1.

Security has been an ongoing trend in the infrastructure sector throughout the first half of the year with four deals in the anti-malware space focused on unified threat management and endpoint security integrity; the most recent being Proofpoint’s May acquisition of NetCitadel for $24M, a 24x revenue multiple. NetCitadel’s platform provides innovative approach to security incident response. The acquisition emphasizes Proofpoint’s current “tuck-in” strategy that started with the Armorize and Sendmail deals.

On the other side of Atlantic, two French leaders in web application firewalls, DenyAll and Corum client Bee Ware, combined forces, adding value to existing customers.

The flash storage industry has also shown significant consolidation. In late May, Seagate Technology paid $450M for the accelerated solutions and flash components assets of LSI, followed by SanDisk’s $1.3B acquisition of Fusion-io last month. SanDisk paid 2.8x trailing revenue to expand its enterprise SSDs business and become a diversified supplier of flash offerings to the world’s largest Internet companies.

Oracle, a perennial top acquirer, continues to strengthen its product offerings in the networking and storage spaces. In early January, the application software giant grabbed SDN technology maker Corente, as a follow-on to its 2013 Acme Packet purchase, and in May, acquired desktop virtualization storage company GreenBytes to augment its ZFS Storage Appliances product suite.

Erin, How has the Internet sector done so far this year?

           

Internet Software Valuations

 

Erin Sanchez

The Internet sector held steady through the first six months of 2014 and continues to trade at healthy multiples.

Continuing its international expansion, Expedia picked up two travel companies this year, including Australia-based online travel company Wotif.com for $660M. The acquisition enhances Expedia’s supply in the Asia-Pacific region, where Wotif offers hotel rooms, airline tickets, and vacation packages. Prior to this deal, Expedia grew its European presence with the acquisition of Auto Escape Group, a provider of online car rental services.

And with the rise of peer-to-peer business like Lyft, the sharing economy is quickly becoming integral to the travel market. HomeExchange.com’s January purchase of online home swapping and vacation rental marketplace Aha! Go illustrates this trend. HomeExchange gained nearly 5,000 members through the acquisition, growing its global network to reinforce the company’s position as one of the largest services of this kind in the world.

As usual, cloud leads the way, with top acquirer Dropbox starting the year off hot. The company continues to buy application providers, expanding its product portfolio. With eight deals in the first half of the year, the California company is seeking to turn itself into a major creativity and sharing platform. Droptalk, Loom, Hackpad, and Zulip are now part of Dropbox’s array of product and service offerings.

Box, another SaaS provider with file storage and collaboration services, which recently received $150 million from the PEs, announced only one acquisition this year: Streem, a San Francisco-based developer of streaming technology that enables users to keep copies of files on the cloud.

Now to Laura who will wrap up our six sectors with Vertical.

 

Vertical Software Valuations

Laura Duren

Finally, to end on a high note, the Vertical sector, most appropriately, is going up.  Overall valuation multiples have increased steadily over the past year, making it the only sector to show such consistent positive growth.  The Healthcare subsector still leads the market, despite taking a small dip since Q1.  Financial Services and Government have remained stable, while two breakthrough subsectors: A/E/C and Energy, are on the rise.

Transportation-related deals contributed to the action in the A/E/C space, with companies lining up to develop their planes, trains, and automobiles.

First up, aviation giant Boeing acquired Dutch aircraft management SaaS provider AerData in order to streamline its aircraft leasing and maintenance records.  It also bought Gibraltar-based ETS Aviation, provider of aviation fuel efficiency software, with the goal of cutting fuel costs while reducing environmental emissions.

Chugging right along, next we see that UK workforce management provider Tracsis brought rail operations analysis software into its station by purchasing Datasys Integration, provider of operations analytics that identifies the causes of train delays in the UK.

Rounding out the A/E/C sector is Japanese global automotive supplier DENSO.  In order to accelerate R and D of its vehicle diagnostic and telematics business it has acquired a majority stake in EASE Simulation, a US-based supplier of automotive diagnostics.

Smart grid-related deals have sparked a lot of interest in the Energy subsector throughout Q2. Landis+Gyr, the utilities-focused Swiss independent growth platform within Toshiba Corporation, led the charge with two smart grid acquisitions.  In May it acquired Danish smart grid sensor and monitoring company PowerSense, and in June bought California-based utility analytics provider GRIDiant Corporation.  These transactions expand Landis+Gyr’s smart grid portfolio and offer its utilities customers even more energy monitoring products.  They also allow Landis+Gyr to take advantage of the Enmeshed Systems trend, as PowerSense’s offerings include both hardware and software solutions for the sensor-based management of power systems worldwide.

In another Enmeshed Systems deal, Imagine Communications, a California provider of broadcasting and streaming systems for content delivery networks picked up Digital Rapids, a Canadian company involved in digital video processing and streaming hardware and software in order to strengthen its TV Everywhere business.

And lastly, in the largest Vertical deal of the quarter, a Blackstone and Goldman Sachs consortium formed just for this transaction paid $960M to acquire a majority stake in New York-based financial book-building software provider Ipreo Holdings.  Original private equity majority stakeholder KKR will retain a minority ownership stake.  With three major private equity backers, Ipreo hopes to accelerate its customer’s access to new market-leading products.

 

Elon Gasper

And that's the halftime report on 2014 tech M&A. Back to you, Bruce.

 

Bruce Milne

Thank you very much. Alina, Amber, Erin, Laura, Tyler, and of course Elon the team leader, that’s the best major report I’ve ever heard, and so much happening, stunning valuations! Some of these buyers, Boeing has picked up three companies since their presentation at our World Financial Symposium. Oculus under Facebook creating almost a pyramid of buying, and then making several of their own acquisitions. GTECH back, we did our first deal with them almost 20 years ago. And the Asian buyers, most of those large bids for gaming coming out of the Asian market, and just wait until Alibaba goes public. Can’t wait. Can’t wait!

 

Global, Personal, and Company Concerns

Let’s close this out with some interesting thoughts on concerns: Global, Personal, and Company. We’ve been talking about the market reaching a peak, certain sectors are higher than others, what keeps us up at night, people ask us when they should sell, when they should go to market… We find that there are some major global concerns that we have to think about that could have an effect.

  1. Geopolitical disruption.
  2. Currency crisis
  3. Inflation increasing
  4. Rising interest rates
  5. Stock market correction
  6. M&A cycle ends

Now, I don’t think I have to make any introduction with rockets landing in Israel today and the downing of the Malaysian Airlines plane in the Ukraine to the idea of geopolitical disruption. There were supposed to be fewer bad guys, but it doesn’t seem to be the case.

Currency crisis: our national debt during the Johnson administration was $40B and everyone couldn’t believe it then. Now it’s what, $17T? We have been printing money non-stop for 50 years. At some point they’re not going to take the debt. That will lead to massive inflation and currency disruption. These things are tied together, inflation leads to rising interest rates. Janet Yellin said she wasn’t too worried, but our own regional Fed governors disagree. Have you tried to get a hotel room lately? Or onto a plane? People are spending money like crazy. It only takes a small incremental demand to drive up inflation and interest rates.

And we’re so tied to the stock market. You see the trends, stock market goes up, there’s a lot of confidence, we can pay these huge valuations, and when it goes down, the confidence of the CEOs and buyers goes down. These cycles end.

Let’s take a look at this next chart. Does this bother anyone else? 2000, up up up and down down down, 2007 there right before the Great Recession. Where are we in 2014? Looks pretty toppish. Now maybe Janet Yellin’s comments are sounding like the irrational exuberance of Greenspan in 1996, three or four years too short. I hope so, but I don’t know. We can’t know for sure. People ask what the best time to go to market is, well you can’t go too early, but you can sure go too late.

There are also some personal concerns to worry about, the stuff that can happen to you.

  1. Market consolidation
  2. Game-changing tech paradigm
  3. Health problems – personal, partner, management
  4. Conflict – founders/investors/personal
  5. Litigation/negligence/criminal acts
  6. Incapacitation or death

Any one of these can take you out of the M&A game. I won’t talk about these, I’ll rely on some of my compatriots here to give me their experiences, and let’s kick off with Jeff down in Texas on market consolidation.

 

Jeff Brown

Thanks, Bruce. What we learned was that markets consolidate in several ways, and we were hit by two of those at the same time. We were working with a New York B Company here in Texas, selling into the utility industry, and in the space of a couple of years, the company was squeezed by consolidation of the customer base, as utilities merge, and by the entrance of ERP vendors like SAP, who bundled our applications as freebies into their overall enterprise offering.

We did sell the company, but only after revenues and profits had flattened out.

 

Bruce Milne

I think we’ve lost John, I’m afraid, he had a really interesting story about being caught in a technology change. It’s interesting, we sold a bunch of fax companies, the market was over. Nat mentioned earlier that we sold Instantiations to Google. Here’s a case of game over overnight. We don’t work with competing companies, we only work with sellers, we don’t work with buyers, so when we sell a company, invariably we get calls from their competitors who want to know if we can sell them. We got those calls this time, but we didn’t return them. The reason why was that in six weeks, Google embedded the technology they’d bought for free into their offering: Game over. There was no future for those other companies.

Now let’s move to Ed Ossie regarding his experience, both as a CEO VC and as a deal maker in the health field.

 

Ed Ossie

While markets and technology certainly drive timing and results, there’s one thing we don’t address very often, and while you hope it doesn’t happen to you, it’s very real. We’ve had serious illness, divorce, sudden family events, cause really sub-optimal exit results in the face of extreme stress. Certainly not the exit they were hoping for, thanks to unpleasant surprises.

The only thing you can do here is control the variables that you can control, and what I’ve learned in the past several years, going through a few of these situations, is you just have to be more prepared for the hurry-up offense if something does happen. It’s really too easy to put things off.

 

Bruce Milne

Totally true, and you don’t want to be in a situation, we had one of the founders pass, it went into probate with his heirs and they suddenly thought they wanted more money. We had a situation where we were closing and one of the founders got a divorce and was suddenly in court, and you don’t want that.

Getting into conflict, Jon, let’s talk a little more about that.

 

Jon Scott

Thanks, Bruce. Lack of management and investor alignment or conflict is always a risk. Investors and founders need to be on the same page. I’ve seen disasters when they are not. I was advising a venture-backed communications company where the VC and founder had agreed to go to market, and had even agreed on a valuation range. We had interest and secured an all-cash offer for 4x sales, which was well above market. In closing, the founder reneged, saying he wanted more money. He had no basis for this, and was really expressing his fear of turning over his baby, and unfortunately with the shareholders agreement, they couldn’t force him to sell.

Over the next two years, he turned down subsequent offers, each for less, and eventually the company went into bankruptcy. Bruce, back to you.

 

Bruce Milne

Thanks, Jon. I know you sold two companies of your own and have been involved with a number of other deals, so thanks for your commentary.

On point number five, criminal acts, litigation, and so on, Rob, you’ve got some interesting experience and comments here.

 

Rob Schram

Yeah, it’s a tough triad. Personal integrity of the executive team is always valued in M&A, but stuff happens that can seriously damage or outright destroy your chances for an optimal outcome. I can cite a number of morbid incidents that we’ve encountered over the years. A recent domestic violence episode involving the founder and CEO of Radium One aptly paints a picture. The board waited for months to fire the CEO and is now facing industry and social boycotting that have the potential to cripple the company and derail their planned IPO. Huge negative impact.

 

Bruce Milne

You certainly don’t want to be involved in one of those, and it doesn’t have to be you, it could be someone on your key management team, that kind of thing.

Let’s finish with Ward Carter on the final topic of incapacitation or even death.

 

Ward Carter

Bruce, you and I both knew the founder of a very successful software company who delayed going to market when his options were many. Sadly he later became ill and passed away before completing the sale of the company. The resulting loss of leadership and founder’s vision was highly disruptive and damaging to the company. An eventual sale after his death was at a greatly diminished value.

We never expect this to happen to us, but it can, so plan ahead for the sale while you are healthy and young enough to enjoy the fruits of your labor.

 

Bruce Milne

Jim was a good guy. This process can take about three years. Because of Sarbannes-Oxley, the professionals, accountants, lawyers and such, they have to go through this in a very determined fashion. Assume a year to sell, and at least a year to babysit the transition, usually two, the Europeans prefer longer.

I see we’re right at the end of our time here, but we want to get into some questions before we go.

This question is, “What is the discount multiple EBITDA from public to private software companies. Elon?

 

Elon Gasper

It’s a standard practice to apply a discount multiple like that in some valuation work. There are disagreements and our practice varies with regard to the sector of the company and what is going on with the structure of the business and the structure of that sector in general. We’d want to take a look at a particular example and decide at that time what kind of discount to apply. We encourage you to give us a call and we can get into specifics in your particular situation. We don’t like to use a one-size-fits-all approach in terms of applying that discount.

The function of that discount, for those who don’t know, is to reflect the change in value regarding whether stock is liquid, as it is in a public company, or not.

 

Bruce Milne

Sometimes the private deals are worth a lot more, but the only data we have in many cases, as with public companies, we don’t know what the EBITDA of some private firms may be.

Generally in valuations, as you go through the process, you’re going to hold off on doing the valuation as long as possible.

We have a great follow-up question about SaaS verticals. Ward I’ll let you answer that, but we have actually recorded several section on SaaS and the premium we get for it. Ward you’ve just sold a company in the SaaS HR space.

 

Ward Carter

We’ve had a lot of activity in the last two or three years in the SaaS space. I’d say increasingly the deals we’re doing are moving more and more toward SaaS and the demand by the buyers for recurring revenue is very high. I’d say that typically if you’re going to compare an on-premises solution versus a SaaS solution, you can expect that the SaaS multiples will be 2x that of the on-prem solution. I don’t have all the details in front of me, but we’re seeing a lot of transactions right now in the 4-5x range for HR-based SaaS solutions. Obviously that varies based upon the size of the business and the profitability, and certainly a key factor is the growth, a high-growth company will sell for a lot more than a slow-growth company. We’ll be happy to talk more about that directly off-line if you’d like.

 

Bruce Milne

Thanks. Back to SaaS again, Ward, an interesting question here, is it possible an investment group could choose to invest in my SaaS software company just to flip it?

I don’t know about flip it, they usually want to do a bit more than that.

 

Ward Carter

They may want to, but to the extent that you’re getting a fair value for the business, they’re going to have difficulty flipping it for much more than they paid for it. They’re likely going to want to hold it, grow the business, and then sell it three or four years down the road after the business has matured and seen some growth. So make sure you get enough value for it that they can’t flip it too quickly.

 

Bruce Milne

An interesting question here, with a potentially long answer, the shortest version we can do is this: We only work on the sell side, we only sell privately-held companies, we get paid as our client does, in the same form. Back to the SaaS question, both Salesforce’s founder and Concur’s are on our advisory board, so we’re heavily involved in that marketplace.

When you go to market, and I would encourage you to go back to previous presentations online or come to one of our live conferences, the Merge Briefing, or better yet the boot camp on how to do this, Selling Up Selling Out, we talk about how 75% of the time there’s someone else willing to pay more than the first party that approaches you. Oftentimes the first offer is from a bottom feeder, dialing for dollars, so be really careful. If you do the process right, your value will improve by 48%, much more liquid. It’ll be hard for a company to flip it if you did the selling right in the first place.

Great questions, we’re getting more here, but unfortunately we’re out of time. You can find it online, please attend one of our conferences, we’re seeing extraordinary attendance and selling around the world.

With that, we’ll go to our closing. Thanks for attending.