Corum March Webinar
Nat Burgess
Greetings and welcome to this month’s Tech M&A Monthly. We’re especially excited about this event because we’re debuting a new feature you’ll see later on in the conference, but first just let me summarize what is coming in the next 30 minutes.
We’ll start with a report from the Heartland by my colleague Ed Ossie who has been managing numerous transactions throughout the Midwest. We’ll have updates from two important conferences that we have attended in the last 30 days, the RSA security conference and the Mobile World Congress. We’ll go to our monthly research report and update you on the important transactions that have occurred and the trends in the valuation realm that you need to know about. Then we’re going to debut Corum’s Top Ten Tech Trends for this year. Definitely stay tuned for that.
Heartland Report
So let me start by handing the microphone over to Ed Ossie in Kansas City. Ed?
Ed Ossie
Thanks, Nat. Tech M&A in the Heartland or the middle part of the US has been and is really active and shows no signs of slowing down. While M&A may be under promoted or not grabbing the headlines out this way, most are surprised to learn that there have been more than 500 completed Tech M&A transactions in just the last two years. These transactions represent done deals, not rounds of financing or angel funding. But there is plenty of activity there too, with many states having tech incentives and angel tax credits in place.
As we wrap up first quarter of 2014, we have unprecedented interest from high quality buyers in Midwest or Heartland companies. Why?
Well, when you think about it, with 90% of the venture capital going elsewhere, most Midwest tech businesses have had to bootstrap and run operations very efficiently. Buyers appreciate the fact that teams have successfully navigated tough markets, and are often up against much better funded competitors and have won. As Nat mentioned, we’ll be announcing a number of closed transactions in the weeks ahead, and these Heartland Corum clients built their successful companies in states like Ohio, Illinois, and Indiana. They attracted a lot of excellent partners to the table in the Corum process.
What has been particularly interesting to me is that the sellers are diverse, not concentrated in any particular area. In fact, all the tech sectors that our team covers have been represented: Healthcare, IT, customer experience, infrastructure, internet, and so on. Historically, while the IT services sector is maybe quieter for Tech M&A, it has become an area of keen interest to buyers and we’d expect that if you run one of these businesses, you may be approached.
With that, we look forward to the upcoming Corum spring conferences across the Heartland. Back to you, Nat.
Nat Burgess
Thanks, Ed. We actually have three transactions closing in the region in the next week, just because of an accident of timing, we’re not able to announce them today (ICF International closing on the acquisition of CITYTECH, Inc. for example), but I will say that as Ed mentioned, a lot of these companies are bootstrapped, there’s no outside capital, and this isn’t a game. This isn’t institutions, in many cases this is a life’s work for an entrepreneur who has created something special and we’re proud to have worked with a number of these companies. Definitely stay tuned over the next couple of weeks for some exciting announcements.
RSA Conference Report
On to our first conference report. I’ve been going to the RSA conference since about 1999. We’ve done a lot of work in security, we’ve sold companies to VMC, six companies to Symantec now; we’ve done work with Microsoft in this area, and so on. It’s always been an active area in tech, it’s generally anywhere from 8-10% of annual IT spending.
A couple of highlights from the conference for us: We had over 30,000 people including exhibitors at the conference this year, which is a record-setting attendance. I think the first comment to make is that the Snowden leaks have really forced everyone, at least for the moment, to acknowledge how insecure our data is, personal and corporate. It’s all pretty much out there in the clear; if someone is determined, they can get to it.
In the old days, the refrain was “What if I get hacked?” and we had promises of perimeter security and host security and not letting anyone in. Now that’s changed to “We’ve been hacked, what do we do about it?”
This is reflected, if we look at the top ten innovative companies, according to Greylock Partners and some other analysts asked to judge this year’s innovation panel, I think eight of the top ten picked are involved in threat or incident response; in other words, how to manage the situation after someone has already gotten in.
The other aspect of this that I found fascinating is the collaboration aspect, and Elon is going to have a lot more to say about collaboration later today in our Top Ten Tech Trends discussion.
But I wanted to highlight an aspect of security that is really important. I spent some time with Jacob West, the CTO of HP’s security division, and he’s looking at data that shows data breaches are up 20% last year, they’ll be up over 30% this year, and meanwhile in the industry, 40% of IT security positions will be vacant. In other words, in his view, the industry is half-staffed to deal with adversaries that are more capable than ever. We’re up against an unlimited number of bad guys, and they only need to be right once, where we need to be right constantly.
The reason, in his view, that the adversaries are so effective today, is that they are collaborating. These threat actors, who specialize in certain activities, basically put up postings, like oDesk, up on the web. They trade expertise, they work together, if someone is good at a certain kind of hack, they will sell data to someone who is good at another kind of hack, and they work together to create all kinds of problems. The question Jacob is asking is, what kind of collaboration are we seeing among the good guys? And the answer is not very much, because when you get hacked, the last thing you want to do is admit it to anyone else.
So, collaboration is going to be the critical thing that gives us an edge this year, in his view, against the bad guys. Stay tuned for more on collaboration later.
Mobile World Congress Report
Now, I’d like to hand things over to Dougan, in Barcelona, who was recently at the Mobile World Congress.
Dougan Milne
Thanks, Nat, and in talking about disruptive trends, certainly mobile is right up there on those lists.
It was certainly a big event here, with over 75,000 people in attendance at this year’s Congress in Barcelona, where we also ran a successful Merge Briefing.
As I mentioned in a recent blog post, this was regarding by almost everyone I talked to as some of the most productive days of the year. The number of deals and high level meetings I witnessed here this year is greater than any I’ve witnessed at an event of this scale.
We’ve been to CES and E3 and many other large conferences around the world, but what we’ve seen here is the Congress staying true to their mission, an annual meeting to conduct business in the industry of mobile and related tech.
Beyond Barcelona, and before we go back to HQ, let me just mention that Corum continued our international reach in being a local player in areas that I like to call emerging tech hubs. Recently we’ve been hosting events in Mexico. We just concluded a successful transaction for our client Infinix. We were recently running conferences in Russia, where we just launched a Moscow-based client, we’re very excited about that, and just last night I returned from Abu Dhabi and Dubai. We had Mohamed Hamedi guest present his story as the CEO of two companies that he has excited in the past couple of years.
We look forward to meeting more entrepreneurs as our calendar takes us to Istanbul, Bangalore, Hong Kong, mainland China, and we’re just finalizing our events for South and Central America, so please stay tuned for that and please join us.
Nat, back to you.
Corum Research Report
Nat Burgess
If you’ve tracked us here over the last few years, you’ll know that every month we highlight the most important deals in the industry and the most important trends that we’re seeing driving tech M&A. So, with our monthly research report, I’d like to hand it over to the team headed up by Elon.
Elon Gasper
Thanks, Nat. We begin with the public markets, where all three major indices we track bounced well last month after a lackluster January, with tech achieving new highs. Despite ongoing concerns over the continuing crisis in Ukraine, and the Fed taper, US markets still see factors ranging from cheap credit to cash-stuffed corporate coffers supporting this historic US bull market which entered its sixth year a few days ago.
When will it end? Well, of the dozen bull markets since World War Two only 3 have survived their sixth year: 1970s inflation, stopped by the Fed soon after; the Post-War Boom in the 50s that ran out to seven years; and of course the Dotcom Bubble that stampeded through nearly a decade.
We predict this bull will earn itself a name too, as sellers enjoy a fine 2014 for tech M&A in particular, while we continue to caution a realistic perspective in exit planning that considers both the timing and the time it takes to execute.
Looking now at the Corum Index, February activity is comparable year over year, with overall spending slightly less than previous and just one mega deal, but it is a historic event, too: Facebook acquired mobile messaging company WhatsApp for a whopping $19 billion, making it the largest venture-backed and one of the top tech exits ever.
One of the main themes Corum senior analyst Alina Soltys shared at the Casual Connect Amsterdam conference last month was the rise of the mobile messaging platforms, naming WhatsApp, WeChat, Line and Kakao and clearly hitting upon a very timely trend: see her Corum blog post, plus we’ll have more later today in a new section reporting our Top Ten Tech Trends.
First let’s review our six markets. Amber, what are we seeing in the horizontal sector?
Horizontal Software Valuations
Amber Stoner
Valuation multiples in the broad horizontal sector remain the highest among all six analyzed sectors, supported by SaaS companies in the HR and CRM subsectors.
Workday bought San Francisco-based predictive HR analytics SaaS provider Identified for $15M. The addition of Identified enhances Workday’s search capabilities and brings hiring analytics to Workday’s product suite.
Earlier in the month, LinkedIn shone a spotlight on this area as well, spending $120M in its biggest acquisition yet, to get San Francisco-based SaaS startup Bright, which leverages data insights and matching technology to connect prospects and employers.
CA-based BI firm Actuate acquired German customer communications management solutions provider legodo, expanding Actuate’s offerings into the interactive customer correspondence space.
And sales and marketing effectiveness software vendor Callidus picked up LeadRocket bringing a next generation social engagement and digital marketing platform to sales.
Erin, what’s been going on in the Internet sector?
Internet Software Valuations
Erin Sanchez
Valuations in the Internet sector continued to maintain strong levels despite a slight dip in sales multiples. 2013’s top buyer, Yahoo, made two acquisitions last month, fewer than January but still a faster pace than last year, bringing their 2014 total up to seven deals. They picked up Wander, a mobile visual diary application, for a rumored ten million.
Several ad platforms changed hands last month, including BannerConnect, a 5 million dollar revenue Dutch firm, consolidated by WPP into its Group M Xaxis unit; and Connexity, picked up by a nearby SoCal firm Shopzilla, citing its commitment to Data Science. Additionally, UK’s SuperAwesome crossed the ocean to acquire the mobile ad network targeting girls, MobiGirl Media, for an undisclosed amount.
Also of note is the nearly 133 million dollar purchase of internet cosmetics retailer LeFeng, based in Shanghai, by Guangzhou online discounter VIP Shop, at an implied value of about $14 per customer. And the expansion in online retailing has touched Canadian Retailer Coastal Contacts, bought by French corrective lens producer Essilor for $388 million, bringing it another 5 million customers through a family of websites.
Elon, what are the trends in the Vertical sector?
Vertical Software Valuations
Elon Gasper
Valuations there remained fairly steady as the market was flooded with financial services deals driven by both consolidation and innovation trends we’ll mention later.
Wolters Kluwer completed its ownership of Houston-based enterprise legal management software provider DataCert by purchasing the remaining 62% of the company for $180 million, a roughly 5x sales multiple.
In other deals, UK financial software provider Misys procured its partner IND, a supplier of online and mobile banking software based in Hungary, Xoom bought cross-border payments innovator Blue Kite for $15 million, and Budget Center picked up Canadian online transaction verification start-up Vericard for a couple million in stock.
Rounding off last month’s financial services deal set is California financial and insurance services provider First American, which bought Interthinx, a mortgage fraud analytics software provider, for $155 million in order to leverage their role in real estate transactions.
Over to you, Amber, for a Consumer sector update.
Consumer Software Valuations
Amber Stoner
The Consumer space has news for the users of messaging and calling smartphone apps. Not only the Facebook deal mentioned earlier, but Japanese e-commerce giant Rakuten spending $900M, an almost 600x revenue multiple, for Cyprus-based instant messaging company Viber. The transaction will add a customer base one and a half times bigger than Rakuten’s currently, while WhatsApp competitor Viber, aims to become a platform for digital content.
Earlier in the month international calling service PokeTALK was acquired from parent E-Mobile by Voxox, a Californian communications provider. That pickup will also bring Voxox the technology, intellectual property, and, what’s more, partnership agreements with Samsung, Lenovo, and Hewlett-Packard.
Moving on to IT Services…
IT Services Software Valuations
Elon Gasper
That sector performed well compared to our other tracked sectors last month. Sales multiples are on the rise and deals with the highest valuations included those involving technology consulting companies.
Avaya Government Solutions sold its IT consulting services business to PE-backed Camber for a hundred million, giving them a stronger and more diversified position in the government IT market.
In the financial IT consulting services market, systems integrator Perficient paid $46M for ForwardThink, a provider of financial management and technology consulting services.
Back to you Amber, what can you tell us about the Infrastructure sector?
Infrastructure Software Valuations
Amber Stoner
While still being down from Q4, infrastructure valuation multiples have increased slightly from last month; with valuations in the security sector being particularly robust.
Speaking of which, security appliances for businesses became a target for Sophos which bought Cyberoam Technologies for $80M at a 2.9x revenue multiple, boosting Sophos’ network security expertise. Elsewhere in the security world, Canadian VersAi acquired email and unified threat management application provider Espion International.
Data center security solutions provider, Imperva did three deals in February, acquiring the mainframe database security assets of Tomium Software for $8M and spending $60M to get cloud security gateway startup Skyfence Networks, as well as picking up the remaining stake in security-as-a-service subsidiary, Incapsula.
Elon Gasper
And that’s our update, Nat.
Top Ten Disruptive Technology Trends
Nat Burgess
Thanks for that. Lots of deal activity and also lots of activity that relates to our next topic, which we’re very excited about: Corum’s Top Ten Tech Trends for 2014. In our history, we’ve been committed to the software market in general and to the lower end of the market, the middle market, the smaller companies, emerging technologies. We have not found resources, others committed to the market like we are, we’ve had to create our own database, we’ve had to create our own deal tracking, and over our nearly 30 year history, we’ve built out a robust infrastructure aimed entirely at covering this market and helping our customers in this market. But what has been missing has been a useful Top Ten disruptive trends list that is actually relevant to emerging companies. So, based on the feedback from our clients and the market and the actual deal activity we see in our world, we’ve now come up with our own Top Ten Tech Trends, which we will go through today.
At a high level, we’re going to be talking about mobilization, enmeshed systems, advanced manufacturing, digital force multipliers, information security, omni-channel marketing, data connected networks, online exchanges, digital currency flow, and the internet of things. These are all familiar terms, but you haven’t seen them before in this context, and you haven’t seen them extracted out of the real world for on the ground transactional information like we’re going to offer here. So with that, over to you, Elon.
Elon Gasper
Thanks, Nat. Our Top Ten for 2014 fall into 2 groups of 5 that we could label Create and Connect. We’ll introduce the 5 in the Create category first, starting with Mobilization, on which we’ll spend some extra time as the first of our deeper discussions focusing on one of the 10 trends each month. Amber?
#1 Mobilization
Amber Stoner
With mobile internet users now outnumbering desktop users, mobile is no longer the future, it’s the present. Technology firms across the board are scrambling to support mobile as fully as they ever supported desktops. Meanwhile, corporate IT departments are finally moving beyond security and other BYOD concerns, and are beginning to focus on how mobility can actually improve business processes. This is driving high demand for the talent and technologies that enable companies and software systems to transition to mobile.
A deal we’ll be announcing tomorrow is a great example (ICF International closes on the acquisition of CITYTECH, Inc.) Our client helps governments and enterprise globally develop and implement their mobile strategy, both building out mobile applications and drawing on their deep expertise in enterprise systems integration to put them to good use within the overall IT framework of an organization.
Other deals in this area include online payment conglomerate PayPal’s acquisition of StackMob, one of its smaller competitors, specifically for StackMob’s mobile technology platform that enables developers and companies to easily create and manage mobile applications.
And then there’s Pegasystems buying Antenna Software to get its cloud-based AMPChroma Mobile Application Development Platform and calling its well-proven and open support for native mobile development: “one of Antenna’s most valuable features.”
We see these themes accelerating, as big enterprise players will roll up infrastructure and vertical niche players that have scale – though the maturation of mobile does mean that tech-only players must be overwhelmingly compelling technically at this point.
#2 Enmeshed Systems
Elon Gasper
Our second trend disrupting the Creation of technology is what we’re calling “Enmeshed Systems”. As the line between software and hardware continues to blur, the relationship between the two goes beyond “embedded” to those hardware-software systems so completely “enmeshed” that it is hard to tell where one ends and the other begins, as revisions and evolution of platforms carry components across the lines like crosscurrents in a tide. We see this clearly in consumer devices, as software companies are taking more and more control of the hardware design, and also in the next-generation electronics in everything from aircraft to cars to power plants and factories.
Firms with the capacity to build value under this flexible new paradigm are already in demand. As one example, acquiring Corum client Esterel gave ANSYS, a leader in simulation for hardware, a product suite that includes embedded system design, simulation, and code generation. We’ll continue to see companies providing mission-critical solutions acquiring software development tools which help further enmesh systems, with multicore and other parallel processing technologies ready to play a starring role.
Much of that will be in support of, or enabled by, Advanced Manufacturing tech, which is our next Trend. Erin?
#3 Advanced Manufacturing
Erin Sanchez
In the past, manufacturers often cut costs by offshoring, rather than by technical innovation. That’s changing in a big way, as today manufacturers are lowering costs and creating value by leapfrogging the previous generation of technology and utilizing next-gen tools.
These range from advanced ERP solutions—like those provided to the flat glass industry by Corum Client Albat + Wirsam, acquired by Friedman Corporation—to 3D printing, where we see deals like Autodesk’s purchase of Airstone Labs, provider of CAD and object modeling SaaS that enables businesses to create designs for 3D printers.
Well-funded 3D printing companies will acquire point-solutions across a range of applicable vertical markets, while software providers to traditional manufacturers will seek out innovative technology in robotics, the Internet of Things and analytics.
#4 Digital Force Multipliers
Elon Gasper
As the costs of building software come down, more traditional firms are eschewing software vendors and development shops for their custom technology needs. Instead, they’re building their own platforms internally, equipping their workers with the specific tools they need to multiply their impact.
These digitally-enhanced, hybrid companies, draw significant M&A interest from large firms seeking growth, serving as a three-in-one opportunity for buyers: solid revenue growth, an innovative technology stack, and an employee base. Meanwhile, non-tech buyers are after innovative tech that will let them buy their way into this category.
#5 Information Security
Amber Stoner
The last of this first set is Information Security. Most of the prior “Create” trends are about blurring lines and knocking down walls. The response to all this is, naturally, increased demand for technologies that draw clearer lines and build stronger walls. Nat discussed a bit of this in regards to what he saw at RSA last month, and Google is underscoring the changing nature of this sector, with three security deals already this year, two of which focus on authentication software.
Going forward, mobile device manufacturers will acquire mobile security software companies in order to offer protected devices. Additionally, there will be an increase in deals with software companies offering “non-text” password protection, such as audio or visual identity authentication.
Nat Burgess
Thanks, Amber. The security element here is so fascinating. We think back to the early days of computers, it was so hard to share information, we’d have to go figure out how to attach a dot matrix printer and then physically get the results to someone else, and everything we touch now is designed, to share, to move data around, it’s about creating data together, it’s about collaborating, it’s about creating data that we share, and it’s about collaboration, which brings us to our next section with Elon and the second five Top Ten Tech Trends.
Elon Gasper
Those second five, as Nat mentioned, are about connecting. It’s not just the second five, Connecting is the other grand tech theme of the year—indeed, of at least the last few decades—and we’ve identified a set of its trends with impacts that range from marketing means to the grand expansion of the internet itself. Let’s start with Amber again, and OmniChannel Marketing.
#6 OmniChannel Marketing
Amber Stoner
In order to understand the behavior patterns of more informed and savvier consumers both on and offline retailers need to deliver a consistent message across channels. Analytics, marketing, sales and payments, if they’re in real-time, can go beyond “multiscreen”, encompassing physical locations, events, social media, and much more, to ultimately drive purchasing decisions.
Corum client RapidBlue was bought by ShopperTrak because it provides location based analytics of consumers to retailers by tracking their mobile phones. ShopperTrak is positioning itself as a key nexus between digital and physical commerce.
Further evolution of online advertising platforms and traditional marketing agencies will force online advertising firms to pick up technologies that let them get closer to physical locations and live events, while both traditional and digital ad and marketing firms are hunting for companies that synergize between two or more channels.
#7 Data Connected Networks
Elon Gasper
Next we have an emerging pattern of commercial connection we term Data Connected Networks, which includes companies building on sets of customers and other subscribers. Often starting from a simple hub-and-spokes supplier or portal, these networks grow up to be conduits connecting the members themselves and enabling opportunities for revenue and improved customer satisfaction, thanks to the capacity to collect Big Data and provide, usually via SaaS, processes to realize and exploit actionable insights and enhanced participation with it.
We predict Private Equity firms will continue to be attracted to DCNs, as their ability to scale revenue on top of an already attractive SaaS solution makes them of particular interest to a financial buyer. They’ll be bidding against strategic buyers who will want to add the DCN capability to their own SaaS solutions.
A related connection paradigm is that of Online Exchanges. Erin?
#8 Online Exchanges
Erin Sanchez
This story started with disintermediation, as brokerages like Expedia and media stores like iTunes removed the barriers between customers and vendors of services and media, enabling us to sell and to buy more and to communicate faster and better. Today, exchanges are building new connections, from real-time bidding for ads, cloud brokering, survey-audience acquisition, and much more in a burgeoning number of markets and narrow niches that can nonetheless generate overwhelmingly broad participation.
See our 2014 Tech M&A Annual for more on this trend from Nat. Clearly there’s a compelling human need that’s just begun to be tapped in this regard, and we project more surprising examples of Online Exchanges to arise, connecting people and companies with resources, and driving M&A.
#9 Digital Currency Flow
Elon Gasper
Those connections will demand faster transactions, forcing the online payments space inexorably towards less friction in each as it builds on the evolving principles of Digital Currency Flow ranging from cryptocurrency platforms like Bitcoin and Ripple’s XRP, to mobile wallets, innovations like Coin and Square, online game and social network currencies, mobile purchase options and even the chips that will finally be added to US credit cards next year.
We’ve mentioned a number of related deals just this year including the Xoom-Blue Kite one mentioned earlier. Similar to our prediction for the DCN Trend, we think Private Equity firms will be attracted to emerging digital currencies and alternative funding and try to advance both innovative platforms and associated asset classes.
#10 Internet of Things
Amber Stoner
Finally, as the Internet of Things (IoT), from enterprise assets to industrial processes to consumer items, grows to a projected $300B in revenue, tech giants are chasing deals to capture a piece of that. Each of these units will require its own software, communication services, platforms and more, with data analytics becoming particularly vital.
Bosch acquired Corum client inubit largely for its ability to provide business processes in enterprise solutions and on internet platforms. With Bosch, inubit will continue to develop its own products and solutions for business customers, but will also provide integral components for creating systems and service platforms for the I.O.T.
Companies who are looking to dominate the I.O.T. hardware space, such as Cisco, will pick up smaller companies that have major software or platform innovations.
Check out Corum’s 2014 World Tech M&A Report for more Internet of Things examples and predictions from Corum Senior Vice President, Jon Scott.
Elon Gasper
Plus our forthcoming White Paper that will examine them all 10—the 5 that Create, and the 5 that Connect—in more depth. Back to you, Nat.
Nat Burgess
Thank you Elon and team. We’re really excited about this month’s webinar and this lens that we’re now using to look at the white space in the market, the opportunities ahead for the emerging companies, and frankly we can point to transactions that we’ve closed recently that are driven by every one of these trends.
As Elon said, stay turned for our upcoming white paper and feel free to reach out to any of us if you’d like to discuss how any of these trends impact your business and M&A opportunity. With that, we’ll say goodbye until next time.