Introduction
Bruce Milne
Welcome to our guests. This is our tech M&A monthly for May 2015 with a special presentation, How to Improve Your Deals by 48%. I’m your host, Bruce Milne, CEO of the Corum Group. Our agenda is packed today. We have a number of speakers, a special overview of the World Financial Symposiums, some recent transactions, a research report, then our special report and Q&A.
Report on World Financial Symposiums
Let’s move first to Peter Parsons and the World Financial Symposiums.
Peter Parsons
The Corum Group and the World Financial Symposiums are partnering in the Market Spotlight series. It is a popular monthly webcast focused on opportunities for growth and M&A within certain specific markets.
Our first two events this year have examined IT services and health tech, both very informative, with phenomenal research done by the Corum Group and valuable perspectives from guest panelists.
Our upcoming market spotlights are AdTech on May 21, Security on June 25, and the Internet of Things on July 28.
The World Financial Symposiums hosts the premiere conference for growth and exit strategies for software and IT companies at various locations internationally throughout the year. Learn more at our website, www. wfs.com. Thanks to Corum for their continued support, and I look forward to many more great events.
Bruce Milne
Thank you, Peter. That’s a 12-year-old series by WFS and we’re delighted to be a platinum sponsor.
Field Report: WorldViz
Now let’s move to the field reports. Our first one is on WorldViz, and we’ll hear from our president, Nat Burgess.
Nat Burgess
Thanks, Bruce. We are thrilled to announce that Intel Capital has made an investment in our client, WorldViz and Corum acted as the exclusive advisor in this transaction. This is our third deal with Intel over the last 20 years. The first was their acquisition of Syncro, a computer telephony platform back in the day when Intel was still selling PC telephony cards. The second was Olaworks, a pioneer in augmented reality for mobile, based in South Korea: fifty patents, great team. This latest deal is also in the virtual reality market, but with a twist: instead of Occulus-style VR for consumers, WorldViz focuses on VR for industrial applications. Intel, as we’ve seen from their prior deals, has always invested ahead of trends and paved the way for their core chip business, and here with WorldViz deal, it’s no exception.
WorldViz, out of Santa Barbara, California, is the brainchild of PhD Andy Beal, who still holds a seat at the computer science school at UCSB. Andy recognized early that VR has important applications for major industrial companies, for doing design, training and simulation. He and his team have been providing turnkey solutions to major companies for many years, including Roche and Boeing. Clearly Intel recognizes the value of the enterprise market and also recognizes the fact that WorldVIz has been there longer than anyone else, and has a great head start. With the advent of commodity hardware such as the Occulus headset and the new Sony headset, VR will grow in the enterprise, and the software opportunity will grow as well. Corum worked closely with management to create a new go-to-market strategy for WorldViz, and the company made several important hires to ensure success. With the capital injection from Intel they will do great things. Congratulations to Andy and team.
Bruce Milne
Congratulations to you, Nat. We’ve worked very closely with Intel Capital over the years and have spoken at some of their VC events, as we have for a lot of other PE firms.
Field Report: Cabforce
Now let’s go to Europe and Mark Johnson on a recently concluded transaction in Helsinki. Mark?
Mark Johnson
Last week it was announced that our client, Cabforce out of Helsinki, was acquired by CarTrawler, out of Dublin. Cabforce is a technology provider that has built a platform for travel distribution channels such as airline portals and online travel agencies (OTAs), to sell pre-booked, travel connected taxis.
The ultimate problem Cabforce is solving is that in travel, there is one piece of uncertainty - the taxi to and from the airport. The traveler has booked and has information about the flight and the hotel, but the taxi trip has been a point of stress and ambiguity: where do you catch the cab, what is the fair price, is my taxi driver to be trusted, do I need cash, I need to remember to keep my receipt, etc.
Cabforce eliminates the stress and ambiguity by enabling airlines and OTAs to sell taxi trips along with flights, hotels, and rental cars. This is revenue generation for the airlines, OTAs, and taxi drivers and companies, and also creates value and efficiencies for the traveler.
We’ve seen significant disruption in the taxi industry, primarily from the likes of Uber and its competitors, however they are focused on “on-demand” taxi journeys and providing content from the shared-economy, bringing more drivers and content to the supply of taxis.
Cabforce’s business is providing the platform to allow established taxi companies to operate at higher utilization. Its platform sits in the middle, and earns money per booking. Cabforce is a direct fit with CarTrawler, which is broadening its ground transportation service by adding travel-connected taxis to its existing rental car booking service.
This was an exciting process as the leading players in travel and leisure have been highly acquisitive, and are all looking for new markets and revenue opportunities such as Cabforce to improve competitiveness.
I look forward to following Cabforce’s evolvement across the world as a part of the CarTrawler group. Thanks.
Bruce Milne
Thanks, Mark, and congratulations again. We’ve been involved with all the buyers in this travel and leisure group and there’s a lot more appetite for transactions. If you have a company that you think should be selling or you want to calibrate value, give us a call because it’s a hot market.
Corum Research Report
Elon Gasper
Thanks, Bruce. We begin with the public markets where multiple indices including the Nasdaq and S&P Tech reached new highs last month, surpassing the dot-com era, buoyed by excellent financial results from the tech giants. European indices like the DAX and Stoxx 600 also set records as central banks there and around the world dropped rates further and kept markets liquid with the easy money that’s helped power up tech M&A plus boosted this bull market up a notch last week to third longest, now topped only by the mighty post WW II boom and the decade-long dot-com bubble itself.
For tech M&A sellers it’s a rare opportunity to achieve liquidity under historically favorable conditions. Prudent companies that can get to the market are moving quickly to take advantage of this near-perfect environment, as the second quarter M&A setting a fast pace, reflected in our Corum Index showing all indicators up comparing to April just a year ago, except slightly fewer crossborder transactions, plus younger companies getting bought as demand pulls them into the market.
The largest megadeal’s size last month tops last year’s top deal with Finland’s Nokia spending over $16 billion dollars for a controlling stake in Franco-American networking giant Alcatel-Lucent, which includes famed US research facility Bell Labs, birthplace of so much of the tech innovation that’s shaped our world: transistors, cell phones, lasers, Unix, and C++.
Network security firm Websense was bought by US defense contractor Raytheon for nearly 2 billion to defend its government and commercial clients from the growing number of cyber attacks: an example of how shifts in strategic value broaden the range of buyers.
As one did for AOL in another megadeal just this week, as the breakout value of its programmatic advertising advancements disrupted the marketplace and attracted acquirer Verizon. AdTech in general M&A is on fire, so we’ll have more on that in our special Adtech Spotlight webinar next week with WFS, and cover the rest of the megadeals as we go through sectors, starting with IT Services. How was last month’s performance there, Yasmin?
Yasmin Khodamoradi
In the IT services market, EBITDA multiples increased while sales multiples stayed in their usual range of 0.4x-1.4x for developed markets.
Returning to megadeals, in IT Services, Capgemini finally gained a stake in the North American market with the four-billion-dollar acquisition of IGATE at a 3.5x sales multiple. This acquisition should strengthen Capgemini’s key businesses in application and infrastructure services as well as BPO and engineering.
In fact, the IT Services segment goes on displaying strong sales through the entire month.
In the managed services space, Konica Minolta continued its streak of buying MSPs by acquiring enterprise content management providers Knowledge Partners and Stonebridge Systems. Both of these acquisitions should help Konica Minolta shift the bulk of their offerings from products to services and business solutions.
We also saw Virtusa acquire Apparatus, a provider of end-to-end IT infrastructure services, for $36M. This deal should help Virtusa increase their total addressable market and deliver expanded IT outsourcing services to clients. For a more detailed look at this sector, watch last month’s market spotlight on IT Services at wfs.com.
Elon Gasper
Internet company valuations dropped back near February levels as investors worried the sector may have overextended, but with still relatively high values and high variance, too, of course, in this melee of technology, business models and markets.
Mark’s field report on our CabForce deal confirms the travel and leisure sector’s position amid such disruptive trends. With a total of over 30 transactions since the beginning of the year, it’s part of an M&A wave that has covered the online bookings world and is now splashing out to ride-sharing services around the world: For example, Paris-based Comuto, operator of social rideshare site BlaBlaCar, picked up 2 other such firms, AutoHop in Hungary and Carpooling.com in Germany. Looks like Comuto hopes having the extra companies along for the ride will let it drive the fast lane through Europe.
Last week in Sweden, CabOnline, part of Fajelvik Group, bought mobile SaaS provider TAXIsystem to combine its cloud-based dispatch and invoicing with CabOnline’s ordering and payment app to offer an off-the-shelf taxi industry solution.
And in India, RidingO was acquired by CarzOnRent last month, following cab reservation website TaxiForSure’s becoming part of ANI Technologies’ Ola a few weeks before.
Moving on, last month we discussed LinkedIn’s recent purchases just before the company announced its largest deal ever, spending $1.5B for online education service company Lynda.com — at a fine 10x revenue multiple. The 20-years profitable VC-funded business linked a chain from education videos to job opportunities, with a great fit to LinkedIn’s needs for growth and broader value.
Right after came another education deal as Houghton Mifflin Harcourt spent over half a billion for Scholastic's EdTech digital curriculum. EdTech transactions were already on pace to post a 30% increase in volume this year; now with valuations lifted as well in the wake of both deals we project it even higher, with additional consolidation in adjacent areas, particularly in the more vertical education market.
Yasmin Khodamoradi
Speaking of Vertical, that market’s overall valuations rose last month, with both Sales and EBITDA multiples reaching record highs. The highly dynamic healthcare technology market, which we covered in a healthtech market spotlight last month, has shifted its focus from electronic health records and point-of-care solutions to m-health solutions. Companies in this sector continue to receive significant interest from buyers.
In addition to teaming up with Apple, Johnson & Johnson and Medtronic, IBM acquired Explorys and Phytel to further its plans for Watson Health Cloud, which aims to gather data from personal medical, fitness and health devices, representing an internet of things play for IBM in the healthcare vertical.
Driven by technological and societal changes, mobile health solutions will continue to play an important part in the way healthcare is accessed and data from patients is collected. As a result, many tech companies are interested in applying their mobile solutions to the healthcare vertical. One example of this is Facebook’s acquisition of Protogeo, the Helsinki-based maker of the “Moves” app. Many consider this deal to be a sign of Facebook’s growing interest in a telemedicine play.
Similarly in India, the diet & fitness SaaS provider FitHo was picked up by Practo Technologies, an online doctor-booking portal, in its first acquisition aimed at preventive healthcare solutions.
Elon Gasper
Next month we’ll focus on the rest of our 6 markets, Horizontal, Consumer and Infrastructure. Back to you, Bruce.
Bruce Milne
Thank you, Elon and Yasmin. Great report. Really interesting from IBM on down around the world, and some companies you’ve never heard of buying at stunning valuations. I know a lot of people today kind of write off the (xxx 15:42 sounds like LL?), at one time even Nokia, and now it’s involved in some of the biggest transactions in history. Stay tuned.
How to Improve Your Deal by 48%
Now to our special presentation. We’ve been at this stuff for thirty years, we’ve sold more companies than anybody in history, and one of the biggest questions people ask is how much do you improve the transaction? How do you get the valuations that we’re talking about here? What is the average improvement from the first offer, letter of intent we call it, with a professional process, to the final? If you create an option to buy, what’s the average improvement? Forty-eight percent. This has held fairly steady over the years. Sometimes it’s much higher than that, sometimes its lower, but that’s a lot, and that’s liquidity.
To talk about the process, I’ve asked a number of our presenters here, deal-markers from around the world to join us to cover the eight stages for an optimal outcome: Preparation, Research, Contact, Discovery, Negotiation, Due Diligence, Closing, and Integration.
Let’s go south to Texas and Jeff Brown, VP, on Preparation.
Jeff Brown
A big part of M&A is execution. The way you respond during the auction and excel in due diligence will improve the ultimate outcome of the deal. Buyers need to understand the risks of buying your company. So before you start, prepare. Get organized for a full disclosure process.
- Know why you are selling and tell a compelling company story. Benchmark to highlight areas of leadership.
- Know your business model, market and customers and why they buy from you. Identify new ways to add sustainable earnings. Build thoughtful forecasts.
- Make sure that your management team is trained and the business can run without you.
- Be sure your financials are accurate and follow industry standards. Resolve all important issues from compliance reviews.
- Make sure your company structure is clean, ownership uncontested, the company agreement, by-laws and minutes are complete.
Everything starts by being well prepared.
Bruce Milne
Great, Jeff. We recently had a seller’s panel and one of the pieces of advice that came from our successful sellers is to use a virtual data room in your preparation so that you can get ready for what the buyers are going to ask you.
Now let’s go to Dan Bernstein and Research.
Dan Bernstein
Having a thorough list of buyers is critical to a successful outcome, but it’s even more important to ask the four questions ahead of time before picking up the phone.
- “Why” would they buy you; what’s the strategic fit?
- “How” will they buy you; what does a potential deal with the acquirer look like given their history and finances?
- “Who” do you need to contact in the organization to maximize your opportunity?
- “What” the message should be once you’re talking to them
Bruce Milne
Thanks, Dan. You’ll also want to be sure to consider the full range of buyers, and there’s so many, as you saw in our research report. Not just strategic buyers and financial buyers, but international buyers and non-tech buyers like Houghton-Miflin.
Now let’s move to Contact and hear from John Simpson here at HQ.
John Simpson
The Contact phase is where the rubber meets the road. It begins with careful preparation of key business information about your company. This must be crisp and compelling enough to promote interest. When it’s prepared, it is time to reach out directly to your list of potential buyers. The right buyer contacts are all C-level executives or Corporate Development officers reporting to the CEO. They’re busy people, and it’s not easy to reach them, so persistence is key. This interaction not only provides information about your company but you can also learn much about them. In short, if run properly, the Contact phase is a classic sales final process that can take literally hundreds and phone calls, but it should produce a shorter and sharper set of qualified candidates to work with in the next phase, Discovery.
Bruce Milne
Great, thanks, John. One of the things we see people making mistakes on in contact is that they are contact at the wrong level, they contact people they have maybe worked with at a certain level, operations, and they need to go to the top. Further, you have to stage your contacts. Some parties can respond very quickly, others take more time. You have to bring them along to create an auction process.
Now let’s go to the next stage and talk about Discovery. Here is Rob Schram, Senior VP here at HQ.
Rob Schram
The initial buyer qualification has been covered in the Contact phase, so in Discovery, the goal is to explore serious buyer interests and fit, learn about each other’s position, and then select a short list of candidates suitable to acquire your company.
Remember that if you want an optimal outcome, you control the process. This means you need to complete your due diligence on each buyer, including synergy and contribution analysis. Also keep in mind that as buyer interest increases, so does the load on your management team for calls, presentations and visits, so try to be as efficient as you can.
In working with buyers during this phase, it’s important to build and maintain a sense of urgency and increasing focus, so be careful to bring qualified candidates up to speed in parallel, orchestrate and support their evaluation of your company, and then go purposefully into the Negotiation phase of the process.
Bruce Milne
Thanks, Rob. Rob has been very successful in closing transactions recently.
One of the things here is that you generally want to hold off on valuation. The buyers, as you get to know them, you get to know why you’re important to them. Of course the market is growing, you’re growing, and there may be changes in the valuation metrics which you may finally apply, because you want to apply valuation at the time when you would be finally handing the control of the company over, so we generally wait as long as possible on that.
Now let’s move on to the next phase, which is Negotiation. Let’s hear from Mark Johnson.
Mark Johnson
Negotiation is a process, not an event. It begins from first contact and goes through closing. Achieving an optimal outcome means taking control of the negotiation process. Discovery meetings will be organized, process letters issued to relevant partners at the right time.
Deal structure and valuation guidance will be provided appropriately to buyers which are moving in that direction, with the goal of creating an auction environment, which means getting everyone up to speed at the same time and then take offers.
Once the top bidders are identified and term sheet negotiations are complete a Letter of Intent is signed with the top candidate and other bidders are informed of the No Shop. You’ll want to be careful with how you advise the other bidders as you don’t want to burn any bridges with backup buyers.
The ultimate goal is closing a deal with the right partner at the best deal structure and price. Achieving this requires experience and having authority to establish the process.
Bruce Milne
To many of you selling your companies for the first time, you don’t know what you don’t know and this is one area you have to be cautious in. The buyers do this all the time, and they have a process they call serial negotiation. You don’t want to learn this lesson the hard way. What they’re doing is trying to get some things from you along the way. For example, would the deal be all cash? Would you do an asset sale? Would you want to relocate? How long are your employment agreements? You do not want to do this, you want to make sure everything is on the table before you start to negotiate. You don’t want to be a victim of serial negotiation.
Now let’s move on to Due Diligence and hear from Jon Scott.
Jon Scott
After you complete negotiation and have a letter of intent in place, you actively enter the Due Diligence phase. Diligence is a confirmation of what you’ve presented during the process allowing the buyer to confirm their assumptions. This can be a difficult stage where a lot of deals die and if mishandled it can be a minefield.
The buyer verifies financial statements and digs into your financial processes, and makes the call as to whether they need other outside opinions. You will establish a confidential data room where diligence materials will be placed including technical, leadership, and ownership areas. Do you have ownership of all the intellectual property or are there any pending lawsuits faced by the company. The buyer may ask for written explanations of your methodologies to understand how you do business.
Finally, the initial drafts of the complete definitive agreement are provided, and then the final agreement is negotiated. A lot of the mystery and risk in due diligence can be removed by simply preparing for this at the start of the selling process.
Bruce Milne
Great, thank you, Jon. Now let’s go to Russ Riggins, Senior Director, and talk about Closing.
Russ Riggins
There are two critical elements to the Closing Stage once LOI is in place: negotiating skills and qualified and experienced advisors; your financial advisor or banker and your legal counsel, both critical team members. Let me comment on the advisors first.
This is the stage where definitive agreements are negotiated and finalized. The agreement contains representations and warrants, escrow hold-backs and other critical details. It is imperative your advisors know what the market conditions are for these provisions. For example, what is the market for escrow amounts for a company like yours in your segment of the market? Is it 10% or 20% of the purchase price? What is the holding period for the escrow amount? 12 months or 18 months? More importantly what is the significance of these provisions? Why do these provisions exist? Qualified and experience advisors can guide the company through this stage.
The second element is negotiating skills. This skill come from experience, experience, experience. To get a deal done, it will require give and take on both sides. It also means knowing when to assume some level of risk and when to minimize risk as much as possible. Experienced negotiators know how to create this balance.
Bruce Milne
Thanks, Russ. One of the things that we see happen sometimes is that firms retain law firms that have not done tech deals. You have to remember that a lot of the things that Russ talks about, the standards, employment agreements, hold-backs and so on, are really part of practice of the major law firms over the years. If someone doesn’t know these things, they’ll be trying to fly practices in other industries that simply don’t apply and you can end up having a lawyer that actually kills the deal. So make sure you get experienced legal counsel that has specifically done these kind of transactions.
Now let’s close with our Chairman, Ward Carter, on Integration.
Ward Carter:
Integration is sometimes ignored in the heat of getting a deal closed, but the fact is that 53% of integrations fail, and you can’t afford that if you are a buyer spending big money for an acquisition, and certainly not if you are a seller with an earnout or other contingent consideration on the line.
How do you protect yourself? Easy: identify those important integration points early in the M&A process, and make sure they are addressed by the buyer in advance of the deal closing. Issues such as key employee retention plans, compensation and benefits, opportunities for advancement, consolidation of staffing, how the merger is announced to employees/customers/vendors, goals of combined organizations identified, and so on.
The key is to anticipate the concerns that the stakeholders might have, and figure out answers before the deal closes, not waiting until after when it might be too late.
Bruce Milne
Thank you, Ward, thanks for wrapping that up. Integration is critical and you have to think about it from the very beginning, otherwise these deals can fail.
Q&A
There was a question that came in about how that 48% comes into play and maybe you can wrap up this whole process on that, Nat.
Nat Burgess
I’m happy to do that, Bruce. It’s been great sitting and listening to our team talk through the steps in a deal, because there’s well over 100 years of experience represented there. We have had some questions come in around this theme of, “What is the secret? How can I unlock this 48%?” We’d all like to eat nothing but celery and lose weight and become fit. We’d all like to find that one secret to investing in real estate. But if you talk to anyone who has a lot of experience in a given domain, what you learn is that it’s the depth of the experience, taking all of the steps, being methodical, understanding context, understanding how all these things inter-relate with each other that unlocks the value and that makes it possible.
You didn’t find one little trick that you can pull to drive your value up by 48%, what you heard was the voice of those 100 years of experience breaking the process down into discreet steps and talking through how they inter-relate with each other and how you progress through a deal and how you avoid falling into a trap and how you build the framework for a successful transaction. Doing these deals is like building a city overnight. You need a water system before you can hire a fire department; you need a road system before it makes sense to put up office buildings. As you progress in the deal, unless you raise that framework, unless you’ve methodically done those steps, you won’t find that increase in value. If you do take those steps, especially if you put experience on your side, then you will.
Bruce Milne
Thanks, Nat. One other comment there is that we find there are so many buyers out there today, and a lot of them are competing with each other, when you go to market and you do the process where you’re professionally doing it, they know you’re serious, they know they’re not the only buyer, there’s sort of this idea that it’ll be wonderful if they buy you and terrible if they don’t, because one of their competitors will get this technology and use it against them, and that’s when these numbers really jump, beyond the 48%.
There’s a quick question here as we close. “Are these valuations pretty similar across the room or dependent upon the region? For example, Latin America, would you expect it to have similar multiples to the US?”
There’s a long answer to that, and in fact what I’d like to do is to be able to talk to you about that specifically so we can address the region in particular. For example, in China, the valuations of their IT companies are higher than here. But in general you have world bidders that are going after companies everywhere, and you saw that in today’s reports. These crossborder transactions are very interesting because there’s some extra added value. The added value is that a buyer, say, in Europe or Asia would pick up an American company to not only get all the other things that anybody else would buy, but they’re also trying to get a base of operations to go after the largest market in the world, the US. They’re trying to get the technology to bring over and sell in their region. Maybe they can lower your development cost. So, crossborder transactions, which are most of them, there’s a lot more added value, which is why we’re seeing so many international buyers. In some cases, international buyers will pay more.
We’re out of time, but we’ll get back to you on that specific question and some other questions that came up. Thank you for attending.