Introduction

 

Nat Burgess

 

Hello, welcome to our November edition of the Corum Tech M&A Update. I’m Nat Burgess, president of Corum and your moderator for today’s event.

 

In addition to our monthly survey of M&A deals and valuation trends, today we have special reports on an upcoming tech finance event in New York and a transaction that Corum closed about two weeks ago. We’ll close out today with some of the most condensed, relevant and actionable M&A advice that I have ever encountered anywhere, so stay with us through the full half hour to hear all our speakers and benefit from their experience.

 

First we’ll hear from Corum’s chairman, Ward Carter, to update us on the New York WFS conference.

 

Special Report: WFS London

 

Ward Carter

 

Thanks, Nat. I wanted to offer a brief update on the late October conference in New York: The World Financial Symposium’s Growth and Exit Strategies for Technology Executives.

 

As many of you know, Corum is a platinum sponsor of the WFS, as we have been since its inception in 2002. This event brings together a stellar set of keynote speakers and panelists with the panels including tech buyers, CEOs and recent sellers, along with PE and VC firms active in the tech sector.

 

The New York event attracted over 100 attendees, and the dialogue between speakers and the technology executive audience was lively and thought-provoking.

 

Of particular interest was an in-depth review of trends in the Internet of Things, entitled “Connected Objects: The Next Technology Revolution,” by Mark Thurman from Vodafone.

 

For those who missed this event, held annually in four to five major global tech centers, plan to attend either our London event in December or Palo Alto in April. Register now at WFS.com and we hope to see you there.

 

Nat Burgess

Thanks, Ward. The New York event was fantastic. The upcoming events in London and Palo Alto look to be great as well.

 

Field Report: eMOBUS acquired by Asentinel

 

Now we’re going to turn things over to Corum senior VP Rob Schram, to talk about a deal that he closed just a couple of weeks ago.

 

Rob Schram

 

Thanks, Nat.

 

I am pleased to announce that Corum client eMOBUS has been acquired by Asentinel, a leading provider of lifecycle technology and Telecom Expense Management solutions, itself acquired by Marlin Equity partners less than a year ago. The Telecom Expense Management or TEM space saw a lot of consolidation a number of years ago, and not much excitement recently. However, the major impacts of the mobile revolution and advent of BYOD created an opening for disruption, one that eMOBUS has been exploiting for rapid growth, and that the combined forces of eMOBUS, Asentinel and Marlin are now taking on together.

 

eMOBUS’ easy-to-use software and expert services enable companies to lower costs and automate the tedious support tasks associated with managing employee wireless plans. Headquartered in San Diego, CA with a software development office in Silicon Valley, eMOBUS serves over 500 innovative companies like Netflix, Silicon Valley Bank and NetSuite.

 

Congratulations to founder Moe Arnaiz and his team at eMOBUS, who we expect to do great things going forward. And congratulations to the team at Marlin Equity—this is the second competitive deal we’ve done with Marlin this year, and their strong technology experience played a role in both this deal, and their acquisition of eMDs this spring.

 

Nat Burgess

 

Thanks, Rob. You noted that there hasn’t been a lot of activity in eMOBUS’ market recently, but nonetheless you were able to pull together a highly successful transaction, and I think that really tells the story of our current market.

 

Before we were seeing isolated activity in a few segments, now we’re seeing consolidation across all markets.

 

Corum Research Report - Vertical Market towers above

 

Let’s learn more on that from Elon Gasper, Corum’s VP of research.

 

Elon Gasper

 

Thanks, Nat. In our last couple Monthly webcasts we called the drop in major public market indices an overdue correction; now we note they snapped back with their best October performance in 4 years. The S&P Tech set the pace, up 6 weeks in a row for a gain of almost 10%. The NASDAQ, Dow and many international markets recovered too, as our aging bull found renewed energy with just a few months left on his climb toward second in the list of the longest.

 

M&A charged forward as well—though, as we mentioned last month, tech M&A never stopped, with our October Corum Index tracking an 11% surge in the number of tech transactions, plus over double the megadeals, topped by the largest one in tech history, presuming it dodges the tax traps, as Dell & its PEs dispelled any doubts about buyer’s cash stockpiles and access to low-cost financing making this one of the best times ever to sell a tech company; Prudence dictates any owner of a successful software company should at least be calibrating their value while these conditions last. In particular, the cheap money seems near its peak with the Fed eyeing a normalization of US interest rates.

 

We’ll cover three of our six sectors today, then the other three next month when we examine Infrastructure megadeals like SolarWinds plus last week’s Consumer sector takeout of videogame-maker King Digital; now we note the second half of 2015 was dominated by a wave of Vertical market megadeals, including a couple fintech ones as Intercontinental Exchange made its largest acquisition ever, of financial data provider Interactive Data for $5 billion and change at 5.5 times revenues, looking to match rivals Bloomberg & Reuters for data services, clientele and scale; while in the hot payment technology space, Utah fuel card & related solutions provider EFS, went to competitor Wex, a more general provider of fleet, travel & healthcare payment means, for 1 and a half billion—almost 10 times revenue—on a flip from PE Warburg Pincus, which had bought it for 1 just last year.

 

Clearly the action and multiples among these Vertical sector fintech megadeals confirm our 2015 Top 10 Tech trend Digital Currency Flow. Come back in January for our 2016 edition. Now let’s pull back to continue our Vertical market update with a valuation overview and some other notable transactions. Amber?

 

Vertical Software Valuation Metrics

 

Amber Stoner

 

Valuations in the Vertical sector bounced back to the robust highs achieved in Q2, with EBITDA surpassing the May multiple. As we move further into the school year, there was a flurry of deals in the education subsector in October. Campus Labs, which offers cloud-based assessment tools for colleges and universities, was traded in by Higher One to Leeds Equity Partners for $91M, to augment their knowledge-focused roster of investments.

 

Singaporean e-learning management SaaS vendor, Wizlearn Technologies was sold by Educomp to V-cube Global Services for $14M. V-cube, which provides web-based video conferencing services, hopes to integrate Wizlearn’s solutions with various back-end systems such as Microsoft Active Directory, SAP and Oracle Peoplesoft.

 

San Francisco’s student-centric e-portfolio startup Pathbrite was bought by Cengage Learning, enabling the Boston-based publishing company to expand its suite of institutional offerings, building on its acquisition of Learning Objects just a month earlier.

 

In the arena of helping students pay for school, SchoolSoup.com teamed up with GoodCall to build a richer scholarship search engine. And student loan origination and application management SaaS company All1Team was snapped up by resource management solutions provider Entech Consulting to try to drive disruption in the student loan market.

 

And in a deal that straddles the education and A/E/C subsectors, Sightlines, a provider of an online education facilities benchmarking database, was acquired by Warburg Pincus-backed construction pricing data and procurement software provider The Gordian Group to deliver a unified suite of products to institutional assets owners.

 

Horizontal Software Valuation Metrics

 

Amber Stoner

 

Over in the horizontal sector, valuations caught up in October, with sales multiples reaching near historic highs and buyers’ continued interest in marketing and analytics companies.

 

Last week email marketing firm Constant Contact was purchased by web hosting giant Endurance International for $1.1B at 2.6x revenue, in a deal that escalates the trend we’ve been tracking of hosting companies making acquisitions to enhance their existing solutions with marketing tools.

 

The same day, audience segmentation SaaS company Booshaka was bought by social media manager Sprinklr following the August acquisition of social marketing firm Shoutlet by Sprinklr competitor Spredfast.

 

Marketing automation software provider Gravity4 increased its 2015 deal count to 6 with two acquisitions in October, grabbing Exovue, a native advertising recommendation SaaS startup, as well as Danish cross-device marketing solutions company Conyak to strengthen the Gravity4 Marketing Cloud.

 

Other deals in the marketing space included mobile marketing & recommendation SaaS vendor Kixer’s acquisition by web content manager LAKANA; data warehousing giant Teradata getting FLXone, a Dutch marketing data management SaaS provider; and Imagna Analytics Solutions, an Indian targeted marketing analytics startup, being picked up by enterprise BI firm Fractal Analytics.

 

Elsewhere in the analytics space, French BI analytics company We Are Cloud was acquired by Zendesk for $45M to build up its customer analytics capabilities.

 

Aaron, how’d the Internet market hold up?

 

Internet Software Valuation Metrics

 

Aaron King

 

Internet market valuations have also gained in both Sales and EBITDA ratios, topping the other sectors with continuing waves of consolidation in the Travel and Leisure subsector.

 

This month Expedia raised this trend to new heights with the purchase of vacation rental website HomeAway, valued at almost 4 billion, more than 30 times EBITDA and 6 times revenue! Earlier HomeAway itself bought Singapore startup travelmob to grow the Asia-oriented business and followed with another acquisition here in the Emerald City: vacation rental property directory Dwellable. This is a huge move for Expedia into the sharing economy, and a flanking maneuver that brings them up against AirBnB.

 

Elsewhere in the sector, The UK’s LateRooms just handed over its mobile technology platform to India’s 250-year-old Cox & Kings, the oldest travel company in the world, for $13M, showing that the ancients can still play with the younger crowd.

 

AlwaysOnVacation, another rentals booking platform, was added by Monaker Group, a digital marketing company with outreach in Travel, Home and Employment sectors.

 

Back across the Atlantic, Sweden-based startup eTRAVELi sold its travel reservations websites to Germany’s ProSiebenSat.1 for almost $265M.

 

Meanwhile, Alibaba has picked up Youko Tudou, the “youtube of China”, for $3.7 billion. Both of these major players are expanding their presence into new subsectors, and Alibaba in particular looks like it is one big step closer to dominating China’s internet.

 

Moving on to Internet-leisure, Ticketfly, a Californian online concert ticket retailer, was nabbed by Pandora Media, a local buyer and radio giant, for $450M. With Google and Amazon moving into music, Pandora is scrambling to stay ahead and can’t move fast enough without inorganic growth.

 

Elon Gasper

 

Finally, in its second Watson megadeal of the year, IBM has bought The Weather Company for its reach and analytics, creating a new consumer opportunity for its growing Watson natural language AI, which, like other interactive automata, needs big data feeds to quickly produce better machine learning. With the Weather Company’s real-time distributed networks, billions of inquiries tracked each day and roughly a thousand employees, including domain experts, to help Watson digest its infomeal and get smarter faster than its competitors, it looks like Watson the Weatherman will increase buyer urgency in the scramble to deliver AI into our everyday lives. 

 

What should we humans think of that forecast, Nat?

 

Nat Burgess

 

I for one welcome our new forecasting overlords, Elon.

 

And so far, they’re calling for more M&A. But seriously, AI, predictive analytics, whatever you want to call it, it is revolutionizing software. We’ve been at this long enough that we remember the earliest days of business software, which was basically just forms put up on screens. That was business software. Now we have analytics, we have access to data, runbook automation, AI, and we’re gradually giving more and more autonomy and control to the applications to solve problems and to solve business processes. That opens the door to innovation and new companies emerging and solving problems, and more clients for us to go out and sell.

 

It’s an exciting time, and I think this is an area that we’re going to highlight more in coming months. There has been a lot of attention around data and a lot of attention around IoT, but perhaps not enough attention on AI.

 

Why Sellers Sell

 

Nat Burgess

 
 

That said, M&A deals are still made by humans, not machines, humans with all their foibles. At Corum we’ve managed over 300 transactions, we’ve worked with a lot of teams over time, and on today’s special report, we’ve gone out to our dealmakers and taken a hard look at some of the human factors that kill deals, and some of the human factors that encourage people to go into transactions to start with, and we’ve tried to put that in a useful, actionable format, and I think we’ve done a pretty good job.

 

To start this off, we’re going to Bruce Milne, founder and CEO of Corum, to talk about why sellers sell.

 

Bruce Milne

 

Today we’re going to be talking about the seven deadly sins, what can kill your deal. Often times, interesting, these reasons are related to why sellers sell.

 

The first reason that people sell is money. Funding of the enterprise. Not so much a big check in the bank, but this is your dream, you want to see it go forward.

 

Second, and this is a big one, that’s conflict between partners or employees or family or board members or investors. Companies are very complex, they grow rapidly, and it’s easy to find yourself in a conflict situation that can destroy your company.

 

The third is fatigue. Because of the complexity of these businesses, it can be very difficult to manage them. Often the founders themselves are technologists, not trained managers, and the management task challenges wear them out, time to move on.

 

The fourth is growth or opportunity. You see an opportunity to move ahead, become bigger, further monetize, go global, but you’re not going to raise the money or go public; merger is the way to go. Find a partner.

 

Lastly, the constant technology threat or change that is out there, new business paradigms, new apps, new competitors. Are you in a situation where maybe what you thought was great is suddenly going to get rolled over by some new competitor that you’ve never heard of.

 

Those are the five reasons sellers sell, and now I’ll turn it back to our moderator.

 

The Seven Deadly Sins of Tech M&A

 

Nat Burgess

 

Thanks, Bruce.

 

We go into these engagements planning to win and in order to win, we have to understand our client’s motivation. Bruce just went through some of the more frequent reasons why people get into these situations. Also, we have to know the traps that our clients may fall into, and sometimes we have to have tough conversations early to help avoid those traps.

 

We’re now highlighting what we call the seven deadly sins of M&A. We’re starting with Jim Perkins.

 

Jim Perkins

 

Sin number 1 is dealing with only one buyer. When a buyer approaches you or responds to your own outreach quickly, it can be tempting to focus only on getting a deal done with that one buyer. But if you don’t calibrate other offers from both strategic and financial partners, it is more difficult to get the value and structure you want. The first interested parties are those who are trying to be preemptive on value, getting a deal. Some are what we call bottom feeders. At a recent World Financial Symposium in New York the buyers panel all agreed that they make an average of 8-10 overtures for every deal they do. Thus, that initial buyer interest seldom translates into a transaction. Don’t make this mistake – there’s a much wider range of buyers today, some you’ve never heard of – talk to them. Your odds and final valuation will improve dramatically.

 

Nat Burgess

 

I just want to repeat a point that Jim made, which is: On a recent buyers panel in New York, the buyers agreed that out of 8-10 overtures they make to potential sellers, they close one deal. And as the seller, you may want to focus on an interested buyer and get a deal done efficiently without a lot of fuss and bother, maybe you don’t want to offend them by going to others, but I think you owe it to yourself to at least go to the other 7 or 9 potential buyers and balance the odds.

 

Okay, on to our second deadly sin with John Simpson.

 

John Simpson

 

Sin number 2 is not handling internal conflict properly.

 

If all your parties aren’t aligned on the deal, it can be difficult to get the offer you want, it complicates due diligence, and it can create havoc in the closing stages.

 

So be sure, as early as possible, that all the key stakeholders are aware of the deal and in general agreement on price and terms that you will accept.  These include outside investors and any current or former employees that have significant equity. Also, don’t forget customers, distributors or licensees whose contracts require notice. 

 

In short, keep all the relevant parties engaged and informed, and handle their concerns directly.

 

Nat Burgess

 

Now we’re going to Mark Johnson in Stockholm to talk about managing deadly sin number three.

 

Mark Johnson

 

Sin number 3 is understanding the buyers process, in order to best align buyers and efficiently dedicate your time to the M&A process while simultaneously running your company.

 

You need to understand how to communicate your value to the right buyers. What are the right channels to discuss partnerships? Who are their inside and outside advisors? How do they value acquisitions? What are their preferred structures? Who actually does the negotiation? How do they handle confidentiality? What are their standard employment and non-compete agreements?  What is the due diligence process, and realistic timelines for final contract preparation. How do they normally pay, and what is their track record of follow though?

 

At the end of the day, you want to negotiate the best possible deal, but also do it with the buyer that has the highest likelihood of success.

 

Nat Burgess

 

Thank you, Mark. Now we’ll stay with our European team and hear from Jon Scott in Amsterdam.

 

Jon Scott

 

On to the next sin: Number 4. Be sure you have done your own self-checking due diligence before the real due diligence starts. What are your strengths, where will there be questions, or even outright problems? Are there issues with revenue growth? Do you have reasonable answers? Are there issues with ownership structure? Lawsuits? Have you checked to be sure you are clear on patents?  Where are their weaknesses with new product launches? Does the balance sheet have excess cash not reserved so they don’t expect it in the deal. Taxes? Obligations not on balance sheet? You won’t have all the answers, but be sure you know what they questions will be. Fumbling for answers can lower prices and worsen structure.

 

Nat Burgess

 

Now back to headquarters and we’ll hear from Dan Bernstein.

 

Dan Bernstein

 

The fifth deadly sin is not qualifying the buyers. With a whole new generation of strategic, financial and even non-tech buyers, often the most aggressive are those that make great promises, get you excited, then fail to come through. The victim is you, your company, especially if they’ve tied you up in an exclusive negotiating agreement, or longer term no-shop, common tactics. Your greatest leverage is before you sign the no-shop, so that’s the time to perform your own due diligence. Simple questions will help. Why are they buying you? What’s the expected deal timeline? Do they have the funds to pay? If not, what is the drop dead time for funds or stock approval? Can you talk to other companies they have acquired – how did it work out? Remember, you control the process, not them, especially if you have other interested parties.

 

Nat Burgess

 

Thanks, Dan. Let’s turn now to Corum’s Rob Schram, also at headquarters.

 

 

Rob Schram

 

Number six is a bit tricky: Failing to properly orchestrate all potential buyers.  

 

We already discussed the disastrous effects of dealing with a single buyer, but if you’re not careful, you can create a similar problem in a broad market engagement by failing to time your approach to buyers such that they all arrive at the LOI stage together.  The last thing you want is for a cluster of viable buyers to get out ahead of the pack.  You then either have to engage prematurely or stall while you secure other potential candidates.  So, it’s important first to reach out to buyers who will take longer to get up to speed, then proceed to those who will quickly comprehend fit and value. 

 

You’ve also got to allow enough time for the big acquirers or international buyers who are necessarily slower due to Sarbanes Oxley, and related laws with criminal liability. And finally, there’s the timing of confidential discussions with competitors.  You’d like to contact them, with LOIs already in hand, and say, “We’ve been approached, but I wanted us to talk before accepting.”  Those are low-risk conversations and can lead to highly productive 11th-hour negotiations.

 

Nat Burgess

 

We’ll close out with our toughest deadly sin, one that often requires a hard look in the mirror and some real contemplation. For that, we’ll turn to our Chairman and senior deal market, Ward Carter.

 

Ward Carter

 

Lastly, number seven: Ego, greed and arrogance. The one sin that breaks your heart when it happens, as it’s often at the end when all your work has culminated in a well calibrated offer. This one actually is one of the original deadly sins, and can come in many forms.

 

Often investors smell blood, and demand unreasonable provisions such as not wanting any ongoing liability, putting a gun to your head to compromise on standard deal terms. Or that one partner who says, “No, let’s push back one more time and ask for this”, or a  key employee rebelling with, “I’m not signing any non-compete agreement without a bigger piece of the deal” or the clueless board member, totally uninvolved who says “Lets raise the bar,” or a spouse who files for divorce, wanting part of the deal in the settlement.  These last minute demands can back-fire as they are perceived by the buyer as bad faith. Too often the deal dies, never to be resurrected. Take care to identify these risks early and find solutions that will prevent the deal from being derailed unnecessarily.

 

Q&A

 

Nat Burgess

 

Thanks, Ward.

 

We actually have time for a couple of questions. It looks like the first one that’s come in is, “Doesn’t vendor due diligence handle a lot of these problems?” That’s a good question. For those of you who aren’t familiar with this concept, vendor, or reverse due diligence, is when you as the target hire a firm, typically an accounting firm, to do due diligence on yourself as a way to uncover problems and ideally remediate them or fix them before you go to market. It’s basically a preview of the diligence process with some time to fix things.

 

Going back to the question, does vendor due diligence take care of these sins? The answer is now. Number four, insufficient due diligence prep, that’s the one area where this can offer some real relief, looking at quality of earnings, local tax issues, really taking a look at the data and figuring out where the problems are and how to solve them. That’s definitely the core role of vendor due diligence, and that only manages one out of the seven sins.

 

If you look at the other six, a lot of them have to do with behavior, alignment, expectations, and a lot of those are solved through prep and frankly, rehearsal, to be able to put your best foot forward with buyers.

 

Okay, we’ll be able to handle the rest of the questions via email. Thank you for joining us today and this concludes our November Tech M&A update.