Introduction
Bruce Milne
Welcome to our global tech M&A report for Q3 2014. I’m Bruce Milne, CEO of Corum and I’ll be your moderator today.
We have a full agenda, including two field reports on Naurtech and Bookpad. We’ll also some event reports. Congratulations to Steve Singh at Concur, and then our research team will dig into all 26 sectors that Corum tracks. And we’ll close with a special report on the impact on Alibaba, and it’s M&A impact, which we think will be significant.
Field Reports: Bookpad and Naurtech
Let’s first go to our field report and Rob Schram.
Rob Schram
Thanks Bruce. We’re happy to report the sale of Indian document management company Bookpad to Yahoo. Bookpad makes the Docspad platform, which enables users to view, annotate and collaborate on cloud-hosted documents through a browser-based app. We initially met the founders through a series of events in India and in Silicon Valley, where I took part in an event for a select group of Indian technology companies hosted by NASSCOM, the Indian technology association. We’re proud to have been a part of making this exciting deal happen, and I’m looking forward to seeing what comes of their new partnership with Yahoo.
I’m also looking forward to meeting with more innovative firms in India at the end of this month, when I’ll be presenting the M&A track at NASSCOM’s “product conclave,” bringing together hundreds of software entrepreneurs in Bangalore, India.
Closer to home, I’m also pleased to announce the sale of our client Naurtech to LANDESK, a Thoma Bravo portfolio company. Naurtech is located in Issaquah, Washington, not too far from our Seattle-area headquarters. Naurtech builds software tools for ruggedized, enterprise-level mobile devices user in retail, manufacturing, distribution, logistics and related markets. They’re bringing LANDESK the only SAP-recommended mobile browser on the market, and deepens LANDESK’s growing suite of mobile solutions. The founders, Pankaj Nauriyal and Tom Wissler, have built a very efficient, well-run company, and their technology and expertise are a great fit for LANDESK.
Bruce Milne
Congratulations, Rob, I look forward to your report from Bangalore next month. NASSCOM is a major conference there and Corum was the only invited M&A firm last year.
Conference Report: ACA Leadership Workshop
Our leadership is also known in financial circles. We recently attended the Angel Capital Association leadership workshop with attendees from around the world. Let’s hear about that from Ed Ossie. Ed?
Ed Ossie
Just a few weeks ago, Corum was proud to be both a sponsor and a participant at the annual ACA leadership workshop in Columbus, Ohio. It was held on the campus of Ohio State U and this electric event brought together more than 200 investors and angel-backed companies.
The event attracted the most engaged and proactive tech angel groups from across the US and around the world. The conference had a level of sophistication in process and best practices that was evident in every single speaker presentation and panel discussion. What a great way for tech CEOs to get to see the world through an investor lens before going to market for M&A.
Bruce Milne
Thank you, Ed.
Conference Report: IBA Silicon Valley
Corum works with all the major law firms around the world, and we recently attended the IBA conference in Silicon Valley. Here’s John Simpson.
John Simpson
Good day. I was recently a panel member for an International Bar Association conference in California, attended by M&A transaction lawyers from all over the world. Our panel compared notes on today’s M&A marketplace, including deal drivers, evaluation trends, and strategy for IPOs and private exits. Judging by the very lively Q&A we had, today’s tech M&A market is not only truly global, but much more solid than the dot-com bubble ever was. These lawyers are certainly on the case.
Bruce Milne
Thank you, John.
Conference Report: GamesBeat
Last month we told you that we would be key-noting the GamesBeat conference. Alina, how did that go?
Alina Soltys
Thanks, Bruce.
Slide1:
Thanks Bruce. It went really well. The GameBeat Conference is produced by VentureBeat targeting gaming and studio executives. There was a great line up of speakers really a who’s who in the gaming world.
I was invited to speak on M&A activity and trends seen in the gaming space. For those who couldn’t make it live, here’s a quick overview.
This is a chart that my group put together taking a detailed look at the gaming ecosystem since 2009, over half-year periods. This includes the entire ecosystem starting from studios to infrastructure, payment providers, portals and other key components in providing high quality games around the world.
The activity on the M&A front has been very strong, the lows are continuing to bounce higher and multi-billion dollar transactions highlighted in yellow here have been pushing the other deals higher as well.
Activity, highlighted by the green line had hit 78 deals for the first half of this year, hitting the highest point in 2 years.
We’ve seen record halves over the last 2 halves; these are both at their highest points in the last 5 years.
If we look at the size of the average deal, it too is trending higher almost doubling in this 5 year period going from $42M to $84M on average.
If we look at the activity over the summer, it certainly didn’t let up, with over $12B in casino gaming deals, acquisitions to spread across geographies as in the case of Italy’s GTech moving into the US with IGT, as well as new segments like Aristocrat acquiring into VGT’s strength in the tribal casino space.
Of course, one of the most exciting deals was Amazon grabbing Twitch from right under YouTube. While at GamesBeat, Kym Nelson, the SVP of Sales for Twitch did a great job expanding upon the value that is expected to be brought to Amazon through this acquisition.
If you’d like to see the rest of my slides from this presentation, please visit slideshare.net/softwarema.
Back to you, Bruce.
Bruce Milne
Thanks, Alina.
I think the acquisition of Twitch by Amazon was brilliant.
Now, before we go to our quarterly report, I want to congratulate Steve Singh. Steve’s a friend of ours and has been for years. For those of you who haven’t joined us for some of our online or live events, he is a regular keynote speaker.
Here he is on the right, you can see here that on our Annual Report he was one of our key executives on the industry, along with other leaders like Google.
Steve built his companies, he’s a leader in the SaaS environment, he recently sold Concur, and we worked with him on that. He sold to SAP for $8.3B. Congratulations to him.
Corum Research Report
Now, let’s go to our quarterly report with Elon, Alina, Amber, Erin, and Tyler.
Elon Gasper
Thanks, Bruce. We begin with the Public Markets. All three indices we track gave back some ground last month but still finished higher or within a point of their Q3 start, and all are still up well for the year, supported by continued profits and easy money policies, as interest rates stayed down. Seeing plenty of cash on balance sheets or within easy reach, tech buyers kept using M&A to meet market demands for growth amid overlapping cycles of change. We see further positive effects on M&A liquidity coming in moves by US tech companies like eBay, HP, and Symantec, toward spinning off divisions, among other things creating more agile buyers, which we’ll talk about in a special report next month.
Our Corum Index rose with high volume, breaking over the thousand transactions mark with increased cross-border activity and twenty megadeals, an 80% year over year increase, with half of those just last month. The Internet and Consumer markets were the front-runners for both volume and value, and there were no billion dollar transactions in IT Services.
Skimming these five market’s megadeals, Bruce mentioned the largest in Horizontal, Concur here in Seattle, being bought by Germany’s SAP.
Another Seattle-founded company sold cross-border in an Infrastructure deal, as UK-based Micro Focus paid a billion two in stock for Attachmate. The resulting company triples the buyer’s size, with associated debt refinancing another example of taking leveraged advantage of these low interest rates.
The changing Financial Services payment processing Vertical saw France’s Global Collect purchased by Dutch ecommerce provider Ingenico in its largest deal since ‘02, and its first since taking in transaction processor Ogone from Belgium last year.
In the Internet space we saw a couple real estate related megadeals, with Seattle’s Zillow buying Trulia, while News Corp made its move into this arena. Rakuten, sometimes called the “Amazon of Japan”, put another billion into expansion abroad by buying US coupons directory Ebates. Finally, in Consumer, Alina’s already mentioned Twitch bought by the actual Amazon, here in Seattle again, and will examine the market further later.
Our aggregate graph shows how the easy money updraft has helped overall valuations hover at this elevated level a year now, near 2.3x sales and 13x EBITDA, though we find differences in the action among our constituent six markets, with leadership particularly in the Internet arena, right Erin?
Erin Sanchez
Yes, it was a consistently elevated quarter for internet company valuations, as sales and EBITDA multiples jumped up for the market as a whole since Q2. The Internet pure play subsector had a very strong increase last quarter, drawing the Internet segment upwards even as the infrastructure subsector struggled, decreasing over the quarter.
Marketing played a key role in last quarter’s increase. In its first acquisition in nearly two years, Texas marketing firm Alliance Data Systems went for a megadeal as it picked up Conversant—a major digital marketer in the LA area—for $2.3B. Conversant will be part of Epsilon, Alliance Data's online marketing unit.
In another megadeal, Gannett, USA Today’s parent company, bought Cars.com, an independent research site for car shoppers, for $1.8B, accelerating its digital transformation while maintaining its focus on marketing services.
Other tech and media companies continued to shake up the digital advertising space last quarter. Facebook’s purchase of California video ad network company, LiveRail, for $382 million will give Facebook a big leg up as television commercials are reimagined for the web. That same week, Twitter bought mobile marketing startup Tap Commerce, following its acquisition of Namo Media and $350M purchase of mobile ad network, MoPub, earlier this year.
Amber, how did the Infrastructure market fare?
Infrastructure Software Valuation Multiples
Amber Stoner
Overall, sales and EBITDA multiples in the Infrastructure sector were up from Q2, albeit with a slight dip in September, and almost all 8 subsectors saw increases in sales multiples. One of the largest increases was in the Security subsector, reflecting its continued importance.
Megadeals made their way into the sector with Thoma Bravo’s $2.5B grab for Compuware, at a 21.5x EBITDA multiple; look for Compuware to take advantage of Thoma Bravo’s investment to become acquisitive, particularly in the cloud and network management spaces.
As we’ve talked about all year, the identity and access management space remains active. Kaseya, a cloud-based IT management provider, spent an estimated $20M for Scorpion Software, which develops two-factor authentication and single sign on solutions. And Gemalto paid $890M to get data-protection vendor SafeNet from Vector Capital.
In the Internet of Things space, PTC paid $170M for Axeda, a developer of solutions that securely connect machines and sensors to the cloud, to expand its ThingWorx business.
On to IT Services, Tyler?
IT Services Software Valuation Multiples
Tyler Vickers
Despite being the only sector without a megadeal, IT services in the US and Europe have held on to gains made at the end of 2013, and have even seen a 24% increase in YoY median sales multiples for Q3. IT services in the Asian markets continue to demand higher valuations, particularly for sales multiples, which were worth nearly 5 times their western counterpart in September.
Publicis Groupe purchased three more digital marketing agencies across Europe: Ambito5, Zweimaleins, and Nurun. The acquisitions extend their buying spree, and with two purchases already in July, Publicis has now picked up five companies in the back half of 2014. WPP Group made a similar push in the first half of 2014 when they snapped up five digital marketing agencies, and with the acquisition of Neoworks, they'll be adding a sixth.
The IT services market has also seen increasing interest in business process outsourcing firms. Paychoice, acquired by Sage for 158 million to help fill out their SMB offering; and SouthWestern Business Process Services, an Irish BPO company picked up by Capita for 47 million to bolster their presence in Ireland.
Amber, what's new in the Horizontal market?
Horizontal Software Valuation Multiples
Amber Stoner
Even with a dip since Q2, the Horizontal Applications’ market’s sales and EBITDA multiples remain the highest among our six major sectors. The horizontal subsectors continue to see fluctuations in sales multiples with the CRM subsector seeing the greatest increase since June.
In one of the largest megadeals of the quarter, TIBCO is being taken private by Vista Equity Partners for $4.3B, a 3.9x revenue multiple. With Vista Equity’s backing, TIBCO should be looking to expand its analytics capabilities, especially through acquisitions, taking advantage of the hot Big Data market.
Reinforcing the business travel management trend highlighted by SAP’s acquisition of Concur, employee mobility solutions provider, Runzheimer International picked up ProcureApp, a Chicago-based travel management SaaS provider.
In Asia, market research giant Nielsen made its first acquisition in India buying Indicus Analytics, a market intelligence and customer analytics SaaS provider.
How’d Vertical do, Elon?
Vertical Software Valuation Multiples
Elon Gasper
After a slight drop at the start, multiples in the Vertical Applications space grew month by month in Q3, though with the exception of the Healthcare and Government subsectors, vertical subsector valuations have not yet returned to the peak levels we saw in June.
And what an exception Healthcare is, showing how valuable it is to establish market positions and profitable models with software tailored to this field even when general alternatives are available. For instance, surveillance and tracking software can generally be addressed in the Infrastructure space, but the special needs of Healthcare for this quarter saw it taking center stage here amidst Verticals. As outbreaks drew worldwide attention to disease oversight, Medical SCM provider Premier bought clinical infection surveillance software developer TheraDoc, for $117M. And PE Riverside Company headed back to healthcare to buy Censis’ surgical instrument secure tracking and sterility management SaaS.
Pharmacy security is another special case, and last month Canada’s TELUS Health took two related deals: ZoomMed, for prescription documents, and XD3 for broader needs.
The medical megadeals included Cerner’s largest as it bought Siemens Health IT business for a billion three, and applications provider TriZetto being acquired by Cognizant, an outsourcing company with most of its workforce in India, for $2.7 billion cash, in its biggest transaction ever, too.
Over in Financial Services, besides the mega-deal I mentioned earlier, cloud tech verticals collector Actua bought FolioDynamix for about $200M in cash.
FolioDynamix’s web-based suite of wealth management products should extends Actua's reach to include family offices, registered investment advisors, and bank trusts.
In the energy subsector, OmniEarth bought geographical information systems & analytics provider IRISmaps, and ShaleNavigator was picked up by Geospatial, an underground GIS mapping provider.
Consumer software valuations were expanding too, right Alina?
Consumer Software Valuation Multiples
Alina Soltys
Yes, it’s been an exciting month, with public companies in this space driven higher in part due to M&A.
Microsoft made a surprising move which resulted in a mega-deal with their pick up of Sweden’s Mojang, Maker of Minecraft for an astonishing $2.5B! It set the perceptible trend in the sector and it certainly tracks to the global gaming activity I've reported.
On the same day that King announced declining growth of the Candy Crush Saga, they announced their first acquisition: NonStop Games. The total enterprise value including earnout is expected to hit $100M as they expand into the fantasy land of Heroes of Honor. They get to expand their target audience into core gaming plus get an established office in Singapore.
Moving forward to the North America, Glu Mobile closed a $100m deal for Cie Games, the well-known creator of Racing Rivals and Car Town. This is anticipated to strengthen Glu’s position on the Apple and Google US appstores with additional Free To Play content.
There’s been a mini acquisition boom occurring in China recently. Shanghai Zhongji Investment Holding spent $960m for Fun Plus Group, the maker of mobile and social games. Another Chinese holding company from Shenzhen, KeyBridge Communications Technology, purchased JMT Mobile which creates mobile video games for $34m.
Elon Gasper
And that’s our update on Q3 of 2014. Back to you, Bruce.
Bruce Milne
Thank you Elon and team. Tyler will stay with us for part of another report coming up. I’m glad you finished on the Chinese acquisitions, a lot is going on there, lots of international stuff in general. Couple of things: One, I think the Minecraft acquisition is absolutely brilliant and shows the new CEO starting to have changes there.
Alibaba IPO Impact Report
Now, for a special report on the impact of Alibaba on tech M&A, what’s going to happen. Tyler?
Tyler Vickers
Alibaba generated $21B and created the “Alibaba Effect” on other tech IPOs, with companies like CyberArk and Travelport trading above their ranges.
So what does Alibaba plan to do with all this cash? The answer lies in what have other tech firms have done after mega IPOs. For example, Google went on to be the most prolific buyer of all time at or near the top of the acquirer’s charts several years running. Facebook wasted no time making their first purchase only a day after the IPO— they purchased 3 companies is 3 months. So not only has Alibaba had an effect on other IPOs, creating more new public buyers, but we expect them to be one of the most active acquirers, challenging the other giants.
Daniel Bernstein
Yahoo got $5B from Alibaba's IPO, with more than half of that available for acquisitions. Yahoo has already acquired over 40 companies since Marissa Mayer took over, including Tumblr, Qwiki, Xobni, RayV, Flurry and just this month, MessageMe and, as Rob mentioned, Bookpad. The IPO also hurt Yahoo's stock, giving them more incentive to make large acquisitions that build investor confidence. What's next? We think AOL.
Bruce Milne
AOL. Actually another rumor is that Alibaba may buy Yahoo. Interesting. Now let’s go to Jim Perkins, our man in China. He’s currently involved in closing a transaction in Hong Kong. He is there on the ground now. Jim?
Jim Perkins
Alibaba’s IPO comes in the context of a fierce fight for dominance with competitors like Tencent and others. Since 2012, Chinese companies, led by Alibaba and Tencent, have spent a combined total of $17B on 149 companies, with the majority of Alibaba’s spend in China. With new cash at their disposal, expect to see them make moves in US and Europe. We’ll be watching to see if they move to more Western-style full acquisitions in the months ahead. Excitement in China is high, and will increase as Alibaba begins making acquisitions worldwide.
Bruce Milne
Indeed. And to wrap us up, let’s hear from Dougan Milne, who has talked to our advisory board in China. What’s their view?
Dougan Milne
To sum up the Alibaba effect on tech M&A, we reached out to our Chinese advisory board for their thoughts.
The first comment was from Benjamin Xu from Fortune Venture, China’s largest VC firm with over 200 investments, nearly 30 IPO’s Their management team recently joined us in the winners circle at the Corum Cup horse races in Seattle and they’ve been a tremendous partner in hosting our M&A events in mainland China.
Benjamin was naturally very excited and made some interesting comments and contrasts about the parity between Chinese and American internet companies.
The next was from Cecilia Yuan. She was in intern here at Corum some years back, and her husband, founder of Gewara, was recently profiled by Forbes as one of the top 40 under 40 to watch. She was equally proud of what Alibaba means for China, though she did approach it with a slightly more cautious optimism.
Lastly, Sean Lui, who personally plays basketball with the vice chairman of Alibaba, had a bit different view. He said. "Alibaba will continue to invest in U.S. startups. But for now they need to get even stronger in China or they could lose their core—they have TenCent, Baidu, and Amazon all gunning for them."
All agreed that we will see more M&A activity, but disagree on whether it will be first in China or the U.S. Each felt Jack Ma would be a very popular, very identifiable character to those in the west.
Back to you at HQ
Bruce Milne
Very interesting comment on Jack Ma. Perhaps the biggest impact of Alibaba is Jack Ma himself. He is a very identifiable character. Just listen to this excerpt from CNBC where we are a regular contributor.
There you have it. From $200 a month and a $60,000 investment, to $20B! You’ve gotta love it.
In our view, and we had a special report on this, Jack will really help to bring down the barriers between China and the west. He’s a very identifiable and likable character. Already, for example, China has responded by having transit visas. It used to be a problem to go in, but now if you go into one city, you can stay 72 hours, assuming you go to another city. That has made a lot of difference. Jack is a very common sense man that we can all identify with, and if you’ve seen him interviewed in China, it’s the same thing, they like him, too.
The biggest thing, we think, out of Alibaba, will be Jack Ma himself. Obviously the $20B going to work, the money for others in the impact, other new companies, we’re going to see a lot more acquisitions and everyone jockeying. It’ll be a great time to sell.
Q&A
We have just a couple of minutes left, so let’s take some questions. One came up because Steve Singh sold his company, and that question is, “What’s happening in Saas now. Ward, I know you’re heavily involved in that.
Ward Carter
We certainly are, Bruce. We’ve got a number of Saas clients in the market right now, and they’re getting a lot of attention. I think that they Concur deal just reinforces the demand in the marketplace for specialized Saas applications that the larger vendors just can’t develop on their own, they don’t need to develop them, they can just go and acquire them. This is kind of the granddaddy of all Saas deals, quite frankly, as far as the scale.
You’ve got the emergence of very large Saas companies like Concur and you’ve got the SAPs and the Oracles that are all scrambling to Sass-ify all of their applications. You’ve got the emergence of companies like Workday that are raving successes. I think we’ll continue to see additional acquisitions in the marketplace, and I know we’re very excited about anything that is Saas.
Bruce Milne
We are, it’s one of the first questions buyers ask, “What is your Saas strategy?”
One question came up on gaming. So much happening there, and a lot of stuff from China. Alina, what do you see happening in gaming? Where are valuations going?
Alina Soltys
There is certainly a lot of interest from China, from Japan, Korea, they have a very different strategy and in the way that they interact with their players, as opposed to North America. They move quickly and have generated a lot of cash. So what’s next for them? They’re looking for continued inorganic growth. We’re expecting them to be acquiring US companies, European companies, and really increasing that cross-border transaction rate.
Bruce Milne
We had another question, I’ll give this to Elon. There’s a lot happening in the world and things to be worried about, we just saw the drop in the stock market. Should we be worried about that?
Elon Gasper
Well, we just saw it drop down, but we also saw it pop back up in the largest rise this year, yesterday. I think we’ll see some volatility as things go forward, but a correction is a healthy matter and the continued easy money out there, the low interest rates that are available to tech companies, is the driver for tech M&A, along with, as I mentioned, the overlapping cycles of changes, the generations of technology are coming so quickly now that they are coming in on each other’s heels. That’s a tremendous amount of disruption, that’s a lot of code that needs to be written and rewritten and I think that the general economy will be fine because of technology and tech M&A will follow its lead.
Bruce Milne
We just got a question, not surprisingly, from India, asking for any insight on software product development services from India.
Unknown
Let me take that one, Bruce. We’re seeing a record number of cross-border deals being done with India, and as I mentioned in my earlier report, I’m going to be over in Bangalore earlier this month for an enclave collecting several hundred software companies. Following the Bookpath deal, there are a lot of interactions with Indian companies and of course there are the bedrock development capabilities over there. Services companies by typical measures don’t’ get the multiples some of the other sectors do, but there’s lots going on over there, and we’ll have more to report later this month after we return from that trip and conference.
Bruce Milne
And we’ll have a report from our Indian advisory group next month.
And that brings us to the end of our half an hour, thank you for joining us, and we hope you look forward to another exciting webinar next month.