September Webinar: Global Reports and Microsoft Changes

Introduction and Market Overview

 

Bruce Milne

Good morning, afternoon, or evening as the case may be wherever you are in the world. Welcome to our global tech M&A Monthly. We have a special report on Microsoft changes this month. I’m your moderator, Bruce Milne.

Our agenda for the day starts with reports from around the world, Western Europe, the Nordics, Russia, Latin America, and China. That will be followed by our monthly research report, and we’ll finish with a special report on Microsoft after Steve Ballmer.

Let’s go right to it, with an international update from our own president, Nat Burgess.

Nat Burgess

Hi, this is Nat Burgess, president of Corum Group. I’m checking in from Atlanta. I’m negotiating a deal here, so I wasn’t able to join live, but I wanted to give everyone an update on what’s happening internationally and specifically in Europe. I’m actually just back from a quick trip. There’s lots of activity in Europe right now. There are two elements from that. One is, if you’re a company over there trying to figure out your options, it’s useful for us to talk about what we’re seeing and what is working. Second, I think there are some lessons there that are relevant to everyone, globally.

I was over there all summer, I had my kids in school in Paris and I was running around working on deals. One of the surprising things to me is, we often think of those European markets as being very small and therefore inconsequential. For example, you might have a total of seven KFC outlets in Finland, and some little retail company gets the contract to run the software to manage those outlets. Big deal, right? Small market, can’t scale, who cares? Surprisingly, often the opposite is true. Because it’s a small market, they are experimenting, trying different things. They are not bound by the standard procedure and they’re basically figuring things out that have application globally. We saw that with our client RapidBlue in Helsinki. They were doing retail analytics, doing really interesting things using cell phones as beacons and sensors to track retail foot traffic. They created a hugely valuable solution for small retailers. It didn’t cost a lot to buy into the system, and ultimately we were able to sell them almost pre-revenue. We had multiple bidders and a really exciting deal.

That’s one thing to think about. As you see these companies emerging in these distant geographies, sometimes they come up with something interesting. I’m from Seattle, Corum’s base there, we saw similar dynamics, for example, with companies like Starbucks: Growing up in the Seattle ecosystem, figuring something out and then taking it broadly. We’re seeing that across all the European markets.

The second thing we’re seeing is a real broad recovery. Some of the PE firms that we’ve worked with traditionally in the US have opened offices in London, just in the last six months. Really good firms like XL, KKR and Marlin. They have some of the smartest people you’ll ever meet, so obviously there’s something there worth paying attention to.

I would say the last thing is that a lot of these companies are actually more international than you would expect. A lot of them were founded by people who had worked for global companies in the past. In many cases their first language is English. I’m not saying that’s better than Rumanian or Dutch or whatever their home language is, but it does open up a huge global market to them. So that means that their technology is readily transferrable. If they’ve established a good customer base, they have good technology, we can help them create a win-win with someone who has distribution globally and can take that product global.

We’ve done a lot here, especially in the last couple of years, and we’re going to do a lot more in the next couple because there is just a lot of activity cooking over there.

So that’s my quick update and I’ll be happy to talk to people about specific situations.

Bruce Milne

Thank you, Nat.

It’s interesting, with offices around the world, we’re constantly surprised at the technology that is being developed in every corner of the planet. Nat uses the Nordics as an example. It’s a hotbed there. Let’s hear more from our man in Stockholm, Mark Johnson.

Mark Johnson

Thanks, this is Mark in Stockholm. Corum’s M&A activity in Europe is high, with the Nordic region performing exceptionally well. We’ve closed four Nordic deals in the last half-year, detailed in earlier webcasts, and we’re currently moving two Scandinavian clients into LOI negotiations.

As far as overall Nordic M&A activity this summer, it’s hard to avoid discussing Nokia. Nokia was once the world’s biggest maker of mobile phones, and has now sold off that arm of its business to Microsoft for a price less than what Microsoft paid for Skype, a freemium VoiP service. We’ll have more analysis on this deal later.

Back in July, Nokia bought out Siemens from its 50-50 joint venture, Nokia Siemens Networks. Basically Nokia is now left to being solely an infrastructure vendor, plus retaining its maps division and many patents. This is now a Nordic trend following Ericsson also spinning out its mobile phones division to Sony back in 2011 to focus on building and servicing telecom infrastructure.

Nordic private equity activity has slowed down this year, somewhat paralleling overall PE activity across industries in Europe attributed to restricted bank credit. Top of the news in Sweden has been legal changes threatening to upend how buy-out firms minimize their tax burden.

In a ruling on August 20th the Swedish tax authority demanded SKr 650m ($99m) of back taxes from the partners of EQT, a local private-equity fund. The amount covers the difference between the 25% capital gains rate and the 57% income tax for 2007-09, plus interest and penalties. EQT is not alone: dozens of other executives at other PE firms have been handed multi-million kronor bills as a result of the tax authorities’ change of heart.

Thanks.

Bruce Milne

Your commentary on the tax changes deciding to go from capital gains to calling it income, that’s happening in a number of companies, we’ll be watching that as it effects PE and M&A from the financial partners.

Now let’s move east to Russia, where there’s a lot more happening, we’re doing a lot of conferences there, and now we’ll hear from Valeriya Chumachenko.

Valeriya Chumachenko

Thanks, Bruce. The Russian tech market continues to hold a leading position in global M&A, in large part due to the persistent activity of its main players like Mail.ru, IBS Group’s Luxoft,  and  telecom giants Altimo, MegaFon, MTS and VimpelCom.

Last year Russian tech sector deal value almost doubled from 2011, rising to over $16B. And the amount of outbound purchasing is increasing as well, going from 9 deals to 15 in 2012.

On a relative basis, Russia represents about a 15 % piece of the world tech M&A pie.

This year’s transactions included one we reported on in April as a Corum Index megadeal: the acquisition of Sweden’s Tele2 by Russian banking group VTB for $3.5B. In another, to diversify away from domestic markets, Moscow-based Luxoft picked up assets of American Freedom OSS.

The growing financial strength of mid-market business in Russia increased the appetite for cross-border acquisitions from Europe:

1)    Sweden’s Hexagon took another step in its global distribution strategy, purchasing Navgeocom, a surveying and mapping products distributor.

2)    After several years of acquisitions within Poland, Asseco has bought a Russian banking software developer, R-Style Softlab, for $28M.

Russian companies have focused their IPOs on international exchanges. Public markets are presented by 11 companies that exited since 2005. Last year the trend of going public on Western stock exchanges was supported by Megafon and EPAM Systems. Recently Luxoft also followed suit but listed on the New York Stock Exchange with $70M raised.

In Venture Capital, Russia is within the top 5 European nations with more than $300M of VC tech funding. In monetary terms, it’s the best performance since 2008, when the financial crisis struck.

To summarize, cross border M&A transactions are increasing, VC activity is driving fresh rounds of investment and companies choosing to IPO do so within Western markets.

Back to you, Bruce.

Bruce Milne

Thank you, Valeriya. M&A is up everywhere. You’ll hear a lot more as we’re doing our advanced conferences in Russia, and a new conference coming up in Moscow.

You know, we think of Russia as just being an oil patch, and clearly it is, but there’s a lot more going on in tech. Speaking of oil patches, let’s go to Jeff Brown in the oil patch of Texas, with an update on Latin America. Jeff, are you there?

Jeff Brown

Thanks Bruce. I just happen to be calling in from a clean energy venture forum.

A little while ago we took a close look at tech M&A in Latin America in a recent WFS spotlight, and the active dealmaking that we found in the region may be one of M&A’s better kept secrets.

I think we all recognize that Brazil's booming economy and robust tech industry as a bellwether, but a healthy amount of deals have been recorded across the entire region.

We've seen a good mix of deals, with clear opportunities for growth beyond Brazil. Leading the way are Argentina, Mexico and Chile, but they are not the only countries with activity.

Now here's where it gets interesting. Only a quarter of the buyers are actually Latin American, with Stefanini of Brazil among the most active buyers in the region. That means 75% of the deals are cross-continent with North American, and the US firms in particular, the primary buyers.

This profile actually matches Corum's own deal makeup for cross-border deals at roughly 70%.

Over the next few years, we’re predicting Asia's portion of the deals in Latin America to increase over the next few years as Chinese technology buyers get more aggressive. And we know that the Indian IT services giants like WIPRO are already targeting Latin America for expansion.

One of the challenges for deal making in Latin America has been the difficulty in making the buyer/seller connections. Most of these deals have been driven from the buy-side. Here at Corum we have one deal under LOI and several others active, so of course that's exactly how we help sellers.

So what’s the takeaway from all this? Well, Latin American technology firms deliver value for a variety of reasons: technology, talent, reliable revenues are always viable, wherever they’re located.

Bruce, back to you.

Bruce Milne

Thank you. Corum just did our first Latin American Spanish-language global broadcast, that was a great success. You’ll be hearing a lot more about Latin America, it is really booming. We’re doing a series of conferences in the next couple months in all the major cities in Latin America, with a special focus on Brazil with a new Brazilian advisor that Dougan has retained.

Speaking of Dougan, he just re-joined Corum as our international business developer and he’ll be heading up a series of conferences, not just in Latin America, but also in China. Dougan, tell us what’s happening in China.

Dougan Milne

Sure, thanks, Bruce. Certainly China’s importance to the technology market is widely understood these days. Just this week we saw Apple making a major push into the country with its newest iPhone release. But even with its billion consumers and rapidly growing technology industry, China has not been involved with much tech M&A – but that’s starting to change.

We saw a boom in in Chinese tech IPOs, and that peaked in 2010. This created a significant crop of potential buyers. The IPOs have dried up in more recent years, and finally smaller firms are beginning to turn to M&A as an exit strategy.

China’s next challenge is too look beyond its own borders. Currently three quarters of Chinese tech M&A, on both the buy and sell-side, is internal. Outside of China, most of the buyers of Chinese companies are from North America, and the US in particular. European and other Asian countries combined account for just 11% of transactions.

We see the same pattern, even more pronounced, for Chinese buyers—three quarters of the deals are internal, followed, distantly, by North America, and then by the rest of the world. We don’t see this as sustainable—there are too many good opportunities within China for international buyers, and vice versa.

A couple recent high-profile deals highlight these opportunities. This summer Chinese consumer tech titan Tencent took a significant share of Activision/Blizzard from Vivendi, after deals for significant stakes in Riot Games and Epic Games. Tencent has been a pioneer in terms of international acquisitions, and others will follow in their footsteps.

On the sell-side, social data startup Ztelic sold to Yahoo as part of its global shopping spree. The deal gives Yahoo some solid talent in the country, and Ztelic founder Hao Zheng, a former Yahoo employee, will play a major role in the leadership of their Beijing Global R&D center.

Next week, I’ll be hosting a World Financial Symposiums Market Spotlight webcast that will go into significantly more detail on all these issues. I hope you can join us – it will be held at 8 PM on September 16, New York Time, which is 8 AM September 17 in Beijing. You can visit wfs.com to register.

Bruce Milne

Thank you, I look forward to the Monday webcast coming up. Try to join us everyone. We’ll have a series of conferences in China this fall. We recently had China’s largest PE firm join our advisory board. We’re very excited about that.

Now let’s move to our monthly research report with Elon Gasper, Alina Soltys, Amber Stoner, and Jason Steblay.

Elon Gasper

Thanks, Bruce.

We begin with the public markets, which are now clearly continuing their climb past last month’s dip, taking off into record levels not seen since the millennium bubble. With that backdrop, plus piles of cash in PEs and corporate coffers, cheap debt, and accelerating social/mobile/cloud revolution, we see the tech M&A juggernaut rolling on.

Our Corum Index agrees, with the month of August little changed over last year.

A couple of megadeals to mention include Baidu’s nearly $2B acquisition of China’s biggest smartphone distribution platform 91 Wireless, for more on that be sure to tune in to the World Financial Symposium’s China market spotlight that Dougan mentioned earlier. The other mega-deal was Rockwell Collin’s acquisition of ARINC for $1.4B.

But these megadeals are overshadowed by the September blockbuster of Microsoft’s acquisition of a significant part of Nokia. Jason, let’s skip ahead to that.

Jason Steblay

Thanks Elon. In a parting shot to make Microsoft relevant in mobile, Ballmer has decided to take its partnership with Nokia deeper, acquiring the latter’s device and services business for $5B in a deal that includes Nokia’s manufacturing  facilities. Ballmer is betting that like Apple and even Google, closer collaboration between hardware and software teams will accelerate innovations.

Although Microsoft went to great lengths to highlight the financial and strategic logic of deal, which is strong, the deal is far from a home run. Both companies are struggling in mobile. The Surface has thus far failed to gain momentum in the tablet market. Meanwhile Nokia’s Window’s phones have yet to find much transaction in the smart phone market.

Elon Gasper

The clearest gain for Microsoft may be the 10-year license to Nokia’s geospatial patents and services which provide freedom to operate for its mapping platform and make improvement possible for them to challenge Google for dominance of that field, while Apple is sidelined, trying to recover via its own M&A.

Jason Steblay

Ultimately however, the merger could be Ballmer’s crowning achievement if these two come together to make mobile products that consumers actually want to buy. But it will be the job of the next CEO to make that happen.  We’ll speculate more on what a new CEO may mean for Microsoft’s M&A strategy after the research report which  Amber will kick off now with the Horizontal sector.

Amber Stoner

With the horizontal market still holding the distinction of having the highest trading multiples among our six sectors, in the month of August, we saw deals in both the BI and BPM spaces.

Software AG spent an estimated $40M to get JackBe, a provider of real-time visual analytics and intelligence software. Software AG is combining JackBe with its existing webMethods suite to create its new webMethods Intelligent Business Operations Platform.

Smaller companies also decided to expand their capabilities in the field of BI. Galigeo acquired the Location Intelligence Division of APOS Systems, which provides location-based business intelligence software and adds a spatial dimension to standard BI and CRM systems.

In addition, content management giant OpenText bought two companies in August: Cordys Software for $33M and ICCM Professional Services for $19M. Both deals move OpenText into the BPM space as Cordys is a BPM and cloud migrations software, SaaS and PaaS provider and ICCM is an IT service desk and business process management SaaS provider.

What’s going on in the consumer sector, Jason?

Jason Steblay

Valuations in the consumer sector have continued to hold relatively steady, with only a slight drop in the sales multiple since we kicked of the 3rd quarter. With the sustained popularity of online video streaming and photo-sharing, companies have been racing to provide consumers with ever more engaging ways to interact with rich media.

In August, Yahoo! continued its shopping spree, notching its 20th acquisition of the year with image-recognition start up IQ-Engines to improve photo organization and search on Flickr.

Facebook meanwhile acqui-hired the team behind the Luma mobile video composition app Midnox to help move its billion dollar Instagram acquisition beyond photos.

Finally, in August NBC acquired user-generated content specialist StringWire to help it ingest video from the millions of smart phones out there directly into its live news feed, creating eyewitness journalists out of just about everybody!  Amber, what’s cooking in the infrastructure market?

Amber Stoner

Security remains a hot subsector in the infrastructure space with over half a dozen deals done in the last month, the largest being IBM’s estimated $900M acquisition of Trusteer, a provider of financial anti-fraud software and SaaS.

Welsh Carson Anderson & Stowe acquired an undisclosed majority stake in on-demand internal network security solutions provider Alert Logic. The deal eases the path for a potential Alert Logic IPO in a year or two.

In the wake of its own 2012 IPO, Proofpoint continued spending by picking up Armorize Technologies, an exploit-based anti-malware SaaS company, for $25M. This is Proofpoint’s second acquisition since going public and probably not its last in 2013.

How does the internet sector look, Alina?

Alina Soltys

The internet sector has stepped back slightly from the 12 month highs it achieved at the end of Q2, but valuations are still up YoY. 

Like many other mature internet companies, Zillow turned to M&A in August to spur growth in web traffic.  Amid intensifying competition from recently-public Trulia, Zillow has decided to go deep in the nation’s busiest real-estate market with StreetEasy which attracts nearly 1.2 million monthly unique users in NYC , paying over $50M in cash.

 Elsewhere, AOL continued its efforts to challenge Google in online advertising with its acquisition of Adap.Tv for $405M. AOL is hopeful the ad exchange platform will give it a leg up in video ads, videos are quickly becoming the hottest area of online display advertising.

Speaking of other trends, Amber there’s one in the vertical space, too.

Amber Stoner

The Vertical market saw a clear interest in fleet management SaaS in August, particularly in the US. Early in the month, Danaher acquired fleet management SaaS provider Teletrac from Vector Capital, after buying Navman Wireless earlier this year to enter the fleet management market.

Towards the end of the month, in another PE-related deal, Qualcomm got $800M from Vista Equity Parnters for its market-leading vehicle management platform Omnitracs.

Meanwhile, outside the US, Dutch TomTom NV grabbed Barcelona-based Coordina, a SaaS company that provides GPS-enabled fixed and portable vehicle fleet management solutions.  It’s the first acquisition for TomTom in over three years.

What’s happening in the IT Services sector, Jason?

Jason Steblay

The IT Services market continued to hover at the 12 month highs first achieved in July. With this newfound confidence, the mega agencies reaffirmed their commitment to emerging markets in Asian and Latin America over the summer.

Not to be deterred by its pending mega-merger with Omnicom, Publicis bought Espalhe, one of Brazil’s leading digital and social marketing agencies just a  month and a half after picking up one China’s leading social media services providers in Net@lk

Meanwhile, Publicis rival WPP expanded its reach in Latin America with a majority stake in Aregentina’s Brandigital and in Asia with its acquisition of the Singapore based demand generation and marketing services firm Verticurl.

Elon Gasper

And that’s our August update. Back to you, Bruce.

Bruce Milne

That’s great, thank you. It’s nice to see a lot of firms being involved. We have some traditional players we haven’t seen a lot lately, like SoftwareAG, companies reinventing themselves like AOL. And speaking of reinvention, Yahoo, did I hear 20 acquisitions to date? That’s just stunning.

Now let’s move on to a special report on Microsoft, post Ballmer. We’re going back to Elon Gasper and Alina Soltys.

Elon Gasper

What does Ballmer’s retirement bode for tech M&A? Regardless of who replaces him, we predict the change will be good for M&A, and could possibly be spectacular. Shall we make the case, Alina?

Alina Soltys

Let’s start with the low baseline Microsoft has, and the associated pent-up need. For its size, Microsoft has always lagged in M&A, never matching the risk-taking of Silicon Valley outfits like Google and Cisco.

Elon Gasper

Those firms have institutionalized their tech M&A pipeline from sourcing through integration, while Microsoft remains ad hoc, cautious and politicized. Change toward the norm would be an improvement.

Alina Soltys

And the new CEO should have less baggage and be more open to strategy change, plus want to make a mark fast – it’s much easier to buy than build in both cases.

Elon Gasper

And the close of Nokia, and any other large deals, will catalyze smaller ones to fill in gaps.

Alina Soltys

We may even see some smaller deals get done sooner, as the diverse factions within Microsoft load up for the coming power struggles.

Elon Gasper

Diverse? Those disparate groups are even more complex and oppositional now with the Nokia deal, which will increase head count by almost a third, plus add a big, new hardware division to the dizzying variety of Microsoft businesses.

Alina Soltys

Finally, as we’ve often discussed, the M&A market is susceptible to waves of consolidation, often triggered by big players. When Microsoft buys, or a competitor moves to pre-empt them, we expect others will jump in.

Now, to look at tech M&A potential beyond that, we must speculate on the new CEO.

First, there are the internal candidates.

Elon Gasper

To begin with, there is no chance of Bill Gates returning to the position, though the record argues his mix of geek culture and product focus worked best there.

Alina Soltys

There still remains a long list of very capable internal candidates, any of which is capable to drive M&A activity. However, it will be a challenge for an insider to really change the culture.  An outsider might do more; but this is tech M&A Monthly, let’s review the most radical possibility—an acqui-hire of a new CEO sparked by a mega-level M&A event.

Elon Gasper

That may have already happened in the Nokia deal, with its outgoing CEO, Stephen Elop, who previously led Microsoft's Office division.

Alina Soltys

Elop is the top candidate currently because of his earlier experience with the enterprise and consumer markets at Microsoft, and now the key business of mobile.

Elon Gasper

So if he gets the job – and that’s a leading possibility – we can call it a mega-acqui-hire, with effects on M&A probably partway between the insider and outsider angles we mentioned, since he’s a bit of both. But I think we could still speculate about a few other mega-acqui-hire possibilities…

For instance, Microsoft could use help in both media and mobile. What about a former Microsoft board member, who just led his company’s stock back from a near-fatal swoon to an all-time high? That would be Reed Hastings and Netflix, easily within take-out size for Microsoft. Then with cash to fund content and acquisitions, his impact on the industry would be matched only by the tremendous boost to tech M&A…

Alina Soltys

Let’s take a look at the second possibility: Microsoft could use a social play – not one for “fun” like Facebook, but a product that relates to enterprise, what Microsoft knows & does, with a capable business leader…

I’m talking about Jeff Weiner, LinkedIn’s CEO. Weiner has been a standout executive, and the stock price has soared as he skillfully navigated past strategic barriers—and Microsoft’s cash would fuel acquisitions to quickly expand on that opening. 

Elon Gasper

Finally, one way out-of-the-box fantasy exec league scenario: echo the heydays of Microsoft by bringing in another brash, young, self-described geek CEO and superb product executive, plus obtain a venerable content and search powerhouse that Microsoft previously wooed and nearly won, now undergoing a rebirth… I’m talking about Yahoo of course, and Marissa Mayer…

That would lead to acquisitions galore– it’s what she and her team know and do quickly and well, plus with 22 Yahoo acquisitions just this year, a Yahoo megaacquihire would provide a head start, and an active group with an established culture to keep it cooking. Best scenario for tech M&A.

Alina Soltys

You think she’d leave the Bay Area to move up here to Seattle?

Elon Gasper

No, no way. But there’s a fix for that issue—and for many of Microsoft’s, shall we say, cultural challenges at the same time. Microsoft could move its HQ to Silicon Valley.

Alina Soltys

Elon, such a traitor! Although it might help with our traffic here in Seattle…

Elon Gasper

And it’s not unprecedented…  Boeing moved its headquarters away from Seattle not long ago, and when Sierra bought my company, it moved the HQ up here. 

Alina Soltys

I suppose… and after Nokia, fewer than half Microsoft’s employees will work in the Seattle area anyway.

Elon Gasper

That’s right. And Microsoft already has a Silicon Valley campus – just a few miles from Yahoo’s! It could be a bold but practical stroke to enable a mega-acqui-hire… or just a wild speculation –

Alina Soltys

Considering the sweeping changes that have hit Microsoft in just the last few weeks, would anyone find it shocking?

Elon Gasper

Lots of possibilities, too bad they have to choose one, Bruce. 

Bruce Milne

I guess I’m dating myself, but once they had three people running Microsoft in the old days. Going way back to when I was an advisor to Bill Gates on OS, they hired all their presidents from outside. Then they had an office of the president running the company, and Steve Ballmer was only one of them. So they’ve tried a lot of different things. When they went after Yahoo, that was really interesting, rumor was they were offered $50B at the time!

Great food for thought. We’re right at our time limit, but we have time for one question before we close. Concerns about rumors that maybe we’re having a downdraft, would that affect us? We’re not seeing any downdraft, we’ll put a record number of companies under LOI in the next few months, you’ll see a lot of closings around the world. You have to remember that we have a lot of disruptive megatrends out there, a lot of jockeying for position, companies re-inventing themselves, strengthening their positions, and over $1T burning a hole in the pockets of PE buyers, and about $400B from the strategic players, 70% outside the US, so we’ll see lots of international transactions as we noted today.

If you have any other questions, please contact us and we’ll have the right person get back to you. Thanks for attending.