Tech M&A Monthly - Hottest Tech M&A Ever - Will You Miss the Window?

Bruce Milne

Good day to you, wherever you are in the world. Our theme today is the hottest tech market ever…will you miss the window? I’m Bruce Milne, your moderator and the CEO of the Corum Group. Our agenda today is a field report on recent transactions, which will be very instructive. Then we’ll look at timing, why now? Will you miss the window? Don’t lose the business while chasing the dream. That will be followed by our monthly research report, plus a special international conference report and Q&A.

ARCOS Field Report

Let’s go right away to Ward Carter for a field report on the recent sale of ARCOS. Ward?

Ward Carter

Thanks, Bruce. I’m really happy to talk about a deal that I led, that we closed last week with ARCOS. They’re a Corum client based in Columbus, Ohio. This is a 100% SaaS model in a space we’ve identified as crew callout. ARCOS is the dominant solution in most of the largest electric and gas utilities in the US and their software automates the process of assembling and dispatching the right crew and equipment to handle emergency repairs. It’s a great example of a small company dominating their vertical market by delivering a comprehensive solution to a complex problem, one that here is complicated by a myriad of union rules, personnel policies, and utility regulations.

This was a majority recapitalization, and the acquirer was PE firm Riverside from Cleveland. This is the second deal we’ve done with Riverside in the last 18 months, and they’re really a top-drawer partner to work with. One message here is that as a seller you really need to examine all of your options and weigh the pros and cons of both strategic partners as well as financial investors. For the right seller profiles, the PE firms offer some very compelling reasons to be invited in.

Thanks, Bruce.

Bruce Milne

Thanks, Ward. It’s interesting, with over $1 trillion in funds available, the PE firms are very active now.

Why Now?

Along with our theme of timing, let’s go to Kansas City and Ed Ossie on Why Now?

Ed Ossie

We don’t have to look any further than the stock market to be reminded that windows of opportunity open and close with dramatic differences in outcomes, depending on just what size of window you are looking through. While timing the market may be a fool’s game, there’s no question that timing does impact values. A simple example might be a well-known one. Netflix a year ago July was thought to be fully valued at $84. There was an article that said it was more popular with couch potatoes than investors. One analyst said, “I think it will get to $130 this summer.”

This current summer it sits at $336. Same company, really, different time, different cycle, new point of view, will it come down and when, you just don’t know. But is the execution five times better today than it was 18 months ago? I doubt it.

Let’s shift from public companies to an example that is closer and nearer and dearer to us, and that’s the value of privately-held tech companies and the current windows of opportunity today. It is, in fact, the busiest M&A market we’ve seen here at Corum since 1999 and early 2000. The window of opportunity is certainly, currently open for exploration if you’re a tech CEO or on the board of a privately held software or services company.

We can’t claim to time the market in this case either, but we can bring a few irrefutable truths into the current wave. First, in tech, unlike other businesses, very few fast growth software and services companies wind up being multi-generational. According to our research at least, one percent or less. At some point, 99% of us have to identify possibilities for future partnership.

Secondly, even with the active tech IPO market and the intoxicating 73% first day rise of Twitter, for those of you who owned it, we know that fewer than 1% of tech businesses will go public, meaning, again, 99% of us will have to explore other growth and exit options in the future.

Finally, the last two that used to keep me up at night are what are the chances of a disruptive technology negatively affecting your market or growth prospects in the next 1-3 years? 50/50. And what are the chances of your own disruptive technology or secret sauce prevailing in your segment for the next 5 years? 50/50? Hard to handicap, you just don’t know.

Our key message here is that given the M&A tailwind, exploring your growth and exit options for the future in a strong market is a win/win proposition. There is a high probability that you will get some feedback and perhaps a stunning result and waiting or exploring options in a soft or distracted market is generally going to produce less feedback, fewer data points, and maybe even less exciting outcomes.

Back to you, Bruce.

Bruce Milne

Good stuff, Ed. It’s interesting, on those last couple of points about disruptive technology, a couple of years ago we sold a company in Oregon to Google. And as often happens, the competitors of that company called and asked if we could sell them. Well, we didn’t take any of them on because just a few months later, Google bundled the technology into their offering and so the game was over for those competitors. Keep that in mind.

It’s also interesting that Ed mentioned the stock market. Historically, the stock market is also a harbinger of what is going to happen in M&A. Look at this, they track almost exactly. There’s been a little bit of a lag effect this last time, but they track, definitely. Right now, the market is very high and it’s very cyclical. The peak he mentioned was in 1999 and the first part of 2000. What we know about the cyclicality is that the M&A markets move with the financial markets, and right now they’re pretty toppy. So a simple question for you, would you be buying stocks at this level? They may go up, maybe a lot more, but I’m not sure. There are lingering concerns with employment. Is the EU really doing that well? Inflation, Obamacare… Markets tend to move in cycles, we know that, we’ve been at this 27 years, we’ve sold more companies than anyone in history. We can’t predict them, but we know about the cycles. M&A peaks, value and volume are short. What is interesting is if we took those charts and blew them up, the peak was only a couple of quarters in some cases. Being too late can be a disaster, because you miss the market entirely.

We took a statistics company out one time, got a good offer for it, sold it. We took some competitors out later on, they were bigger, more profitable, faster-growing, and we couldn’t even get an offer. Too early doesn’t hurt. People ask us if it is too early to go to market, and it’s not. You get to know people, you get great feedback from the market, you learn a lot about research and positioning, you open doors for other relationships, even if you don’t sell. That’s important. Test the waters now.

Special Report: Revenue During M&A

Along the lines of timing, we have a special report from Gary Beyer who recently joined us. He was representing a buyer in a transaction and it was very instructive.

Gary Beyer

Thank you, Bruce, glad to be here.

In line with our theme today on market timing and the need to stay focused, I have a recent personal experience from a strategic acquirer’s perspective that may be instructive.

Last year, on behalf of a Fortune 100 company, I led the acquisition of a small, but successful commercial software company with about 70 employees. The firm had solutions serving three separate markets, all of which we needed. I approached them directly and developed a relationship with the CEO that ultimately led to a direct acquisition effort. The timing was right for both firms, but was the seller ready? Could they handle the work load of a merger, which is literally a full time job. We soon found out.

Once approvals to pursue were secured up the chain on our side, and we got agreement on a price, our large and experienced Corporate Development group, 40 strong, went to work.  We had weekly internal calls with all 40 chipping in with their due diligence requests. As you can imagine, very shortly we overwhelmed the seller as they only had their CEO and CFO to respond to all of our requests. Without an experienced M&A advisor helping to look after their interests in the transaction, filtering the due diligence and setting expectations, the CEO struggled to maintain focus on current operations. Business suffered.

Stakeholders on both sides of a transaction expect management to deliver the revenue and profit projections that were made at the outset of the merger negotiations. Unfortunately, this becomes difficult when the two transaction teams are so heavily lopsided, and the selling CEO is critically disadvantaged for time, resources and support.  The result is almost inevitable: a deterioration of sales focus, loss of momentum, and underperformance against plan, which, at a minimum, affects final price in the final merger agreement.

In this specific case, we recognized the problem we were creating, and changed our goals to not overwhelm the seller. Had we not done that, we could have easily killed the deal, which would have left the selling company worse off than before due to the business not making their targets. They would then have to rebuild, make up for the bad quarters, to prove to any other buyer that their model was not flawed – this would take time and the seller would likely miss the window to sell, thus never getting the value they deserve.

Some key takeaways:

(1)     Be sure to have an experienced M&A advisor in your corner to guide and protect your interests.

(2)     Don’t drop the ball on your run-rate sales growth activity. Leverage your advisor to block and tackle the process while you focus on running the business.

 

There’s no reason for you to lose the business while you chase the dream!

Back to you Bruce.

Bruce Milne

Don’t lose the business while chasing the dream. Good input as a buyer. I know you were a seller once and you had an interesting experience with timing.

Gary Beyer

That’s true, Bruce, you gave the same advice a few years ago when I attended my first Corum workshop. At that time our board wasn’t ready to move forward, we thought we could fly a little closer to the sun and the market closed on us before we could pull the trigger.

Bruce Milne

Could you share what you think it cost you in terms of valuation?

Gary Beyer

In my opinion, at least 50%.

Bruce Milne

Wow.

Corum Research Report

Now let’s close off this section and go to our monthly Corum research report, with Elon Gasper, who has sold a few of his own companies, along with Alina Soltys and Jason Steblay.

Elon Gasper

Thanks, Bruce.

We begin with the Public markets, which as was pointed out, keeps setting record highs in multiple indices as central banks cut rates and continue QE and  the social/mobile/cloud revolution gathers even more momentum. With corporate coffers bulging with cash and IPOs like Twitter’s bringing in billions, tech is partying like it’s 1999 and the tech M&A sellers closing deals now are breaking out the bubbly.

Alina, how’d the Corum Index reflect these general conditions as it opened its new quarter?

Alina Soltys

This month the total deal volumes are quite high and on level with last years, although the megadeals, being lumpy as they are, are down to one this month. We see continued growing numbers of PE-backed deals, high levels of cross-border transactions and lots of startup acquisitions. This demonstrates M&A interest in small and medium sized targets that are spread out globally.

A near miss of an addition to the Mega Deals is SnapChat, who formally rejected Facebook’s $3B offer.

The deal that did go through can be called a startup: founded only 3 years ago, Finland’s Supercell, otherwise known as the maker of the game Clash of Clans, was picked up by Japan’s Softbank for $1.5B. Softbank’s founder has a 300-year plan to become the singular internet conglomerate that can satisfy all foreseeable consumer needs.

Elon Gasper

I’ll point out that Alina shared some other intriguing thoughts on Softbank and its acquisition of SuperCell with VentureBeat’s Dean Takahashi along with other industry insiders in a very interesting recent article there.

Let’s return for more on the Consumer sector in a minute, but first, Jason, how did the Infrastructure sector fare?

Jason Steblay

Thanks, Elon. The Infrastructure sector is continuing to have a strong year with EBITDA multiples hitting 24-month highs in October. Notwithstanding Cisco’s miss this morning, the sector’s performance is positioning the market leaders to invest aggressively in growth, yielding high multiples, starting with IXIA which paid 3.4x revenues, or $190M, for network and application performance company Net Optics.

CSC paid 4x sales, or $158M, for cloud application management SaaS provider Servicemesh.

Finally, SolarWinds Paid 7.4x revenues, or $103M, for database performance management specialist Confio Software. Speaking of high multiples, Alina, what’s going on in the Horizontal market?

Alina Soltys

We’re seeing the highest EBITDA multiples in the Horizontal space as many companies focus on driving growth rather than pumping their bottom lines; driving total EBITDA down while multiples go up.

Neustar acquired Aggregate Knowledge, a campaign and predictive analytics solution highly focused on the Facebook marketing platform, for $119M. This moves Neustar away from their legacy contact database mgmt services for phone companies squarely into marketing solutions.

Oracle bought BigMachines, which automates sales orders in the cloud to help assemble and optimally price complex orders. Business Insider reported the deal was for more than $400M, approximately 5x revenue. Interestingly, Salesforce.com was an investor in BigMachines with a minority stake; this acquisition may cause some sparks as Oracle just bought into a large Salesforce userbase.

And lastly, Facebook bought Israeli mobile app usage tracker Onavo, establishing its first Israeli Office. This will provide Facebook with extremely relevant data usage reports on apps; Onavo’s premise is to offer smartphone plan savings through minimizing data consumption, with a backdoor look at what users are doing. Sometimes it’s worth reading the T&Cs before installing apps.

The deal is estimated between $120-$200M; huge multiples for a no revenue company.

Jason Steblay

Turning to another sector with huge multiples for startup companies, the Consumer Market, Softbank still managed to make a splash with the $1.5B megadeal Alina mentioned earlier despite cooling multiples for the broader sector.

Outside of games, Yahoo continued its shopping spree in October, adding three more companies to bring its total for the year to 25. As with most of Yahoo’s acquisitions this year, these were smaller deals aimed infusing the giant with fresh talent and tech. This month’s haul includes:

•             LookFlow, an image recognition software that enables users to search images presumably to integrated with Flickr

•             Bread Labs, a social media focused banner ad agency

•             And Hitpost, which provides mobile apps for fantasy football and other sports

What trends are we spotting in the Vertical Space, Elon?

Elon Gapser

As the vertical space gained interest in the eyes of PE’s and strategics, the financial services sector demonstrated particularly increased activity with buyers taking out targets for diverse motives.

For example, banking software developer DCI acquired the software assets of its strategic partner Benchmark along with related clients and support staff, to focus on branch banking automation; and in an intercontinental deal Francisco Partners French company eFront bolted on NY-based AnalytX’s product to bolster its North American expansion.

In the adjacent insurance segment, iPipeline consolidated an even larger customer base with purchase of Florida-based Aplifi, a life and annuity solutions provider.

Finally, E-Trade sold its G1 Execution Services computerized online liquidity flow purchasing software to Susquehanna for $75M. Having exited this market maker, E-Trade expects to now concentrate on its core internet stock brokerage business.

And speaking of Internet business, how’s that segment doing, Alina?

Alina Soltys

Internet Market valuations continue to maintain strong levels with EBITDA even ticking up a bit this month.

The trend continues of acquisitions that provide analysis, reference content, and online databases. Starting with DMG Information, which acquired the European assets of Decision Insight Information Group, an online real estate database provider, for $88M, paying 12x EBITDA.

Meanwhile, Market Track, a provider of intelligence solutions for the retail industry with promotion, real-time ecommerce activity, and pricing intelligence capabilities acquired Competitrack. Competitrack has a very comprehensive set of creative archives, with access to over 11 million ads from the U.S. plus in more than 60 countries. So the deal will layer analytic capabilities onto client accounts providing access and analysis of ads served globally.

Finally, Yandex acquired KinoPoeesk, the online film database known as “the IMDb of Russia” with some 20 million visitors per month for a reported $50M. This comes on the heels of Yandex reintroducing a new search technique driven by content type, similar to Google’s searching of images, videos or the usual webpages. More and more searchers are interested in video content—we saw Amazon implement a similar strategy—when grabbing for IMDB many years ago. And lastly, we move to IT Services.

Jason Steblay

The IT Services index is continuing to have a strong year, with sales multiples holding steady and EBITDA ratios improving somewhat in October. Against this backdrop, the major systems integrators are investing aggressively in growth and higher-margin areas. In its largest deal to date, C-A-C-I international announced its intent to acquire Six3 Systems for $820M at nearly 2x rev. CACI estimates that Six3 expands its market opportunities by $15 billion dollars in rapidly growing areas such as cyber defense technology.

Accenture and Deloitte also announced acquisitions during the month targeting high growth areas. Given estimates by Gartner and the like that CMO will soon spend more on IT than the CTO, marketing technology integrators have been particularly popular targets lately. In October, Deloitte acquired Quattro Innovation and Perficient paid $21.5M, or 1.4x Sales for CRM integrator Core Matrix.

Elon Gasper

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

Bruce Milne

Great stuff, guys. I see Yahoo is still on a tear. By the way, those of you who are listening, and there’s a lot today, from 36 different countries, if you don’t recognize some of those buyers, you’re in good company. There are new buyers coming on the market every day, about 25% of the transactions we’re seeing working with sellers, are to companies where the seller doesn’t know, or barely knows, of the company interested in buying them.

Jason, did I hear Deloitte and Accenture on your list? They’ve been very inactive over the years.

Jason Steblay

Yes, you did. Accenture is really revving things up this year, so far they’ve announced 9 deals this year with only 3 for all of 2011.

International Business Development

Bruce Milne

So we’re seeing sellers everywhere, buyers everywhere, and Corum is expanding accordingly with a new position of international business development. Let’s go to Dougan Milne in Europe.

Dougan Milne

Thanks, Bruce. I’m here in Zurich in our international headquarters, and we just finished up a merge briefing conference today to a packed crowd. This week we have a record seven conferences in four countries, and every one is at capacity. We’re excited about that, it’s been a very busy year. It was almost 20 years ago now that Corum made a very strong commitment to entering the European market. Today, over half of our transactions involve a buyer or a seller from outside North America. Needless to say, a large percentage of those deals are with our European clients. The Corum brand here is recognized as the top software advisory firm on the continent.

I’ve recently been appointed to the role of international business development and my goal with that is to continue the Corum tradition and our legacy of market leadership and regional leadership.

Over the course of the coming months and years, I’ll be working to build relationships, sponsorships, and partnerships throughout the international hotbeds of technology. Some of that will be done in regions where Corum has already begun this process and immersion, others will be done in areas that are certainly off the beaten path for us. So, as the Corum model goes, we’ll be entering these markets with education first; we’ll be introducing our educational event series, Selling Up Selling Out, the merge briefings like we just had here in Zurich, and region specific, language specific webcasts and market publications.

To give you an idea of how and where this will be happening, let me go ahead and announce some of the events that we have on the calendar.

We’re starting in Russia. We’ll be in St. Petersburg on the 3rd of December and in Moscow on the 5th of December.

Only a week or so after that we’ll begin our Latin America series with Monterey and Mexico City in mid-December.

Then much further south we’ll be in Rio de Janeiro and Sao Paolo on the 21st and 23rd of January respectively. We’ll continue our work in Latin America with Santiago.

From there, we’re lining up our conference events with a series in the Middle East, and that includes stops in Dubai, Abu Dhabi, and Dohan. Within the coming weeks, we’ll be announcing our annual program in Asia as well, and that will include several cities in China, Japan and South Korea, so stay tuned for those.

Meanwhile, we certainly aren’t diluting our efforts in North America. On the contrary, we’re keeping the pedal to the metal. Clearly times are busy. I’m excited to be taking on this new adventure with Corum and to continue building our success and our recognition throughout the industry and the world.

Bruce Milne

Thank you Dougan. He was originally in our Zurich office for three-and-a-half years and then came to the US to head up our research group before taking a sabbatical.

Closing Comments

Now let’s go to some closing comments with Nat Burgess.

Nat Burgess

Thanks, Bruce. I’m joining you today from Boston. I’m on a trip that started in Mexico City and it’s taken me through Beantown here, then to Helsinki, Stockholm, Olso… I’ve been directly involved in closings in five countries. We always see this frenzy at the end of the year. We’re seeing that in the deal announcements, and obviously Ward announced our deal with Arcos.

What’s interesting now is that there is an added element. Not only are we closing deals and getting stuff done, the amount of inbound calls we’re getting is unprecedented. I’ve been involved in M&A since the late eighties and tech M&A since the early 90s. I haven’t seen this before. We’re seeing all the majors down in Silicon Valley, Yahoo, LinkedIn, Facebook, etc, they can’t hire fast enough, so they’re doing these acqui-hires, these smaller deals. We’re seeing SaaS reach the mainstream and that’s why I’m especially excited about Ward’s deal. These niches that are traditionally blue collar software niches, they are actually being taken over by smart SaaS players now, and when those guys get a foothold, they have tremendous value. Ward’s worked successfully with several companies that have done that, Arcos being the most recent.

The other comment that I want to raise again, Bruce mentioned that stock market’s traditionally track to M&A. The stock market is reaching new highs weekly, sometimes daily. Obviously the tech M&A market has lagged and is trying to catch up, but some of the other impact that a really highly valued stock market has is this:

The CEO is under pressure to put money to work, to do acquisitions, so there’s a lot of energy being put into this, obviously. We’re seeing that in the deal flow, in the inbound inquiries. And we’re seeing some interesting consequences of that. I’m involved in two situations now where buyers were interested in our client but they weren’t the top priority. And in both cases in the last two weeks they’ve lost out on other deals. Suddenly we ARE the top priority because they have to get stuff done and there isn’t enough inventory in their pipeline to make their CEOs happy. If you have one company that three buyers want, well guess what, they can’t all be successful at that. The losers in those bids are going to be out looking for alternatives because they are under increasing pressure now to put money to work.

A final comment, Bruce, before we wrap, is we’re seeing innovation in all geographies. It’s been true for a long time. We’re seeing companies come up with ideas and quietly execute in their home markets, and create something really cool, and they stop hiding behind the flag, as we say, they come out and start competing globally. That’s why we now have closings pending in five countries and why we continue to be excited about our growing relationships in the different geographies that Dougan is now helping us address.

I’m looking forward to next month’s monthly, when we’ll have more exciting deals to talk about that we’ve managed that will close soon. I really appreciate the update from the research team back at headquarters.

Bruce Milne

Thanks, Nat. While you were talking we got a very appropriate question, and you may have already answered it. What is the minimum revenue run-rate threshold that you are seeing for tech M&A?

Nat Burgess

That’s a question we actually get a lot because companies are being approached early, they wonder if they’re better off raising more money and looking to the next lap around the track, or doing something now… Here’s my take on that. If you went down to Silicon Valley today and you put together a dream team of people who have great experience at all the big players, that team alone would drive a return on investment. All you have to do is assemble the right people and that would be a pure acqui-hire play, because it’s hard to assemble those teams.

At the other extreme, if you’ve developed software and offshored it, and you don’t own the development team that built it, so you have some IP and you’re starting to get some traction, from an acqui-hire perspective that’s going to be tougher, and now you’re going to be valued more on the IP and the market presence that you have built.

The short answer is that revenue threshold is zero and we’ve been involved in a number of those; deals where the tech was right and the vision was right and we sold them pre-revenue.

The deeper dive needs to be, is it the right team that has a high value to the buyer? Is it the right IP and market? That all takes a look at the specific situation.

Bruce Milne

We had another question that I can answer briefly. How do you get to high multiples? By creating an auction environment, not just talking to one party.

We’re down to our last minute or so, and I’ll throw it to Elon. How long will the market last in terms of peaking?

Elon Gasper

Well, I wish I knew that, I wish there was a way that any of us could know for sure. What we do know is what you said before, Bruce, the peaks tend to be shorter as history progresses and things heat up. We don’t know, it could go on a while, it could be triggered by something like, well, watching what happened with Cisco or what if you were a health insurance software company and the President of the US can just walk out in front of the White House and change a lot of the landscape for you. At both macro and micro levels, we can’t predict, but we do know things move in cycles and we do see many of the harbingers of a peak in the cycle happening now.

The one thing I will say is that getting in the queue at big companies, when M&A moves across the peak it does move quickly, but deals that are already in the pipeline tend to move forward.

Bruce Milne

For those of you considering getting into the market, it can take six to nine months or longer, the reason why is not because of interest or lack thereof, it’s the Sarbannes-Oxley and various laws regarding due diligence which have criminal impact if you’re wrong, so people are much more careful.

We’re at the end, we received more questions, and we’ll respond directly with the appropriate person.

With that, thank you very much for attending, and we’ll go to our close.