Introduction

 

Timothy Goddard

 

Welcome. My name is Tim Goddard, I am SVP of Marketing here at Corum Group. We're very happy to be bringing you the May edition of Tech M&A monthly. We have a great agenda for you today. We're going to talk a little bit about a very important event coming up in New York. We have some reports on deals we've done, we will look at the last month in deals overall, and then we're going to examine17 misconceptions that are killing deals today, sometimes before they even start. Then we'll get into Q&A, so please share your questions with us.

 

Field Report: AI Enablement and Online Exchanges

 

Now, let's go to the reason we're all here, which are the deals. We have closed a couple recently, and first we're going to hear from Allan Wilson in Austin, Texas. Allan?

 

Allan Wilson

 

Last week Corum sold one of our clients to a private buyer in a deal which will be formally announced shortly. It was a small company, but one in the hottest of the Top Ten Disruptive Trends, artificial intelligence. AI is hot, and the buyers are hungry. I will share more in an upcoming special report: AI, Who's Buying, and Why.

 

Timothy Goddard

 

Thanks, Allan.

 

Now we'll hear from Jim Perkins, who is in China negotiating another deal.

 

Jim Perkins

 

We just closed another deal similar to Allan's, not yet announced, and a smaller company built on leveraging one of our Top Ten Disruptive Trends. In this case, online exchanges. Our client's technology will enable the buyer—a household name in its industry—to maintain its market position in the midst of a significant disruption driven by online exchange technology in the space. In today's market more than ever, even small companies that have key disruptive technology are in high demand. It is important to have advisors who understand these technology trends and can leverage them across the growing universe of buyers.

 

Timothy Goddard

 

Thanks, Jim.

 

Speaking of that growing universe of buyers, we are coming up now to our research report. There are a lot of new buyers and sellers that you have never heard of, so pay attention to that and see how many you recognize.

 

With that, I'll turn things over to our research team with Elon Gasper, Amber Stoner, and Amanda Tallman. Elon?

 

May 2017 Research Report: Tangoe acquired by Marlin Equity

 

Elon Gasper

 

Thanks, Tim. We begin with the public markets, which continued to set records in an April rally led by big tech, as industry soared and the NASDAQ gained over 3%, though the Dow still hasn’t broken above its March 1st high.

 

Our Corum Index -- and our field reports -- show a great market for sellers, with supply issues limiting deal volume, particularly at the high end, a more robust mid-market and an increase in PE deals. The lack of supply forces buyers to reach across more borders, draft older companies, and paw through conglomerates for software-rich components, as in one of last month’s two megadeals, where KKR led a take-private reshuffle of venerable comm and chip systems vendor Hitachi Kokusai and its visual intelligence systems -- a Corum Top Ten Trend. We’ll be highlighting those disruptive trends throughout this report, starting with the Horizontal sector - Amber?

 

Horizontal Software Valuation Metrics

 

Amber Stoner

 

Sales multiples in the Horizontal sector rose to 12-month highs, with EBITDA multiples increasing after fluctuations in the first quarter. April saw a number of deals in the marketing space as well as in workforce management.

 

In an example of Corum’s Omni-Channel Sales trend, sales engagement startup ToutApp was picked up by Vista Equity-backed Marketo, as its first bolt-on acquisition, to reinforce its account-based marketing and sales insights portfolio.

 

Oracle continues its relentless deal pace with its eleventh acquisition in the last year. The cloud giant paid $600M, over 13x revenue for viewability firm Moat to build on Oracle’s Datalogix and BlueKai deals. We expect to see more consolidation in marketing and AdTech as industry players try to compete with Google and Facebook’s digital advertising duopoly.

 

Wi-Fi marketing company Turnstyle was landed by Yelp for $20M to expand its customer acquisition services into customer loyalty, grounded in on-premise customer behavior. And Experian sold its cross-channel marketing unit to Vector Capital for $300M.

 

Deals were driven by our Digital Currency Flow trend in the payments space where RatePay, a provider of payment processing for online shops was acquired by Advent International and Bain Capital and online global payment processor 2Checkout was picked up by Avangate, adding payment model flexibility.

 

And in an acquisition that encompasses both our digital currency flow and omni-channel sales trends, ecommerce platform Magento, picked up social commerce company Shopial, allowing online merchants to connect their stores to social media.

 

Another of our disruptive trends, AI Enablement, was also on display in the business intelligence space, where, in addition to the deal Allan mentioned earlier, AI-enabled retail pricing and product BI company 360pi was acquired by Aurora Capital-backed promotional intelligence solutions provider Market Track.

 

Finally, in the workforce management space, employee training developer Vertex Solutions was nabbed by TCC Software to complement its IT staffing services. PRO Unlimited, specializing in contingent workforce tracking for large enterprises, was acquired by PE firm Harvest Partners. And ShiftHound, a provider of shift schedule management SaaS, was picked up by ABILITY Network to incorporate into its revenue cycle management solutions.

 

Amanda, what’s going on in Internet?

 

Internet Software Valuation Metrics

 

Amanda Tallman

 

Sales multiples in the Internet sector rose nearing September levels while EBITDA jumped up to multi-year highs. Our Online Exchanges trend, particularly in travel, drove the M&A flow in this sector.

 

In its third acquisition this year, Florida-based HotelPlanner bought UAE based reservation service Travel-Ticker.com, its first purchase  outside of the US.

 

Two Berlin-based vacation rental startups, FeWo and Vacaleo were picked up by AirBnB, to bolster its offerings in Europe.

 

French hotel group Accor upscaled its domestic offerings by acquiring VeryChic, a platform for luxury hotel rooms. Accor also expanded their B2B offerings with the purchase of  Availpro, a marketplace for hoteliers.

 

Elsewhere in online exchange deals, ticketing software startup TopTix, out of Israel, was bought by SeatGeek for $56M in its largest acquisition to date, broadening its investment in primary ticketing.

 

Paris-based makeup marketplace Beautyst, was picked up by England’s lifestyle retailer Feelunique, to accelerate its expansion into France, which is touted as Europe's third largest market for online beauty.

 

Ebay India was sold to Bangalore-based e-tailer Flipkart. The acquisition, coupled with ebay's accompanying half a billion dollar investment into Flipkart, will help the coalition, which also includes Tencent and Microsoft, defend against Amazon’s expansion into India.

 

The pet care industry unleashed a pack of deals as personalization site Just4MyPet was collared by gifting site MailPix.

 

Traditional pet retailers joined in with Petco buying PetCoach, a service that connects owners with veterinarians, to reinforce its consumer focused initiatives.

 

And in one of our megadeals, Petco competitor Petsmart acquired Chewy.com, a pet supplies retailer, which fetched a reported $3.4B, and is poised to be the largest ecommerce acquisition in history, beating out Wal-Mart’s acquisition of jet.com last year.

 

Other traditional retailers also extended their online presence, with Bed Bath & Beyond picking up online interior design service Decorist, and Jo-Ann Stores acquiring arts and crafts instructional website CreativeBug.

 

In our digital currency flow trend, Eyeo, the company behind AdBlock Plus, picked up Flattr, a micropayment and micro-donation service out of Sweden allowing users to pay for content from a single account, through a browser extension.

 

And lastly, in a non-digital currency deal involving blockchain, Mediachain Labs was acquired by Spotify, in an effort to improve the attribution of royalties to rights holders. Mediachain plans to make its stack open source and could serve as enabling tech for a new generation of online exchanges.

 

What happened in Infrastructure?

 

Infrastructure Software Valuation Metrics

 

Amber Stoner

 

Infrastructure multiples remained steady last month in both sales and EBITDA, with multiple deals following our Data Security trend.

 

Digital authentication vendor TeleSign was acquired by Belgium-based carrier BICS for $230M, over 2x revenue to create an end-to-end communication platform as a service.

 

In the UK, email authentication firm SecurEnvoy was bought by Shearwater Group, in its first acquisition ever, for over $25M and 6x revenue to establish a presence in the identity and access management market.

 

Mac-based anti-malware software firm Little Flocker was picked up by F-Secure in its second acquisition of 2017, after being out of the M&A market for nearly 2 years.

 

j2 Global strengthened its email security offerings, buying MXForce and its email encryption software provider Send.

 

In the virtualization space, Cisco spent $610M, more than 24x sales to get software-defined WAN startup Viptela, netting Cisco a cloud-based solution to help broaden its Intelligent WAN portfolio. And earlier today Cisco announced it spent $125M on conversational AI startup MindMeld.

 

Earlier today Cisco announced spending $125M on conversational AI startup MindMeld.

 

Finally, telecom expense management company Tangoe was taken private for over $300M by Marlin Equity, to be combined with current portfolio company Asentinel. Tangoe was considered the dominant player in this space when Corum sold eMobus to Asentinel in 2015. It's a good example of how the right small acquisition can catalyze major disruption across an entire industry.

 

Back to you, Tim.

 

Timothy Goddard

 

Thanks, Amber. That was a great deal, I was very proud to have been a part of that. Thanks to Elon and Amanda as well.

 

17 M&A Misconceptions Killing Deals Today

 

Now that we've heard about the deals that are happening, what about the deals that aren't happening? Deals that are getting killed, sometimes before they even start.

 

We have a special report on seventeen misconceptions killing deals today. To lead that, I'm happy to turn things over to our founder and CEO, Bruce Milne.

 

Bruce Milne

 

Thanks, Tim. I would call this not only 17 misconceptions killing deals today, but a lot of these are misconceptions that are keeping people out of the market altogether, keeping them from taking advantage of what I think is the best market ever.

 

Let's start right away with the first misconception:

 

  1. “Companies are bought, not sold”
    We've spent 31 years disproving this misconception. We find that people are waiting for that one company to call them, that prince, but they're more likely to get a call from a frog. Some bottom feeder that is going to try to lock them up in an exclusive negotiation for a lower value. You want to control this process, create an auction environment that will get you optimum value. That means you have to leverage the strategic and financial buyers against each other. We want you to control this.
     
  2. “We can’t sell—we’re not profitable”           We hear this one all the time in traditional business. Dr. Rusic, is that true with technology companies?

    Ivan Rusic
    Most tech companies run deficits early on due to reinvestment. Buyers rarely worry about that. They want what buying you brings them in the future. This means that they care more about your product or technology, your domain expertise, users, the quality of your team, growth potential, competitiveness, barriers to entry and customer retention rates. Each business is unique and so is its marketability.
     

  3. “We have conflict to resolve first” There is a lot of conflict in these companies, and it's probably the number one reason people have trouble selling. Rob, what do you have to say about this?

    Rob Griggs
    When issues between partners or shareholders exist it can have a very negative impact on the business. The Corum 8 Step Optimal Outcome for a managed auction process can establish a common bond, agreement or alignment between the parties and by selling the company the conflict may be resolved. What may appear to be unsolvable issues on their own can indeed be rectified with a successful outcome.

    Bruce Milne
    This is one of the reasons why our 8 step process was developed. We find often that we have different investors, past founders, that sort of thing, in fact sometimes we have to be an arbiter in a dispute to get everyone in line.
     

  4. “I’ll launch my next version, then sell” What do you think about that, Andy?    

    Andy Hill
    Buyers don’t necessarily value new versions. They value increased revenues - more customers, and they know that it takes time, additional investment in sales and marketing, before a new version generates a bump in sales. Rolling out a new version during M&A discussions can create momentum. And remember this, there are many buyers who would rather new versions be released under their banner.

    Bruce Milne
    Thanks, Andy. Good stuff. He sold his company and has been involved in a number of recent sales, including one to Rubert Murdoch.

    It's interesting, the buyers often love these companies that we work with, we only work with privately held sellers, and the first question they ask is, “when is the next version out?” because they have the distribution, the brand name to really make that launch go.
     

  5. “We’ll get locked into a bad deal” Really? What do you think, Steve?        

    Steve Jones
    You only get locked into a bad deal if you choose to.  You are in control of the process - creating an auction environment - its up to you and your shareholders to accept or reject a deal.  If the deal doesn’t fit then you walk away.  With Corum – our clients have the option of taking a hiatus—and coming back on the market several months later –seeking a partner with a better fit after improving the company.

    Bruce Milne
    Great stuff. Thanks, Steve. Steve sold a couple of his own companies.

    Now, this is a very fluid industry, and I got a panicked call this morning from one of our clients that is about ready to go to market. He lost a key person in accounting and he was concerned.
     

  6. “We’ve lost key people, can’t sell now” What do you say, Jeff?

    Jeff B
    Yes, certainly you can sell. It should not impact whether you sell or who you sell to. In fact it can actually highlight a strength of your company – showcasing its resiliency and talent depth. What matters most is how the business responds by adjusting and moving forward. Experienced buyers know that all businesses lose people, but eventually succeed as a team. And remember, these buyers have far deeper benches, able to help you grow.

    Bruce Milne
    Yes, far deeper benches. And congratulations to Jeff on his promotion to Senior VP.

    One of the things that also happens is that sometimes during the process we lose people. Buyers are savvy. If you explain properly, they'll explain what is going on, and then we get back to the point about deep benches.
     

  7. “We’re going work it out with our inbound buyer” What do you say, Dan?

    Dan Bernstein

    Buyers love to know that they’re the only ones you’re talking to. Not only have you given up your biggest leverage but you have given your perspective buyer an opportunity to lowball the deal since you have had no market validation of what you’re actually worth. Moreover, an inbound inquiry does not mean you will sell your company – in fact the odds are less than 20% that a transaction will actually occur. Finally, it is your fiduciary responsibility to yourself and your shareholders to find the best possible exit for your business, so don’t sell yourself short.

    Bruce Milne

    Great advice, Dan. That whole idea of fiduciary responsibility is crucial. You don't want one of your investors asking you, “well you got us to sell, but how many other buyers did you talk to?” You need to calibrate the marketplace. And there is almost always—75% of the time—a buyer out there willing to pay more. A lot more.

    Now one we hear a lot, I heard it just yesterday.
     

  8. “We’ll raise another round, then sell” Let's hear from Dave Levine. Does this make sense?

    Dave Levine

    Not usually. You’ll dilute your equity position in your company and then have additional stakeholders to contend with. They may have conflicting interest with the company's exit timing, and often have unrealistic return expectations as they just came in at the latest valuation. If you need cash during the selling process, it's better to use debt. This will leave your cap table unchanged and ideally keep control of key decisions with the CEO or founders.

    Bruce Milne

    That's great stuff. There's another issue here, too. People don't realize that because of Sarbannes-Oxley, if somebody buys a company, the bigger buyers, usually public companies or those under some kind of regulation, they are required to redo the due diligence, because there is criminal liability if it has not been done properly. The due diligence you might do as a private company is completely different than what a public company would do. So if you go out and buy somebody, you may end up creating a situation where they can't buy you, because they don't want to do the additional due diligence.
     

  9. “Preparation starts when you decide to sell” By the way, congratulations to Nina on he promotion to VP. When does preparation start?

    Nina Seghatoleslami

    I would say that you need to plan for an exit from the inception of the Company. Buyers are looking at multiple acquisition, so be prepared to answer questions and provide required information quickly. If not the buyer will move on. Good preparation gets you through due diligence, to the deal you deserve.

    Bruce Milne

    Thanks, Nina.

    Next is one that would kill most traditional sellers in other industries.
     

  10. “We have too much debt to sell” Let's hear from Rob Schram.

    Rob Schram

    Cash rich buyers today are not afraid of debt. It will be structured in it as part of a transaction—usually paid off at closing as part of the purchase price—which also allows you to sidestep issues related to interest, taxes and convertible loans. So don't miss this M&A window due to debt.

    Bruce Milne

    Don't miss the window. I'd say we sell a couple of companies a year that technically might be considered bankrupt.
     

  11. “Buyers don’t want an exclusive intermediary” Let's hear from Allan Wilson.

    Allan Wilson

    Buyers recognize that a professional M&A intermediary can only mean one thing: they will have less control, and will pay more via the auction process. It lets buyers know that you are serious, and it makes them more serious. It also means you are more likely to be prepared for due diligence, which they appreciate. Buyers don’t like wasting time with sellers who are unprepared.

    Bruce Milne

    That last point is really critical, this preparation. If you're not prepared, you're not going to make it through due diligence, you won't be able to answer the critical questions; remember, they're buying the future. Often we see that the buyers welcome us because they know that we will get through not only dissident shareholders and some of the issues with the structure of the company, but we can also get them better prepared to make it through due diligence. No buyer wants to spend six figures in expenses trying to do a deal with a company that isn't ready because they haven't been properly prepared.

    This is a good one:
     

  12. “We’re not SaaS, so buyers won’t bite” What do you say, Jeff?

    Jeff Riley

    Broadly speaking, SaaS is a value accelerator, not a prerequisite. Buyers are looking for many different things: talented people with deep expertise, strategic product capabilities, customer and partner relationships, and new avenues to accelerate their own growth. A strength in any of these areas can boost your value. The key to finding a great buyer is making sure there is a shared vision about why your business is valuable to them. SaaS is just one of many factors that contribute.

    Bruce Milne

    That's right. It's very important to craft the right story about what you have and what you might represent to the buyer. In each case it might be slightly different, different buyers.
     

  13. “I need an audit before selling” Is that right, Julius? 

    Julius Telaranta

    You don’t need an audit before selling your company. The buyer will dig into the numbers anyway and probably will use their own audit firm to do that. It fine to start the process without an audit because getting a full audit at this stage will really slow down your getting into today’s strong market.

    Bruce Milne

    You know, that's great stuff, Julius. Another thing is, I just had a conversation two days ago with a firm that said, “We have to get our accounting records GAAP compliant before we go to market.” That might take a month, or six weeks. The reality is, you can be doing that while you're going to market, because it will take a while to get into dialogue, to get offers, to get through the process, so I wouldn't let that delay you either.

    Jim is in China negotiating with some of those buyers that you've never heard of.
     

  14. “I already know my buyer”

    Jim

    It’s a new world of buyers. They're global; many you’ve never heard of.  They may not even be in your technology space. As we reported last month, financial buyers are now the most active, they don’t advertise who they want to buy. Asian buyers; do you know who they are? Not likely!  Point is: Most of the time, you don’t know your buyer.

    Bruce Milne

    Great stuff, Jim. Good luck with your negotiations.
     

  15. “We want to buy first, then sell” Good idea or bad idea?

    Jon Scott

    That can be a very bad idea.  You could miss the up market cycle because of the time it takes to integrate new acquisition.  And you have unknown risks like IP issues that could come up with the company you buy.  Further your buyer might not want the other company.  Better to sell, then work with your buyer to make the acquisition if it’s right.

    Bruce Milne

    I mentioned earlier that you don't want to be doing an acquisition while you're trying to sell, it's a really bad idea.
     

  16. “Buyers won’t want our legacy tech” Peter, you've sold a lot of companies, what do you think?               

    Peter Prince

    It gets asked a lot Bruce. It’s a common situation that companies find themselves in and buyers are smart enough to know it. They also know that sellers will have a revenue stream associated with their legacy technology so there’s no expectation from buyers not to buy that part of the business, if they do the deal they will divest what they don’t want after the event. In fact we can help them do that or, as in one of our current deals we can sell the business in two pieces.

    Bruce Milne

    Thanks, Peter.
     

  17. “I don’t want to go to market too early”

    Joel

    Nathan Rothschild famously said “I made my fortune by selling too early.” The biggest concern these days should be missing this tech M&A market; clearly, the best ever. Buyers are hungry for companies, especially in the Top Ten Disruptive Trends. You'll get interest, but if the offer is not to your liking you simply go on hiatus benefiting from the extensive research and preparation, the feedback you've received and many doors opened.
     

Bruce Milne

Thanks, Joel. I'm glad you mentioned disruptive trends, because that is what we started with today. We're seeing that driving the market. And you mentioned hiatus. We have a unique process, companies go to market, we journey together, we find that it's not quite the right time or they're not willing to pay quite as much as they want, that sort of thing, but they learn a lot in the process, they are in a better position, they are better prepared, great market feedback and calibration. They go off the market on hiatus, then they come back and sell, and we often see that they get much more than the original expectations.

 

Q&A

 

That's a lot of response, Tim, from around the world. I'm sure it has engendered some questions.

 

Timothy Goddard

 

Yes. The first question here, we'll hand this to Elon. “How long will this market last, what does the timing actually look like here?”

 

Elon Goddard

 

Well, with one of the longest bull markets in history and in a time of unprecedented context and change, calling the peak moment is even less practical than usual. Moreover, you would need to lead that moment, allowing six months or more to get into the market, select a buyer, and finish the deal. To us it looks like you have that time now, and this is a fabulously favorable climate for it, so I think trying to call the exact moment or lead it any more is not the prudent thing to be doing.

 

Bruce Milne

 

I might add a little bit to that. I was just in a long conversation with a seller on the east coast. He wants to sell at the beginning of next year. So he figured he'd start in Q4. The problem is that going through preparation, doing it right as we talked about here, is about a 4-6 week project, and then you have to go to market, start getting feedback from the buyers, you go through due diligence to get the offer, then you go through final due diligence to get the deal done, which we know still takes 90-120 days. So if you want to sell at the beginning of the year, you need to be out right away. For some folks, you have to be careful, you can't go to market in August, because some of the buyers are just gone.

 

Tim do you have any more questions?

 

Timothy Goddard

 

Sure. We have a UK-based company that has been approached by a UK competitor, and they are concerned that they're really just after intelligence and data. They're not looking to sell right now, but obviously they are intrigued by the possibility. What do you think, Bruce?

 

Bruce Milne

 

I love that scenario. We're seeing a lot of that, competitors trying to pick your brain or get details on the secret sauce that you have. The first thing you have to ask yourself is if you want to sell. If you want to sell, I would use this overture to get on the market and calibrate, because if they are looking, others are looking.

 

The better scenario would be to go back to them at some point and say, “we've always thought there might be a good fit between our firms, but we've been approached by another party, the investors and the board want to do something, now might be the time to talk.” What I'd rather do in a situation like that is to calibrate the rest of the market before you respond. The problem is that they can quickly come up with a number because they know you and you don't know what the value is, maybe they picked a number, but is it the right one? Is this the right structure, the right buyer? You can't just tell them to sit tight while you calibrate the market. I would use this interest to launch the process to calibrate the market.

 

Timothy Goddard

 

Here's another question. “Is it a good idea to ask questions about how buyers are financing the deal?”

 

Bruce Milne

 

That's a great one. We have a deal, two of them actually, that closed with some financing done afterwards. You have to qualify these buyers. Often they will tell you that they're doing some financing, whatever, you need to drill in on that, because they may not be qualified to by you and you'll waste months, even turning down other buyers. So yes, absolutely, you need to check that out.

 

Timothy Goddard

 

One more question. You touched on this a little bit, but I think we'll wrap with this. “Briefly, do you have any tips on approaching potential buyers.”

 

Bruce Milne

 

You have to do it professionally. This is the most important transaction of your life. A well-prepared, make your lists, A list, B list, those you may not want to contact, and the chief thing, we talked about this elsewhere, you need to stage who you contact. Some parties can move very quickly, they can make an offer. There are firms we call rabbits, they may not be the best buyers, but the rabbits will help you find out the answers and practice those answers. There are some big firms, for example, some of the big strategic firms are taking longer these days, so you have to give them more time. Some of the PE-backed portfolio companies, like those we talked about last month, they move incredibly fast. You have to know these buyers, know how quickly they move, and stage things appropriately.

 

Timothy Goddard

 

Thanks, Bruce. That's all the time we have and hopefully we'll see you at a conference soon.