February 2018 M&A Monthly
Bruce Milne
Good day to you, wherever you are, we started out our Global Tech M&A report with our buyers and luminaries. This month is our PE panel and next month we'll have our seller's panel. I'm Bruce Milne, CEO of the Corum Group, your sponsor for this annual event.
We have a jam-packed agenda today: we'll have an overview of the World Financial Symposiums Growth & Exit Strategy conference in San Francisco, coming up on February 22. Then we'll hear our February 2018 research report, we're starting off fast. Then our special report, PE and Tech, what the last year held and what we see going in the future. Then we'll go to our live PE roundtable.
Let's start off with Marc O’Brien in San Francisco on the Growth & Exit Strategies conference.
Marc O’Brien
This is Marc O’Brien, VP of M&A for Corum Group. I am based in Silicon Valley and very happy that the Corum Group is sponsoring the World Financial Symposium's conference: Growth & Exit Strategies for Software & IT Companies on February 22. This is a key global conference and the Corum Group is pleased to be sponsoring and participating. There will be an impressive agenda and speakers ranging from keynotes, a presentation of the Top 10 Disruptive Trends driving M&A activity, to multiple panels, including PE, buyer and investor panels featuring top PE investors and corp dev executives. The execs on the panels will be included from companies like Google, Salesforce, Morgan Stanley, Netapp, and multiple top PE firms. This is along with additional valuable tracks, keynotes, and networking opportunities. You can find more information on the WFS website at wfs.com.
Bruce Milne
Thanks, Marc. We have an extraordinary cache coming in, being repatriated, over $1 trillion, this is an event you won't want to miss.
Now let's go to our February Corum research report with Elon Gasper, Amber Stoner, and Becky Hill. Elon?
Research Report
Elon Gasper
Thanks, Bruce. We begin with the public markets, where US and Asian indices rocketed skyward in January like a Falcon Heavy, before encountering some sudden turbulence and gravity effects this last week.
A longer-term perspective on the year so far looks like this last week just added some reasonable texture to the chart of the long bull market, after nearly 2 years without a significant correction. We do urge prospective sellers to take advantage of the still-open window of opportunity to at least calibrate your company’s value, while highly favorable conditions for tech M&A remain in place. Our Corum Index for January showed the great seller’s market story continuing, with a declining number of transactions at rising prices confirming the dearth of supply as buyers, increasingly PEs, reach more across borders and to a broader range of sellers, with the continued exception of companies backed by VCs whose traditional model keeps getting squeezed between angel investors and PEs.
January’s megadeals spanned 4 of our 6 markets; we covered 1 last month, so now the other 3, starting with Horizontal, where Blackhawk, a pioneer in prepaid gift cards and incentives tech, was taken private for $3.5B by Silver Lake and P2 Capital Partners, with potential to expand mobile payment offerings of its partner Alipay to US retailers.
Amber, how’d the rest of Horizontal do?
Amber Stoner
Sales multiples climbed to record highs, while EBITDA metrics remained remarkably stable. There have been a number of deals to start the year, particularly in the CRM and HR subsectors.
In January’s other horizontal megadeal, CallidusCloud was purchased by German ERP behemoth SAP for $2.4B, to bolster its CRM cloud offerings with Callidus sales performance management and configure price quote solutions.
Elsewhere in the CRM space, Luxembourg-based customer analytics solutions provider, Talkwalker was bought by Marlin Equity. And Vista-backed Aptean purchased its prior partner, TheySay, a customer text analytics and emotional intelligence SaaS company.
One of our top PE acquirers, Thoma Bravo picked up two companies, mobile workforce management SaaS provider Motus and an employee mobility management firm, Runzheimer, establishing an all-in-one vehicle management and reimbursement platform to serve a growing fleet management market.
HR is a particularly well-suited sector in which to apply artificial intelligence. AI knowledge base platform SkipFlag was bought by Workday, adding machine-learning capabilities to its HR offerings, in an example of our AI enablement trend.
Other AI deals included those enabling conversational AI. Converse.AI, which provides software for the integration of chatbots into existing CRM and ERP systems using a drag-and-drop interface, was acquired by collaboration platform Smartsheet, to accelerate natural language user experiences and conversational workflow automation.
And in Latin America, Chile-based conversational AI provider, Intelligens was bought by Conversica, adding Spanish AI conversations to its machine learning data set.
What happened in the Internet sector, Becky?
Becky Hill
Sales and EBITDA multiples in the Internet sector soared to their highest levels in years, as online content sources address the appetite of financial buyers.
For the first megadeal of the year in the sector, Blackstone paid $17B for the financial and risk arm of Thomson Reuters, as its largest deal in a decade.
Other deals in the reference content space include German DOCUgroup, which offers information for architecture, engineering and construction, which was picked up by PE-backed French Infopro to expand its footprint in the DACH region.
New York-based educational content provider Infobase was bought by Centre Lane Partners from VSS, with plans to scale Infobase’s digital subscription model.
Strategic intelligence specialist Shungham, out of Brussels, was acquired by FiscalNote to improve its AI-driven approach with more insights into legislative and regulatory issues.
And here in Seattle, a legal marketplace for connecting lawyers and consumers, Avvo, was bought by KKR-owned Internet Brands, another online marketplace acquisition similar to its WebMD megadeal last year.
Also here in Seattle, a marketplace for consultants Maven, acquired collection of lifestyle websites Hubpages for $15M to complement its publishing and community platform.
And MovieLaLa, a network for movie fans, was picked up by GIF platform Gfycat to strengthen its movie marketing capabilities.
Online food ordering services continued consolidation by diverse buyers. Ando, a delivery-only lunch startup was swallowed by UberEATS as its first-ever acquisition.
Texas-based and delightfully-named Entrees On-Trays was purchased by Square to extend the meals ordering platform it acquired in 2014.
And in France, delivery service Foodcheri was bought by food services and facilities management company Sodexo in another bricks-to-clicks composite commerce deal.
Finally, in the ecommerce world, Italian online fashion retailer Yoox Net-a-Porter is being acquired for $3.4B by its existing investor, Swiss luxury group Richemont. Even the high-end retail market is not immune from the composite commerce trend.
How did Infrastructure fare last month?
Amber Stoner
Sales multiples reached historic highs, while EBITDA multiples remained stable. In addition to continued M&A in the security space, the year’s first infrastructure megadeal featured the end of an era as classic brand Xerox was acquired by Fujifilm, which paid over $6B for the tech veteran, capping a decades-long partnership.
Security deals included anti-malware protection expert Percipient Networks’ acquisition by unified threat management vendor WatchGuard, backed by one of our top PEs, Francisco Partners (who will be joining us on our panel a little later).
Niddel, which detects threats with its autonomous machine-learning tech, was bought by Verizon to enhance its portfolio of managed security detection and response services.
RELX paid $820M for online transaction anti-fraud software provider, ThreatMetrix. RELX plans to add ThreatMetrix to its existing partner LexisNexis Risk Solutions in the hopes of better competing with the likes of FireEye and Cisco’s OpenDNS.
In the identity and access management space, biometric ID startup Confirm.io was snapped up by Facebook to fight identity fraud.
Cyberinc sold its malware protection and identity management assets for over $34M to KPMG, which seeks to reinforce its consumer identity capabilities and tighten alliances with other IAM players such as Sailpoint and Ping Identity.
In the cloud management space, ATADATA, which develops a platform for migrating workloads in both on-premise and cloud environments, was picked up by Deloitte to boost its roster of end-to-end cloud offerings.
Cloud-native backup company N2W was acquired for $42.5M by hybrid cloud data recovery specialist Veeam, to strengthen its position as a data protection provider for AWS.
Finally, in network performance management, AppNeta, a provider of network and application end-user performance management for the distributed enterprise, was bought by Rubicon Technology Partners.
And flash-based storage optimizer Avere was picked up by Microsoft to pair its caching technology with Azure and better appeal to large-scale computing applications in the cloud.
Elon Gasper
And just this week, security and signaling systems AI specialist Argyle Data was bought by Dallas-based mobile messaging infrastructure player Mavenir, backed by Siris Capital, in a deal overlapping our AI Enablement, Data Security and IoT Software trends.
Back to you, Bruce.
Bruce Milne
Thanks, Elon. There are going to be a lot more transactions in all three of those spaces. Boy did we start off with a bang! Xerox and Reuters being sold. Thank you to our research group.
Now let's go to a special annual report with Amanda Tallman. What happened in 2017 and the role of PE.
Amanda Tallman
Thanks Bruce. Financial buyers continue to play an increasing role in Tech M&A and In 2017 they netted a record 25% of all deals, an increase from 16% in 2016. Private Equity grabbed an even greater share of megadeals with 39% up from 32% in 2016.
The top PE buyers have remained remarkably stable with median volume steady at roughly 16 deals.
Tech Savvy, Tier one, firms continued to demonstrate the greatest ability to close deals.
Vista led for a 3rd year as Insight and TA Associates climbed a couple notches into the top 3, knocking Thoma Bravo to 4th, with all having ranked in the top 6 since 2015.
We saw a few key changes as Francisco Partners made its first appearance since 2013, Marlin returned after a years absence and Netherlands’ Main Capital made its debut.
Bolt-ons outnumbered platform deals 2:1 for the second year, serving as a reminder that demand for smaller acquisitions to grow platforms by filling gaps means that a carefully-targeted search for PEs with portfolio matches should be part of an optimal M&A process.
Our top acquirer Vista highlighted an accelerated case of picking up a platform and following up with a bolt-on deal by spending just over $560M for incentive solutions firm Xactly and just days later growing the company by bolting on territory management firm AlignStar.
PE megadeal acquisitions spanned 5 of our 6 market sectors and many of these larger deals were divestitures.
We saw Thoma Bravo lead a spinout of Lexmark’s Enterprise Software Business, comprised of Kofax, ReadSoft and Perceptive Software, for $1.4B.
The financial engineering included selling Perceptive Software to Thoma’s portfolio company Hyland and merging Kofax and ReadSoft under the Kofax name.
Many other deals were done between PEs: TA associates sold its majority stake in database solutions provider, Idera, to HGGC for over 1 billion. Prior to the sale, TA Associates did 3 bolt-on acquisitions with Idera, the last of which was Corum client Gurock.
Looking deeper into the sectors, B2B, particularly SaaS plays, were clear favorites of our top acquirers, mostly from the Horizontal and Vertical sectors.
In the vertical sector, there was increased activity within the healthcare, energy and environment and real estate subsectors where we saw Providence Equity’s portfolio company, Boston Logic pick up real estate CRM provider, Propertybase.
Many of the horizontal deals were also driven by vertical customer specialties such as Insight Ventures portfolio company, Community Brands, acquisition of Abila, a provider of accounting software, designed specifically for non-profits, and associations.
And that’s our look at the PE tech M&A buyers in 2017. Back to you, Bruce.
Bruce Milne
Thank you very much, Amanda. With nearly $3T in dry powder, we're going to see a lot more activity. Just a couple of years ago we saw the PE firms actually surpass the strategic firms in terms of the number of deals, and they just keep going.
Private Equity Roundtable
Now let's hear from our panel of experts, led by our moderator Tim Goddard.
Timothy Goddard
Thank you, Bruce. We are joined today by two of the three here. Adam Sullivan may be able to join us, but he is having some trouble connecting, so hopefully, we'll see him later, but we have Mike Libert from TA Associates and Sabrina from Battery Ventures. Very happy to have you both. I've asked them both to start off by talking about where the trends are that they see in today's market that you, the audience of tech CEOs may need to understand. We're going to start off with Mike. Go ahead.
Mike Libert
My name is Mike Libert, I'm a VP at TA Associates. We are celebrating our 50th anniversary this year, making us one of the oldest PE firms in North America. We currently manage a pool of capital that is $24B. On an annual basis, we are investing approximately $2B in software and technology businesses. In the past year, we completed 60 acquisitions, of roughly half were in tech, and over the past 5 years, recent data has shown that PE was the buyer or associated with the buyer in 70% of the top 25 acquisitions in the world by market cap. So there is a very large trend toward PE acquisition and PE buyers.
Some of the qualities of businesses that are most attractive to us include recurring revenue.
1. Any type of move toward making a customer repeatable, recurring, and the term I'd use is “sticky” is very attractive.
2. Profitable businesses are very interesting to us, I think having a proven economic model, a business that customers are willing to pay what I call a very high price that enables producer surplus, that's attractive to us.
3. Businesses that have market leadership in a niche. And it doesn't have to be a large market definition, but having some kind of strong market or defendable market position, whether that is regional or within a product category or a vertical market category is very attractive to us.
Timothy Goddard
Thank you, Michael. Now I'd like to go to Sabrina. What are your thoughts on trends that our CEO attendees should be looking at?
Sabrina Chiasson
I'm Sabrina Chiasson with Battery Ventures in the Boston office. For those who aren't familiar, we are a 34-year-old multi-stage technology investment firm. We invest across a company life cycle from seed stage to buyout. We are investing out of our twelfth fund, it's a billion-and-a-quarter fund. We have invested in over 300 technology companies and have about 100 active portfolio companies in the software and technology sector.
We have a pretty broad aperture when evaluating software companies. I spend most of my time focused on majority recapitalizations and that means we will invest in companies with $10M in revenue that are growing 20% a year or we will invest in companies that are $50M in revenue and growing 3% a year. Businesses that may or may not be profitable today. So again, a broad aperture.
What we tend to focus on is three key components, so we look at revenue quality, sales and marketing efficiency and are particularly attracted to markets where we think there is an interesting M&A landscape.
So when we look at revenue quality, as Mike mentioned, we typically think about what percent of a company's revenue is recurring, how diverse the customer base is, what does revenue retention look like on that recurring base, and what is the gross margin of the business? I think one trend that we've seen is really software companies capitalizing on payment processing revenue streams lately. Which people, I think, used to discount to some degree, but both sponsors, as well as lenders and public markets, continue to favorably view payments revenue as high-quality revenue and that is definitely something we see in both our portfolio as well as in new investments that we're looking to make.
Then on the sales and marketing efficiency front, we typically think about what amount you have to spend for each new dollar of recurring revenue, we hear a lot about vertical markets and one reason why they are attractive to financial buyers is really just sales and marketing efficiency in those markets tends to be much higher.
And then we look for areas where there is fragmentation in the market and where we think we can be acquisitive, so whether that is product tuck-ins that are able to expand the solution footprint of our platform investment or whether it is leaders in their respective geographies that brought in the business geographically, or it may be regular players that increased the scale of the business.
Timothy Goddard
Thanks, Sabrina. We will be passing on any questions for the panelists that we receive, we have a few here already. One, you just sort of touched on, Sabrina, but the question is on geography. Are there particular regions you are seeing that are exciting right now?
Sabrina Chiasson
As a firm, we have five offices around the globe, two in the Bay Area, one in Israel, one in London, as well as one here in Boston. For us, we invest both in North America and Europe as well as Israel. We have seen a lot of activity in Europe, particularly with new SaaS vendors entering traditionally legacy on-premises markets in Europe. We continue to be very active there across the board.
Mike Libert
Speaking specifically for the US, I find that we are most active outside of the large coastal cities, even though we have an office in Boston and in Silicon Valley. The vast majority of our investments are probably in the Midwest or in other regions beyond California or the Northeast. I have an investment in Cleveland, Ohio. We're very active in Texas. So I would say that financial services' bias toward the coast is often misunderstood and a lot of great businesses are found outside of the popular urban hubs.
Timothy Goddard
We have definitely found that to be the case here at Corum.
Another question is, “What do you think about block chain?” This was a big discussion last month. Is this something you are starting to see as potential bolt-ons? Are you starting to see any traction there, or does that still need a cycle or two from your perspective?
Sabrina Chiasson
Battery is certainly on the venture side. That's an area where my colleagues spend a lot of time. I think for us, from a PE standpoint, it's still probably a little bit too early.
Mike Libert
I would say the block chain componentry, specifically for payments which Sabrina talked about is very interesting to us and watching where that evolves as the ledger for higher security for any kind of transactions will be really interesting as it evolves. I agree there are businesses that aren't at our scale yet, but we have our radar on that.
I think regarding currency, Bitcoin specifically, that's a bit further afield for us, and still feels more speculative and that's probably outside of our domain. But the core technology is something we're keeping our eyes on.
Timothy Goddard
That makes sense.
You both alluded to this, can you talk a little more about what kind of customer attention or churn you like to see. I know that is something for some folks to get their arms around, is what is a good churn? Obviously it will depend on the market, but can you speak broadly to that?
Mike Libert
It depends on the category. I would broadly say we like to think about net retention, and we define that as existing customers after churn, but including price increases and upsells. If that is north of 100%, that's a very attractive business, because that means your business can grow every year, just based on your existing customers without landing any new customers. I think any business that has net retention about 100% has that intrinsic ability to continue growing forever and that is certainly a beautiful business model.
We also look at gross retention, which is just the cancellation or people think of that as attrition, and I think anything north of 90% on the annual basis, or less than 1% monthly attrition is pretty stick and recurring and very attractive to us.
Sabrina Chiasson
I think I would have had the same exact answers, so consistent thinking on both growth and net retention, and I guess it is important that that is how we define it. There are a number of ways to calculate retention, but we think about it similarly, so gross retention, north of 90%, net retention north of 100% are very strong metrics. For us, if we see a business that is south of 80% gross retention it is usually a non-starter for us.
Timothy Goddard
That makes sense.
Looking back at the last couple of years, with the significant number of bolt-ons leading to this larger PE deal flow that we have seen, what do you think is driving this larger amount of bolt-ons that you guys have both done quite a bit of. Sabrina?
Sabrina Chiasson
I think the technology market is one and any market really where scale matters and there is scarcity value associated with scale. We've been particularly active on the add-on front as we think about building value in our existing platforms. So I think really it is a question of getting scale and then when you're in a vertical market, being able to cross-sell and up-sell an existing base which hopefully is sticky if you have invested in a company with the dynamics that Mike and I have laid out.
Timothy Goddard
Mike, anything to add?
Mike Libert
Yeah, I would go back to the last question on retention, I think in categories where customers are very hard to replace, they are very embedded, acquiring new customers is very expensive from an organic perspective, you know, sales and marketing, and it's actually often more cost effective to buy businesses that already have those stable customer relationships, those long-term embedded relationships. Therefore I think just from a capital strategy, it's more valuable and faster time to market to acquire businesses instead of trying to spend a lot of money on sales and marketing.
Timothy Goddard
Logical.
A couple of questions. I know you are both heavily focused on SaaS and recurring revenue, but what about items that are still on-premise? That may be where the customer piece comes in, Mike. Or things like tech-enabled services or IT services. How do you think about that?
Mike Libert
On the on-premise question, we're always willing to evaluate on-premise software businesses. I think software is valuable no matter how it is deployed, but certainly that impairs a little bit of the value. A better way to think about it is we have to price the business in a way that is appropriate relative to the amount of work we're going to have to do to bring that product to the cloud. One of the first things we always do with any acquisition is migrate the product to the cloud. We call that our Windows-to-web migration. I do think the future is very much cloud-based software, but that's okay. We can make that migration over a 6-12 month period. We're willing to take on that project, but certainly if the existing owner or seller has made that transition I think that will help improve the value of their business when they decide to sell it.
As it pertains to services, of course, anything that is recurring is attractive to us. I do think there has been a lot of migration towards tech-enabled services, I would just encourage business owners in that category to find a way to structure contracts that are currently annual and repeating and recurring. I think traditional IT services, where it is much more of an hourly labor utilization type business model can be more challenging from PE, it's just less leverage-able and there is less visibility into the future.
Timothy Goddard
Great. Before we wrap up, anything to add, Sabrina?
Sabrina Chiasson
No. I would say we continue to evaluate and have invested in on-premise solutions. I think you see companies that are on-premise with subscription revenue models that we'll still invest in and we also still invest in perpetual license businesses, so not something that we shy away from. I think it depends on the market. Some are just, if you look at the banking software space, on-premise is pretty prevalent in that market and so we've gotten comfortable with that. On the services side, I would say both focused on recurring revenue as well as gross margin profile, I think if you have a truly tech-enabled service, you're able to demonstrate that with high gross margins, so that's usually what we look for when we evaluate those businesses.
Timothy Goddard
Thanks to both of you.
We're going to turn things back over to Bruce to close us out. Bruce?
Bruce Milne
Thank you to Mike and Sabrina, great job. Thank you to Tim for hosting that discussion.