Introduction
Timothy Goddard
Good day, my name is Tim Goddard, EVP of Marketing here at Corum. We're very happy to have you join us for our quarterly report for Q3 2017. We have a lot to get to, including the full report on the M&A market, so let's get to our agenda. We have some event reports coming up, in addition to the 150-200 of our own events that we run annually. We also participate in a number of outside events and we're going to talk about a few of those today. We're going to take a look at another webcast coming up, for those of you in the healthcare sector, we're going to hear a little bit on succession planning, which I know is a vital issue for everyone listening, and then we'll get to our quarterly research report. We'll then do some Q&A as we have time. Please send us those questions.
Event Reports
Let's start, and I'm happy to introduce Joel Espelien. He is our VP of Client Services here at headquarters, as well as being a lawyer, which brings him to the ABA national business law meeting.
Joel Espelien
Thanks, Tim. I just returned from the American Bar Association national business meeting in Chicago, IL, a great event that attracts the top M&A lawyers in the US, and even many from abroad. The big theme this year was the impact that smart money PE buyers are having across the landscape. Experience doing deals with PE funds has become absolutely critical for anyone advising private technology company sellers.
One of the key tools in negotiating definitive agreements has become the use of deal term surveys. These surveys provide data regarding how specific terms get results in real-world deals. This data is very powerful, but be careful. As a study group within the M&A committee presented this year, terms vary substantially with the size and sophistication of the buyer. Only the most discerning advisors understand that what’s “market” for a deal with a small PE fund may be quite different than what’s “market” for Amazon or Google.
More than ever sellers need advisors who have experience across both financial and strategic buyers of all shapes and sizes to get to the optimal outcome.
Timothy Goddard
Thank you, Joel. Now to Vancouver, actually an event in Waterloo, and Dave Levine on Acetech.
Dave Levine
Thanks, Tim. At the end of September I had the opportunity to speak to over one hundred CEOs at the quarterly Acetech Ontario dinner in Toronto. Acetech helps established software company CEOs grow their businesses through networking, roundtables and seminars.
During my talk, I covered drivers of technology trends, software company valuations, and an overview of the M&A process. Valuation and market timing were hot topics at the dinner as Ontario’s software M&A market has been very active over the last twelve months with over seventy companies being acquired.
Timothy Goddard
Thanks, Dave and congratulations on your recent promotion to Senior VP.
Now Ivan Ruzic, who recently spoke at Carnegie Mellon.
Ivan Ruzic
I felt privileged to be invited to speak at the Swartz Center for Entrepreneurship at Carnegie Mellon University two weeks ago as part of their CONNECTS series. Carnegie Mellon has historically been, and continues to be, a focal point for technical innovation in the US.
The audience was composed mainly of graduate students from the Tepper School of Business and technologists – mostly information technology and robotics, interested in taking their ideas from conception to commercialization.
I spoke for over an hour on the state of the technology M&A market together with the technology trends that we see driving M&A activity. Much of the talk was based on Corum’s experience in helping entrepreneurs identify the value drivers that help a young company secure an early and optimal exit.
What was particularly gratifying was seeing the number of companies these individuals had already started – fully one-quarter to one-third of the group, with many more actively contemplating the life of a serial entrepreneur. Corum, and I personally, are looking forward to keeping in touch with these individuals as they grow and innovate their companies.
Timothy Goddard
Thanks, Ivan.
Special Report: Succession Planning
Now I'd like to turn things over to our CEO and founder, Bruce Milne, who along with Joel, again, is going to discuss some succession planning. Bruce?
Bruce Milne
The recent loss of Tom Petty had my wife and I lamenting that we are losing our favorite singers way too young. In one conversation last week, she asked if we'd updated our will. Fortunately, we had, but let me ask you, have you updated your will?
Selling your company is the most important transaction of your life, and to do it right can take a while. We've seen tragic losses of founders, investors, key employees critical to the process. Or maybe there is heart-breaking news about a terminal disease. You need to plan. Are you ready? Let's hear from Joel.
Joel Espelien
Thanks, Bruce.
Succession is a topic that every founder or CEO needs to consider, even if you’re not immediately contemplating retirement or concerned about health or family issues. There’s a lot to think about, and we’ve only a little time today, but we're planning a special webcast on that before the end of the year.
There are 3 main categories of succession issues to think about:
First, your business and your role in it. Many of you are indispensable to the day-to-day operations of you businesses. This is understandable, but a real problem for both succession and M&A. You need systems, processes and management in place so your business can not just survive, but thrive, even if you are not around every day. It’s critical to be able separate yourself from the company, which is not easy. You may contemplate retiring in 2018, but the company needs a vision, a roadmap and even revenue projections for 2020 and beyond. Starting now will put your own mind at ease – and pay major dividends when a buyer sees a well-run company with a bright future.
Second, the governance and stakeholders of the company need to be addressed. In many founder-run companies, governance is minimal because the founder makes the key decisions. But what if you’re not around? Conflict can easily rear its ugly head among management, board or shareholders. Again, start now to bring clarity to these different groups. Management and employees need to know the business will continue and that there is a strong bench of leaders ready to step up. The Board needs to be able to make decisions, including the ultimate decision of whether or not to sell the business. Finally, there needs to be consensus among shareholders about the company’s direction. The last thing you want is a nasty shareholder fight when you leave, or when a buyer comes to the table.
Third are the nuts and bolts of succession itself. Have you created a living trust or at minimum a basic will that includes your ownership interest in the company? Have you considered tax and other estate planning issues, including any philanthropic or legacy goals? Have you made provision for financing, insurance, and other operational handover issues? For example, you don’t want the bank to suddenly call in the company’s line of credit, which unbeknownst to everyone else, was tied to a personal guarantee on your part. Give particular care to any corporate burdens or responsibilities that will be thrust upon your significant other, children, or other family members. Are they ready, willing or able to do what is required? Obviously, all of this would be heightened in an M&A scenario, where stress can be high, timelines are short, and significant decisions simply cannot be avoided.
As you can see, there’s a lot to think about. We’re helping founders work through these issues every day now in the M&A context and are committed to helping business owners get to the optimal outcome.
Timothy Goddard
Thanks, Joel. That special succession planning webcast will be before the end of the year, so look for notices on that. I know that most of our listeners are the primary rainmakers, as well as the folks who cover payroll, so I think you'll find this particularly worthwhile.
Q3 2017 Research Report
Also very worthwhile will be our Q3 report on the tech M&A market, led by Elon Gasper with his team Amber Stoner, Yasmin Khodamoradi, Amanda Tallman, Becky Hill, and Patrick Cunningham. Elon?
Elon Gasper
Thanks, Tim. We begin with the Public Markets, in which major indices rose again to new records in a Q3 that marked the 8th up quarter in a row for the first time in 20 years, taking another gravity-defying step upward as easy money, good earnings, and widespread investor confidence whipped the old Bull closer yet to its longest run ever, over eight and a half years now, amid record cash stockpiles and valuations.
So I’ll say it in another way this month: potential sellers who think this will go on forever should wait until their company is perfect before going to market; everyone else should look at starting an exit process to at least calibrate value during this extraordinary window of opportunity—remember, you need runway time for tech M&A, which often takes nine months, or more.
Our Corum Index this quarter echoed this year’s supply crunch, as buyers, particularly PEs, strained to find good companies left to acquire. To turn their huge cash stockpiles into competitive advantages and revenue growth amid fast-changing tech landscapes they’ve combed through VC portfolios, reached across borders, hunted out the lifecycle edges of both older targets and startup trailblazers, pushing all three of our Attributes to record levels.
Billion-dollar deals occurred in 5 of our six sectors in Q3.
Infrastructure optimization company Syncsort was bought out by PE Centerbridge Partners for $1.3B.
In the Internet space Disney took BAMTech for $1.6B to set up its own streaming service—as CBS has, now, too, and last week Netflix announced increases in price and original content spend; we expect this unbundling trend to produce more M&A special effects.
Office Depot’s acquisition last week of IT Services veteran Compucom should help the beleaguered retailer offer tech services to its business customers, joining the bricks and clicks trend we’ll discuss later.
Three of the year's 4 Horizontal megadeals have been purchases of payment processors, with 2 this quarter in the Nordics; including the region’s top payment card solutions provider Nets, buyer itself of Corum client Paytrail, now selling up to PE Hellman & Friedman for $5.3B at 4.5x revenue.
And Vertical tops megadeal value and volume year to date, with one of the largest health information vendors, WebMD joining KKR-backed Internet Brands’ network of vertical websites and services for $2.8B, at just under 4x revenue and about 16x EBITDA.
This has been Vertical’s year by many measures, including its leadership of sales multiple valuations. The quarter saw some minor re-sorting among the other sales multiples, with Internet passing Horizontal again to regain second place. Among EBITDA multiples the same 3 are on top, in different order, led by the bid for mature, profitable internet models. Among the lower 3, the highly volatile Consumer EBITDA multiples crossed lines, nearly sinking into last place as IT Services continued its historic climb.
But back to Vertical, let’s lead off our deeper dive with that. Yasmin?
Vertical Software Valuation Metrics
Yasmin Khodamoradi
Sales multiples in the Vertical sector hovered just below historic highs while EBITDA ratios are up from the prior month.
The real estate subsector led the pack in sales and EBITDA multiples, with A/E/C, healthcare and automotive following closely behind.
In the HealthTech market, Fidelity National Financial made its first investment in this space, acquiring medical document management software provider T-System for $200M, setting the stage for future tuck-in acquisitions.
In Australia, Charm Health, which provides oncology ehealth systems, was bought by Citadel for $6.5M.
And in Italy, Santa Lucia Pharma Apps, which provides hospital workflow and prescription management SaaS, sold to H.I.G. Capital.
Next, in financial services, Verisk spent over half a billion dollars to pick up 3 companies: G2 Web Services which offers merchant risk and fraud intelligence SaaS for $112M, insurance software developer Sequel Business for $322M, and LCI which provides bankruptcy monitoring and management SaaS for $151M.
NASDAQ resumed its M&A activity last quarter, first acquiring Sybenetix, a SaaS firm with AI capabilities for financial market surveillance, later adding online financial reference site eVestment for over $700M.
In the Loan management space, Vanguard Software was purchased by Jack Henry to strengthen its digital underwriting capabilities.
And Snap Capital, an online platform connecting business owners with lenders, was integrated into LendingTree’s online marketplace for $12M.
In the AEC space, construction has seen considerable PE activity. Seattle-based Dexter + Chaney, which develops accounting and payroll software, was bought by Bain-Capital owned Viewpoint to bolster its own construction ERP suite. And project management SaaS Newforma, was picked up by Battery Ventures as a platform acquisition in the space.
In the energy sector, the recent consolidation wave in the utility tech segment involved energy management SaaS acquisitions: in France, GreenFlex sold to energy producer Total, and in the U.S., Silver Spring Networks found a home with Itron, which paid about a billion at 2x revenue.
In the Automotive space, automotiveMastermind, which provides behavior analytics for the vehicle purchase process, was snapped up for nearly $400M by IHS Markit, to leverage its monetization of data science.
Dropcar, which is developing an app for valet parking and vehicle support, was acquired by network integrator WPCS in the hopes of capitalizing on the auto-tech race.
Similarly, car valet startup Luxe was acquired by Volvo to help the Swedish automaker expand its digital stack through valet convenience.
In the Real Estate space, listing site New Home Feed was picked up by Zillow to enhance the quality of their new construction listings.
ForRent.com was purchased for $385M by CoStar to add millions of renters to its other online property, Apartments.com. This deal followed their purchase of Screening Pros, a tenant leasing service.
Similarly, On-Site, was bought for $250M by data analytics company RealPage to enhance its screening and document management solutions.
In government, the public safety field saw a number of deals, including first responder skills management provider EVALS, which was acquired by public safety media specialist Praetorian Digital.
And in Louisiana, Murphy Technologies, which delivers public safety SaaS to agencies, was bought by Kologik to extend its inventory of Computer-Aided Dispatch applications.
How is the internet sector doing, Amanda?
Internet Software Valuation Metrics
Amanda Tallman
The third quarter saw a decline in its volatile EBITDA multiples, while sales multiples rose steadily from the midyear, following an uptick in both the diversified internet and social networking subsectors. Travel metrics were down slightly but there were plenty of deals outside of the US.
In India, corporate travel service provider, Uniglobe ATB was picked up by Yatra, making it the largest corporate travel platform in the country.
Vayant Travel Technologies, a Bulgarian travel commerce and search engine provider, was bought by Houston based PROS for $35 million to bolster its real time commerce and merchandising solutions.
Priceline’s Kayak picked up Brazilian metasearch travel site Mundi as it furthers its market expansion.
Expedia’s Trivago, followed suit, buying AI-enabled travel recommendation startup Tripl, adding personalization technology to its platform.
Private equity also got involved with Apax Partners acquiring a majority stake in hotel search engine and booking company, Go Global Travel.
The food ordering and delivery market was another that saw notable consolidation in Q3 as Chinese Giant Baidu sold off its food delivery business, Xiaodu, to Alibaba backed startup, Ele.me , in a deal valued around $800 million.
Korean food delivery platform Fly&Company was bought by German-based giant Delivery Hero, expanding its operations to over 40 countries.
And In the U.S., meal kit delivery service, Plated, was gobbled up by grocery retailer Albertsons; this is another bricks and clicks deal in the wake of Amazon’s acquisition of Whole Foods.
Amazon had a delivery deal of its own, as its Middle Eastern commerce platform, Souq, bought Dubai-based delivery marketplace, Wing, strengthening its same-day delivery business and cementing its presence in the region.
Dating site M&A also saw activity as mobile startup Evolve, a machine learning dating advice app, married into marketing provider, Hubspot’s platform, further enhancing the capabilities of its CRM engine.
And German dating app, LOVOO, was picked up by Nashville-based Meet Group for $65 million, despite last year’s bot scandal.
How did the IT Services market fare, Becky?
IT Services Software Valuation Metrics
Becky Hill
Sales multiples in developed markets for IT Services have plateaued since April this year while EBITDA metrics have grown more than 12% year-over-year.
In the emerging markets, valuations have bounced back after a short dip in August, though EBITDA multiples have increased steadily each month this year.
The developed markets have made up ground but emerging markets are still heavily favored in valuations.
Q3 brought a number of deals in Microsoft-based system integration. For instance, Salt Lake City-based Customer Dynamics was acquired by IT services firm Microexcel for its customer experience solutions. And Netherland’s integrated ICT services provider Getronics was grabbed for $220M by Brazil’s Grupo Cimcorp to expand its global footprint in the ICT market.
Elsewhere, HPE has been on a quest to broaden its hybrid cloud capabilities acquiring Cloud Technology Partners to complement HPE’s PointNext division with expertise across major cloud platforms.
Colorado-based AWS consulting partner 47Lining joined forces with REAN Cloud in an attempt to bolster its big data and machine learning offerings.
In Iceland, cloud management platform developer Greenqloud, was acquired by NetApp to accelerate its capabilities in the delivery and integration of hybrid cloud data services.
Focusing on health IT, Symphony Health Solutions was picked up for $530M by public clinical research company PRA Health Sciences, and in Japan, Konica Minolta acquired medical imaging services provider InviCRO to accelerate the impact of its precision medicine platform.
What’s happening in the horizontal sector, Patrick?
Horizontal Software Valuation Metrics
Patrick Cunningham
Sales multiples in the Horizontal sector stabilized over the third quarter after rising earlier this year.
Notably, multiples rose in the people-focused sectors BI, Marketing AdTech, CRM and Human Resources.
In marketing automation, Israeli SaaS enterprise software giant, NICE acquired Satmetrix, maker of customer satisfaction and loyalty platforms. Location intelligence company Sense Networks was bought by mobile advertising firm Verve.
Illustrating the AI-enablement trend, HubSpot purchased not one, but two AI-enabled marketing software makers. In July it picked up B2B specialist, Kemvi, and in September acquired Motion AI.
In the highly active logistics space, order management provider Newgistics was snapped up for $475M by Pitney Bowes to help it improve its positioning in the U.S. domestic parcels market.
Descartes acquired MacroPoint, provider of load tracking and management SaaS and its connected network of 2 million trucking assets for $107M and an impressive 8.6x revenue.
In Advertising, data science monetization drove a number of transactions, with Chicago PE GTCR picking up hyper-local programmatic advertising platform Simplifi. In Australia, Tapit, a proximity marketing firm using NFC and beacons, was grabbed by mobile marketing company Geronimo. And French AI-powered in-app ad mediation layer AdinCube, was purchased by London based mobile monetization company Mozoo for $20M.
Elsewhere in advertising, enterprise software vendor Deltek made its first acquisition as a part of Roper Technologies by picking up Denmark-based WorkBook for its project-based tools for ad agencies.
In the compliance space, Chilean ereceipt firm Paperless joined tax compliance and reporting software provider Sovos for its cloud based receipt platform and Latin American customer base.
Finally, in the HR subsector, eHarmony’s career spinout, Elevated, was picked up by Florida based Candidate.Guru.
How has infrastructure fared, Amber?
Infrastructure Software Valuation Metrics
Amber Stoner
Sales valuations in the Infrastructure sector continued to climb after a slight drop in July, accompanied by normalized EBITDA metrics.
Multiples rose in all 6 subsectors. EBITDA leader data security remains critically important for all enterprises; we tracked a number of security deals, across various domains, over the course of Q3, in a reflection of Corum’s Data Security trend.
Enterprise networking veterans fortified their inventories as we saw threat defense startup Cyphort picked up by Juniper Networks for Cyphort’s risk mitigation platform, including machine learning analytics. Security analytics firm RedOwl was bought by Raytheon-owned Forcepoint; RedOwl’s user and entity behavior analytics tech could enhance Forcepoint’s human-centric cybersecurity system. And K1 Investment paid $225M for adaptive access control company SecureAuth to merge it with Core Security, a vulnerability discovery firm under K1’s umbrella.
Cisco brought its 2017 acquisition total to 6 with another deal in the enterprise security space by picking up Observable Networks, which should increase compliance for apps deployed on public cloud and enhance the networking giant’s Stealth Watch Solution.
Cisco also spent $320M for hyperconverged storage systems developer Springpath to build on its HyperFlex product, in line with Cisco’s data center-oriented strategy.
Backup and recovery solutions attracted buyer interest in Q3 as cloud-based disaster recovery and data protection firm Axcient was acquired by business continuity specialist eFolder to reinforce its file share component for managed service providers.
Zetta, which offers disaster recovery as a service, was picked up by Marlin-Equity backed data protection company Arcserve to further its exposure to midsize enterprises.
Internet of Things software companies continued to be attractive acquisition targets. GE Digital spent $40M for IoT app development startup IQP to extend the drag & drop capabilities of GE’s Predix platform. With its third deal of 2017, GE, one of 2016’s top acquirers with 11 deals, has slowed its acquisition pace this year, possibly a result of the recently reported management shakeup.
Finally, IoT cloud company Arrayent was purchased by carrier-grade IoT services provider Prodea to create an end-to-end connectivity platform for data-intensive industries.
Consumer Software Valuation Metrics
Patrick Cunningham
Sales valuations in the Consumer sector slowed after reaching a peak in June, with EBITDA ratios dipping down as buyers have become more selective in their M&A endeavors.
We saw casual and core gaming valuations head in opposite directions while other consumer valuations remained fairly constant.
In gaming, Alibaba acquired Ejoy, marking Jack Ma’s long-awaited entry into the sector, and may herald the return of what had been the biggest buyers in the space, the Chinese tech giants.
In the meantime, we did see a bump in other high profile consumer deals. Stringify, an If This Then That rival, was plugged into Comcast to build out the media and telco conglomerate's Internet of Things software.
Elsewhere, we’ve spotted a number of deals in digital streaming, such as LiveXLive picking up two streaming companies, including radio streaming player Slacker Radio for $50M, which hopes to tune up its partnerships with live events, music publishers, and artists.
England’s DJ-focused livestreaming startup Chew.tv was absorbed by Singapore’s BandLab to complement its online musician collaboration tools.
Texas-based anime streamer Funimation Entertainment was snapped up for $143M by Sony to tighten up competition with Netflix and Hulu’s animated offerings.
And IAC’s Vimeo added streaming services through its acquisition of Livestream.
The ridesharing industry is traveling the consolidation route. In Germany, Daimler sold off Croove, a private car-sharing platform, to the Airbnb of cars, Turo, marking a new partnership between Daimler and Turo. Daimler then acquired door-to-door carpooling pioneer Flinc.
Also in Germany, mobile parking startup Parkpocket was picked up by auto components group Continental for its knowledge of parking data and expertise in urban areas.
Israeli startup Streetsmart, which develops machine-learning based operations for managing taxi fleets, was bought by taxi hailing company Gett to attach to its earlier acquisitions of US-based Juno and Radio Taxis.
And finally, if you’ve been daunted by flat-pack furniture assembly, you can now relax and enjoy a shopping trip to IKEA, as the home furnishing titan recently bagged online home services marketplace TaskRabbit to help you put it together.
Elon Gasper
Bricks and clicks again, and that wave keeps coming, as we predicted after Amazon took Whole Foods; three more have stacked up already this month. Retailers like Ace Hardware and Walmart joining Target, Signet and the ones we discussed earlier, turning to tech M&A to fend off Amazon and remember, would-be sellers who got started after its Whole Foods deal are likely now just nearing the middle of their M&A process. As I said earlier, sellers need to allow for 9 months, often more, so we look forward to reporting on many more in our monthly webinars. Back to you, Tim.
Timothy Goddard
Thanks, Elon.
Q&A
We have just a couple of minutes here for questions. One that we do have time for, Elon, with this discussion of bricks and clicks, is that just going to be with ecommerce deals or what else should we expect?
Elon Gasper
I think that we are expecting to see both ecommerce deals where bricks are coming in from one side and the alternative, like with the Whole Foods deal. I think there are many ways to put the pieces together to form the companies of the future, which will have a big foot in both worlds.
Timothy Goddard
Another thing I think we're also going to see is logistics pieces and the parts that will be needed not just to compete with Amazon from the front end, the web-surfing side, but also from the logistics side, which they have built up with a pretty significant infrastructure that other companies are beginning to need to emulate.
With that, we'll have to take the other questions via email. Thanks for attending, and now we'll go to our close.