Introduction
Bruce Milne
Thank you for joining us for Tech M&A monthly. This is our Q3 report for 2016, and what a quarter it was. I’m Bruce Milne, CEO of the Corum Group, your sponsor for today’s event. We have a jam-packed agenda with field reports, special reports, and some landmark deals to report on, as well as a full report on three different sectors.
Let’s start off with our special reports, starting with Allan Wilson and a special presentation from the World Financial Symposium. We co-sponsor the World Financial Symposium, do market spotlights for them, and Allan hosted a recent event.
WFS Market Spotlight: Manufacturing
Allan Wilson
In last month’s edition of the WFS spotlight series, we discussed the use of new software solutions to advance US manufacturing. We were very fortunate to have Joe Barkai and Peggy Smedley join us. Joe and Peggy are luminaries in the use of technology to improve manufacturing effectiveness.
They both reported seeing a significant increase in M&A activity in software solutions, leveraging the Internet of Things, and machine to machine AI. They also discussed seeing additional demand from US manufacturing executives for real-time operational intelligence dashboards that provide early warning of problems in supply chain, manufacturing execution, customer fulfillment, and asset performance, allowing them to take remedial action when problems occur.
The recording of this Spotlight, entitled, Offshore to Onshore: The Renaissance of US Manfacturing, can be found on the WFS website, wfs.com.
Bruce Milne
Thanks, Allan. You can go to wfs.com to see past events and we have some upcoming market spotlights on AI, Fintech, and estate planning that you won’t want to miss.
Field Report: Jagex acquired by Zhongji Holding
Now let’s go to a landmark deal with JAGEX.
Jim Perkins
Thanks, Bruce. We’re proud to announce the sale of our client JAGEX, the owner and developer of the iconic RuneScape online gaming franchise, to Zhongji Holding. Zhongji Holding is a new public company focused on gaming, part of Shanghai Zhongji Enterprise Group, a highly respected and well-established Chinese company. Corum represented JAGEX during the M&A process. Congratulations to the JAGEX shareholders and to JAGEX CEO Rod Cousens and the entire team there.
Like our sale of Digital Extremes to Leyou Technology and Perfect World last year, this is another instance of active Chinese buyers looking for growing Western gaming companies, to put their IP to work in China while continuing their success globally.
Field Report: EEDAR acquired by The NPD Group
In another gaming deal, congratulations to our client EEDAR, a specialist video game market research firm built on top of a proprietary games database. As they publicly announced, they were acquired by the NPD Group, a global information provider for video games as well as consumer goods, foodservice, media, and more. The combination of the two companies creates what the media is calling a “game market research juggernaut” and we’re excited to see what they accomplish in the future. Good luck to them.
Bruce Milne
Thanks, Jim. As a firm we’ve been telling you about Chinese buyers for a long time and to watch out for them. They’re now one of the biggest buyers out there, we’ll do around a half-billion dollars in business in recent times with Chinese buyers. Congratulations to them again. That was an interesting sale of a Cambridge, England company to a Chinese buyer in the US.
Field Report: Punters.com.au acquired by News Corp Australia
Let’s go down under for a very interesting story, an acquisition by Rupert Murdoch.
Dan Bernstein
About a year and a half ago I went for my first trip to Australia, where I met the founders of Punters during a Merge Briefing in Melbourne. We struck up a conversation and discussed where the business was headed. Luc Pettett started Punters.com.au in 2009, borne out of his two passions, programming and horse racing. Since that time, the company has grown and matured, whilst still keeping close to its founding mission.
Australia is the world’s third-largest wagering market, and betting and sports are a big part of the culture there. Online wagering already accounts for about 50% of all betting activity—a percentage that grows each year.
At the root of Punters’ success is the team’s deep understanding and sharing of the desires of Australian horse racing enthusiasts, a passion that translates into Punters.com.au – a multifaceted web site that brings the experience of the race track online, complete with the social aspects of racing that has connected more punters than any other website ever has.
Since the time of that first conversation, Punters became a client of Corum. Luc and the team were introduced to a large number of potential buyers before inking the deal with News Corporation of Australia. The combination of Punters with the world’s largest media powerhouse will accelerate their growth into Australia’s 6 billion dollar horse racing industry, providing them with a monthly audience of 16 million.
I and all of Corum sincerely congratulate the Punters team on their transaction with News Corporation and wish them the very best in this new chapter of their lives. I look forward to my upcoming trip to Singapore, Australia and New Zealand in November, where we have seen up and coming software companies create a significant return on investment through a targeted, globally focused M&A process.
Q3 Research Report 2016: Megadeals open the door for tuck-ins
Elon Gasper
Thanks, Bruce. We begin with the Public Markets which continued in record territory, driven by the unprecedented levels of cash in the system and buyers’ need for growth amid a fast-changing landscape, with major M&A and market changes pushing tech-heavy indices the highest as they again soar above broader averages after shrugging off a couple drops that in retrospect represented a healthy correction on the path upward to what’s now clearly the longest bull run since the ‘90s.
Potential sellers should be taking advantage of this historic situation to calibrate value and reap the other rewards of an M&A process during these exceptionally favorable conditions.
Our Corum Index of Tech M&A KPI’s drop in transactions showed the sell-side scarcity that’s another sign of—and a contributor to—this intense demand, as buyers were forced upmarket by the pressing need to “move the needle” in growth and strategic maneuver. It printed an all-time record number of tech megadeals, a 70% year over year increase and 45% more than the previous record high. We see this deluge of megadeals disrupting the tech landscape with major implications for sellers as:
· Buyers will be looking for smaller companies to tuck in around their new purchases;
· Competitors will be spurred into matching investments in inorganic growth;
· And mid-sized players will be facing fears of consolidation waves eroding their market positions and profits.
These effects will work together, making now a great time to check if an exit window is opening for your company.
Let’s sample a few of those megadeals, Thomas?
Thomas Wright
As mentioned, cash-rich Chinese companies are looking to deploy capital and are responsible for all three of our Consumer megadeals, totalling over $9B.
Rackspace was taken private by PE firm Apollo Global for $4.3B, or 2.1x revenue. The 38% premium signals that Apollo will continue Rackspace’s rehabilitation, possibly by acquiring higher-margin bolt-ons.
Verizon acquired fleet management SaaS provider Fleetmatics for nearly two and a half billion, following its purchase of fleet telematics provider Telogis.
Dell EMC plucked out its Enterprise Content Division, with Documentum in there, handing it to OpenText for $1.6B - freeing up Dell to expand in cloud computing, security and predictive analytics.
Yahoo may have finally found a home with Verizon for $4.8B, hack price adjustment demand allowing. Remember, nothing good happens in due diligence.
And finally, network-security specialist Infoblox went to Vista Equity for $1.6B as the security tsunami is continuing to crest like overall sector valuation multiples are too, nearly all up for the quarter, with Sales to Enterprise rank order maintained and matching 3 years ago, Vertical pulling away some while IT Services remains last but catching up, with a 14% rise this quarter. EBITDA metrics also held rank, with the longer trend still Consumer flaunting nearly 80% growth over the last 2 years, pulling it above the more commoditized Infrastructure segment to rival Vertical for second place.
Speaking of Vertical markets, what’s the deeper story there, Yasmin?
Vertical Software Valuation Metrics
Yasmin Khodamoradi
Sales multiples in the Vertical sector reached some of their highest levels this year, mainly driven by growth in the AEC, energy & environment, and real estate subsectors.
In the AEC vertical, we saw our January prediction for more drone software M&A, play out as Paris-based Redbird, a provider of drone analytics for construction was scooped up by drone services giant Airware to sell U.A.S. hardware, software, and analytics to large enterprises seeking turnkey drone solutions.
We also saw several cross-border deals in the Building Information Management (BIM) space as steel modelling and fabrication SaaS provider Design Data rounded out the AEC portfolio of Nemetschek, expanding on their current expertise in concrete, for 46 million at 4.6x revenue. Australia’s IGS BIM Solutions was acquired by UNIFI Labs to reinforce its foothold in the digital building content niche. The third quarter also saw multiple deals in healthcare. Dallas-based Anthelio was sold for $275M to French IT services provider Atos to expand its reach in healthcare IT.
Care management platform provider Essette was snapped up by benefits and claims management provider HMS for $20M to help their payer solutions subsidiaries improve outcomes with better population health management.
Germany-based exocad, a provider of CAD/CAM solutions for the dental industry, was bought by The Carlyle Group, who compared the fast-growth of the company to its earlier acquisition, Corum client UC4.
And Apple picked up Gliimpse, a Silicon Valley startup which pulls disparate personal health records into a single archive. This tech may be used in Apple’s HealthKit framework to manage chronic diseases like Diabetes, a growing market and focus of both companies.
In megadeals, Swedish PE firm EQT made its first U.S. based acquisition, paying over $2B for Press Ganey, which provides patient satisfaction surveys for healthcare providers.
In the rapidly developing world of connected and autonomous vehicles, OpenSynergy’s embedded software for integrating automotive operating systems into a single view was picked up by Panasonic, which has its sights set on driver assistance technologies.
UBER continued its investments in autonomous driving, reportedly shelling out nearly $700 million for Otto, which provides retrofit-kits to create self-driving trucks. And Urban Engines came home to Google to enhance their Maps with location based analytics for urban planners, creating a so-called “internet of moving things.”
Elon, how did the Internet sector fare?
Internet Software Valuation Metrics
Elon Gasper
Valuation multiples there bounced back to near the previous quarter’s levels for EBITDA, and above for sales, across nearly all subsectors. Along with high-profile deals in social networking and travel, we saw demand for search engine related tech, with Google back in action as a strategic acquirer, taking deep search tech developer and sharing app maker Kifi into its Spaces team; Alibaba paid a reported $200M for Wandoujia, China’s largest remaining independent Android app store, and a key to mobile entertainment search in a country that still bans Google Play, to help the e-commerce behemoth catch up with search and app distribution leader Baidu.
Blucora-owned Infospace was snatched up by OpenMail for a reported $45M. The deal should finally erase Infospace’s notorious dot.com past and add some search expertise into the email marketing company.
In the realm of social networking, video chat room Paltalk bought Snap Interactive to broaden its offerings; it’ll elevate the Snap Interactive name to be the overall corporate brand; Entrepreneur matchmaker FounderDating was adopted by competitor CoFoundersLab to create one of the largest communities for entrepreneurs, now boasting a quarter million users in the combined network.
Travel continues to be a roiling market segment. Barcelona-based Trip4real, an online exchange for travel activities, joined Airbnb, which continues to extend its agenda to cover your whole trip.
Finally, travel innovator Hipmunk was caught by SAP-owned Concur, continuing to expand on its value proposition to corporate travelers, in an interesting case of a consumer-facing solution fused into an enterprise play.
Speaking of the enterprise world, how has Infrastructure fared, Amber?
Infrastructure Software Valuation Metrics
Amber Stoner
Infrastructure valuations saw an upward trend in the latter part of Q3, with EBITDA multiples hitting a 2016 high. ITSM multiples were up, leading the sector in EBITDA while security remained steady near the top of the sector in both sales and EBITDA. Enterprise security and application monitoring companies were frequent targets for acquisition last quarter.
Google added to its enterprise cloud offerings with its acquisition of Apigee, for $625M at 6.5x revenue, to help the search giant catch up with rivals Microsoft and Amazon. Behavioral analytics provider Prelert was grabbed by Amsterdam-based Elastic to bolster its incident management capabilities with machine learning algorithms.
AppNeta traded in its TraceView SaaS technology to its long-term partner SolarWinds, to expand SolarWinds’ app performance monitoring portfolio after the deal with LOGICnow back in June. And application performance management company AppFirst was purchased by ScienceLogic, in their first-ever acquisition, another example of a deal between partners seeking to transform tech into value.
We’ve also been tracking a number of deals in enterprise security in Q3 including TPG’s $2.2B acquisition of McAfee from Intel last month.
CyberFlow Analytics was pocketed by Webroot adding data science to its network anomaly detection services. Core Security spent an estimated $10M for Atlanta’s Damballa to augment its threat protection Actionable Insight Platform with machine learning tech.
Confer Technologies was bought for $85M, at 17x revenue, by Carbon Black to build on its next-generation endpoint security platform. And Oracle sustained its acquisitive pace snapping up Palerra for its LORIC SaaS solution, enabling security automation across enterprise apps.
We also saw consolidation in the identity and access management space. Nevada-based LaunchKey was rolled up by iovation to create a multi-factor authentication toolkit leveraging customer security requests. Ping Identity made its first acquisition after being taken private by Vista Equity, securing its partner UnboundID to facilitate customer engagement and scale it into connected devices.
Speaking of connected devices and Internet of Things, DGLogik was picked up by Acuity Brands to add more intelligence into energy usage management. In Sweden, Kombridge was acquired by Tele2 to fortify its security portfolio within the connected devices network. And InterNiche and its networking assets were taken into HCC Embedded to streamline HCC’s stack of communications and storage solutions for IoT.
Thomas, how’d the IT Services sector perform?
IT Services Software Valuation Metrics
Thomas Wright
Sales multiples in developed markets continued their ascension to new heights, while emerging markets have seen sales multiples regress towards the yearly average, after a brief jump in July. However, in IT Services, most exits are determined through EBITDA multiples, which reached new peaks in developed economies and maintained their relatively low levels in emerging countries. Despite the continuing convergence, emerging markets still yield twice the multiples of their developed counterparts.
In the sector’s largest deal, Avnet’s IT Solutions Group was acquired by Tech Data for $2.6B. With the deal, tech data completes its pivot from a pure tech company to one that generates almost half its revenue from datacenter and hosting services. This is yet another example of an unusual buyer, further evidence of the need to enter into a full M&A process.
Moving to the sector’s top acquirer, Accenture flexed its financial muscles this quarter. The consulting giant reinforced its French Connection through purchasing Parisian consultancy OCTO Technology for $129M, or 3.1x.
Next, Accenture focused on its digital division, rolling up Netherlands-based MOBGEN and Madrid’s Tecnilogica, to help deal with the increasing technological demands in Europe, particularly around the emerging IoT ecosystem.
Moving across the pond to California, systems integrator DayNine Consulting was acquired by Accenture to expand its cloud services and Workday expertise.
There was a new dimension to Digital Advertising service deals this quarter, with India-based 3DPhy being purchased by PropTiger Realty to use 3D visualization to provide an immersive marketing & advertising experience for real estate buyers. And Brooklyn-based VR agency Fake Love was bought by the New York Times to fold it into its “T Brand studio” for ramping up custom-branded marketing campaigns.
3D graphics were also a driving force behind the gaming developer deals. Canada’s Volta was acquired for $4M by Keywords Studios to enhance its high-end visuals.
Finally, the Israeli mobile games developer Scene53 was picked up by PLAYSTUDIOS for its platform which hosts virtual events and runs multiplayer, real-time games in a 3D setting.
Horizontal Software Valuation Metrics
Amber Stoner
Valuations in the Horizontal sector have been climbing after a slight dip early in the quarter with sales ratios reaching two-year highs. The CRM and HR subsectors saw gains in multiples while SCM retained the top spot in sales multiples despite being down for the quarter. And even with a drop in multiples for the Marketing and Ad Tech subsector we saw a number of deals in that space over Q3.
In an adtech megadeal, Orient Hontai Capital paid $1.4B for mobile targeted ad network company AppLovin. The deal confirmed the interest of Chinese investors in ad-tech, recalling the buyout of Media.net earlier in August.
New York-based Olapic, which generates brand-oriented content from various social media, was nabbed by Monotype Imaging for $130M to expand its brand engagement strategy. Marlin Equity bought marketing automation firm Revenew to complement its Q2 purchase of Teradata’s Marketing Applications business. Top acquirer j2 Global added Florida-based SharpSpring in a July flurry of acquisitions to expand its e-mail marketing and lead generation lineup.
In a closely related sector, Customer Engagement and Analytics has been mirroring the marketing automation M&A trend. Amdocs spent an estimated $85M for its partner Pontis to help identify the best touchpoints for customer engagement. Nuance grabbed TouchCommerce for $215M to bolster its customer care solutions with digital engagement offerings. And Peerius went to KKR-backed EPiServer to add omnichannel individualized interactions into its e-commerce offerings.
Artificial Intelligence influenced M&A in the marketing sector as well. Paris-based Nextperf, specializing in AI-enabled ad retargeting, was sold to multi-channel marketing player Rakuten to improve its real-time ad intelligence. eBay purchased Israeli predictive behavior analytics company SalesPredict for $40M to support its structured data efforts.
And just last week, Salesforce geared up its Marketing Cloud, getting Krux for $680M. The deal is poised to inject advanced audience segmentation and intelligence into the CRM giant’s data management stack and is the latest in its unusual series of high-valued acquisitions, including omnichannel sales solutions provider Demandware. We expect Saleforce’s M&A window to stay open through at least the end of this year.
The AI-enabled solutions trend also left its mark on the workforce management sector as San Francisco’s Kanjoya was acquired by Ultimate Software to utilize its tech in UltiPro Perception for collecting and acting on employee feedback.
And for the last of our six sectors, Consumer…
Consumer Software Valuation Metrics
Thomas Wright
Both sales and EBITDA multiples continued their recovery climb this quarter, with sales multiples up nearly 20% since June and EBITDA almost returning to its March highs. This healthy rebound was reflected by the market subsector valuations increasing across the board.
A picture may be worth a 1000 words, but Pinterest isn’t taking any chances, instead it purchased New York based, and mobile-optimized, “read-later” app provider Instapaper to add text to its signature visual bookmarks.
Here in Seattle, Trover, a mobile travel photo sharing application, was acquired by the neighboring Expedia to act as a marketing tool. The travel giant hopes to use shared photos as triggers for Expedia users to book their dream destination.
Diving into the seemingly never ending pool of Gaming deals, the French creator of the “Endless” series of games, Amplitude Studios, was purchased by industry stalwart SEGA to shore up its PC game portfolio and reinforce its European position.
Finland’s TicBits was sold for $3.7M, or 3.4x, to Hong Kong-based Animoca Brands. As Jim commented earlier, Asian buyers are continuing to look west for new growth opportunities.
The California-based brand-experts behind the mobile Marvel Avengers game, TinyCo, was acquired as part of SGN’s pivot towards Gamertainment: the combination of gaming and entertainment embodied by the Angry Birds movie and Kim Kardashian mobile game.
Wagering has also been a hot ticket as shown by Dan’s sale of Punters. Stride Gaming doubled its online bingo share in the UK by acquiring 8Ball Games for $16M and the assets of Tarco for $24M. Online sports betting and wagering site TonyBet was acquired for $4.5M by the Swedish online casino Betsson, adding both a betting element and Eastern European presence to the virtual casino.
Moving to Wearable technology, Ireland’s provider of GPS tracking systems for professional athletes PlayerTek was acquired for $2.7M by Australia’s Catapult Group, which looks to expand its established leadership position in the elite sports sector into the consumer markets - bringing professional grade sport technology to the average Joe.
Elon Gasper
Finally, a deal bringing together widely-applicable computer vision and AI core tech with the automotive vertical: The Israeli startup SAIPS now looks to help Ford extend its self-driving car strategy with deep learning algorithms, a good lesson in how a company with core tech and broad horizontal possibilities can sometimes find its best value from a Vertical buyer.
And that’s our update on Q3 2016, record megadeals, value, unusual buyers and disruption setting up more demand. What a quarter! Bruce?
Bruce Milne
Wow. Thank you to our research team for that great report. So much to digest right there. Interesting, lots of French sellers, Chinese buyers, and activity in every sector and we’re seeing activity with all the buyers. Our Monday meetings where we review all our clients worldwide are fun with all this happening.
Q&A
We have a number of questions around how big you have to be, how quickly you can get a response, and I’ll throw that to Dan.
Dan Bernstein
Thank you, Bruce. One of the questions we get a lot is, “Am I too small for M&A? How do I know?” One of the things you need to recognize is that it is better to be too early than too late. Look at your business, look at where it is headed, look at your sector, look macroscopically at what is happening in the market, and also microscopically at what is happening in your sector. Where are your competitors headed, how are they going to consolidate around you, and if you have questions, you better talk to a professional to help you calibrate exactly where you are vis a vis the rest of the market and your competitors. Reach out to us, we’ll be happy to talk.
Bruce Milne
Good. Another related question for Dan, how long does it take to get interest?
Dan Bernstein
Great question, Bruce. For the most part, it’s like answering the question, “How long is a string?” It really depends on you as a company. For the most part, the best way to make sure that you get interest right away is through proper preparation. This is why we spend time with companies to make sure that we present their best assets first and I think that drives the interest forward. For the most part, our engagements go between 9-12 months on average, but it really depends.
Bruce Milne
The interesting thing about timing, we do in our conferences mention the 9-12 month window, but we’re seeing a lot faster transactions. Like for example JAGEX I think we took them to market in January and they were in LOI and closed by the time six months were up. We are seeing faster transactions and a lot more buyers, which kind of relates to the next question, from Ari in Finland. He asked what the difference is with Chinese buyers. We get asked that a lot because we do a lot of work in China. The difference is that the further east you go, the more you have to have some kind of relationship or trust. It’s absolutely crucial, as all of us know in business. If they know you and trust you, then things will move forward quickly. If there are lawyers or accountants or the party is doing technical due diligence, etc, they don’t know you, they’re trying to bridge a gap, they’re in trust, it’s important you work with someone who has a relationship.
We had an interesting experience last weekend at a retreat with one of our Chinese advisors. He was involved in taking 21 companies public and they’re all going to be buying. Their number one target is the US. Even the smallest are going after US companies and that’s one reason why we’re going to be running a conference on, “Is there a Chinese buyer in your future?” because they are beating out even the PE guys, the American and European strategics. They are coming, even more than they already have.
That puts us close to the end, but there was a question I wanted to address how long it takes. What’s interesting is that we’re seeing companies go out and get interest almost immediately. I have one, I think, with 20 interested parties in 10 days. This is like the dot-com period. I love it.
We have a lot more questions and we will get back to you individually. Thank you for attending and we will go to our close.