Tech M&A Monthly: What Happens If You Don’t Sell?
Good morning, afternoon, or evening, wherever you happen to be in the world. My name is Timothy Goddard. I am the executive vice president of marketing for Corum Group, and I'm very happy to be bringing you the June edition of Tech M&A Monthly. We've got a great agenda today. Gonna start with an event report from the Electronic Entertainment Expo, or E3, then our June 2018 research report, and then our special report, What Happens When Deals Fail? I don't know if you hear a lot of M&A advisors talking about that, but we're going to because it's an important topic. Also important is what's happening at E3. So right now let's go to Jim Perkins, reporting from there, Jim?
The E3 Gaming Expo has been a whirlwind and a great event for gaming firms right now. I have been so busy with buyer and client meetings that I've barely made it onto the show floor. But I wanted to share some developments that I think will be most relevant for tech companies in or adjacent to the video game space.
First, Microsoft announced the acquisition of four gaming studios in the US, Canada, and UK in one of the larger such announcements made in our space, which is obviously relevant to any gaming CEO and could drive M&A in the space as competitors in both Asia and the west respond. Second, many of the major players are all in with eSports, and while that market is still evolving it is moving extremely rapidly. Whenever a trend moves as quickly as this one is moving, we see consolidation happen quickly as well, sometimes much more quickly than anyone expects. Innovators creating real value in the space should be considering an M&A process sooner rather than later to avoid being left without a dance partner when the music stops.
And finally, the release of multiple wireless virtual reality headsets along with announcements of a number of new games, including names you might recognize like Wolfenstein and even Tetris, means that VR gaming has another opportunity to win over what remains a skeptical market. Under the surface, we're seeing more interest in AR, augmented reality, than VR, at least for the moment. The E3 wraps up today, and we'll be sure to cover any additional relevant announcements during our mid-year report webcast next month.
Thanks, Jim. Be sure to tune in for that. It will be the expanded version of what we're about to hear about the previous month. So, to turn it over now to the research team, Elon Gasper, Amber Stoner, and Patrick Cunningham, Elon?
Thanks, Tim. We begin with the public markets which climbed in May, led by tech again as the NASDAQ and S&P Tech hit new peaks after gaining 5%. Europe did well again too, given less concern about interest rates there than in the US, where the Fed just hiked another quarter point yesterday. Though worries about rising rates and geopolitical risks remain, they've receded enough that many non-tech averages set or are closing in on record highs since our last webinar. With good stock prices and buyers' bulging balance sheets, the Tech M&A market's demand side case remains intact.
Yet, our Corum Tech M&A Index caught a small decline in disclosed May deal volume as supply constraints and buyers' cost discipline push them upmarket to mega deals, nine in May, over twice last May. More on those big deals in a moment. Private equity continued to take share from strategics, and the market continues to globalize, as shown by record high cross-border transactions. 2018 tech mega deals keep piling up, with volume led by the business world sectors of horizontal and vertical applications, while the internet sector commanded the highest total value. Infrastructure's two largest deals this year occurred in the last month, as Microsoft shelled out $7.5B for leading code development platform GitHub in Redmond's biggest transaction since catching LinkedIn two years ago.
The move should help it reach and recruit some of GitHub's 28M developers to Azure in its cloud war against Amazon and Google, reportedly the losing bidder for GitHub. And while that current developer platform settles into Microsoft's hands, old-line enterprise stalwart BMC was bought for a reported $8.25B by KKR, the massive PE deal setting the stage for future bolt-on purchases and a fresh, though delayed, start for BMC as a cloud competitor, too. What else did we see in the infrastructure sector, Amber?
The infrastructure sector has seen a slight decrease in sales multiples, while EBITDA metrics climbed back to the early year highs. We've tracked a collection of deals in the identity verification and network monitoring spaces.
Colorado-based security information and event management pioneer LogRhythm was picked up by Thoma Bravo. In Boston, network access control player Bradford Networks was acquired for $17M by unified threat management giant Fortinet, to extend its reach in the enterprise internet of things space by advancing continuous visibility of all devices. And in April, Israeli endpoint security automation startup Secdo was bought for $100M by Palo Alto Networks to strengthen its detection and response inventory.
In the identity verification space, London based customer onboarding specialist Dealflo was acquired for $55M by digital identity veteran VASCO, to enhance its eSignLive solution, in use by such customers as BMW and Santander. Fraud alert startup Confyrm was picked up by credit card issuer Capital One, the fifth credit card company to make a tech acquisition this year, in an example of our digital currency trend, to improve its consumer identity protection capabilities. And Portland-based device intelligence firm iovation was bought by credit reporting agency TransUnion to bolster its anti-fraud capabilities, and build upon its recent purchase of Callcredit in the United Kingdom.
Financial buyers reigned over a network monitoring M&A deal flow last month. Scotland's capacity planning analytics startup Sumerian was acquired by TA Associates backed trading app performance monitoring company ITRS, for Sumerian's machine learning technology. And finally, network visibility firm Lumeta was picked up by security intelligence company FireMon, whose CEO mentioned both technology and complementary customer base, FireMon, commercial, Lumeta, government, as reasons why the fit was compelling. Now to the consumer sector, Patrick?
Valuations in the consumer sector dipped down, reflecting the volatility of that market, which still yielded notable deals in education, gaming, and fantasy sports.
In the education sub-sector, AI enabled writing feedback provider WriteLab was picked up for $15M by textbook rental company Chegg to enhance its array of digital services for students. And Primary Capital Partners acquired online professional education platform ICS Learn, which has a range of consumer education courses and certifications, such as accountancy, leadership, and fitness instruction.
In gaming, New Zealand's Grinding Gear Games, a free to play role-playing game developer, was acquired by Internet giant Tencent to add yet another game studio to its massive portfolio. Hyper casual developer Gram Games was bought for $250M by social games developer Zynga to pick up hits like TenTen, and appropriately, Merge Dragon. Electronic Arts picked up both the Israeli team and the cloud gaming technology developed by subscription based game publisher GameFly for $54M to broaden its audience of game streaming players.
And within three days of the US Supreme Court decision that opened the door for the legalization of sports gambling, former unicorn FanDuel was acquired for $158M by the Irish bookmaker Paddy Power Betfair which seeks to leverage the popular daily betting site in the coming environment. Paddy Power also paid $48M for fantasy sports app Draft just last year, which may be merged with FanDuel, to capitalize on the new opportunities in fantasy sports.
IT services sales and EBITDA valuations stayed stable, and high, as last month saw acquisitions of systems integrators and security-focused services.
A flurry of deals in the Microsoft systems integration arena featured Toronto based Azure migration specialist Infront, picked up by managed services provider Green House Data to add Fortune 100 companies to its clientele, and a record of operations in complex IT environments. Swiss Microsoft analytics firm Evolusys was bought by Germany based systems integrator Bechtle to expand its presence in Switzerland. And Microsoft based IT systems developer StoneHouse was purchased by business communications specialist Chess, which remains dedicated to its proactive M&A strategy, also purchasing a unified communications player, Frontier, in the same month.
In the CRM space, Salesforce integrator RelationEdge was acquired by managed cloud hosting company Rackspace, which aspires to underpin its SaaS expertise and build upon the acquisition of TriCore last year. And in April, PlanetPro, offering sales force integration and analytics services, was bought by digital transformation firm Kellton Tech to expand its gateway into the Asia Pacific.
M&A in security-focused services surged over the last month. Sage Data Security, handling the entire cybersecurity lifecycle for vertical markets, was acquired by public sector tech vendor Tyler Technologies, which plans to integrate Sage's managed threat detection offerings into its ERP and education divisions. In Utah, Red Sky, specializing in cybersecurity services for data centers and cloud solutions, was bought for over $40M by network and security integrator Presidio, adding a strong presence in the mountain states and additional security solutions. Finally, South African Ntsika Group, which develops multi-factor authentication solutions for manufacturing and telecom clients, was picked up by regional tech holding company Foursight.
And another mega-deal just a couple of days ago, as BI solutions provider Adaptive Insights was grabbed for $1.6B by HR software maker Workday in that buyer's biggest transaction ever, preempting Adaptive's IPO which was scheduled for today. In our mid-year report next month, we'll talk about why this deluge of mega deals matters to smaller companies' potential to be bought as bolt-ons and tuck-ins. Back to you, Tim.
Thanks, Elon. Looking forward to that. But before that happens, what happens when deals fail? It's an important question, and it's important that we, that you have an answer before going into a process, so you know what happens if things don't go the way you want. To kick this conversation off, let me turn things over to our founder and CEO Bruce Milne.
What Happens If You Don’t Sell?
Recently I attended a college graduation where the commencement speaker talked about how to be successful in life. His message was simple. Success is not from how you do when things are going well, but how you handle the setbacks and failures that befall all of us. Can you pick yourself up, learn from your mistakes, improve, move on?
Since failures and setbacks are so much more common than the wins it was a good message for the millennials about to embark into the real world, and it's a good message for our special presentation today since the number of failures in M&A exceeds by multiples the deals that are announced.
Indeed, 80% of all self-managed efforts to sell your own company are not successful. We have the largest, most detailed buyer knowledge base in the world, and in a recent report, we noted that only 11% of buyers' overtures to sellers end up in a transaction. Every day we get companies that come to us suffering from a failed merger attempt. We can't take them on, or at least right away until they've made changes. The biggest single reason is that they talk to only one buyer, the worst mistake you can make.
Some know our case study of what not to do, botching their contact with the most logical buyers. So let's listen to a panel of experts, CEOs that have sold their own company, about what you do when you don't sell. Let me turn it over to our moderator, Timothy Goddard, executive vice president, Tim?
Thanks, Bruce. To kick us off as we go through some reasons potentially that these deals fail let's start with Jim Perkins, Jim?
One set of factors that can kill a deal that is out of your control are geopolitical changes that impact the buyer or the seller. With the world going through so much turmoil, this is not uncommon. This can be as simple as currency fluctuations. What happens if the party that is buying you has the value of their currency suddenly change? Or, in the case of China recently, the government has highly regulated the cash flowing out of the country, which significantly impacted M&A in the games industry. Other destabilizing events can make it much harder to get a deal done. The conflict between Russia and Ukraine over Crimea dried up deals in that part of the world for a while, and Brexit has certainly shut down some deals. These are situations where the transaction may be put on hold and are just out of your control.
Thanks, Jim. Now, over to Paris and Jaber Tannay.
Another problem that many of you may have faced is an industry announcement by a major player that disrupts an entire market. Suddenly an Amazon, Google, or Microsoft announced that they're going to do something in your space. Maybe they've acquired someone or maybe they've released a new product, but all of a sudden, the buyers get concerned about the future. That can be a good thing, making your company more valuable, but not always. We sold a company a few years ago and that killed the market for their competitors. The acquirer, Google, took their product and embedded it in Chrome, giving it away for free. Another case could be some broader kind of technology shift where your technology stack falls out of favor or new developments make certain aspects of your technology obsolete.
Thank you, Jaber. Now, from a couple things that may be outside of your control to something more in your control, let's go to Steve Jones, based in Utah.
Misalignment on valuation is the major reason that a deal doesn't get done. The good news though is that the right M&A process can solve this problem. Sometimes you may be early to market. This is way better than being late though. When there's a big gap between you and potential buyers does that mean that you give up or stop the process? No, it just means that you take a step back and perhaps go on hiatus, which we'll talk about in a minute. We recently went through a very similar situation. Our client had expectations for a deal in the $40M range but would have agreed to a value of about $32M. That would have been a great exit for them. They're a very solid company and received multiple offers in the high 20s. The market had spoken. But there was a disconnect there, a spread of about four or $5M. During our M&A process, we introduced them to three or four companies that couldn't do a full acquisition but wanted to create strategic partnerships with an immediate contribution to their revenues. Rather than accept a lower offer, they decided to focus on these alliances and grow their revenues to get them closer to their exit price, likely within about a year from now.
Thank you, Steve. I'm looking forward to talking a little more about that topic here shortly. But before we do, let's go back to HQ and Daniel Bernstein.
Sometimes the buyers are interested but they want you to meet some product or sales milestone. It may be something as simple as getting a certain number of international users, closing a key account, or finishing your SaaS implementation. It's not uncommon for smaller companies that are selling. Sometimes they even go so far as to help you open doors in trial situations, where they themselves become early users. But be cautious. Some buyers will try this approach of working together, let's date before getting hitched logic, usually wanting an exclusive relationship. You have to be careful about jumping into such a relationship. It's a classic buyer's ploy of getting the milk without buying the cow. Fully calibrate if there are others willing to acquire you. This is why it's imperative to have a full global partner search.
Absolutely, Dan. And now, to Houston, Texas, Jeff Brown.
Partner conflict, this is a big one. This is one of the reasons we tell people to be sure they're aligned ahead of time. This includes founders, investors, board members, key employees, even family. You don't want to be getting to your closing and realize that one of your partners doesn't want to sell, or that you have a complete misalignment on the deferred payouts, or what roles you're going to play going forward. This also applies to the amount of escrow, willingness to take earn out or stock for payment, employment agreements, whether you're willing to relocate, length of non competes, et cetera. And the issue of liability needs to be discussed and agreed. For example, passive investors may be asked to step up to joint and several responsibilities for ongoing deal liabilities. This is where a seasoned deal maker on your side can really help.
Thanks, Jeff. Now, over to Berlin and Julius Telaranta.
We have talked about problems on your side that cause the deal to be sidelined. What about problems on the buyer's side? There are many. For example, the buyer in some cases is being acquired themselves. They may still want you, but they can't do anything. They themselves are in the middle of a major release. Perhaps your deal champion leaves in the middle of the process or they are in the middle of making another acquisition. If they have an FCC investigation, they have to hold off doing any acquisitions, or they haven't raised the cash yet. Sometimes it is as simple as they need more time to sell the deal internally, to key alpha investors or internal decision makers.
Thank you, Julius. Now, to Canada, in Ottawa, Bruce Lazenby.
Lack of preparation is probably the most common reason deals don't get done. The buyer asks questions you're not ready for, and in some cases, haven't even thought about. Due diligence is a minefield. This is where the deal dies if you're not prepared. At a minimum, well in advance get a good due diligence checklist, ideally one from one of the most logical buyers. They will not only cover all financial records, but sales records, contracts, shareholdings, patent protection, IP ownership, quality of revenue, churn rates, and so much more. It can be daunting. You will not be able to answer all of the questions fully but at least you'll know what they will be and you will have formulated a response reflecting you at least thought about these issues in a serious way. This is where access to a deep buyer knowledge base makes a big difference. First, in getting interest, then negotiating a better price, and finally in making it successfully through due diligence.
Thanks, Bruce. Now, staying in Canada, but moving to the west, in Vancouver, though I believe he's in Edmonton today, Dave Levine.
Lack of resources and losing focus can easily kill deals. What we mean by this is that when you're selling it literally is another full-time job, all while you're trying to run your company. This leads you to number one, deal fatigue, and relatedly, number two, business drop off due to lack of focus and the time to attend to your business. You're trying to run your company plus go through all the preparation, research, and contact with buyers, as well as financial forecasts and valuations, and the various stages of negotiation, due diligence, and contract production. It's wearing, not only in running the business but on you personally as CEO. It can sour you on the process, or the buyer's questions may feel like they're just there to wear you out. If you then don't make the projections you've supplied, interest wanes, valuation falls, and offers become more structured, none of which you want, which is why a team needs to be assembled to offload you in a well-orchestrated process.
Thanks, Dave. So, looking at all those things, obviously the reasons that a particular deal fails, that's gonna impact what you do next, but the over the many years that Corum's worked with privately held companies and seeing all of these happen to one extent or another one of the things that we've seen is that you learn things during the process.
So, whatever the eventual outcome is you learn things and that's a journey together. And so sometimes to get maximum value for our clients which is obviously our goal the best move is to take them off of the market for a little while, so they can take what they've learned, apply it, and then build a better company before taking them back to market. Steve touched on this a bit. We call this process hiatus.
Really it's unique in the industry, and sometimes it may just last for a few months. It can be years, but it's really not uncommon that a number of our most recent and upcoming deals that we've announced were for companies that spent some time in hiatus. But, the key to making hiatus successful is to leverage the unique benefits that come from a global M&A process. So we're gonna hear now from a few more deal makers on what those benefits look like, starting here at HQ with Rob Schram, Rob?
Going through a disciplined M&A process will leave you with a better business model. In short, you're compelled to look at your company through the lens of the buyer community. What would they want from you in terms of top line, bottom line, market share, or reduced operating costs? How about domain expertise, specific technology, customer and vendor relationships, and overall best practices? How cohesively do all these pieces fit together, and what's missing or needs improvement? The process won't necessarily hand you all the answers, but at least you get a much better understanding of what the questions are, what's important to buyers, and how to improve your company's market standing. When you go through this exercise of being self-critical which is essentially a strategic audit utilizing feedback from outside experts and a range of interested parties you end up developing a better, tighter business model. Even if you didn't sell that's a big benefit, and well worth the time and cost of an M&A process.
For the next benefit let's go to Minnesota and Rob Griggs.
During the search process there's extensive research on buyers, their strategies, and how you'll fit to create the highest degree of future synergy, as well as a deeper dive on the competitive landscape and how you objectively stack up against them, which is part of both your initial positioning as well as due diligence. Then you receive feedback from potential buyers, what they like about your company, what they don't like, and where they see your market going in the future. Guess what? You end up with a much better strategic focus, a stronger foundation for growth, and better positioning for eventual re-entry into the M&A market. What's that worth?
Thanks, Rob. Now, back to HQ, Joel Espelien.
The third benefit is the best market feedback imaginable. A professional M&A process ends up reaching out to everyone in the world who either knows or should know your company, including strategics, international players, and the smart private equity buyers in your space. The discovery process produces high-level meetings with smart people who understand your market, your customers, and the problems you're solving. As a result, these meetings almost always produce highly candid and invaluable feedback about your market, your strategy, the competition, and most importantly your positioning. As the CEO of a private tech company you couldn't pay for this type of insight, and in many cases, our clients have taken this learning and gone back and built better business models, better go to market strategies, and ultimately more valuable companies.
Thanks, Joel. Now to Jon Scott, managing director of the Corum Group International in Amsterdam.
The fourth benefit of the process is the business relationships you gain from non-buyers who express interest in you. On average, there are 15 parties that express initial interest, but only one buyer. Often firms that progress to going under an NDA with you have an interest that may be as simple as they wanna be a customer, or maybe they wanna be a joint venture partner, develop a joint product, bundle your product as a promotion, white label or OEM it, or simply sell the products to their user base themselves.
Thanks, Jon, and then number five, especially if you've done all these things over the course of whether it's your first time out, or you've gone hiatus, the exit, and of course any of these benefits ultimately justifies the time and expense that goes into this process. So, let's now hear about how this is working in a specific case, and I'll turn things back over to Bruce Milne, Bruce?
Let's end today's presentation with a case study. In this case, it was a $3M company. They got two offers of five to $8M. Their target had been only four or five, so they felt pretty good. The problem? The offers fell apart. One buyer had stock problems. In the other, the champion left. The company then went on hiatus, and we used the time to improve. They built a tighter business model based on the preparation they had done and the research. They used the market feedback to reposition product lines and to reprice not only the product but ongoing support. More importantly, those relationships they had built with non-buyers we had introduced them to were used to build some profitable connections that really increased their value.
We reentered the market 18 months later and sold the company for $40M on a 90% recap, meaning that the company founders kept 10%. They pocketed $36M. Then around two years later, the buyer, a PE firm, sold it again for over $100M. Our client, the founders, got another $10M. In all, they received $46M, around 10 times their expected price for the company originally, all of that because of the process they went through and what they learned and how they applied that during the hiatus period. Tim, I'll turn it over to you.
Thanks, Bruce. We've now got just a bit of time for some Q and A. So if you have any questions about this process, about the research report earlier, please do get those in. We'll try to answer them here and if we don't have time, we will get to them via email afterward. One that has come in, and it's a logical question, that Bruce, I'll turn over to you, what can I do to make sure my M&A process doesn't fail, Bruce?
Well, probably the number one thing is just to get educated. Read as much as you can. Go to conferences that talk about how you go through the process of focusing on those areas that you may feel you're weak. For example, preparation, your documents, that sort of thing. There's quite a lot of conferences on our website, both Selling Up, Selling Out, as well as the Merge Briefing, and then we also co-sponsor with the World Financial Symposium and other organizations. So take a look there is a good start.
That's a good answer, and we've also got, we mentioned the WFS and we've actually got three events coming up with the World Financial Symposium this fall in both London, New York, as well as our first ever in Sydney, Australia, which we're looking forward to. So that should be great. With no other questions having come in, if you've got any, feel free to reach out to us via our website or email. But in the meantime, thank you very much for attending, and hopefully, we'll see you back for our mid-year next month. Let's go to our close.