Introduction
Bruce Milne
Good day to you and welcome to our Tech M&A broadcast for December, 2016. We have a special presentation today on When You Are Approached: Twelve Tips to Insure Deal Success.
I’m Bruce Milne, CEO of the Corum Group and your moderator for today. We have a jam-packed 30-minute agenda, starting with a special report from London. Then we’ll hear about end of year tax planning, our 2016 research report, and our 12 tips for success.
Special Report: WFS London Report
Now let’s hear from Peter Prince in London.
Peter Prince
The 29th of November was the annual World Financial Symposium take place in London, hosted by Olswang. Speakers and panelists came from various backgrounds as the worlds of PE, VC, buyers, sellers and bankers were well-represented.
Among the speakers were some high profile sellers, most notably Rod Cousins, the celebrated gaming CEO who had recently sold Jagex. The audience—and there was standing room only—were captivated by the journey that Rod described.
Other topics covered were great growth stories and panelists discussing, in fine detail, top tips on how buyers view potential targets, which dovetailed well with that of PE and VC.
Clearly one of highlights were the questions posed at the panel of sellers, CEOs of Xysmo, Orthoview and Symphony made the selling process seem at times like a journey of intrigue and a lesson in how to keep your nerve.
Hosted by Olswang, a firm themselves in the process of merging, were represented by partner Antony Waller, who eloquently discussed the pitfalls associated with negotiating the sale or purchase of a company. Such was the quality of content on offer that the conference seemed to fly by, despite there being ample time to network. The agenda was closed by Bruce Milne, who shared his thoughts based on three decades of selling companies, on valuations and how to achieve them, which was very well received.
As the organizer of the event—Tanya Froehlich—commented, following a question on how to improve this year’s conference, she said, “We need to get a larger venue, given the popularity of the event and its attendance.” Few would argue with that comment.
Bruce Milne
Indeed, more space. We had to go from the schoolroom style to getting rid of the tables, we just didn’t have the capacity.
This event has been going on for 13 years on growth and exit strategies in major venues around the world. We hope you can join us next year.
I can tell you that Rod Cousins’ presentation was amazing, full of wisdom in his evolution of building the company and selling it for over $300 million.
End of Year Tax Tips
As some of you know, our website shows that we were going to be doing an end of year tax planning conference with tax tips and estate planning. That was scheduled for the end of November and we had to cancel it due to the election. The presumed winner was Hillary Clinton and, of course, her proposals were completely different than Trump’s. She was proposing a 45% estate tax, taxes going from 35 to 41% depending on the state you were in and corporate structure, up another 5% and reducing the amount you could give in your lifetime total from $5.45M to $3.3M. Our conference is co-sponsored by Morgan-Stanley and Wells Fargo, and one of our law firms, Perkins Coie.
The conference was cancelled because we were putting together a program talking about estate planning, trusts, valuating the things to put into trusts, and basically how you could take advantage of trusts so as not to have your estate taken away and pay more taxes. The advice was going to be to get in this year versus next year because rates were going up.
Donald Trump: totally different. He’s going to lower the income tax down to 15% or 20%, which is the world average for corporations, with the idea that we need to be competitive. You don’t have to be putting together a trust and such and doing valuations if you know that is the case. He will also have no inheritance tax, which was one of his platforms.
So our advice for the end of the year is pretty simple. Get your expenses in this year when they really count and defer your revenue till next year.
Now, let’s go to our Corum research report for this year with Amanda, Amber and Thomas.
Corum Research Report: A World of Buyers
Amber Stoner
Thanks, Bruce.
We start with the Public Markets, where major indices continued to set new records as this old bull market gets an injection of fresh blood in its anticipation of that more business-friendly US government.
And though the S&P Tech index pulled back a couple percent in November as investors shifted some resources to other sectors, it’s recovered all of that this week. Our advice remains that tech execs should take advantage of this historically long bull market and other favorable conditions to at least calibrate the value of their company.
Our Corum Index reflected a drop in the number of transactions as buyers recover from the surprising US election and the mid-year shopping spree, adjusting their demand in favor of gap-filling solutions and sought-after verticals. Private equity and venture capital deals are up from last November while remaining in line with last month’s numbers, with the pace of megadeals normalizing.
Samsung paid $8B for car infotainment and audio company Harman to drive into the connected car market.
Scotland-based Skyscanner ended its IPO plans when it was snapped up by Ctrip for $1.7B, helping China’s online travel firm continue scaling up globally. Both deals confirm Corum’s predictions back in January; we’ll review those, and others, as well as reveal our 2017 predictions in our upcoming Global Tech M&A Monthly Forecast on January 19th.
Infrastructure remains the leader in deal volume and value for the year. Siemens, in a bid to broaden its industrial software stack and strengthen its position against rivals GE and Bosch, spent $4B to get electronic design automation company Mentor Graphics.
And Netherlands-based automotive chipmaker NXP was picked up for over $39B by Qualcomm in an attempt to move from smartphones into the hot connected cars space while striking the largest chip deal in history.
Thomas, what else happened in Infrastructure in November?
Infrastructure Software Valuation Metrics
Thomas Wright
Infrastructure EBITDA multiples reached their highest level in the last year while sales multiples remained stable.
Recent US legislation requiring EMV chips in credit and debit cards is changing the payment processing M&A landscape. Similar legislation in England caused a drop in physical fraud and a sharp increase in virtual or card-not-present fraud, leading buyers to target firms that specialize in digital fraud protection. Examples include Visa acquiring long-time authentication partner CardinalCommerce, and just this week American Express purchasing authentication and anti-fraud mobile application vendor InAuth for $150M. Due to the recent nature of the legislation, Corum expects this acquisition trend to continue.
Security remained the dominant player within the sector, as new innovations in cloud and IoT spurred healthy M&A. As usual, SaaS business models were appealing to buyers for their ability to expand markets and generate stable, recurring revenue.
SaaS security stalwart Proofpoint paid $55M for cloud application control provider FireLayers, adding cloud expertise to Proofpoint’s email security platform and allowing the Company to stay current with the market through inorganic growth.
Continuing the recent trend of buyers using M&A to enter new markets, electronic design automation giant Synopsys purchased security software cloud development tools provider Codiscope and application security consultancy Cigital, its first two deals in the security space.
Corum’s Top Ten Tech Trends of AI Enablement and Data Security interwove with the purchases of aggregated threat intelligence software provider Soltra by NC4 and the sale of Irish security analytics startup Barricade to Sophos. Both Soltra and Barricade apply machine learning techniques to feed anonymized and aggregated threat data from its customers into its advanced algorithms – allowing for predictive alerts and reduced risk of data breaches. Remember that in today’s competitive M&A landscape, having deep data pools can be the perfect defense to the classic build vs. buy debate.
Finally, Madrid-based AGNITiO, a voice authentication and biometrics firm, was grabbed by Nuance to consolidate its position in the user authentication market. Through creating a unique “voiceprint,” organizations are able to automate their physical security measures with a lock whose key cannot be stolen.
Horizontal Software Valuation Metrics
Amber Stoner
Horizontal valuations dipped slightly with a number of deals driven by demand for video advertising and machine learning technologies.
Video advertising enablement provider TubeMogul was acquired by Adobe for $540M to plug it into its Adobe Marketing Cloud. With video ad spending increasing, it is likely that there will be increased interest in the space, especially from other marketing automation companies.
Artificial Intelligence was also active in November as machine learning startup Wise.io was picked up by GE Digital to bulk up its Predix industrial analytics platform. The deal should increase GE’s data science capabilities along with its $915M purchase of ServiceMax potentially bolstering field service productivity across all industries, through the use of analytical tools.
Expert Personal Shopper, a Watson-based cognitive shopping assistant, was handed over to IBM by digital agency Fluid continuing a string of acquisitions for Big Blue’s Interactive Experience division and improving its “conversational commerce” offerings.
Across the Atlantic, England-based CRM and AI marketing SaaS provider BrightTarget was bought by Sidetrade, out of France, to enrich its Sales-to-Cash performance platform and apply machine learning algorithms to its B2B solutions.
In pursuit of optimizing sales forecasting, Callidus spent $13M to get Dublin’s Datahug for its patented tech bringing together diverse CRM sources. And elsewhere in the CRM space, customer feedback management company OpinionLab was nabbed by Verint to complement its customer engagement optimization portfolio with a range of real-time voice of the customer solutions.
Amanda, how did the vertical sector fare?
Vertical Software Valuation Metrics
Amanda Tallman
Valuations in the Vertical market are slightly down following post-election uncertainty but are still supported by major trends including multiple acquisitions of asset management SaaS, a larger focus on services in the digital economy, and increased M&A activity within the US, UK and India.
Starting in the healthcare market, UK-based clinical solutions developer DrugDev, acquired ConsentSolutions, an e-consent mobile SaaS company out of Maryland, to optimize site & patient convenience and add to the launch of its patient solutions unit.
In the pharmaceutical software industry, Raleigh based Ateb, was acquired by Omnicell for $41 million to incorporate their patient-management access portal and medication synchronization platform, providing an onramp for pharmacies to implement medication adherence programs.
German Medical data management SaaS company, Conworx Technology, was picked up by Siemens Healthcare to deliver open connectivity for over 100 point of care instruments and to keep up with the intensity of regulatory requirements for point-of-care testing.
In yet another connected vehicle driven deal, Sun Hydraulics, out of Florida, acquired the power control & vehicle technologies business units of Oklahoma-based Enovation Controls for $200 million with potential for additional earnout of up to $50 million, as the connected vehicle trend spreads to marine systems, power systems, and recreational vehicles.
The online Real Estate market is also seeing a wave of consolidation as India-based online-broker to broker exchange startup, REXPROP, was acquired by BroEx.
In the US, commercial real estate management SaaS startup, Hightower, joined View the Space for a reported $300M to provide asset management tools across the US and UK.
Amber Stoner
And earlier this week, Uber, apparently not content with its carpooling market share, moved into AI by acquiring startup Geometric Intelligence to form its own research center. The deal should match up Uber with the likes of Apple and Google, and extend its reach to the self-driving vehicle domain. Back to you Bruce.
Bruce Milne
Thank you, Amber, Amanda, and Thomas.
I’m always stunned by the range of buyers. You saw the usual top 20. There were some credit card companies in there. We saw a lot of nonsec companies in there and there continue to be a lot of nonsec companies buying. We saw a lot of companies in there that no one has ever heard of. The world of buyers is growing every day.
It’s very interesting, from our presentation in London, Jagex sold to what was at one time a bankrupt Chinese cement company that they had never heard of.
When You Are Approached: 12 Tips to Ensure Deal Success
Now let’s move on to our special report.
I’m going to start this section off by saying first you have to understand the numbers. Now, what do we mean by that? Well, we want you to know your odds. Selling your company is the most important transaction of your life. It’s about changing your life, so it can be very exciting to be courted. But you should understand the odds.
Let’s take a look at the numbers: 11, 48, 75, 80, 100. What do these refer to?
11% is the number of buyer solicitations that actually result in a transaction. That’s about 1 in 10. The problem is you may be one of the 90%. But you get all excited, you put your company on hold… be careful.
48% is the average improvement from first offer to closing with an auction process. That’s a lot, and that’s in liquidity. You have to have an auction process.
75% of the time there is another firm willing to pay more than the initial bidder.
80% is the failure rate for self-managed tech M&A. You don’t know what you don’t know and there are so many hoops to get through. Just due diligence alone can be overwhelming.
100% of deals involving one bidder are sub-optimal. You never get optimal deals if you only have one bidder. Your price, your structure, your liabilities, no way.
Let’s move to the rest of our report here and start in Berlin with Julius Telaranta.
Julius Telaranta
Immediately, before entering any merger discussions with a potential buyer, you should execute a non-disclosure agreement, and possibly a non-solicitation agreement if you are worried about them trying to poach your staff. As Bruce just described, buyer outreach seldom turns into an actual transaction: only 11% of the time. That’s an average from our buyer surveys—sometime it’s worse. Last week at the London World Financial Symposium, the buyer who bought my company in Berlin stated that about 1 in 20 acquisition overtures they make ends up in a transaction: that’s only 5%.
The point is, you have to be careful, and protect yourself from anyone trying to basically get your technology, algorithms and ideas… your “secret sauce.”
The NDA helps protect you and your company by imparting a duty to keep information confidential and only use it for a specific purpose; in this case, of evaluating an acquisition. Don’t be afraid to ask. It’s expected and shows you’re serious.
It will typically cover financial information, intellectual property, as well as the fact you are in M&A discussions.
You still need to be careful about when you discuss the most confidential data about your business – only disclose to serious buyers at the appropriate time.
On the flip side, we also caution strongly against being too restrictive in providing confidential data a buyer needs to evaluate your company. If you make it too difficult to get information to move along in the process they may lose interest or undervalue your business. Let your advisors help you strike the right balance.
Bruce Milne
Wonderful stuff, Julius. Now we go from Berlin to Jon Scott in Amsterdam.
Jon Scott
There are buyers known as “bottom feeders”. These buyers repeatedly put offers on the table that are well below the value of the company they are trying to acquire. These acquirers have a pattern of paying the absolute lowest value for their acquisitions. Sometimes they are just being opportunistic and hoping that they can hook you before you discover the true market value of your company and other times that are so very poorly valued themselves due to weak performance or operating in a declining market that they simply refuse to pay a market prices. In either case identify these bottom feeders quickly. They will waste a lot of your time and use tactics like saying “we will walk away,” if you want to speak to others or hire an advisor. It never turns out well for the seller.
Bruce Milne
Thanks, Jon. Now to HQ and Rob Schram on qualifying the buyer.
Rob Schram
After your first discussions with a potential buyer, you need to screen for serious interest. The load on your management team for calls, presentations and visits will be significant and distracting; so there’s no sense wasting time with buyers who can’t or won’t conclude a deal.
You need to quickly determine if the buyer is willing and able to pay a reasonable price. How are they planning on funding the deal? For some buyers, this is a non-issue, but it’s something to be careful about. Are they asking for a seller note – i.e., you loaning a portion of the purchase price? Are they planning on offering cash or stock? If cash, do they have it in the bank, or will they need to do an additional round of fundraising around the deal? More complex structures can work, but can also be a red flag that you’re not talking to the right buyer.
Understanding these expectations will help you determine not only IF they can put a reasonable term sheet together, but how well the companies are aligned and how well things are likely go after the deal closes.
Bruce Milne
Now let’s hear from Peter Prince in London on the same topic.
Peter Prince
One thing becomes true after you’ve been approached and that is you can speak directly to the CEO of the potential buyer. You need to know certain things by way of qualifying their credentials as a buyer, but certainly their acquisition experience and track record. It’s great that you have been approached but it’s more important that you know as early as possible that the buyer can complete the deal so to save any time being wasted.
One question which will give you some comfort is “what deals have they already done?” This will also tell you if they have experience of completing a deal. Also it will give you the chance to get to know their process, not only should you find this out but also how they did their previous acquisitions. Ask whether they have bought in your space before and the valuations they put on these transactions. You will ultimately find out if they are an experienced buyer which means you have some idea of how the process will go. Finally, you can use these facts to make your position stronger with any other potential buyers.
Bruce Milne
Thanks, Peter.
From London to Salt Lake City and Steve Jones.
Steve Jones
The most critical element you need to drive to your optimal valuation is competition in suitors. The challenge is to engage with other buyers before you get too far down the path with the first interested party. When you get an overture from a potential acquirer, don’t get too fixated on that tree and miss the forest.
First, you should be tracking all of the companies and investment firms who are actively pursuing transactions in your market. Invest 30 minutes a month in Corum’s tech monthly report. You’ll get an inside look at the players that you can engage with and you’ll understand the drivers that will capture their interest. Second, create a list of potential partners in you ecosystem. Include your alliance partners, largest customers, investors, and even competitors. Don’t’ forget private equity firms, as either a platform or a bolt-on depending on scale. If you’ve been approached, this is urgent -- if it hasn’t happened yet, be thinking about it today so that you’ll be prepared when the time comes.
Bruce Milne
Thank you, Steve.
All of these speakers have been CEOs and have built their own software company and sold it, so this is sage advice.
Now let’s move to the Midwest and hear from Rob Griggs.
Rob Griggs
A quick way to gauge a potential buyer’s interest or intent would be to discuss their due diligence checklist. As a well-prepared seller, you have already established as many of the basics of a list already, and to ferret out whether they are just asking versus are truly prepared to have serious discussions about acquiring you can make a few key things clear:
1. You are knowledgeable about the acquisition process
2. You have potentially had other discussions, based on your representation of knowing what the logical next steps are in the process
3. Depending on their response you will know whether they are serious, ready, willing and able to proceed to a more detailed discussion
Your time is very valuable, don’t waste it on inbound inquiries where the acquirer isn’t serious about proceeding. Getting a checklist from a buyer can help make this clear, and will provide you with a better understanding of what you will need to prepare if discussions do go forward.
Bruce Milne
Thanks, Rob.
Remember, this is the most important transaction of your life. I think the important word there was “serious.” If you show them that you are serious, they will reflect that in their actions and show you that they are serious, too.
Now to Dr. Ivan Ruzic on the East Coast.
Ivan Ruzic
When an acquirer approaches you, they will typically ask for as much information as you are willing to share. Of course, this includes your financials.
If you don't already have them, you will need to quickly prepare three years of historical financials and a three year projection. Remember, the acquirer needs to understand what your business could look like as part of their operation, so consider the financials from their perspective. You may want to recast to remove extraneous one-off items that don't accurately represent your business going forward. This is where advice from an experienced M&A advisor will be invaluable.
Summarize by quarter, and provide only the minimum detail necessary. At this stage, your objective is to get to a quick “Yes” or “No.” Make sure that you include clear and concise explanations of both your historical financials and your projections - and ensure that you and your pipeline can support them. You will be asked to provide detailed monthly data at a later stage.
Don't be too aggressive on your projections, as they will be tested during due diligence. If you fail that test, your credibility will be damaged, possibly irreparably, and so will your valuation.
Bruce Milne
Be very careful on these projections. Year three will be critical, because that is where we determine terminal value, which will be used in discounted cash flow, which is one of the most common methodologies used by all by companies, especially non-tech buyers.
From New York to Canada and Dave Levine.
Dave Levine
While you build out your projections as Ivan described, take this opportunity to question your own underlying assumptions that will be used to fortify that forecast. Ensuring that these assumptions are credible will be critical to driving value. The assumptions must be built on supporting facts, figures and objectivity, otherwise you will lose credibility with potential acquirers. Those underlying assumptions in many cases are more important than an actual number on a profit and loss statement or balance sheet.
Look at your historical assumptions to verify if they have been accurate. If your prior assumptions have been demonstrably on the mark, leverage this to set the stage that your current assumptions are sustainable and accurate as you predict the future results of your business. Don’t forget to test your assumptions with your management team to ensure alignment across the functional areas of the business. This is a useful exercise in any situation, but with a buyer knocking on the door it takes on more urgency.
Bruce Milne
Thanks, Dave.
Now let’s hear from Dan Bernstein here at HQ.
Dan Bernstein
You have a fiduciary responsibility to your shareholders to maximize value. Even when you have an attractive-sounding deal in front of you. Even when you’ve qualified the buyer and prepared to present your company in the best light, you still have the responsibility to get the best value for your company, and you can’t do that talking to just one buyer
So buy time. You need to put together a valuation model for your business anyway, so use that process to give you the time you need to get feedback for more than one buyer. If the buyer wants to be preemptive and blow your expectations out of the water early, then they are still welcome to do that. But a credible valuation, coupled with outreach to strategic, synergistic partners, will help you achieve an optimal outcome.
Bruce Milne
Fiduciary responsibility is critical. If you have shareholders, you don’t want the conversation where you go to sell and they ask you how many buyers you talked to, and you answer “one.” You could be liable.
Now to Jim Perkins in the sunny southwest.
Jim Perkins
As you put together your valuation, it’s time to make additional discreet inquiries to other serious buyers, particularly those that have expressed interest in your company in the past. This must be done at the highest possible level, because of the sensitivity of the buyer already in play. These potential buyers may be your competitors, the buyer’s competitors, and possibly one of your largest customers or partners. Buyers appreciate knowing the current state of the M&A process, and will be looking for additional guidance on valuation range and deal structure. This is when patience becomes key! Give other buyers enough time to respond to make sure you have more than one bidder.
Bruce Milne
Thanks, Jim.
Now finally to Austin, Texas and Allan Wilson.
Allan Wilson
“In business as in life you don’t get what you deserve, you get what you negotiate” This is never more true than in software M&A. So what is the key element that must be in play to get the best deal? The answer is FEAR. Fear in the mind of the buyer that if they don’t get your company someone else will take it away from them. With only one buyer in the mix there is no fear. They are in control, calling the shots, getting it all their own way. They see you as having no option.
One buyer is no buyer, without healthy competition in a managed auction process the optimal outcome for you and your shareholders will never be achieved.
Bruce Milne
Thank you, Allan. Sage stuff. One buyer is no buyer.
Q&A
I think your comment about you get what you negotiate prompted our first question. We have many questions and only a couple of minutes to address them.
That first question is, “Do you expect the Trump Rally to continue, and what will be its effect on M&A?” We can do a whole conference on this. Yes, we expect it to continue. The reason is that the new administration is proposing a 10% holiday on taxes from abroad. Some of you may have heard this already, but when the Obama administration came in eight years ago, they eliminated the 15% dividend tax on foreign earnings, and since a lot of major corporation multinationals have earnings abroad, they didn’t bring the money back. The shortfall was made up by issuing debt by the government, so we didn’t get the normal flow of cash back into the US, and the taxes back to the government that would have come from those dividend taxes.
That has been dammed up and now we have maybe $3 trillion dollars sitting offshore. They are suggesting, proposing that we only have 10% one time to get it back into the US. You can imagine that might bring back as much as $2 trillion, money that could not be invested in stocks, real estate or in getting jobs, all coming into the US. Yes, that will increase our growth and we think that it will have a positive impact on M&A.
Globally and in every single market we are seeing activity. I expect that Q1 next year will see more companies going under LOI than at any time in history.
We are at the end of our time. We had one other quick question here, and we have 15 more that we will get to offline. The quick question is, “I have been approached. How do I know my value, if it is even worth talking to these folks?”
Well, one thing I would suggest you do is attend our annual webcast next month which will cover all 30 sectors and valuation metrics, as well as disruptive tech trends that you can align yourself with. We will have our luminary panel there, we’ve had folks from Google, IBM, Salesforce, SAP, and Microsoft there in the past, as well as all the major PE firms. We’ll be talking value from the buyer’s perspective. We’ll have the buyers group in January, a panel of PE firms in February and we’ll have our annual seller’s panel in March.
To answer your question, we’ll be happy to give you time with our analysts for free just to see if we think you have value and where you might be placed on our buyer’s list today.
That puts us at our 30 minute mark. Thank you for attending today.