If you’re looking at taking advantage of today’s strong M&A market, what can you do to make sure you’re bringing the most valuable company possible to market? There’s no easy trick to building a valuable technology company, but there are specific things that owners and executives can do to maximize that value when preparing for an exit, whether this year or farther down the road. June 9, hear from Corum’s global team of dealmakers for their perspectives as both M&A advisors and CEOs themselves--what they’ve seen drive real value in actual transactions, and how companies like yours can put these best practices to use.
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Good day to you and welcome to our global tech M&A report for June 2016. I’m Bruce Milne, the CEO of the Corum Group and your host for today.
As you can see from our agenda, we have a lot of ground to cover, starting with some special reports and a few new items to some of you who have been listening in regularly.
Then we will have our research report on deals and valuations that affect you. Finally we have a special report: The ten ways you can increase your value to take advantage of today’s hot M&A market.
Now, let’s get started with your moderator for today, Timothy Goddard.
Thank you, Bruce.
Special Report: Europe conferences
We do have a great agenda today, and to kick it off we’re going to head across the pond, where Corum VP Jon Scott has some interesting details about some events that we co-sponsored recently. Jon?
We had great conferences in London and Edinburgh last week on intellectual property. We were asked by Metas Partners, an IP firm based in the UK and in San Francisco to present our thoughts on software M&A and the impact that IP has on valuations and transactions.
We had 40+ people in Edinburgh and about 35 people in London, great conversations, there were lawyers there, companies that have a lot of components of IP in their solutions, so very interesting conference in presenting the materials and we look forward to speaking with some of those folks again.
Thank you, Jon. We are the leading expert on software company valuations as well as the leading M&A educator, and we are increasingly seeing requests for Corum experts to speak at events like this. We recently did an event for a data room supplier, another one with a private equity firm to their base of investments, and one with a strategic acquirer not long ago as well.
I know that we have a lot of tech associations, industry associations, investment groups, and so forth on the call today, and if you would like Corum to speak to your group, we’d be very happy to have you, whether that is live or online. Contact me, firstname.lastname@example.org or you can reach out through our website, corumgroup.com.
Now we’re going to go to a new regular segment on tech M&A monthly. I’m going to turn things back over to Bruce Milne.
Merger Myths & Misperceptions
This month we’re starting a special monthly presentation: Merger Myths and Misperceptions.
The first one we’ll start with is a common one that maybe some of you have heard: The buyer will relocate or fire people.
That makes you reluctant to sell. But in truth, that’s not correct. It may be true in other industries, where they are trying to rationalize costs or merge assets together, but in technology companies, it’s just the opposite. They are often buying you for talent, domain expertise, user bases, technology; they do not want to lose you, they want to keep you.
In fact, a lot of our negotiations are for the post-integration period, keeping the employees. How do we do that? Through stay policies, stay bonuses, completion bonuses, no cut policies, that kind of thing. So that if somebody is dismissed, you have to pay them a severance package. In the US, typically employment agreements are two years, with a three-year non-compete. In Europe and internationally it can be a bit more. So they want to keep you.
This is one misperception that is completely wrong.
Another one that we hear related to this topic is that the buyer will let you and management go.
Again, unless you’ve been doing a terrible job and the company is being sold in a fire sale, that is absolutely not true. Just the opposite. They are trying to buy talent and domain expertise. They want management that knows how to go into a market and create products and services that somebody will buy because the large companies have a hard time doing that themselves. Almost all new technology and products in these companies today are bought. They don’t even try to create them anymore. They don’t have time to. These big companies are now just a collection of acquisitions and they need good talent. So rather than getting rid of you, it’s just the opposite. Often times they will do what they can to keep you, save bonuses and stock options, whatever, to entice you to stay on.
Further, often you will also wind up running a larger operation inside the buyer, which can be very enticing.
So, this is another myth that is wrong. They will not be firing your management.
If you have any questions, including myths you would like us to address in the future, please do use the Q&A window on the right side of your screen.
Corum Research Report: Cloud analytics rising in popularity
Now to hopefully answer some questions you have and spark some new ones, we have Elon Gasper, our VP of research and Yasmin Khodamoradi with our Corum research report.
Thanks, Tim. We begin with the public markets, which climbed in May, the S&P Tech among the leading indices with a 6% increase, and with many US averages now approaching record highs, this month is setting up as a springboard to close a quarter of bustling M&A.
That’s mirrored in our Corum Index, which showed a confident increase in overall transaction volume. Private equity swelled the pipeline while VC exits stepped back a bit and startup acquisitions soared with a 50% leap.
Most of the tech megadeals last month happened in the Horizontal sector, playing catch-up after its sluggish 2015. These demonstrated that PE increased, too, as our top PE acquirer Vista Equity paid $1.7 billion, about an 8x sales multiple, for Marketo, the renowned marketing software giant, and another PE leader, Thoma Bravo spent $3B for visual analytics firm Qlik Technologies, while Salesforce made its largest purchase ever, spending $2.8 billion, about 11x revenue, for Demandware. All three deals, and more, were part of a wave of buyers scooping up cloud and analytics components while deploying just some of their immense cash reserves; we expect more and will delve deeper into this story in our quarterly report next month.
Turning now from megadeals to the Vertical sector, what’d we see, Yasmin?
Vertical Software Valuation Metrics
Vertical valuations maintained levels achieved back in Q1, with energy, healthcare and financial services keeping valuations afloat.
Over the past month Oracle spent over a billion dollars acquiring two public vertical market companies: Construction management SaaS vendor Textura, which acquired Corum client Planswift back in 2013, and energy monitoring and savings provider Opower, which was bought for over 3x revenue in a bid to defy competitors in the cloud services space and complete a suite of utilities management apps.
On the other side of the world, Norwegian info management systems provider Baze Technology was bought by Chinese multinational Envision Energy to expand its global presence in the energy analytics niche.
Santa Clara-based energy storage management provider Green Charge Networks was scooped up by French utilities provider ENGIE, which is attempting to establish a foothold in the North American energy storage market.
In addition, French sustainability, compliance and EHS software provider Enablon was bought by Wolters Kluwer for $278M. Enablon’s range of vertical solutions should help strengthen Wolters’ portfolio of legal and compliance solutions.
The healthcare and patient care subsector also saw some activity as DNA Healthcare, out of New Jersey, sold to iHealth Solutions which wants to solidify its offerings in revenue cycle management across the East Coast.
Canadian company Privacy Analytics was bought by IMS Health to help it make use of sensitive data and reinforce partnerships with life sciences clients, while Illinois-based Lynxit Solutions was grabbed by iWT to promote better messaging products for healthcare providers. Finally, patient engagement vendor Duet was acquired by MedData to improve its traction with providers’ workflow.
In the fintech and insurance policy management sector, British processing platform provider Target Group was bought for $164M by Indian IT services giant Tech Mahindra, which is planning to dive deeper into the European market, reflecting the trend of Indian IT giants like Infosys and Wipro tending to buy abroad, another reason to conduct a global buyer search.
Apax Partners provisioned its portfolio with two insurance software vendors by forming a JV with Accenture’s Duck Creek Technologies and acquiring Boston’s Agencyport to back up the venture through digital distribution channels.
Finally in the automotive sector, Russian computer vision provider Itseez was bought by Intel to lead the chip maker’s focus on IoT offerings and become a key contributor in computer vision standards for self-driving cars and other autonomous vehicles. Corum took a closer look at this sector in the Connected Car market spotlight, which can be found at wfs.com.
IT Services Software Valuation Metrics
IT Services sales multiples jumped off with almost 20 percent increase over Q1, hitting historic highs as Hewlett Packard Enterprise set the stage with a megadeal, spinning out its IT Services division in a complex multibillion dollar merger with CSC, leaving HPE more clearly focused on its cloud services business.
And CSC bought Aspediens, a Swiss ServiceNow and related solutions specialist, through its Fruition enterprise services integration and management sub, acquired late last year. Similar SaaS-focused integrators have been in high demand. If that’s you, you should be taking a look at this window of opportunity.
We also saw a series of deals in digital forensics services. North Carolina’s Guardian Digital was grabbed by an Atlanta-based forensic engineering firm, another new buyer in M&A; Maryland-based cybersecurity specialist Prime was bought by Altamira, strengthening its offerings for the national intelligence community. And F1 Discovery was sold to Clearview Capital portfolio company Xact Data Discovery, looking to expand its forensic collection offerings.
Fintech consultancies were in demand last month as well. In Germany, Smarthouse Media was acquired by Adesso for 27 million and change, to solidify its position in the banking sector. And London fintech consultant Hatstand was nabbed by New York-based Synechron for its market data, compliance and cybersecurity expertise, all timely hot-buttons for exit value and marketability today.
Finally, Iowa-based industrial automation robotics systems integrator Vizient became the latest acquisition by Lincoln Electric, which began as a 19th century motors and welding company and has now used a decade of steady M&A to adapt to the 21st century by broadening its offerings.
You can’t be sure when these old dogs will decide it’s time to learn new tricks -- another reason to broaden your own buyer search, too.
Consumer Software Valuation Metrics
In the Consumer sector, sales multiples slid back to December levels while EBITDA receded from the peak achieved in the first quarter. Along with the usual gaming theme, we tracked some interesting deals with near-field communication payments.
Payments pioneer Coin sold its wearable payment assets to Fitbit, putting the fitness tracker in a better position to compete with Jawbone. Italian mobile payments provider Onebip was bought out from Neomobile by the Austrian company DIMOCO to bolster its carrier billing offerings in Europe and expand its reach in Latin America.
The growing fantasy sports market also saw some M&A activity, despite regulatory rumblings in this space, as DraftFury was landed by SinglePoint in a bid to boost its profits via daily fantasy contests. This deal comes as the second this year by the Seattle-based mobile tech vendor, which already picked up DFC GoDraft earlier this year.
Elsewhere in the gaming space, Swedish slots developer Quickspin was acquired by Playtech for up to $55M at 8x sales, in the hopes of expanding its gaming content and tapping into the lucrative Nordic market. Playtech also picked up casual game developer Funtactix out of New York, whose relationships with Hollywood studios enable them to create games based on franchises like Hunger Games and Mission: Impossible.
Finally, Snapchat joined the VR gold rush, acquiring three-year-old British startup Seene, developer of a new 3D photo format for virtual reality projects, including facial animation.
The ongoing theme of computer vision is spilling from Vertical now to the Consumer space - can VR selfie avatars be far behind?
Back to you, Tim.
Thanks, Elon. I don’t think they can be far behind, and I’m certainly looking forward to implementing them in our webcasts here! Until then we’ll continue with our Powerpoint slides.
Ten Ways to Increase Value
And we have some good ones coming up with our Ten Ways to Increase Value. As you look ahead to M&A, especially in today’s hot market, or maybe if you’re getting started earlier and further down the road, how do you make sure you’re getting the value that you deserve out of your company? We have some very experienced dealmakers and executives on the Corum team and we’re going to hear from them.
We start in Phoenix, with gaming legend and dealmaker Jim Perkins.
A quality senior management team contributes substantially to the value of your company, but a disjointed or unqualified team can kill deals immediately. Make sure this doesn’t happen to you.
First, deal with problems before they get in front of buyers. That may mean adjusting roles, or even getting rid of bad apples before they spoil the bunch. Going to market can serve as a catalyst for making the hard decisions you may have been putting off.
Second, make sure your entire team is on the same page, and rehearse your corporate presentation together so that you are ready when buyers visit with you. Well defined roles and responsibilities, combined with a clear, common corporate message from the management team will deliver dividends from buyers.
Finally, be sure to emphasize the experience and talent of each senior manager in your company, and reiterate how qualified they are at every opportunity. It can be very difficult for big companies to put together high quality teams, and finding those teams already in place is a major driver of M&A.
Thank you, Jim.
Now from sunny Arizona to the Great White North, we’ll hear from David Levine out of Vancouver.
Starting the preparation process for a possible M&A event is one of the most important steps that you can take today, whether you are planning on selling your company in 2016 or in the next five years. We recommend that you begin the preparation process by assembling all of the documents that are used to operate your business in a centralized secure online data room.
You should include all of your corporate documents including articles of incorporation, annual reports and meeting minutes. Your annual financial statements, customer and vendor agreements, and sales projections should also be placed in your secure data room.
Being able to respond quickly and efficiently to buyer requests means you’ll be putting your best foot forward, and you’ll be able to more effectively coordinate buyers and orchestrate the auction process critical to getting maximum value.
Thanks, Dave. Actually, Dave has a blog post on the Corum website that details additional information about what it looks like when you are setting up a data room, so you may want to check that out.
Let’s go back to Jon Scott in Amsterdam.
I’d like to turn the theme around a bit and talk about one way that you can really decrease your value in an M&A transaction. That has to do with the contracts that you have in place with your customers. Often companies will accept terms of the agreement, change control provisions, pricing provisions, volume provisions that just don’t make sense. When they get into an M&A process, those contracts are all looked at by the buyers. So the best thing to do is to begin with the end in mind when you set up your contracts. Look at the gotchas that you may be presented when you go to sell your company. A good contract review with a lawyer that understand M&A is critically important.
Thank you, Jon.
Now to John Simpson here in Seattle.
An assessment of a company's value ultimately depends on the buyer’s perception of risk, answering the question “What’s my chance of achieving an acceptable return on this investment?”
One key assessment factor here is a profile of the customer base, which says a lot about the business’s stability, growth, and future opportunities.
In particular, customer concentration is critical to a risk assessment. For example, if 80% of revenues come from one customer or one industrial segment, that’s clearly a more risky prospect. Because if either is struggling, the effect on revenues could be disastrous. That risk will be reflected in the business’s valuation. So, diversify the customer base as much as possible and aim to spread the revenues widely by customer, market segment, and/or geography.
Thank you, John.
We’ll stay here at HQ and hear from Senior VP Rob Schram.
Year-over-year growth is a primary driver for how companies are valued in today’s M&A. Growth factor gives buyers a solid metric of how well your company is run, underscoring yoru competitive strengths, how well the markets are receiving your product, and how effectively your sales and marketing organizations are running.
For companies with SaaS offerings, most buyers will determine the purchase price using revenue multiples based primarily on year-over-year growth rates, irrespective of EBITDA. In other words, if you are investing earnings into expanding geographically, increasing market share, and beating out the competition, then year-over-year revenue acceleration is clearly reflective of future performance, and after all, the future is what they are buying.
Now down to Portland, Oregon, where Peri and Bruce will be doing a presentation later today, but first, we’ll hear from Peri.
Having a relevant set of KPIs and analytics for the organization yields multiple benefits. Not only does it enable your business to operationally run more effectively, it will also elevate the opinion a prospective buyer has of your organization. Well run businesses have thoughtfully constructed KPIs that highlight their financial, operational and market performance. The level of sophistication of your KPIs should be commensurate with the sophistication of your business. The set of KPIs and analytics for Microsoft is quite different from that of a technology start up. Thoughtfully putting your KPI library in place now will help your business today and drive higher valuation in the future.
Thank you, Peri.
Now to Austin, Texas and our resident Scotsman, Allan Wilson.
Customer churn rate is the percentage of customers that do not renew their license following an initial term. A high customer churn rate can have a significant negative effect on a SaaS business valuation. Customer churn can be minimized through regular customer contact to insure that they continue to see the value that the software is delivering to their business. Their continued appreciation of value will result in more licensed renewals and lower churn.
High churn is reflective of low customer satisfaction, year-on-year growth rates slow, and the valuation of the business drops. As a rule of thumb, the churn of a SaaS company should be lower than 7% to command a premium valuation.
Thank you, Allan.
Now to hear from Corum President Nat Burgess, who was just on CNBC talking about M&A out of China. Nat?
When you are running a small company, trying to grow, trying to build confidence with customers and employees, the most important thing you will do is partner with larger companies. They can help you sell. They can give your customers the confidence that you will still be in business in a few years. You can piggy back on the distribution channels and brand equity that they have spent millions or billions of dollars building.
Equally important, one of those partners may end up being your acquirer. They will get to know you, you’ll build trust, and you’ll figure out how to work well together. A lot of deals start that way. They’ll still need the leverage of other bidders and some competition to become a real buyer, but they partnership and the work together goes a long way towards an M&A transaction.
Thank you, Nat.
Now we’ll hear from Rob Griggs in Minneapolis.
As technology entrepreneurs, we’re well aware of the trends driving disruption across the marketplace. At Corum, we’ve compiled our own list of Top Ten disruptive technologies from the perspective of what’s driving M&A deals. Understanding these trends, you want to be able to convey at least one of three things as you present your company to buyers.
First, that your company is not being made obsolete by any of these disruptive forces and that you are aligned with one or two of them, at the very least, in your development roadmap.
Second, that you are making your company, products, services relevant by seizing opportunities opened up by the disruption driven by one or more of these trends.
Third, that you are riding the wave of one or more disruptive trends. Be sure to position your company and tell your story within this disruptive context.
These disruptive forces will be evident in your markets in varying degrees, some more than others. If they are not obvious yet, they may be bubbling below the surface.
Thank you, Rob.
Now, finally, maybe the most important one, Dan Bernstein here in Seattle.
Selling your company is not like going to a party—there’s nothing fashionable about being late.
For one, the market may have consolidated around you, to the point that your value has plummeted even though your sales may have increased. An aspirational story works well when there is room to consolidate but it’s hard to prove that you, as David, can take on a Goliath without some kind of divine intervention.
You could also find that one of those disruptive trends overtakes and upends your market, changing the entire landscape nearly overnight.
Or, the current strong M&A cycle could end. M&A comes in waves, and once one ends it can take quite a while to get interest again.
So, while we all understand the rule that Timing is Everything, it’s also important to remember that being too late is much worse than being just a little bit too early.
Thank you, Dan.
Here is the whole list. We will be making these slides available if you would like a copy. They are always available on the Corum website shortly after the presentation. Feel free to grab them from there or from Slideshare.
Now let’s go to Q&A. We do have a few minutes left. Let’s start with a question that I’ll throw to Elon. “What are the advantages to a completed, proven, disrupted cloud IP right now in terms of opportunities for sale?”
Well there’s a lot going on in cloud technology, of course, and I wonder if this one is related to another question we got in terms of completed cloud IP. IP is usually associated with patents or with other protection and ownership of technology. If I can fold in the other question we got, which was about if it’s too early to consider M&A when your primary asset is IP, including issued patents.
The large companies want to buy, through M&A, the synergy of not just IP, not just address some particular area of the market that they’re interested in going into, but getting the synergy of IP and instantiation of it, a market that is receptive and that has been proven through taking a product to market and getting some traction. The large companies know that you don’t have a large sales force, it’s very unusual for a small company to be strong on the sales side, it is usually on the tech side, but you have to have that synergy, you need to make a business out of it in order to realize the true potential that IP has. I hope that answers both questions.
Thanks, Elon. We have a few more questions on timing that I’d like to toss to Bruce, in general. Related to what Dan was talking about in terms of being too early to sell and so forth, Bruce, what are your thoughts on that, I know that’s something you’ve been talking to people a lot about.
I just finished a road trip where the biggest issue that I heard from CEOs, people we’ve known for some time, people who have attended our events, was on timing. It was brought to bear for a couple of reasons. In a couple of cases, we have a lot of baby boomers who are concerned about their health. They are facing mortality, cancer, heart issues, diabetes, and concerned about timing around that. Then we have people of the younger generation looking to balance their lifestyle, want to spend more time with the kids, there’s timing there. A lot of people, with the elections, Brexit, George Soros worrying about China, things like that, there’s lots to worry about. Should you go to market now; is it going down?
What we’re seeing is that the next move will probably be up. You’re hearing a lot of concerns about some kind of recession coming ahead. We do follow the markets and we do follow the economy. My advice is wait too long, some people are trying to wait for the next product to be done or for something to happen. You want to have good news while you’re out there, so don’t wait. You don’t want to miss the market. When it moves against you, when time moves against you it moves very fast and hard.
Thanks, Bruce. We have more questions coming in, we’re not going to be able to get to all of them, but we’ll follow up with you individually after the event.
One question that came up was, “What are these trends that were mentioned earlier?” Every year we introduce a list of disruptive trends that we see driving M&A, based on our interactions with buyers and sellers and the work we do on these webcasts. We presented those originally in the annual report in January, which you can find on the Corum website, or in our printed annual report. If you haven’t received that, please reach out to us and we’ll send one over.
Also, please join us next month in July for our mid-year report when we’ll be looking at how those trends have progressed over the course of the year and we’ll dig into each of them a little bit deeper.
That brings us to the half-hour mark. Thanks for joining us and we hope you join us for the mid-year update next month.