When it comes to the most important negotiation of your life, are you prepared? Negotiating the sale of your software company is one of the most difficult tasks you will undertake. Not only will you and the buyer be in complete opposition on every point, from price to structure to risk and more--but you're negotiating with your future boss! Corum's senior dealmakers shared 12 key negotiation tips drawn from decades of deal experience. Learn how to make use of "straw men," body language, attorneys and more in order to get the optimal outcome for you and your company.
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Good day to you and welcome to our Global Tech M&A Report. I’m Bruce Milne, CEO of the Corum Group, your sponsor. On our agenda today we have our research report followed by our themed report, Twelve Tips for M&A Negotiation.
Before I start, let me first give you an overview of what is happening. We just had a record-breaking quarter last quarter. We’re seeing that August is just unbelievable, as you’ll see from our report. Tech M&A is very strong. The reason: Disruptive trends; strategic imperatives to buy. Cash: Nearly $4T available. Low cost debt: Not only from leveraged buyouts from PE firms, but also for the strategic buyers. Lots and lots of new buyers, both in tech and non-tech. Very strong financial markets. Remember that tech M&A follows the financial markets. And then one that we just added: Megadeal disruption. We’ll be explaining that later.
Since this theme is about negotiation, I wanted to relay that we’re seeing record unsolicited interest. People are calling and saying, “We just got an inbound interest in our company, we’re excited about it, can you help us negotiate this?” We’ll be talking about that today.
But there are a couple of problems here. What kind of interest? A lot of this kind of interest is from what we call the second tier strategics or tertiary PE firms that may not follow through, or they’re very frontloaded in terms of expenses, backloaded in terms of interest. Bottom feeders and what we call pre-emptive buyers.
Now, often these firms are trying to lock you up. They often demand exclusive negotiations. They don’t want you talking to others, they want to pay less than true value. And remember your fiduciary obligation, you do not want to be dealing with only one buyer. You do not want to have a minority shareholder say, “You just sold the firm, I think we could have gotten more; who else did you talk to?” In this day and age, that is not a conversation you want to have.
So here are some tech M&A guidelines. What are these numbers? 11, 48, 75, 80, and 100.
11: Percent of buyer solicitations that result in transactions. Only about one in nine times when a buyer reaches out to you does it result in a transaction. So here you, your wife is spending money on a deal she thinks is done… be careful there. Only one in nine makes it.
48: Average percent of improvement from first offer within the option process. These deals improve dramatically if you have other bidders.
75: Three-quarters of the time there is another firm willing to pay more than the initial first bidder. We’ve learned over thirty years that this is a standard that keeps repeating itself, year after year.
80: This is the percent that represents the failure rate on self-managed tech M&A deals. You don’t know what you don’t know, and this is complicated. The due diligence mine field is amazing. It will take you out.
100: This percent represents deals involving only one bidder with sub-optimal results. I have never—in thirty one years—seen what I consider an optimal value without involving other bidders for leverage.
Remember, selling your tech company is the most important transaction of your life. The bulk of your family or partner’s wealth is involved. It deserves the same due diligence you put into building your company. Never just respond to the first interest. Leverage it. Use it. Achieve an optimal outcome with a global partner search.
As a reference, August has been amazing. We are seeing extraordinary activity, as you’ll see in the research report, so we have added some additional conferences.
Now let’s go to that research report, with Elon Gasper, Yasmin Khodamoradi, and Thomas Wright.
Corum Research Report - Billions to Spend
Thanks, Bruce. We begin with the public markets, surging this summer as the long bull market rises to its feet again, with nearly all major US indices hitting records, the Dow catching up with just another all-time high just this morning, and this month the NASDAQ breaking above last year’s top, too, and posing the question of whether this run will take the #1 spot away from the ‘90s boom. With corporate cash piles and new buyers popping up all around the world, it’s lit up the M&A market too, reflected in our Corum Index where a mass of megadeals sucked the air out of the room with 13 of them totaling over $70B dollars occupying buyer attention.
Expect these trends to reverse as buyers digesting these large acquisitions start filling in gaps with smaller deals, disruptions breeding more M&A as big companies need to adjust, fast, and we’re seeing a leading indicator already here at Corum, with the most active interest and discussions we’ve seen in August since, again, the ‘90s. July’s 13 tech megadeals added to an already impressive year to date; they spanned nearly all our 6 market sectors.
Starting on the right, that included Infrastructure, where in the year’s largest deal, so far, Japanese Internet giant SoftBank paid $32B at over 20x sales for chip designer and development tools maker ARM, paving a path into the Internet of Things. NetSuite returned to its roots in Oracle for over $9-billion in the largest SaaS deal ever, as that tech colossus strives to extend its position in cloud-based services. And just this week, Jet.com was called upon by Walmart for over $3B to restart its ecommerce growth strategy, Walmart’s bundle of prior smaller acquisitions clearly failing in its face-off with formidable rival Amazon and Citrix merged its GoTo business with Boston’s remote desktop developer LogMeIn in a complex transaction at a $1.8-billion value.
Vizio, known for smart-TV products but also other software, was nabbed for $2B by Chinese tech giant LeEco, the Netflix of China, embarking now on a diversification journey in the US that includes buying land from Yahoo for a big new office in Silicon Valley. Most other Yahoo assets found a home with Verizon in a deal just under five billion, likely uniting it with another faded Internet star, AOL, to help Verizon scale to realize its ambitions in digital advertising. And last week, Telematics leader Fleetmatics also snuggled in under Verizon’s blanket, for $2.5B at 7.5x sales, enabling Verizon to enmesh itself further into the connected car and IoT ecosystems. All of these major moves will open new opportunities for related mid-market and tuck-in M&A exits in their respective sectors. Speaking of which, Yasmin, what else did we see in Vertical?
Vertical Software Valuation Metrics
Vertical multiples soared to historic highs with deals in healthcare and education pouring in last month. In the healthcare subsector, Imprivata, which makes authentication tools for hospitals, was taken private by Thoma Bravo for $544M to enhance its product line and round out their stack of healthcare IT companies. In the healthcare quality space California-based Performance Management Services was bought by HealthStream to add nursing assessment expertise to its workforce development lineup. HealthStream also spent nearly $50M to expand its portfolio of provider solutions with medical credentialing software from Morissey Associates.
Atlanta-based Wellcentive was scooped up by Philips to integrate its population health applications into Philips’ HealthSuite and promote better connected care services. In Europe we saw French PE Ardian take a majority stake in Italian clinical management software Dedalus to capitalize on opportunities in the public health market. Also, British social care vendor Open Objects Software was purchased by Idox to enhance digital services delivered to local governments. In the educational arena, Australian K-12 internet security and monitoring provider Cyber Hound was purchased for over $5M by the Big Air Group in an attempt to scale its offerings as part of a cloud services vendor.
Ohio-based n2y was nabbed by Riverside for its leadership in special needs curricula and teaching materials, building a platform for future add-ons. Australian school information systems provider Alpha School Systems was landed by Volaris Group, an operating arm of Constellation Software, to capitalize on K-12 communities in its portfolio of vertical markets. In China, we saw Header get acquired by IRTOUCH for a reported $120M to position themselves for growth in the booming Chinese educational industry. And in India, Ray Business made a foray into EdTech through its purchase of Indian college ERP SaaS provider QuickEdmin to enter the Indian market and bolster its presence in the US and Australia.
How are IT Services doing, Thomas?
IT Services Software Valuation Metrics
Sales multiples maintained recent record highs while EBITDA multiples climbed back towards their previous high water mark. Call center acquisitions drove most of the activity in IT Services, with Canadian customer care center Minacs acquired by California’s SYNNEX for $420M at 1.1x revenue, from its PE backers CX and Cap Square. Germany’s buw Group was purchased by Cincinnati-based Convergys for $137M at 0.8x, to increase BPO service capabilities in the German market.
While call centers were responsible for some of the largest reported deals, System integrators drove deal volume with the hot subsector taking up 27% of total monthly IT acquisitions. Texas-based Oracle ERP integrator Capscient assimilated into PCB Apps from New Jersey. Staying in-state, AMERI Holdings bought Kansas-based SAP Business Suite systems optimizer and integrator Virtuoso. In England, SAP Business One specialist Complete Business Systems was acquired by APH Computers. Consolidation was the theme for Australian SIs, with BPR being purchased by Fusion5 to dominate the regional NetSuite space. And cloud systems integrator Sixtree was acquired by Deloitte Australia.
Internet Software Valuation Metrics
Internet sales valuations regained levels achieved late last year, backing the rising demand for growing startups in the sector. Among the megadeals, China’s Didi, beefed up from Apple’s investment, went after Uber’s Chinese assets for a reported $7B. Uber’s surrender highlights the difficulty of competing in an environment that favors large, well-funded Chinese companies—showing that even Uber knows better than to go it alone in the vast, but treacherous Chinese market. Meanwhile, the ticketing space has seen increased cross-border consolidation in pursuit of new markets and higher profits. India’s largest travel aggregator Yatra was sold to Terrapin for over $2M to build on its recent IPO and expand its network of international partnerships. German-based TripCombi was snapped up by Fareportal, which aims to win a piece of the European market.
And CHARGED.fm, out of New York, was picked up by Vendini in a bid to amplify its customer base for both primary and secondary event ticketing markets.
And hold on, there’s a late-breaking megadeal -- Sweden’s EQT buying Boston healthcare performance technology company Press Ganey for a couple billion at nearly 7x sales, in their largest transaction and first direct investment in the US. And that’s our report: mega-disruption setting up more opportunities and what a hot summer! Bruce?
What a hot summer indeed. Is that a record for megadeals? It looks like one to me.
Yes it is.
Okay, good. Lots of green. Lots of activity from the PE firms. Lots of new buyers. It’s interesting to look at the number of Asian buyers. We’ve gotten just under a half-billion in deals with Asian buyers. This last year we’re going to see a lot more. Watch for our upcoming new series across Asia with our partners in both India and China.
Twelve Tips for M&A Negotiation
Now, to our twelve tips for M&A negotiation from the pros.
First we’ll start with Peri Pierone in Portland.
Bruce, we often think of negotiation as an event, but actually, in a well-managed process, we understand we’re always negotiating and positioning in every interaction we have.
One important prerequisite is determining your own position long before the conversations with buyers get under way. This is important for a couple of reasons. Firstly, in many situations there are multiple shareholders involved. Determining your collective position up front insures that everyone is in alignment, enabling you to communicate with one voice, avoiding any mixed signals that buyers could take advantage of.
Secondly and perhaps most importantly, by determining your position up front, you avoid making on-the-spot decisions that could erode your position. Having clarity regarding the endgame you are seeking is an important factor to being successful in this process.
Thank you, Peri.
Now across the Atlantic to London and we’ll hear from Peter Prince.
Negotiating, whenever possible, should be conducted from a position of strength. The strength of your position is pre-determined by identifying your weaknesses and eradicating them. If any weaknesses are impossible to eradicate then declare them as early as possible so to remove them being used against you when they could undermine your position for the maximum benefit of your adversary. Failing to use this tactic can cause significant damage to the strength of your negotiating position. Think of it in terms of one yachtsman taking the wind out of the sail of another yachtsman’s and the beginning of a race. Any advantage gained now could be the difference at the final outcome. Remember, defense is sometimes the best form of attack and turn your weakness into a strength.
Good advice, Peter. Now let’s return to the US and Steve Jones.
Another key to successful negotiations is to identify and prioritize all the issues from the start. The most difficult issues should be addressed as early as possible. As Peter mentioned, your leverage is greatest in the early stages of the process. Use this leverage to establish your position and resolve the most pressing conflicts at the outset.
You stand to gain a few key benefits by addressing the most difficult issue first. If you can address the most difficult issue, you save time and money that would have been wasted on issues further down the list. But more importantly, when you do resolve that most difficult issue, you set the stage for a much smoother resolution to lesser issues. You also learn how the buyer negotiates. Understanding their style and negotiation protocol will only strengthen your position down the line.
Sage stuff, Steve, thank you.
Now back across the Atlantic, to Jon Scott, recently promoted to Managing Director in Europe.
In a successful negotiation there needs to be flexibility shown on both sides. Without this flexibility it’s tough for the opposing parties to feel like they reached a fair middle ground. One way to do this is to include “straw men” in your proposals. In other words, as part of your negotiations, put in a concept or two that you are absolutely willing to take off the table.
This will help you focus on the others conditions you feel you really need and trade-away some of these straw men terms that aren’t really that important to you. This will show the other party that you can be flexible and not have to have everything in your favor.
Now to Jim Perkins, recently promoted to Executive VP. Jim?
One of the most effective negotiating ploys by buyers is serial negotiations. After an LOI is signed, some buyers present issues individually, and you as the seller are pushed to reach a solution on each one before moving on to the next. The problem is, you don't know at the beginning how many issues there will be, and which ones are actually important to you and the buyer. Your response as a seller, on the offense, should be to ask for all the issues to be put on the table first, so that you understand all of them at together at one time. Then you can reshuffle them, making sure that you stage the issues so that the buyer can win one, and then you can win one that is important to you. Inevitably, you will be left with a few big ones to hammer out, but at least you won’t have given away too much early on.
Great stuff, Jim.
Now to something a little more subtle and Rob Schram.
After receipt of an LOI, it’s important to get on the phone with the buyer to review the T&Cs. Your initial objective is to understand the term sheet and set a positive tone for further discussions, but be careful not to imply agreement to certain buyer conditions. Even a passive or inferred suggestion that you’re okay with unattractive terms, or with complex and unusual frameworks, will only cause problems later.
And the inverse is equally true, that is, be clear when you don’t agree with positions that seem unreasonable, and explain why. You don’t have to argue the case at this point but it helps to put preliminary concerns on the table for further discussions once your M&A counsel is fully engaged. This approach saves backtracking, streamlines the LOI process, and sends a clear message to the buyer that you’re a competent negotiator.
Very important stuff, but very subtle.
Now to Allan Wilson, in Texas.
During the negotiation process, it’s often the case that a prospective buyer will try to introduce the idea of a go-to-market partnership, rather than an outright purchase. This may sound very compelling, especially if the buyer has a large sales force and a dominant position in the market. However, test marriages seldom work and the buyer is simply trying to “Get the milk without buying the cow”. It is important that this dialogue be closed down quickly. It should be made clear that a purchase of the company is the only option on the table. Many times the buyer may be simply trying to buy time to test for market acceptance of the joint solution or to learn more about your secret sauce so they can make it themselves.
Good stuff, Allan, thank you. Now to Atlanta and Steve Hassett.
Negotiations can get heated. Reactions can be irrational. Sometimes it’s an act and sometimes it’s real. I’ve had in-house attorneys tell me they would not agree to a point because they did not want to. It didn’t matter that it was immaterial to them. It was personal. He thought he’d given enough. No matter how frustrating the process, remember that if you complete the deal, you are going to have to work with the other side. Perhaps even for years. I’ve worked with companies that let operating people drive the deal until it was time negotiate the transaction. Then they brought in the corporate development team so that the relationship with the operating people could be maintained. It’s a good idea and it works. They can be tough in negotiation and preserve relationships. Don’t let the transaction poison your relationship. Use your intermediaries to take the heat. Express your frustrations to us and let us take the heat from the other side.
Great advice, Steve.
Now to Rob Griggs in Minnesota.
Responsiveness in the critical stages of final negotiations of a Letter Of Intent is incredibly important! All requests for additional information must be handled as quickly and professionally as possible. Every opportunity to demonstrate knowledge, capability, timeliness, and professionalism in communications with your acquirer has a direct and positive outcome on price and structure. Your sense of urgency automatically translates into keeping the acquirer moving forward with the same purpose. I have always believed that positive momentum keeps churning along creating more positive momentum. Conversely, the opposite can also be true, so I have always wanted to create my positive momentum, make it contagious, have others share in the pace and share in the upside rewards of getting a job done well.
Remember, this is a courtship process and you need to be very responsive. Now for Number Ten, let’s hear from Ivan Ruzic.
M&A law is a discipline unto itself. There are firms that dabble, and then there are the experts, who understand the intricate dance between buyer and seller. Tech M&A deals are complicated, and an inexperienced attorney can kill them—this means that your company attorney is probably not the right choice.
So here are some of the questions to ask to find the right attorney for you:
• Ask them about their last couple of deals. Do they have a track record of successful technology M&A?
• How do they approach negotiating risk? Discuss the risk-rewards tradeoffs they have made in the past.
• What is the range of capabilities of the firm? Can they review the patent, tax, and other issues that may arise?
• What’s the chemistry like between you and the attorney? It can be an emotional experience, so make sure they’re not adding additional stress.
• Don’t be reluctant to ask for references and do follow through.
Finally, a great way to find a good lawyer is through a Corum event—we work with some of the top firms to host our tech M&A workshops globally.
Thank you, Ivan. Great stuff.
Now we’ll hear from Dave Levine.
Once you receive a letter of intent to purchase your company, you’ll enter one of the most important phases of the M&A process. This is a point in the process when you have the most leverage. It is at this point where your M&A team must be aligned to successfully negotiate the letter of intent for the process to move forward. As you consider your M&A playbook, do not underestimate the importance of having an aligned team, including your banker, attorney, and accountant. Carefully assemble your M&A team with a balance of experience and pragmatism. Every word of the letter of intent matters and critical issues will come up between you and the buyer during this phase that can kill your deal. An aligned M&A team is your best offense and defense to achieve an executable letter of intent that meets your goals and reduces your long-term risk.
Thank you. Now let’s head back to HQ and hear from Dan Bernstein.
Completing a transaction is a complex, emotional and long process. Gridlock is commonplace, and often leads to the buyer and the seller walking away with a sour taste in their mouth. Email conversations are often impersonal, can sound strident, and in certain cases can exasperate an already tense situation. You know both the seller and the buyer want to do the deal! There’s just a few issues blocking. So, get everyone on the phone and work through the remaining problems. Hearing your voice and your intent to work through the issues will automatically dispel 90% of the tension. Just get on the phone and get it done.
Thank you, Dan. Negotiations are a very interesting dance. There are times when the principles have to stay apart because they have to work together and there is a lot of stress, a lot of details. Then there are times, like Dan is saying, just to wrap it up, cover the last few issues, just get it across the goal line there; you just need to get everyone in the room.
Now it’s time for our questions. We have a couple of minutes, so please send us any questions you may have.
One of the questions that came in: “We’re a small firm, maybe too small. Should I talk to PE firms?” Elon?
Yes is the short answer, Bruce, for our questioner. The PE firms are open to discussions concerning their portfolio companies. If you’re a small company, the opportunity there is to be bolted on to a company that is already in their portfolio that is in the same space or that you have synergies with. Often it is best to approach the PE first on that because the portfolio company may be seeing challenges that are better dealt with from the investor level.
Thanks. There was somebody who was asking about valuation and calling in. When you call Corum or send us a note, it will be filtered down to people in your market or your region, so you’ll be talking to specialists. Often we’ll get back to you on a confidential basis with what we think you can do, what your chances are in the marketplace, and perhaps a valuation and there’s no charge. We are the world’s leading experts in valuation, we do this every single day.
Speaking of valuations, one person asked where valuations are going. “I’ve been listening to your conferences and you have sounded concerns.” Yes, we have. We’re seeing a lot of activity for the reasons mentioned today. A lot of people are concerned about later in 2017, so that’s why we’re seeing a record number of companies going to market right now.
Another question was, “Is going to market too soon a problem?” Actually no. What we find is that you learn a lot about the process, you learn a lot about what the buyers are interested in, you build relationships, and you can nurture those relationships to a final sale. We learned this a long time ago. We have a process called “hiatus” where people go off the market if they don’t get the offer they want or it’s not quite time. So there’s really no such thing as too early. Too late is deadly, because not only do the buyers disappear, but the valuations crash as well.
This is a good one: “We have a software company to sell right to the interested buyer, so we’re wondering how to seek other possible buyers.” We get this almost daily. We’ve been approached; now what?
First, you don’t want to blow the dialogue with that buyer, but you also need to engage other parties. What we generally do in situations like that, is if we’re engaged to help you do this, we’ll do a valuation, we’ll tell the buyer we’re here to make this happen, but there are other parties involved in the other side, so as quickly as we can we’ll do a valuation, get a preliminary copy to the potential buyer, and then we quickly move to calibrate interest in other buyers, at least the A list, perhaps more. Now remember that only about 11 percent of buyer outreaches result in a deal. Most of those deals die out anyway. Seventy-five percent of the time someone else is willing to pay more. This may not be quite the crutch you think. The buyer often—as we said—will try to come to you with a preemptive bid, they don’t want you to talk to others. After all, it’s your wealth and your company. You want them to pay too much! Here’s another question that just came in. “Are companies paying for data assets? How are they valuing?” Elon, you want to take that one?
Yes. Having an archive or data pool of big data that a company larger than yours can analyze, that data scientists and even some kind of AI can talk to, is an advantage in going to market. Now, you may not see that data—unless it is extraordinary—assessed independently as value, but rather as something that you can use in negotiation when it comes to a build versus buy situation. There may not really be that much of a build versus buy tradeoff, and you may think you can argue that, but much better than arguing it is having a way to sidestep it by saying, “We have archives of data that go back many years,” and that’s something that can’t be built. That’s something you have to buy. That allows your champion in the larger company that is advocating for the deal to be able to brush off any attempts to derail the deal internally by saying it’s better to build than to buy.
We’re at the end of our time. We have some more questions regarding asset sales and IT companies and which methods are best and what are they paying for data assets. We’ll respond to you individually, but I would encourage you to bring those kinds of questions to Selling Up Selling Out, our M&A bootcamp for C level executives and that’s where we teach these things. How do you go about going through this process? Those things are specifically covered.
Some of the things that we were talking about in the advanced negotiation, some of that we have at our conferences and as some of you know, we have it more in our advanced conferences, which are a two-day session.
With that, we’re wrapping up here. If we didn’t get to your question, we will reach out to you individually. Thank you for attending, and we’ll go to our close.