Today’s combination of active public markets, resurgent IPOs and a growing pool of buyers means that deal structures are getting more complex as buyers and sellers get creative in order to get deals done. The September edition of Tech M&A Monthly examined some of the many ways that structure is more important than price in many cases, following up on last year’s highly-praised webcast on the topic. When is a profit sharing agreement appropriate? What’s the role of consulting agreements? How do cross-border issues complicate matters? Corum dealmakers addressed these questions and more, drawing on the largest body of tech M&A in history. In addition, we examined the key deals, trends and valuations from the past month in the Horizontal, Infrastructure and Consumer technology markets.

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Bruce Milne

Thank you for joining us and welcome to our tech M&A monthly for September 2015. I’m Bruce Milne.  

Before I begin, let me make some comments about the volatility of the stock market. A lot of you have commented and have some concerns. We’ve seen some record down days in various exchanges around the world, but we’ve also seen some record up days. It’s a real trader’s market. But is this like the dot-com crash or the ’08 recession? Absolutely not. There were some underlying systemic or structural flaws, or concerns about the economies in those markets. We don’t see those being parallel to today. Actually, things are pretty good, so we’re not that concerned about the stock market, in fact, just the opposite, we believe that we’re going to go into 2016 with a record amount of activity. There are more buyers than ever, with more cash than ever, both strategic and financial, buying for good companies.  

Today’s session is on structure. Those of you who have attended our live events know that we believe structure is more important than price. We have a blue ribbon panel of presenters today who have been through deals with the new generation of buyers and very complex global transactions. I think you’ll enjoy it. Let me turn this over to conference director Timothy Goddard. Tim?  

Timothy Goddard

Thank you, Bruce. We do have a great agenda for you today. Before we dive into the structure points that Bruce mentioned, we have a special report on selling a games company; we’ll take a look at some of the unique factors that are influencing the games market today in particular, but I do think there is good information in here for companies across the tech industry. We’ll then go into our research report with our standard deals, trends and valuation metrics, and then into some key items regarding tech M&A structure today.  


Special Report: Casual Connect  

But, to jump right in, we’re going to start with Dan Bernstein, VP here at Corum, who recently presented at Casual Connect. We are fortunate enough to have him giving us the abbreviated version of his presentation from that conference. Dan?  

Dan Bernstein

Corum had a strong presence this year at Casual Connect 2015 in San Francisco, where over 6,000 leaders from the $100 Billion dollar games market met to discuss the future of the industry. We emceed the Finance track, where we led a panel on game project and company funding as well as a talk on how to sell your game company. We outlined the steps it takes to sell your company and talked about drivers that increase the value of your games studio in this highly competitive marketplace.  

Intellectual Property ownership continues to be the number one driver of value in the games industry. Supercell, for example, fully owns their IP, and can support billion dollar valuations and more options for exit and financing. If you do work-for-hire, like working on a companion game to a movie owned by a large film studio, you are relegated to a service company with precious little value attributed to what you are building. However, many studios started as work for hire shops and have used margin from those early deals to build out their own IP.   

New technology expertise such as virtual reality and wearables are becoming more important as value drivers for studios, with PC and console developers receiving a smaller share of the pie. In the future, as VR becomes more important, large studios will play “catch up” by acquiring the best and brightest developers that have built expertise in this area.  

The business model of free to play continues to dominate as it generates higher lifetime values per customer than a traditional pay to own model, where your revenue is capped at the amount a consumer pays to own your game outright.  

The red ocean of mobile games, with over a million apps available in app stores, has made it difficult for smaller mobile developers to compete, using arbitrage to manage ever increasing costs to acquire customers versus a diminishing life time value of those customers. Companies that can balance this equation can run their studios profitably, delivering a higher EBITDA, and are highly prized.  

The games industry is full of one hit wonders. The track record of a studio and its team members to make a business out of consistent high performing titles is a key metric for acquirers.   We are looking forward to Casual Connect Tel Aviv on the 19th-21st of October and Casual Connect Europe on the 16th-18th of February, 2016 in Amsterdam, where Corum Group will be emceeing the finance tracks and presenting more insights into the world of game industry M&A. Stay tuned!  

Timothy Goddard

Thank you, Dan, we will stay tuned!   Corum Research Report: Infrastructure hits big again, Carlyle buys Veritas  

Right now, though, we’re going to turn things over to the Corum research team with Elon Gasper and Amber Stoner, who will take a look at the last month or so in M&A. Elon?  

Elon Gasper

Thanks, Tim. We begin with the public markets, which veered into correction territory amid high volatility last month, then further sharp drops last week which gave back this year’s gains for most indices, before bouncing back a bit this week. With a longer term view across the bull market that started in 2009, this correction has been overdue—it’s the first in 4 years, since 2011—and we remain convinced from the chart’s striking resemblance to that occurrence, plus many economic and monetary underpinnings, that the odds are good we’ll see our 6-year old bull stand back up to run another leg. In the meantime, M&A activity remains robust: supported by low debt costs, huge corporate cash stockpiles, new buyers, disruptive tech trends, and other factors Bruce mentioned, and as we talk to buyers here at Corum, we are hearing no hesitancy regarding tech M&A.  

Our Corum Index concurs, posting healthy metrics including an increase in total transactions, boosted outbound activity and reduced time-to-exit amid demand for yet younger companies. A slight decline in PE buyouts reflects increased purchasing by strategics seeking growth through acquisitions of proven technologies and expertise.  

Among the megadeals, here in Seattle we saw QVC’s $2.5B purchase of Zulily, an entrepreneurial success story that happened despite taking on Amazon in its own backyard and mapping services business HERE was bought out of Nokia by a consortium of German automakers for $2.7B, underlining the soaring importance of software in the automotive vertical;  

And the largest megadeal last month was yet another infrastructure one, the eight-billion-dollar PE buyout of Symantec’s cloud storage unit Veritas by Carlyle. The massive Infrastructure consolidation wave has helped values for that sector to be the only one outperforming the public indices this quarter. Would you lead us through the rest of that sector, please, Amber?  


Infrastructure Software Valuation Metrics

Amber Stoner

Sure, infrastructure valuations have taken a slight hit since Q2, with sales multiples ending up roughly in line with the dip we saw in April and EBITDA multiples remaining steady. Deals continued in the space with buyers keeping a keen eye on reliable security and mobilization solutions.  

In security, Blue Coat Systems acquired cloud data protection platform vendor Perspecsys for an estimated $105M in cash, expanding its cloud security offerings and hybrid cloud portfolio.  

CA Technologies paid an estimated $100M for Xceedium, which offers a comprehensive ID authentication solution for administrators with respect to compliance requirements and threat risks.  

Elsewhere in the identity management space, Thoma-Bravo backed SailPoint picked up data access governance vendor Whitebox Security, which should allow Sailpoint to provide customers with a single view of users and their associated privileges, including those for unstructured data.  

In its second acquisition of 2015, log analytics firm Splunk bought Palo-Alto startup Caspida for $190M. Combined with its June acquisition of Metafor, Caspida gives Splunk the capability to add analytics to its SIEM product to automate detection and provide alerts on attacks and insider threats.   

Blackberry snapped up former unicorn Good Technology with its secure mobile solutions for $425M, just a month after a sweeping litigation setback in which a jury not only ruled against Good’s claims of infringement by competitor MobileIron, but tossed out some of Good’s patents while it was at it, ruling them wholly invalid. Good had immediately vowed to continue its other patent lawsuits, but we doubt that’ll be a priority for new owner Blackberry as it reinvents itself. You can learn more about IP’s impact on M&A in our upcoming Patent Spotlight webinar.  

Also in enterprise mobility, Indian IT consulting and services company Sonata Software paid $5M for California-based Halosys which delivers a mobile Backend-as-a-Service platform enabling enterprises to build and deploy mobile applications while connecting to business systems such as SAP and Oracle. The deal confirms the trend of IT Services companies amplifying resources by picking up product businesses.  

Zebra Technologies picked up ITR Mobility and iFactr from ITR Group to build on its capabilities in cost-effective migration of legacy mobile apps to current operating systems.  

Finally, storage systems provider Seagate spent $694M, a 2.7x revenue multiple, to get Dot Hill Systems, enhancing Seagate’s portfolio with Dot Hill’s solutions for storing, sharing, protecting and managing data.  

Elon, what’s happening in the Consumer space?  


Consumer Software Valuation Metrics  

Elon Gasper

Consumer valuations slid back to Q1 levels in conjunction with the public markets but also as this fast-moving sector confronts a new level of challenges in predicting consumer behavior amid the roiling changes in tech and fashion; driving deals which included sports lifestyle giant Adidas buying fitness tracking app maker Runtastic, giving it access to a community of 70 million users for $239М, as it plays catch up with competitor Under Armour’s $700M fitness software shopping spree.  

With the US football season starting, fantasy football site FanDuel acquired sports analytics platform numberFire to help it compete with Boston-based DraftKings, its main rival in one of the few legal online gambling venues in the US.  

Overseas in Europe, a battle for online gaming and sports betting company took another turn last month. After reportedly agreeing in July to a $1.4 buyout by 888 Holdings, the company’s board changed its mind in favor of a higher megadeal offer valued at $1.7B from Sportingbet’s parent company GVC.   Stockholm entertainment firm Modern Times bought German-based eSports company Turtle Entertainment for $87M. Modern Times also bought Dutch online video and content producer for $49M to ramp up its online entertainment portfolio.  

Also in Stockholm, Unibet acquired the online gambling business of Stan James for $29M. The deal for clicks but not bricks does not include Stan James’ 90 UK betting shops. Back here in Seattle, RealNetworks sold the Slingo and Social Casino portion of its games business to London’s Gaming Realms for $18M, providing it an entry point into the North American market and the social casino online gaming segment.  

And tech M&A continues apace in China as Tsinghua acquired mobile games publisher FL Mobile from NQ Mobile for $624M. NQ also transferred its NationSky Network unit back to founder Hou Shuli for $80M.  

Amber, how’d the Horizontal Applications market hold up?  


Horizontal Software Valuation Metrics

Amber Stoner

Despite sales multiples sliding back to Q3 2014 levels, deal activity in the horizontal sector continued with buyers expressing particular interest in Business Intelligence and Supply Chain Management.   Advance/Newhouse, an affiliate of Advance Publications, acquired New York big data firm 1010data for $500M, a 10x revenue multiple. The deal will provide 1010data with capital it can use to invest in the platform, expand product offerings and scale sales growing into new industries and geographies.   Hortonworks paid nearly $38.5M for data startup Onyara, which could allow it to turn increasing, what it calls “Internet of Anything” data, into actionable insights derived from data in motion.  

LANDESK grabbed Xtraction Solutions for an estimated $20M at a 5x revenue multiple. Xtraction features data aggregation technology for visualization of IT environments and improved system upgrade decision support.   Seattle-based BI analytics company Tableau made the first acquisition in its history buying Montreal-based data infographics creation SaaS startup Infoactive, gaining expertise in data visualization design.  

Cloud-based SCM firm GT Nexus was purchased by Infor for $675M.  Infor plans to integrate GT Nexus into the Infor CloudSuite, creating one solution for greater visibility from supply chain management to production management.   E-invoicing and P2P platform provider Tradeshift grabbed product information management SaaS company Merchantry, for $30M, a 10x revenue multiple, allowing suppliers to upload and manage product, inventory and pricing information.  

Descartes Systems bulked up its logistics offerings with the purchase of carton tracking platform BearWare for just over $11M, complementing its 2014 acquisition of mobile SCM SaaS company Airclic.  

And in Asia, Hong Kong online digital marketing platform iClick bought OptAim, which operates a mobile advertising platform with related customer analytics SaaS solutions for advertisers with a target audience in China.  

Elon Gasper  

And that’s our report till next month’s quarterly review. Back to you, Tim.  

Timothy Goddard  

Thank you, Elon. Lot of great stuff in there.  


Tech M&A Deal Structure  

Now we’re going to dive into some more great stuff. I know a lot of you have been waiting for the structure portion of the webcast, so let’s get right into that.   Structure, as Bruce mentioned earlier, is more important than price, as it can drastically impact the value and reliability that comes out of a deal. We’re going to look at seven particular aspects within that, hearing from Corum dealmakers around the world.  

We’ll start here at headquarters with Rob Schram, who is going to look at an asset sale versus a soft sale. Rob?  

Rob Schram  

One of the biggest decisions for the seller is stock sale or asset sale? The tax differences can be dramatic.               

As a general rule sellers prefer stock purchases, while buyers prefer an asset sale as they can buy the assets without having to purchase the liabilities. In a stock purchase all of the assets and liabilities are sold and the proceeds are taxed at a lower capital gains rate.  

An asset sale of a C-Corp is particularly burdensome as the gain will be taxable to the Company when they sell the asset, then taxed again to the shareholder when the funds are distributed. Asset sales can not only involve tedious valuation of each asset class, but may well require sign off from customers whose contracts are considered an asset. Getting these sign-offs will at least delay closing, maybe kill the deal.  

Then there is the whole issue of 338(h)(10) elections!   Complicated stuff, so experienced counsel is needed to take home the maximum from the sale of your company.  

Timothy Goddard  

Thank you, Rob.  

Now, across the Atlantic to Jon Scott in Amsterdam. He is going to look at another structural aspect, a few, in fact, including employment agreements, consulting agreements, and non-competes. Jon?  

Jon Scott  

Part of most transactions are some forms of employment, consulting or non-compete agreements. These are important for both buyers and sellers. The talents and knowledge of the selling CEO or senior executive can be critical to a successful integration. In an employment or consulting agreement the buyer can lock you in to staying with them for a period—typically from one to three years—to ensure transitions are smooth. For you it can be a benefit especially if there is an earnout part of the deal.  You’ll be there to be sure the buyer abides by the purchase agreement terms so the earnout can be achieved. 

In one of my deals as a selling CEO if I had not stayed I’m confident my new boss would have found a way around paying the earnout. And, with non-compete agreements, as a seller, you need to be very careful. After all you don’t want to be prohibited from working in a field where you have developed significant subject matter expertise.  My advice would be to limit the time period for a non-compete and keep it very specific so there are no future legal problems.  

Timothy Goddard  

Thank you, Jon.  

Back to HQ, we’ll hear from Ward Carter on earnouts.  

Ward Carter  

Earnouts are a way to structure an M&A transaction to defer part of the deal value subject to the future performance of the business. These are often used to bridge the gap in value expectations between buyer and seller.  We advise against earnouts as they can unduly complicate the deal, and shift significant risk to the seller. Baring other options, we seek to keep the terms as unambiguous as possible, and structured so control over achieving the targets remains in the hands of those who will receive the earnout rewards.  

If not carefully structured, the incentives may be diminished, and the performance objectives originally envisioned by both buyer and seller never achieved. Now, having given you all the cautions, properly structured, I was able to get a client an additional $60 million that would never have been possible otherwise: a very positive outcome.  

Timothy Goddard  

I should say so, Ward!  

Now, back across the Atlantic, Mark Johnson in Stockholm is going to discuss profit sharing and options, a similar topic.  

Mark Johnson  

Incentivizing sellers through profit-sharing or options essentially works the same way as with employees: a motivation tool. In a structured transaction, it is the carrot on top of the deal to keep the sellers on board and perform, rewarded for hitting sales or profit targets, either seller company's own targets or to the performance of the company at large.  

Driving a higher profit is the goal of any M&A deal. However, sellers need to be cautious when the weighting of the deal is too focused on profit sharing or options in order to "bridge the gap" on valuation.  

Profit targets can be out of the sellers' control, meaning that the seller hits his or her targets, but the overall targets are not met and therefore there is no payout.   And, things can change post merger. An example from a former client here in Europe involved the buyer being bought, and then the new owner not having interest in the business involving the sellers' solutions. This unfortunately made it impossible for the seller to hit his payout targets.  

Timothy Goddard

Thanks, Mark.   Back to Dan Bernstein, who will talk about Acquihires.  

Dan Bernstein  

Thanks, Tim. The term “Acquihire” is used when a company is purchased for its personnel and their unique skillset. In a traditional acquisition, the acquirer is getting a combination of product, revenue and customer base. In an acquihire, a talented, cohesive team is the rare and sought after commodity.  

With the cost of engineers in Silicon Valley skyrocketing, acquirers are willing to pay upwards of $1 million for a highly specialized technical employee. Acquihires are attractive options for smaller technology companies that are looking for a quick exit, however the structures for those exits need to be navigated carefully. If you have outside shareholders, they must be satisfied before the lucrative employment agreements are negotiated for key team members. If there is an earn-out component, careful thought must be given to how the team will integrate into the parent entity.  

Acquihires may be structured with up-front cash, stock options, earn out, or even a high-value employment agreement. The best way to drive a fair deal is to run a thoughtful, comprehensive competitive process that positions your team and company to multiple buyers.   

Timothy Goddard

Thanks, Dan.  

Now, on to John Simpson to discuss debt and leverage in a deal.  

John Simpson

A buyer’s debt or leverage financing may be essential to a deal’s success, but either could also raise red flags for a seller.  

For example when the source of debt financing is the seller, it effectively makes them co-investors for a period in sharing the risk. Sometimes that debt is repaid to the seller directly out of the company’s future cash flow. This can put a strain on the company’s performance while the seller is still a creditor.  

Alternatively, buyers may look for leverage by tapping cheap institutional sources of cash rather than using their own. This may facilitate the seller receiving 100% cash up front, but the total price may be less since the buyer has to build in future debt payments to the ROI model.  

Timothy Goddard  

Thanks, John.   Now, finally on to the one structural issue that encompasses all of them, and that’s how things get more complicated when you’re working cross-border, as so often happens these days.  

Jim Perkins

Over 60% of all Corum’s M&A transactions are cross border as many of your best buyers are not in North America.  Depending on the size of the transaction, you may have the complexity of government approvals, both on the buyer and seller sides. Among other issues, this could involve anti-trust, currency controls or labor issues.  

Foreign buyers that are listed on foreign exchanges must consider the reporting and approval from the exchange they are on. Foreign tax considerations are also a factor. This adds planning and approval time, and complexity.  

Add to this the potentially opposite time zones you may need to work within.   If you’re a North American seller working with Asian buyers, for example, most of these challenges apply, but the rewards can be substantial.   An experienced M&A team is essential and will make the process go much smoother.  

Timothy Goddard  

Thank you, Jim.  

He just wrapped up a great cross-border deal with a company in China. If you didn’t catch last month’s webcast, take a look in our M&A archives at, we had a conversation with the seller about that whole process. It’s very interesting.  



We now have some time for Q&A, so if you have questions for any of our deal makers or on the research topics or anything else you saw in the webcast today, please do write us a note. Right now we have a question on structure. I’m going to toss this to our chairman Ward Carter. We’ve heard a lot about different structures, what kind of structures are we generally seeing in terms of earnout and profit sharing and that kind of thing?  

Ward Carter  

Good question, Tim. Certainly it varies given differences with various buyers and sellers needs and opportunities, but I’d say the vast majority of our transactions are cash-based and that’s reflecting the fact that buyers do have significant pools of cash to draw upon. There is also wide availability of debt at very low interest rates, so it encourages them to use cash as the primary consideration for these considerations.  

We have done several deals lately where there was a smattering of pre-IPO stock, but in all cases those were deals where we really believed there was a significant upside, and that was over and beyond the initial cash consideration.  

Timothy Goddard  

Great, thanks, Ward.   Another question here, for Dan, regarding gaming. How do you see the recent Apple announcements on the Apple TV revamps; how do you see that impacting gaming moving forward?  

Dan Bernstein  

Great question. As always, Apple has dropped another bombshell on us yesterday. The biggest one is kind of a pill, I guess, with the introduction of the app store into Apple TV. What that is really doing is democratizing access to the living room, which was heretofore been outdated to just Microsoft and Sony with Xbox and Playstation. It’s giving an opportunity for mobile developers to compete with console developers and also giving an opportunity for console developers to go for a new platform, potentially one that may someday overtake consoles. It is a fascinating turn of events, one to watch. If I were building games for Xbox, Playstation and Nintendo, I would look at this very carefully and be cautious.  

Timothy Goddard  

Great. Another question for you, Dan, what are the best methods for valuating in-game monetizations?  

Dan Bernstein 

Well, there are certainly a lot of analytics tools out there. The biggest metric that you’re looking for in monetization is lifetime value. So you’re seeing how well your customers is going to monetize throughout the lifespan of being in the game itself. That combination of LTV, what we call lifetime value, is the combination of retention and what we call ARPDAL, average revenue per daily act of user. Very similar to SaaS metrics that other companies have. Really the changeover using a premium model in mobile is all about running your games business as a games service business, and as such you really need to start looking at some of those very similar SaaS metrics and figure out how well users can monetize and how long they’re going to stay within your game.   Timothy Goddard   Great, thanks, Dan.   The last time I did this and thought we didn’t have any questions left about five more came in… but it does look like that is all of the questions that have come in. Thanks to everyone for turning in. Next month will be our quarterly update, where we will be going through all six market sectors and 29 subsectors in detail, so we hope you can join us for this.   If we didn’t get to your question, we’ll have to followup with those later in person. Let’s go to our close.