The world of buyers for technology companies is very different than it was just a few years ago. The rise of Private Equity, a new generation of international buyers, disruptive change creating new tech giants and destabilizing old ones – today, your ultimate buyer may be someone you've never heard of, in a country you've never visited. In the August edition of the Tech M&A Monthly webcast, Corum Group dealmakers and experts examined the new classes of buyers that you need to be aware of as you consider your company’s future. Plus the key deals trends and valuations of the last month, and a special report on M&A in the gaming sector.
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Good day. We have a record number of speakers in only 30 minutes, so let’s get to it. The agenda today will include a brief report on the gaming industry, and then our research report for the month. We’ll follow that with a special presentation on the new world of buyers and some closing comments, so get those questions into us.
Let’s go first to some fun things that we did. Langara, just a couple of weeks ago. Once a year for the last 25 years, we’ve been taking our clients who sold up to Langara, Canada, for some world class fishing. This year, in addition to our domestic clients, we had a number from Europe and Latin America. It was an amazing year, and we got the biggest fish in the last 12 years, 46.5 pounds, and a good time for all.
Now let’s go to our gaming ecosystem M&A report with Alina Soltys, who was recently at Casual Connect. Alina?
Thanks Bruce, I’ve had the opportunity to speak and work with Casual Connect, a casual gaming conference for a number of years, speaking at events in Amsterdam, Beijing, San Francisco, Seattle and Singapore. Next month I’ll be heading over to GamesBeat which is run by VentureBeat, the tech blog / news site I’m sure many of you ready on a daily basis.
The research group and I put together a report reviewing the entire gaming ecosystem, starting with content creators like studios, to payment providers, to portals and infrastructure, all key components in providing high quality games for all platforms.
This is a half-yearly look, spanning from January 2009 through to June 2014. The billion dollar plus deals have been put in yellow here to show the highs that we are reaching with them as well as the steady going rate for the remaining majority.
The next slide has further detail. Activity has been very strong on the M&A front – the lows are continuing to bounce higher and most recently multi-billion dollar transactions have been pushing the other deals to record levels.
Activity has been bumping steadily higher, hitting 78 deals in the first half of this year. This is the green line here. The two most recent halves: H2 2013 & H1 2014 have been at the highest points in 5 years, even excluding the billion dollar deals. And another key point, the average deal size has been increasing as well, almost doubling from $42m to $84m in 5 years and growing 57% looking at H1 2013 to H1 2014 comparison.
Gaming is a key component in the mobile space as well as in the development of new revenue models; this drives interest from all of the larger players like the Googles, Apples and Microsofts as well as the international community, with strong activity seen from Asia.
Back to you Bruce.
Thank you, Alina. Alina is one of our leading researchers, and her reports are picked up by press around the world in the gaming sector. A lot is happening, and we’ll come back to the gaming sector here shortly.
Now let’s go to Corum’s research report for the month. Elon?
Thanks, Bruce. We begin with the public markets, where indices gave ground in July before recovering a bit late last week. Contributing factors appeared to be led by global economic and geopolitical concerns, as the EU caught a whiff of stagflation and Argentina approached another debt default, while warfare raced around the Mideast and Ukraine. But for tech M&A, the low rates and easy money policies of the US Fed and other central banks combined with consistent profits to support buyers’ stocks and their cash positions, as 2014’s fine market for sellers continued.
Consistent with that, the Corum Index displayed a healthy and growing number of total deals and VC-backed exits, with cross-border transactions and megadeals also at reassuring levels.
One of those big stakes deals used the easy cash to cross multiple borders as Italian lottery giant GTECH dropped a $5 billion dollar bet on the North American market, buying Nevada’s IGT in a complex deal that appears to invert at least part of the US business to a London newco, all funded in part with the change from a ten billion dollar bridge loan.
A case in point is the sensational real estate megadeal here in Seattle as Zillow swallowed Trulia for 3 and a half billion, combining the two largest online real estate listing companies in the U.S. Capping off its prior M&A career of a small deal a year: Retsly, Streeteasy and Hotpads, Zillow’s stock price rise after this transaction demonstrated confidence in the value represented by this major consolidation.
Checking a few of our 6 market sectors now, we saw good overall value in the rest of the Internet space, too, right, Erin?
Internet Software Valuations
Yes, a pop in EBITDA ratios, in particular, adds to the promise that the value seen at the megamerger level will control in smaller deals, too.
Still relating to real estate, New Jersey giant Realogy Holdings supported the emerging buyers’ trend, pushing into tech by spending $166M on ZipRealty, a Canada-based brokerage and real estate technology whose end-to-end and multi-device platform should provide an agent recruiting edge.
And Toronto-based real estate company Altus Group acquired RealNet Canada, a smaller firm that gathers its own data on the commercial market but also researches the construction and sale of new homes and condos. Altus also invested earlier this year in Voyanta, a UK SaaS commercial real estate analytics platform.
Other bricks-to-clicks internet deals saw the largest U.S. supermarket chain, Kroger, acquire online vitamin seller Vitacost for $280M; and leading fashion retailer Nordstrom bought Trunk Club, a five-year old website that sells about 100 brands.
Tyler, how does the IT services sector look?
IT Services Software Valuations
The IT services sector is looking good, continuing its streak for historically high sales multiples for the third month in a row. This has been an attractive market for both PEs and non-tech buyers as companies jockey for position in the digital marketing landscape.
In their first and only acquisition, Barker/DZP, an integrated marketing agency, extended their services with their purchase of Brandwire, an online marketing company that specializes in high-profile clients. Blending technology and traditional services, Barker is part of a growing trend of non-tech buyers that are relying on technology acquisitions to provide innovation for their products and services.
Another surprising deal from the non-tech sector is Abtex's acquisition of Nihmble, a company specialized in providing engineering consulting and automation IT services. Abtex, a machine manufacturer, will incorporate Nihmble's software into their existing equipment to create an integrated hardware solution, another common trend.
In deals more typical of this space, Publicis Groupe acquired several digital marketing companies last month. Reaching overseas, they added US-based Crown Partners, a web design and content management company. Looking to their neighbors in Belgium, Publicis picked up digital marketing service Proximedia. Both of these purchases extend their localized business and point to some consolidation underway for digital marketing companies that have established a global reach.
Erin, what's going on in the consumer sector?
Consumer Software Valuations
The hot gaming market that Alina discussed continued to support consumer valuations, particularly the value of profitable companies.
We saw an unusual buyer in the Asian market when plastic products manufacturer Zhejiang stepped into the gaming space, acquiring UTGame for $90 million in cash and stock.
And California video game developer Glu Mobile picked up another California company, Cie Games, for $100 million, Glu’s largest deal to date. The acquisition expands Glu’s portfolio and brings top studio talent to the company.
Reaching into August by just a day, Scientific Games carries forward the casino technology consolidation trend with its $3.3 billion acquisition of Bally Technologies.
We’ll have more on that and other deals of this month in our next report, four weeks from today. Back to you, Bruce.
Thank you, Elon and team, good report. It’s interesting, a lot of firms you may not have heard of in there, and it’s worth noting the number of non-tech firms involved, we saw Nordstrom and Kroger in the retail space. Very hot, and we’ll come back to that shortly.
New World of Buyers
Now let’s go to our special report on Buyer’s Today. We’ve been in this business for 30 years and it has changed dramatically. I remember being on a panel with Steve Balmer just a few years ago and they talked about the consolidating number of buyers, with a few larger companies buying up the smaller ones. My how things have changed and how wrong they were! There are more buyers today than ever before in sectors that you never imagined. Today we’re going to cover the range of those buyers.
Let’s start by looking at strategic buyers and going to Dan Bernstein. Dan’s our newest associate. What do we have on strategic buyers?
As in previous years, giants like Google and Microsoft continue to make significant acquisitions, alongside Apple, who has now become a major acquirer. With these well-known companies are less-well known ones like WPP and Hexagon, who have both been very active this year. WPP is particularly interesting. Here’s a company with a $27B market cap, which has made more than 15 tech acquisitions just in the first half of 2014.
Of course, up and coming firms like Dropbox, Twitter and Facebook continue to dominate the landscape for acquisitions in the consumer internet space. Dropbox has raised $1.1B to date and continues to use that capital to actively acquire companies, to expand it’s suite of services, while Facebook is making big bets on how people will consume next generation content, with the $2B acquisition of Oculus VR, a leader in virtual reality tech.
Good stuff. That was the top 12. We’re actually tracking nearly 3000 strategic buyers, and a lot of them are frankly firms you’ve never heard of. Here are some recent transactions we’ve done or offers we’ve taken. I’d bet there are quite a few you’ve never heard of. Now, a challenge for our listeners. I want you to keep track of the money that is out there, the dry powder. Dan just talked about strategic buyers. Our last report last year noted $515B available to tech strategic buyers. It’s approaching $600B! Keep track of that and let’s see how much dry powder there is in the whole system, because money is driving acquisitions.
Now let’s go internationally to PEs, the private equity guys. Speaking of cash, they’re the big dogs with the most. Here’s Mark Johnson in Stockholm.
Private equity activity globally continues in its upward trajectory, driven by buyout firms having over $1T in dry powder.
Particularly in Europe, the TMT, or Technology, Media, and Telecom sector remains the strongest. Two of the biggest deals in Europe in 2014 are the buyouts of Nets in Denmark, a card payments company for $3.1B, and Unit4 in Holland, a software development firm, for $1.5B with Advent International leading both of these deals.
A couple of months ago I attended the Nordic PE congress in Stockholm and the general sentiment was optimism. All PEs in attendance were involved in exit processes. The secondary exit market and IPO markets have hit record highs this year, driving this confidence.
Looking ahead, it is likely that sell-side activity will continue to dominate over the coming months in Europe due to current high valuation multiples and deal pipeline.
Private Equity is involved in all of our current European processes as either direct platform investments or bolt-ons to their portfolio companies.
That’s all from me!
Thanks, Mark. From Stockholm to Kansas City. Let’s hear about the domestic PE buyers from North America from Ed Ossie.
In the US and Canada, we too are seeing a stepped up level of energy, engagement and follow through on behalf of PE firms. In 2014 we have already seen several bn in deal value by US Private Equity, on top of stepped up VC investment.
It's common for us to reach out on behalf of a client and hear back the same day on interest and next steps.
And these are PE firms of all sizes, 5 principals or 50. And it’s not just San Francisco, Boston and New York, there are also plenty of really active Heartland or Midwest private equity partners. Actually, some of the most active PE firms are right here in the middle of the US, or Heartland region we call it at Corum.
It is mighty busy out here: in recent weeks we have already reported a number of Heartland Corum client successes, including Columbus, Cleveland, Detroit, Kansas City and others, with PE buyers from all over the world.
If you are considering your options, the last best time was 1999!
Back to you at headquarters.
Thanks. You know 40% of the largest deals are done by PE firms, but there are a lot of smaller firms out there as well. Let’s hear from Ward Carter, Corum Chairman.
We know the big firms and their big deals get all the press, but much of the activity we’re seeing is with smaller PE funds, often under a couple of billion in assets, who are actively leveraging their expertise in software and technology. Firms like Bregal Sagemount and Serent Capital and others on this list who recently bid on Corum clients, or Chicago-based Prairie Capital, successful in investing in Corum vertical market client DRB Systems, provider of software to manage carwashes. With smaller size private equity firms comes greater attention from their principals and often quicker execution, and importantly, gaining attention in the first place is critical to getting the deal done. Back to you Bruce.
Amazing. $2B is considered a small firm. We track between 600 and 800 PE and VC firms around the world. They’re very active, we supply them with research, they come to our conferences; every week we have a new one dial in to give us a profile on what they’re looking for, to get to know them.
The public markets are driving M&A, with it, IPOs. Only a few years ago there were no IPOs. How things have changed. Rob Schram?
Another class of buyers, flush with cash, are US tech companies who’ve recently IPO’d, and those soon to go public, often heavily backed by our friends in the Venture Capital community.
IPO activity is back: US exchanges just set a 10-year record that encompasses the last 3 quarters. The NYSE and NASDAQ exchanges garnered a combined total of 162 IPOs, raising US$35B in capital, in the first half of this year; that’s a 72% jump in activity from the comparable period a year ago. Overall, the total market cap of all tech companies that have gone public on US stock exchanges in the last 12 months is $121B.
One of the first challenges for these newly public companies is to prove to the market that they can grow through M&A. I recently coordinated the sale of Campus Special to Chegg, who went public last November and we have a number of clients under LOI with companies that are either preparing for IPOs or have recently gone public.
The window is open now but in the IPO market trends can change rapidly so keep an eye on this powerful driver in current M&A.
Thanks, Rob. Wow, $121B in fresh cash! One of the first things they’ll want to do with it is make acquisitions. Just take a look at these tech IPOs the last 12 months. I suspect you don’t know many of these companies. They come from about two dozen exchanges around the world, now churning out tech IPOs. Speaking of international, let’s go to Dougan Milne in Barcelona.
Over 200 IPOs on the European exchanges so far in 2014: outpacing the US for volume, but the US still leads for tech debuts.
We will start to see some change to that as more detailed plans emerge for the upcoming tech IPOs of Berlin-based Rocket Internet, Zalando, and SoundCloud -- all of which are being positioned for Fall 2014 release dates. Remember: IPOs coming from Berlin are a pretty big deal, why? Because we’ll finally see some validation of Berlin as the new HUB of the European Tech Industry.
Among them, the biggest, Rocket Internet, gave valuation guidance last week at ~$3.3B, looking to raise about half-billion in their debut.
Moving South to Latin America, just this past month, Argentina’s Globant became the first Latin American tech company to list on the NewYorkSE. They raised nearly $70m in their offering, with a strong first month of trading. We are hearing rumors for additional IPOs from Despegar, OpenEnglish, and Brazil’s Dafiti and Netshoes.
Last, certainly not least: China tech IPOs are, once again, on the push. Just this year, we’ve seen King Digital, maker of Candy Crush, and then VIP SHOP which debuted in March. Since then, Qunar, Weibo, Jumai, and of course, JD.com. Now, JD raised nearly $2B on the NASDAQ back in May and they continue to trade well.
Of course, it’s already been mentioned… but the world awaits Alibaba.
Alibaba, yes. China tech IPOs…we’ll come back to China. One interesting thing to note, about two-thirds of Corum’s transactions today involve a non-US buyer or seller. Today’s IPO is tomorrow’s buyer. Why do these buyers want to buy so much in the US? Let’s hear from John Simpson.
Acquisitions of US software companies by non-US buyers are definitely on the rise. Why is this?
First: The US Dollar has become cheap. Down as much as 12% over 18 months against some currencies, and that's a big discount.
Second, they have access to the US's low cost of capital for deal financing.
On top of that, US companies have a deep well of tech talent and leading edge software available.
And finally, let’s not forget that a US acquisition will get you a direct on-ramp to the biggest market in the world.
That last point is very noteworthy, because it’s daunting for an international firm to set up operation in the US. How many of you have tried to start up in another country? Imagine how hard it is for them, so competitive. Much easier to buy a presence, a footprint in the US, user base, trade name, feet on the street. Let’s stay with the international side and go to Jon Scott with some buyers you may not have heard of. Jon?
There are many big international buyers that likely no one has heard of. For example, how many of you out there have heard of ALSO? In our live events almost no one raises their hand, but ALSO Group is Europe’s largest IT Distributor, €6B and trading on the Swiss Stock Exchange. There is a major transformation taking place in the IT distribution market as customers shift purchases from hardware to cloud services. ALSO, while unknown to many until now is at the heart of this industry, and acquired our client, Nervogrid, a Helsinki provider of cloud brokerage solutions to telcos and hosting providers.
Another example is Canadian based Constellation Software, a publicly traded holding company of vertical market software companies with over $1B in revenue and 8,000 employees. These are just two of hundreds of buyers we deal with daily, and Bruce showed a chart earlier with many more, that most have never heard of.
Thanks, Jon. Moving from Europe east, I promised we’d go back to gaming and China, so let’s hear from Jim Perkins.
Thank you, Bruce. Asia dominates gaming M&A: in 2013, 9 of the 10 top deals worldwide were in Asia, particularly mobile. This activity has increased in 2014.
Just last month, ChangYou bought MoboTap in the US for almost $100M, Zhejiang bought UTGame for over $90M. Top Asian buyers include Baidu, SoftBank, and ChangYou with more emerging as the IPOs are resurgent. The most active dealmaker countries are India, Japan, China and Hong Kong, and South Korea.
These buyers are consistently outbidding their North American and European rivals for the best studios, technologies, and IP.
The big game buyers are paving the way for other Asian firms in all other markets. With their cash and aggressiveness, we expect them to expand to other sectors. Keep your eye on Alibaba, Netease and Tencent
Is there an Asian buyer in your future?
Good question. Is there an Asian buyer in your future? We’re investing heavily on that premise doing conferences across Asia with China’s largest PE as a co-sponsor.
We can’t let our time run out without mentioning non-tech buyers. They have risen up as we saw earlier in the report, and these are giant companies. Let’s hear from Jeff Brown.
Traditional companies fear the next disruptive technology thing. For this reason, we’ve sold tech companies to banks, appliance and printer manufacturers, data providers, infrastructure engineering and logistics companies like ASCO, BBVA, Bosch, Brother, Equifax, Hitachi and others.
We see similar buyers in sectors in transition like agri-business where Monsanto bought the Climate Corp. and Land-O-Lakes bought GEOSYS Technologies. In mass media, Gannet, which owns USA Today is buying Cars.com for $2.5B. In retail Under Armour bought MapMyFitness, Target bought 3 ecommerce companies: Chefs Catalog, Cooking.com and DermStore Beauty and Staples bought Runa, an ecommerce startup.
Highlighting a few other deals: The payments processer First Data bought two mobile startup’s Perka and Clover. UnitedHealth Group bought analytics provider Humedica and Ford bought Livio, an in-car music app startup.
Back to you, Bruce.
Pay attention to those names. These are giants. Even privately held firms like Bosch are absolutely huge, dwarfing most tech buyers. Bosch has $50B in revenue.
Let’s go now to our closing comments from Nat Burgess, President of Corum. Nat?
Thanks, Bruce. Really exciting update today. Here at Corum, we’re transactional. We’ve closed over 300 transactions, we’re students of the market, because the more we know, the more we can help our clients get deals done. That’s the perspective that I’ve taken to today’s update.
Let me tell you what I’m thinking. First of all, we see valuations go up periodically, you get a couple of transactions that are high value, it’s interesting, but it’s not really a trend until you see volume at those levels. We are now seeing volume at high valuation levels. We’re seeing IT services deals at 8-9x EBITDA. The two biggest deals that we reported on in the last quarter totaled almost $10B.
Secondly, after the dot-com, and not many people know this, we lost over 600 companies from the NASDAQ to liquidation, bankruptcy, privatization, you name it, but they were gone. Over the last ten years, the number has continued to shrink.
The IPO boom that we’re seeing now is finally replenishing those numbers, with the volume that Dougan reported, 200 deals, with $120B in the last 12 months in IPOs. That creates buyers and opportunity for every body. It’s always challenging to go to market when you only have a couple of logical buyers, but we’re doing deals now in Mexico City, Helsinki, London, Cleveland, Kansas, Cincinnati. Across the country and the world, buyers are everywhere, and there is money in their pockets and they’re making deals happen.
The third comment that I will make is that all of this M&A activity creates more M&A activity. Every time a buyer does a deal, their competitors have to sit up, take notice, and respond in kind. That’s what we’re seeing now. One company makes an aggressive move like Zillow. Guess what? You’ll see an explosion of transactions across that marketplace because you had two big competitors and now you have one giant one, new opportunities opening up, and you’ll see new opportunities in that vertical market, and that’s just one example. We’re going to come back roaring into September here with transactions and valuations continuing to rise. This is a market that you want to transact in.
Yes, we’re seeing a record number of companies in LOI now that will close at the end of this quarter. Did you keep tally of how much money there was out there? More than $2T for making acquisitions, which is a record, and they have to spend it. They certainly can’t use it any other way, or they just have to give it back to their shareholders.
We have a couple of questions. One question that came in, “I’ve been on the fence about selling. How long does it take to get interest in my company?” I’ll throw that one to Nat.
That’s often a question that we get. Really it depends partly on the market you’re in and how aggressive the players are, but when you’re dealing with horizontal technologies and you get the likes of Google and Microsoft in play, from first contact with the buyer to LOI can be a matter of weeks. However, if you make that first contact without being properly prepared, the deal may never happen. The idea here is let’s all sit down together, take the company apart, put it back together, optimally position it, anticipate all the questions and do it right. That’s what we advocate. That’s typically a month of prep, and then a couple of months to get through the initial marketing process, and then you pretty much know where you’re going to land.
Now, it’ll still be six to nine months to get a deal done, but again they take a lot of the mystery out of the deal.
I knew this one was going to come up. “Do you think anything will actually happen to tax inversion side to do deals faster?”
We haven’t seen much tax inversion here. Tax inversion, for those of you not familiar, is basically doing a transaction where the public company in Europe or the minority company outside the US becomes the new company and you set up a new tax domain. That’s generally done between public companies. We work specifically selling privately-held companies to mostly public buyers, so that wouldn’t be a factor. I haven’t seen anything there, but we may.
Unfortunately we’re out of time. We’ll get back to the rest of you off line. Thank you for attending, and now we’ll go to our close.