What happened in Tech M&A during the first quarter of 2018? How did tumultuous markets impact valuations? Are private equity deals still soaring? Who were the new buyers making waves? Listen in as Corum Group gives the most in-depth look available at Q1 of 2018 for mergers and acquisitions of software and related technology companies. We’ll look at the key deals, trends and valuations for all six technology sectors and 30 subsectors, with a special report on new buyer strategies. All of this comes with a special focus on what it all means for technology executives considering whether this is the right time to take their firms to market. Plus, we’ll hear directly from the COO of last year’s top acquirer, Constellation Software – what sets them apart?
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Tech M&A Monthly: Q1 2018 Report
Good morning, afternoon or evening, wherever you happen to be in the world. My name is Timothy Goddard, EVP of Marketing here at Corum. Very happy to welcome you to our quarterly report for Q1 of 2018. We've got a lot going on today. We're gonna start with a top acquirer spotlight, last year's top acquirer of tech companies. Then into our Q1 Research Report, looking at the market in general, our Corum Index, and then diving in deep into all six sectors on deals and valuations. And then we will end with a preview of some market spotlight events coming up. But to start, we are going to hear from last year's top acquirer. It wasn't Google, not Microsoft, rather Constellation Software. If you aren't familiar with them, they're a public company based in Toronto. They make M&A a core part of their business strategy, using a broad portfolio of subsidiaries to do dozens of deals annually. I recently had the chance to sit down with Constellation COO Mark Miller. He’s also CEO of Constellation subsidiary Volaris. And he went over what makes Constellation different from most other acquirers. So let's hear from Mark now.
Mark Miller, COO, Constellation Software, The Differentiating Business Strategy
What's different about us would be we really care about decentralization. We think scale. When you start putting businesses together and staffing them into becoming bigger and bigger businesses, you lose a lot of accountability. Now, not that we don't do that. Sometimes we will buy businesses and we definitely will what we'd call "tuck them in" or functionally integrate them. For sure we do that as well. But we really do like to leave a group of business leaders in charge of a particular area of business that is generally a vertical market. And a vertical market is a very broad, broad statement. So it can be a sub-vertical, it could be transportation is a vertical market, you could argue, but transit's more specific. And so we really like that leadership team that's in charge of that area of the business to be really able to control and focus on that. And we think accountability always trumps scale, just about. We really believe a lot in developing people. I probably spend the bulk of my time, as well as looking at acquiring businesses, at making sure that we develop our people. And we're pretty proud because I think like three-quarters of the leaders of our businesses now are from internal, which I think is a good statement about how we do things. So we want it to be a place where people can continue to build up their careers and learn a lot. And I think that attracts a good group of people.
One unique thing is about our businesses, we basically are able to benchmark all of our businesses against each other. And benchmarks aren't perfect because depending on what you're trying to do, you can argue one's better than the other. But they give you a bit of sense as to where to look and see if there's something that you might be able to do better by looking at another business that's actually performing better on that benchmark. It might be as simple as how you're running your marketing group, or how you're running your professional services group, or how efficiently you're doing R&D. And our ability to benchmark those businesses against each other is a great opportunity because you're able to go and sort of say, "Hey look, this particular business is doing this really, really well. Why don't you go ask them what they're doing and learn from them?" And we try to bring them together for events where they focus in on certain areas of the business and continue to educate each other on how to do things.
Another area would be mergers and acquisitions. How do you do mergers and acquisitions? What's involved? What does integration look like? So we're perpetually in education mode, trying to teach our leaders how to do things better, to learn from each other, and develop their team as well to continue to do that. And so I look back to when I started, we were very, very small with dozens of employees. And now the business has continued to grow and it's built on this structure of learning, decentralization, people development, that allows us to continue to grow it and continue to do what we've been doing for a long time. So that's the strategy.
Thanks to Mark for sitting down with us. We're actually making a longer version of that conversation available on the Tech M&A Podcast, which you can get at corumgroup.com, iTunes or wherever fine podcasts are sold. One item that Mark discussed that we didn't actually have time to go into was that they actually hold onto their investments permanently. To hear how that changes the perspective in a deal, you're welcome to subscribe to our podcast.
Now, let's go to the heart of our webcast today: a detailed rundown of tech M&A in the first quarter of the year. If you have questions about anything that comes up, please do enter those in the window and we will try to get to them as we have time. But now, let's turn things over to Elon Gasper, Amber Stoner, Yasmin Khodamoradi, Amanda Tallman, Patrick Cunningham, and Becky Hill. Elon.?
Corum Research Report
Thanks, Tim. We begin with the public markets, which after a spectacular performance early in the quarter, saw a return of volatility with pullbacks amid perceived risks ranging from geopolitics to rising interest rates. Asia finished generally ahead of Europe, tech ahead of old-line industries, as the long, full market ended Q1 well off its highs in correction territory and breathing hard. But tech M&A demand has held up amid these moves, with strategics and PEs both with immense cash hoards, still seeking a fast path to buy growth - when they can find it priced in the range of their value rubrics. It's still a sellers' market and a highly favorable time to start an M&A process. But a few high-flyers notwithstanding, buyers are showing value discipline. Our Corum Index supports that, booking a year-over-year drop in total transaction volume, reflecting the continuing supply squeeze. Basically, fewer quality companies left on the market because those with reasonable price expectations have already been acquired, while replacement new ones aren't mature enough yet for the picky buyers.
Megadeals managed an increase, with a likely assist from the new U.S. tax law. Here at Corum, we saw a number of closings delayed to land in 2018. And our pipeline shows PEs finding more success with VC inventory depleted as buyers jump ahead and buy extending target GOs and lifecycle range. Those Q1 megadeals stacked into five of our sectors. Starting on the right, we see that the Internet sector racked up the highest total, $26B, which included Italian online fashion retailer Net-a-Porter, taken out for almost $3.5B by Swiss luxury group Richemont to help it “riche” out into high-end retail.
Next in total value is infrastructure, where conferencing pioneer Polycom changed ownership again, bought out for $2B by headset maker Plantronics. The vertical applications market booked the most megadeals, including diabetes care specialist LifeScan, plucked out of Johnson & Johnson by Platinum Equity. In IT services, General Dynamics spent nearly $7B for government systems and security integrator CSRA, beating back a last-minute bid from rival CACI with a price increase, showing the benefit of a competitive process at the infield level. Finally, in Horizontal, supply, demand and delivery network CommerceHub is being taken private for over $1B by PE firms GTCR and Sycamore Partners. The disruption caused by this many megadeals sets up conditions for follow-on M&A, particularly tuck-ins to round out offerings and shore up defenses in changing competitive landscapes. Another reason sellers should get in the market now.
Tracking our six sectors, the last few years we see sales multiples rising for Q1, in line with an established converging sector values trend, particularly, product companies with IT services, apparently subject to the ceiling we predicted last year. EBITDA multiples were mostly down, most conspicuously from social media and other Internet-intensive companies subject to perceived business-model challenges, which dethroned our Internet EBITDA metrics for a new value leader there, Horizontal. We'll discuss these disparate effects on valuation multiples as we dive deeper into these six sectors and their 30 subsectors, starting with Horizontal Applications. Amber.
Horizontal Applications Valuations Metrics
Overall, sales multiples in the Horizontal sector remain steady, following a slight uptick in January as EBITDA ratios dropped back. Though, as Elon noted, they still lead all six sectors. The CRM and payments subsector saw increases in both sales and EBITDA multiples, while human resources and SCM reported increased EBITDA multiples as well. AI Enablement was a key trend throughout the Horizontal sector. Product data syndication company FSEnet was acquired by marketing intelligence specialist Gladson, which also picked up catalog information SaaS publisher Webcollage to deepen Gladson's content management expertise. JustEnough Software, developing demand management solutions for retail, was bought by Respida Capital-backed Mi9 Retail to help implement its customer-centric demand planning approach. For more information on recent activity in this space, join us on April 24, the Smart Logistics Market Spotlight webinar that we'll be co-sponsoring with Polk Financial Symposium.
M&A activity continued in the advertising space as well last quarter. Digital audio ad firm AdsWizz was snapped up for $145M by music streaming company Pandora, as it seeks to improve monetization following the divestment of its ticketing business. London-based media analytics consultancy Ebiquity sold its advertising intelligence arm for $36M to research behemoth Nielsen. And Spoutable, which applies machine learning to the creation of high-yield and ad inventory, was acquired by Proper Media, as part of the AI Enablement trend which continued in the marking automation space, where Japan's Data Artist was picked up by advertising giant Dentsu to accelerate their joint AI-powered initiative. And machine learning-driven customer analytics specialist Spongecell was bought by ad serving SaaS provider Flashtalking to bolster its dynamic creative optimization capabilities for brands.
Companies that deliver course management and training spaces remain attractive targets for M&A. In India, mobile-first learning platform developer Qustn Technologies, the company behind Capabiliti, was acquired by PeopleStrong to strengthen its talent management portfolio. India and US-based Recruiterbox was bought by Turn/River Capital, an example of PE firms buying SaaS companies earlier in the lifecycle and applying their own infrastructure to grow them further. In Denmark, payroll and employee management firm Axcel was picked up by Paychex to help the HDM company further expand into Europe. And Inkling System, specializing in field workforce operations software, was bought by Marlin Equity, demonstrating continued PE interest in this space.
In business intelligence, data science firm Angoss was acquired for $24M at 2.3x sales, by predictive analytics company, Datawatch, to augment its Monarch data intelligence offering. Real-time big data analytics software provider X15 Software was bought for $20M by security specialist FireEye, adding data management capabilities to analyze machine-generated security data across multiple environments.
Finally, Samsung, speaker on our recent AI Enablement Market Spotlight webinar, made its third AI acquisition, following Viv Labs and Fluenty, picking up deep learning startup Kngine with the intent to enhance the Bixby virtual assistant. Now to the vertical sector. Yasmin.
Vertical Applications Valuations Metrics
Vertical multiples have declined since achieving a year-over-year peak in January as they followed the pullback in the broader market. The healthcare subsector, in particular, saw more volatility as whispers about Amazon entering the sector grew louder, while insurance and pharmacy megamergers created uncertainty in the space. The AEC subsector, however, was an exception with sales and EBITDA multiples nearing record levels.
The private market in that sector also saw high multiples, as construction management firm e-Builder was acquired for $0.5B, at a healthy 9.5x sales, by Trimble, to boost its project delivery solutions for owners and contractors. Trimble also picked up Corum client and building information management software provider Stabiplan. New Zealand's CostCon, which handles a range of ERP solutions for the building and contracting industry, was bought by Canada's JDM Technology Group, continuing its buying spree from last year. AGTEK, a specialist in 3D cost estimation for civil construction, was picked up by Hexagon to reinforce its portfolio of heavy construction technologies. And Virginia-based ClearEdge3D, whose verification software tracks construction progress and quality, was acquired by Japanese industrial machinery maker Topcon to expand its offerings in the construction vertical.
In healthcare, ABILITY Network, which simplifies clinical complexities for point-of-care facilities, was nabbed for $1.2B, at nearly 9x revenue, by healthcare analytics firm Inovalon to help it access more carer sites and reduce their dependence on insurance. And GE Healthcare sold off its value-based care division for over $1B to Veritas Capital to redirect their focus towards smart diagnostics and connected devices. Connectiv, which provides biomedical device and facilities management software, was bought by Austin-based facilities manager Accruant for their capabilities in security space.
In Belgium, Internet reprocessing workflow company Aexis Medical sold for $21M, at nearly 6x revenue, to Cantel Medical to boost its presence in the infection prevention market. Home Health Gold, which provides data analysis and reporting stats for home health organizations, was picked up by healthcare management and staffing firm Axxess to expand their offerings in the space. And HomeCare Accounting Solutions, a back office automation firm out of New Jersey, was acquired by Allscripts subsidiary Netsmart to help it gain momentum in the post-acute care management space.
Allscripts also paid $100M for electronic medical records task provider and former unicorn Practice Fusion to expand its ambulatory solutions into smaller practices. They also offloaded their OneContent division to Thoma Bravo-backed Hyland Software. Elsewhere in the EMR space, revenue cycle management firm Accumed was acquired by Abu Dhabi's Gulf Capital. And Corum client and EMR software developer Infian was acquired by Quantitative Medical Systems, a subsidiary of last year's number one acquirer, Constellation Software.
Solutions in the education space found renewed popularity among financial and strategic buyers last quarter. Most notably, student and teacher assessment firm Performance Matters was bolted onto Vista Equity's PeopleAdmin. And Microsoft picked up education and collaboration startup Chalkup to augment its Slack competitor, Microsoft Team.
In the financial trading space, the exchange operator CME shelled out $5.4B for England's OTC trading expert NEX Group, which runs one of the largest platforms for trading treasuries.
Finally, S&P announced what may be the biggest AI deal in this space, spending $550M, at over 28x revenue, for Boston-based Kensho, which applies machine learning to deliver visualization techniques to Wall Street banks.
How did consumer fare, Amanda?
Consumer Applications Valuations Metrics
Consumer sales multiples set multi-year highs after dipping in February, with EBITDA showing a less dramatic increase. Gaming multiples dropped a bit, while general consumer sales multiples picked up. Deals in gaming, ridesharing and various consumer applications attracted both tech buyers and traditional companies. In the gaming world, Atlanta-based developer Blue Mammoth Studio was acquired by Ubisoft for online multiplayer expertise and the Smash Brothers-style game Brawlhalla. And European game company Koch Media was bought by THQ Nordic for just over a hundred and twelve million, $112M bringing some games back to the THQ label.
In the betting space, we saw international targets in some unusual places. Georgian online gaming operator Crystalbet was bought for $51M by online betting group GVC Holdings. And Brazilian studio EsysnetG was purchased by Scientific Games, providing access to its video bingo content for game development.
International ridesharing consolidation continues in the wake of Uber's retrenchment in the U.S. and Europe. Brazilian ride-hailing app 99 was picked up by Chinese car-booking group Didi Chuxing, which had earlier acquired Uber's Chinese assets. Uber's Southeast Asian assets were acquired by Singaporean ridesharing company Grab. And in Korea, carpool startup Luxi was pocketed for more than $23M by web giant Kakao to complement its taxi-hailing service. Uber was also part of a flurry of bike-sharing deals in the last couple of weeks, which we'll cover next month. Elsewhere in the connected-car ecosystem, BMW bought Atlanta-based parking app Parkmobile, the latest example of automakers acquiring technology companies.
In the e-commerce world, UK's blockchain payments and ID platform Nuggets was picked up by Chinese online retailer JD.com, adding data security and advanced digital currency flow capability to JD's existing AI-enabled tech.
Elsewhere in the entertainment space, Google added GIF delivery platform Tenor to optimize search and sharing of animated images. The composite commerce trend drove deals in beauty, fashion, and retail. Canadian beauty tech company Modiface was pocketed by French cosmetics brand L'Oreal to facilitate augmented reality makeovers. And here in Seattle, fashion retailer Nordstrom purchased a pair of local retail startups, BevyUp and MessageYes. Corum is co-sponsoring a market spotlight on the composite commerce trend on May 2.
How's the Internet sector looking, Becky?
Internet Applications Valuations Metrics
As Elon mentioned, we saw an unusual valuation trend in the Internet market, where EBITDA multiples dropped away from sales multiples, as most subsectors saw a sudden challenge to their business models. Only ecommerce eked out a gain in the value of profits, while those most dependent on personal data monetization saw the largest divergence, as fears of regulation and user exodus spooked investors from social networks like Facebook, which may need to pivot to maintain earnings levels. But M&A continued for social networks, especially those with a prosumer bent. Canadian photo-sharing community 500px was picked up by image provider Visual China Group to facilitate its expansion into photo licensing markets.
Online publishing community HubPages was acquired for $10M by Seattle-based content company Maven to build a platform for independent publishers and compete against Facebook in the ad industry. Consolidation has begun in the meal kit delivery space, where organic ingredient delivery startup Greenchef was bought by German HelloFresh as it competes with Blue Apron in the US. And in France, food tech startup Quitoque was wrapped up by food retailer Carrefour, the latest grocery chain to make a composite commerce deal. Food delivery, in general, continued consolidating. In China, Alibaba acquired food delivery service Ele.me for $5.4B to dive deeper into retail, bringing it closer to competition with Tencent.
Moving into Europe, Dutch food ordering service company Takeaway.com expanded its international footprint by grabbing two food delivery services: Bulgaria's Bgmenu and Romania's Oliviera. And delivery service FoodChéri was bought by food services and facilities management giant Sodexo in another French bricks to clicks composite commerce deal.
Infrastructure Applications Valuations Metrics
Sales multiples in the infrastructure sector continue to rise, while overall, EBITDA metrics dipped following January highs, despite increases in storage and network management. Security continued to see a flurry of deals, particularly in disaster recovery and backup, as well as identity access management. Application and data integration software provider MuleSoft was acquired for $6.5B by Salesforce, which intends to use MuleSoft's rich data layers to build upon its Einstein machine learning projects.
In the cloud infrastructure world, Evident.io, which resolves security compliance issues with AWS and Azure, was picked up for $300M by security veteran Palo Alto Networks to extend its API-based security for cloud infrastructure. And Nutanix made its first acquisition since going public, picking up cloud cost analytics provider Minjar. VMware kicked off the quarter with three deals, the same number it did in all of 2017. First, the virtualization giant bought CloudCoreo for its cloud infrastructure monitoring capabilities, following up with hybrid cloud migration firm CloudVelox to advance VMware's hybrid cloud extension and strengthen relationships with multi-cloud providers. VMware also picked up machine learning-based behavior analytics firm E8 Security to leverage its Workspace ONE platform. Other security deals included data encryption firm Vaultive being acquired by privilege management firm CyberArk to provide more granular control to its admin.
Security automation and orchestration expert Phantom was picked up for $350M by Splunk to better automate its adaptive response solutions. New phishing startup manager Cofense was bought for $400M by PE firms Pamplona and BlackRock Capital.
In the authentication space, ThreatMetrix, which combines threat intelligence data and behavioral analytics to identify high-risk transactions in real-time, was acquired for over $800M by RELX to bulk up its risk and business analytics arm. And Cyberinc sold its malware protection and identity management assets for over $34M to KPMG to reinforce its customer identity capabilities and tighten alliances with other IAM players such as Sailpoint and Ping Identity. Disaster backup and recovery players have been targets for M&A as well. For example, cloud data management company Rubrik bought distributed database backup provider Datos IO and its over 20 patents in application-aware data management. And N2W Software turned its early focus on EWS into $42.5M from virtual data backup company Veeam, enticing it from its nearly decade-long M&A hiatus.
In the networks and application performance management space, real-time traffic optimization company Cedexis was picked up by Citrix to improve app performance in hybrid and multi-cloud environments through intelligent traffic stream technology. In England, NCC Group sold its web performance division to Carlyle-backed TestPlant for $10.5M to add NCC's AI-enabled platform and a portfolio of blue chip customers. And app performance management software provider AppNeta was bought by PE firm Rubicon Technology Partners. How did IT services perform in Q1, Patrick?
IT Applications Valuations Metrics
Sales and EBITDA multiples in developed markets normalized since their spike in January, while emerging markets dipped from last year's highs. In reflection of our Focused IT services trend, we spotted deals across the Salesforce, Microsoft, and Oracle systems integration demands. CirrusOne, offering billing consulting services, was acquired by systems integrator Simplus to strengthen its close-to-cash consultancy capabilities and Salesforce expertise. Consultancy Comity Designs was picked up by data integrator Brillio to help it enhance its offerings across a range of verticals.
In the Microsoft ecosystem, Kansas-based dynamic specialists Associate Solutions was bought by High Touch Technologies. Sweden's Azure-driven systems integrator iBiz Solutions was bought by Norway-based TeleComputing to solidify its position in the Nordics. And Constellation's Vela Software was bought by Croatian system integrator IN2, which should augment Vela's IT services share in the Adriatic region. Among Oracle-based system integration deals, we saw Newbury Consulting Group, specializing in Oracle cloud talent acquisitions solutions, acquired by Indian integrator Evosys to boost its North American presence. And M-Power, which focuses on enterprise performance management and business intelligence, was picked up by DXC.
And speaking of DXC, just last week that IT giant, which was formed last year by a merger of veterans CSC, the old computer sciences corporation, and Hewlett Packard Enterprise's services arm, also made its first Q2 acquisitions, a pair in the Microsoft systems integrator space, buying UK SI eBECS and Austrian dynamics VAR Sable37, rolling both into its already huge Microsoft practice. Another illustration of our focused IT services trend. Eh, Tim?
Indeed, indeed. Thank you very much, Elon. A lot of stuff going on. A lot of buyers, some you've heard of, many that you haven't. A lot of deals driven by trends and a couple of those were called out in a couple spotlights that we are doing in the near future that I just wanted to mention before our close here. One coming up on April 24 about smart logistics, looking at everything from SCM to delivery services and everything in between. There's a lot going on there. And then into this Composite Commerce trend – they're both very related – on May 2. Looking at the way that the offline and online worlds are converging and the technology that is needed in order to bolster that.
We'll go now to questions. The first question we got was, “Will we get the deck?” And the answer is, the deck will become available on our website very shortly, so you can watch for it there. And let's see what other questions have come in. So here's a question, and this is probably one that I would be happy to toss to Rob Schram, one of our dealmakers, who just dropped in, which is: "For mature software companies, are valuations based on gross revenue, EBITDA or recurring revenue?" It's a very simple question, Rob, why don't you take that?
1. Mature Software Companies Valuations
It's a simple question. There's a simple answer and it's "Yes." It's this combination of all three and it depends on the buyers as often times we see. And as you've shown today in some of these various analyses, buyer value is based on top-line revenue, it's based on earnings, and it's based on a number of other parameters within the company that are relative to the market itself. So we generally will look at top line and relative to other comparisons in the market, comparables in public and comparable M&A deals. We'll come up with a revenue multiple. Some of the buyers we've been talking to recently, the financial buyers in particular, will look at EBITDA. Because if it's a stable company, kind of up on step and on a decent trajectory, then it's the earnings factor that may be interesting to a specific buyer. However, to a lot of the strategics, if your company is the perfect missing piece of the puzzle and it fits or dovetails really nicely with what their roadmap looks like, then they may not care so much about earnings. And if you are plowing your profits into growth, then you'll get rewarded for doing that. It's a good transition and helps them catapult down the road to their roadmap.
And one other item that I would add is the ultimate place the valuation comes from at the end of the day is the process you go through to sell your company. You aren't going to get maximum valuation because whatever buyer you're talking to, if you don't have the leverage of other opportunities out there, you're simply not gonna get what you're worth. So that's I think a key piece that we cover in a lot of our events that will be coming up shortly, hopefully in a town near you. Lots of questions coming in. We're not gonna have a chance to get all of them, but here's another one for you, Rob, since I know you've been doing a lot of deals in this space recently. "Are the PE buyers primarily doing cost-cutting or revenue-growing on these tech deals?"
2. PE Buyers: Cost-Cutting or Revenue Growth?
Cost-cutting or revenue-growing… The PE buyers are just like all the other buyers in this market right now. And as Elon mentioned earlier, there's a value discipline being exercised and there is a paucity of reasonable or good opportunities in this market. So generally it's promoting, it's adding a vector to what's already being moved on. In other words, within portfolio companies, say the tier 1 private equity groups in particular, they're looking for accelerators to these various holdings. And what they're looking for is forward movement, not necessarily to cut costs, although both are important. In this market right now, we're looking for value addition on the top and bottom levels.
Lots of other questions, like I mentioned. We're not gonna be able to get to the next ones. But we will try to follow up by email. Thanks, everybody, for joining us.