The 10 M&A Mistakes You Don’t Know You’re Making

Introduction  

Timothy Goddard  

Thank you and welcome to Tech M&A Monthly. My name is Timothy Goddard, I’m VP of marketing here at Corum, and I’m happy to be your moderator today and looking forward to what is really a packed agenda. Our focus is the 10 M&A mistakes that you don’t know you’re making, but we have a lot to get through before we get to that. We’ll start with a field report on a very exciting deal out of Europe. We have a number of international conferences to report on, both ours and in India with NASSCOM, the major Indian tech association. We have a special report that we teased last month on new buyers and spin-offs. Then we’ll have the research report from our M&A research team, and then finally we’ll get to the meat of today’s event, the ten M&A mistakes you don’t know you’re making.  

First let’s join Corum Senior VP Jon Scott in Amsterdam to hear about the Orthoview deal.  

Field Report: Orthoview  

Jon Scott  

Thanks, Tim. Last month we announced the acquisition of my client Orthoview Holding by Belgium-based Materialise. Materialise is a provider of 3D printing software and services. UK-based Orthoview is the world’s leading provider of 2D digital pre-operative planning and templating solutions for orthopedic surgeons. Orthoview’s software supports the importing of a digital x-ray image from a picture archiving and communicating system (PACS) and positions the templates of suitable protheses on the x-ray image at the correct scale. Orthoview currently serves more than 11,000 orthopedic surgeons in over 2000 hospitals in more than 60 countries. They focus primarily on joint replacements.  

For almost 25 years, Materialise has been at the forefront of major innovations in 3D surgical planning based on CT, MRI, and most recently, x-ray images. Their experience in 3D printing technologies has made it possible for the company to provide patient specific anatomical models to surgeons, as well as specific patient instrumentation for surgery. Materialise has software and service solutions for joint replacements and other surgical processes, and through their subsidiaries they offer customized 3D printed implants.  

The combination of these two companies was an excellent match and a lot of fun to advise on. The Orthoview team had developed very specific industry expertise in the pre-operative planning area. It was great working with John Chambers, their founder and CEO and his team, and a number of strategic options, but the combination with Materialise was a hand-in-glove fit. We were pleased to help partner the market leader in orthopedic surgery software with a tech pioneer like Materialise.  

This transaction was our Corum’s fourth in the healthcare space in the last 18 months, and we see robust activity in the sector continuing. Healthcare is being transformed, and healthcare M&A is being driven by dramatic regulatory, social, and in this case, technological change.  

Tim, back to you.  

Timothy Goddard  

Thanks, Jon. I also want to mention something else about this deal: it’s a great example of one of the tech trends that we’ve been talking about all year, in this case, Advanced Manufacturing. 3D printing is a pretty big piece of that, and it was exciting to be involved in a deal that is putting that technology to work in such a practical manner.  

Now, staying in Europe, we’re going to hear from Tanya Perlich, out of our European headquarters about conferences we’ve been doing in Europe and beyond.  

International Conferences Report  

Tanya Perlich  

Hi, this is Tanya, branch manager based out of our Zurich office. We have a number of events taking place globally. We were in Lisbon and Madrid in September, and we did a German roadshow at the end of October, together with our CEO, in Munich, Frankfurt, and Hamburg, followed by Warsaw and Prague. We were also in Sao Paolo and Rio just last week. Great conferences, sold out, just a great group of companies. There were lots of questions, and there’s a lot of excitement in the air. We still have a few other events planned for the rest of the year. We’ll be in Helsinki at the end of November for SLUSH. We’re also planning an events in Tel Aviv, Zurich, and Vienna, before the end of November. Then, in December we’ll be in Amsterdam, London, and Hong Kong for tech M&A workshops.  

If you’re in the area, please let us know, we’d be thrilled to meet with you or invite you to one of our events. These are great opportunities to get your questions answered, and we hope to see you at one of our events.  

Rob Schram, VP at headquarters, was recently in India for the NASSCOM product enclave, so let’s hear from him.  

India NASSCOM Report  

Rob Schram  

Thanks, Tim. I recently had the pleasure of presenting at the recent annual NASSCOM product enclave held in Bangalore, India during the last three days of October. This sold out event attracted over 1500 attendees, more than 100 software startups and emerging companies, and it included multiple track sessions with lots of insights, with tech workshops, strategic planning sessions, and how-tos for preparing for and working with the global M&A markets, which I covered in a series of three talks.  

There is exceptional innovation and world class potential in these scrappy, cash-efficient product companies that have emerged in this historically IT services-centric part of the world. Corum looks forward to working with many of these companies in the months ahead. During my visit, Japan’s Softbank became the largest investor in Indian startups, after buying a stake worth $627M in online retailing Snapdeal and leading a funding run of $210M in taxi aggregator OlaCabs. Masi Osi-san, Softbank’s chairman and CEO, whose $20M investment in Alibaba is now worth $80B, declared that India, with it’s 1 billion people, good education, and engineering skills, is destined to be one of the top two world economies. So, you can be certain that we’ll be paying close attention to India’s rapidly evolving world technology hub.  

Timothy Goddard  

Thanks, Rob. I had the opportunity to be in India back in April and had a chance to hear from the CEO of Snapdeal while I was there. It’s an exciting company and there are lots of exciting things going on over there.  

Now, over to Europe again and we want to welcome a new member of the team, Nina, and she has a really interesting report on major tech breakups and spinoffs, and what that means for tech M&A.   

Tech Breakups and Spinoffs  

Nina Seghatoleslami  

The big news in the tech world last month was the sudden trend in major technology company breakups. First eBay announced that it would finally spin off PayPal, something shareholders had been pushing for a long time. Then, HP announced that it would break into Hewlett-Packard Enterprise, focusing on enterprise software, services and servers, and HP Inc, selling PCs and printers. The surge was capped by Symantec’s board approving a plan to split it into two publicly traded companies, one focused on security and the other on information management.  

In addition to these major breakups, though, we’ve also seen some important spin-offs on the lower end, often with Private Equity assistance. In July, Juniper Networks spun its mobile security portfolio out to Siris Capital as Pulse Secure. That month, CA did the same with its Arcserve backup and recovery software business, this time with Marlin Equity on the receiving end. Earlier in the year, Marlin acquired three divisions from Compuware and turned them into Changepoint.    What implications does this trend have for technology company M&A? In general, it’s good news. When giants like HP or eBay split, the two resulting companies are each more focused and more nimble. As HP CEO Meg Whitman said during her announcement, “Being nimble is the only path to winning.” More nimble buyers, and more focused corporate development offices, are good for sellers. Expect to see these new companies make key acquisitions in the months ahead, as the CEOs forge new identities for their firms.  

The same is also true with the smaller spinouts—Private Equity firms are always looking for synergistic bolt-ons they can add to their portfolio companies to spur growth. Marlin has already added Daptiv to Changepoint, and expect to see the others follow suit. These moves also have implications for competitors, who must respond to the changing landscape and new, more nimble opponents.  

So if this trend does continue, who might be next? The popular name is EMC, which is under shareholder pressure to break off its VMWare and Pivotal units. The CEO has been resistant, but the same was true of eBay. Cisco is another name that has been mentioned, possibly breaking into networking and cloud businesses, while Microsoft has long been urged by some to spin out its Xbox division. We suspect at least one of these will happen eventually—as well as some that will come as a surprise. We’ll be watching this trend closely. Back to headquarters.

Timothy Goddard  

Thank you, Nina. Now, before we get to our 10 Mistakes. Let’s go to the Corum Research Report, as we do every month, with Elon Gasper VP and Director of Research, and Amber Stoner, Senior Analyst. Elon?  

Tech M&A Research Report  

Elon Gasper  

Thanks, Tim. We begin with the Public Markets, where we saw the October correction set up a soaring bounce to new record highs across the key indices. The auspicious chart, buyers teeming balance sheets and continued low interest rates, augur for an enduring and robust tech M&A market.  

Our Corum Index bears that out, printing with year over year growth in transaction number, size, and speed, while VCs held back for potential IPOs. Increasing crossborder traffic included a $2.5B deal in Cambridge’s booming “Silicon Fen” hi-tech region, where M2M software, silicon and services company, CSR, was picked up by Qualcomm in a deal matching both our Enmeshed Systems Top Ten Trend as well as the Advanced Manufacturing one Tim mentioned. In a similarly sized megadeal NetScout bought out a set of communications businesses from Danaher, including parts of some venerable brands like Tektronix and Fluke, with which NetScout expands its network performance offerings while eyeing the security sector. Amber, how’s its 3.1x sales compare with other Infrastructure value metrics?  

Infrastructure Software Valuation Metrics  

Amber Stoner  

It’s a bit higher than the overall sales multiple in the infrastructure sector which has ticked up in early Q4 with a distinctive trend of cyber security deals in October. Given the growing use of smartphones and tablets, BYOD solutions are finding a comfortable niche in the market.  

Pulse Secure, which, as we mentioned earlier, was spun out of Juniper Networks in early October, heightened its cyber security capabilities by adding Israeli mobile management and security SaaS provider, MobileSpaces, for $100M. MobileSpaces’s BYOD app creates a secure partition between corporate and employee data and consolidates Pulse Secure’s customer experience on both PCs and mobile devices.  

Following Pulse Secure’s lead, Sophos picked up Mojave Networks, a cloud-based mobile security SaaS provider, broadening its security solutions portfolio and its ability to deploy both SaaS and non-SaaS offerings. And Digital Guardian grabbed cloud-based and on-site mobile device security software provider, Armor5, enabling secure and compliant access for enterprise employees. The addition of Armor5 augments Digital Guardian’s existing portfolio of security endpoint solutions for enterprises.   On to the vertical market, Elon?  

Vertical Software Valuation Metrics  

Elon Gasper  

There multiples dipped only slightly since the end of Q3, staying in step and a relatively tight recent range.  

In the financial space, Moody's bought the Boston financial management software developer Lewtan Technologies, whose strong European position and mortgage database should broaden Moody’s product line while extending its global reach.  

And responding to growth in the asset management industry, London’s TFG Financial added Charlotte-based Risk Technology Solutions to its real-time portfolio risk management platform. The integration is expected to enhance TFG’s SaaS products for its North American clients. We are seeing more willingness to consider cross-Atlantic M&A, if it falls within the short 5-hour time zone gap like this one did.  

In the increasingly overlapping Healthcare and Government subsectors, Booz Allen Hamilton purchased Epidemico, a public health analytics SaaS provider originally spun out from Harvard & MIT; it’s interesting to see a big services company buying some SaaS, though the expertise is likely the real driver here, particularly given that Epidemico’s customers include the CDC and other US agencies, and that Booz Allen also picked up a government healthcare IT Services arm of Genova Technologies last month.   Amber?  

Horizontal Software Valuation Metrics  

Amber Stoner  

Moving on to the Horizontal sector, valuation multiples remained steady with an uptick in EBITDA multiples for the first month of Q4 and ERP & CRM companies were particularly active in October.  

Apax Partners reached into the Netherlands, picking up ERP and CRM vendor Exact Holding for $922M, a 2.8x sales multiple. The investment will help Exact accelerate its cloud strategy as well as scale up its portfolio of cloud-based business software, potentially through acquisitions. 

Like Apax has been doing with portfolio company Epicor, which acquired Atlanta-based retail analytics software company QuantiSense for $16M, expanding Epicor’s offerings in omnichannel solutions by adding BI and advanced analytics capabilities.  

Workforce management software companies were also busy in October. HgCapital spent $175M, a 2.3x sales multiple, to get workforce management software provider, Allocate Software. And Cornerstone OnDemand acquired San Francisco-based big data platform Evolv for $42.5M.  

Digital marketing consolidation continued as well, with Ensighten’s 2nd acquisition this year, of SaaS multi-channel digital marketing company Anametrix, adding marketing analytics technology to Ensighten’s platform. And software analytics company New Relic made its first acquisition ever, just in time for its IPO filing, buying Spanish startup Ducksboard, bolstering New Relic’s data visualization and integration capabilities.  

Elon Gasper  

And that’s our update. Back to you, Tim.  

Timothy Goddard  

Thanks, guys.  

Top Ten M&A Mistakes You Don't Know You're Making  

Now, let’s go to the heart of today’s event, the ten M&A mistakes that you don’t know you’re making. We see a lot of companies doing a lot of things right, but we also see them doing things wrong here, and we’ve sold more companies than everyone, which means we’ve seen just about everything you could do one way or another. So we’re going to share some of that wisdom with you from our dealmakers across the globe.  

We’re going to begin in Texas with Jeff Brown, discussing what happens when you sell perpetual licenses.  

Jeff Brown  

It’s easy to become addicted to the big checks and the quick cash that come from perpetual license sales. This is especially true for self-funded start-ups that need the cash to pay the bills right now.   While this may seem the best way to get through the early days, quit the habit as soon as you can. Perpetual licenses are outdated. They severely limit the life time value of a customer and minimize the upsell opportunities. They create a dependence on the next large sale and drive a lumpy revenue profile that is difficult to forecast.  These businesses are more difficult to manage. Buyers and investors crave predictable, recurring revenues and customers with lots of upsell potential. Your best buyers stopped selling perpetual licenses years ago and so should you.  

Timothy Goddard  

Thank you, Jeff. Now, back at headquarters, with a similar contract question, Ward Carter is going to discuss change of control provisions.  

Ward Carter  

Your customer license agreements and support contracts are a valuable asset of your business, as they represent future revenue and detail the contractual obligations between the parties. These can also be a liability if you have given rights to the customer that could limit your ability to transfer ownership.   All too often, we see contracts that include change of control provisions, including the ability to cancel the agreement or withhold payments in the event there is a change of ownership or other event where the contract is being assigned.  Exclude such rights in your new contracts, and if you have existing provisions like this, plan to delay the close of your M&A transaction while you solicit the customers’ agreement on selling your company. Not an insurmountable obstacle, but one that could have been avoided early on had you known the troubles it can cause.  

Timothy Goddard  

Thanks, Ward. Staying at headquarters, we’re going to hear from Rob Schram about another mistake on a slightly different tack, about failing to build early on the key relationships that you’ll need later on.  

Rob Schram  

According to a recent survey of over 100 failed tech startups, one of the biggest reasons for failure was that the founders had spent too much time and capital developing the tech, while neglecting to secure key customer relationships. This is a mistake I've noticed frequently with earlier-stage, development-centric firms—they fail to create close working contacts within the appropriate divisions of their top-tier customers who, when the time is right, will make excellent buyer candidates.   

Today, strategic acquirers are rolling in cash and their Corporate Development teams are not generally drawn to doing small deals.  However, if the company has established tight working relationships with internal sponsors who are prepared to champion a relatively small acquisition, then CorpDev teams are far more inclined to respond.   It usually takes a year or so to develop solid connections within client companies, so don’t delay this critical-path to success for both topline and future M&A.  

Timothy Goddard  

Thanks, Rob. Now across the ocean and further into the process, Mark Johnson is going to discuss what happens when you trust your buyer too much.  

Mark Johnson  

I’m going to talk about the problem of developing too close a relationship with your buyer and getting sucked into having faith in their intentions. An example of this is a client which blindly signs an LOI with the buyer prior to negotiation of important elements up front, accepting 120-day exclusivity for one. The rationale of the seller was that the buyer was smart, honest, and really wanted to buy the company, therefore everything else would work out. Unfortunately, they did not.  

The seller needs to keep a warm relationship with the buyer, but also maintain distance. His or her advisor is the one to take the hard deal discussions, the seller should focus on synergies and integration.  

Timothy Goddard  

Thank you, Mark. Back to the US, and from the heartland, Ed Ossie. He’s going to give us some good advice on how to communicate with your buyer about your value.  

Ed Ossie  

Not concisely linking your company's Key Performance Indicators to value for buyers can be an early, costly mistake.   Many sellers have their own KPIs and may be aware of the critical indicators that buyers look for when assigning value. But becoming conversational on these, well ahead of the process can, pay off in a big way. 

Recurring revenue, maintenance renewal rate, customer churn, customer acquisition costs, net new clients, and CMRR should roll off your tongue way ahead of that first webex or meeting with the prospective buyers.   We can’t tackle all these terms in just a minute, so we’ll take recurring revenue.   Through the buyer lens, the higher percent of recurring revenue your business delivers, the higher the value.   

If you're a traditional license business transitioning to SaaS, think of your maintenance revenue and subscription revenue as recurring. In some cases, even your services revenue can be considered recurring, depending on how it is contracted. This might seem obvious – but communicating a simple, easily understood percent definition will be well received.  

Timothy Goddard  

Thank you, Ed. Back at headquarters, Daniel Bernstein has a personal story about going it alone when selling.  

Dan Bernstein  

It can be tempting to avoid the expense of an advisor, but from personal experience I can attest to the 80% failure rate when you try to sell your own company instead of running a deliberate process. With my own online games business I went through five cycles of interest, due diligence and term sheet. Things fell apart in different ways, whether it’s because of incorrect structure, wrong mix of stock, cash and incentive bonuses, or simply because I had just one buyer at the table and they weren’t as motivated to get the deal done. After doing it four times and getting pretty distracted from running my company, I was able to get a successful outcome only on my fifth try at the bat.  

Timothy Goddard  

Sounds fun. Dan touched on this a bit, but we’re going to Jim Perkins in Phoenix for a look at what happens if you do only talk with one buyer.  

Jim Perkins  

One of the biggest mistakes sellers make is talking to only one buyer. You may think you already know the right buyer for you, but there are dozens of other potential buyers worldwide interested in your company – why limit yourself to just one? Seventy-five percent of the time other buyers will pay more for your company. Working with one buyer means that the buyer is driving the process – they are dictating the timing, the price, the structure, everything. Bring others to the table and gain leverage so you can set the pace, drive up the price, and pick the deal that is right for you. When you do a full buyer search, value goes up an average of 48%—well worth talking to many buyers worldwide!  

Timothy Goddard  

Thanks, Jim. Now we’ll turn to John Simpson here at headquarters on ignoring the concerns of minority shareholders.  

John Simpson  

This real life story is about a software development tools company, 85% owned by the CEO, and 15% by a few employees and former employees. We brought them an offer from a large public technology buyer, which the board accepted. I was there when the CEO broke the news to the shareholders. Most were happy, but one, a disgruntled former VP threatened to sue to block the sale, claiming the price was way too low. In fact, there was no reasonable basis for this, because it was a good offer, but the buyer was public, they balked, and were about to walk away because of the potential cost in publicity. The client had to work very hard to get this man to back down and see sense.   Lesson: Make sure any minority shareholders have any reason to threaten anything.  

Timothy Goddard  

Thanks, John. Now across the pond to Jon Scott, who we heard from at the beginning, who will talk about what happens if there is no sense of urgency to your transaction.  

Jon Scott  

Surprisingly, one of the more common mistakes I see is the seller not responding quickly and efficiently to information requests from the potential buyer. A lot of times this is in the discovery process when you’re getting to know each other. Responsiveness is key in an M&A process. The buyers are busy and if they have already indicated interest and asked for further information you need to respond quickly. Your response tells them a lot about how prepared, organized and detailed you are and how you might likely be to work with if they buy you. A slow response also sends the buyer a signal that you may have a lack of urgency and can cause the buyer to lose faith and move on to their next target.  

Timothy Goddard  

Well that’s our ten, but we’re going to go last to our founder and CEO Bruce Milne, who has a few bonus mistakes he wanted to share as well.  

Bruce Milne  

Four things to remember in the term sheet, what we call the letter of intent—LOI—so that your deal doesn't fail at the end. Don't forget to freeze the balance sheet at the time of LOI. It should be the same when you close. Identify who gets any excess cash in the balance sheet - otherwise you're in for a fight at the closing. Be sure to keep the "no shop" period short. That's your biggest leverage in getting the closing done on time. If there is any change in the deal terms by the buyer after you sign the LOI, during due diligence, you should have the right to walk away, instead of waiting for the "no shop" period to expire.  

Timothy Goddard  

Thank you, Bruce.  

We’re coming close to the end of our 30 minutes here, so we’re going to turn to our President, Nat Burgess who will share some closing thoughts to wrap us up.  

Nat Burgess  

Thanks, Tim. It’s not hard to tie things up with a bow with the caliber of advice we heard today. Really fantastic. We had a couple of hundred CEOs register for this event, so clearly people are understanding education is important and so is anticipating problems. We all want to succeed.  

So let me close with a couple of thoughts.  

First: A lot of what you heard today was about problems that could occur during the development of a company, and then cause problems during the months of negotiation. These are the kind of things that you can fix in place and without the pressure of an M&A deal. If one person has the power to block a deal unless they give in at some point that is critical at closing, that’s a problem. If you take it on matter-of-factly, in the ordinary course, you can fix it. So, accordingly: Get educated. Understand what these are, review the deal killers, the mistakes we reviewed today, and anticipate how those will trip you, and go fix them when you have the time. Every anecdote you heard today, all these war stories, these are things that came up in deals and I think every one of these deals closed. Our clients had experience on their side, we were able to negotiate, we were able to work around these issues, we were able to get them done. So get to know the professionals in this business, build that relationship as well, so when the time comes you have experience on your side.    

Timothy Goddard  

We had a few questions, but we’re at the end of our time, so we’ll have to address those offline, and we’ll get back to you.   Thank you for joining us. We’ll go to our close.