What happens after you sell your company? Hopefully you go on to the life you’ve dreamed, whether retirement, travel, a new company or whatever goal you have. But what about your company—your customers, partners and, especially, employees? A failed integration and handoff to the new owners can kill your reputation and relationships, while a clear success story can open doors like nothing else. On December 13, Corum dealmakers will walk through 10 Tips for Postacquisition Success—what can you do, even before the deal closes, to help ensure that your employees are taken care of, your company is successful and your legacy is strong.
Read Presentation TranscriptRead more Show less
Introduction & Forecast 2019 Preview
Good morning, afternoon, or evening, wherever you happen to be in the world. My name is Timothy Goddard, EVP of Marketing here at Corum. I'm very happy to welcome you to the final Tech M&A Monthly of the year. We've got a great agenda coming up for you over the next half hour we're going to walk through. First, a couple of introductions as in resources, one that is available to you now and one that is available to you in January. And then we'll have our research report looking at deals transmutation metrics from the last couple of months. And then our special report, 10 tips for post-acquisition success. And then if time Q&A, please do send in your questions via the little window to the right of your screen. Let's go ahead and get started.
First off I'm very pleased to introduce the special Tech M&A edition of Software Executive Magazine. This is a magazine we've been working with over the past about a year and a half since its launch last year. And very pleased to have brought about the special Tech M&A edition with an enormous amount of insight, details, facts, both from books from Corum as well as articles from Software Executive Magazine about the Tech M&A process. A lot of you hopefully received this in the mail recently. If you haven't reached out and we will be very happy to get you a copy. You can also find it online. We believe we have a blog post that has the digital version linked to it.
Then coming up next month, the largest Tech M&A event of the year. January 17th every year we do our global Tech M&A report with detailed metrics on all six sectors and 30 sub-sector. We'll be introducing our new Top 10 Disruptive Technology Trends. We'll have our luminary panel back with Peter Coffee and Reese Jones, a Silicon Valley futurist joining us, as well as other members of that luminary panel that we're lining up right now. So hopefully you can join us for that. This is the largest event of its kind for Tech company CEOs. We're looking forward to having you there. You can register right now at corumgroup.com/forecast-2019 and we'll be getting that link to you in many other ways shortly.
So with that now, I'd like to go to our research report, turn things over to Elon Gaspar as well as Amanda Tallman, Alden Mendoza, and Becky Hill. Elon?
Thanks Tim. We begin with the public markets where after a stormy October, major US indices trying to climb the hill again, eking out small gains before skidding and sliding back last week like on an icy December roadway. November Asian markets were mixed, most of Europe fell again. A so long bull market finally met its match. We strongly advise Tech execs, particularly entrepreneurs who are older like me, start a process, check your options, give yourself a chance to take something off the table.
A lot of tech remains up for the year and the M&A markets still have the window open, but clearly, the times are changing and a new set of challenges arriving. Our November Corum index showed increased deal volume year over year with mega deals still pouring down as buyers seek models they hope will deliver dependable growth in the changing landscape. VC exits up the third month in a row and here at Corum, we are seeing increasing divestiture action from the corporate side in two as the proverbial smart money continues to take advantage of this exit window.
Last month's mega-deal edition stacked into five of our six sectors. The formerly high flying Internet market has produced no mega deals since June and consumer just three, most recently, Hitachi car navigation unit Clarion picked up for over a billion dollars by global parts maker Faurecia in the shift toward new taxis, autonomous driving in IT services, payroll processor, Paychex bought another outsourcer going big with 1.2 billion for Oasis Outsourcing which itself and rolled up for others in the last couple years. In Horizontal, SAP swept Qualtrics away just days before its IPO, paying $8 billion dollars of a hefty 21 times revenue for the Utah based survey software maker. In the vertical sector, practice management staff's leader Athenahealth was grabbed for 5.7 billion at four times revenue by VE firms led by Veritas. To merge into it to two mega-deal purchases of GE healthcare software. And in infrastructure, Ai Based cybersecurity firm Cylance was scooped up for 1.4 billion at nearly 11 times revenue by inhibited and smartphone pioneer BlackBerry. Now the details on three of our sectors, starting with Internet. Becky?
Internet valuations dropped sharply. The deal flow continues as travel and leisure remain the most active Internet subsector. The complex global ecosystem is a natural hotbed of M&A. In the Netherlands holiday platform, TravelBird was picked up by online travel group Secret Escapes, for its dynamic vacation package technology. A rental was consolidated by New York-based service departments startup Domio as a combined company takes on Airbnb's last. Restaurant reservation service, Reserve was scooped by its competitor Resy, adding strength in the top domestic market while challenging open people. And just this month, online ordering and on-demand food delivery platform Waitr bought Bite Squad for $321 million also for a broader geographic scale.
During a series of cross border transactions in the e-commerce subsector such as in Sweden, social shopping site Tictail being bought by its larger rival Shopify switching part from a marketplace into an E-commerce platform. Singapore E-commerce from ezbuy was acquired for nearly $86 million by a Chinese online retailer LightInTheBox to try to strengthen its position in an escalating E-commerce war in Southeast Asia. New York-based personalized print platform TeePublic was purchased for $41 million by its Australian competitor Redbubble expanding its apparel business. And crown store shopping comparison engine Wikibuy was bought by Capital One, adding another consumer shopping tool to its portfolio. Online used vehicle marketplace Carizy was acquired by Renault, to establish a position in the peer-to-peer used car market. An auto classifieds website Wholesale was bought for $23 million by online motorcycle marketplace RumbleOn to extend beyond its current market. What happened in consumer Alden?
In consumer both sales and EBITDA evaluations lost all their gains from the last year. Despite a slow down in M&A, we did see some deals in gaming and education. THQ Nordic rounded up another set of studios, including Finland's Bugbear. Created up Wreckfest. From Swedish developer Coffee Stain. Created a surprise in Goat stimulator for 43 million. THQ has been on a buying spree all year. It also wrapped up the Expeditions Ip from Logic Artists adding to its roster of role-playing games. And Microsoft continues the gaming spree that it started at E3 getting RPG studios in InXile and Obsidian under the Xbox umbrella.
In consumer education, constructive media which develops edutaining content was bought out from H.I.G. Capital by London based Sandbox and company out into its digital learning portfolio. And in India private education startup Acadview was picked up by online learning firm UpGrad seeking to capture a larger chunk of the $20 billion Indian education market. Amanda?
Field multiples on the horizontal sector dropped but only to July level remaining at a steric height and everyday metrics stayed put as enterprise software evaluation help up better the broader tech market. Active subsectors included the resources base for training, hiring, and employee wellness. New York-based Grovo learning which develops microlearning courses for employees. Was picked up for $24 million and nearly three times revenue, by workforce management firm Cornerstone. Employee training fast developer Mindflash was acquired by PE-backed Applied Training Systems, adding a fourth product to its HR portfolio. Simppler which uses machine learning and matching job candidates for social networking was bought by the referral-based, recruiting part of Teamable. And employee wellness firm SimplyWell required both Claims Analytics and condition management functionalities diversion Pool itself required by Merlin Equity in May from Richard Branson's Virgin Group.
In the customer engagement field, experience-based offline retailer Ulta Beauty bought two software companies Qm Scientific and GlamST. And elsewhere in the sector, Aptrinsic was acquired by customer success developer Gainsight to better connect customer engagement and product teams in both companies. We saw a fair amount of activity in the business intelligence space for analytics firm Datawatch was scooped up for 176 million and four times revenue by Altair engineering, which AMSA blended Watson Visualization stack with its manufacturing station. Machine learning software provider BlueData was picked up by Hewlett Packard enterprise, to strengthen its AI and analytics offerings. And DataFox, a builder of predictive intelligence as a service was bought by Oracle for DataFox's AI-derived database. Project management appears to be back in M&A style which is platform deals by private equity firms. Icelandic time tracking, budgeting, and workforce management from Tempo was bought by diversifying capital and collaborative work management sort of rights with private equity. The social media intelligence-based cat studio has social listening stuff. Synthesio was picked up for $50 million by French research firm Ipsos. And video analytics firm Delmondo was bought by video streaming optimizer Conviva to help grow up, pull out a social insights platform.
Just last week in its largest software divestiture ever, IBM offloaded a bundle of its products for $1.8 billion to India's IT services giant HTL. The deal included mostly on-prem and legacy items like the old lotus notes. Megadeals continue shaping and reshaping today's M&A landscape and opening opportunities for smaller players. Tim?
10 Tips for Post Acquisition Success
Absolutely look forward to digging more into that next month at the annual report, but for now, we're going to talk about something that frankly a lot of M&A advisors don't talk a lot about, and that is what happens after the deal. We want you to be successful through the deal and afterward, so we're going to dig into that. Let's start with an introduction here and turn things over to our founder and CEO Bruce, please.
The deal is done. You cashed a big check. Then your son or daughter comes home from school or maybe your wife from church and says they just heard that someone who worked for you was just let go, fired. The word is you got rich but didn't do anything to take care of your employees after the deal. Now, how you feel about the merger, your personal legacy. In the midst of selling a software company, it is easy to neglect the final phase of the M&A process, namely the integration of the two companies after the deal is closed. According to an Ernst & Young study, nearly 53% of mergers fail to meet the buyers' or sellers' expectations. Integration is a leading factor. As a founder or CEO, you don't want to be seen as someone who did a deal to benefit yourself while leaving your customers or employees out to dry. To help you, we put together a panel of experts to review the basics of successful integration.
Thanks Bruce. We're going to walk through 10 tips for those that hope for this post-acquisition success. First off, know how integrations fail, understand the levels of integration, start that conversation early, create a team to set the right expectations, mitigate risk, and satisfy stakeholders. Establish the operating model, retain your key employees, learn from others, important to celebrate, and finally don't shortcut the process. Let's start now with Jon Scott, Managing Director of Corum Group International in Amsterdam, Jon.
1. Know How Integrations Fail
As Bruce described, most mergers ended up failing to meet expectations. The good news is the sellers have a significant opportunity to influence the ultimate outcome of the integration during the M&A process itself if it's running properly. By anticipating problems, understanding the options, and preparing carefully, you can help ensure that the deal will work for everyone. Let's look at the top six reasons for integration failure.
- The first is improper due diligence, finding weaknesses you didn't know existed.
- Then there's a change in your market or strategy. The dealer had started many quarters ago and there's a major change in the competitive environment.
- Third, poor leadership, whether the overall leadership of that parent company or poor oversight of the newly acquired company, either one can cause problems.
- The fourth is culture clash in all its forms. This might be as obvious as a foreign buyer picking up a US firm in the Bible belt, to fundamental differences in virtual versus office-based operations. We've run into both of these.
- Next is improper retention plans. This can kill successful deals easily.
- Lastly, there can be what appears to be stifling management practices. That big company that acquired doing budgets and forecasts and constant reporting, which a small company never did.
Thank you Jon. Now let's head to New York City, one of our newer deal makers Lonnie Schilling, Lonnie.
2. Understand the Levels of Integration
When we talk about integration, you need to understand there are different levels. From limited to full integration. In a limited integration, some aspects of the company will be consolidated, generally, key corporate functions like treasury management, legal and other things that are not needed onsite while leaving the acquired company more or less free-standing. And impartial acquisition, more departments will be merged together, possibly combining the sales organizations or some of the development or support activities, but retaining much of the original separate structure. Full integration is where the entire company and all its business units are absorbed. This is generally, less column particularly at the onset. There's less pressure today to fully integrate. That's buyers are reluctant to force relocation in a tight labor market. This is usually done by the biggest companies, for example, Microsoft, IBM, and others. On the other end of the spectrum of foreign buyers who want to keep your operation intact, often to give them a North American footprint with little or no integration.
Thank you, Lonnie. Now let's head to Jim Perkins at Phoenix. Start the conversation early, Jim.
3. Start The Conversation Early
Dialogue about integration best practices should start early. After all, this may be one of the value enhancers the seller used in getting their price. The buyer must be determined which practices of the acquired company they will change and which they will adopt. Such as an advanced CRM system, better project management control, marketing strategy, and more. This involves transitioning people, products, practices, and relationships. In general, you can think about integration as falling into four basic categories. Marketing, which involves vision and strategy, positioning and sales strategy, human resources, which includes HR concepts, benefits, compliance, organization, and people's skills. Relationship management, which involves customers, dealers, and partners, and suppliers. Operations, which involves processes, systems and procedures, products, and technology. Each of these needs to be addressed in the integration plan.
Thank you Jim. Now, back across the pond to Peter Prince out of London, creating a team to set the right expectations, Peter.
4. Create A Team To Set The Right Expectations
During the integration period, many people will be performing two jobs. So, everyone will be stressed. There will be lots of uncertainty about people's positions, who they report to, et cetera. Thus, it is critical that there be open communication and feedback. Set realistic expectations as full integration often takes time. To mitigate these issues, you will need to develop an integration plan with the buyer. Put together a multidisciplinary team with members from both companies and across all departments. You can't just have the guy who runs sales trying to run the entire initiative. Create a team balance with HR, legal, technology, Ops, sales and marketing, and other key departments. It's recommended to put in place a full-time executive officer as an integration manager to guide the process. Have the team and managers set key events, create milestones, and develop a 90-day action plan that everyone can focus on. It's a short enough term. It will motivate people to get onto the bandwagon. Set goals and milestones, then monitor that progress making sure people know and understand what is happening and where they will stand.
Thank you Peter. Now to Atlanta, another one of our newest deal makers, welcome aboard Arnaud, who's going to talk about mitigating risks and satisfying shareholders, Arnaud.
5. Mitigate Risk & Satisfy Stakeholders
With an integration manager and an integration team in place, they should develop the integration plan and execute it. Charting how the company will come together across all departments. Who are all the players and what needs to be done? The goal of the plan is to mitigate risk, keep key employees, protect intellectual property, and engineer the short term ones. Make everybody feel part of the team wanting to be part of the deal going forward and understanding the opportunities ahead. You have a variety of audiences here, not just the shareholders but also the employees, customers, vendors, partners, and perhaps even the investment banking community needs to know and understand what this deal is, and why it is good for all these participants? When things get bumpy, you need to go back and tell people, "There is a reason we did this." "Let's re-focus on that plan" "and make this work."
Thanks, Arnaud. Next up, Steve Jones based in Salt Lake City established the operating model. Steve.
6. Establish The Operating Model
It's important to establish an operations model going forward. First and foremost is the org chart, who works for who and in many situations, you'll have duplicate roles and responsibilities. Sometimes there's only one position, for example, there's only one VPA technology, so you need to figure out who will be there to head it and how to make sure the other person knows they have an important role moving forward.
Fortunately, in most cases, these are much larger organizations taking over smaller organizations. That provides a significant opportunity for the acquired company's employees to advance within the buyer's ranks. Throughout the process, you should identify and focus on the key employees - engage them. They're the glue that will openly bind the two companies together. These key people are on board - the rest will generally follow, so you need to do an exceptional job of communicating. For some, you'll want to have one on one conversations, but you can also institute regular small team Q&A meetings to give people an update. Make sure they know they're still part of the team. For larger groups, do town hall meetings. Communication is the key.
Another good option is the peer level body system - linking employees laterally to someone in the same position within the new organization. When an employee has a problem or a question they can get immediate feedback.
And unpleasant items; sometimes you have to deal with is layoffs. It's best to do all the cuts immediately with a clear message that there won't be additional cuts planned. This gives those who'll remain the confidence that they are not about to be laid off. They can be more committed going forward and work towards the success of the organization.
Thanks Steve. Now to Boston, Martin Lauer. Retaining those key employees.
7. Retain Your Key Employees
The most critical piece of the integration is the employee retention plan. Any transition as significant as an acquisition will naturally make employees consider their options even under the best of circumstances. Ensuring the success of your merged company going forward as well as the goodwill of employees and their families requires investment to ensure that they share in the gains of the company. Retention plans will vary from company to company based on the specifics of the situation, but there is a common set of tools that you can make use of in various combinations like welcome bonuses, retention bonuses, completion bonuses, profit sharing, stock options, no cut provisions, and even sharing a percentage of any earn up amongst the key employees.
The value of retention bonuses is self-evident as employees are directly incentivized to stay through the transition period. This can also take the form of welcome bonuses where half is paid upfront and the other half after 12 months. Stock options that invest after a period of time can have the same impact. Whenever significant technical projects is in process at the time of the acquisition or where the technical integration itself is likely to be a significant task. A completion bonus may be offered to the team working on the project. For example R&D or deployment. A profit-sharing plan can have a similar impact on sales and marketing. The broadest way to engage your employees is through adding them to the earn-out program if earn-out is part of the transaction.
Thank you Martin. Let's dig in, look at some examples and I'll hand things over to Rob Griggs in Minneapolis for some retention plan case studies. Rob?
8. Learn From Others: Retention Plan Case Studies
Here are three sample of retention plans. They are highly disguised, but each of them is a real program from a merger that ended up being very successful.
Company A was very small, heavily focused on R&D because it was crucial to get a new product to market. There was both a retention bonus for two years as well as a large completion bonus which would diminish if there were delays and finally there was a profit sharing plan to keep the key developers engaged. Ffter a heavy R&D effort, it worked very well. The product shipped and the team pocketed $7 million an average of $1 million each.
Company B, very much a family-oriented business where the owners wanted the employees to get part of the deal. Since they didn't have equity or stock options, there was a hefty welcome bonus paid out of the selling of the company, cash, and an equal amount a year later from the buyer. There is also a 12 month severance if an employee was terminated in the first year.
For company C it was critical that the firm stays intact for the first couple of years after the transition thus keeping the key employees. They were put into the earn-out, which was worth roughly $3 million for the other employees there was a two year stay bonus paid as a lump sum equivalent to getting two years extra pay.
Thanks Rob. That's good stuff. Now let's change gears a little bit and talk about another piece of life after the deal and the importance of celebration. Turning things now over to Dan Bernstein. Dan?
9. The Importance Of Celebration
Sadly, too many transactions end on a whimper. A local filing in some county courthouse, a couple of emails, and a wire transfer. The days of the big paper contracts being signed and all-night parties other stuff for movies. Be sure that everyone is briefed on all the positives moving forward. And what an extraordinary milestone you've achieved together, and then do something to celebrate. Here at Corum, we celebrate by taking clients as our guests to Angueira, the last island out in the Gulf of Alaska. Home of the trophy salmon and Halibut. We also celebrate by taking those who have completed a transaction to our company compound in Laredo, Mexico. Be creative. The key we found is to do something together that is beyond just having a fancy dinner, something that gives you an opportunity to truly celebrate what is a landmark achievement and hopefully reflect on the new chapters of life ahead of you.
Thanks, Dan. Now, let's wrap up with some summing up advice from our President. Joel Osbourne. Don't shortcut the process. Joel
10. Don’t Try To Shortcut The Process
Integration is the one phase of the M&A process where both sides consistently tend to cut corners. Whether it's the pressure to just get the deal done, lack of organizational bandwidth, or just simple deal fatigue. Parties consistently fail to put the same kind of energy into organizational structure, retention plans, compensation and go to market integration as they do with other aspects of the deal. This is a big mistake. It is worth spending time to be sure that employees, customers, and other stakeholders are taken care of after the deal is closed.
The other piece people miss is that running an effective global M&A process that brings multiple buyers to the table pays big dividends in integration as well. Why? Simple, the presence of other buyers waiting in the wings to snap up the target. If the acquirer stumbles, keeps buyer teams sharp and focused on doing everything possible to demonstrate to the target that they are the best fit. This includes integration and ensures that the seller's interest and perspective are taken into consideration rather than the buyer just doing whatever he wants or following the path of least resistance. Remember, it's not the buyer's legacy that's on the line concerning M&A integration, it’s yours. This is the most important transaction of your life, do it right all the way to the end including integration.
Thanks, Joel. Great summing up.
We will talk more about the M&A market, and M&A process at both our live events going forward as well as the annual report on January 17th. And I hope to see you up. With that, I think we will go to our close. Thank you very much.