We're in the midst of the best market to sell a software, Internet or related technology company in more than a decade. If you're considering taking advantage, you won't want to miss this in-depth conversation with a tech CEO who just sold the company he founded nearly 10 years ago. Kevin Linden sold his firm Email Direct to j2 Global, one of the top buyers of software companies right now. Learn how he did it, what he learned, what surprised him and much more. Plus, a special report on the hot gaming M&A market.
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Thank you, my name is Timothy Goddard, I’ll be your moderator today, Vice President of marketing here at Corum Group. We’ve got a great agenda for you today, not as jam-packed as usual, and that’s giving us the opportunity to really go in depth on some very interesting topics that I’m looking forward to sharing with you. We’re going to start off with a brief report from a deal recently closed, EmailDirect, sold to J2 Global. We’re then going to have a special report on not just gaming M&A, but the overall gaming ecosystem. I think this will be interesting even for those of you who are not involved in gaming directly. We’ll have our monthly research report, and then we’re going to go more in depth on that EmailDirect deal; our President Nat Burgess is going to have a conversation with Kevin Linden, CEO of EmailDirect, about his company, his experience selling that company, and what’s next. We’re looking forward to this, so let’s jump right in and hear from Rob Schram here at headquarters and more about that EmailDirect deal. Rob?
Field Report: EmailDirect
We’ll hear more about this later in the webcast, but J2 Global, in a move to enhance their business cloud services campaigner brand email marketing platform, and accelerate market expansion, recently announced an asset purchase of Corum client EmailDirect, a California-based provider of email marketing services. This acquisition follows a similar purchase by J2 last July, of North Carolina-based email marketing services provider Contactology. J2 ranked number 4 last year in strategic acquisitions, closing 18 deals, eight of them announced in December, primarily within their business cloud services division.
They’ve already closed another nine deals in the first two months of 2015, including EmailDirect. This strategic buyer is representative of many other strategics: loaded with cash and aggressively accelerating their client base and technology by acquiring companies like yours. We’re looking forward to hearing more from Kevin Linden, CEO of EmailDirect, later in the webcast.
Thank you, Rob.
Now, let’s go to Alina Soltys. She’s been at a number of gaming events, GamesBeat, Causal Connect, and just got back from GDC and she’s going to present to us some of the information she’s been presenting at these events, about what’s going on in one of the hottest M&A markets around. Alina?
Gaming Ecosystem Report
Thanks, Tim. The M&A industry sways significantly with the confidence of the public markets, so if we have strong results and no nasty surprises on the economic front, then deal flow will continue. There are about 20 companies in our public peer group here of gaming companies, posting pretty solid revenue multiples of about 2x revenue and EBITDA driving up to 12x by the end of February.
If we take a look at the top strategic acquirers of 2014, the common thread here really are the gaming ecosystem transactions that are being done by all the top firms, shown here in green. These acquisitions include studios, plus ad tech firms, payment providers, portals, and infrastructure, all key components in providing high quality games around the world. If we dive a little bit deeper on what these tech giants are buying, Yahoo!, for instance, posted over 30 mobile transactions, the most significant one here being Flurry for $300M. It really highlights the action in the ad tech space, with innovation happening on the mobile front. Microsoft is on here with Mojang, the maker of Minecraft, which is now the #1 PC game, and it really gives Microsoft an in with the young population playing Minecraft for many years to come.
Then let’s take a look at Amazon, which reached out and acquired Twitch. It was a battle between Amazon and Google for that company, and Twitch has now hit 100 million unique monthly viewers. E-gaming is one of Corum’s Top Ten Trends to watch this year, and it’s really a significant segment. Amazon is continuing to grow by sending Twitch through its acquisitions, starting with GoodGame. GoodGame’s team really knows how to pitch companies with big budgets for brand advertising, really opening up the e-sports channels for them.
Let’s take a quick look at Oculus. Oculus, with the backing of Facebook, started off hot and heavy, with the pickup of Carbon Design Group and Raknet, right out of the gate. In mid-December, they continued to prime the Rift for public consumption with two more acquisitions. During GDC last week, there was a lot of news driven around virtual and augmented reality, with both ATC and Valve planning product releases yet this year.
Now, getting into the meat of the data, my team and I took a look at the entire gaming ecosystem for M&A transactions. These are half-yearly views, spanning from 2009 to 2014. We’ve had two years in a row of record-setting dollar value. Activity has been strong as well, with a nice upward sweep of that green line. The orange bars here signify the multi-billion dollar deals. If we take a look at the bluer bars, these are the small and medium-sized deals, which have more than doubled if you compare first half of 2014 to the second half. This is excellent news for much of us here: You don’t have to be a billion-dollar unicorn to attract attention in today’s M&A market. The average deal size is increasing, now that $115 million for average deals has been disclosed.
Let’s take a look at some of the transactions that are really leading the charts that we’ve been looking at. There are the top gaming ones, minus the super-billion-dollar casino deals. Corum deals with a lot of financial buyers, private equity buyers, and it’s interesting to note the massive bets that CVC Capital Partners, out of London, did by putting $1B for SkyBET. Not as common in the gaming industry to see these financial buyers picking up companies. The same goes for Churchill Downs, another name that’s not as common in the tech industry or gaming industry, they picked up Seattle’s Big Fish Games. You’ll also note a lot more red, white, and blue flags. If we take a look, Asian firms have finally learned how to share the top deals in the space. They were responsible for four out of the top ten deals, two of which were take-privates with Giant and Shanda. That’s down from 9/10 the prior year. However, activity has not stopped from the eastern countries. The world’s largest gaming company, Tencent, has accelerated its pace of private company investment. It’s the most active VC in China, averaging three investments per month. This comes at a time when Tencent and Alibaba are competing with each other across multiple domains and they aim to continue to expand their mobile internet presence.
Which, if we take a look at the traffic they have both driven since 2013, Tencent and Alibaba have been responsible for at least 88 acquisitions and investments, worth about $21B according to our research.
Taking a look at the games as a service segment here, similar to the SaaS revolution that we’ve seen in the larger tech sector, this has impacted gaming as well. Delivering compelling gameplay has never been a bigger priority for publishers, creating content that will please players, keep them coming back, and ultimately drive them to play in the Free To Play world. The as a service concept is key, and taking care of the players leads to the most successful companies out there, which is nice for gaming designers, because they don’t need to specialize on the back end. The infrastructure layer has really grown on its own, with specialized companies that are able to help on individual aspects.
If we take a look at a company like Helpshift, that helps companies like Supercell, with their FAQs and customer feedback. Mixpanel delivers tremendous data feedback on every component of your game, and Photon’s engine, which allows multiplayer cross-platform development.
As we wrap this up, one thing I’d like you to consider from the broader tech world, is the fact that gaming companies are significant customers for technology companies, especially if we look at these three in particular, who are capitalizing on that trend. Plus, I’m predicting that these three companies will be excellent M&A targets in the very near future.
Back to you, Tim.
Thank you, Alina. Great stuff.
We’re going to have more great stuff in the rest of the sectors from our research team, Elon Gasper, Vice President and Director of Research and Amber Stoner, Senior Analyst. Elon?
Tech M&A Research Report
Thanks, Tim. We begin with the public markets, where in February all 3 indices we track surged, hitting record highs before receding in March, in a volatility pattern much like last year—but stepped up to higher levels. Monetary considerations remain in focus as Europe begins its own QE money printing program, adding to the easy liquidity big buyers can tap for tech M&A in this great market for sellers.
How long will it last? Well, one sign came this week as we bid happy sixth birthday to the bull market that started in 2009; in just a couple months it will climb another rung on the chart to be third longest. That seems a good bet; but to go on for years more and enter uncharted territory as the longest ever, that’s clearly a lot less likely. So with that bracket in view, it's not surprising we see sellers moving quickly to take advantage of these extraordinarily favorable conditions.
Also unsurprisingly, our Corum Index has all its numbers up or steady for February too, with substantial increases in transaction volume, deal size, PE deals and number of billion dollar acquisitions. Among those mega deals we saw DC-area aerospace IT and defense solutions company Exelis, formerly part of ITT, bought by competitor Harris at a value of nearly five billion dollars. The result will be a top 10 government IT and defense contractor headquartered near NASA on Florida’s Space Coast.
In another, Japan-based giant Canon, snapped up Sweden’s Axis Communications, maker of video monitoring software and networked camera systems, for $2.8B, in Canon’s largest-ever purchase, as it pivots from old-line camera sales toward the quickly developing video surveillance market.
And investment management and analytics software maker Advent was valued just a hundred million less, at $2.5B, in an acquisition by SS&C Technologies, which works in the same sector with SaaS and BPO offerings, too. The combination reflects the trend of growing interest in outsourcing financial solutions.
Speaking of trends, we’ll talk more about Orbitz along with other travel in the Internet market discussion after our review of the Horizontal market. Amber?
Horizontal Software Valuation Metrics
Horizontal sales multiple valuations are up from Q4, while EBITDA multiples have dipped since the end of 2014, but deals continued in the analytics space as companies focus on deriving value from their data. Hitachi Data Systems spent an estimated $530M to get open-source BI analytics and data integration software company Pentaho at a 13.3x sales multiple. And Microsoft paid an estimated $200M, an amazing 50x sales multiple, for Revolution Analytics, a provider of open source BI statistical computing and predictive analytics software.
Market intelligence analytics companies were targets in the first two months of the year with PE-backed FocusVision acquiring Decipher, a provider of marketing research data collection and reporting SaaS solutions. And Irish company First Derivatives bought B2B predictive analytics and marketing automation software company Prelytix for $7.5M, a 3.8x sales multiple.
Mobile advertising and analytics companies were also being snapped up in the last week of February. Google picked up social media marketing vendor Toro, Swrve grabbed Irish mobile marketing automation company Converser, and Kochava acquired Canadian mobile advertising and predictive marketing analytics software provider, InferSystems. There were a number of other deals in the marketing automation space as well, including holding company AH Belo spending over $15M for a majority stake in Dallas marketing automation SaaS company, Distribion. Plus Alliance Creative Group bought marketing automation, customer engagement and analytics SaaS provider, PeopleVine. And WRAPmail picked up Prosperity Systems, also in the space with team collaboration tools.
What’s happening in Internet, Elon?
Internet Software Valuation Metrics
Values in this maturing market are lifting but with sales multiples still far from last year’s highs, as great variance continues among its subsectors, with hot ones like travel seeing profitable models pushing those metrics higher as consolidation waves roll through.
At the other end is eCommerce, continuing to texture ever more finely, down from giant Amazon to recent mid-level home furnishings winner Wayfair to niche players like online curtain store Swags Galore, acquired this year by new PE Menerva Holdings.
In the world of online travel booking, the biggest move was made by Expedia, which went into Orbitz for $1.3B. It plans to map Orbitz searches against its much bigger inventory of hotels and car rentals. Expedia also acquired online travel agency Travelocity from Sabre Corporation for $280M. And, just this week, it paid $270M for a minority stake in Argentina online travel agency Decolar. With these additions, Expedia's growing portfolio will go head to head with Priceline and the other industry leader, TripAdvisor, which just acquired two Italian startups: Milan-based Restopolis and Turin-based MyTable, plus ZeTrip, maker of the Rove travel journal app.
Whether buying apps and tools like TripAdvisor, or big ticket online exchanges like Expedia, a look back at this travel sector shows a classic M&A wave rolling through, which, if it continues at this pace, will crest even higher by the end of 2015.
Already this year it includes over 20 companies, nearly all in the United States or Europe. A notable one there stood out as Top PE KKR railroaded the public markets by snatching it away just before its planned IPO: that was Trainline, the UK's leading online platform for rail tickets, in an event which helped demonstrate the diverse and competing liquidity options available to privately held companies, Mark Cuban’s recently publicized laments notwithstanding.
Next, Amber, let’s look into some of those liquidity options in Infrastructure.
Infrastructure Software Valuation Metrics
While down a bit since Q4, sales and EBITDA multiples in the Infrastructure sector are still healthy and the dip in multiples hasn’t slowed acquisition activity in the space, particularly in security.
Intuit reached into the encryption space, grabbing Israeli key management and data encryption SaaS company, Porticor. Hewlett-Packard spent an estimated $175M, 5x trailing revenues, to get enterprise data encryption SaaS provider, Voltage Security. HP also nabbed Aruba last week, and we expect more enterprise software deals going forward as HP returns to the M&A arena.
Cybersecurity M&A continued with Inverness Graham’s purchase of Identity Finder, a provider of anti-data breach and leakage software. Bottomline Technologies acquired Israeli behavior tracking security software company, Intellinx, for $85M.
In early February, Helsinki-based security software company, F-Secure, sold its personal cloud business Younited, which includes email, anti-virus, mobile phone and network security management software, to Synchronoss Technologies for $60M.
And in an example of one of our Top Ten Tech Trends, Internet of Things software, social data integration company Ubiquity paid nearly $6M, a 4.8x revenue multiple, for Coversant, the developer of an Internet of Things service bus, which connects disparate systems and devices in real time. IT Services Software Valuation Metrics
A real-time report on IT Services valuations must lead with the healthy overall multiples as well as mention some possible trend lines.
Hitachi, for instance, besides buying Pentaho, that Amber previously mentioned, also acquired two overseas IT services firms: Italian systems design house Cosmic Blue Team and French cloud solutions outfit oXya. Both should help Hitachi as it strives to enlarge its continental footprint.
And lastly, in another Japanese acquisition taking in both our Enmeshed Systems and Sports and Gaming trends, Texas-based TS Sport was purchased by longstanding partner Panasonic. The seller’s services cover sports venue LED signage, video board design and other systems integration solutions. These giant, highly-customized displays are increasingly an essential component of the stadium experience, not just for seeing the score but for emerging sports analytics read-outs and social features.
Panasonic appears to plan on bringing more specialized engineering services inhouse. Are it and those Hitachi acquisitions this year part of an IT Services trend? We’ll have more on the sector in our upcoming Market Spotlight with World Financial Symposiums, to be webcast on March 31st. Back to you, Tim.
Thanks, Elon, we’re looking forward to that event.
I’m also looking forward to what is coming up next. Our president, Nat Burgess, had a chance to sit down recently with Kevin Linden, CEO of EmailDirect, which, as mentioned earlier, just sold to J2 Global and they had an in-depth conversation about what his process looked like. Let’s go to that now, I think you’ll enjoy it.
Seller Conversation: Kevin Linden [EmailDirect]
Kevin, thanks for agreeing to speak with us today about your recent experience getting a transaction done with a company that you and your partners built. Could you give us a quick introduction of yourself and your business first?
My name is Kevin Linden and me and my partners started the company EmailDirect. Our company was formed about 10 years ago, 2005, after a couple of pivots from a previous company. We provide a SaaS-based email service for clients. We help companies send out marketing emails, transactions emails, or triggered, dynamic put-together emails.
Now this story reached a turning point recently, actually just a couple of months ago, when you sold the company to J2, but I wanted to go back and talk a little bit about the origins. That’s always interesting to me. We’ve done a lot of work in email, we represented Lyris and What Counts and it’s a market that has been around for a long time. And you guys have been around for a long time. Tell me how you originally got started. Was there a point when you realized you had a real business here?
Yeah. We didn’t realize we had a real business until probably five years too late. It was all of our first time starting a company, we were all teenagers when we started it. It was just about four years of doing various types of email marketing and even playing with flash banner ads as a service. We decided to jump into email ESP services. We saw some other companies out there, we saw the technology and we were hearing about it and even using it, so we decided we could compete with them.
When we started EmailDirect the industry was pretty young still, there were ten or twelve major players, and a lot of room for the mid-market growth area. We really focused there and we maybe couldn’t compete with the big corporations, but going through and one day looking at the fact that we were sending 400 million emails a month and looking at some of our clients, it was kind of a hit in the face. We realized we had something big and it suddenly became more corporate and focused.
You mentioned that you pivoted, so you originally were doing more services and ad stuff. Did the email business start with a core customer or how did that get rolling?
Like I said, we were sending out emails, we had an email list that was picking it up, we were helping companies generate leads from that. It was one of those times when we saw a better way that we could improve the ESP world. A lot of smaller companies didn’t have access to the services that the bigger guys did, and finding a way to build that, I think, was something that kind of hit one of our partners. After a couple of nights of drinking Jack and deciding what was the way to go for the next ten years, we chose an email ESP services.
Hopefully you weren’t still a teenager when you stayed up all night drinking Jack Daniels and thinking through these concepts.
No, probably 22 or 23.
I want to shift gears a bit and talk about the transaction. We all use email a lot, but our business is built on relationships. I thought it was interesting how we got to know you. I actually had a call from a buyer. We’d sold them another company. He called me up and said, “Here’s the situation. We’re not in a position to make an acquisition at this time, but this is a great company, you should talk to these guys.” That was how we first met, right?
Yes, he’s always been kind of a mentor to me and my partner, throughout the years he’s always been really honest and helpful, and working with him, we kind of had this idea and he’s one of the first people we went to. He said, “Here’s who I trust, they helped me through a transaction, I’d recommend you go to them.”
We appreciated the introduction and when we got to know your company we were very impressed.
Let me ask you another question about the deal. You built a great company, but it was your first company, you hadn’t been through M&A, and there was a point when you started thinking about being acquired. Was there any huge different between what you expected and what actually happened in the transaction?
Sure. Initially we were thinking some giant corporation was going to come in, buy us, take all the best parts of our company, and times my ten, help with the marketing, build the sales team out, the support team out, using the model that we’d proven and send us into a giant company. In the end it didn’t happen like that, it ended up being an asset purchase, so they came in and are migrating our clients over to their platform. It was completely different than we thought. There was less of a transition period because of that. Certain things like our code and things that we thought were going to be long-term hand-offs to them, we’re just taking them out of play. It was kind of nice in a way, but very unexpected.
It’s also a testament to the business you built, because if you have a business that is heavily-reliant on a few key people and on complicated technology that you have to watch and tweak and take care of all the time, then it’s expensive to scale and it’s hard to take care of, but in this case it seems like you had built a repeatable model, you delivered clear value to your customers, and it was largely about the value that you were giving to the customers and the fact that could be migrated over to another provider.
Yes, and that thought never even crossed our minds through this process, until we actually spoke with them during some initial intro calls.
As you went through this process, were there any elements where you felt especially well prepared for the due diligence and for the transaction, things you think you guys executed on well and have made you well prepared for the deal?
I think spending some extra time with the Corum team and even spending time with our own team here, getting to know the business a little bit more in depth, getting to know the numbers so I didn’t have to go to different people and find out little bits of information. We put a guide together working with Corum when we first introduced ourselves and you came up and met and that was pretty helpful. Getting to know all the details that were going to be asked over and over as they talked to different companies, having that on the tip of my tongue, it was something that I think we did very well at.
I like to hear that, because we obviously go through a lot of these and we’re pretty good at anticipating the questions that will be asked and I’m glad we were able to work with you so that you guys were very crisp and prepared when we sat down with people. There was not a lot of mystery to it. There was no scenario where you had to say you would have to go and dig into a database and run numbers to figure something out, it was, “No problem, we can address that question.”
Let me ask the flip side of that question. If you were go to through this again, and I’m thinking about the whole genesis and evolution of the company, are there things you would have done differently over time to be better prepared for the M&A process?
Yes. We learned quite a bit. A lot of the questions the buyer was asking toward the end made us look at our business differently. The set of questions and detailed MOR reports, those were the things that really helped us analyze our own client base, something we probably should have done. Specific for us was understanding the numbers better. We thought we were a slim, well-run company, and even though we were purchased, I think there were a lot of ways we could have improved. Understand the numbers, I think, was starting point number one, you know, what customers are worth it, where are you putting in time, what’s the most valuable not only to your customers, but also your business.
I also wanted to touch briefly on your counsel in this business, Michelle. Talk a little bit about her role in the deal, we were very impressed working with her. She’s very aware of what is market, she’s very business-focused. Michelle Rowe-Halston over at Greenberg. Talk a bit about your experience with her.
We strictly brought them on for the transaction. We have a lawyer that we use for day-to-day stuff. They came recommended and it was a huge help. One of the best things we did was hire her. The confidence she brings to the table when talking to the buyers and the buyer’s counsel and sticking to her guns, was something that was unexpected, I think.
You were very smart to hire her. We’re firm believers that you want to have experience on your side. A lot of companies work with corporate counsel over time, but when it’s time to do something like this you want to go to an expert, and we really enjoyed working with her. In the same vein, any thoughts on working with Corum and where we added value and how that partnership worked.
I worked with Rob, who initially brought me up to speed, preparing me for what would happen talking to all these different companies on a day-to-day basis, certain things we were doing correct, things we were doing wrong, even telling us, “If your developer gets on the phone, he should be more confident,” Rob was straight shooter in helping us understand the right way to talk to buyers and the right way to represent your business. And also Russ, Russ came on board and really helped a lot with the financials. We thought we were doing things clean and the right way and Russ comes in and says, “Here’s how you should be doing things,” and actually getting dirty with us, looking at the data, the numbers, and helping us prepare spreadsheets and financial statements that the buyer was looking for, that was a huge help.
We’ve really enjoyed working with you, we’re very impressed with your company and your team. We can’t wait to see what you guys do next.
Every night now is brainstorming what’s next, so we’re excited about it.
More Jack Daniels.
You can always hope.
Thanks very much to Kevin Linden, CEO of EmailDirect, it was a pleasure working with you on this one and we look forward to the next one.
Thank you, Nat, I appreciate it as well.
Great stuff. We do have a little bit of time left for some of the questions. One question came in that we actually hear a lot. How do you sell for enough when you don’t have revenue? That’s an interesting question, especially today where the markets are so strong, there’s so much cash in the area.
The answer is this, it’s very difficult, frankly. It’s tough, especially in this market. I want to share something we heard at the World Financial Symposium just a few weeks ago here in Seattle. Mukund Mohan, who was on our annual report, was also keynoting that event, from Microsoft Ventures. He made the point that what really people are buying these days, and we certainly see that, is growth. Usually that’s revenue growth, almost always, frankly, that people are buying. But if you have another metric that you are zeroed in on, that you have confidence is going to create value in the future and that you can convince buyers of will produce value in the future, growth of any sort is significantly valued, whether that’s conversion or installs or user base or whatever it is. If you focus on growth, that is very interesting right now. We had another question, that I want to go to Alina for, which is about the travel sector and what other companies might be targets, specifically stand-alone companies on Skift's travel list. Alina?
I think the travel industry is quite interesting, and what you’re seeing from the data we just shared was some of the larger names being acquired, but there are a lot of really small, unique companies that are hitting various challenges that the travel industry has. They’re getting a lot of attraction and a lot of user growth. I’m talking about somebody like a HotelTonight that came out in the last year or two; they’re solving a problem that has been a challenge through technology. There’s a lot of room for those kind of companies to be acquired and folded into some of these larger companies. I think there is a lot of interest yet to be had in small and medium sized, or even toward the bottom of the list, to specifically address the question. The travel industry continues to be very interesting for M&A.
Thanks, Alina. That’s all the time we have. Thanks to everyone for attending, we look forward to joining you next month for our quarterly report.