The more qualified buyers you can bring to the table, the better your chances for an optimal sale of your company. But how do you build the ideal buyers list, with the right combination of "A list and B list" buyers? What about Private Equity, non-tech buyers, or international firms? View the November edition of Tech M&A Monthly for a look at how Corum Group builds buyers lists--our dealmakers walked through 15 things you need to be able to do in order to identify potential acquirers for your company.
Read Presentation TranscriptRead more Show less
Good day to you, I'm Timothy Goddard, EVP of Marketing here at Corum. I'm very happy to be hosting this November addition of Tech M&A Monthly. We have a great agenda today. We will start with a look at the webcast in partnership with WFS last month on health tech, some interesting things there. Then we'll dive into our research report, going through deals, trends and valuations in three of our six sectors. Then, not 14, but with a bonus 15 ways to find buyers, we'll hear from our deal makers on the different kinds of buyers out there for when you take your software or tech related company to market.
Healthtech Market Spotlight Report
Let's dive right in. I'm going to turn things over to Steve Jones, recently promoted to SVP here at Corum, who recently led a spotlight webcast on health tech M&A. Steve?
This past month, the Corum Group, in partnership with the World Financial Symposium, hosted a market spotlight webcast, where we focused on the healthcare IT market. We identified those segments that are getting the most attention, like remote monitoring, genomics, and patient engagement. We were also joined by a panel of healthcare CEOs who have a rich history of successful M&A transactions. We enjoyed a lively discussion where we talked about the trends that are driving the market.
Primarily there is a move to patient-centric approach, requiring a seamless experience across the continuum of care. We also reviewed the need to be able to partner, not just integrate technology, but allow companies to work together to provide a unified solution for customers and clinics.
Another key factor is leveraging data and content, with predictive analytics, machine learning, and AI to create preventative intervention that will disrupt this landscape.
To learn more, go to wfs.com and get an archive of this webcast.
If you are at all involved in healthcare technology, check that out. It was a great conversation. We have more market spotlights coming up, including AI, car-sharing, security and marketing technology.
November 2017 Research Report: Largest tech deal on the horizon?
Now I'd like to turn things over to our research team, led by Elon Gasper, with Amber Stoner, Yasmin Khodamoradi, and Patrick Cunningham.
Thanks, Tim. We begin with the public markets, soaring to new records again in October, boosted by earnings from top tech companies, the NASDAQ closing the month at a new record, and the rocket ride continuing this month with record closings yesterday of the Dow and S&P, too (though sliding back today). Our advice remains that tech execs should take advantage of this window of opportunity, get started on a process, at least to calibrate company value; good things are happening to those in market, you should be there if you can as our Corum Index keeps showing a supply side crunch, as buyers shopping with their record high cash stockpiles find the M&A shelves already picked over. Our pipeline continued to track PEs also somewhat limited by that deal flow challenge, with an increasingly sidelined VC industry’s pullback adding to trend.
Last month’s four megadeals came in the three sectors we’ll cover in depth today: as Vertical and Horizontal each booked one, while Infrastructure saw two, as Cisco made its eighth acquisition of the year, paying nearly $2 billion for unified communications player BroadSoft to now boast the largest 2 Infrastructure deals so far this year.
And network visibility firm Gigamon got a billion six in PE Elliott Management‘s first take-private deal, the value of 5.3x revenue apparently benefiting from enterprise data security considerations.
How’d the rest of the Infrastructure sector fare, Amber?
Infrastructure Software Valuation Metrics
Sales multiples continued to climb after a slight dip mid-summer, while EBITDA multiples stepped back a bit in October. Security companies remained attractive targets for a variety of buyers, especially in threat detection and identity and access management.
Managed threat detection and incident response startup Morphick was acquired by government intelligence company Booz Allen to boost its managed security portfolio, continuing the trend of defense contractors buying security firms, such as Raytheon’s 2015 acquisition of Websense, now Forcepoint, and General Dynamics buying Fidelis Security five years ago.
Speaking of, Fidelis Cybersecurity, now a Marlin portfolio company, bought malware detection company TopSpin Security to integrate its DECOYnet solution with Fidelis’ Elevate platform.
And machine learning threat detection firm Efflux Systems was acquired by NetScout to support its advanced threat detection solution Arbor Spectrum.
In the identity and access management space, identity authentication firm Clearlogin was picked up by PE-backed cloud service provider Evolve IP to fold Clearlogin’s Identity-as-a-Service into its private cloud platform.
Mobile capture and identity solutions developer MiTek paid $15M for Barcelona-based ICAR, which offers consumer identity verification solutions in Spain and Latin America, adding several authentication methods to MiTek’s digital identity verification capabilities.
And Comodo sold its SSL Security assets to Francisco Partners, setting up a new portfolio company to focus on expanding into IoT, potentially leading to future bolt-on acquisitions in the space.
Finally, in another PE deal, data backup and recovery specialist Datto was bought by Vista Equity to merge with its Autotask IT management suite with the goal of creating a full-stack business continuity platform.
How did Horizontal fare last month, Patrick?
Horizontal Software Valuation Metrics
Sales multiples in the Horizontal sector remained stable with EBITDA multiples rising to historic levels as the sector takes a brief respite from disruption, but with plenty of M&A bubbling up to start the next cycle.
In another PE driven megadeal, virtual data rooms provider Intralinks added a brick to the megadeal wall, being stacked up for over $1 billion by Siris Capital from Synchronoss.
In the behavioral analytics space, Panasonic became the latest major brand to join both the AI and IoT acquisition parades with its purchase of the Arimo team, makers of AI-centric products for use in commercial and manufacturing applications.
In Brazil, ShopBack, developer of behavioral retargeting solutions, was picked up for over $12M by Sao Paulo-based commercial automation software developer Linx.
And Detroit-based retail shopper data analytics firm reach | influence was snapped up by PE-backed Inmar adding additional analytics to their transaction intermediary solutions.
Deals in AdTech included Automate Ads, which was bought by AdHawk to integrate its automation into AdHawk’s optimization and reporting platform.
Canadian customer acquisition firm Acquisio was pocketed by Web.com to utilize its machine learning tech for small and midsized businesses and help them scale on major ad platforms.
The cross-device customer identity company Adbrain was sold to ad-firm The Trade Desk in its first acquisition to help it better identify consumers across channels.
And in France, customer experience management company Teleperformance bought Wibilong for its user communities consisting of 13 million consumers across retail, tourism, insurance, and telecom.
What’s the news in the Vertical sector, Yasmin?
Vertical Software Valuation Metrics
Sales metrics in Vertical hovered near record highs with EBITDA multiples tracking closely behind as savvy vertical players leveraged their deep domain expertise to create historic value. Last month in particular saw a surge in health-tech M&A, including a megadeal as specialty healthcare benefits manager eviCore was bought for $3.6B by Express Scripts to shore up its position in the prescription drug marketplace as Amazon eyes the pharmacy space.
Here in Seattle, virtual care provider Carena was purchased by rival Avizia to build out a one-stop-shop telehealth platform.
Virginia-based mProve, which specializes in mobile solutions for customers in the life sciences, was bought by clinical trial technology provider Bracket Global to improve patient engagement in clinical research.
As Steve mentioned earlier, patient engagement was a hot theme in M&A.
For instance, patient engagement specialist Tea Leaves Health, was picked up for $90M by health optimization firm Welltok to expand its growth in the hospital market.
In the same vein, Strive Labs, was acquired by rehab therapy software developer WebPT to streamline its patient-focused practices.
And in Germany, surgical workflow specialist Surgical Process Institute was bought by Johnson & Johnson Medical to boost its digital offerings for operating room efficiency.
In the property management space, London-based PEX Software, which manages private rentals in Europe and Australia, was purchased for over $6M by RealPage to nab a spot in the UK’s growing rental market.
And TA Associates rolled-up five deals in five weeks into its real estate ERP portfolio company MRI Software, buying British SaaS providers Real Asset Management and Qube Global, in addition to public housing solutions providers Tenmast and HAB, as well as property management SaaS eCondoSystems.
In the financial services space, Neurensic, which applies artificial intelligence to examine complex patterns and identify risks, was nabbed by trading platform Trading Technologies.
And cap table management and electronic-share tracking firm Capshare was acquired by Solium Capital to complement its Shareworks platform.
In the self-driving vehicle space, Boston-based nuTonomy was picked up for $450M by General Motors spinoff Delphi to speed up the introduction of its own self-driving robotaxi test fleet.
Traditional automakers continued to step up their game in the autonomous vehicle race, with GM subsidiary Cruise Automation acquiring LiDAR specialist Strobe, and Ford-owned Argo AI picking up LiDAR imaging developer Princeton Lightwave.
Finally, Boeing made a sortie into autonomous technology, buying aeronautics research firm Aurora, which should accelerate its development of self-flying, long-flight duration aircrafts, regulatory hurdles notwithstanding.
And looming in the background is what would be the largest tech deal ever: Broadcom’s unsolicited offer to buy rival Qualcomm for over a hundred billion, putting chips, patent issues and IoT market implications in play and what else would it mean for the M&A market? I expect we’ll be looking into that next month, when we cover our other 3 sectors.
Back to you, Tim.
Thank you, Elon. One interesting thing about that deal is that for the current bid, at least, the EBITDA sales ratio is right at that 4.0x multiple that we have for Infrastructure as a whole. I thought that was notable. These valuations are high, but we're seeing them play out both in the public markets as well as in M&A, even at the highest level.
Special Report: 15 Ways to Find Buyers
We are also seeing a lot of different kinds of buyers, so where do you find those buyers?
We're going to go to our dealmakers worldwide to talk about the different kind of buyers and different ways to find those buyers, starting with Jon Scott our managing director in our Amsterdam office.
These should always first on your list, the firms with strategic imperative to buy you. From the A list players like Microsoft and IBM down to the smallest firms, who may have even greater need. These are the companies that your technology will fit into, hopefully to give them a competitive edge. Good examples are a couple of recent transactions such as Zero Hero, an online ticket exchange platform that fit perfectly with Ticket Master’s suite of products. Another example is the sale of Cabforce in Finland selling to Cartrawler based in Ireland.
Thank you, Jon. Now to the Midwest and VP Rob Griggs.
Increasingly, we are seeing traditional firms buy technology companies to gain a competitive advantage. They are being very proactive in controlling their destiny. They do not want to be reliant on the tech giants controlling their technological solutions or licensing them critical code. A perfect example is Bosch in Germany, one of the largest privately held firms in the world—about $60 billion in sales—that outbid all technology firms including Google for a critical Internet of Things company, Inubit. Today they are one of the largest suppliers of IoT technology.
Thanks, Rob. Now on to Austin and Allan Wilson, who will discuss one of the largest buyers today, PE.
With over $3 trillion to invest, the Private Equity firms are the largest buyers of tech today. Corum provides research, education, and works with all of the PE firms in the world, including the aggressive Asian bidders who are sitting on mountains of cash. Often there are multiple sales to individual PE firms such as Riverside, Francisco Partners, Carlyle and Marlin Equity in order to do roll-ups. Some of these transactions are leveraged with bank debt. Nearly all are for cash.
Let's go on now to another kind of financial buyer, with family funds and private investors from Dave Levine.
In many industries such as natural resources, pharmaceuticals, and fashion, wealthy individuals and family investment funds have traditionally played a huge role in the development and growth of their industry. The same thing is beginning to happen in tech with the recent investment by some of our leading families like Bezos and Zuckerberg into some of the hottest new unicorn startups such as Convoy. Over $3B in transaction value has been completed by attendees at Corum events and we are seeing much greater activity by the families involved, instead of them simply turning over their funds to the wealth managers to invest.
Thank you, Dave. Now to Steve Jones in Atlantic City for more on PE.
In April, Corum reported that private equity portfolio companies are the hottest group of buyers today, gobbling up bolt-on or tuck-in companies in every imaginable sector. These portfolio companies are no longer working independently with their own staff identifying, negotiating and doing due diligence. Now they are simply a conduit to transactions, most the work being done directly by legions of specialists at the PE firms. There are even special sub funds of the major PE firms set up to move quickly on targets, often even the smallest companies with little more than an idea. Just this last quarter, we announced three such transactions: the sales of our clients Endeavor, Pipeline and Hospicesoft to PE-backed portfolio companies.
Thank you, Steve. Now what about those folks already using your product? Let's hear from Ivan Ruzic.
Don’t forget your customers when searching for a partner. Eager to expand, and not wanting to lose control of some critical technology to a competitor, they may be more than willing to talk to you. The advantage of a customer is they obviously already know the technology well, and have less concern about ROI as they have that additional financial benefit of being a user, often a major one, that now is not paying for something they previously licensed. However, such buyers are often not used to the speed of the transaction and may have a problem with sticker shock, as they are used to paying balance sheet related valuations which have no relevance in valuing a software company.
Thank you, Ivan. Now to someone who I believe is making his Corum webcast debut, one of our newer dealmakers, based in Silicon Valley, who will talk about suppliers as buyers.
As part of the food chain in your industry, the suppliers are at the other end of the spectrum from your customers. They may be supplying critical components, licensing technology - whatever. Like all firms they want to grow, expand and one way to do that is to have a more integrated approach, garnering revenue from downstream sales and profits. Good examples are the acquisition of Accumap by QC Data in oil and gas, and the acquisition of Advanced Veterinary Systems by IDEXX Labs.
Now over to headquarters, and on the same theme is Jeff Riley.
Another major group of “food chain buyers” is Channel Partners. Be they distributors, dealers, ISVs, OEMs, licensees - whatever - they may jump at the chance to move upstream to secure a product or service that has been critical to their success. Whether it be to protect their own business from someone who will cut them out of the channel relationship, or simply an expansionary move, don’t forget this group of potential buyers. Some good examples are Corel acquiring GraphicCorp and Glaston acquiring Albat and Virsam.
Thank you, Jeff. Now to Jim Perkins in Phoenix on companies reinventing themselves.
One of the leading classic growth strategies, developed by Boston Consulting Group, is that of taking money from cash cows and investing it in the stars. Microsoft funneling profits from Windows sales into Azure is a good example. But often this applies to entering completely different industries, usually involving acquisition, as markets are too dynamic to take years to develop new technology. A good recent example was the sale of my client Jagex, maker of Runescape, for over $300 million to Zhongji, a Chinese commercial real estate and cement company. I don’t think you could find two more different firms. Another example is our client Nefsis, a technology leader in video conferencing, selling to Brother out of Japan, the world’s largest maker of sewing machines. Again, not a logical fit, but they ended up being the top bidder in the world. You never know who your buyer will be.
Both of those deals also have another thing in common, which Peter Prince will address.
Foreign buyers, especially the aggressive Asian buyers, have some particular advantages in buying a firm in North America or Europe. The first advantage is that they gain a footprint in new markets traditionally very difficult to set up and gain traction in. They get user bases that provide revenue and credibility. They are able to take the seller’s technology back to their country—say China or India—which are huge, bigger markets than our own. Further, they can be developing and supporting 24/7 with a significant cost advantage. Thus, a foreign buyer will on average pay 17% more for you, plus they tend to have a hands off approach versus full integration. A couple examples here are Polaris, out of India, acquiring SEEC in the US, and Leyou Technologies out of China acquiring Digital Extremes in Toronto.
Thank you, Peter. Another class of companies that makes for an interesting buyer set are newly public companies.
Though they may be part of some other classification as well, newly public or near-public companies
deserve special attention as they are often more aggressive and willing to pay top dollar. Such companies have to produce growth to meet the lofty expectations of buyers and investors, which they can’t do only organically. So, they have to hit the acquisition trail. The problems are that they have thin staffs, often not that experienced, and lots of acquisition candidates. Thus, being properly prepared and packaged is crucial to getting their focus, then making it through due diligence and finally to being a contributing factor to their growth. While they have cash, they will often offer stock at attractive prices, which may be worth a fortune later. Examples include Campus Special, which I sold to Chegg right after their IPO, and Planswift, sold to Textura right before theirs.
Now to Australia and Dan Bernstein on buyers who are driven by disruptive technology.
Major disruptive changes in technology or the law can change the game... for both sides. We sold a subsidiary of Price Waterhouse in France, Cartesis, and a division the Chicago Stock Exchange due to new government regulations on conflict of interest. The sale of our client Instantiations to Google is another good example. Had they not sold, the market might well have disappeared out from under them—because Google immediately bundled their technology into Chrome and gave it away. Another is the sale that I led of Punters to Rupert Murdoch’s News Corp here in Australia, whose newspapers depend on the horseracing community that was increasingly turning to electronic news sources such as Punters.
Thank you, Dan. Now to another new member of the Corum team, we're happy to hear from Martin Laury, based in Boston.
In M&A you go where the money is! The biggest coffers of all are the governments. We are seeing examples where the acquisition fit into some form of economic development plan to bring industry in, keep local employment, and develop skills. On a macro level this is the one of the goals of the sovereign funds around the world which some economists say are valued at over $15 trillion. Look at Saudi Arabia’s direct investment of $3.5 billion in Uber. Every country, county and city wants tech and related growth - just look at the scramble for the new Amazon hub for 50,000 jobs. On a micro level, the Confederated Tribes of Warm Springs bought one of our clients through their casino, to keep local employment near their reservation in Central Oregon.
Now to Berlin to hear from Julius Telaranta.
There’s a class of holding companies that tend to make opportunistic acquisitions, where having common infrastructure, funding, sales channels, support resources, user base access and R&D leverage can help a small company make it in a consolidating world. Somewhat different than the portfolio company strategy of the PE firms, these firms often target smaller vertical players, and because of the cost savings can often acquire somewhat disparate companies. Good examples of these are Gores Technology in California, and Constellation in Canada, which I sold my company to, which directly and through related international subsidiaries is one of the most active buyers in the world. The advantage of these buyers is that they can often move fast, providing an IOI—indication of interest—very quickly.
Now, finally, our bonus round. While all of these are definitely good examples, there is one that you need to be careful of. For that one we'll go back down under to hear from Andy Hill.
Often, the M&A process starts with an overture from one of your competitors. Be cautious in dealing with them, because nearly always, they will want to lock you up into dealing only with them, which will hurt your chances for getting a better price. To gain an optimal outcome, you should calibrate with these other various categories of buyers, then approach competitors later in the process with the message that you have significant interest, but before you proceed you wanted to talk to them, as you had always thought perhaps they would be a logical partner.
Thank you, Andy, for that good advice.
One final note, be careful. While it would be easy to go to a large number of all of these, you have to leaven this advice with your capabilities and bandwidth. You don't want to waste anyone's time, but you do want to reach a wide audience.
We will go now to our Q&A.
We'll start with this question for Elon. One of the things that came up in our research report is that vertical software companies are in high demand. How does that mesh with the notion of casting this wide net to a diverse group of buyers?
While Vertical is seeing a lot of demand right now and people who are engaged in them think of it as a very small world with buyers who will be interested because they know the domain, that's not necessarily the case. I would say most if not all of the categories we went through will be receptive to looking through for a buyer of a vertical company as well. When we're talking about customers or suppliers, for instance, vertical companies may even have more opportunity to service buyers from the communities that already know the domain, but the folks who may not know that particular domain are not in that vertical are still adjacent to it or perhaps are in a position to horizontalize the technology that has been instantiated to make that vertical software successful to date. People with core technologies in small companies are very used to getting some tunnel vision going and not plant seeds in every one of these fertile fields that their core technology could bloom in, but a larger company could take it to that more horizontalized area. I think the model's a bit different, but it's still lots of possibilities for buyers for vertical software companies and that's what we're seeing here.
Another question here. What categories of the buyers would tend to focus more on revenue versus those that would tend to focus on IP?
If we go through them, traditionally some of the PEs and the family offices would be watching for revenue and the strategics would be watching more for the IP constituents. But I think things have changed very much in the PE universe in particular, where they are far more engaged at the strategic level and in doing financial engineering of companies to become more valuable at sale. That's a real difference in what's happening with the PE model there. Some of the other categories that we covered, such as companies that are trying to reinvent themselves or foreign buyers, I think we're still seeing so much alertness and understanding of the strategic nature of technology in these very fast-moving times that I think the IP considerations are going to be preeminent across almost all these buyers and certainly for the ones who are going to bid higher in the markets that we're in right now.
Also, here's a question from the dealmaker side for Jeff Riley. Jeff?
The portfolio companies for PEs are definitely looking to grow their own enterprise value and just mathematically speaking would be interested in revenue from that perspective. So competitors will be interested in revenue for the same reason. Revenue is really the key barometer toward enterprise value if there is a single metric revenue and the growth of revenue, so I think there is going to be a lot of interest from all different buyer categories but certainly more interest in the areas where roll-ups are concerned or an aggregate value strategy of building portfolio value by diversifying the different assets in it, and revenue is a big part of that.
I think basically what I'm hearing is that individual buyers may vary, but the categories are behaving more and more like each other and are able to make deals for both revenue and for IP. Obviously, both are nice and some level of revenue is usually necessary in most but not all cases.
Also in the buyer's perception, IP is elevated by revenue. There is credibility in showing you were able to build something, even if it's in—as we discussed before—this narrow vertical that shows the IP is really useful. That's further consideration there, that there is a crossover between those things.
Well, we've come to the end of our thirty minutes, thanks to everyone for sticking with us, and we hope to see you again on a future M&A webcast.