Tech M&A Monthly: 4 Sellers, 4 Buyers, 4 Offers - And They Haven't Met Yet!

June 2020 Tech M&A Monthly – Introduction

Gina Stanhope

Hello, everyone. Welcome to the Corum Tech M&A Monthly webcast for June 2020. I'm Gina Stanhope, Executive Vice President at Corum and I'll be your host for this episode. Please feel free to chime in with questions on the Q&A sidebar throughout the webcast. After the report, we'll make slides available for your reference on our website, and you can also reach out directly via info@corumgroup.com with any additional questions or comments.

Before we continue, for those of you who may not be aware, I've been leading the charge in our efforts to bring back Corum subsidiary, Software Investments. Software Investments, or SI, focuses on the sale of smaller software companies, including asset sales, private stock sales, and divestitures. There's been a lot of changes since SI first launched 25 years ago, but we saw a clear need for the program today as more smaller companies are trying to go to market driven by our current global situation.

And as technologies like virtual data rooms, video conferencing, and remote team staffing become commonplace, it made sense for us to extend our services to companies who may not have been able to work with us previously. Reach out to me at GinaS@corumgroup.com to see if your firm is a good fit.

Now, let's continue. Here's what we have for today. We'll start with highlights from some of our recent deals. Then a quick check-in with events, followed by our Global Tech M&A report. Then, we'll finish with "4 Sellers, 4 Buyers, 4 Offers and They Haven't Met Yet!" and "How to Get Your Team on Board to Calibrate the Market?"

 

June 2020 Tech M&A Monthly: Arreva-Maestro Acquisition

Gina Stanhope

Let's get started. First to Joel, who recently closed the deal on the Arreva and Maestro acquisition. Joel?

Joel Espelien

Thanks, Gina. I'm excited to announce the acquisition of our client, MaestroSoft by Arreva. MaestroSoft was founded way back in 1995 by Jay Fiske to create industry-leading event management software, online management tools, and credit card processing for the non-profit industry. Together, these products have helped to raise nearly $5 billion for clients. For Arreva, this acquisition means integration of Maestro's suite of fundraising software to help further their growth in the donor relationship management space. Congratulations to the Arreva-MaestroSoft teams.

Gina Stanhope

Thanks Joel, congratulations again. 

 

Southeast Asia WFS Growth and Exit Strategy – Jakarta, Indonesia

Gina Stanhope

Now, let's go to our field reports with Mark White, leading our growth in Southeast Asia and Matt Rung, who's leading the Boston Growth and Exit Conference for WFS in June.

Mark White

On May the 14th, we held Corum's first-ever Merge Briefing for Indonesia. It was really successful. There was more than 25 attendees. The factors currently driving Tech M&A, our top 10 disruptive tech trends, how to achieve an optimal outcome, and importantly, how to avoid deals from becoming disasters.

We were really grateful to our co-sponsor Dentons HPRP in Jakarta and want to thank them for their terrific support. Indonesia, indeed the markets right across Southeast Asia, are really exciting hotbeds of technology and innovation. We're thrilled to be expanding Corum's presence in the region, and we're looking forward to the many events we have planned for Asia throughout the second half of 2020.

Matt Rung

The WFS has gone completely virtual for the Growth and Exit Strategies for Software and IT Companies Conference that we normally hold in tech cities throughout the world. We've got some really big events coming up. On June 18th, we'll be in Boston, Massachusetts – and that's going to a full North American audience, including some countries in Latin America. In addition to that, we're doing a series of LARS regional events, specifically to Europe, Asia, and Australia. These are going to be very big events. Europe is coming up on June 25th. Following up with that, we'll be having Asia within the first two weeks of July. And then Australia and New Zealand will be following that probably early August. For more details on those events, please visit wfs.com. Our new website's in great shape and you should be able to find everything you need there.

Gina Stanhope

Thank you for keeping us posted, guys.

 

June 2020 Tech M&A Report: Public Markets and Corum Index

Gina Stanhope

Now, let's move on to the market research report.

Corum Research Analyst

We begin with the public markets where gradual reopening of the economy and lifting of some restrictions globally led S&P Tech to new all-time highs, and NASDAQ recovered from March lows, while the Dow is still having a tough time. Japanese and European indices are up too, while Chinese markets felt the pressure of the trade tensions.

Our Corum Index for May showed the continuing effect of the pandemic on the M&A market with all metrics declining in no-tech megadeals during the month for the first time since September 2004, but what was the effect on multiples? We'll take a look as we dive deeper into three sectors, starting with Horizontal.

 

Horizontal Deal Spotlight:  AdTech, DMS, & Customer Engagement

Corum Research Analyst

Horizontal sales and EBITDA multiples continue their ascent driven by Business Intelligence, MarTech, and SCM, where VisTracks, a device-agnostic compliance SaaS to the transportation and logistics industry, was purchased by fleet management solutions maker, Omnitracs, to extend its reach into telematics SMB market. And supply diversity specialist, ConnXus, was acquired by cloud-based business spend management platform, Coupa.

In AdTech, mobile interactive ad company, CrossInstall, was acquired by Twitter, while Amazon advertising analytics platform, PPC Scope, was bought by Texas-based full-service marketing agency, Canopy Management, to broaden its support of all Amazon ad types.

In Argentina, digital signature and document management solutions provider, Zetech, was acquired by accounting and administration software maker, Visma, in a rare acquisition outside the Nordics. Contract lifecycle management specialist, Conga, was bought by Thoma Bravo, merging it with Apttus. Corum sold Conga CEO Matthew Schiltz first company, StatSci, in 1994.

In Italy, e-document management software provider, Namirial, which had previously acquired Corum client, xyzmo, was purchased by PE firm Ambienta.

In the customer engagement space, Israeli AI-powered behavioral analytics company, Personali, was acquired by customer journey hijacking prevention tool, Namogoo, to expand its range of sales growth solutions. Berlin-based customer attribution analytics SaaS, converlytics, was purchased by chat marketing platform, ManyChat, to quantify Facebook Messenger and Shopify marketing campaigns.

 

Vertical Deal Spotlight: Healthcare, Travel, Real Estate, & AEC

Corum Research Analyst

In the Vertical sector, both sales and EBITDA metrics improved as well as healthcare continues to drive deal flow in the sector where HintMD, a fintech platform for plastic surgeons, was acquired for $180 million despite only $1.4 million in revenue by Revance in a deal illustrating the power of the payment stream control trend. London-based patient engagement platform, Zesty, was bought for more than $15 million at 12.2 times sales by healthcare collaboration management SaaS, Induction Healthcare.

Deal flow continued even in sectors that have been hit hard recently, including Oil & Gas, where we saw deals in Automation, Modeling, and Imaging. And there has been M&A even in the Travel & Hospitality space, including the acquisition of rental car software provider, CarTrawler, by TowerBrook Capital Partners. CarTrawler had previously acquired Corum client, Cabforce.

In the Real Estate market, digital auction platform, Ten-X was purchased for $190 million in 3.3 times revenue by CoStar to take advantage of the tsunami of distressed real estate opportunities it expects to see in the coming months. And Philippines-based property listings website, Lamudi Global, was bought by EMPG, a digital classifieds group out of Dubai.

In the A/E/C vertical, 3D architectural collaboration platform, Modelo, was acquired by Kujiale, the parent company of Chinese home decoration unicorn, Coohom. And construction management platform, BuildTools, was pocketed by cloud-based business management solutions provider, ECI, to reach smaller custom builders and home remodelers.

 

Consumer Deal Spotlight: Software Market, Entertainment, & Gaming

Corum Research Analyst

Sales and EBITDA valuations in the Consumer sector reached record levels as consumer applications see new interest in the COVID-19 era. The growing popularity of podcasts drove deal flow in this space, where podcasts website, PodcastOne, was sold for more than $18 million to live music streaming network, LiveXLive Media. And podcast app, Player FM, was snapped up by mobile media-tech company, Maple Media.

Elsewhere in entertainment, animated giphs platform, Giphy, was bought by Facebook to integrate its massive giph library into Instagram and other apps. In mobile health, therapeutic app, My Pain Sensei, was sold for $30 million to functional genomics provider, The DNA Company, to create a new consumer platform for managing chronic conditions, including the coronavirus. Israeli public transit app, Moovit, was acquired for nearly $1 billion by Intel, for the data generated by its millions of customers, which Intel plans to use to enable its self-driving AI capabilities.

In the gaming world, Machine Zone, the studio behind strategy title "Game of War" was purchased by mobile marketing platform AppLovin, moving further into mobile gaming.

In the UK, former Corum client, Jagex, was sold to PE firm, Macarthur Fortune, for $530 million. And while there were no megadeals in May, on June 1st, Turkey's Peak Games was bought for $1.8 billion by Zynga in its biggest acquisition ever.

And that's our tech M&A report for May.

Gina Stanhope

Thank you to our research team. What a great job with the report.

 

June 2020 Tech M&A Monthly: 4 Sellers, 4 Buyers, 4 Offers

Gina Stanhope

Let's continue to our topic today, "4 Sellers, 4 Buyers, 4 Offers" and "How to Get Your Team on Board." Corum CEO, Bruce Milne, will start things off. Bruce?

Bruce Milne

Thanks, Gina. The new normal is virtual. As you said, Gina, we've come a long way from everything being onsite or personal meetings. Your coworker's not in the next cubicle or office, but as a tile on your computer screen. The same goes for buyers and sellers. When we started issuing alarms three months ago about the impact of COVID-19, a number of companies took our advice to at least calibrate the M&A market before the recession deepened. Four firms in four different markets are already at the offer stage. Buyers are very active. What's amazing is that due to the pandemic quarantine, none of the buyers and sellers have personally met yet.

 

Corum’s M&A Process: 8 Stages for Optimal Outcome

Bruce Milne

Let's take a couple of minutes to review the eight-step process that they've gone through. So, the way you get a maximum value is to go through a process we call the "8 Stages for Optimal Outcome" – preparation, research, contact, discovery, negotiation, due diligence, closing, and integration. 

The reason you go through these is you have to be prepared, and this is how you create competitive tension – an auction process. That's how you get the valuations up.

First is preparation. What this is basically is, is a self-checking due diligence. You're going to be asked to come up with business and marketing plans and financials and such. You have to go ahead and do this yourself. You'll set up a data room, that sort of thing, and start putting information in that.

Then you have research. Who the buyers are at the A&B level, financial, and non-tech. You have to do a strategic analysis on them, prepare preliminary evaluations, but not the final valuation. We'll get to that later.

So, who do you contact within these firms? That's not easy. We've spent tens of millions of dollars tracking all of our engagements for decades, so we know who to go to, their process, the EAs and advisors. You've got to know that in order to get to the people. You need to prepare a position statement for each buyer. Why should they buy you?

Then, there's a critical contact stage. It starts with introductory correspondence and executive summary. I consider this the toughest thing we have to do in the investment banking world, because we have to get to that story. How do you map the best practices and the disruptive trends that the buyers need to know about? You have the mechanics of NDAs and non-solicitations not to go after your people. You have to screen interest. You have to find out about valuations, where they set, where you set, not that you do a final evaluation. You have to establish a log on all communications and listen. You'll refine your position based on feedback.

Once you get into dialogues, we then have discovery. This is a term we took from our friends in the legal community. So, you'll have conference calls, site visits, all this is confidential. You'll have technology review. There'll be a formal valuation report – not always, but generally. You have to look at synergy and contribution analysis, set up NDA with the other parties involved – your customers, your contractors – who will be part of the due diligence process later and finish due diligence on the buyer. Are they capable of buying you?

Then, we get into negotiation with all the parties that have come into the process and you'd like them to all come in and create an auction environment all the same time. So, that's why it's so important to stage who do you contact when. Some people can respond quickly, others take a while. So, final visits, valuation guidance – generally, they'll make the offer first and then you start negotiating with your top bidders and then you sign your letter of intent, the LOI.

And at that point, you inform all the other bidders of "No Shop" meaning you can't tell them who the buyer is, obviously, but you can no longer talk to them to get other bids.

Then we get into due diligence. There was due diligence to get to know each other, to do the deal, but now we have to verify financial statements and unfortunately, this is where the deals die, oftentimes, because of the due diligence minefield you haven't been properly prepared.

So, there's verification of statements and projections, all right. You may need opinions of outside advisors, legal opinions. You have to have a confidential data room – we talked about that earlier. They have to confirm that your ownership is proper. What is the business model? You need to explain that. How is your sales model? What does the sales flow in the pipeline? And then while you're doing due diligence, you're also completing your definitive agreements. They're being done simultaneously.

Bruce Milne

Then we get to the closing, which is pretty anti-climactic. It is final reps and warranties, escrow holdbacks, final opinions have to be done. You may have outside parties. For example, we just had one with a client where it required an approval from his largest customer. You sign the contracts, you arrange for payment, there's regulatory filings and disclosure schedules. What's interesting is that it oftentimes close it with a whimper. You simply get a notice that there was some filing in some county courthouse.

Bruce Milne

And then we get to a part that a lot of people forget about, integration. You want to think about this. It's a lot about how you take care of your employees, merging best practices. You need an interim transition team. Let me tell you what you don't want. You don't want your wife coming home from church or one of your kids coming home from school, your son saying to you, "Dad, John's dad was just fired from the firm and I thought he used to be one of your best friends. And by the way, sort of the story on the street is you took really good care of yourself and didn't think about your employees." At that point, the big cheque in the bank doesn't feel so good.

To summarize, up to and including the closing can be done virtually. The integration will a require meeting, of course, and there's no way we can virtually go on our annual celebration fishing trip to Langara, the furthest island out in the Gulf of Alaska. Back to you, Gina.

Gina Stanhope

Thanks, Bruce.

 

June 2020 Tech M&A Monthly: Getting Your Board on Board

Gina Stanhope

But despite our previous warnings, some CEOs are still having a hard time convincing their teams of our message. To clear up some misconceptions and offer practical ways to get your team on board, let's go back to Matt Rung, Director of WFS.

Matt Rung

Thanks, Gina. Today, I'm excited to speak with you about a topic that's becoming more and more relevant for CEOs of software and IT companies who are mulling over their options facing an economic downturn and a long recovery back. And that's getting your board to see the value of calibrating the market. Having attended many of Corum's educational events and many of WFS' educational events and studied the research, many CEOs are now saying that they're ready to engage in a tech M&A transaction. Maybe it's because they don't have the balance sheet to last through a recession, or maybe they're looking for a way to keep growing and they need the right partner to do it. They see the benefits of tech M&A, and in this case Corum's process. But the problem that we keep hearing about this is although they are ready to engage in a process and calibrate their company's value, their board is slow to align with them.

So, how do you approach your board members? What's the best way to show them the value of calibrating the market right now? Let's clear up some misconceptions. 

 

Misconception #1: Calibrating the Market is Legally-Binding 

Matt Rung

First, starting a tech M&A process doesn't lead to a legally binding commitment. You don't have to accept any offers. No one says that you have to sell right now. It's about exploring your options and making sure that you have all the information you need to make the best decision about your company's future. How will you know the true market value unless you do the work through the process? You can't, that's the thing. That alone is worth the time and investment.

What's more, making sure you're exhausting all options to ensure survivability in a recession speaks to your fiduciary duty. You don't want to be found liable for not having done your part to take precautionary measures if you're forced to take down round financing. Your investors wouldn't be happy to hear that you gave way big chunks of the company for a fraction of what they're worth. Are you going to have the answers when the questions start coming? Did you seek additional funding before the situation became dire? Did you get a third party valuation prior to financing to ensure a fair value? Did you appoint a committee to consider the transaction, et cetera? You need to partner with an experienced outside advisory group who've been through the downturns with software companies to guide you through the minefield, avoiding anything that's going to erode your value. This is where our partners at Corum have really done their research. There's an 80% rate of failure for companies that go into M&A by themselves. And that's during a bull market. It's far worse during a recession.

 

Misconception #2: Process is Time Intensive with Little or No Return

Matt Rung

Second, some people think the process is time-intensive with little or no return if you end up not selling. It's completely the opposite. You've heard it before, "It's the journey, not the destination." Well, when it comes to tech M&A there's significant value in both. The journey of going through the steps has profound benefits in and of itself. Corum has discussed the five major benefits of committing to a full tech M&A process in previous webcasts and podcasts and at our Growth and Exit conferences.

The preparation phase helps to forge a better business model for your firm because it exposes you to where you're weak and where you're strong as a company. With a level of inspection from due diligence, nothing is hidden under the rug. You'll come out of it learning things even you might not have known about your own company. Your strategic position will improve as a result because you know where you stand and what needs to change going forward.

Contact with potential buyers provides invaluable data and insight that you wouldn't be able to obtain otherwise. What are they looking for? What are the deal breakers? Interestingly enough, often the relationships you create from the process yield opportunities for your firm going forward. It's not just about shaking hands with a couple of potential buyers. Competitors can even end up becoming strategic partners down the road. This is something that you can see with Corum's recent deal with Datalight and Tuxera.

 

Corum’s Hiatus Program: Case Study

Matt Rung

And don't forget, in tech M&A it's also about timing. There have been cases where companies went through Corum's process and didn't find the right partner at first. No problem. Corum put them through their hiatus program. But hiatus isn't about staying put and waiting for deals to come.

Let's take a look at a quick case study. This was a real company worth $3 million in Lake Oswego, Oregon. Corum actually got them two offers for $5 million to $8 million in the beginning, but unfortunately, the deals fell apart. In one case, there were stock problems, and another's a champion left. So, the company went on hiatus to tighten up the business and build relationships. 18 months later, they went back up. Corum did a 90% recapitalization actually with Vista Equity at a $40 million evaluation. Remember the original expectations? They were $4 million or $5 million. They got $36 million while retaining 10% ownership. Then, they sold later for a $100 million, so they got another bite of the apple for $10 million. So, the total amount that the founders got was $46 million -- that's 6X.

 

Misconception #3: M&A is Akin to Giving Up or Defeat 

Matt Rung

Third, at the very least, taking the step in the M&A process serves as an insurance policy for when things go from bad to worse. Recessions last a while and can take years to hit the bottom and even a few more to rebound. We're talking an average of seven years judging by previous events. A lot of people think waiting things out and reducing cost is the only strategy to survive in a recession, but just staying put isn't going to get you anything. Corum has been in the M&A business for more than 30 years, and they've seen it before. Staying put means at best you're the last man standing when no one's looking to buy, while you're losing value.

Does your company have the balance sheet to make it through? If not, you'll have to partner with someone who does. Again, it's a matter of survival. It's not as simple as another round of investments. You'd be hard-pressed to get the capital you need without giving away everything.

But there is another option. Some people think M&A is akin to giving up or admitting defeat. It's the end in some people's minds. Far from it. It's an option for growth and you need to be able to see that.

When Corum's client Bizview was acquired by insightsoftware, the goal wasn't a successful exit. It was a global outreach through strategic partnership. The process for them meant getting the right partner for the growth that they could not have achieved alone.

 

M&A Opportunity: Get Liquidity Now, Larger Exit Down the Line

Matt Rung

Finally, there's an opportunity here that's sometimes missed. Get some liquidity now and bet on a larger exit down the line. Calibrating the market and getting the opportunity to roll some equity into a new entity can create a second bite of the apple for your board. We've heard of situations of CEOs facing board members dead set against any action, fearing dilution from a down round, or even some looking to force a down round to grab a larger proportion of the company. So, whose interest is at play? And what are your options at that point? Remember, the board might not be feeling the same pressure that you are. When you get down to it, you have to ask yourself, "Am I getting the right advice?"

The truth is there isn't a clear cut answer for all situations, but depending on where and how your company is structured, getting board approval may not be necessary to start an engagement, because as I said before, you don't have to accept an offer. Please understand, we're not advocating any divisive action here. What we are saying is seeing the numbers from the process will provide a better understanding all around and make for better decision making as a result -- one that works for everyone.

 

Getting Your Board on Board: Summary 

Matt Rung

So, let me sum up with this: there's no commitment to sell by calibrating the market. 

The process itself has many benefits for your company and is worth the investment. Calibrating the market is a good insurance policy. As we're facing a steep recession, you have to make sure you're looking at all the options on the table to ensure you and your company will be coming out of it stronger on the other side. It's in the best interest for you and your company to have all the information you need to make the best decision. You might have the chance to have your cake and eat it too. 

If it's a matter of going with the right team for the process, no one is more active in software-based tech M&A on the sell-side than Corum Group. This is why we're proud at the World Financial Symposiums to partner with Corum and have them be our Platinum sponsor for all of our events. Corum knows tech M&A like no one else. No one has the research capability, the experience, the background, and the number of deals to draw from, to provide unparalleled insight into the tech M&A process. If done right, the results of the process is a successful merger, an asset sale, or a financial recap of your company. If you're still struggling with getting your team on board, I strongly recommend that you reach out to our friends at the Corum Group.

Gina Stanhope

That brings us to the end of today's Tech M&A Monthly. Thanks for joining us and we look forward to seeing you again next month. Stay tuned to find out how to get in touch.