The world of buyers for technology companies is very different than it was just a few years ago. The rise of the “bolt-on” strategy among Private Equity firms, a new generation of international buyers, disruptive change creating new tech giants and destabilizing old ones – today, your ultimate buyer may be someone you've never heard of, in a country you've never visited. In the May edition of the Tech M&A Monthly webcast, Corum Group examines the new classes of buyers that you need to be aware of as you consider your company’s future. Plus key deals trends and valuation metrics in the Horizontal technology, Internet and IT Services sectors.
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May 2019 Global Tech M&A Monthly Report - Introduction
Bruce Milne: Good morning, afternoon, or evening, wherever you are in the world. Welcome to Global Tech M&A Monthly, with a special report on buyers’ bolt-ons. I'm Bruce Milne, CEO of the Corum Group, your host for today's event.
We have a jam-packed schedule with reports on gaming and AI. Our monthly M&A research report, plus a special report on the impact of bolt-ons and the new world of buyers. If you have any questions, use your Q&A window to the right of the screen. This event is being recorded for more convenient broadcast for our international listeners.
Let's get right to it in the special reports by going to Jim Perkins in Phoenix.
Special Report - Gaming Industry: GDC 2019 Highlights
Jim Perkins: Compared with some previous Game Developers Conferences, GDC 2019 was exciting and very upbeat this year. Cloud-based gaming was one of the highlights with Google announcing the Stadia cloud gaming platform. Other new digital game delivery offerings include the Epic Games Store to compete with Steam, Snap Games from Snapchat, and Apple Arcade, a new subscription game service coming this fall. These, along with digital distribution offerings from Facebook, Amazon, and others, offer game developers and publishers a wide array of options for selling their games. This means more great content for gamers and will lead to even more merger and acquisition activities as the game industry continues to consolidate.
Professional eSports, which is organized multiplayer video game competitions for spectators by players, is a way of life in Asia. It is now rapidly moving into the West with sold out arenas and new dedicated eSports arenas under construction nationwide. This was another hot topic at GDC and we believe analysts are significantly underestimating the revenues to be generated in North America in this already multibillion-dollar eSports market. All of these game industry developments will undoubtedly lead to even more game industry M&A activities worldwide.
Bruce Milne: Thanks, Jim. And now, to a special AI conference that Dr. Ivan Ruzic attended. Ivan?
Special Report – AI Conference Highlights
Ivan Ruzic: A few weeks ago, I participated in a 45-minute AI panel at the 3 Rivers Venture Fair in Pittsburgh. The theme was "AI and Machine Learning: Powering the Next Wave of Industry." It's an understatement to say that interest in the topic was high – the room was absolutely packed. The discussions and subsequent wide-ranging conversations covered far too much territory to effectively summarize here. However, major themes included the impact of AI and Machine Learning on existing industries, necessary precursors for the effective implementation of AI by organizations, new application areas, and industries that may emerge as a result of AI-enablement. It's been estimated that the application of AI will increase global GDP by as much as 1.0-1.5% per year with leading AI countries gaining an additional 20% to 25% in net economic benefit over competitors. So, it's no surprise that investment is increasing in all things AI.
To help put this in perspective, around one-third of all external AI investment is through mergers and acquisitions, and this is the fastest growing segment at a compound 85% per year. Clearly, interests and expectations are high. If your company operates in any of the many current AI hotspots, such as machine learning that exploits large proprietary data sets, predictive risk mitigation, enhanced robotics, vision-based systems, or systems developed around sophisticated and natural language processing, there's no better time to consider taking your company to market.
Bruce Milne: Thank you, Ivan. Now to our April 2019 research report, featuring our research staff headed by Elon Gasper, joined by Anna, Julian, and Stephanie.
May 2019 Tech M&A Report: Public Markets
Elon Gasper: Thanks, Bruce. And we begin with the public markets where major indices shot ahead. The NASDAQ and S&P Tech notching new highs, the Dow close behind. International markets rose too, led by the German DAX up 7%. Policy worries held China back. Overall, this astounding 2019 rebound is historic, steeper than any in decades, and led by tech. We urge execs to make use of the open tech M&A window and its still-high demand chasing a limited supply of sellers.
In our Corum Index for April, deal volume almost matched last year's with mega deals rolling down as the cash flows to IPOs instead. And our pipeline shows PE's supply squeezed at platform level, forcing them into bolt-ons, while VC exits popped 45% as smart money takes advantage of this sellers’ market.
Mega deals landed mainly in the enterprise software sectors such as vertical, where digital printing company Electronics for Imaging (EFI) took a buyout for 1.7 billion from tech PE Siris Capital.
And in horizontal, data marketing giant Epsilon went for $4.4 billion to French ad giant Publicis, its largest purchase ever. The other April mega deal was in IT Services. Let's review that sector now, Anna?
May 2019 M&A Report: IT Services
Anna Lebedieva: Both sales and EBITDA multiples held their Q1 gains across global IT Services markets with emerging markets continuing to command a premium, particular to sales. Industrial robotics integrator, JR Automation, was bought for $1.4 billion and 2.4 times revenue by Hitachi, which entered the robotic SI market through this purchase, hoping to expand its IoT business in North America.
We also saw M&A activity in the Google Cloud SI space, where French cloud consulting firm Cirruseo was grabbed by Accenture to extend its AI capabilities and strengthen its foothold in the French market. Devoteam pocketed two Google partners – Swedish Avalon Solutions and Dutch g-company – reinforcing its position in the Nordic and Benelux markets.
In the government services market, security specialist KeyW was acquired for $563 million by Dallas-based Jacobs Engineering Group, adding to its cybersecurity capabilities and increasing its role in the ISR sector. IT services contractor eGlobalTech was pocketed by engineering services provider Tetra Tech to boost its government services portfolio. And mission-critical services provider Phacil was snatched by PE-backed systems integrator By Light on heels of its Axom Technologies purchase just a year ago.
How's the internet sector looking, Stephanie?
May 2019 M&A Report: Internet Services
Stephanie Jensen: Though internet company multiples remain with their multi-year overall downtrend, their EBITDA multiples did manage a bounce back to last summer's levels as markets rallied around dependable, profitable internet business models.
In internet education, tutoring platform TutorMe.com was purchased for almost $5 million by Zovio, a recently rebranded EdTech company that continued a buying spree that started last month. And education fundraising software developer Funderbolt was acquired by student financial services platform CampusLogic to enhance its fundraising capabilities. For more information on recent activities in this industry, join us on May 30th for the EdTech Market Spotlight webcast presented by World Financial Symposiums.
In the travel and leisure subsector, Toronto-based ticket reseller Fanxchange was bought for $63.5 million by Vivid Seats in its first acquisition ever. And AI travel startup TRILL was picked up by Lonely Planet to move deeper into the influencer space and revamp its network of travel content producers. In its biggest deal to date, German XING paid $25 million for the recruitment platform Honeypot to dive further into the European market.
But what happened in the horizontal sector, Julian?
May 2019 M&A Report: Horizontal Technology Sector
Julian Valencia: Horizontal took the lead as our highest-valued sector back in Q3 last year. And now, a rocket launch to new heights of the big B2B sector roars upward. Sales multiples added another 10% in just a month after booking 13% in Q1 on the value of the sticky SaaS products amid the global rush to digital transformation.
The recruitment and workforce management industry has seen a fair number of mergers as well. For instance, Breezy HR, which develops recruiting and applicant management software, was picked up by UK-based digital learning giant, Learning Technologies, to build on its purchase of PeopleFluent last year. Employee performance management firm, AgileHR, was bought by Summit Partners-backed PrismHR to expand its human resources outsourcing offerings.
Attendance solutions provider, Integrated Time Systems, was wrapped up by human capital management player, Ascentis. The purchase builds on its buy of Cincinnati Time Systems last year. Devine Group, which specializes in HR management solutions for finance, healthcare, hospitality, and retail, joined forces with pre-employment tech developer OutMatch to advance its position in predictive talent analytics. And lastly, Belgian talent enablement startup Intuo was acquired by the Netherlands-based Unit4, an enterprise applications developer seeking to extend its talent management suite.
Now, there was a string of deals in the contract and invoice management space. The Boston-based contract modeling firm Exari was picked up for $215 million by Coupa, a business expenses management firm, to reinforce its AI contract management capabilities. WebMerge, a platform that generates automated contracts and proposals, was nabbed by Formstack, a providence form creation SaaS provider, to enhance its online documents product portfolio. And in France, invoice digitization specialist, BSV Electronic Publishing, was acquired by an e-document management firm, Cegedim, to complement its acquisition of German Ximantix earlier this year. And SaGo.ai, which improves compliance and information governance for legal teams, was acquired by data integrator, Congruity360, to broaden its data governance offerings.
Contract management players have spotted the need for acquisitions in the areas of relationship intelligence and marketing automation. Gwabbit, which offers enterprise relationship and data quality management tools primarily for law firms, was acquired by Temasek-backed contract management firm Intapp to get a hold of its AI expertise. And in Eastern Europe, Ukrainian AI-powered Captain Growth, which optimizes ad campaigns based on Facebook and Google AdWords data, was picked up for almost $4 million by Israeli ad-tech firm Perion to enhance Undertone, its synchronized digital branding solution.
Moving on to the business intelligence and analytics space, data analysis firm, ClearStory, was bought for $20 million and four times revenue by data science and analytics developer, Alteryx, to upscale its data profiling and inference capabilities. And in a deal that took place between two companies based in Shelton, Connecticut, the firm Hybrid Analytics, which focuses on planning and analytics for consumer goods, was picked up by its neighbor, the marketing data analytics firm TABS, to bolster its financial planning offerings.
The shopping craze in the payments processing sector continued this month. Wibmo, a payment security and e-commerce payment solutions provider, was grabbed for $70 million by Naspers-owned PayU to expand its presence in India. And London-based Practi, which develops mobile POS solutions for franchises, was locked in for nearly $9 million by Just Eat to help it fence off competition from Uber Eats and Deliveroo.
Elon Gasper: And that's our monthly report. Back to you, Bruce.
Special Report: Bolt-Ons Overview
Bruce Milne: Thank you all, Elon, Anna, Julian, Stephanie. Great job.
Now, for our special report on buyers and bolt-ons. Let's start with two questions. First, do you know who the new buyers are? Many are firms you've never heard of, and there's more than most people realize constantly changing.
Now, for many of you, this next question is more important. Are you a bolt-on? Do you even know what it means? And why today's hottest action in tech M&A is with bolt-ons?
Bolt-ons are generally purchased by portfolio companies, sometimes called platform companies, to enhance the main product or service. These acquisitions are also called sometimes add-ons by the private equity firms. Here at Corum, we've been at the forefront of the bolt-on trend.
Let's review a few sample transactions with my colleague, Head of Corum's Marketing, Timothy Goddard. Tim oversees nearly 200 educational events a year, plus related research reports distributed to our proprietary database of nearly a quarter million. Tim?
Tim Goddard: Thanks, Bruce. As we see more companies than anyone in the world, Corum has a long history and strong relationships with all the private equity firms active in tech. And as this bolt-on strategy has developed and accelerated, we've seen a number of our clients benefitted. These are some of the bolt-on deals we've done with PE firms in the last few years.
As you can see, it's a strategy being used by a variety of firms. Sometimes, we'll do a couple deals with one firm, as with Francisco Partners a couple of years ago. Now, we can't cover them all, but to get a look at how these strategies can play out, let's start with the earliest deal here.
We sold Gurock Software out of Berlin to TA Associates-backed Idera. Gurock was a small but very successful company building software testing tools, sold to a much larger maker of development tools. So, the fit was logical and Gurock ended up being the last piece to that puzzle before TA sold Idera to HGGC for over a billion dollars. Another, more recent example was our sale of AnalytiX DS to erwin. Erwin makes data modeling software dating back to the 90s. It ended up as a part of CA eventually but was spun out to Parallax Capital Partners and began doing its own deals recently. AnalytiX DS brought erwin Metadata Management capabilities. So again, this is a deal that was very strategic.
Now sometimes, the PE firms do the heavy lifting during a deal, and that's more and more typical, but sometimes the CEO of the portfolio company is empowered directly. That's what we saw here. And erwin CEO, Adam Famularo, will be discussing that transaction and more at the World Financial Symposiums conference in New York on June 18. I hope to see you there.
Finally, just be aware that because these deals are private, there is often no requirement that they are announced at all. We've talked about these "secret deals" before and those private equity firms doing bolt-ons are notorious for it. So, this list isn't comprehensive and the world of tech M&A is always even busier than it looks from the outside.
Bruce Milne: Thanks, Tim. That conference Tim was referring to is a WFS conference to be held on June 18 in New York. What's interesting is that sometimes these end up being plastic roll-ups where you help the buyer acquire the portfolio company and then help them buy a bolt-on, even if it's in the furthest corners of the world. Speaking of which, let's go down under to hear from Dan Bernstein.
Special Report: Bolt-on Transaction - QSR and Planet Software
Dan Bernstein: In July 2018, I sold QSR International, the leading qualitative data analytics software company to Rubicon Technology Partners, a US-based private equity firm that invests in lower middle market enterprise software companies, establishing a platform in the data analytics and higher education space. Academic institutions, researchers, as well as commercial and government entities all around the world use QSR's products to analyze large volumes of human data in order to derive groundbreaking insights in social research and commercial application. QSR's market-leading position in the academic market was a perfect fit for its first bolt-on, a company in Adelaide that came to Corum three months later called Planet Software.
Planet Software provides a product for the academic market segment that allows QSR to expand their presence in the targeted higher education institutions. Planet's flagship product, Sonia, is used by universities all around the world to manage student placement. This bolt-on transaction allows QSR to utilize its market presence and Planet Software's existing customer base to accelerate growth in the academic segment with a new product offering into an expanded breadth of faculties, meaning higher account values and new account opportunity. This set of transactions shows the rapid pace with which platforms are established by private equity and then grown through inorganic means to create market dominance. We've been honored to represent both sellers in this pair of transactions.
Special Report: New Generation of Buyers - Overview
Bruce Milne: Thank you, Dan. Now, let's go back to that question about the new generation of buyers. First off, let's look at the total number of buyers that are out there that were active in the past year. Wow, 2,549. We then broke this down by country and what do you see? U.S. has a lion's share, 63% of all buyers. One of the reasons United States buyers are so high and rising is because so many relatively new buyers are portfolio companies owned by private equity firms specifically bought by these PE firms to build, acquire, and consolidate markets – just like Dan's story about Rubicon.
Remember, the only way you're going to get the buy you deserve is through a true global search and create an auction environment. Even though the total numbers are lower, don't ignore the other countries. Some of the biggest and most active buyers are giants outside the United States – Alibaba, SAP, Samsung, SoftBank, and so many more. And for those of you who are foreign-based sellers, this global search is even more important because two-thirds of your buyers are going to be firms that are not in your country. In other words, they will be foreign to you.
And lastly, oftentimes, sales are to the firms you don't know. For example, in a recent seller's panel Corum hosted, two of the CEO's said they never heard of their buyer before. The universe of buyers is that big.
On that note, let's go back to the question of do you know the new world of buyers? Who they are?
Here's a quick buyer's IQ test. How many of these buyers do you recognize? These are buyers we reported on in just the last couple of quarters. We put up about three dozen. I've asked this question before at our live events and there was a lot of silence. Most people don't know these firms.
Now, let's highlight just a couple of them. Jamf, Granicus, cvent, and Ping. Got those names? I'm going to come back to them in a moment to make a point.
Special Report: New Generation of Buyers – Strategic Buyers
Now, let's look closer and break down these buyers into two basic classes: strategic buyers like Amazon and Google versus the financial buyers, the PE firms. Let's take a look at how things have changed with these two basic groups in just five years and how it affects you.
Here's a comparison from Corum's annual Global Tech M&A reports for years ‘13 versus 2018 for these two groups. What do you see? Well first off, the PE's are now the dominant buyers. The first time in history. There was a time when they weren't even a factor. The total number of deals of the top strategic firms was flat at 210 for each year, while the top PE firms increased by over 50% to 306 transactions in 2018. And if we look a bit closer, you'll see that the strategic buyers are constantly changing. For example, the biggest strategic buyer in 2013 was Yahoo. They're gone now. And Thompson Reuters, who was a top ten then, is barely active now. The biggest strategic buyer last year was Constellation. Constellation's COO, Mark Miller, was our guest on the buyer's panel Corum hosted at the World Financial Symposiums Growth and Exit Strategies conference recently held in Seattle. His co-panelists were Zillow, Microsoft, and Amazon. Good company. Just look at this chart of their deals. A lot of them look like bolt-ons to Constellation's core of portfolio companies.
Let's look at one of them a little further. Volaris, you see that one? Eight transactions, acquiring Empresa, Sicap, Helm, Aleyant, EISG, Occam, DSi and Grosvenor. By themselves, Volaris is almost big enough to be a top ten buyer globally. The head of M&A for Volaris will join us on June 18th at the WFS conference in New York, if you want to meet him.
Special Report: New Generation of Buyers – Financial Buyers
Now, let's take a closer look at the PE firms, 2013 to 2018. What do you see? Well, the biggest thing is that they increased their transaction volume. What you don't see here is that they're spending a lot more money because they have a huge war chest – three trillion dollars – three times that of the strategic buyers, which only have a trillion dollars. While the top strategic buyers may wax and wane in their buying patterns, the top PE firms you see are fairly consistent. Vista, Insight, Francisco, Advent, TA, Riverside, et cetera. That's because buying, investing is what they do. They are relentless buying machines -- there’s more cash, doing more deals, buying through an ever-broadening way of portfolio companies.
To understand this point, just take a look at those buyers I asked you to remember. Remember those? Jamf, Granicus, cvent, and Ping. Very different companies in different markets with one major common thread. Just look at the small print in brackets. Jamf Software is a portfolio company for Vista Equity Partners – so are the other three companies. No wonder Vista is the number one buyer in the world for the last two years. By the way, if you want to network with Vista, they’ll be a speaker at the upcoming Silicon Valley WFS conference, joining us on September 17th.
To wrap in this topic, bolt-ons is being the biggest driving force in today's market. Let's turn to Alpine. They were on the finance panel in Seattle. Joining us today though from Alpine is Patrick Eble.
Special Report: Bolt-On Transactions – Alpine Investors
Patrick Eble: My name is Patrick Eble and I am an Investment Professional with Alpine Investors. Alpine is a software and services-focused PE firm with investments in a number of vertical markets and applications. We are based in San Francisco with investments across North America. One of the ways we help our portfolio companies to grow is by acquiring add-ons, or bolt-ons, as they are commonly called, with a team of analysts and industry specialists who help execute the transaction. Bolt-ons are an important part of our investment thesis across our portfolio companies and out of our 40 acquisitions last year in 2018, 35 of them or nearly 90% were add-on acquisitions.
Bruce Milne: Thank you, Patrick. Wow. Nearly 90% bolt-ons and that resonates throughout the PE world.
So, let me ask you that question again. Are you a bolt-on? Is the answer different? So, how do you get to this new world of buyers? Both strategic and financial. Because of the number of guest speakers we had today, we'll have to defer that to next month. You won't want to miss it, but I'll give you a hint though by having you listen to the advice by Tom Marvin, who was at the recent WFS conference. Tom is a serial entrepreneur who has sold three companies with Corum's help.
Special Report: The Story, The Future, The Vision
Tom Marvin: My name is Tom Marvin and I'm old and I've been in the technology business since 1982. And I've started a number of companies, some of them have worked, some of them have not. We sold three of them all pretty long ago at relatively low evaluations and I do a variety of consulting and take the natural advisory positions in very, very early stage companies at this point. The overwhelmingly pertinent first advice I would give is that selling your company is remarkably liking raising money for your company. Don't forget that you need a story. Dry financials, dry information about the market you're in, is insufficient. Buyers buy vision. They buy future. They buy enthusiasm.
May 2019 Global Tech M&A Monthly Report – Q&A
Bruce Milne: Thanks, Tom. Indeed, it's about the story, the future, the vision, the energy you represent. We'll go into more detail next month on how to do that. How you go to the top of the buyer's acquisition list?
I see we're at our limit. We have time for just a quick question.
Here's one. How big do I have to be to be a bolt-on? The answer is that they are purchasing even smaller companies in order to secure the right strategic technology. We have some clients getting interested who have almost no revenue.
Okay, one last question. How long will this buying last? Oh, that can be complicated but on an individual market basis, it's until some level of consolidation in your market. You don't want to be the last man standing in a market that has been consolidated. So, calibrate your values soon with these buyers.
We'll get back to any of you – others – with responses to any questions. Thank you for joining us. We'll look forward to seeing you next month online or at one of our live events. Let's go to our close.