Corum Webinar
June 10, 2010
“Tech Acquisition Frenzy”
Mark Reed
Welcome to the Corum M&A Monthtly for June, 2010. These web events put current events and
economic news in a context relevant to software executives who are building
their companies and planning for strategic transactions like M&A. We have a very full agenda for today, lots of
topics including market overviews, tax impact and special comments by ENC. We also have a big slate of speakers
today. I'm Mark Reed, executive VP based
here in Seattle. We also have Bruce
Milne, CEO of Corum Group, Nat Burgess, President of Corum Group, our managing
director out of Europe, Miro Parizek, Dougan Milne, our head of research, Jeff
Brown, VP based in Texas, and of course our special guest speaker, Matt Olton,
who is the VP of Corporate Development at ENC Corporation.
We do like to keep these events to 60 minutes and we have a
few logistics to cover. We will do
Q&A at the end, but feel free to ask questions at any point during the
webinar and we will address the questions at the end. To submit your questions, use the Q&A
window on the right side of your screen and make sure that you send your
question to all panelists. You'll see a
small window for that above the text input area. If you select host or any other option, your
question will not be seen or included in the queue.
We are also recording today's conference and it will be
rebroadcast a week from today, Thursday the 17th of June. Thereafter, the recorded event will be
available in audio and slides on the Corum website, via the conferences and
events menu on the left hand side.
With that, I'll turn this over to Bruce.
Bruce Milne
Thank you, Mark. As
Mark said, we have a lot of ground to cover today, so I'll be brief in my
market intro. Let's start out moving
from east to west.
In Asia, Japan just announced a new prime minister, the
fifth in four years and it is beginning to feel like Italy. In India they finally found 8 guilty in the
Bhopal gas leak. Eight thousand people
died 25 years ago. I think when that
happened we were thinking this was a less-developed country, we have a
completely different view of the country and its evolution today, as we talked
about last month in our report, Asia Rising.
They are trying to freeze the property prices in China, but
I saw the headline this morning that speculators are still in there. It was also interesting to note that China's
exports rose the most in 6 years, month over month from prior years, 48% from
last year alone. It looks that they are
clearly in full recovery mode.
With Japan, over the last three months their annualized rate
has shown 5% growth. This is all good
news.
In Europe, debt, debt, debt, we have lots of issues, we
talked about this the last couple of months, debt concerns drove the Euro to
fresh lows, under $1.20, and it has recovered a little bit.
The governments in the UK and Germany are taking drastic
action that, as Cameron said, will affect everyone in the UK. Merkel in Germany is trying to make spending
cuts.
Unionized states have lost 430,000 people and 411,000
thousand were hired by the government, so we're seeing a little different
strategy over here.
The heads of Hungary vowed to avert a Greece-like crisis and
then they immediately regretted saying that, because that is fairly dire.
HSBC has downgraded Europe, including the UK and that has
been resulted in jitters. Lots of things like this are reasons that the market
goes up 200, down 200, and went up 200 this morning. The good news is that Germany's factory
orders unexpectedly jumped in April, which really mirrors what we are seeing in
Asia.
In the Americas, we actually see some good news here. Chile had the fastest economic growth in 14
years. Brazil's economy has cut the 2010
inflation forecast, which is great.
Copper demand may double in 15 years, which is great since they are so
dependent on copper.
Venezuela's economy, on the other hand, shrank 6.2%. Chavez has wrecked that country.
In the United States, we have $13 trillion in debt, which is
going to overtake GDP. I'm not sure we
should be proud of that. We're borrowing
at record rates to fund spending.
The US rebound is the slowest we've seen since 2002. They say this is because of Euro debt, but we
have our own debt issues. This raises
the odds of a double-dip recession from one in 20 to one in four.
Geitner has been in the news a lot lately with the G20,
stating the world can't rely on the US consumer, and I think we all knew
that.
Good news though, Texas Instruments has raised their Q2
forecast, seeing more demand for electronics products in the future.
Home sales declined, which suggests trouble, but this has
been a troubled market for a while. June
seems to be when everyone around the country listed their home. We'll see what happens.
Bad news in that unemployment rose to a record 34
weeks. Warren Buffet came out, he
usually doesn't talk about this stuff, but obviously he's in the business of
financing some of these debts. He sees a
terrible problem with municipal debt.
Wealthy investors are betting on property. It seems to be at a bottom. A lot of people are going out and buying,
some of them on direct contracts with owners, because the banks won't finance,
but but that's actually good.
Gold settled at a record price. Is that good or bad? It says people don't have a lot of faith in
currency.
In technology, Steve Ballmer was deciding the future of
Windows. We'll have a guest speaker next
month from Microsoft and we'll be able to ask him about that some more.
Google continues to be in the news regarding data. It handed over intercepted data and Apple
debuted the iPhone 4 to fend off the Android.
The stock went down, but it was a big move and I think a lot are actually
buying that.
What's interesting about real estate and tech in San
Francisco is that they had 26 bids on one ocean-view property. It's kind of back to the old days. What was really interesting, I thought, kind
of combining tech and finance, is that Microsoft did convertible financing with
no coupon, actually, at a 33% premium over current prices. It was gobbled up and that will really help
the convertible financing market. They
raised $1.5 billion and guess what, we think they'll use some of that on
acquisitions.
These acquisitions will be part of the Tech Acquisition Frenzy according to USA
Today, Nat Burgess was quoted and he was also quoted in Time Online and he can
tell us a little bit about that article.
Nat Burgess
It's been an exciting time and we've had a lot of questions
from the press about M&A. They have
plenty of information on the big blockbuster deals that we all hear about, but
what they're missing is data on the smaller deals that are actually forming the
foundation of tomorrow's major companies and major opportunities, so all the
big guys out there are watching different markets, they're seeing emerging
trends and the innovation that is going to drive growth in those markets is
happening in smaller companies, and that's where some of the most interesting
acquisitions are taking place. Years
ago, ENC saw this in virtualization and created a juggernaut, VMware, in that
process. I was quoted in USA Today
saying that small agile companies are developing tomorrow's solutions, and
M&A is the only way for big companies to keep up and we really believe
that.
Bruce Milne
Thank you, Nat.
To underscore that, last week we announced some of our own
transactions, one in Europe. Miro
Parizek, our managing director in Europe is in Munich. Miro, can you tell us about that transaction
there with Beta.
Miro Parizek
Sure. We just closed on the divestiture of the ECM
unit from Beta Systems AG. Beta, like
most companies, took a close look at their product portfolio after the economic
crisis and examined where they could build on core strengths and potentially
shed some non-strategic assets. The ECM
division was born out of the acquisition of another German-listed company. This provided their solutions to the
financial services industry. Beta
provides data center solutions to the same industry. The goal was for Beta to leverage its
own strengths in serving that market segment and to provide related solutions
at the application layer on top of their data center solutions. The desired synergies never panned out, as
the decision maker for ECM at the bank is different from the buyer purchasing
infrastructure product. So, the new Beta
management decided it was better to focus on its core data center business and
to sell off this solutions branch that it acquired a number of years ago.
They chose us to represent them as we ran a process
addressing both regional, financial, and globally operating strategic buyers,
where we have completed hundreds of deals focused on exactly such software and
IT service related transactions.
The buyer, BancTec, is a special vendor addressing the
document processing needs of banks around the world, found the division
solutions local presence in the German-speaking region to be of great value and
closed the acquisition after their recently minted IPO. It is one of the few companies that we've
been seeing in this slightly open IPO window.
The key here was the attention paid to private buyers as we
accompanied BancTec in their pre IPO phase, and on a client basis throughout,
until the time was right for both companies to focus on this intercontinental
transaction. Back to you.
Bruce Milne
Thanks, Miro. I want
to go back to Mark Reed. Mark, you just
completed a transaction in Singapore.
Mark Reed
Yeah, it was an interesting transaction, Bruce. Leveraging off of our conference last month,
Apex really does typify the the high energy, sophisticated Asian tech companies
that we talked about in that report.
They are based in Singapore and operate throughout Asia and they are expanding
into the Middle East and Eastern Europe.
Their customers are in the financial services space, global insurance
companies that are building businesses in Asia, which is the insurance
industry's fastest-growing market.
Apex's goal for M&A was really to try to implement a growth strategy
because the opportunities were out stripping the resources they had.
So Apex engaged us because of our track record in software
M&A and our global access to acquirers.
In fact, the target buyers for Apex came from all over the world,
including Asia, resulting in a multinational short list. Ultimately, Apex reached an agreement with
NTT Data and the strategic fit really is excellent. Apex compliments the
operations of NTT's new Asia-Pacific headquarters, which they set up in
Singapore in September of 2009. Apex
offers state-of-the-art J2EE-based enterprise software, which is really market
leading and they bring deep domain expertise in the insurance vertical market. NTT Data provides Apex with tremendous
credibility on a global basis and system integration resources that will allow
Apex to grow much more rapidly by taking on larger transactions. This is an exciting opportunity for both
companies.
Bruce Milne
That's great. So NTT is headquartered in Tokyo?
Mark Reed
Tokyo, yeah. NTT Data
is a subsidiary of NTT Corporation.
Bruce Milne
Moving on, Jeff, you're down in Texas. I
know you've been working with some of your clients and that one of the issues
that has come up in negotiation and timing valuation issues is related to the
tax impact of long-term capital gains of now versus the future.
Jeff Brown
One of the things that we have been wrestling with is
timing, as part of our decision for when to go to market and what impact the
long term capital gains tax might have on valuation. US sellers in particular need to consider
this impact. Most of us are expecting a
graduated increase in long-term capital gains from 15% to as much as 28% by
2013. But what impact does this have on
valuation and our go to market timing?
We have to get a handle on the business model and understand
how much the business will need to grow to generate the same proceeds to the
seller as it would if we sold in 2010.
We have a company with $10 million in revenue, generating 20% EBIDTA and
used a 9x to bid a multiple in order to assess.
We wanted to offset the impact of long-term capital gains and we also
needed to consider the effect of inflation bank interest on net proceeds if we
delay the sale. We probably should have
considered the health care tax, but we didn't.
What we saw was, the impact was pretty stunning. Under our calculations, sales in 2011 would
need to grow by 16% over 2010 in order to offset that impact. In 2012, we'd
need to see another 13% sales growth, and in 2013 we'd need to see 11%. Year on year, that is 45% over 2010 revenues
to offset that tax increase. How
achievable is that kind of growth? Well,
most companies are emerging from about 18 months of recession, tight cost
management, and basically flat revenues.
These companies are going to need to reinvest in sales, marketing, and
possibly product development in order to generate that kind of scale.
That also means that
margins will not improve, significantly, as revenues scale in many cases. That will be a real challenge. If your market
is stagnant, or worse, shrinking, it means your sales must come from
greater market share, and that is a pretty expensive proposition as well. So, where does the new funding come from to
drive this growth?
If you look at things as we look at them, we're also keeping
in mind that generating anything beyond 25% year on year growth, based on cash
alone, is a pretty challenging proposition for most businesses, so you need to
think about whether you can do this on cash, cash flows, or new
investment. Bottom line is, 2010 might
be a good time to look at going to market.
Back to you, Bruce.
Bruce Milne
Thanks, Jeff. I think
that with all this debt that we are seeing piled on, we may see a lot more taxes,
unfortunately for us, as business owners.
Shifting gears, lets go to the meat of our presentation
today, with the Corum Index and M&A Update with Dougan Milne. Dougan?
Dougan Milne
Thank you. It's
certainly been an interesting month and historically May and June often
are. This past month we had the public
market down, acquisitions up, enterprise value to sales down and we've seen
many enterprise value EBIDTA multiples going way up. It is a little wacky, even.
For transactions, Corum did well this last month as we just
saw a little earlier. As a whole, the
smaller, mid-market strategic deals were very positive this month. Private equity deals were hot as well, and even
the public to public and public buy outs were up. Speaking of that, lets look at the public
markets.
With equity markets it was definitely a rough month. I don't know how well you can see this chart
at the very end there, but actually the S&P tech index, in red, didn't
slide as hard as the broad market trends that we saw with the Dow and the
NASDAQ. This is pretty typical of tech,
it hasn't gotten quite as wet when the rain falls, but it also seems to bounce
back much quicker than the broad market indices.
Transaction volumes of M&A activity were definitely
positive, we're up about 20% from what we saw in May of 2009 and about 20% from
what we just had in April, last month.
We generally see a little bit of run up in deal volume in May and June,
as I mentioned before. This is because
the banks, the buyers, the advisers, etc, are all trying to get these deals
completed before we get into July and August.
This is when people start going on vacation and it becomes really
difficult to get deals done. Sometimes
deals even fall apart in those latter months of the summer.
The Corum Index gives us a bird's eye view of some of those
important totals, averages, and percentages in software M&A that Corum is
tracking. Here you have a brief snapshot
of May 2009 versus this May. The top
line there shows number of transactions, we spoke about that last month, 280+
deals for the month, which is one of the highest months we've had so far this
year. Megadeals are still very
healthy. May of 2009 was actually the
return of the megadeal last year, after the recession. Twelve months later we have a solid six
megadeals. Of course, the largest of
which was the SAP-Sybase deal, that was over $6 billion. We also saw deals from Silverlake Private
Equity, acquiring IDC for $3.4 billion.
Of course IBM purchased Sterling commerce from AT&T. That was a $1.4 billion deal. Symantec finally took a big chunk of the core
asset of Verisign for about $1.3 billion.
If you remember last year, about this time, it was a big
deal that EMC picked up Data Domain for about $2.35 billion. That was 7.5x trailing 12 months revenue, so
hopefully we can get a bit more insight on deals like that from Matt Olton,
coming up in just a little bit here.
Running through the rest of these quickly there, the average
deal value and median seller revenue are going to be a little skewed by the
surplus of megadeals and the range of deals that we have. Forty-two VC-backed exits, and that is not
even including some of the VC-backed acquisitions. VC is certainly feeling more comfortable
putting those portfolios back on the market, they were non-existent 12 months
ago.
Small- to mid-size deals still dominate the market, as
indicated by that 78% of undisclosed deals.
These deals are undisclosed because they don't have to report the
details to the FCC. Last couple of lines,
all cash deals are not as prevalent as they were in, say, 2007, but we are
seeing a good mix of cash deals out there still, and the percentage of public
buyers out there is certainly going up.
The big boys have been very active lately.
We move on to Corum's six broad markets, and remember these
markets are further broken down into 26 subsectors. For example, the subsectors in Horizontal
Applications are things like business intelligence, content management, EMP,
CRM, and so on. If you are looking for
more information about your specific subsector, you can visit our website,
shoot us an email, you can even give us a call and we'd be happy to chat with
you about what is happening in and around your space, be it a software company,
an IT company or an internet company.
As we run through these public valuations, you'll see a
see-saw trend. These valuations are
based on public companies and as we've already seen the public space was not as
strong this month. Horizontal market
valuation tapered off a little bit, both in sales and EBITDA multiples, but
we're still in the category of what I would call “normal”.
Take a look at the deal spotlight on the right side of your
screen. It was difficult choosing this
month, because there were so many good deals.
There was ABB's acquisition of Ventyx, that was a billion dollar deal.
On the smaller side, IHS picked up Quantitative Micro, a business intelligence
vendor in a $40 million deal. There was
the Deltek and Maconomy deal, that was a great deal.
I've chosen the CubeTree deal, their acquirer was
SuccessFactors. SuccessFactors has been
a very hot little public company and they're not so little any more. The market is very pleased with their
performance. If you picked up any of
their stock during the down turn, it was at about $4 or $5, I believe, at its
low point. I think it has quintupled
since then, running around $22 today.
I'm not as familiar with CubeTree, I've certainly seem them
grabbing a lot of headlines in the collaborative publishing space. They have a platform that allows them
internal collaborative wikis as well as external blog publishing that I think
should and could integrate very well with SuccessFactors. I'm not going to offer too much in the way of
opinion regarding the structure of this deal, but I want to read to you the 8K
SEC listing here. It is very
interesting. Just as a side note, there
was no advisor on this deal. “Total
consideration of $50 million, which includes an initial payment of $20 million
in stock, plus an additional payment of up to $30 in cash, three years after
closing, is required to bring the total consideration up to $50 million. Acquirer will not make contingent cash
payment if the value of the stock exceeds $50 million at any point during the
three-year period and to the extent that the holders have disposed or hedged
their holdings.”
To me, that means that all CubeTree is getting up front is
stock. The idea is that the balance will
be paid out over the next few years, but that doesn't mean if the stock value
drops to $10 million that they will be happy to pay $40 million out. So what I further understand is that if the
stock price is to exceed the proposed $50 million at any time, there would be
no cash. Meanwhile, CubeTree is further
incentivized not to sell or hedge any of their $20 million in stock over the
next three years, or that cancels the deal, too.
This is a tricky one.
This is a tricky situation. I
absolutely understand the position of both parties on this one and both are
trying to mitigate or spread risk. There
are definitely consequences if things don't go as planned over the next few
years. There are some risks here.
In Vertical Applications, there is another little dip here
as well, in the enterprise values to sales multiples, but here we see the
vertical enterprise value to EBITDA multiples moving up a full point. My guess
is that given the pretty extreme run-up we've experienced over the past months,
we're going to get a little bit of a calibration, a bit of pull back, but I
don't think it will have a huge impact or detrimental effect on our strong
public players.
For our spotlight, the deal is an interesting one for
Corum. We have a long and successful
history with vertical transactions and some of our most prominent deals have
been in the mining and energy market. I
don't know if Mark mentioned it earlier, but he also did a deal just last year
with Hitachi and Wenco. That was in the
mining space and a couple of years ago we had the Surpac Gemcom deal and then
Jeff's recent deal with Petrospec.
For this spotlight, Matrikon has been a strong mid-market
brand. It has not only been an
interested party, but a bidder on some Corum transactions. They're based out of Ontario, they are
publicly traded on the Toronto exchange and they will be a very solid addition
to Honeywell's mining and energy sectors.
Plant scheduling, monitoring, other enterprise solutions, the deal was
for about $140 million, coming off revenues of nearly $80 million last
year.
Generally I'm groaning when we get to the Consumer
Application Market analysis. It was
certainly hit worst by the economic downturn in 2008-2009. It has also certainly been the slowest to
recover of our six broad markets. In fact, I've yet to use the word recovered
when talking about this space. So the
enterprise values too a bit of a dip and there is some...I don't want to use
the word “trend” just yet, but I think over the past few months, both the
enterprise value to sales and the enterprise value to EBITDA multiples have
both shown progress. I like that word
for this and I truly hope that will continue with these public peers in our
Consumer space.
The private sector has been doing really quite well, so I
just don't know what to make of this slow turnaround.
Our deal spotlight, I had to put this one up there and
primarily the target has a very interesting history. Buy.com, if you go back in time, way back, to
the dot com crash, we all remember how many of these little companies were
going public. Buy.com had their IPO in
2000, but funnily enough they weren't even public for a year when the original
founder, Scott Blum, re-acquired them in 2001.
Needless to say he was able to navigate through a rough patch with them
and they are one of the biggest retail aggregators on the planet. If you do a Google search for a product,
anything, a lawnmower or a generator, have a look at the ads on the right side
of that screen and I guarantee you'll see one saying that Buy.com has found
your desired item at the lowest price.
Meanwhile, we have Rakuten, a very large, very public
Japanese company on the JASDAQ, a Japanese search and social medial
conglomerate. I think this is a home run for them, assuming they have strong
intentions to open some doors in the US consumer market, where Buy.com has
definitely been most established.
They're also going to take some of that retail aggregate approach in
their home market in Japan as well.
With Infrastructure, again, we see the slight calibration to
the numbers here. Enterprise value to sales dropped to 2.21x in trailing
twelve. Enterprise value to EBITDA slides in at 10.5 profits before the good
stuff.
There are so many great deals here this month, I didn't know
where to start. Thoma Bravo private
equity picking up Sonicwall for 3.3x revenue. IBM has huge multiples for Cast
Iron, which is cloud-based application integration, that was a $200 million
deal at 6.7x trailing twelve months revenue for them. Tekelec also acquired Camiant for their
network policy control, that was $130 million deal.
For our deal spotlight, I actually chose another Thoma Bravo
deal. It is one of their portfolio
companies, Vision Solutions, a leader in cloud managed data recovery and backup
for enterprises. They are pulling the trigger on this publicly traded
DoubleTake Software. This could be one of those 2+2 =10 kind of deals, assuming
everything goes according to plan. You
get two of the defined leaders in recovery, they are now consolidating, they
are PE backed, loads of growth capital behind them, Thoma Bravo has a great
name. The deal was for 2.4x trailing
twelve months revenue, that is 14.4x EBITDA.
This could be a really great deal.
I'd love to see where these guys are at in about a year's time.
Moving on to the Internet sector, it's still looking
okay. I'm sounding like a broken record
in telling you that the public numbers slipped but we still saw a lot of deals
in this sector over the past month. I
could talk about Google deals, there were four of them. There was Global IP, I have Invite Media,
Ruba Travel and Simplify. I think there
were another three or four last month, as well.
We are also likely to see a few this month, too.
I picked the deal for the spotlight for myself,
actually. Maybe it is my generation, I'm
not sure how far back this goes, I've always been a big baseball/sports card
collector, a big Ken Griffey, Jr. rookie collector, I'm very proud of
that. He just retired last week, he will
be missed. I also love fast cars. This is a perfect blend of both those passions. When I was young I used to go down to the
Three Point store and pick up the Beckett.
The Beckett would tell me how rich I was going to be with all my
baseball cards. When you are 10 years old and you have just realized with the
Beckett that you have a $500 baseball card collection, that's a big deal.
Despite eBay and Craiglist, all the other online auctions
and retailers, Beckett Media has survived, evolved into their own online
trading and collecting house. They span
across most major sports and they are now making a strong push into the
automotive collector space with the acquisition of Motorpedia. The specifics on this deal were not listed,
but it seems like a real win/win to me.
Last, we have the IT Services market. We did see that little drop again, and that's
the last time I'll say that today. It is
still looking good for the IT service providers and the BPOs. A lot of transactions were in this space,
plenty of integrator deals and plenty of BPO deals. One we have in our deal spotlight is CGI out
of Canada, I believe out of Montreal. It
is a huge beast of a company, a strong acquisition in the US Government space,
they purchased Stanley Services, who's sole focus is on software development
and BPO to the US Government. I think
we'll see a lot of fed deals and municipal deals this year, it seems to be a
strong focus, perhaps now more than ever.
I made this slide last night. It is kind of last minute, but I think it
paints a great picture of our top twelve software tech players. You see the stock prices on a year-to year
basis there in that June 2009 and June 2010 comparison. That really shows you who's climbing the
ladder and turning those numbers. It is
arranged by growth in the green numbers there.
Apple showed absolutely tremendous growth. Moving down the chain from there, we have EMC
next up, over 50% year over year.
Thankfully we have Matt Olton to talk to us a little bit more about
that. On the right side we have the
number of acquisitions they have each done over the past twelve months, ranging
from four to five all the way up to Google with 19 acquisitions in 12
months. I would not be surprised if this
year they are well over that.
With that I am going to turn things over. Thank you for signing in. If any of this information has brought about
further ideas or questions about your company, its market, or more importantly,
its future, please call us or email us here at Corum. With that, I'll hand it over to Nat Burgess
to introduce our guest speaker.
Nat Burgess
Thanks, Dougan. As
always, a fascinating presentation and a couple of the themes there, I think,
are relevant to our next section. We've
seen some volatility in the public markets, but meanwhile we're seeing very
strong acquisition activity with privately held firms. We're seeing some of the
sectors, like the consumer sector, recovery strongly and then perhaps the most
exciting segment, in your presentation, was around digital infrastructure and
cloud computing and how that is driving consolidation and deals. We're actually speaking at an educational
event in New York for the private equity community around investing in digital
infrastructure and cloud and it will be a fascinating program. We have a bunch of leading PE firms on panels
and we will talk about the M&A deals.
For us, that is a huge opportunity.
We see data centers with only 16% virtualized at the moment. That will
go over 50% in the next few years. That
will drive investment in systems management, it will change the way we approach
disaster recovery and storage and secondly, the sheer amount of data that is
being backed up and stored and secured is growing astronomically every
month. So, companies like DoubleTake
that have figured out how to harness virtualization in the storage context, are
doing very well. I don't think we've
seen Thoma Bravo pay 14x EBIDTA for any other deal, ever. That gives you an indication of how strategic
this segment and these companies are.
For that reason, we're really excited to have EMC on the
call today, because EMC is right at the heart of those trends. They birthed VMware basically, which is the
leader in the virtual market. They took
a strong position in the infrastructure around security with RSA, which secures
a lot of the virtual environments, storage environments, etc. Then, they have a leading position in storage
as well. Historically they have been
very aggressive on M&A. Our speaker
today, Matt Olton, will introduce himself shortly, but since its up here right
now for everyone to see, we'll admit right up front that he's a lawyer, but
he's recovering. That seems to be a
common theme. Dave Drummond, who was the
first M&A guy at Google, was also a lawyer and I think he is doing pretty
well now. This is a common theme here,
to have someone with a legal background.
With Matt he was at Skadden, Arps, which is one of the blue chip law
firms in New York, so very strong on execution of structure, but also an
ability to think more broadly, strategically, to drive business strategy.
With that, Matt, I'd like to hand it over to you to
introduce yourself and talk a little bit about your role at EMC as well as
their acquisition strategy.
Matt Olton
Thank you for those kind words. If EMC is not a household name for you like
some of the other companies that were on that last slide, just by means of
quick introduction, we are a Fortune 500 company. We are really the world
leader developer and provider of information infrastructure technology,
services, solutions, etc. We enable
people and companies to transform the way they create value from their
information.
Our mission today is to lead customers on a journey to what
we call the private cloud. We see this
as a dramatically more efficient and effective model for delivering ideas and
service, making IT more easy and user-friendly to install, use and manage.
EMC is a company that has demonstrated an ability to
maintain consistently strong, organic growth, at the same time as it has
dramatically expanded the breadth and depth of its offering through
M&A. This is really combining our
core strength with what we think are best in class technologies and
businesses.
Just to give some sense of the level of activity over time,
if you like statistics, over the last ten years or so, we have closed in excess
of 50 acquisitions and spending well in excess of $12 billion. Over the last six years, our M&A
investment has been in the neighborhood of $11 billion, our organic R&D
investment has been in the neighborhood of $9 billion.
M&A has also transformed EMC. It is hard to argue that EMC was more than a
provider of enterprice storage solutions and today we offer, thanks to this
series of acquisitions, we have a very robust portfolio of security, content
management, resource management, data protection and archiving, duplication,
and of course, as you mentioned, virtualization technologies.
Since the focus here, I guess, is on M&A, I think it
might make sense for me to chat briefly about what we think are some of the
keys to our success in the M&A practice are, things that we consider and
things that we value, and then I'd be happy to take any questions if that makes
sense.
In terms of, I'll call them keys to success, to us these are
pretty fundamental points and I'm sure they'll sound that way to you, but they
really are the basis to what we think is a successful practice. We start without fail, with a strategy. We have to understand why somebody had
decided to champion a transaction. That
is not to say that the strategy that we present or bring forward has to be the
best strategy. First and foremost, I
think, we need a logical vision. Once
that is in place, we do think that we need to have the best execution against
it, without restraint. In some respects
we go back to the adage that success is a small percent of strategy and really
80 to 90% execution.
The next tenet on which we have built our practice is
valuation discipline. I trust that it is
clear, but to us, in a choppy market like we have today, we have found that
patience really pays. We have embarked
on a course of fewer before significant transactions recently and maintaining
valuation discipline has contributed dramatically to the success rate that we
have had with growing the businesses that we have combined with.
Next is execution discipline. The stakes today for our M&A practice or
for the practices of many of the attendees here, are much higher than they used
to be. There is just little room for
error and everyone wants results now.
The execution really must be rigorous and display a sense of urgency and
that has been a dramatic change, at least during my tenure at EMC, from the way
that we used to be. Now, everyone is
looking for results immediately.
Finally, I think perhaps the most important key to success
in any acquisition practice is an infrastructure that mandates
accountability. This helps insure a
relentless focus on performance and I think it does take an infrastructure to
have it in place. Without
accountability, I think you're going to have behavior that isn't consistently
in the best interest of the company.
So quickly, with respect to some of the things that we
consider in our practice, while we are very strategy focused, we do try to be
agile enough to react to opportunities.
I think that in some respects, if you can't do that, you're really not
going to be able to grow quickly. We've
also been very focused on simply making strategic investments, not necessarily
M&A but finding opportunities to access or influence development or
companies or businesses without ownership.
We've also been working quite hard on developing our partner network
internationally.
We've been considering more recently a lot more creative
arrangements, financing, partnerships from the very simple to the very complex,
we look at consolidation plays and we've really shied away recently from the
classic tuck-in, which we think in many ways is sort of an oxymoron. It is very hard for us to tuck in
technologies that are going to work and provide anticipated benefits on the
scale that we need them to.
Then, I think lastly with respect to things that we value in
targets that we look at or companies that we evaluate, it is important to us to
see operational discipline. We want to
see an effective product, an established revenue base, an appropriate market
view, maturity of processes, profitability.
A track record of success against plan.
These are some of the core cultural foundations on which EMC was built
and we've found that the most successful companies that we have paired with
have shared all of those. The classic
example is Data Domain. I don't think
you could find a better fit for EMC.
That company was entirely focused on performance and execution, in many
ways just like we like to think EMC is.
So in many ways it was a wonderful transaction for us.
I guess lastly is, as I've mentioned, we really value a
culture of accountability.
Cross-functional respect between, say customer and enginering
organizations, a customer first focus, integrity, a dedication to performance,
because at the end of the day that's really what matters. As I think I've said, execution, execution,
execution. Those are the things that we
value most.
Nat Burgess
Thanks Matt, those are great comments and that is a great
baseline for us to dig a little bit deeper into the topic. I have to say that our experience with EMC
reflects exactly the tenets that Matt is talking about. We've known there were various members of the
corporate development team and management over the years and we've been very
impressed with the valuation discipline, which is sometimes painful when you're
on the other side of the table, but just the vigor and the approach to
M&A.
If you don't mind, I'd like to ask just a couple of
questions, specifically around valuation and I think we can all look at your
VMware acquisition as a huge success.
You came in with a relatively low acquisition cost, I don't remember
what it was exactly, but in the tens or maybe hundreds of millions and subsequently
took VMware public in the billions, so that was clearly a huge win, but you've
also lately had some deals that were much more richly valued and I'm thinking
specifically of the Data Domain and Archer transactions. Obviously, every small company out there
wants to be like those, we all like those valuations. Why don't you tell us how you got to those
relatively aggressive valutions and what drives that kind of deal?
Matt Olton
Valuation in transactions is very much situation
dependent. VMware at the time, I laugh
about in retrospect, because EMC paid some heat for paying just about 10x
trailing revenues at the time, our acquisition price was about $635
million. Coming out of 2003, I think
VMware had something in the neighborhood of $60 million in revenue. I think it is hard to find, in the last 20 or
30 years, a transaction that has had a better payout. VMware's market cap today is just shy of $28
billion. The company that had $60
million in revenue in 2003 or 2004 will have well in excess of $2 billion this
year.
On the one hand, a high price? In that market at that time it may have been,
but the vision has clearly paid off.
In respect to more recent transactions, it's easy to pick
and choose. There were some dynamics in
the Data Domain transaction that forced us, admittedly, to pay a price that
perhaps we didn't want to pay, but it is hard to argue with the success that we
have had with that one. We took a very
hot company with (xxx 46:29) Technology, a wonderful team that was very focused
on performing and we've figured out a way to accelerate our growth on all
fronts, to levels that are terrific. It
has become the new standard, internally here, for our CEO to say, find me
another Data Domain, because it is one of the best, because it is one of the
best deals we've had.
In those situations, I think anybody will admit that it is
more acceptable to pay what you might term a strategic premium.
Nat Burgess
That makes a lt of sense, and obviously success speaks for
itself. If you pay a rich price, but you
buy an asset that is driving tremendous value, then it is hard to argue it was
a mistake.
Matt we're getting some really good questions now into the
queue, so while we're lining those up and prioritizing, I'd like to briefly
hand the presentation back over to Mark Reed, who is going to talk about some
of our upcoming events and we will be back to the Q&A shortly.
Mark Reed
Thank you, Nat, and Matt.
We do have a number of questions here we want to get to, but first some
housekeeping. I'd like to single out two
conference series as well as two specific events. First the conference series: Corum holds two
events, one called a merge briefing and one called Selling Up Selling Out, to
which we invite all of our audience members today and we offer you
complimentary passes. The merge briefing
is a focused 90 minutes on what is going on in the M&A market and some high
level comments about the actual M&A process and how to affect a successful
transaction. The Selling Up Selling Out
event is longer, half a day, and it is a very deep dive, very tactical, into
how to prepare for and successfully execute a merger or acquisition. It is focused specifically on software and
technology companies, but it is a fully blown road map, and again, we will
offer free passes to those, which we hold around the world, and if you go to
our registration page and enter the promo code juneflash, you will get that
complimentary registration to either event.
There are two specific events I want to bring to your
attention in July. One, July 17, is our
next M&A monthly report. That will
go through the 26 sectors that Dougan mentioned. We will also have a guest speaker from
Microsoft, and we'll see if they have any thoughts on how to put that $1.5
billion to work. In addition, we are
guest speakers at the SaaS Institute event in Dallas on July 17 and we would
love to have any of you attend that. It
is not our conference but we are keynoting that event, and we'd love to have
you join us there.
So, with that, lets make a transition to the Q&A. I'll hand it back over to Nat.
Nat Burgess
Matt, we have questions queuing up here, and a lot of them
deal with M&A strategy going forward, but there's one I'd like to address
up front because I think it is very interesting. One of our participants is asking for
clarification on private cloud. You
referenced it as an important area in your introduction and we are seeing press
now seeing that adoption of private cloud is faster that public cloud. Can you give us some quick context on that,
what do you mean by private cloud and how are you thinking about it?
Matt Olton
Organizations are trying to leverage centrally located,
cloud-based information within the organization, in a sense a private cloud,
versus a public one like the general internet.
In a sense what EMC has done, this was announced last November/December,
is create an alliance with Cisco and VMware to provide architecture-led, best
of breed solutions that are really pre-configured, pre-packaged, pre-integrated
IT building blocks with security, data protection, data management capabilities
that really provide an ability for organizations to seamlessly leverage private
cloud deployments.
Nat Burgess
I wanted to bring that up now because I think it is relevant
to the next question. I have one more
here before I hand it over to Mark for the remaining Q&A. The next questions is really around your road
map for the second half of 2010, moving into 2011. You gave us some interesting statistics
before about how you spent $12 billion on M&A but only $9 billion on
organic growth. You talked about the
importance of the private cloud and your alliance with Cisco and VMware. Can you give us some thoughts on what kind of
growth mechanisms, what kind of acquisitions we should be looking for from EMC
moving forward.
Matt Olton
Sure. I don't know if you really want my first answer, but I
think one of the most important things we will be focused on for the second
half of 2010 and going into 2011 is organic growth. EMC and VMware, both individually and
together, have IT growth rates that very few other companies and extremely few
companies with any critical mass are experiencing today. So one of the most improtant things that I'm
trying to be sensitive to is not to interrupt that organic growth. The worst thing would be to pursue a
transaction that is poorly thought out and that requires an enormous amount of
attention to the detriment of what we have going on organically.
That said, we've very focused, as we always are, on creative
approaches to strategic gaps that we have or initiatives that we want to
pursue. So we are constantly figuring
out how else we can achieve our objectives.
M&A will continue to be a part of that. I think that if you look at the best
acquisitions that we have had, recently they have been ones close to our core
and ones that have enabled us really to leverage the best of both
companies. In a sense we're looking for
transactions that enable us to make 1+1=>2.
You look at Data Domain and you get a 1+1=7. We also want businesses with critical
mass.
I think I mentioned earlier and maybe I didn't explain the
term, tuck-in transactions, which is an acquisition of a small point solution,
a very small business, perhaps focused on a single product or solving a single
problem. These end up being very
difficult transactions for large enterprise IT providers to deal with. In many ways, the distraction and expense is
disproportionate to any benefit you might achieve. The simple fact is that it is much harder to
move the needle with a company of EMC's size or the size of many others.
So I think you will see companies with critical mass,
companies close to our core competencies, and also I think you will see us
trying to expand our international reach, both through traditional and more
creative M&A.
Mark Reed
Thank you, Matt.
Here's another question that addresses the accountability concept that
you lobbed out there. The question is
for you to elaborate a bit on that accountability and, more specifically, are
acquisition transactions evaluated post closing against the original business
case and what sort of time period is relevant for that?
Matt Olton
Yes, so evaluating against the business case that whatever
the approving body is, management or our M&A committee or our board,
depending on the size of the transaction, evaluating a transaction against that
case is exactly how you determine accountability. At a very simple level, if you achieve your
business case, you have achieved your objectives with the transaction and if
you have not, if you are the business foster for an acquisition, you really
need to be held accountable. There are
many ways to do that, but people react in our world to compensatory incentives. We track our acquisitions against our plans
of record, our business plans, for a period of three years. It is a quarterly review and at times it is
an uncomfortable meeting and at times it is a very easy meeting, but it is all
about the performance.
Nat Burgess
Thank you, I appreciate that. There are two other questions that are
related to what you just said and also maybe to your prior tuck-in questions
and I'll ask them together. First is the
observation that EMC is a big company and the question is, is there a size
threshold on your M&A transactions?
We've heard from Google, also a large company, that they favor small
transactions. The second one is about
how you actually do deals, and this ties into the tuck-in question. Do you make
deals on a centralized basis or do you push the M&A evals out to your
companies?
Matt Olton
Minimum size? No, there is no minimum size. My comments about our increasing focus on
transactions with critical mass and ill-defined terms are general trending
questions. The minute you say something
like that you identify an exception to the rule. We are trying to focus on bigger
opportunities, but inevitably there is a special technology, business or
rationale that comes up that might enable us to pursue a smaller transaction. We try to look at everything, a success factor
for us has been size and infrastructure.
With respect to your question about how our transactions are
managed, they are centrally managed through our corporate development
group. We do have very good working
relationships and lots of open interactions with what we refer to as business
development groups that are out in our various business units, like our RSA
security business or content management group and so on. With respect to traditional M&A, it is
centrally managed through our corporate development team.
Nat Burgess
Thank you. Here is
another question that came in through a different queue, but I still would like
to ask you. It ties into some of what
Dougan was talking about, about growth overseas. The question is, what kind of business growth
strategy or M&A strategy do you have for Asia, in particular China?
Matt Olton
At a very high level, like so many other companies, we see
China as a geography with enormous potential.
So, we have been spending an inordinate amount of time focused on how to
improve and increase our presence there.
Nat Burgess
Appreciate that. I
see that we are at the top of the hour and so we are out of time. Thanks, Matt, it was really interesting to
hear everything you had to say, and thank you also to our other speakers and to
our audience for joining us today. We
look forward to seeing you in person at an upcoming Corum event.