Tech M&A Monthly: Seller’s Panel
Timothy Goddard
Good morning, afternoon or evening wherever you happen to be in the world. My name is Timothy Goddard, EVP of Marketing here at Corum. Very happy to bring you part three of our annual report. We started with the buyers in January then on to the financial buyers of the private equity firms in February. And here we are in March. Time for our seller's panel. Very excited. But we've got a few things to get to on that.
Let's go through our agenda. Start off with a report from the Growth & Exit Strategies conference held in San Francisco just a couple weeks ago. We're gonna look at the market fundamentals, a special report from our founder and CEO. And we'll dive into our research report for March 2018 and then on to the seller's panel. So, with this much to get through, let's jump right in. I'll turn things over to Marc O'Brien based out of Silicon Valley, who will speak to an event we held in San Francisco not too long ago. Marc.
Marc O’Brien
Thanks, Tim. The WFS was really a pleasure for me, both participating as a panel moderator and also interacting with a flock of CEOs who had flown in from around the country. It was particularly noticeable in the interactions between the CEOs throughout the day. A lot of value was driven from the interacting with CEOs evaluating growth and exit strategies.
The view from the 38th floor showing a panoramic view of the San Francisco Bay was stunning, but it was not enough to keep the audience from focusing on the great speakers. The WFS team put together a terrific agenda and schedule. From Bruce's opening to the various panels (they included private equity, corporate buyers, and venture capital) to the expert sessions from Morgan Stanley, Salesforce, and Venable. It was a high energy day, and the CEO feedback was clear that it added great value. I heard more than once that it was a must-attend event if you were a CEO evaluating a potential exit.
Timothy Goddard
Thank you, Marc. We're very proud to be the platinum sponsor of the WFS which works to educate technology leaders globally. Looking forward to our next event with them in London in June and then in New York in the fall. It'll be great events if you can make those. I highly encourage it.
Now, the question that has been on a lot of folks' minds is just about the economy. Lots of things have been in the headlines. Should we be worried? I'm gonna turn things over to Corum CEO Bruce Milne with some commentary on economic conditions and the sometimes chaotic news that is affecting tech M&A. Bruce?
Bruce Milne
Thanks, Tim. There's been a lot said about the economy. People worry that inflation, interest rates, or a trade war will cripple our growth while stock market gyrations and saber rattling don't help calm nerves.
Our advice? Sit tight. Things are fine. I just did M&A conferences and negotiations in 10 different cities, half each in Europe and the U.S. It doesn't matter where you go. Airports are jammed. Planes are full. Ditto hotels. There are several economic indicators our researchers look at. Among them are raw materials including oil, the energy sector, construction, (Are people, and businesses, building?) and transportation, which is usually a precursor of moves in the stock market as well as M&A, which follows market cycles. You can look at the indices or you can just look around you. Pay attention to the skyline and the headlines.
Here's a few headlines. The first is regarding oil. How things have changed when everyone was shuttering the shale fields. Oil is rebounding. The U.S. is more energy independent than ever.
The second headline is about construction. Building stocks are a buy. Cranes are everywhere. Homes and condos are going up in price. Lots of new commercial construction, too.
Lastly, this headline about 76% monthly increase in trailer sales is stunning. Both industry and consumers are on the move. There's real confidence. With a massive repatriation of trillions in cash, most into tech companies, that confidence will translate into acquisitions. Indeed, we're seeing our clients in every single market sector getting offers. And the Chinese are back.
Look, there's lots to worry about, but for now, it's a thumbs up. Caution, though. Don't wait until things start to turn to decide to sell. We're nine years into a seven-year cycle, and when conditions change, values plummet, deals are far more structured, and there are fewer buyers. Tim, back to you.
Timothy Goddard
Thank you, Bruce. Now, to dig in on some of the more recent activity along those lines. I'm very happy to turn things over to our research team led by Amber Stoner, Director of Research, backed up by Yasmin Khodamoradi and Becky Hill. Over to you, Amber.
Research Report
Amber Stoner
Thanks, Tim. We begin with the public markets where most indices close down after 10 months up in a row and long overdue pullback that included high volatility with the clients over 10% at mid-month before rebounding into March a series of higher interest rates abated. Technology stocks, which have long passed the growth, continue to outpace the rest of the market.
Looking at our Corum index of tech M&A, deal volume matched last year's as buyers continued to grapple with a lack of companies available for purchase on their preferred terms, though megadeals managed a small increase year-over-year. The demand for tuck-ins to shore up those megadeals will add to the imbalance that underpins this great supply-limited seller's market. Among those megadeals, London-based financial trading and compliance veteran Fidessa was acquired for $2B at nearly 4x revenue by Swiss banking software company Temenos as it seeks closer relationships with top-tier banks. We'll discuss the vertical sector in more detail in a minute but first Becky, how has the IT services sector been performing?
Becky Hill
IT services valuations continued their stable performance last month while M&A saw demand for niche applications including those in the government sector. For example, General Dynamics outbid two other buyers by spending $6.8B at nearly 2x revenue for security and analytics contractor CSRA to increase scale and compete with Leidos for more lucrative government agreements.
Competition in the government services market was also evidenced by DevOps and engineering firm ECS Federal which was acquired for $775M by staffing firm On Assignment to accelerate its entrance into the federal space.
The open source plus services space is proving seemingly attractive to buyers, Solinea which utilizes open stock to enable hybrid cloud adoption strategies for enterprises was snapped up by cloud integrator Unitas Global to bolster its inventories and digital transformation in cloud migration. In Japan, Creation Line which develops open source software for connected vehicles was brought by auto parts maker Denso to gain more R&D expertise and benefit from access to open source communities.
We also tracked M&A activity in the HR technology services base where Polaris Global Mobility which builds software for managing ex-patriot employees in over 100 countries was acquired by England startup Move Guides to add tax and payroll services to its suite of solutions for managing the global workforce.
Finally, Thomas International, a British specialist in psychometric employee aptitude assessments, was picked up by Pellman Capital Partners for its position in the small and midsize corporate segments. What happened in vertical last month, Yasmin?
Yasmin Khodamoradi
Sales multiples in a vertical sector dropped back to November levels while EBITDA remained stable as solutions in health care, transportation, and fintech shaped the M&A landscape last month. In healthcare, Swiss pharmaceutical giant Roche shelled out $2B for Alphabet-backed cancer analytics startup Flatiron to utilize its data from millions of patient records to gain an edge in oncology drug development.
Elsewhere in the cancer care market, Montreal-based clinical decision support firm Evinance Innovation was picked up by Varian Medical System to support its oncology care management platform.
Portland-based, employee health management startup Provata was acquired by Merck’s health improvement company StayWell.
And revenue cycle management company BMS Practice Solutions was picked up by WebPT to create an end-to-end clinical care workforce solution.
We also saw a lot of activity in the membership management space with a series of gym management deals last month. Buyers ranged from Private Equity backed Daxko and ClubEssential to Constellation’s Jonas Software.
In automative, fleet management firm Stratim was picked up by Used-car auction company KAR Auctions to help it tap into the on-demand car and ridesharing market.
And Ford attempted to realign its Mobility group by grabbing public transportation monitoring service TransLoc for its microtransit services, and transportation mobility firm Autonomic for its monetization capabilities.
Finally, the financial services space saw two more deals out of London as regulatory risk reporting firm Lombard Risk Management was acquired for $71M by Dutch banking software maker Vermeg to expand its compliance solutions.
And Fraedom, which provides transaction and spend management SaaS for banks was purchased for nearly $200M by Visa to expand its offerings for B2B payments.
Becky Hill
Sales valuations in the consumer sector held back slightly after an upward trend while EBITDA metrics continued a steady climb with M&A taking place globally.
In India, esports events creator NODWIN Gaming was acquired by mobile games company Nazara Technology to leverage its investments in the virtual interactive sports space.
And Germany-based, blockchain-powered esports platform-as-a-service developer Valiance was picked up by Finnish mobile game publisher Kuuhubb to add blockchain development capabilities and monetization opportunities to its platform.
In the gambling space, Maltese betting company, World of Sportsbetting, was bought by Sweden's online casino LeoVegas Group for $3M to use its operating licenses for expansion into the German online gambling market.
Moving down under, Australian corporate bookmaker CrownBet was snapped up for almost $118M by Toronto-based Stars Group, owner of PokerStars, to enter the regulated Australian sportsbook market.
As the second credit card buyer this month, American Express during the AI race by purchasing the personal travel assistant chatbot Mezi to enhance its mobile travel servicing experience. This acquisition follows AmEx Ventures arm’s investment in Mezi back in 2015.
In the ridesharing space, Splitting Fares, a carpooling app for employees, was picked up by industrial titan Bosch as its first foray into the ridesharing territory.
And Korea's carsharing startup LUXI was pocketed for over $23M by web giant Kakao to complement its taxi-hailing service.
Amber Stoner
And just this week, in the third tech acquisition by a major credit card company of the year, MasterCard picked up South Africa-based mobile payments software provider, Oltio.
Back to you, Tim.
Timothy Goddard
Thanks, Amber. There's a lot of activity including just announced today that mega, megadeal of Cigna acquiring Express Scripts or something like $67B. We'll go into more detail on that as well as much more next month in our quarterly update where we'll cover deals and valuations for all six sectors and the 30 subsectors.
But in the meantime, I'm very excited to get to the next portion of the webcast today: the seller’s panel. We're going to be hearing from four people across three companies who just sold their firms in the last few months. We're going to start with Juha Renfors. He's the CEO of Visual Components based in Finland. He was kind enough to record a brief message for us, so I'm going to turn things over to him now.
Seller’s Panel
Juha Renfors
Visual Components is a Finnish company that specializes in solutions for 3D simulation in factory planning. Our family of software can be used for both planning and optimizing factory and production line layouts. I co-founded the company in 1999, and we received funding from regional investors. From the beginning, our goal was to create an accurate, virtual version of the production line as close to real as possible based on Microsoft platform. And we succeeded, became installations in some of the most demanding factory environments in the world including Foxconn, Samsung, and Caterpillar. After our last major release in 2014, it became clear that we had a technology in critical segments of the factory of the future, the creating of national potential.
We were faced with the challenge of seeking more investment upon finding a global partner to help our commercial opportunity. At the same time, we were getting M&A and investment overtures. To make sure that we chose the right partner with terms that were satisfactory to our board and investors as well as our key stuff, we looked at a number of investment banks. We had attended some Corum events. They had experience in our market, had sold the number of Nordic and related technology companies, and offered a detailed global search process that we appreciated as we were a company that specializes in optimizing processes.
Following a visit to the headquarters near Seattle by our chairman, we agreed to engage with an international team from Corum led by the managing director in Europe, Jon Scott. After an extensive preparation process, we went to market and received almost immediate interest from a number of firms in the U.S., Europe, and Asia; both strategic as well as financial buyers. We eventually received a number of offers and after an extended period of due diligence by us on potential buyers we chose KUKA, a German firm owned by a Chinese manufacturing company. We had actually been working with KUKA for years, the simulation ecosystem sees Visual Components technology as one of the key elements for technology innovation in AI, virtual, and augmented reality. KUKA is a strong and reliable partner for us. I'm working on the first stages of integration and I see an exciting future together for the international crowd.
Timothy Goddard
Thanks again to Juha, and congratulations again to you and the entire Visual Components team. I'd now like to move to a more Q&A portion of our panel where I'll be speaking with a number of sellers. Beth and Hal Guarnieri are the founders of Infian sold to QMS, and Wayne Steagall is the founder of Lending Manager sold to Loyalty Express. Welcome to all of you. Hal, why don't you start things off by telling us a little bit about Infian and how it got started?
Hal Guarnieri
Way back in 1979, we were working for Fortune 500 companies and realized that we wanted to be in our own business, so we did a market survey and found out that the medical market was the least automated and so we got into it. Having done the survey, frankly, talked to a next-door neighbor who was an oral surgeon and we wrote the application based on his needs for oral surgery. And that was the seed software where we grew from.
And in 1985 and '86, one of our clients was a urologist and said he wanted to do medical records. And we said, “Well, we can do that.” And so we took the chance when we could write, we guaranteed it. Took the chance we could write the software to do it, we did it, and so that's how we got to where we are today into clinical and renal billing.
Timothy Goddard
How about Lending Manager? Tell us a bit more about your company.
Wayne Steagall
Lending Manager started in, basically, January of 2012. We basically had one customer at that time, we built the software kind of custom within a few different customers which are all basically mortgage companies. So we basically took the company in January 2012, went to market – you know after that first customer – and then over the next five and a half years and went from 1 to 100 customers and we still had just four people within the company itself from when we started with the first customer all the way up until we sold the company.
Timothy Goddard
So what then brought you to the point where you wanted to sell the company, Beth?
Beth Guarnieri
A number of things positioned us to want to sell. Number one is we were in a huge market. Even though we had a niche, we were in the dialysis market and also revenue cycle management electronic health records and we excelled within our marketplace. And in order to address the evolving healthcare world, an infusion of capital is required. And so we saw the capital market as a way to monetize our investment and continue our family business.
We are a family business. All of our children, at one time or another, worked in the business our sons currently are running the business along with QMS. So it was a way to infuse capital, extend our reach, and combine our resources with the other leader in our dialysis billing so that we have a leadership venue into the dialysis medical informatics world and further into the physician world. That's why we did it. Our number one is to extend our reach, number two is to monetize, and number three to realize the vision that we had in 1981.
Timothy Goddard
That's great. Wayne, how about you, what is a point where you were willing to sell?
Wayne Steagall
Basically, there was a lot of money flowing into our industry, like hundreds of millions of dollars into kind of a mortgage point-of-sale area, basically, people doing digital mortgages, if you will, where they can do everything online. So at that point, we knew we needed the resources of a bigger company and so with us, we were basically rolled up underneath another like a mortgage software company and then both of us were backed by private equity. So more resources – you know sales, HR, full on marketing, things like that – to enhance the product and get in front of more and more people than you could just from the resources that we had at the time.
Timothy Goddard
So what can you tell us about how the deal came about?
Wayne Steagall
We had known the private equity company that was behind the deal for about a year and a half before we actually closed and then kind of went market, had a few different bids, but that first one just kind of felt right. So from there we were actually able to compare to others, sometimes they'll get better deal sometimes than the one you have, you can kind of improve upon it if you did, by going to market, and then after that, you do the usual 90 days of due diligence and we closed the deal in December.
Timothy Goddard
Fantastic. Congratulations. Back to you, Beth. What were the surprises in the process of selling your company?
Beth Guarnieri
One of the things that surprised me was the interrelationships of all the participants, that it was closer than I had ever anticipated. Not to praise Corum too widely, I would have to say that they were the glue that held it together. This was a first time for us and so their seasoning helped us to see what we were doing with better clarity. What surprised me was also the close collaboration when you really roll up your sleeves and you work in the trenches together that's really where the rubber meets the road. The third thing that surprised me is the voluminous amount of facts that we needed to marshal. While we feel very strongly about our vision as a company and our mission, showing it to someone else outside the company as a financial transaction is really based on the facts only. It's a lot of harder work than I anticipated, and the amount of paper that resulted from the hard work was astounding.
Timothy Goddard
Yeah, yeah. Wayne, how about you? Any surprises?
Wayne Steagall
I mean just kind of getting to learn the thought process. So you know private equity firms, strategic buyers, everything that's involved with due diligence – you know, going through that process – but also the sales process itself. People are used to pitching their products, so that when you go out sell your company you have to kind of learn a somewhat new process to sell your company, marketing the whole company which includes the people and also property, things like that, as opposed to selling features and services on mobile sales cycle that you go through. So just kind of learning the sales process itself. And then once you select the acquirer, just kind of learning everything that goes into due diligence, the attorneys, and accountants.
Timothy Goddard
Was there anything that you felt particularly well-prepared for?
Wayne Steagall
So one of the things that we had done since we really first started the company is that we associate so that it could be sold. So you know got the trademarks in order, copyrights in order, all of our customer licenses, which are standard for a software company. So that was one of those nice things that we had been extremely organized about throughout the process. And then just even other things, we made it onto the Inc 5000 and as part of that, we had that whole compiled financial going all the way back to the beginning. That's the main thing; it’s just having your financials and legal items as organized as you can, so when you go to market because otherwise it's just going to kind of bog down the due diligence process which you're already going to spend a lot of time with the attorneys, you don't want to spend too much time with the accountants, that comes up as well.
Timothy Goddard
How about on the Infian side? Anything you guys felt particularly well prepared for?
Hal Guarnieri
I think the biggest thing we were prepared for is one of the things as Beth mentioned that Corum helped us to do, that was to focus. When you enter something for 37 years, you can lose sight of how to focus it to make it meaningful. So the things we felt particularly well prepared for were what to focus on and what the particular prospect would likely be looking for. And I think Corum prepared us quite well for providing focus. That was where the strongest preparation came through of Dan and other folks in Corum.
Timothy Goddard
Thanks. You guys did quite a bit of work yourselves. Lastly, what advice do you have for the CEOs listening right now who are considering M&A?
Hal Guarnieri
I think the advice I'd give probably to CEOs that are considering selling their company is that just when you think you have everything figured out, prepared, lined up, put your cover all in a row, expect something to happen at the 11th hour in the negotiations. It's my experience and Beth's experience that that usually is what happens, and it's usually a curveball, and it's usually under a tight timeframe. So the better prepared you are or if you have anything that you think might be a concern, it's better to talk it through than say, “Well, they'll never think that” because they will think it. So if you have any skeletons in the closet you don't have to expose them, but you need to know if you did find the skeleton how to avoid the dog bones.
Beth Guarnieri
Just from my standpoint, for us at least, we wanted to know what our goal was in advance of coming to market so that we could prepare the company for what we wanted to happen; that's the first thing. Number two is considering the type of company you want to associate with. We were very concerned about our staff and how the company we're associated with would gel with them, and that was a consideration.
And for a dose of reality, study all of the sample due diligences that you can lay your hands on because it's extensive. What we did is we looked at the due diligence and we divided and conquered. We siphoned it off months in advance so we knew how we were going to address it. So when the questions did come up, we could hit the ground barely running, although we still had a lot of work to do.
Timothy Goddard
Such great advice. And Wayne how about you, what advice do you have for the CEOs listening?
Wayne Steagall
It must be a very, very strong market out there especially right now, after we did our deal we have other private equity firms including the one that acquired us going out there and looking at other companies and it's just – we took down the market before getting offers out of the blue, I mean. It's just – there's a lot of money going around. That's one of the things we've seen is probably five years ago, there was maybe a lot more strategic buyers at least in our industry, whereas now private equity firms are taking over a lot of that which kind of gives you more opportunities because there's so many more private equity firms where strategic buyers usually will do one deal a year, maybe two kind of thing where there's a lot of private equity parts to deal with. So yeah, I would just say it's a very strong market right now for M&A, for any tech CEOs that are looking to sell.
Timothy Goddard
Well, thanks to all of our panel members for joining us briefly. There's one question I want to toss to Rob Schram. He's one of our deal makers here; he led the Lending Manager deal. Wayne just touched on it; Bruce spoke a bit about it earlier: the level of activity that we're seeing here at Corum. Can you just briefly speak to how it's impacting you?
Rob Schram
Sure. And I'll just segue on what Wayne left off on there. There are unprecedented amounts of cash in the market now, that's a condition that it's been in existence for a number of years and it's persisting. There is some nervousness I think on the part of the industrial base, both buyers and sellers, that this – as Bruce mentioned – ninth year of a seven-year-cycle won't last forever. And as you can see or you may have noticed from the chart when the tide turns and runs out, it runs out in a hurry.
This was a theme that was touched on both by Wayne and by Infian as well. Oftentimes we see the pattern is that a company has grown to an extent where they're looking for a buyer to slap the baton of what they've achieved into the hands of a more capable partner; the stage is really well set. Well both on the strategic side which is going to be fueled by the repatriation of trillions of dollars and on the private equity side as Wayne mentioned, not only do they have really broad portfolio holdings that they can bolt-on acquisitions, but they almost look like strategics now. The breadth of their portfolios is so – well, the depth and breadth are pretty significant impress events and they can move quickly, half of the deals that we're seeing in market right now are on a private equity on the financial side and that's held strong for the last three or four years.
So, anyway, I would encourage you if you're in the market or considering being in the market as a seller look now. Don't wait too long; the tide will turn eventually, nothing goes up in a straight line, and so we're looking for those kinds of corrections to occur, but it looks like a strong 2018 and we're looking forward to I think we've got 40 or 50 companies in market right now. That's an all-time high for a Corum I think, so.
Timothy Goddard
Great, well thank you very much Rob, and thanks again to our panelists. We're right up against our half hour mark. We will try to get your questions answered that you have sent in and try to get you at least to some degree of answers from our panelists. We really appreciate everybody tuning in today hopefully we'll see you one of our conferences coming up let's go to our close.