Tech M&A Monthly: What To Do When You Are Approached

Tech M&A Monthly: What To Do When You Are Approached

Timothy Goddard

Good morning, afternoon, or evening, wherever you happen to be in the world. My name is Tim Goddard, EVP of marketing here at Corum. I'm very happy to have you join us for the September edition of Tech M&A Monthly. We have a packed agenda today, so we're gonna jump right into it.

First, field reports on three deals closed recently. Then, we report on even more recently the client fishing celebration up in the Gulf of Alaska, then, our September research report, and finally the special report on what to do when you are approached. So, without any further ado, because we may or may not have time for Q and A based on how long this goes, but if you have questions put them in. We will follow up by email if we don't get to them at the end.

Let's jump right in starting with Dave Levine in Vancouver who just sold NTP Software, David?  

Field Reports

David Levine

It is my pleasure to announce the acquisition of our client NTP Software by Esperitus. NTP is a pioneer in the management of unstructured data for enterprise and government. The company's core technologies control, analyze, and audit file and object data across all storage platforms for some of the largest organizations in the world, and Corum is thrilled to have helped NTP continue to scale through an acquisition. The acquisition will provide additional resources so that NTP can help institutions of all sizes manage their data in hybrid cloud and on-premise environments. NTP is the chosen technology by the market leaders in the storage and archiving space, and grew its business with top-tier customers in the commercial, military, and government sectors representing millions of users. The company has been re-branded DefendX. Congratulations to the NTP and DefendX teams.   

Timothy Goddard

Thanks, Dave. Now here at HQ Rob Schram, who just sold ExakTime to Providence Equity, Rob?  

Rob Schram

It's my pleasure to announce the acquisition of our client ExakTime by Providence Equity. ExakTime provides market-leading SaaS workforce management solutions for the construction and field services industries serving over 7,000 customers and a quarter of a million users daily. Their platform equips businesses with GPS enabled activity tracking and compliance verification plus cloud-based software and direct syncing with accounting and payroll systems. ExakTime is serving as a new platform company foundation for Providence, named Arcoro, with one bolt-on already announced and more to come. Congratulations to the ExakTime team.  

Timothy Goddard

Thanks, Rob. And over now to Ivan Ruzic in New York, Ivan?  

Ivan Ruzic

I'm very pleased to be able to announce the recent acquisition of our client AnalytixDS by Erwin. Privately held ADS with a staff of 90 and led by co-founder Michael Boggs pioneered the automation of enterprise data mapping as well as metadata-driven automation and governance tools. Our client's robust data management platform has been proven with Fortune 1000 customers on six continents.

This acquisition will enhance Erwin's EDGE data governance platform with multiple new features including their broader set of metadata connectors as well as automated code generation, data mapping, and cataloging tools.

We really enjoyed working with Michael, a real industry thought leader and his team, and we were really impressed with both their subject matter expertise and the innovative quality of their technology. This is a great example of how a small and fast growing software company can exploit the white space in products with much larger industry participants. We had several very interested parties in the process and Erwin came out on top because of the strategic fit between the companies and Erwin's desire to aggressively augment its existing products with ADS technology.

Congratulations to Michael and his team, but also congratulations to Adam and his team at Erwin for a strategic acquisition well executed. This transaction highlights the continued demand that strategic buyers are creating as they try to fill out their product and market gaps, and the importance of entrepreneurial companies such as ADS play in the innovation ecosystem.  

Timothy Goddard

Thanks, Ivan. Now every year we take clients that have successfully sold up to the Gulf of Alaska. The team just got back just the other day, and our founder and CEO Bruce Milne has a report, Bruce?  

 

Langara Report

Bruce Milne

We just returned from our annual fishing expedition where clients are Corum's guest celebrating the sale of their company. We began with our traditional kick-off dinner at iconic Joe Fortes in downtown Vancouver.

Next morning, a dawn flight on Air North to the last stop on their Pacific route, Masset, a Haida Indian village.

From there, we helicoptered into the Langara Fishing Lodge, the furthest island out in the Pacific. Upon landing one guest said, I feel like we have come to the end of the earth.

Following boat orientation, we headed to the fishing grounds which that day was five miles offshore. We had to dodge the humpback whales to get there. This is their peak mating season.

In heavy seas, the Texas team got their first fish. That consisted of Sean Meyers and Corum's Jeff Brown who sold Sean's company Endeavor to Vendavo. Then success for the Guarnieri brothers, Steven and David, the Virginia team who fished with Corum's Joel Espelien. Corum sold their company Infian to Constellation.

Bringing up the rear was the Seattle team whose first salmon had two lines in its mouth. We're still trying to figure that out.

The halibut fishing and lingcod fishing were the best ever. We even caught TPC. Sounds like one of our clients, but it stands for true Pacific cod. It's never been seen in these waters, a delightful white fish.

The cuisine was amazing, including a five-star dinner with wine flights by Bishop's, one of Canada's top chefs. When they weren't fishing, drinking, or eating the guests were scheming new companies, new ideas. The group had about $100M of dry powder between them.

The scenery there is stunning, laced with more rainbows than I've ever seen. As the trip came to a close, the top fisherman emerged. First, the Scottish team, led by Jim Kennedy with sidekick Alan Wilson, also from Glasgow. Jim caught a beautiful, huge coho, what a fight. Then the Aussies came on strong, Nathan Isterling and Luc Pettet. Dan Bernstein pictured on the right sold their company Punters to Rupert Murdoch's news corp.

But it was the Swiss who won. In the end, the mister big fish award went to Frederik Decouttere of Genohm who John Scott, Corum's managing director in Europe, sold to Agilent Technologies. Congratulations Frederik. Langara is one of life's true bucket list experiences, the perfect place to celebrate the most important transaction of your life. Some of you online will be joining us there next summer. We look forward to seeing you.  

Timothy Goddard

Thanks, Bruce. It really is a special trip. Now let's go to the Corum research report led by Elon Gasper as well as Amber Stoner, Amanda Tallman, and Becky Hill, Elon?  

Corum Research Report

Elon Gasper

Thanks, Tim. We begin with the public markets, where US tech-heavy indices roared in August, the S&P Tech up 8%, the NASDAQ six, both hitting new record highs, the Dow just 2% below its January top. Most other markets fell, particularly China. Our Corum Index printed a moderate year over year decline in deal volume, fewer and smaller mega-deals, narrowing scope of private equity platform deals, and VC exits contribution to tech M&A dynamics. Buyers extended the hunt to slightly more mature companies, consistent with a limited supply of sellers. This relatively slow August was offset by the strong July, bringing Q3 volume and mega-deals as of today very near last year's.   

From our Corum vantage point, we also know of many closings pushed into September, plus approaches and interest from buyers. So we conclude the tech M&A window remains open and still favorable to sellers. As mega-deals keep piling up, infrastructure has taken the lead in total value with horizontal still ahead in volume.

Among August's mega-deals; New York-based hospitality systems provider TravelClick was bought for $1.5B by Spanish travel giant Amadeus to fill its gap in business intelligence and post Amadeus' biggest acquisition ever. Now to sectors. How'd internet fare, Amanda?

Internet and Travel Sector Report

Amanda Tallman

Sales multiples bounced back a bit from their Q two drop, but EBITDA-based metrics fell. We saw this same unusual divergence earlier this year, the last time that there were social media hearings in Congress. Those, along with approaching US elections, seem to be adding to concerns about profit models.  

Now turning to deals, we begin in the travel sector. Hong Kong-based book now, pay later flight search engine, Gagfare, was acquired by Sharing Economy International, a traditional manufacturer pivoting into tech via M&A, paying $3.6M for 60% of the company. This is becoming a more common move by traditional Chinese firms, and here at Corum, we have done similar, larger deals with Chinese firms moving into tech from food production and mining.

In Germany, online travel agency Tropo was acquired from media conglomerate ProSiebenSat by air services provider Dnata, part of the Emirates Group. We predicted in January that we would see more sovereign Arab money moving into tech M&A, and this is one indication. And last week, UK based online jet charter exchange PrivateFly was picked up by OneSky, backed by Directional Aviation, adding its suite of systems and services for private jets.   

Though the food delivery consolidation wave has peaked, some activity remains, with certain novel models seeing high valuations. For example, Israeli website 10bis, an online marketplace for business catering, was gobbled up for over $157M and 10x revenue by Dutch player, Takeaway, to expand into the B2B space and improve international coverage. We also saw deals in the Philippines and South America. In the ticketing arena inventory aggregator, Rukkus, was nabbed by no fee ticket vendor, TickPick, in late July, adding its 360-degree venue viewing solutions as Rukkus builds on its recent purchase of secondary ticketing marketplace Razorgator. And Eventbrite continued its acquisition streak, picking up Vancouver based early access event ticketer Picatic, giving it access to its APIs and distribution partners.

And finally, on-demand home repair firm Serviz was nailed down by Seattle based Porch, its third acquisition in the past two years. What's happening in consumer, Becky?  

Consumer Report

Becky Hill

Both sales and EBITDA multiples in the consumer sector leveled out after two volatile quarters. We tracked a number of deals in gaming, several of them making use of blockchain technology, such as Hong Kong publisher Animoca Brands, which paid nearly $5M for PixOwl to launch its own token marketplace, following its previous acquisition of Fuel Powered, which utilizes blockchain and machine learning in its monetization platform for publishers.

In the UK indie studio, The Chinese Room, was picked up for $2.8M by video game developer Sumo Digital, following Sumo's acquisition of Eve Online maker and Iceland's largest game studio CCP Games' Newcastle studio in January. And just last week, CCP Games itself was acquired by Korea based Black Desert Online developer Pearl Abyss for $425M.

We saw a number of deals in the personal finance space in India, driven by the continued rivalry there between Amazon and Alibaba. Amazon-backed lending platform Capital Float spent $30M for the personal banking management app Walnut to add to Capital Float's line of customized credit products. Amazon itself paid $40M for one-stop services app Tapzo to augment Amazon Pay usage in the country. And Indian smart savings management startup Balancetech was acquired by Alibaba-owned PayTM to ramp up its computational intelligence capabilities. Next, bring us up to date on the IT services market, Amber?  

IT Services Market Report

Amber Stoner

August upticks have returned both sales and EBITDA multiples to numbers that have held mostly steady for the majority of 2018. The focused IT services trend continued to drive August deals with a particular emphasis on sales force integrators and security services.   In Australia, Salesforce Marketing Cloud consulting provider Amicus Digital was acquired by Dentsu's Merkle to expand its footprint in the APAC region. Indian sales force platform specialist SaaSfocus was purchased by IT Services giant Cognizant for its focus on Australia and India. Salesforce professional services firm Figur8 was bought by Israeli cloud solutions provider AllCloud to enter the North American market. And sales force implementation partner Canpango was acquired by point of sale specialist ScanSource to add CRM capabilities to its services offering.  

In the security space, Turkish cybersecurity systems integrator InfoNet was purchased for $14M by UK cyber security advisor CYBER1 to extend its produc.t offering in the Middle East. And defense contractor MacAulay-Brown was picked up by Alion, a portfolio company of Veritas Capital, to add MacB's cybersecurity and AI domain expertise.  

Accenture made two August acquisitions to expand its Industry X.0 practice, hardware engineering firm Mindtribe, and smart embedded software company Pillar Technology. Accenture will be joining us at World Financial Symposiums in New York next month.  

Elon Gasper

Finally, just this week, government IT contractor Engility was acquired for $1.5B by rival SAIC, with claims the deal makes it the second largest federal IT house, as increased US defense spending drives players to scale up to support bids on bigger projects. Speaking of which, next month we'll review the whole quarter, fanning out to all our six markets and 30 sectors survey of activity and valuations on October 11th. Back to you, Tim.  

Timothy Goddard

Thank you, Elon. Looking forward to that.

Now to our special report, when you are approached, 13 tips to ensure deal success. To moderate this section, I would like to turn things over to Joel Espelien, Joel?  

Special Report: 13 Tips to Ensure Deal Success When You Are Approached

Joel Espelien

Thanks, Tim. It's common in today's tech M&A market for companies to receive inbound offers from potential suitors. How you respond is critical. Here are a baker's dozen tips to help you respond to an unsolicited offer. We start with Bruce Milne.  

Bruce Milne

I'm going to start off this section by saying you first have to understand the numbers. What do we mean by that? Well, we want you to know your odds. Selling your company is the most important transaction of your life. It's about changing your life. So, it can be very exciting to be courted. You start dreaming about the future. But you need to understand the hard realities.   

Let's take a look at the numbers. 11, 48, 75, 80, 100. What do these refer to? 11% is the number of buyer solicitations that actually result in a transaction. That's about one in 10. The problem is you may be one of the 90% that don't get done. You get all excited and start dreaming about the future. Put your company on hold. Be careful.  

48% is the average improvement from the first offer to closing with an auction process. That's a lot, a lot of liquidity. You have to have an auction process.  

75% of the time there is another firm willing to pay more than the first initial bidder. This is very consistent.  

80% is the failure rate for self-managed tech M&A. You don't know what you don't know, and there are so many hoops to get through. Just due diligence alone can be overwhelming.  

100% of deals involving only one bidder are sub-optimal. You never get optimal deals if you only have one bidder. Your price, your structure, your liabilities, no way. So you need to be sure you're not talking to just one buyer.

Joel Espelien

Thank you, Bruce. Now onto our panel of experts around the world, beginning in Europe with Julius Telaranta in Berlin.  

Julius Telaranta

Immediately before entering any merger discussions with a potential buyer, you should execute a non-disclosure agreement and possibly a non-solicitation agreement. You have to be careful to protect your technology, algorithms, and ideas, your secret sauce. The NDA helps protect you and your company by imparting a duty to keep information confidential and only use it for a specific purpose, in this case of evaluating an acquisition.  

Don't be afraid to ask. It is expected and shows you are serious. It will typically cover financial information, intellectual property, as well as the fact you are in M&A discussions. You still need to be careful about when you discuss the most confidential data about your business. Only disclose to serious buyers at the appropriate time. On the other hand, we also caution strongly against being too restricted in providing confidential data. The buyer needs to evaluate your company. If you make it too difficult to get information to move along in the process they may lose interest or under-value your business. Let your advisors help you to strike the right balance.  

Joel Espelien

Thanks, Julius. Now let's hear from Corum Group International managing director Jon Scott in Amsterdam, Jon?  

Jon Scott

There are buyers known as bottom feeders. These buyers repeatedly put offers on the table that are well below the value of the company they're trying to acquire. These acquirers have a pattern of paying the absolute lowest value for their acquisitions. Sometimes they're just being opportunistic and hoping they can hook you before you discover the true market value of your company, and other times they're so very poorly valued themselves due to weak performance or operating in a declining sector that they simply refuse to pay market prices.

In either case, identify these bottom feeders quickly. They'll waste a lot of your time, and use tactics like saying, we'll walk away if you wanna speak to others or hire an advisor. It never turns out well for the seller.  

Joel Espelien

Thanks, Jon. Next, we turn to Rob Schram in our headquarters outside Seattle on qualifying the buyer.  

Rob Schram

Following your initial discussions with a potential buyer, it's important to screen for serious viable interest. The load on your management team for calls, presentations, and visits will be significant and distracting. So, there's no sense wasting time with buyers who can't or won't conclude a deal. You need to quickly determine if the buyer is willing and able to pay a reasonable price and how they're planning to fund the deal. For some buyers this is non-issue, but it's something to keep an eye on. Are they asking for a seller note, that is you loaning a portion of the purchase price? Are they planning on offering cash or stock? If cash, do they have it in the bank, or will they need to do an additional round of fundraising in support of the deal?  

More complex structures can work but they may be a red flag that you're not working with the right buyer. Understanding these fundamental expectations will help you determine not only if the buyer can put a reasonable term sheet together, but how well the companies are aligned, and how well things are likely to go after the deal closes.  

Joel Espelien

Thank you, Rob. Now let's head to the UK and hear from Peter Prince in London.  

Peter Prince

One thing becomes true after you've been approached, and that is you can speak directly to the CEO of the potential buyer. You need to know certain things by way of qualifying the credentials of the buyer, most certainly their acquisition experience and track record. It's great that you've been approached, but it's more important to know as earlier as possible that the buyer could complete the deal, so to save any time being wasted.

One question which will give you some comfort is what deals have they already done? This will also tell you if they have experience in completing a deal. Also, it will give you the chance to get to know their process. Not only should you find this out, but also how they did those previous acquisitions.  

Ask whether they have bought in your space before and the valuations they put on these transactions. You'll ultimately find out if they are an experienced buyer which means you have some idea of how the process will go. Finally, you can use these facts to make your position stronger with any other potential buyers.  

Joel Espelien

Good advice, Peter. From London, we go to Salt Lake City, Utah and Corum dealmaker Steve Jones.  

Steve Jones

The most critical element you need to drive to your optimal valuation is competition in suitors. The challenge is to engage with other buyers before you get too far down the path with the most interested party. When you get an overture from a potential acquirer don't get too fixated on that tree and miss the entire forest. First, you should be tracking all of the company's investment firms who are actively pursuing transactions in your market. How do you do that? Invest 30 minutes a month in Corum's Tech M&A Monthly report.  

All of the information is there, and be sure to get our annual report and most recent quarterly report. You'll get an inside look at the players that you could engage with and you'll understand the drivers that will capture their interest. Second, create a list of potential partners in your ecosystem. Include alliance partners, channel partners, largest customers, investors, and even competitors. Don't forget private equity firms either, because they could create a platform or view you as a bolt-on depending on the scale. If you've been approached, this is urgent. If that hasn't happened yet, be thinking about it today so that you'll be prepared when the time comes.  

Joel Espelien

Thank you, Steve. It bears mentioning that all of our dealmakers are former CEOS that have built and sold their own software companies. You can be sure they've walked in your shoes and dealt with this kind of inbound offers. Next, we head over to the mid-west to hear from Rob Griggs in the Twin Cities.  

Rob Griggs

How serious is the buyer? A quick way to gauge a potential buyer's interest or intent is to discuss specific data requests and their due diligence checklists. As a well-prepared seller, you'll have already established as many of the basics of a list already, and to ferret out whether they are just asking versus are truly prepared to have serious discussions about acquiring you can make a few things clear.  

One, you are knowledgeable about the acquisition process. Two, you have potentially had other discussions based on your representation of knowing what the logical next steps are in the process, and three, depending upon their response you will know whether they are serious, ready, willing, and able to proceed to a more detailed discussion. Your time is very valuable. Don't waste it on inbound inquiries where the acquirer isn't serious about proceeding. Getting a checklist from a buyer can help make this clear, and it will provide you with a better understanding of what you will need to prepare if discussions do go forward.  

Joel Espelien

Great points, Rob. And to all of our listeners back in Minnesota, skull Vikings. Next, let's hear from Martin Lowrie in Boston.  

Martin Lowrie

When an acquirer approaches you they will typically ask for as much information as you are willing to share and, of course, this includes your financials. If you don't already have them, you will need to prepare quickly three years of historical financials and a three-year projection. Remember, the acquirer needs to understand what your business could look like as part of their operation. So consider the financials from that perspective. You may want to recast to remove extraneous one-off items that don't accurately represent your business going forward. This is where the advice of an experienced M&A advisor will be invaluable. Summarize your information by quarter and provide only the minimum detail necessary. At this stage, your objective is to get a quick yes or no.  

Make sure that you include clear and concise explanations of both your historical financials and your projections and ensure that you and your pipeline can support them. You will be asked to provide detailed monthly data at a later stage. But don't be too aggressive on your projections. They will be tested during due diligence and if you fail that test your credibility will be damaged possibly irreparably, and so will your valuation.  

Joel Espelien

Thanks, Martin. You really can't be too careful with those projections. Year three is particularly critical because that tends to drive terminal value in discounted cash flow projections, which are commonly used these days by both strategic and financial buyers as a core valuation methodology. From Boston, we head up to Vancouver, Canada and hear from Dave Levine.  

David Levine

While you build all your projections as Martin described take this opportunity to question your own underlying assumptions that will be used to fortify that forecast. Ensuring that these assumptions are credible will be critical to driving value. The assumptions must be built on supporting facts, figures, and objectivity, otherwise, you will lose credibility with potential acquirers. Those underlying assumptions in many cases are more important than an actual number on a profit and loss statement or balance sheet. Look at your historical assumptions to verify if they have been accurate.  

If your prior assumptions have been demonstrably on the mark leverage this to set the stage that your current assumptions are sustainable and accurate as you project the future results of your business. Don't forget to test your assumptions with your management team to ensure alignment across the functional areas of the business. This is a useful exercise in any situation but with a buyer knocking on your door it takes on more urgency.  

Joel Espelien

Thanks, Dave. Next, we turn to my fishing buddy, Dan Bernstein. Like myself, he just returned from the Corum fishing trip we heard about earlier, Dan?  

Daniel Bernstein

You have a fiduciary responsibility to your shareholders to maximize value, even when you have an attractive sounding deal in front of you. Even when you've qualified the buyer, and prepared to present your company in the best light, you still have the responsibility to get the best value for your company, and you can't do that talking to just one buyer. A valuation helps set the bar, especially one that is rigorously researched and created by a credible source.  

However, leading with a valuation too early gives away your greatest leverage. You need to create a valuation model for your business anyway, so use that process to give you the time you need to get feedback from more than one buyer. If the buyer wants to be preemptive and blow your expectations out of the water early then they are still welcome to do that. But a credible valuation coupled with outreach to strategic, synergistic partners will help you achieve an optimal outcome.  

Joel Espelien

Thanks, Dan. You have to take your fiduciary duties seriously whether a CEO, officer, board member, or in many cases with founder run software companies as the majority shareholder. You never wanna be in a situation where a critical voice asks how many buyers did you talk to as a market check, and your answer is one. Next, we hear from Jim Perkins in Arizona.  

Jim Perkins

As you put together your valuation it's time to make additional discreet inquiries to other serious buyers, particularly those that have expressed interest in your company in the past. This must be done at the highest possible level because of the sensitivity of the buyer already in play. These potential buyers may be your competitors, the buyer's competitors, and possibly one of your largest customers or partners.  

Buyers appreciate knowing the current state of the M&A process and will be looking for additional guidance on valuation range and deal structure. This is when patience becomes key. Give other buyers enough time to respond to make sure you have more than one bidder.  

Joel Espelien

Good point, Jim. From the sunny southwest, let's head over to New York and hear from Dr. Ivan Ruzic, Ivan?  

Ivan Ruzic

In business as in life, you don't get what you deserve, you get what you negotiate. This is never truer than in software M&A. So, what's the key element that must be in play to get the best deal?

The answer is fear, fear in the mind of the buyer that if they don't get your company someone else will take it away from them. With only one buyer in the mix, there is no fear. They're in control, calling the shots, getting it all their own way. They see you as having no option. One buyer is no buyer. Without healthy competition in a managed auction process, the optimal outcome for you and your shareholders will never be achieved.  

Joel Espelien

Thanks, Ivan. One buyer is indeed no buyer. Based on everything we've just heard I'd like to close with this. The stakes are high when you get approached with an unsolicited inbound offer. For many of you, this is the time to get some help, and call in professional advice to help you work through the issues. You may not get a second chance. Thanks again to all of our panelists, and back to you, Tim.  

Timothy Goddard

Thanks, Joel. We are right at our half hour mark, so any questions that have come in or come in in these last few moments we'll follow up by email. Hope to see you at one of our live conferences including World Financial Symposiums in London, New York, or even Sydney coming up, and with that let's go to our close.