Tech M&A Monthly: Private Equity Panel

February 2020 Tech M&A Monthly - Introduction

Heidi Owen

Hello, everyone joining from around the world. Welcome to the Corum Tech M&A Monthly. My name is Heidi Owen, Director of Marketing at Corum Group and I'll be your host for today.

Before I get to our schedule, I'd like to point out the Q&A sidebar. You can email us at any time at info@corumgroup.com. And following the event, the slide deck can be made available to you. Let's begin.

First, our most recent acquisition announcements, followed by field reports from Arnaud Viviers. Then our Corum Tech M&A monthly report, finishing with a panel discussion on Private Equity with guest panelist, Jenna Sleefe of K1, Jeremy Holland with Riverside, and Tomer Yosef-Or from Abry Partners.

Now, to Ivan Ruzic in New York and David Levine in Vancouver for updates on recent acquisitions.

February 2020 Tech M&A Report – Recent Acquisitions Announcement

Ivan Ruzic                           

Emerald Lake Capital Management and HCI Equity Partners recently completed a minority investment in Corum client, Perceptronics. This investment was on behalf of their portfolio company, Pacific Defense. Perceptronics is a developer of advanced artificial intelligence and machine learning software based at Falls Church, Virginia and Encino, California.

The investment means that Pacific Defense and subsidiaries will now have exclusive access to innovative artificial intelligence and machine learning technology that addresses some of the most difficult problems in electronic warfare. This investment is part of a larger initiative in the development of military systems based on the modular open systems architecture. Our congratulations to Emerald Lake, HCI, and of course, the team at Perceptronics on the strategic transaction.

David Levine

Thanks, Ivan. Also, Corum client, Impulse, was recently acquired by OPSWAT. Impulse is a cybersecurity software company based out of Tampa. The purchase of Impulse broadens OPSWAT's capabilities in endpoint security and provides technology for the growing zero trust sector.

Heidi Owen

That's really great to hear. Congratulations to the team of Perceptronics and Impulse.

Corum Group at the WFS Growth & Exit Strategy - Atlanta

Heidi Owen 

Let's move on. Arnaud Viviers, Vice President at Corum, has some updates from the field. Let's go to him now.

Arnaud Viviers

On December 5th, World Financial Symposium held their flagship conference, Growth and Exit Strategies for Software and IT Companies in Atlanta for the first time. The WFS was hosted by gold sponsor, Morris, Manning & Martin, and we were very excited here at Corum to be the platinum sponsor for this event once again. Atlanta was a fantastic event and extremely well-attended, with over 100 tech CEOs and founders in attendance. As the conference Chairman, I spoke on Corum's Top 10 Tech Trends, and the current tech M&A activity in the market.

Guest speakers in tech and finance from InComm, K1 Equity, Resurgens Technology Partners, BIP Capital, JP Morgan, and others, offered their insights, perspective on growth strategy, and exit planning. Huge thanks to the WFS for inviting us. This is a must attend event for education and networking around tech M&A.

Heidi Owen

Thank you for the report, Arnaud. Let's hand it over now to our global research team for an in-depth look at the tech M&A market.

February 2020 Tech M&A: Public Markets, Corum Index, and Megadeals

Elon Gasper

Thanks, Heidi. We begin with the public markets, where indices diverged in January amid concerns over US-Iran conflict and coronavirus. Most tech fared well, the S&P Tech index up over 6%, the tech-heavy NASDAQ, 2%. But the Dow booked its first monthly loss since last summer, and Chinese equities fell hard, Shanghai losing 10%, Hong Kong almost 7%, Europe was down less.

With that backdrop, our Corum Tech M&A Index showed some hesitation. Deal volume was the lowest in a year. Megadeal activity continued, though at lower value, and PEs bought the fewest platforms since last summer. Other metrics were jittery but not at a trend level.

The January megadeals spread across sectors that included Vertical, where in the largest transaction of the month, fintech network, Plaid, was bought for $5.3 billion by Visa, as the credit card giant continued to charge ahead with acquisitions, building out its tech stack.

Tech M&A Transactions: Healthcare, Automotive, Education, Retail  

Elon Gasper

How'd that Vertical sector doing general, Yasmin?

Yasmin Khodamoradi

Vertical sales multiples remain stable, with EBITDA reaching historic highs, while deals occurred in Education, Retail, Automotive, and connected healthcare where InTouch Health was purchased for $600 million at 7.5 times revenue by Teladoc to expand its presence in hospitals and retail pharmacies.

Personalized healthcare company, NantHealth, divested its connected care assets for $47 million to non-invasive monitoring solutions company, Masimo. And patient flow tracking provider, Intelligent Insights, was bought by Infor to bolster its IoT offerings in healthcare.

In automotive, Brazilian dealer management provider, DealerNet, was snapped up by Constellation's Volaris. Stateside Auto/Mate was acquired by its longtime partner, Vista-owned DealerSocket. And vehicle diagnostic systems maker, AutoEnginuity, was bought for $20 million and 5 times revenue by competitor Drew Technologies.

In education, adaptive learning startup, Smart Sparrow, was acquired for $25 million by Pearson to enhance its personalized learning capabilities. In K-12, digital curriculum specialist LearnZillion became the latest bolt-on for PE-backed Weld North Education. And Veritas Capital bought administrative management platforms, Campus Management and Edcentric, as it continues its expansion in the higher ed market.

In retail, AI-based strategy analytics provider, Precima, was acquired by Nielsen. And SwiftIQ was picked up by ERP firm, PDI, for its data analytics capabilities.

February 2020 Infrastructure Sector M&A Report

Yasmin Khodamoradi

What happened in infrastructure?

Stephanie Jensen

Sales-based valuations in the infrastructure sector dropped to their lowest point since 2017, pulled down by the network management subsector, while EBITDA multiples held relatively steady.

PE firm, Insight Partners, did two megadeals in the sector, spending $5 billion at 5 times revenue, for backup solutions developer, Veeam, and over $1 billion for IoT security firm, Armis.

Other security deals targeted AI-enabled technologies. In Zürich, AI-enabled threat detection SaaS company, BinaryEdge, was acquired by security monitoring firm, Coalition, to enhance its cybersecurity insurance offerings. And Israel-based Segasec Labs was bought by Mimecast to boost its phishing defense capabilities.

In network management, software-defined networking specialists, Big Switch, was picked up by Arista Networks, as it competes with Cisco.

AI-powered network analytic startup, Nyansa, was purchased by VMware to boost its software-defined networking technology.

In Stockholm, AI-based log monitoring company, Unomaly, was acquired by infrastructure intelligence company, LogicMonitor, backed by Vista, to enhance its core IT monitoring platform with AI capabilities. And Loom Systems was bought by ServiceNow.

February 2020 M&A Report on IT Services

Stephanie Jensen

Billy, how'd IT services do?

Billy Hao

In the developed market, sales multiples remain stable at record highswith EBITDA metrics following suit. The emerging market sales multiples have remained in the same narrow band in the last three years, with a similar stability in EBITDA multiples going back one year.

IT services maintains strong deal flow, as Microsoft integrator, Applied Information Technologies, was acquired by Siemens to build out its IoT capabilities. Customer experience and CRM consultant, maihiro, was bought by Accenture for its SAP capabilities. Digital consultancy, CassaCloud was pocketed by Ness Digital Engineering to expand its Salesforce practice. AWS gov-tech specialists, JHC Technology, was bought by Effectual Cloud Solutions for its AWS government push.

Chinese services firm, Pactera, was picked up for $750 million by state-owned China Electronics Corporation, marking the second acquisition in the company's history.

Cybersecurity firm Avnet Data Security was bought by indstrial automation provider, Rockwell Automation. Finally, having acquired Symantec's enterprise business last year, chipmaker, Broadcom, sold Symantec's services unit to 2019 top strategic acquirer, Accenture.

Elon Gasper

And that's our report on the first month of the 2020s. Back to you, Heidi.

Panel Discussion: Introduction of Guests

Heidi Owen

Thank you, team. We'll now go to our panel for our discussion on the topic. Can we start with brief intros?

Jeremy Holland

Sure. I'm a partner with the Riverside Company, a global investment firm managing approximately $10 billion. We're global in scope with a fund dedicated to Europe, another in Australia, and the remaining strategies in North America. We're very active software investors on the B2B side across a broad range of end markets. We've been around for more than 30 years and invested in hundreds of businesses. So, we're looking to apply the expertise gained from those investments to help entrepreneurs get to the next level.

Tomer Yoser-Or

I'm Tomer Yosef-Or, a partner at Abry Partners, which is a sector-focused, Boston-based private equity firm. I've been with Abry for the last 15 years, and prior to that I was with Bear Stearns, and prior to that I was with the Deloitte & Touche. I spend the majority of my time investing in the communication space, internet of things, as well as the IT infrastructure space, and a bit in the healthcare IT space.

Jenna Sleefe

So, my name is Jenna Sleefe. I work at K1. We're a private equity firm investing in B2B and enterprise software. I focus on the business development side -- so, finding our new investments for the firm and also working with existing portfolio companies on any of their M&A or corporate development initiatives. So across the firm, we invest in companies that have between less than a $100 million of revenue. So, across that group, targeting new investments within software that are very mission critical, system of record, really companies that can become this category leaders.

Tech Trends to Lookout For: Tomer Yoser-Or, Abry Partners

Heidi Owen

Great. Let's begin. What are the tech trends you think CEOs should be on the lookout for this year?

Tomer Yoser-Or

It's a great question. I think a lot more automation. Technology is fostering the ability for enterprises and consumers to do things on their own. This translates into a couple of different areas where you're going to see big pushes. The first one is healthcare IT and remote patient monitoring. I think there's going to be big push over the next few years to allow elderly people and people with chronic illnesses to be able to use technology and devices, to track their health and ultimately reduce cost within our healthcare system.

So, software and IT and devices are certainly going to impact the healthcare industry. I think by the same token, those devices then translate into IoT connectivity and therefore, a big push in IoT and connected devices in the healthcare vertical, as well as the fleet tracking vertical. You're going to see IoT expand in a big way, both on the enterprise side and the consumer side, so that real time revenue, cost, and customer service related decisions can be made.

The last thing I think is a push towards cloud, both public and private cloud. We're going to see hybrid platforms. We're going to see more and more applications moving over to public cloud. It's certain applications that are mission critical, that have certain latency requirements or security requirements are going to stay on premise or on a private cloud. We're going to see businesses and CTOs wrestling with, "Where do I put my information? Does it make sense for me to put it on the public cloud? Within the public cloud, is it Azzure, is it Google, is it AWS or Oracle? Or should I go into a private setting given the type of application that I'm running?"

Tech Trends to Lookout For: Jeremy Holland, Riverside

Jeremy Holland

We see a bifurcation in the market in terms of value for companies that are full SaaS as opposed to license maintenance. And so if someone is looking to maximize value, they're going to be far better off with a full SaaS product. Additionally, we're seeing great value being attributed to excellent customer retention. So, maintaining fantastic customer relationships is paramount to obtaining a premier valuation.

Tech Trends to Lookout For: Jenna Sleefe, K1

Jenna Sleefe 

A lot of momentum has been happening within the fintech and payments side, so we're seeing software being coupled or partnered or integrated with other payment solutions. So, if you have an end user being able to also process their customer's payments has been a pretty big trend. So, across our different investments everyone has the recurring software, subscription platform, but then if you can couple that with reoccurring payments, if you can make it on a reoccurring basis and not pure transactional, that's ideal. The goal is, it's very predictable and repeatable, but adds an additional revenue stream.

So, we're seeing that everything from even the landlord-tenant property management space where you can process rent payments. We're seeing it within the non-profit sector in terms of donation and helping non-profits grow and scale their businesses and getting a percent of that transaction fee. We're seeing it across even just software that focuses on billing and really that's CRM, but being able to be that full best-of-breed solution where you don't need a third-party processor.

Most Exciting Tech Trend:  Tomer Yoser-Or, Abry Partners

Heidi Owen

Good point. Of the top 10 trends that Corum has identified, are there any in particular that you are excited about?

Tomer Yoser-Or

I actually think you guys nailed it. I think hybrid cloud, absolutely. That's a big piece of the growth in the market and it really enables companies to be much more nimble, much more cost effective and faster in development when it relates to platform, or whatever solutions they're bringing to their B2B clients or their B2C clients. I think there's going to be new businesses created around hybrid cloud in terms of being able to advise CTOs on which platform is the best one for them to use based on their applications.

By the same token, there's going to be additional solutions developed on top of these public clouds, in order to be able make users life much easier, as well as provide them with security, predictability on monthly spend, and CPU optimization, which is a big area right now where there's some challenges on public cloud. I think on IoT, we'll see a huge push, particularly within a 5G world from a communication perspective. Applications that have not even been thought about are going to become much more available and at our fingertips because of the amount of bandwidth that can be pushed through the pipe in a 5G world. And I think it's going to drive significant demand in IoT.

Some of the predictions out there say that over the next three to four years, we're going to see the number of IoT devices more than quadruple to billions and billions of devices deployed out in the field extracting information to the home base.

Healthcare is another one. We just have way too much cost in the system today associated with healthcare. You look at Medicare and Medicaid combined, that makes a huge portion of our annual budgets. There's about 10,000 incremental elderly people hitting the market above the age of 65 on a daily basis. That's just a massive number.

And we have the Baby Boomers who in 2021 will have their first cohort above the age of 75 and it's at that point where people start experiencing a lot of different types of health challenges and difficulties that need to be addressed by Medicare and our healthcare system. And there's just not enough people to do it. There aren't enough nurses, there aren't enough institution and it's incredibly costly. So, healthcare is going to adopt technology in a big way. It's going to adopt IoT technology in a big way.

It's already adopting software technology, particularly around EMR solutions or EMR software packages, but it's going to need IT and devices and remote patient monitoring to extract cost out of the system. IT solution will need to provide a much better experience to the consumer and the elderly person. In addition, IT will need to be able to track consumers engagement and usage. For example, is grandma taking her medication and is she mobile throughout the day? Whether her weight goes up or down, whether her blood pressure goes up and down. All these types of things are going to be tracked with IT, and particularly with remote patient monitoring and we're going to see a lot of big growth there.

Most Exciting Tech Trend: Jenna Sleefe, K1

Jenna Sleefe

As we start to think through everything within healthcare, the true system of record has always been really that electronic health system, the EHS, and that's not something we want to go compete against an Epic or Cerner on. But as we think through servicing, different parts of healthcare, whether it's the hospitals, whether it's outpatient, we really want to make sure it flows for the patient. So, every part of the experience is really making sure there's a workflow and the patient just wants to know where to go for the best care. And many times you don't know where to even start. Do you start with your health insurance card? Do you call a doctor? Do you Google on Yelp or Healthgrades? What are you looking for to even get to your first position to go see someone within the practice of healthcare?

And it's just something that there's been now so many resources and technology that people don't always know where to even start. So, I think that's either starting as a trend many times on the employer side. How can employers do a better job of actually providing resources that are within the network? But then once you're in network, how as a patient do you set up and track your own care? So, if I am attending a doctor's office appointment, being able to have done everything in advance that's automated in terms of my forms, in terms of questions, so that you can just make it a much more seamless experience.

I think with a lot of modules and changes, people do believe in that consumer approach now to healthcare. So, how do you give the consumer, the patient, what they want in terms of being able to schedule on demand, being able to change appointments, being able to look up information on your mobile device, and then being able to get that care anywhere in the world through your mobile device is absolutely key. And on the flip side, you needed the physician and the care teams to be able to do that as well. So, as part of it is telemedicine, part of it is really just really those connections as APIs all tie together to allow the data to be shared.

Most Exciting Tech Trend: Jeremy Holland, Riverside

Jeremy Holland               

We've had a great deal of success in blue collar software. We still see a tremendous amount of opportunity for efficiencies in the workforce and a great deal of white space remaining where there really isn't a competitor being displaced. Additionally, we've had tremendous success and continue to invest in a whole range of GRC and EHS solutions. Additionally, we've been investing in B2B fintech, and we're also very excited about healthtech, given that healthcare has historically been our largest and deepest specialization. We've been able to leverage our relationships and knowledge of healthcare into working alongside our software specialization. And we're actively investing behind managed services providers, helping small businesses manage their IT infrastructure.

Tomer Yoser-Or’s Advice on Growth & Exit Strategy Planning

Heidi Owen                       

Great. Any advice for the CEOs listening on Growth Strategy and Exit Planning in the next 12 to 16 months?

Tomer Yoser-Or

Well, the first one I would say is always think about building your company for the long-term. You never know when the right exit opportunity is going to come, but I'm a big believer that building a good business, building a business with a long-term vision, is going to drive the best return for you as an owner and as a CEO. You might be thinking about an exit this year, or next year and therefore you're going to cut back on spending. I'm a big believer that the buyer's recognize when that's being done and they ding you for it. And they also recognize when you're continuing to make investments and they give you credit for it. You never know even when you are outselling your company whether a transaction is going to close and therefore, I believe holding off spending can only hurt you especially since buyers are given credit for those who make investments in their business.

The second recommendations around selling your business would be to take into consideration a bunch of different factors. First, just market dynamics and overall amount of positivity within the market. We certainly have a bunch of that today, which is also expected to continue throughout 2020.

The second factor is the abundance of leverage that's available for potential buyers, certainly on the private equity side. When leverage is available, it typically drives higher valuation for sellers.

And the third factor is how distracted, or not distracted are the strategics in the market. And does your business attract strategic interest? Some businesses don't, some businesses do. I think you want to look at all of these types of factors and then ultimately evaluate whether it's the right time for you to sell.

Jenna Sleefe’s Advice on Growth & Exit Strategy Planning

Jenna Sleefe                     

Yeah, I also would say as you're probably getting a lot of inbound interest, it is natural. A lot of private equity firms have built out teams to help get to know you in advance of a transaction. I do encourage you to take those phone calls and get to know folks well in advance of a transaction. There's going to be a lot of different looks and feels to investors. So, quickly getting on the phone, seeing if you're a good fit and starting to keep your list of folks that are reaching out is important. Because I would say if you get further along in this process, the last thing you want to do is not know who is a right fit when you're starting to fundraise, or think about selling your business.

So, it is important to take those early phone calls. It is important to take some of those meetings in person. Feel free to own your calendar, keep them short and to the point, but start to really assess, are these investors that fit the profile of my business and could this be a long-term fit? It's really important to actually build those relationships. I would say on the K1 front we're typically getting to know companies, for two to three years before investment.

Tomer Yoser-Or’s Advice on Bringing on a Partner

Heidi Owen

That's interesting. What about bringing on a partner?

Tomer Yoser-Or

That is such a good question. I think not enough people pay attention to the softer points. I really view these types of deal makings when an entrepreneur, a founder, a CEO is partnering with private equity, to be a bit of a marriage. And in certain instances there's just not enough time to get to know each other. And so I think it's really important to do your own due diligence, just like the private equity firm is doing due diligence on you. Call up some of the former entrepreneurs and CEOs they've worked with, some of the people who've sold them businesses and ask them some really pointed questions. Ask them questions about what was the relationship like? Where did the P add value? Were they always available? Were there times when you were trying to reach them that they weren't available?

I would also add that you should speak not only to the people who the private equity firms had success with, but talk to some of the people where they didn't necessarily have the best outcome. It's in these circumstances that you truly know who your partner is.

You also want to understand what are some of the other things they can bring to the table? For example, do they have a really strong debt financing capability? If your business is going to be one that's grow through acquisitions, are they going to be able to bring additional debt resources to the table to effectuate these transactions?

You also want to understand if they have an operations team and what is that operations team comprised of? Do they have some people that, for example, can help evaluate a new ERP implementation, or a new marketing system like HubSpot or Salesforce? If there's one thing I know for sure, most projects that involve software implementation come out more expensive and take longer than expected.

You also want to ask, do they have people that can help you with sales and marketing and how to scale a sales team, or quotas. If the private equity firm has operating partners and resources they can bring to bear, I think that's very, very helpful.

Lastly, I'd say you want to understand their M&A capabilities. Will they devote resources to help you identify targets on the M&A side as well as help you do the due diligence and contract negotiation? Most private equity firms have a lot of expertise here because this is what we do for a living, but will they have the right resources? Will they have a junior, middle, and senior deal member on the team that can help with that?

Jeremy Holland’s Advice on Bringing on a Partner

Jeremy Holland

Private equity firms and other types of investment firms are so diligent about getting our questions answered that the entrepreneur gets back on their heels psychologically and slides into question-answering mode. But they need to make sure they get their questions answered. I specifically encourage them to reach out to investment partners, prior portfolio companies, ones that have been exited, no longer in the portfolio and really drill down into the value add. Try to understand specifically when the entrepreneur ran into different problems or opportunities in their growth cycle, what the partner did to help them get from A to B, other than just capital or vague phrasing, like strategic advice at the board level. Specifically and tangibly, how did they add value beyond capital?

Jenna Sleefe’s Advice on Bringing on a Partner

Jenna Sleefe

Picking a partner is the most important thing the entrepreneur need to focus on when raising capital or doing some transaction. There's all different types of partners out there, and so it's that relationship, it's that trust. So, many times that comes down to instincts and getting to know that partner and what they'll bring to the table. But outside of that trust factor, it's how is your partner going to help you build a better and bigger business over time? So, every entrepreneur that we back will be successful on their own, but the real question is how do you do something in a faster way? How do you get to a position where you are that true market leader, or even that market killer over time. And from our side, we want to ensure, you know that we are there to be that best partner to help our companies scale.

So, if we invest in a company under $100 million of revenue, what's the path to help them get to when we first invest, if they're at $10 million, ensure they hit $50 million of revenue, $100 million of revenue, $200 million, depending on the industry and the space. So, we have two different approaches and I think when an entrepreneur is interviewing and getting to know a partner, understanding what they can actually help on post-investment. So, a key component is operations. How do you help your companies scale? We've invested now in over 115 software companies, so we've seen that movie over and over again. So, really helping our companies look around that corner, what comes next and having a true team that gets in and can get their hands dirty to help a company scale is something that we like to see.

And then the other side of growth is corporate development. So, if you didn't have capital as a restraint and you could potentially acquire one of your competitors, or you could extend your product roadmap through an acquisition, or expand globally, working with a partner that can think through that corporate development strategy and help you truly execute on it. So, everything from sourcing to due diligence to M&A integration can really help push that company forward.

February 2020 Tech M&A Monthly - Closing

Heidi Owen

All great insights for a successful tech M&A exit. That's it for today's webinar. Thanks for joining us. Stay tuned to find out how to get our full webinar notes and how to get in contact with Corum.