Valuations for an Optimal Outcome

Introduction and Event Report: Growth and Exit Strategies

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 Group. Very happy to have you on the call today, looking forward to a great agenda. Let's run through that right now. We're going to start with a pair of event reports, from Growth & Exit Strategies Conferences, that Corum sponsored in New York City and in Sydney, Australia, Field Report on a deal we just closed, then our research report, walking through key deals, trends and evaluations in a number of sectors. And then finally, what I know many of you are here for, a special report: Valuations for an Optimal Outcome. And I do think we will have some time for Q&A at the end, so if you do have any questions as we go through these various reports, please do note those in the box on the right side of your screen. Let's go ahead and get started. We'll kick things off going to New York, with Ivan Ruzzic, who's going to give us a report from that event just wrapped up there, Ivan.

Event Report: World Financial Symposium NYC

Ivan Ruzic

This is World Financial Symposium in New York, on October the 16th first sponsored by Venable LLT, and co-sponsored by Software Executive Magazine and a Tech Company, LiveTiles Limited. The theme for the one day conference was, Growth & Exit Strategies for Software & IT Companies, with keynotes and panelists representing some of the best known firms in investment banking. Private equity and venture capital, as well as the fiscal buyers and sellers.

Both the agenda and venue were packed, as in previous years, the various panel discussions were very popular events indeed. This years private equity panel consisted of executive Don Brigard Sagemont, Riverside GE Sespa Hannah and Avery Partners, all well known names in the PE world. The Investor panel featured FFDC and the IA Capital group, while revised panel consisted of M&A executives from IBM, Accenture and Together Works.

There were many questions and subsequent discussions, centered on identifying acquisition and investment criteria, used by these and other high-profile buyers and investors. Additional highlights included an excellent presentation by Morgan Stanley, on the state of the M&A and IPO markets, and indicators of IPO success. A panel by two Venable World Partners, on how to build and monetize IP, a fire side chat between Corum president John S Toledan, and with partner Chuck Morgan, complete with a projected background of burning logs visually, and as always the Sellers panel. This years panel consisted of Michael Edelstein, former CEO of Sinosco, and Corbet Kull, former CEO of 640 Lads, both panelists eloquently discussed some of the pitfalls associated with negotiating the best deals for the sale of the company. Though there was ample networking time, the concepts nevertheless seemed to fly by.

My compliments to the caliber of the content, good speakers, moderators and panelists and the athios for participating company founders, CEO's and CFO's.

Timothy Goddard

Thank you very much Ivan. Now let's go to Daniel Bernstein, who just got back from Sydney, Australia, Dan.

Event Report: World Financial Symposium Sydney

Dan Bernstein

Last Thursday, in Sydney, Australia, buyers, sellers, VC's, angels and great software companies met for the inaugural Growth & Exit Strategies, for software & IT companies conference in Australia. The even put on by the World Financial Symposiums and sponsored by the Corum Group and the DLA Piper Law Firm, brought together an international group of tech and finance leaders. Buyers such as Rubicon Technology Partners, News Corporation and Constellation Software, shared their insights along with sellers and regional VC's such as Telstra Ventures and Blackbird.

The speakers were astounded by the quality of the software companies in the audience, and testaments to the mature software and IT eco system that exists in the region. Software companies from all around Australia and New Zealand were in for a treat. An information filled day from sellers, such as QSR and Punters, along with their buyers, Rubicon and News Corporation.

All representations, the cocktail event went into the evening, as our host DLA Piper provided a fitting background for the scenic event. We're excited to continue to help grow the tech community here as buyers are paying more and more attention to quality companies down under.

Timothy Goddard

Thank you Dan, we are very proud to be platinum sponsors of the World Financial Symposiums. This was the first event of theirs, outside of North America or Europe, but it will not be the last and we are very much looking forward. Also looking forward to hearing from Dave Levine, on a deal that he just closed, in British Columbia, Dave.

Field Report: Tradetec

Dave Levine

It is my pleasure to announce the acquisition of our client TradeTec Computer Systems, by a Strategic Investor. TradeTec has been a leader in the forestry lumber industry, serving customers throughout North America. There continues to be strong activity in the ad tech sector, in truth that's the ability, the optimize and track forestry and lumber production of the supply chain and logistic software. There's a little bit of an edge in a consolidating market, and strength that had shaped at the tables scale, toward strategic investment. TradeTec is poised to continue to grow a market that is projected for strong growth, and as it stands where the only enterprise for distribution center solutions for logging operations, large or small. Bringing in additional resources will help TradeTec continue to grow further and enhance the position to market better forward. Congratulations to the TradeTec team.

Timothy Goddard

Thank you Dave. Now let's go to our resource team for our research report, led by Elon Gasper as well as Amber Stoner, Yasmin Khodamoradi and Aiden Mendoza. Elon.

Research Report

Elon Gasper

Thanks Tim, we begin with the public markets, which dropped world-wide in October, as US interest rates, trade, politics and other uncertainties proved hazardous and long Bull markets stumbled.

As the markets continue to digest, US elections impact and forecast and rates, we can note that the October market storm sure didn't slow Tech M&A, as our Corum index tracks substantial year over year increases in volume, in size and included the biggest mega deal of the year. Moreover, DC exits doubled, in year record. And here at Corum, we're noticing divestitures are too. So, basically the pro's, the proverbial smart money are, easing this exit window opportunity tech exec's who don't relish the thought of enduring the next downturn, but consider starting an M&A process to understand your options.

October's 8th mega deal stacked into five of our six sectors with the headliner and infrastructure, where last week century old IBM made the largest software acquisition ever. $34 billion dollars for Linnex Power House Redhat, of course cloud wars in the buying growth, market position and more at a premium price. You'll see this sudden shake up drive follow on M&A from hold on's to competitor counter moves.

Among other mega deals, wealth management services giant FNZ, traded CD's for 1.5 billion, ending up owned by a group that includes Al Gore's Generation Investment Management. And aerospace systems workhorse L3 was bought for 16 billion dollars by military coms veteran Harris, making it the top 10 global defense contractor in the biggest deal in the vertical sector. On the rest of that sector fair, Yasmin.

Research Report: Vertical Application Software Market

Yasmin Khodamoradi

The over EV multiples in the vertical sector have declined across the board, reflecting the broader market downturn. Nevertheless field growth continued, particularly in health care as Noona Healthcare was bought by cancer care solutions developer Varian Medical Systems. Was based off a portfolio with smart mobile technology. Medical care quality company COMS Interactive was purchased by specialist PointClickCare, in hopes with compliance with new Medicare payments. We also saw some unexpected players making deals. Healthcare revenue cycle solutions company Rubixis is nabbed by credit agency TransUnion, for it's healthcare revenue projections solutions. And clinical trial management platform goBalto was purchased by Oracle. Education, with new demands for K-12 solutions, particularly from private equity, had previously acquired.

Tech solutions group Cambium Learning Group sold for more than $685 million to e-firm Veritas Capital at 4.7 times revenue. Adding education to the public sector portfolio AI powered grading site Gradescope was purchased by plagiarism detection veteran Turnitin. Insight Venture Partners quick influence. In eight and C sub-sectors, total modeling tools were in demand, as Bricsys, which develops 2D and 3D direct modeling software was acquired by Hexagon. Philadelphia based Bentley Systems bought Swedish geo-visualization company, Agency9, to enhance their digital cloud services, and British pedestrian crossing simulation software, Legion, as an open building designer.

Finally, on the threshold of the midterm elections, Market meeting election management task maker Everyone Counts was acquired by block-chain voting innovator, Votem, to enhance its solution with digital voting capabilities like online voter registration. Now to IT Services Market, Aiden.

Research Report: IT Services

Alden Mendoza

Valuations in the IT Services sector declined, after robust year-long performance. Affirms with clear market focus for continued demand. Last month there was a handful of deals in the Azure SI space, for instance, Melbourne based Assured Cloud Network specialist, CNI, was picked up by Logicalis. Deloitte also did a deal in Australia, pocketing Mexia just days after buying Australian AW specialist Cryotech. And in France, ISI Expert, offering Azure and Microsoft 365 managed services was acquired by Swiss software procurement consultancy, softwareOne. In the UK, four year old Symphony Ventures, which help supply machine learning to repetitive task, was lapped up for over 67 million by US customer engagement firm, Sykes, to support their position in intelligence automation.

In the security services space, FusionStorm, which offers disaster recovery and service solutions, was bought for 70 million by IT consultant, Computacenter. And Israeli cyber security services company Synia, was bought for 250 million by Singapores sovereign fund, Temasek.

Finally, health care and human services consultancy Maximus, cleared up the US government IT market, paying $400 million to defense titan, General Dynamics. For its citizen engagement contact subsistence, which supports Medicare and defense bureau operations. Amber.

Research Report: Infrastructure Software Market

Amber Stoner

In the infrastructure sector, sales multiples dropped back to last years levels while EBITDA metrics remained remarkably steady in the face of the market downturn. Among mega deals we've noted, IBM ecosystem optimization solutions that are in Rocket Software bought for two billion dollars by Bain Capital. Largest tech deal since picking up Blue Coat for 2.4 billion in 2015.

Security deals accounted for 66% of all infrastructure deals last month. From network security to identity authentication and including newer technologies. All part of the data security trend. Starting in one of the newer corners of the security space, Layered Insight, specializing in container native application protection was acquired for $12 million by security and compliance firm, Qualys, to ramp up its container security offerings.

In cloud infrastructure security, Israel's cloud native adoption firm, Dome9, was picked up for 175 million by cyber security player Check Point Software, to fill a gap in its portfolio as public cloud deployments become increasingly popular. Palo Alto Networks continued its shopping spree with its third acquisition this year, paying 173 million for cloud threat defense startup, RedLock, combined with the evident IO technology Palo Alto acquired in March. And AWF cloud optimization firm, FittedCloud was bought by cloud cost management specialist, Apptio, to build on its public cloud management tool. And endpoint security deal, virus and malware protection firm, Total Defense, was picked up my Marlin Equity, to merge with app reverse cloud based security suites.

In network security, Seattle based AI cyber security company Versive, was acquired by managed detection and response player, eSentire, in its first acquisition, to enhance its visibility capabilities plus cloud hybrid and on-premise environments.

Dutch behavior and network security analytics firm, RedSocks, was bought by Romanian anti-spyware firm Bitdefender, gaining a new foothold in the Northern European region. In the A&E authentification space sparked the interest of both strategic and financial buyers. Australian identity verification firm Vix Verify was acquired for over 27 million by fraud protection software company GB Group, to compliment its existing IBV and locate solutions. Identity verification expert Acuant was picked up by Audax Private Equity. And Akamai divested its identity services division, which provides self service authentication class solutions to video content encryption company, Verimatrix, through description within its content distribution work-flow, using a common authentication system. Finally, CorreLog, which develops solutions for security and compliance auditing professionals, was acquired by systems management stalwart, BMC Software, to bring security management into BMC's portfolio.

Elon Gasper

And November's first mega deal is in security too. Another divestiture, cloud security platform, Veracode, bought just last year by software veteran, CA, shed now in the sudden purchase of CA by chip maker Broadcom, landing in CE Thoma Bravo's hefty security portfolio, alongside Imperva, Barracuda logirythm. Amid reports, Thoma may even add Symantec to that mix too. Mega deal tsunami's are rearranging landscapes, Tim.

Timothy Goddard

Thanks Elon, they certainly are. And that brings us to a certain degree, to the opportunity presented by those changing landscapes, and a question that we get a lot here. Which is, what is my company worth? I suspect that's why a lot of you are on the call, it's to get a better sense of the answer to that question. Obviously we just went through a lot of deals and numbers. But there's a little more to it than just that. So we're going to get into that right now.

Corum Group is recognized as the leading expert on valuations for software, IT, and related tech companies. In addition to the work we do for our clients, we have educational events we have offered to software valuation guidelines for Wiley, the world's premier publisher of higher education material. All that's not to toot our own horn, but to give you some context for what we're going to share next. Let's hear from our global team of deal makers on T-tips and software company valuation. It's only going to be an overview, our time is short, but hopefully it does give you a good foundation as you move forward. Let's begin with one of our newest deal makers, but a very experienced technology CEO and entrepreneur, Stephen King, based in Oregon. Stephen, start us off.

Special Report: Valuations for an Optimal Outcome - # 1 Software Companies are Valued Differently

Stephen King

To make the discussion of valuation more relevant, you first have to understand why software companies are so different to traditional firms. Just take a look at this chart of traditional firms vs software companies. As you can see from this list, software companies and traditional firms do not match up well on basic characteristics. Further, their economics are completely different. As this graph shows, fixed versus variable costs are completely different. At the increment, unlike traditional businesses, the next products you sell in software is old profit. Thus software companies are valued much higher than traditional firms.

Timothy Goddard

Thank you Stephen. Next in Boston, Martin Lowrie, Martin.

Special Report: Valuations for an Optimal Outcome - # 2 Understand the Purpose of your Valuation

Martin Lowrie

First of all you need to understand the purpose of your valuation. Often people speak about valuations as if they're all the same. That's not true. There are valuations for divorce, or settlement of your estate. What's acceptable for the courts involved in preceedings like these is very different than what we're discussing today. If you're raising financing, that's a different kind of valuation. If you're setting up ESOP, or putting together buy-sell agreements, then different metrics will apply in those cases as well. What does all that mean? You can't just go to an accounting firm and ask for a valuation from their consulting group. You'll be surely disappointed. What you want is a valuation applicable for a knowledgeable strategic or financial buyer. One who has a strategic imperative to pay a premium. These valuations look carefully at the underlying value, which is often intangible, and the future potential, which is obviously critical to the buyer. This results in a much higher valuation.

Timothy Goddard

Thank you Martin. Now to Silicon Valley, and Mark O'Brien is going to walk us through a few of these methods.

Special Report: Valuations for an Optimal Outcome - # 3 The Top 10 Valuation Methods

Mark O’Brien

The valuation methods that we are going to be talking about today, are for the strategic sale to a buyer that will be bidding in an auction environment. In that case, the actual process plays a critical role in determining the final value. I recently included this in a keynote speech, it's very important. There are basically 10 ways to value a company. Sales multiples from public companies, earnings multiples from public companies, comparable M&A transactions, discounted cash flow, also known as DCF, replacement cost analysis, dollars per R&D Developer, internal rate of return, or IRR, liquidation value, book value, and lastly, internal transaction price. We are only going to be talking about the first five because as Stephen mentioned earlier, software companies are very different than traditional firms, where the hard asset valuation methods traditionally apply. Multiples of sales and EBITDA are the most commonly used methods. In addition to the comparable transactions and discounted cash flow analysis. In very few cases you may also look at replacement value. Keep in mind that none of these methods provides an exact valuation, and a weighting should be used to develop not a magic number, but a range of values for discussion.

Timothy Goddard

Thank you Mark. Now down to LA with Serge Jonnaert, Serge.

Special Report: Valuations for an Optimal Outcome - # 4 Present your Valuation in Context

Serge Jonnaert

In presenting you valuation, before turning to the numbers, it is important to introduce your company in the valuation report. It's marketed value proposition, and the opportunity that it represents. You should include summary of the business, its history and technology, it's strength and weaknesses, the business risks, along with its unique position in the market. Also identify markets where your product or services could also apply. Information will be based on a few sources: the original executive summary that you prepared, the competitive research plus the feedback that you may already have received in dialogue with potential buyers. They will confirm why you may be of value to them, and what elements of your company they want or need the most. It will definitely help you to better articulate your value. Along with accurate view of your market, there should be an explicit definition of your business and revenue model, with some reference to other similar companies that are logical comparables. Especially those companies that went on to be very successful in related markets.

Timothy Goddard

Thank you Serge. Now down to Houston, Texas, Jeff Brown on some financial advice.

Special Report: Valuations for an Optimal Outcome - # 5 Pro Forma Earnings should be Cautious and Supportable

Jeff Brown

The financials required include three years of past financial statements. They may need to be recast per GAP standards, or to take out one time charges or expenses that won't be part of ongoing operations. Even more important are three years of Pro Forma earnings in a standard accepted financial model with detailed assumptions on strategy, growth, and profits. If not included, the foundation of your entire valuation is undermined. Pro Forma earnings don't have to be computed using standard gap, and usually leave out one time expenses that are not part of normal operations. A Pro Forma financial statement can exclude anything a company believes obscures the accuracy of its financial outlook. One note on preparing these projections is to be cautious and supportable, especially in year one as the buyer may tie part of the transaction value to an earnout based on your projected revenues and profits.

Timothy Goddard

Thank you Jeff. Now to New York, another one of our newer points, Lonnie Schilling, who's going to talk in a little more detail about one of those methods we discussed earlier; Lonnie.

Special Report: Valuations for an Optimal Outcome - # 6 Start with Analysis of a Public Peer Group

Lonnie Schilling

When it comes to establishing a range of valuations for a transaction, one of the first places that almost anyone starts is with an analysis of a public company financials. This is because public data is readily available and also serves as an objective, public measure of value. The analysis involves a comparison to primary operating metrics, and a prize value to sales, and enterprise value to EBITDA for your peer group. This peer group are generally companies much like yours, although sometimes you may be in multiple markets concurrently, representing a hybrid. Size, growth, business focus, all come to play in establishing a peer group. Remember that any valuation based on public companies is no more than just a guide. It doesn't reflect a potential buyer's premiums for strategic value or change of control, nor does it reflect any appropriate discounts. After all, public companies are usually more highly valued than private ones. This is one of the places where experience really counts, and a seasoned analyst can be invaluable.

Timothy Goddard

Thank you, Lonnie, and welcome aboard. Now let's head over to Switzerland and Mattias Borg on another type of comparable.

Special Report: Valuations for an Optimal Outcome - # 7 Comparative Analysis is Perishable

Mattias Borg

One important approach used in determining valuation of the subject company is analyzing comparable transactions. Most of us know horrors in financial real estate values are driven by comps, and the same principals apply to tech companies. Key criteria for finding good comps include the positions of companies that have like business models, or also are in the same industry. Companies that have similar profiles for growth and profitability, or companies of similar size. Comparative analysis is somewhat perishable. The preference is using more recent transactions over older ones. M&A may be private, finding the right set of comps can be challenging. That's one reason reason that you want to work with a firm that has the research capabilities.

Timothy Goddard

Thank you, Mattias. Now back down to Texas, this time to Austin, and Allen Wilson on discounted cash flow; Allen.

Special Report: Valuations for an Optimal Outcome - # 8 DCF is the Most Commonly Used Method Across Sectors

Allen Wilson

The DCF of discounted cash flow valuation method is the most universally used method by all forms of buyers, tech and otherwise. The reason is that DCF attempts to capture the present value of your cash flow going into the future, critical to whether the acquisition will be accretive for the buyer, and useful to young selling companies that may not have enough track record to use the other valuation methods. The three years of projections are discounted to the present, as is the terminal value, which represents all subsequent years cash flow. The terminal value is usually a sales multiple of year three revenues. These two calculated values, terminal value and three years of discounted revenues, represents the present value of the company. The discounted grade is critical. It is highly technical and must be supported. For growing technology companies, it usually ends up being 15 to 20% or more.

Timothy Goddard

Thank you, Allen. Now to Ottawa, in Canada, with Bruce Lazenby.

Special Report: Valuations for an Optimal Outcome - # 9 Build vs Buy is the Foundation of Replacement Cost Valuations

Bruce Lazenby

The classic build versus buy analysis is the foundation of a replacement cost valuation method. The fully burdened cost per person or contractor, the number of full time employees and contractors required, and the number of years in development will go in to building this analysis. Not to be overlooked, prior legacy work has to be factored in and the time to market factor, which will be defined with underlying assumptions. With this information an inquirer will calculate their ability to build it themselves. This method may be useful for a seller where other valuation methods don't clearly value the investment put into the company, such as raw startups, legacy companies that don't typically get high multiples but often get extraordinary investment in technology domain expertise and or user basis.

Timothy Goddard

Thank you, Bruce. Now, over to Paris, France, Jaber Tannay, on what you do.

Special Report: Valuations for an Optimal Outcome - # 10 Weighted Averages Should Support Strategy & Market Dynamics

Jaber Tannay

The weighted valuation provides a good way to balance the three main approaches we've just discussed. Public company multiples comparable transactions and discounted cash flow. Results of these three methods can be weighted evenly, or, you can move the weightings to support your strategy or dynamics of your market. For example, if you're a high growth software firm focusing on capturing market share and top line growth, you may want to raise the weightings of comparable transactions and reduce weightings on the DCF method. On the other hand, if your strategy is to maximize EBITDA, then you should raise the weightings of the DCF methods. The main benefit of adjusting your weightings is it provides you with different scenarios to study and build your case before presenting a valuation model to an interested buyer.

Timothy Goddard

Thank you, Jaber. Now back here to HQ with a bonus tip from President Joel Espelien; Joel.

Bonus Tip: When to Present Your Valuation

Joel Espelien

As a seller, when should you present your valuation to buyers? The answer, as late as possible. In today's market, your business should be growing, market multiples are staying strong, and along the way you will often learn why you are important to particular buyers. The marketplace determines your company's most valuable attributes. During a properly managed M&A process, buyers will frequently disclose their preferred valuation methods, market comparables, deal structures, and the points about your business that they find most valuable. All of which you can use to craft your valuation. In addition, time will help to create an auction environment that increases the value of your company with multiple buyers bidding. Ultimately, deal value is determined by what qualified interested buyers are willing to pay. And a broad market engagement ensures that you're leveraging the right candidates. Too many software company owners sell themselves short, leave money on the table, because they never let an auction process develop. Our experience has been that properly executed, an auction process will generate 48% greater deal value for your company.

Timothy Goddard

Thank you, Joel. Now let's go to Q&A, we've got a number of questions that have come in. We're not going to be able to get to all of them, just as we are coming right up against a half hour. But one that did come in is, one of the things we talked about was there are a lot of security deals getting done, what's driving that particular market dynamic?

Elon Gasper

Well I think we all feel the growing importance of cyber security in general and M&A, we covered this latest Thoma Bravo acquisition of Vericode. In it, a partner there noted that practically every company is turning into a software company now. And that's true, they're building their own apps and they need to consider cyber security from the start and that demand for expertise, tools, personnel, it's moving upstream into M&A. That's why for almost four years data security has been the anchor of our Corum top ten trends.

Timothy Goddard

Thanks Elon. That does bring us to our close. I've had some requests for the slides. We will certainly get those out, but I want to encourage you if you want to learn more about the process of valuing a software company and going to market, please attend one of our upcoming events, particularly Selling Up Selling Out. Coming up hopefully in a city near you. You can see some of them here as well as on the Corum website. Hope to see you there soon, and let's go to our close.