A Seller's Biggest Mistake

Introduction

Bruce Milne

Welcome to the May 2016 World Tech M&A Report. I’m Bruce Milne, CEO of the Corum Group, your sponsor.  

We’ll start off with a CNBC Power Pitch by Nat Burgess, then special reports on record conferences, both live and online around the world, a field report on the recent sale of Lingospot. Then we’ll turn to our HQ Research Group on what is happening in deals and valuations. Then, finally, our special report on the single biggest mistake a seller can make. Then, of course, Q&A.  

Now let me turn it over to our conference moderator, Timothy Goddard.  

Timothy Goddard

Thank you, Bruce. We do have a really great conference prepared for you today. To kick things off we’re going to go to Corum’s Nat Burgess, who has been doing something interesting on TV.  

CNBC Power Pitch  

Nat Burgess

Imagine if you had sixty seconds to pitch your business and if you succeeded you’d get a meeting with qualified investors and have a shot at raising real capital. Well, that’s exactly what we’ve been doing on a CNBC program called Power Pitch.  

This is Nat Burgess, President of the Corum Group, and also an angel investor. I’ve invested in companies that have been acquired by Google, Yahoo!, Microsoft, and others, and as a Power Pitch panelist I get the chance to look at the world from both perspectives, M&A and investing.  

By the way, Power Pitch is on CNBC at 1:40 EST, 10:40 PST today, immediately after this session.  

The format is simple, we listen to a sixty second pitch and then we put the founder in the hot seat, asking them the tough questions that uncover flaws or advantages in their business model. At Corum, we spend our days talking to CEOs and M&A professionals about our clients. We’re the ones making the pitch. On CNBC the tables are turned.  

Power Pitch entrepreneurs often overlook two critical elements of a successful business plan, and I think this is useful for our audience today.

First, they generally start with a mission, but they don’t have a clear destination in mind. They don’t think about how they will position for their next funding round, or more importantly, for an exit.  

Second, they often overestimate what they can do as a startup. Maybe television makes us feel like we’re invincible. We have some evidence of that today. But whatever the reason, they aren’t narrow, they aren’t focused, they haven’t limited their focus to what they can do with small capital.  

Thanks for listening and enjoy the next episode of Power Pitch today.  

Special Reports: Record Conferences  

Timothy Goddard

In addition to television, we’ve had some really fantastic live events recently. Now we’re going to hear from our deal makers across the globe about some of those events.  

We’ll start with Dan Bernstein who was just in Reston, Virginia.  

Dan Bernstein, Merge Briefing, Washington D.C.

Dan Bernstein

Last Thursday we hosted a Merge Briefing at the Cooley Offices outside of Washington, DC. The event was a great success, with almost 50 participants, a record attendance of CEOs that speaks to the quality of great software and IT services companies in the region. Fueled by a healthy economy, a booming population of knowledge workers, and a government sector that is looking to be transformed by technology, the DC Metro area is developing into a region of tech innovation. We explored the top ten trends in technology, reviewed valuation and market trends, and dove into what it takes to market, position, and sell your company in this red-hot M&A environment.  

Timothy Goddard

Thanks, Dan.

Now, heading north, we’ll hear from Dave Levine who has been in Canada. Dave?

Dave Levine, Selling Up Selling Out, Canada

Dave Levine

Last month we also hosted Selling Up Selling Out events in Montreal, Ottawa, and Toronto. We experienced record attendance in Montreal and Toronto as valuation and alternatives to venture capital funding was on everyone’s mind. We dove deep into the steps necessary to achieve an optimal outcome including the necessity for starting preparation now, how to structure a deal for success, relevant valuation models, and negotiation strategies. We finished our Canadian swing with a Selling Up Selling Out conference in Vancouver this month and next month we will be in Portland and Salt Lake City with the industry’s definitive M&A education. We hope to see you there.  

Timothy Goddard

Now, on the other side of the world, Jon Scott, based in Amsterdam, had some very successful events in London and Berlin.

Jon Scott, Tech Infrastructre and SaaS in London and Berlin

Jon Scott

Thanks. It’s great to be here. I just wanted to quickly give you a report on what happened at our recent events. There’s a lot of great infrastructure in London for tech companies and a lot of interesting companies there. We also had that event with our co-sponsor Olswang, a law firm in London. We did our Berlin event yesterday, and that was interesting, we’ve seen a lot of interesting companies, especially in the SaaS space, and these are companies that are developing pure SaaS models beyond the software, but also from the standpoint of low-touch, easy-install, easy-onboarding for their customers. Out of interest, here in Berlin, we partnered with Greenberg Traurig, one of our partner law firms, and the support infrastructure in Berlin is actually matching London now.  

Finally, we’re seeing more and more strategic buyers and PE buyers at our conferences, more than ever before. That shows, I think, the very interesting opportunities out there and that these strategic buyers are looking at them.  

Back to you.  

Timothy Goddard

Thank you, Jon. Now on the other side of the world, we’ve got some very happy news coming out of the land down under, so now we’d like to go to our new Regional Advisor Andy Hill. 

Andy Hill, Corum Regional Advisor, Austrailia and New Zealand

Andy Hill

Thank you. I’m delighted to join Corum Group as the new regional advisor for Australia and New Zealand. Previously, I was a client of Corum as CEO and co-founder of Oniqua, a Brisbane-based software vendor. Corum Group advised Oniqua on a very successful global sales process with the business ultimately acquired by a PE-backed company in the UK. I’m looking forward to using this experience to help other Australian and New Zealand businesses who are seeking access to global buyers.  

The Oniqua sale, together with deals with Zeacom, Cintellate and Gemcom underlines Corum’s focus on the region with some really exciting businesses, with fantastic technology, currently in the market.  

Corum Group will be running a series of Merge Briefings in Perth, Melbourne, Sydney, and Brisbane during the week starting 20th of June and then in Auckland and Wellington on the week of the 27th of June. I hope to see you there.   

Timothy Goddard

Thank you, Andy. Now, for more happy news let’s hear from Jim Perkins, who just closed a very interesting deal. Jim?  

Field Report: Lingospot Acquired by Picsel

Jim Perkins

We are very proud to announce the sale of Corum client Lingospot to Picsel. Lingospot, based in LA, developed natural language processing, semantic search, image analysis and machine learning technologies for the analysis of scene-level metadata for television, while Picsel has a SaaS platform for designing, building and managing online video solutions. Lingospot’s technologies will be leveraged in Picsel’s Pallette platform to create proprietary metadata on a scene-by-scene basis, which can be used for intuitive search, recommendations, and discovery.  

This application of AI and machine learning to video analysis is a great example of the AI-enablement trend we noted at the beginning of the year. We expect to see many more deals throughout the year. Congratulations to the Lingospot team and what they have accomplished and what they will accomplish as part of the Picsel team.  

Timothy Goddard

Thank you, Jim.

Now, for more reports on more deals, let’s go to Corum’s research team, led by Elon Gasper, joined by Amber Stoner and Thomas Wright.  

May 2016 Research Report: AdTech on the Rise  

Elon Gasper

Thanks, Tim. We begin with the public markets, which extended their March bounce, until some tech earnings and economic stats disappointed during the last week of April, taking most indices lower for the month.  

Our Corum Index spotted a year-over-year decline, too, in tech M&A transaction volume, the bulk of which was due to a big drop in VC-backed exits, a shift also highlighted in target age increases and fewer acquisitions of startups, all factors reflective of a narrowing of the market with some retreat from last year’s buyer and valuation exuberance. Though still, historically strong, so I’ll counsel tech execs again, it’s just prudent to consider launching a process while the cycle holds if only to calibrate your company’s value and direction.

Megadeals also saw value compression, but with a large increase in deal volume, as more aggressive consolidation chased these scaling opportunities. The deals span four of our sectors, Internet, Infrastructure, Horizontal, and Vertical, which here in Seattle includes insurance industry specialist Vertafore, bought by our top 2015 PE, Vista Equity, going in with Bain in a deal reported at $2.7B, following Vertafore’s recent acquisitions of two SaaS providers to insurers, including Corum client QQ Solutions.  

Vista also spent $1.6B to take event management platform Cvent private at 8x sales in its largest solo acquisition ever.  

Imaging and ECM solutions provider Lexmark was grabbed for just over $2.5B by a China-based consortium, led by Apex, with hopes to leverage the Lexmark line into the buoyant Asian mobile market.  

In the Infrastructure arena, a flurry of activity in the media subsector included DVR pioneer turned video tech software provider Tivo being bought by entertainment discovery specialist Rovi.  

Also in Infrastructure, video conferencing vendor Polycom joined forces with Canada’s Mytel in a $1.9B transaction bundling two legacy firms to face tech-focused rivals Avaya and Cisco.

Amber, how has the rest of Infrastructure fared?  

Infrastructure Software Valuation Metrics

Amber Stoner

Overall valuations in the Infrastructure sector have remained fairly steady since Q1, with a slight dip in EBITDA multiples. There were a number of deals in the security space, especially related to identity and access management in April.  

IoT identity and access management software provider Device Authority was scooped up by London’s Cryptosoft to differentiate its set of security solutions for the IoT.

Austin-based Quick Security was nabbed by Alert Logic to complement its incident response solutions.

Van Dyke Technology out of Maryland was acquired by Jacobs Engineering Group to add enterprise identity access management offerings to its current IT services capabilities.   

The cloud management space has also been busy. Hybrid cloud management provider Itap was purchased by Service Now for $15M, a 7.5x revenue multiple, on the heels of Cisco’s pick up of Clicker earlier this year. Cloud provisioning company Ensim was bought by Ingram Micro, which hopes to bolster its services with cloud app distribution.  

Thomas, what’s happening in the Internet space?  

Internet Software Valuation Metrics

Thomas Wright

After a full year of runaway multiples in 2015, 2016 has seen four months of steady rationalization in the Internet sector, with sales multiples reaching parity with the upper end of our five other sectors.   

Travel remains a feature attraction, with travel giant Trip Advisor acquiring London-based Housetrip to augment their existing vacation rental websites and to gain a foothold in the European market.  

Europe’s largest hotel operator, Accor, moved to fortify their position in the luxury rental market, against Airbnb, snapping up London-based One Fine Stay for an estimated $169M.  

Hall Street was bought by the UK’s TimeOut Group, who aims to integrate Hall Street’s dynamic maps into a simple, end-to-end travel planning mobile platform.  

In the legacy travel neighborhood, Spanish bed bank Hotel Beds was purchased by Cinven, a PE firm from the UK in a megadeal valued at $1.3B. Cinven hopes to repeat the success they had with another Spanish travel giant, Amadeus.  

Departing from travel, Spotify continues its aggressive 2016 with its third acquisition of the year, creating a comprehensive multimedia platform by integrating San Francisco-based photo aggregator Crowd Album.  

Video asset management continued to be a driving force within Internet M&A. VHX, a branded video-streaming marketplace where content creators can sell their work directly to the consumer, was acquired by video-sharing titan Vimeo. Denmark’s ioGates was purchased by video production software provider Broadcast Pix, in an effort to bring its cloud-based video management services to a wider audience.  

Horizontal Software Valuation Metrics  

Amber Stoner

In the Horizontal sector, valuations have remained stable as buyers are willing to pay for universal technologies, as evidenced by deals happening in multiple subsectors.  

Social monitoring tools came to the forefront last month. LiveFire was acquired by Adobe, trying to reinforce its content user generation capabilities. FreshDesk secured India’s Air Route in an attempt to extend its customer support offerings via social channels, and San Francisco’s Kit CRM was picked up by Shopify, making a step towards conversational commerce.  

In only its third deal of the year, Google purchased Ontario-based Google Apps training provider Synergyse. Google has remained diverse in its targets this year, getting YouTube collaboration tool BandPage and Singapore’s Pie as well, even as it slowed its acquisition pace following the reorganization into Alphabet, with half as many acquisitions announced in 2016 as it had this time last year.  

In a related deal, enterprise training management SaaS company View Central sold its assets to Callidus Software for $4M.  

Israel’s device dropping ad startup Crosswise was bought by Oracle for $50M to be integrated into the Oracle data cloud.   In the mobile marketing space, Carnival, out of New York, was snapped up by customer retention cloud platform Sailthru to solidify its expertise in mobile personalization.  

Elon Gasper

And finally, just his week, in another marketing AdTech play, Paris-based video platform StickyADs was bought by Comcast ad server division FreeWheel Media for a reported $100M+, following other telecomm and cable buyers, such as Verizon and Telenor, scrambling for AdTech companies. A lot happening in video and AdTech, but speaking of scrambling, we’re at the end of our report.  

Back to you, Tim.    

Timothy Goddard

Thank you, Elon. Feel free to submit any questions you may have from that presentation in the Q&A window.  

A Seller’s Biggest Mistake  

Now we’re going to go to what we’re calling the Seller’s Biggest Mistake. Corum CEO Bruce Milne has a report that covers the major mistakes you can make when looking at selling your company, including the largest one.  

Bruce Milne

When you've been at this business for 31 years, do as many Tech M&A educational events as I do, and have sold more companies than anyone, you see patterns in M&A that kill deals, destroy value.  

While there are a number of mistakes as you can see on this list made by company owners that hurt value—hinder your ability to sell—there is one mistake we see almost daily that stands out above the rest, ensuring you won't get maximum value—or an offer at all—sometimes even killing the company.  

The number one biggest mistake, clearly in a league of its own, that kills more value than the others combined, is dealing with only one buyer.  

We do from 2 to 7 conferences a week around the world. Invariable an owner at these event will tell us that he's been approached and all he wants to do is get this one negotiation done.  

Look, it's tantalizing to make an exit easy, but given how much you've invested in building your firm, and all of the responsibilities you have to customers, employees, partners, it's important that you handle the sales of your company thoroughly and professionally.  

Further, if you have investors, there's the issue of fiduciary responsibility. Fiduciary responsibility - something you need to be concerned about. You will have a tough time defending yourself against an unhappy minority shareholder group who asked you the simple question: “So, how many buyers did you get offers from before you decided on this price and structure?” The outcomes are not good for management.  

When you're only dealing with one buyer that approaches, the deck is always stacked against you - in far more ways than you realize. So, be careful, before launching ahead with trying to get this one approach over the goal line.  

First off, a very interesting statistic. From a survey the past six months of Strategic and Financial buyers, who have over $4 trillion in uncommitted funds, we found that only 11%, of the acquisition overtures that they make to potential sellers end up in a deal.  

Wow, only 1 in 9. So before you start counting your chickens because somebody comes a callin, realize that 89% of those phone calls eventually end up going nowhere. In the meantime you get all excited by the courtship - hey, all the right words are being said.  

But, you've signed up for another full time job to try to go through the hoops they put you through - the myriad of due diligence demands that can drag for months, quarters even, taking a huge toll on your time to run the business.  

If your performance goes down—even slightly—the process is delayed for more results—usually, price and structure modified—and contract liabilities get worse. Often the offer is withdrawn.  

It can take a long time to recover your value - you may miss the peak, or even the window to sell.  

But, we're getting ahead of ourselves. Let's look at why buyers even make approaches.  

Who are they?  

They may that one logical buyer, who has a strategic imperative to acquire - but even then, you need leverage from other interests.  

Most likely early interest comes from what we call bottom-feeders, those trying to buy on the cheap. Or those preemptive buyers, those who try lock you up ahead of the other buyers.

By taking their approach, you let them control the process. You want to control the partnering process.   

A standard ploy of these initial overtures is they tell you they are going to spend a lot of money to do due diligence, thus they need to lock you up in an exclusive negotiation arrangement where you can't talk to others. Sounds enticing, but it's a disaster for you. We know one financial buyer all of you have heard of that has 42 associates worldwide that do nothing but call companies sounding out who's interested in selling. This is their standard tactic.  

You've been forewarned if you go into an exclusive negotiation with them!  

Look, you've worked hard to create value - often more than you realize. Remember, it's not just about technology. There are so many other factors about your business model and hidden assets that can unlock value.  

The right price and structure are created by a detailed process professionally done. In the age of Sarbanes Oxley and much tougher legal and accounting advisors, due diligence is fraught with land mines. So, you have to be ready.  

Statistically, firms that try to sell themselves, without professional preparation and research, have a failure rate of 80%. Only a 20% chance of success. Don't let that be you.  

Here's "8 steps to an Optimal Outcome" that will turn those odds around, and get a better price and structure.  

First off have iron-clad preparation, followed by extensive research. Leave no stone unturned in terms of buyers, contacting and vetting them.  

You must go global. A lot of the buyers today are international, are non-technology, or portfolio companies of PE firms. About 40% of your interest will come from what we call the B list of buyers - often firms you've never heard of that help you leverage your value up.  

Premium values are created by having the right professionals on your side in valuation, negotiation, and contract preparation. “You don't know what you don't know” is a phrase we are all well aware of. In tech M&A, it kills deals.  

This is no time for homebrew approaches - dealing with only one buyer. If you do it right, go through a professional global search process for your partner, you get what you deserve for your years of hard work.  

75% of the time, there are other buyers willing to outbid the first party who approached you to.  

Bidding is the key here - by leveraging interest from a range of bidders, you create an auction environment. The result is extraordinary. You can expect to get an average of 48% more for your company over dealing with just one buyer. That 48% more liquidity - as in funds in your pocket. Most deals are for cash these days. Those early low ballers who try to do structured deals with earn-out, notes, private stock, etc. quickly get washed out of the process by better bidders.  

So do the job right. This is the most important transaction of your life.  

Timothy Goddard

Thank you, Bruce.  

Before we go to Q&A, I know that even after all that, there are still some of you in the audience saying, “In my case, I really have the right buyer, the right buyer is at the table, I just need to push this over the finish line.”  

I’m going to hand this over now to Corum Chairman Ward Carter who has an anecdote about one of those rare situations and what that means, given everything that Bruce just went over. Ward?  

Ward Carter

We fully recognize the virtue of having multiple buyers at the negotiating table to get full value. What happens when you don’t have those multiple bidders? It still makes tremendous sense to create the semblance of multiple bidders to leverage the buyer. We recently had a situation where our client had a tentative offer from the giant in their vertical space and there was a strong fit, given that both parties addressed different segments of the same market. There were few other options for the buyer, and our client represented by far the best solution.  

Our client was also not actively looking to sell and saw holding on as a viable long-term option. We established valuation benchmarks for similar high-growth, high-EBITDA SaaS companies. We knew we were the best option for the buyer, so we were able to be aggressive on valuation and also send the message that we were ready to walk if this buyer failed to execute, as we had other options, including selling to the buyer’s competitors, who we were prepared to approach.  

In the end, the buyer agreed in the face of compelling logic that they were better off buying an existing solution, obtaining not just the technology, but the customer base, the team, the recurring revenue, along with domain expertise and brand, than to spend time and money on developing a competing solution.  

Timothy Goddard

Thank you, Ward.  

Q&A

Let’s go now to Q&A. Specifically, how do we look at hardware and software companies, for somebody both of those? Elon?  

Elon Gasper

Yes, Tim. A lot of companies these days have a mix of hardware and software components to them, or they may even have the things that are partway between them, such as firmware or enmeshed systems, one of our top ten trends this year.  

What we need to do there is to separate out the revenue streams and the valuation of them, without getting to the point where we’re missing the point, which is the synergy between those things.  

So, hardware and software combination companies are an art to evaluate and to take to market and they are almost always one of a kind. So we encourage you to contact us and we’d love to chat about your particular situation.  

Timothy Goddard

Regarding the indices that we showed, many of those are large public companies that often have a mix of software and hardware. We’ve selected those companies and curate those indices based on how they track the technology in their particular segment.  

Question for you, Nat. When a buyer is identified, what is the standard duration of exclusivity?

Q#1 Standard Duration of Exclusivity

Nat Burgess

That question definitely comes from experience, so thank you for asking. When you accept exclusivity, you are at the buyer’s mercy and that creates a lot of risk. What you try to do is make it as short as possible and also potentially to stage it. So we’re negotiating an LOI right now where we are requiring the buyer to deliver a draft purchase agreement within a certain period of time and then to reconfirm their commitment to close the deal on the negotiated terms. That reconfirmation needs to come within 30 days. So, then they get another 30 days to close. You end up with 60 days, which is fairly standard now, it might have been 30 days back in 2000, but it takes longer now, and you look for ways to confirm interest along the way and make sure you’re not just getting strung along.  

Timothy Goddard

Thanks, Nat. Another question that’s right up your alley. If you are transitioning to a SaaS model from a licensed model, how long do you wait before going to market?  

Q#2 Going To Market Post SaaS Transition

Nat Burgess

Well, sharpen your pencil because there are certain things buyers look for in SaaS companies and you need time to develop those metrics. The first is top-line growth. You have to prove that you can get customers to sign up and that’s been the biggest handicap for SaaS businesses. They’ve built something cool and then they realize that they’re not able to get any customers on the platform. So that’s the first one.

Second is you need to be able to track a client through a period of time to make sure you’re able to retain them, ideally a year. That really is a measure of churn or retention rate. Then the third thing is time to profitability with a customer. Are you losing money on every customer that you sign up or do you have a profitable business model? If you have enough history behind you to establish those three things, and they’re all positive, then you have a high value validated SaaS business.  

Timothy Goddard

One last question, Elon, about the managed services space, we have a number of those companies listening in right now, these are companies with monthly recurring revenue as well as non-recurring revenue and hardware and software. How do we see them being approached in the market?  

Q#3 Managed Services Companies Buyer Approach

Elon Gasper

Well, there is certainly a market for companies that are addressing a technological need by whatever needs are appropriate to it. Many of them these days are not the simple business models they used to be back in the 1990s, they are addressing a very complex situation and have to address it with multiple means. There’s certainly a market for companies like that, but getting down to specifics is the crux of evaluating it and I would encourage you to contact us about that.

Timothy Goddard

That’s all the time we’ve got for today. We have a lot more questions we will follow up by email. Thanks for your attendance and let’s go to our close.