Tech M&A Monthly: Tech Deal Structures Post-COVID

Special Report: Tech Deal Structures Post-COVID

Bruce Milne

We've been getting lots of questions lately about what deal structures are looking like right now post-COVID. As many of you who have attended Corum's Tech M&A bootcamp: Selling Up Selling Out, know we preach that structure is more important than price. Here are two recent offers with the same company this summer that reflect this. See what you think.

Case Study #1: Structure vs Price

The first offer from what our client thought would be the logical buyer came in "highly structured" as we call it, meaning there were number of non-cash components. The second offer came from a private equity firm we know well, one that our client had never heard of. The valuation of the firm is about $12 million, so the seller was happy with the results of the global search process that we took him through. He had some overages from buyers we know who are bottom feeders less than $10 million in value. They'd been trying to lock him up into exclusive negotiations. Don't do that.

There were other offers as well, but these were the two best. On the first offer, as you can see the price is good, $20 million. But most of the payment is in the future. There's $5 million down with two additional payments of $5 million each at the end of year one and the end of year two. The first $5 million is guaranteed. It's a debt note. The second $5 million payment is not a guaranteed note, and has the basic contingency of the company meeting some liquidity requirements assuming the business does not dramatically drop off.

There is an additional upside of our four years of $5 million bonus based on agreed-upon high goals, tied to an extended employment agreement of four years with a five year non-compete agreement. There are no provisions for employees. 

The second offer is only $15 million, but it's all cash with a 10% on year escrow for contingencies, meaning that the owner pockets $13.5 million at closing, the rest $1.5 million within a year, if escrow contingencies are met. And usually they are. The employment agreement is two years with a non-compete agreement of three years, and a large severance bonus for any employees let-go.

So, which offer would you take? 

There was a time not long ago when you would have looked carefully at the higher offer believing that the liquidity and earn-outs were very doable, but with today's much riskier environment, a recession is unclear. Worst case, you might only receive $10 million for your company. Plus, most people would tend towards the sure thing – the $15 million offer. It's a better structure for today's environment with a shorter period of time you would have to stay in the company, and nice provisions for employees.

There's been a lot of work to get to this point, with lesser bidders that have dropped out. It's decision time. At this point, a logical counter to buyer number one is to have them make the $20 million offer into all cash, with shorter employment agreements and some protection for employees. We'll tell you as we as a professional would handle this in an upcoming session, “How You Negotiate Your Value Up?” The components of structure haven't changed over the year, essentially as this pyramid shows. You can expect to get more from the buyer if you're willing to share the risk. In other words, a buyer can afford to pay you the greatest price if the transaction is all earn-out, essentially payment in the future based on performance meeting some agreed-upon goals. If you want all cash, then the price will naturally be lower.

When COVID hit, no one knew what the effects would be. At that time, we had a quarter of a billion in transactions in the works. Many offers were cash. 

Case Study #2: Deal Shifts Before and After COVID

Now, here's an extreme example to show you how one deal shifted before and after COVID in a matter of just a couple of months. 

In January 2020, we had an offer for a client in the IoT space from a strategic buyer of $9 million at closing with $6.5 million upside earn-out for management over three years, a $15.5 million deal. That's very good as it's a small company.

In March, when the effects of COVID were starting to hit home, the buyer withdrew the offer thinking the seller had panicked. He changed the deal, what we call "re-trading". The new offer, now zero cash at closing and $11 million over three years tied to EBITDA. We were concerned as his representative. Corum's unique in the industry as we don't have a requirement that you accept any offers, nor do we have a minimum. Our contract basically treats us like a shareholder with the same risk. We get paid as you get paid in the same forum. So, if you get all earn-out, we get paid earn-out when you actually receive I. With this situation, we were concerned. We advised to turn the offer down, and they did. We found a better buyer.

Things have normalized since the initial COVID wave, especially after the stock market recovered. Further, demand from buyers is still very strong because of the massive amount of capital available. Private equity firms are still sitting on over $3 trillion in dry powder, with a mandate from limited partners to commit these funds. In fact, they may have been raising some very large new funds. Strategic buyers are flushed for cash as well, with over $1 trillion to invest.

As the most active firm in the tech M&A world, we speak with all buyers on a regular basis, and they still have the strategic imperative to buy to stay competitive. The disrupted tech trends are stronger than ever. If you don't know which ones those are, the ones you should be mapping to, be sure to go to Corum's website to review.

Case Study #3: Changes in Variability – Price & Structure

Let's take a look at an example of how things have changed in the variability, both by price and structure. This example is an international company with revenues just under $3 million. There were three buyers that we're focused on. There was actually some others that got knocked out early. The first bidder was a strategic tech company. The second bidder was a major PE firm in North America pushing for a bolt-on deal with one of their portfolio companies. The third bidder was a smaller PE firm that wanted to make a say platform play and build around it, so they were willing to pay more. Eventually, this third firm would become the top bidder. Here's what happened. 

During the first round of offers, the strategic bidder offered $12 million in cash up front. The larger PE firm offered $12 million, but instead half cash/half earn-out. The third bidder, the smaller PE firm, made an initial offer in the low teens. We went back to all of them and pushed for more. In the second round, the first buyer, the strategic firm, dropped out. We got the second bidder up to a $28 million offer, half cash/half earn-out with some stock considerations thrown in. The third bidder, the smaller PE firm, provided a written offer for just about the same: $28 million plus with cash rollover and earn-out.

We went back again, the third bidder, the smaller PE, came back at $52 million with cash, roll over equity, earn-out, and a seller's note as part of the structure. The second bidder, the large PE firm, couldn't match it. So, our client signed the yellow one with the third bidder. 

So, where does that leave us? 

Buyers are active. We actually have a record number of companies in LOI. Tech is still the place to be. Private equity needs bolt-ons like never before. No one knows how deep or wide the recession will be, what valuations will be like when we get done. The range of deals is much wider both in price and variability.

Let me leave you with some closing thoughts on structure in the Age of COVID. More than ever, you need to go through a global partner search process to create buyer tension, sort out the real bidders, and create the auction environment that would you get the optimal outcome. 

Second, you didn't leave the building of your company a chance, did you? It took focus and hard work. The same applies to selling your company. After all, it's the most important transaction of your life. You take control of the process so you have multiple options and are not at the mercy of one bidder.
Finally, don't miss the window. The buyers want healthy companies. Don't let your company suffer, become healthy. It'll be tough to sell for a good price, let alone the appropriate structure.

Heidi Owen:
Thanks for the great report, Bruce. It sounds like structures are changing, but it's still a good time to test the market.

August 2020 Tech M&A: Public Markets and Corum Index

Heidi Owen:
Finally, let's go to your Tech M&A Research Report for a look at how the Tech M&A sectors are doing.

Corum Research Analyst:
We begin with the public markets, where S&P Tech and NASDAQ set record highs again in July and made encouraging news on earnings from tech behemoths in support from the fed, which will hold interest rates at near zero levels for the foreseeable future. International markets were mixed. Chinese markets recovered this month, while European and Japanese indices showed more volatility.

Our Corum Index showed an increase in year-over-year volume, with exactly the same number of megadeals. PEs found fewer platform deals to do, but more VC smart money kept heading to the exits. So, we conclude the Tech M&A window still remains open and favorable to sellers. 

Tech M&A Megadeal: Sogou-Tencent Acquisition

Corum Research Analyst:
Almost all July megadeals occurred in the Internet sector, taking it up to the highest in value for the first time in years as Chinese search engine, Sogou, was acquired for $2.1 billion at two times revenue by Tencent, a deal that would see Sogou de-listed from the New York Stock Exchange as America increases scrutiny of US-listed Chinese companies. Internet sales multiples rose after falling in March, while EBIDTA metrics are slightly down. 

Tech M&A Deal Spotlights: Classifieds, Travel, & Insurance

Corum Research Analyst:

Scandinavian media group, Schibsted, went on a shopping spree with the $8.9 billion acquisition of Ebay's global classifieds arm, through its subsidiary at Adevinta and Ebay's Danish classifieds business for additional $330 million. Schibsted also bought real estate online marketplace, Oikotie, spending $210 million at almost seven times revenue. OLX Global sold its Central American online classifieds to marketplace and business solution provider, Encuentra24.com, marking the first acquisition in its history. Residential real estate search site, Movoto, was bought by Ojolabs, an AI assistant for real estate to broaden its national footprint.

In travel, airport operator MAG USA snapped up a trio of airport parking, hotel, and transfer booking platforms, AirportParkingReservations.com, ParkSleepFly.com, and ShuttleFinder.com to broaden its parking distribution offerings. TripAdvisor sold its travel website operator, SmarterTravel, to travel booking site, HopJump. Online passenger compensation app, Service Technologies, was purchased by its peer company Claim Compass to develop its flight compensation technology. And travel services online platform, iTraveller, was acquired by booking site, LastMinute.com to expand into the Indian market.

In the insurance field, health insurance marketplace, Benefytt Technologies, was bought for over $420 million by PE firm Madison Dearborn Partners. And consumer-focused insurance broker, Chill Insurance, was purchased by LivingBridge marking its second Irish deal in a week. 

Full digital consumer finance bank, AB Fjord Bank, was acquired by global browser provider Opera to further accelerate its fintech operations in Europe. And digital wealth management company, Personal Capital, was sold for $825 million to retirement services provider, Empower Retirement, to offer improved financial wellness tools to its retail clients.

August Tech M&A Report: Verticals - Megadeals

Corum Research Analyst:
In Vertical, both sales and EBITA multiples held steady as solutions in healthcare, automotive and real estate shaped the M&A landscape last month.

In Mega Deals, GTCR sold its portfolio company Optimal Blue, an online mortgage marketplace, for $1.8 billion to fintech giant Black Knight to boost its origination offerings by merging it with its Compass Analytics business. And AI powered mortgage lending software startup, Homebot, was picked up by ASG, an Alpine-backed vertical SaaS business marking its first foray into the residential real estate software market.

Tech M&A Deal Spotlight:  Real Estate and InsureTech

Corum Research Analyst:
In real estate, pricing tool DashCMA was purchased by real estate tech provider, Inside Real Estate. And real estate search applications developer, IDX Broker, was bought by residential specialist Elm Street Technology. Real estate API provider, HomeJunction, was pocketed by property database Attom Data Solutions to expand its information warehouse with school and neighborhood boundary, crime, points of interest, and demographics data. And real estate CRM and marketing platform, Buildout, was purchased by the Riverside Company.

In insuretech, cloud insurance software solutions provider, Majesco, was acquired for $594 million by Thoma Bravo. And cloud based-solutions maker, Insurity, rolled up underwriting solution developer, Virtual MGA. And workflow automation firm Epic Premier, further expanding its offerings for managing general agent and broker markets.

Tech M&A Deal Spotlight:  Legal, A/E/C, and Automotive

Corum Research Analyst:
In the legal sector, DPS Software, best known for its SaaS based practice management system Spitfire, was acquired by the Access Group, coming on the heels of Access's acquisition of case matter and practice management system Eclipse Legal Systems for nearly $71 million from capita. And Corum client, For the Record, a digital court recording tech company, was purchased by Bison Capital Partners.

In the A/E/C space, Indian AI construction project management company, Pype, was bought by AutoDesk to strengthen AutoDesk construction cloud. And, Event 1 Software, an Excel-based reporting solution for the construction industry, was bought by Insight Software.

M&A activity in the automotive sector continued globally. In France, autonomous vehicle systems expert, eSoftThings, was purchased by equipment manufacturer, Lacroix Group, strengthening its positioning around industrial IoT and AI. Israeli car sensor startup, VayaVision Sensing, was acquired by Canadian ADOS firm Leddar Tech to accelerate the delivery of its open sensor fusion and perception platform. And in Canada, Directed Electronics sold its RSS and connected car solutions business for $11 million to its American competitor Voxx.

M&A Tech Deals: EdTech, Food, and Healthcare

Corum Research Analyst:
In edtech, educational data management and analytics firm, Hoonuit, sold its professional development and training platform to educational content provider, Infobase, completing its suite of educator solutions. In England, student information management system, Pupil Asset, was snapped up by education sector software company, Juniper Education, boosting its school management offerings.

We also spotted some deals in the food industry as Assets365, a British IoT analytic SaaS for the food and drink industry, was gobbled up by Brazilian refrigeration equipment manufacturer, Metalfrio Solutions. Dutch food and beverage ERP maker, DIN Solutions, was bought by Aptean. And Irish manufacturing SaaS, Orbis MES, was acquired by dairy market SEM provider, Dairy.com, in a bid to accelerate its end to end supply chain digitization and expand its global presence.

In healthcare, clinical decision applications developer, PebMed, was bought for almost $25 million by medical education group, Afya out of Brazil. DXC Technology sold its healthcare software business for $525 million to Italy-based Dedalus Group. And patient and device reporting platform, BoxView, was acquired by patient monitoring and diagnostic cardiology solutions company, Spacelabs Healthcare.

Monthly Tech M&A Report: Consumer, Streaming, and Gaming

Corum Research Analyst:
Consumer sector multiples continue to rise, beating last month's record, while EBITA metrics remain stable. In the mobile payment space, New York-based buy-now-pay-later services provider, Quadpay, was bagged for $295 million by its Australian rival, Zip Co, gaining access to the world's largest retail market. Mobile banking and payment app, Stack Fintech, was purchased by Credit Sesame in its first ever acquisition. In Spanish, peer to peer payment app, Verse, was acquired by payments platform, Square, to expand its presence in Europe.

In the streaming space, SoftBank sold its video service, Animehodai, to video on demand and mobile service, U-NEXT. Malaysian digital entertainment services provider, iFlix, sold its multimedia streaming platform to Tencent, which aims to expand its on demand video business beyond China. And podcast pioneer, Stitcher, was bought for $265 million by SiriusXM in the hopes of better competing with Spotify, IHeartMedia, and Apple in the podcasting space.

Finally, in gaming, Swedish game developer, Paradox Interactive, continued its international expansion picking up Finish Iceflake Studios and Paris-based Playrion Game Studio.

That's our report.

Heidi Owen:
Thank you to our research team. Great job, as always. That brings us to the end of this Tech M&A Monthly. Thanks for joining us. We look forward to seeing you again next month. Stay tuned to find out how to get in touch.