m&ain tech sector

8/9/2019 M&Ain tech sector

1/6

______________________________________________________________________________________________________________________

______________________________________________________________________________________________________________________

2012FinancierWorldwide.Allrightsreserved.FinancierWorldwidereservesfullrightsofinternationaluseofallpublishedmaterialsandallmaterialisprotectedbycopyright.FinancierWorldwide

retainstherighttoreprintanyoralleditorialmaterialforpromotionalornonprofituse,withcreditgiven.ArticlessubmittedtoFinancierWorldwide

cannotbecopied,reproduced,transmittedorheldinaretrievablesystemwithoutthewrittenpermissionofthepublisher.Submissionofanarticleto

FinancierWorldwidedenotesacceptanceoftheaforementionedconditionsbytheauthorandthefirmheorsherepresents.

1

E D I T E D

V E R S I O N

TALKINGPOINT:M&Ainthetechsector

FWmoderatesanonlinediscussiononM&AinthetechsectorbetweenNatBurgessatCorumGroup,

DavidR.YatesatHunton&WilliamsLLP,andJamesKleinatPenningtonsSolicitorsLLP.

FW:WhataresomeofthemajortrendsyouhavewitnessedintechnologyM&Aoverthelastyearor

so?Haveanyparticulardealscaughtyoureye?

Klein:GlobaltechnologyM&Avolumein2011increasedbyaround11percent.Privateequitydeal

volumegrowthwasstrongthroughout2011;theaggregatevalueofPEbackeddealsin2011grewat

nearlytwicetherateofcorporatedeals,withinvestorsbeingattractedbystrongbalancesheetsand

highergrowthrates.Sincethelastquarterof2011dealvolumeinthesectorhasdeclined,withthevalue

ofdiscloseddealsfallingsignificantly.During2011dealvolumeincreasedacrossthesectorexceptfor

generalsoftware,withthesametrendcontinuingintothefirstquarterof2012,althoughsoftwarestill

hasthehighestdealvolumeofanysector.Withinsoftware,videotechnology(especiallymobile)and

Softwareas

aservice

(SaaS)

deals

increased

and

continued

to

do

so.

Social

media,

ecommerce,

informationmanagement,cloudcomputingandITsecurityalsoflourished.IntheAmericas,PEinvestors

wereparticularlyfocusedoncloudcomputing/SaaSandhealthcaretechnologies.Thesecondhalfof

2011featuredanumberofsubstantialdeals,suchasHewlettPackardspurchaseofAutonomyCorpPLC

for$10bn,MicrosoftsacquisitionofSkypeandGooglesallcashbuyoutofMotorolafor$12.5bn.

GooglesacquisitionofMotorolaisevidenceofthetrendofusingM&Atogaincontrolofvaluable

patents.Indeed,Googlecompletednolessthan21acquisitionsin2011,inadditiontothe27companies

itacquiredin2010.TheUKtechnologysectorsawanumberofoverseasbuyersin2011inparticular

largeUStechnologycorporatesontheUKacquisitiontraillikeIBM,Google,Cisco,AmazonandTwitter

aswellasanumberofdelistings.Thebalancesheetofthetechnologysectorremainssolid.Thetop10

globaltechnologycompanieshavearound$300bnincashandarewellpositionedtofundM&Aactivity

without

the

need

to

call

on

bank

funding.

Burgess:Valuationsareup,buyersarehiringcorporatedevelopmentpersonnelandactivelyseeking

deals,andprivateequitybuyersaremorewillingtoleanforwardandcreditaggressiveEBITDAforecasts

towardcurrentvaluations.2012isreminiscentof2006,thelastbigrunuptoatechM&Apeak.

Yates:Wehaveseenmoreandmoredealsandactivityinanumberoftechnologysectorsthatare

becomingfurtherdefined,includingcloudcomputing,smartmobility(andparticularlymobilepayment

systems)andbigdataanalytics.Cloudcomputing,asithashitthemainstreamandisacceptedbyan

increasingnumberoflargeandsmallbusinessandhomeusers,presentsuniqueopportunitiesforlarge

strategicstoroundoutorexpandtheirserviceofferingsmanyofwhichwerecompletedin2011and

nowhavethefoundationinplaceandforfinancialstopursueindustryspecificmiddlemarkettech

playersto

expand

into

cloud

services

in

that

industry.

Meanwhile,

the

big

data

analytics

sector

has

seen

tremendousactivityasbettervalueisbeingderivedbytheenduserfromtheoutput.Sofarthisyear,

DellsacquisitionofAppAssureSoftwareisparticularlyinterestingsinceitisDellsfirstsoftware

acquisitionsinceitannounceditsnewsoftwaregroupinFebruary.ThemovehighlightsDellsdesireto

movequicklyonthesoftwaresidewithafocusonsystemmanagementandcloudservices.


2/6

______________________________________________________________________________________________________________________

______________________________________________________________________________________________________________________





2

E D I T E D

V E R S I O N

FW:Whatarethedriversofactivityintodaysmarket?Arethereanysegmentsorregionsthatseemto

beofferingawealthofM&Aopportunities?

Burgess:ThepremiumtechM&Adealsoverthepast12monthshavebeendrivenbycrossborder

dynamics,diversification,

and

the

explosive

growth

of

certain

key

markets.

US

companies

have

billions

in

cashoverseas,wheretheycanputittoworkonM&A,ratherthanrepatriatingitandfacingstifftaxes.

Allofthemajorbuyerswetalkto,fromMicrosoftondown,arerefiningtheirstrategiesforbuying

qualitycompaniesoffshore.InthelastfourmonthswehavesoldaFrenchcompanytoANSYS,aKorean

companytoIntel,andhavereceivedotheroffersandindicationsfromUScompanieslookingtoput

offshorecapitaltowork.Diversificationisalsoastrongdriver.Bigtechcompaniesareseekingthe

growththattheycantachieveintheirlegacymarkets.Theyareplacingbetsinnewareas.Thesegments

thataredrawingthemostattentionarecloudanddatacentre,mobile,collaboration,andcustomer

engagement.

Yates:Financingandeconomicconsiderationsaredrivingmuchoftheactivityinthetechsector.The

biggestdrivers

are

the

low

cost

of

borrowing,

cash

on

hand

by

top

technology

companies,

available

capitalofprivateequityfundsandanticipatedtaxincreasesin2013forincomeandcapital

gains/dividendsintheUS.Interestrateshaveneverbeenlower,andwehaveseenthereturnofnear

covenantliteloansfortherightdeals.However,lendersarerequiringmoreequitywhichhasnotbeen

anissueforstrategicorfinancialbuyers.Asforthecoffersofthetop20UStechnologycompanies,they

arefilledwithover$300bnofcashandmarketableinvestments,accordingtoPwCsMarch2012report.

Similarly,privateequityissittingonbillionsofdollarsofdrypowderyearningtobeinvested.Finally,US

sellershaveanundeniableincentivetosellbefore2013totakeadvantageoflowercapital

gains/dividendstaxratesbeforethe2013increasegointoeffect.Inordertoachievethis,manyofthose

dealsarelikelyinprocessalready.EvenbeforetheUSSupremeCourtsdecisiontoupholdtheAffordable

CareAct,thehealthcareindustrywasakeyfocusinthetechsector.TheimplicationsoftheAffordable

Care

Act

on

the

tech

sector

are

undeniable,

and

will

channel

more

focus

and

activity

on

the

tech

sector

toserveandsolveissuesinthehealthcareindustrypresentedbytheAffordableCareAct.

Klein:TechnologyM&Aisgenerallybeingdrivenbysmartmobility,wireless,cloudcomputing,social

networking,andbusinessintelligence/analytics.Anumberofourrecent,andlarger,crossborderdeals

havebeeninthesesubsectors.KeyregionsforM&Aopportunitiesincludecloudcomputing,business

intelligenceandanalytics,ecommerce,socialmedia,informationmanagement,managedservices,SaaS,

ITsecurity,onlinegamingandinternetandmobilevideotechnology.RecentdealsbythelikesofZynga,

suchasitspurchaseofOMGPOPInc.,andGrouponInc.suggestanevolvingmobilecommercestrategy

towardssmallervaluedeals.PEdealmakersappeartobereadyforincreasedgrowthinthesectorin

2012.Theyarefocusedonstrategicacquisitions,drivenbytheopportunitytogainaccesstonew

technologyandproducts,particularlywithinthecommunicationandnetworkingsoftwaresectors.The

Economisthas

estimated

that

PE

investors

are

sitting

on

$370bn

in

dry

powder.

US

buyers

have

been

particularlyinterestedincompaniesinEurope,theMiddleEastandAfrica(EMEA)andalthoughthe

valueofEMEAdealsfellinQ12012,thenumberofEMEAdealsannouncedinQ12012hasincreased.

AlthoughthecurrentaggregatevalueofEMEAdealsisdown,thetrendistowardsoutofregion

companiesbuyingEMEAcompaniesthreeofglobaltop10dealsinQ12012bydollarvalueinvolvedUS

corporateorPEbuyersandUKtargets.TheexpectationisthatEuropeanmarketsarereadytoimprove


3/6

______________________________________________________________________________________________________________________

______________________________________________________________________________________________________________________





3

E D I T E D

V E R S I O N

through2012.

FW:WhatissuesneedtobeconsideredwhenassessingbusinessreadinessfortechM&Atransactions?

Yates:InpreparingforanyM&Atransaction,apartyisseekingtoputitselfinthebestpositionpossible.

Thatincludes

getting

its

books

and

records

in

order

and

conducting

an

internal

assessment

to

identify

issues,andresolvethoseissuesbeforegoingtomarket,beforeothersdo.Sobeyondthestrategicand

economicviabilityassessment,oneofthekeyissuesoftenoverlookedistechnologycompatibilityacross

systems.Asoutsidesystemsareconstantlyevolving,keepingyoursystemuptodateandcompatible

requirescontinuousassessmentsaswellasinvestmentsinyoursystems.Succeedingonthisfrontwould

suggestthatacompanyisproactiveandisflexibleenoughtoadapttodifferentenvironmentswhich

bodewellformaximisingvalue.

Klein:Techcompaniespreparingthemselvesforsaleshouldhavethefollowingcharacteristics.Enhanced

profileinrelevantandappropriatemarkets.Existingpartnershipstobuildcompatibleplatformsand

servicesforacquirers.Earningspredictabilityandthestabilityofearningsforecasts.Maturityof

operationaland

financial

controls

importantly,

PE

firms

can

often

invest

in

more

immature

companies

andhelpthemtoreachmaturity,whichmakesthemmoreattractivetocorporatebuyers.Attractiveness

ofthecompetitivepositionandstrengthofcompetitivebarrierswhichthetargetcompanyhasinplace.

Stabilityandloyaltyofthekeycustomerbaseandabilityofthebusinesstoswitchtodifferentvendors

andsuppliers.Abilityofthebusinesstoextendthecustomerbaseovertime.

Burgess:Duediligenceistougherthanever.Eurozoneregulatorsaremoreprotectionistthanever,

lookingforanyexcusetoavoidlosinghighqualitycompaniestoforeignbuyers.Thereisheavyscrutiny

onrevenuerecognitionandlongtermdeferredrevenue.Companiesinterestedinsellingneedgood

advicetomanagetheseareas,andtopresentthemproperlyandinatimelyfashion.

FW:

IP

assets

are

one

of

the

primary

motivations

for

undertaking

M&A

in

the

tech

sector.

How

can

companiesidentifyandunlockvalueandprotecttheirIP?

Klein:AkeystepforcompaniesinunlockingvalueistofirstidentifyallIP.AninternalIPaudittoidentify

whatIPacompanyhasorislikelytoacquireisrecommended.ThisshouldidentifybothIPthatisowned

bythecompanyandIPwhichthecompanyusesunderlicence.Attentionistypicallyfocusedon

registeredorregistrableIPrights,suchaspatents,trademarksordesigns.Inthetechsector,

unregisteredIPisjustas,ifnotmore,important.AfullIPauditshouldidentifypatents,(including

applications),trademarksandtradingnames,designs(registeredandunregistered),copyright,domain

names,software,databasesandkeyknowhowandtradesecrets.Copyrightanddatabaserightsare

commonlygiveninsufficientattention.Copyrightcanexistinsoftware,softwarespecificationsand

releasenotes,operatingandtechnicalmanuals,marketingliteratureandwebsitecontent.Most

companieshave

databases,

for

example

containing

information

on

customers

and

targets,

in

which

IP

rightsmaywellreside.ProtectionofIPinvolveshavingaclearIPstrategy.ThevalueofIPmaybe

underminedbyinfringementbythirdparties.CompaniesshouldproactivelymonitorandprotecttheirIP.

Withtrademarksitisadvisabletosubscribetowatchingserviceswhichidentifypotentiallyconflicting

marksthatarefiledbythirdpartiessothatthecompanycantakeactionatanyearlystage.Watching

servicesarearelativelylowcost,butextremelyprudent,measure.Takingthesestepscanhelp


4/6

______________________________________________________________________________________________________________________

______________________________________________________________________________________________________________________





4

E D I T E D

V E R S I O N

demonstrateandunlockvalueinIP,andwillalsomakeanacquisitionprocessmuchsmoother.

Burgess:IPcutsbothways.Acompanywithastrongpatentportfoliocanhelpabuyerdefendacritical

area,butalsoopensthemtosignificantriskintheM&Aprocess.Forexample,certainbuyerswhoare

undersiegefrompatenttrollswillopendiscussionswithanNDAthatincludesanoenforcement

provisionfor

patents.

This

stalls

discussions

before

they

can

even

get

started.

We

have

to

choreograph

a

delicatedancetogetthebusinessunitsinterested,whileavoidingstallingoutinlegal.Werecentlysold

twoemergingtechcompanieswithover50patentsintheirrespectiveportfolios.Thepatentsdrove

value,buthadtobemanagedverycarefully.

Yates:IntechM&Atransactions,nothingismoreimportantthanconductingindepthduediligenceon

theunderlyingIPassets.AbuyermustensurethattheselleractuallyownsorhasvalidrightstotheIP

assetssothatthebuyerwillenjoythebenefitofthoseassetsgoingforward.Aprudentbuyerwillensure

thatIPassignmentshavebeenobtainedfromallapplicableemployeesandcontractorsattheoutsetof

theiremploymentorengagement,oraddressconsiderationissuesifsuchassignmentsareenteredinto

afterwardsorinconnectionwiththetransaction.Also,abuyermustaddressissuesarisingfromany

opensource

code

that

may

be

present

in

applicable

software

coding.

A

buyer

can

protect

itself

in

the

purchaseagreementthroughrepresentations,warrantiesandindemnificationrelatingtotheIPassets.

However,inanidealsituation,theremediesinthepurchaseagreementshouldserveasabackstop,and

theduediligenceshouldidentifyissuesanddetermineifthedealshouldproceed.Whilemostevery

partybelievesthattheirIPisuniqueandamarketchanger,abuyershouldalsoconductalandscape

reviewofthesellersindustryandcompetitorstoensurethattheIPassetsareinfactasuniqueand

valuableasthepartiesbelievetheyare.Additionally,alandscapereviewwillprovideabuyerwitha

betterideaofpossibleinfringementissuesandpotentialclaims.Ofcourse,thisissomethingthataseller

shoulddoaswellinadvancesothatitisneithermischaracterisingitselftobuyersnorsurprisedbyany

resultsthatabuyerwoulddiscoverinitslandscapereview.

FW:

How

can

companies

overcome

transactional

challenges

such

as

cyber

security,

privacy

and

data

protection?

Burgess:TherearesomegreatconsumergradefilesharingplatformssuchasDropboxandLivedrive.

TheydontbelongintheM&Aprocess.Weknowofatleastoneprocessthatwascompromisedwhen

buyerandsellertriedtouseaconsumerplatformtomanagethedataroomithasrecentlybeen

reportedthatDropboxwascompromisedonalargescale.Forongoingoperations,emergingcompanies

needtomodeltheirprivacyanddataprotectionpoliciesandinfrastructuresafterthepracticesofthe

large,entrenchedplayers,ortheywillcreaterisksthatthebuyersarentwillingtobear.

Yates:Weareseeingsignificantinvestmentbycompaniesgoingintosecurityanddevelopmentand

implementationofpoliciesandprocedurestomaintainprivacyandprotectclientdataandother

information.The

old

adage

remains

true

today:

an

ounce

of

prevention

is

the

best

medicine.

Compliance

withUSandEUprivacylawsaswellasdatabreachnotificationlawswhichcanvarybyStateintheUS

requiresasignificantcommitmentbyacompany.Failuretomaintainmaterialcompliancewiththese

lawsandregulationsisrarelyincidentalandisoftenasignoflarger,systematicissues.Notonlyforsake

oftheongoingbusinessofthecompanybutparticularlyinadvanceofgoingtomarketonatransaction,

acompanymustassessitssystemsandimplementnecessarychangesasthecostforfailurein


5/6

______________________________________________________________________________________________________________________

______________________________________________________________________________________________________________________





5

E D I T E D

V E R S I O N

connectionwithatransactioncanliterallybemultiplesofanydamagesornotificationexpenses.

Klein:InanM&Atransactiondocumentsareoftensharedbetweenasellerandapurchaserusingan

electronicdataroom.Itisimportantforbothpartiesthatareputabledataroomproviderisused,

providingclearlevelsofsecurityanddataencryption.Partiesshouldretaincontrolovertheirdocuments

bylimiting

access

to

specified

members

of

the

other

partys

team,

including

advisers.

Parties

can

also

considerrestrictingtheabilityofdataroomuserstomakecopiesofthedocuments.Partiesshouldbe

awarethatinthecontextofanM&AtransactiontheymustcomplywiththeDataProtectionAct1998

(DPA)foranydatasharing.Finesofupto500,000canbeimposedforseriousbreachesoftheDPA.

OftenintheM&Acontext,theprospectivepurchaserwillwantinformationaboutthetargetcompanys

employees,includingpaymentinformationandbenefits.TheInformationCommissionersOffice(ICO)

hasprovidedsomeguidanceinitsEmploymentPracticesCodetoassistemployerstocomplywiththe

DPAinthisscenario.Businesstoconsumerbusinessesshouldmakeitclearintheirprivacypoliciesthat

customerinformationcouldbesharedifthecompanyoritsbusinessisacquired,andthesellerand

purchasershouldworktogethertoagreeonthebestwaytocommunicatecompletionofthedealtothe

customer.

FW:Lookingahead,howdoyouexpecttechM&Aactivitytounfoldfortheremainderof2012andinto

2013?

Yates:M&Ainthetechsectorshouldremainstrong.Whileitoutpacedmanysectorsoverthelastfew

yearsandmanyforecastedthatthesectorwasduetoslowsomewhatthisyear,theeconomic(low

borrowingcostsandavailablecash)andtax(increasedtaxratesin2013)driversshouldcontinuetopush

dealsinthetechsector.Dealvolumeinthemiddlemarketshouldcontinuetobestrong,butdont

expecttoomanymegadealsinthesecondhalfof2012asthatwillkeeptheoveralldealvalueincheck.

Klein:Therearetentativebutoptimisticsignsofgrowth.ContinuedcautioninEuropeduetoconcerns

about

the

stability

of

the

euro

may

inhibit

activity,

however

the

low

cost

of

borrowing

and

anticipated

2013capitalgains/dividendstaxincreasesforUSsellersmeansthatweshouldseethemdivest

themselvesofbusinessesbefore2013.ThedrypowderbeingheldbyPEfirmsmaydriveincreased

technologyprivateequityM&Ain2012/13.Alsofactorintothisanticipatedchangestotaxationregimes

forcorporategainstaxintheUKin2012/13,whichmayencouragefurtherinvestmentin2012.Further,

expectenhancedinformationsecuritysolutionsinvestmenttodevelopalongsidethegrowthofthe

socialmobilecloud.Thiswillinvolvepossiblysmallervaluedeals,ratherthanbigticketdeals.Cloud

computing,socialnetworking,mobileappsandbigdatawillcontinuetobekeytargets.

Burgess:2012and2013willlookalotlikethelastM&Apeakin2006and2007.Therewillbean

acceleratingwaveofconsolidationintheconsumerandenterprisemarkets,butitwillpeak.Itisonlya

questionofwhen.

NatBurgessispresidentofCorumGroup.HejoinedCorumin1996andbringsadiversebackgroundin

technologyM&Aandlaw.WhilewiththeEnforcementDivisionoftheUSSecuritiesandExchange

Commission,MrBurgesshelpedidentifyandbuildcasesagainstsecuritiesfraudschemes.Withthe

StrategicDevelopmentDivisionofMorganStanleysM&Agroup,heworkedoncrossborderacquisitions


6/6

______________________________________________________________________________________________________________________

______________________________________________________________________________________________________________________





6

E D I T E D

V E R S I O N

ofUSandEuropeancompaniesbyJapanesefirms,andonfinancingsbylargeJapanesepubliccompanies.

MrBurgessmovedtoMorganStanleysTokyooffice,wherehereporteddirectlytothePresidentof

MorganStanley,JapanLtd.andfocusedexclusivelyoncrossborderM&A.Hecanbecontactedon+1

(425)4558281x206orbyemail:[email protected].

DavidR.

Yates

is

apartner

at

Hunton

&

Williams

LLP.

His

practice

focuses

on

international

and

domestic

publicandprivatemergersandacquisitions,divestitures,investmentsandstrategictransactions.Mr

Yatesalsoadvisesprivateequityfundsandtheirportfoliocompaniesinalltypesofprivateequity

transactions.HisclientsincludeabroadrangeofpubliclyownedandprivatelyheldUSandforeign

companies.Hecanbecontactedon+1(404)8884238orbyemail:[email protected].

JamesKleinleadsthecorporateteaminPenningtonsLondonoffice.Hejoinedthefirmasapartnerin

2011,havingpreviouslybeenapartnerwithatop20lawfirm.Hehasstrongexpertiseinthetechnology

sectorandcoheadsPenningtonstechnologyteamwhichhasastronginternationaloffering(in

particulartheUSandIndia).JamesregularlyvisitstheUSandhasveryrecentlyreturnedfromseparate

visitstoSiliconValleyandNewYork.Heactsforadiverserangeoftechnologycorporates,fromOMBs

andSMEs

through

to

companies

listed

on

AIM

and

the

FTSE

index.

James

also

has

astrong

track

record

advisingonprivateequitytransactions,havingactedformanagementteamsandmanyinstitutional

housesonnumerousmidmarketprivateequitydeals.Hecanbecontactedon+44(0)2074573207orby

email:[email protected].

m&ain tech sector

Documents