Thrilled to be on PowerPitch today with Tyler Mathison

January 15th, 2014

Check it out at 1:20 ET: http://yhoo.it/1aoo4CR.
We will be talking with Carvana. Are you in? Or out?

Whenever I read that companies acquire startups primarily for “talent” – I think to myself wouldn’t it be cheaper to simply hire away tha…

December 5th, 2013

Answer by Nat Burgess:

In theory it is cheaper to hire people individually.  In practice, when the job market gets competitive as the economy improves (2000, 2007, 2013), large companies with specialized needs have no choice but to acquire teams through acquisitions.  This is because a) being late to market is fatal in fast growth markets.  It takes time to recruit a team one member at a time.  A well-led team that has already been established to solve your problem is an instant offense.  b) Senior talent is increasingly tied up in startups.  We have gone through enough cycles now that senior, sophisticated players know that they will ultimately make more money and be in a better position if they go with a good startup rather than a "quarry job" at a big company.  And, the cost of admission for startups has gone way down with advent of AWS, cloud, offshoring, etc.  Not to mention the resources many of these players have already banked through prior ventures.  I have acted as advisor on a half dozen acqui-hire transactions, including deals with Google, Microsoft, Linkedin and others.  In summary:
> When a startup is in trouble and really needs an exit, Acquihire generally isn't an option.  I get a lot of these calls, and my advice is to pivot, try again, build a better position in a more promising market.  Ironically it is usually the funded, successful startup that gets approached.
>Not all acqui-hires are created equal.  If the deal is opportunistic and tactical, the valuation may actually be based on a "hire vs buy" analysis.  If the deal is truly strategic, then the seller will have more leverage.  Buyers are reluctant to ascribe too much value to team members, because doing so creates a bad precedent that de-leverages the in future negotiations – so often the value of the IP becomes the center of the negotiation, even though the buyer really wants the team.

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Drones vs Bras – battle of the headlines

December 5th, 2013

This could be classified as a follow-up to my post on event analysis. Is the market efficient? Does the media raise awareness and knowledge among investors? Or is all the world but a stage, and the audience just players an a battle of bras and drones?

What is event study approach (related to M&A profitability measurement)?

December 4th, 2013

Answer by Nat Burgess:

The event study question is timely (December 2013) because we are in an M&A bubble, where acquisition announcements drive stock price – similar to in 2000 and 2007.  Rather than analyze actual returns from M&A after the fact, the event study method focuses on the implications of the market reaction to an announcement on returns.  This requires an important assumption: what would the share price of the acquirer (or acquirer and seller) have been if the transaction had not occurred?  A premium (or discount) to this assumed chard price is then calculated by comparing the assumed price to the actual, post announcement price. 
If an M&A deal will create efficiencies and drive down pricing and returns, the M&A event should reduce the valuations of the involved companies, and the other companies in their sector that are subject to the same market dynamics.  Conversely, if an event will drive growth and profits, the event should raise valuations.
The analysis assumes an efficient, knowledgable market that prices equities intelligently.  In the tech M&A market, where I have operated for the last 20 years, this cannot be safely assumed.  In fact, companies go to great lengths to try convert complex technology strategies into rainbows and unicorns that they can fly over Wall Street.   Therefore the event study approach is, in my opinion, unreliable in tech.

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What are the pro’s and con’s of Microsoft acquisition of NOKIA?

December 4th, 2013

Answer by Nat Burgess:

The $7.2 billion identity crisis; should MSFT be a hardware company, a software company, or both?  Selling software at 90%+ margins to drive low margin hardware created by third parties is the model that turned MSFT into the behemoth they are today.  That model won't work any more; the "computing" experience is commoditized, and customers now make purchase decisions based on innovation and integration on the hardware platform itself.  If we accept this as fact, then the Nokia acquisition delivers a mission-critical "pro"; for less than they paid for Skype, MSFT gets one of the world's best mobile hardware teams.  Note also that over 70% of MSFT cash is held offshore and would be taxed if repatriated.  This effectively gives them a built-in discount when they acquire offshore assets like Skype and Nokia.

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What are the long term effects of Google acquiring Waze?

December 4th, 2013

Answer by Nat Burgess:

For Google to drive their ad network down to the local level, delivering geo-targeted ads, offers and assistance in real-time, they need the majority of Android users to "ALLOW" location to be enabled on their devices.  If consumers think too hard about the implications of this choice (giving up a comprehensive, permanent record of everywhere they have been, how they got there, and someday, what they were doing), they will opt out.   A service like Waze swings the pendulum in the other direction by creating a clear incentive to share location – namely, to become part of a virtuous data cloud wherein everyone mutually benefits from sharing location data.

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How do you value an IT company from an M&A perspective?

December 4th, 2013

Quora – Valuing an IT company

Answer by Nat Burgess:

Valuation methodology depends on the maturity of the business, the market segment, and the revenue model. 
The first question is growth stage.
An early stage, innovative startup that has developed new technology for a promising market will be valued based on the revenue opportunity they have created.  That value can be expressed as discounted cash flow.  It can also be expressed replacement value times a "time to market" advantage derived from having the technology early in a market window.  However I have yet to find a reliable methodology for defending a time to market factor.  A mid-stage, high growth IT company is often valued on a revenue multiple, because revenue is the best measure of their market penetration and growth, and profits are not yet important (assuming they are investing heavily in growth).  A mature company will be valued on EBITDA multiples.
Segment matters as well.
IT services companies are valued on EBITDA, scaling up or down based on growth, margin, customer concentration, predictability of revenue, and desirability of skills.
Revenue model also has an impact.
SaaS businesses are generally valued on top-line growth, because revenue in the current period represents only the tip of the revenue iceberg; the lifetime value of a SaaS customer is much bigger than the revenue they deliver today.  The valuations of publicly traded SaaS companies moves in lockstep with their top-line revenue growth.

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RSA SECURITY CONFERENCE – San Francisco, February 2013

February 27th, 2013

I used to speak at the conference every year, but deal flow and administrative duties got in the way. After a 4 year absence I was able to go down and spend a day at this year’s event. Not much has changed, and that is a good thing. It is one of the best run conferences I have frequented in any industry, with high-quality attendees, presenters and exhibitors. It is one of the few tech conferences routinely attended by CEOs. Art Coviello’s vision remains alive, even after the integration with EMC.

Based on my conversations several dozen companies, I walked away with a couple of central themes.

First, the vendor promise has moved from outright protection, to risk management. Vendors used to sell on FUD; “Buy or stuff or else you will get hacked, and it will be catastrophic!”. Now the pitch is, “you have already been hacked. You are being hacked every day. You need tools to prioritize your vulnerabilities and risks, so that you can make intelligent decisions about what to fix first.”

Traditional modes of protection – perimeter, host – are still driving some innovation. I was very impressed, for example, with Barracuda’s positioning of their Next Generation Firewall. Barracuda is definitely a company to watch. Several years ago I wrote a white paper on EMC’s acquisition of Data Domain, a paper that was immediately picked up by the Wall Street Journal. It was basically a best practices piece (available here) highlighting the discipline and hard work that made the acquisition a success. Well, that same team – BJ Jenkins, ex- EMC, and Rod Matthews, ex-Data Domain – are now guiding the ship at Barracuda. Good things to come.

So there is still opportunity on the perimeter, but the Wild West and the big opportunity today is in malware prevention. We expect fast, aggressive consolidation in that area.

The shift from outright protection to risk management is evident on the mobile front as well. The coolest company I met in mobile was Appthoria. They test mobile apps to find out how malicious, vulnerable, or secure they are. They give a detailed analysis of the app’s behavior, open APIs, etc., so that IT managers can create and enforce policies that will minimize the risk of compromised BYOD and corporate mobile devices.

The desktop security guys are moving to mobile as well. Stephen Cobb from ESET told me about an Android hack that he and his team have been demoing. A game is downloaded to the phone. Along with the game comes an application, designed to trigger off opening the first app, that will copy the entire contents of your phone to a remote server. Email is a gold mine for hackers. An app that makes your message store available can reveal trade secrets, credit card numbers, social security numbers, and other data that has value in the hacker bazaar.

There are markets for passwords, credit card and social security numbers. There are markets for compromised computers and phones. Payment is by credit cards, PayPal, or any of several alternate, untraceable cash proxies. Cybercrime happens at a distance from its victims. The information that is ultimately used to commit a crime was probably stolen and sold two or three times first, creating even more distance. Tibetan Buddhists don’t mind eating meat, so long as they don’t witness or commit the killing. Someone else takes care of that, creating a karmic buffer from the killing. A cybercriminal can take similar comfort the layers of transactions between them and their victims.

Android devices are wide open to hackers. IOS is more locked down. Blackberry has finally recognized that security is one of their best features, and has launched a new phone that caters directly to the IT manager and security officers of enterprise companies. At RSA I had a chance to play with the Blackberry Z10, not yet released in the US, and I was very impressed.

The Blackberry Z10 is an enterprise dream come true. Hold a finger on the screen, and then drag down. Two tabs appear at the top – work and play. Click on work and you are in a secure, encrypted partition of the phone, managed by the Blackberry Enterprise Server. Information can’t move between partitions. When they hang up their briefcases and bow ties, workers can then tap “play” and enjoy angry birds to their hearts’ content. Blackberry went as far as to provide tools and a runtime environment that makes it easy to port IOS and Android apps to the Blackberry platform. Kudos to RIM for finally emerging from their stupor, playing to their strengths, and playing well with others.

Having just experienced the Blackberry before sitting down with Stephen to here his stories of mobile hacking, I was curious to hear about how he manages risk in his own mobile life.

“What phone do you use,” I asked Stephen, expecting him to pull a hardened blackberry out of his pocket. “I just bought an Android,” he said. “I’m not paranoid. I just try to live like an ordinary person and see what kind of challenges come up.”

I started talking about themes and quickly went down the rabbit hole. There is so much investment and opportunity in security today that it is hard to step back and see the bigger trends. Let me try again:

1) Risk management, not outright prevention
2) Mobile
3) Importance of the channel.

Regarding the channel, one investment theme that PE firms should consider would be to buy companies with some success selling direct, and shift them over to the channel. I spoke with several firms that are run by direct guys who don’t know how to go to the channel, and are missing perhaps their most important growth opportunity.

How to react to an inbound M&A approach:

February 27th, 2013

Focus only on the buyer that made the approach. Cooperate fully, respond quickly to information requests, dedicate resources to helping them fully understand the company so that they can the best decision. Acquiesce to their request that you not open up dialog with other suitors. . .

WRONG!

Sorry buyers, but this hurts you as much as it hurts your target. If a target follows this approach, they will lose focus, the questions will never stop, and the deal will eventually die of exhaustion. Shareholders cannot make an informed decision or react intelligently to an offer unless they understand their options. Buyers who fight the hardest to prevent other bidders from entering the arena are typicall low-ballers trying to take advantage of the situation

A buyer who makes the first approach has earned the right to be preemptive. If they stall or play games, they lose that right.

Cooking in the Nordics – Two closings, more to come

February 27th, 2013

We have closed two transactions in Finland – the A&W divestiture from Glaston to Constellation, and the sale of Fastrax, also in Helsinki, to U-Blox. Companies in the Nordic region definitely punch above their weigfht. Rovio is making headline news every day, but there are hundreds of other companies worth watching. We are managing three additional transactions in the region that should close this year.