Q-News
August 2010
Posted in Mike's Commentary
M&A sources that we follow have all reported that the
second quarter of 2010 was a strong one for technology deals in the U.S.
with both the number of transactions and the value of transactions improving
markedly. Depending on the source, deal
volume increased on a year-over-year basis by between 12% and 24% while deal
value increased between 27% and 43%.
While the difference between the reported sources is significant, the
trend from all sources is definitely upwards, which is very positive given the
current state of uncertainty in the US and concerns over another
economic slowdown or recession. It will
be interesting to see the results of Canadian transactions, particularly since
Canadian sources reported that first quarter M&A activity in Canada showed
its first decline in activity since Q1 of 2009.
During the month we only managed to identify four reported
M&A transactions among private Canadian technology companies:
Sysomos/Marketwire; Xceed Molecular/Axela; Elluminate/Blackboard; and, Syscon
Justice Systems/Sverica International.
Sysomos was reportedly acquired by Marketwire for a figure
in the range of $30 million. Since that
number cannot be confirmed, one has to be cautious about reading too much into
it; but for an early stage revenue company any number north of $10 million
should be considered superb. If the $30
million number is in fact close to the truth then the Sysomos transaction will
rank right up there with Bumptop’s acquisition by Google as one of the top
small cap technology deals of the year.
It is interesting to note that both of these transactions support the
view that successful companies can be built with much less capital, in a much
shorter timeframe than has previously been the case, and can still exit at high
multiples. I for one don’t see either of
these transactions as representing the norm in our early stage technology
universe.
The Blackboard acquisition of Elluminate and Wimba for a combined
total of $116 million is also interesting, with Blackboard reporting combined
metrics for the two companies as opposed to breaking out details
separately. Calgary-based Elluminate was
founded in 2000, had approximately 140 professional staff and more than 1,900
K-12 and higher education clients through the U.S. and 80 other countries. Wimba was founded in 1998, has 100
professional staff and over 700 customers in a similar target market to
Elluminate. Blackboard reported that the
combined contract value for the two companies was $27 million and, if the
transaction were to close early in August, that these two companies would
contribute approximately $6 million to Blackboard’s full year GAAP
revenue. Making simple assumptions puts
the multiple for the transaction at 4.3X contract value or somewhere in the
range of 8X to 10X revenues. With Blackboard
trading at a multiple of 2.9X revenues it’s pretty obvious that this company is
desperate to buy revenue.
One has to be careful in selective use of reported
information since private company transaction metrics are often not disclosed,
are subject to rumors and hearsay and, even if published, may not contain full
disclosure of terms and conditions that could have a significant impact on the
overall value of the transaction.
Nonetheless, it appears that despite the growing wave of uncertainty and
concern that continues to creep into the capital markets, the number of transactions
and valuation multiples are increasing.
For how long is anyone’s guess.
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