Tuesday, June 21, 2016

Company Acquisition Opportunity - Omnichannel Marketing Meets IoT & Analytics

Real Time Consumer Interaction Management Platform

The Company has continuously upgraded the toolset to create the most flexible, comprehensive and cost effective Real Time Interaction Management System (RTIM) available today.  The Company’s CTO has refined this platform over the past several years and the architecture facilitates rapid deployment and  integration. The current production system is deployed at the corporate headquarters of Toro and is being used as a model for user experience management for their dealers.  The platform  provides the rich user experience and  informational content currently available on Toro's Website, directly on  the user's mobile device, driven by proximity and  user initiated requests for additional information.

·         The Omni-Channel Imperative: The next wave for retail marketing pros is Cross-Channel Campaign Management but according to Forrester Research schedule-based CCCM workflows are becoming less effective and need to be replaced  by contextually relevant customer interactions which include advanced analytics, real-time interaction management and digital channel delivery.
·         Time to Market Developed Solution:  This product can either be deployed as a stand-alone solution or integrated into a more comprehensive Cross Channel Campaign Management Solution. The company estimates that owning this technology will provide a 12-18 month time-to-market advantage over developing the technology from scratch.
·         Rapid growth in markets: According to Forrester Research, "In the US market, nearly $1 trillion of US retail spend was influenced by mobile phones.  US shoppers spent $334 billion online in 2015 and another $1.2 trillion in physical stores influenced by digital channels, with this number expected to grow to $1.6 trillion by 2020."
·         The Strategic Acquirer:  Can immediately expand company sales with an improvement in sales and distribution efforts. The product can be deployed as a stand-alone socially integrated software platform built for enterprise. It delivers personalized digital content based on customer’s interactions and environment . It is also an excellent companion product for providers of cross channel marketing campaigns to retail consumers, data analytics and market research vendors, email marketers, and other consumer facing marketing services.
·         Potentially Valuable Patent Pending: Provisional patent was filed as well as a full patent application. The USPTO application number is 14/964,253 entitled INTERNET OF THINGS DEVICE MANAGEMENT PLATFORM with specific features involving Real Time Interaction Management and driving re-targeting marketing on social media - a huge potential area for growth.
·         Elegant Software Architecture and Design: the CTO was instrumental in the design and architecture of Target Stores very successful Cartwheel proximity marketing in-store system and has added numerous additional capabilities to the new Company's platform. The platform's API's and Software Developer Kit make it an ideal stand-alone system or one that could be quickly and easily integrated into an existing suite of consumer marketing capabilities such as CRM, consumer data and analytics, real-time interaction management, Web based marketing, email marketing, and social media.
Please contact me for more information.

Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To learn more about our services for technology business sellers click to visit our Web Site MidMarket Capital

Thursday, June 16, 2016

Venture Capital Alternative for the IT Entrepreneur

Latest article published in Divestopedia. Takeaway: MidMarket, Inc.'s "smart equity" model serves both the startup entrepreneur as well as the lead industry investor. 

If you are an entrepreneur with a small information technology-based company looking to take it to the next level, this article should be of particular interest to you. Your natural inclination may be to seek venture capital (VC) or private equity (PE) to fund your growth. According to Jim Casparie, founder and CEO of the Venture Alliance, the odds of getting VC funding remain below 3%. Given those odds, the six to nine month process, the heavy, often punishing valuations, the expense of the process, this might not be the best path for you to take. We have created a smart equity model designed to bring the appropriate capital resources to entrepreneurs. It allows you to bring in smart money and maintain control. We have taken the experiences of several technology entrepreneurs and combined that with our traditional investment banker merger and acquisition approach and crafted a model that both large industry players and the high-tech business owners are embracing.

Cost of Success Cheaper for Tech Startups

Our experiences in the technology space led us to the conclusion that new product introductions were most efficiently and cost effectively the purview of the smaller, nimble, low overhead companies and not the technology giants. Most of the recent blockbuster products have been the result of an entrepreneurial effort from an early stage company bootstrapping its growth in a very cost conscious lean environment. The big companies, with all their seeming advantages, experienced a high failure rate in new product introductions and the losses resulting from this art of capturing the next hot technology were substantial. Don't get us wrong. There were hundreds of failures from the startups as well. However, the failure for the edgy little start-up resulted in losses in the $1 to $5 million range. The same result from an industry giant was often in the $100 million to $250 million range.
For every Google, eBay, or Salesforce.com, there are literally hundreds of companies that either flame out or never reach a critical mass beyond a loyal early adapter market. It seems like the mentality of these smaller business owners is, using the example of the popular TV show, "Deal or No Deal," to hold out for the $1 million briefcase. What about that logical contestant that objectively weighs the facts and the odds and cashes out for $280,000?

'Smart Equity'

As we discussed the dynamics of this market, we were drawn to one of several equity investment models commonly used by technology bell weather, Cisco Systems, that we felt could also be applied to a broad cross-section of companies in the high-tech niche. Cisco Systems is a serial acquirer of companies. They do a tremendous amount of R&D and organic product development. They recognize, however, that they cannot possibly capture all the new developments in this rapidly changing field through internal development alone.
Cisco seeks out investments in promising, small technology companies and this approach has been a key element in their market dominance. They bring what we refer to as "smart equity" to the high-tech entrepreneur. They purchase a minority stake in the early stage company with a call option on acquiring the remainder at a later date with an agreed-upon valuationmultiple. This structure is a brilliantly elegant method to dramatically enhance the risk reward profile of new product introduction. Here's why:
For the Entrepreneur (Just substitute your technology industry category giant's name for Cisco's below.):
  1. The involvement of Cisco – resources, market presence, brand, distribution capability – is a self-fulfilling prophecy to your product's success.
  2. For the same level of dilution that an entrepreneur would get from a VC, angel investoror private equity group, the entrepreneur gets the performance leverage of "smart money." See #1.
  3. The entrepreneur gets to grow his/her business with Cisco's support at a far more rapid pace than he/she could alone. He/she is more likely to establish the critical mass needed for market leadership within his/her industry's brief window of opportunity.
  4. He/she gets an exit strategy with an established valuation metric while the buyer helps him/her make his/her exit much more lucrative.
  5. As an old Wharton professor used to ask, "What would you rather have, all of a grape or part of a watermelon?" That sums it up pretty well. The involvement of Cisco gives the product a much better probability of growing significantly. The entrepreneur will own a meaningful portion of a far bigger asset.
For the Large Company Investor:
  1. Creates access to a large funnel of developing technology and products.
  2. Creates a very nimble, market sensitive, product development or R&D arm.
  3. Minor resource allocation to the autonomous operator during his/her "skunk works" market proving development stage.
  4. Diversify their product development portfolio. Because this approach provides for a relatively small investment in a greater number of opportunities fueled by the entrepreneurial spirit, they greatly improve the probability of creating a winner.
  5. By investing early and getting an equity position in a small company and favorable valuation metrics on the call option, they pay a fraction of the market price to what they would have to pay if they acquired the company once the product had proven successful.

'Smart Equity' Investment Model Example

Let's use two hypothetical companies to demonstrate this model: Big Green Technologies and Mobile CRM Systems. Big Green Technologies utilized this model successfully with their investment in Mobile CRM Systems. Big Green Technologies acquired a 25% equity stake in Mobile CRM Systems in 2009 for $4 million. While allowing this entrepreneurial firm to operate autonomously, they backed them with leverage and a modest level of capital resources. Sales exploded and Big Green Technologies exercised their call option on the remaining 75% equity in Mobile CRM Systems in 2014 for $224 million. Sales for Mobile CRM Systems were projected to hit $420 million in 2016.
Given today's valuation metrics for a company with Mobile CRM Systems growth rate and profitability, their market cap is about $1.26 billion, or three times the trailing twelve monthsrevenue. Big Green Technologies invested $5 million initially, gave them access to their leverage, and exercised their call option for $224 million. Their effective acquisition price totaling $229 million represents an 82% discount to Mobile CRM Systems 2016 market cap.
Big Green Technologies is reaping additional benefits. This acquisition was the catalyst for several additional investments in the mobile computing and content end of the tech industry. These acquisitions have transformed Big Green Technologies from a low growth legacy provider into a Wall Street standout with a growing stable of high margin, high growth brands.
Big Green Technologies profits have tripled since their original investment, and the stock price has doubled since 2010, far outpacing the tech industry average. This success has triggered the aggressive introduction of new products and new markets. Not bad for a $5 million bet on a new product in 2009. Wait, let's not forget about our entrepreneur. His total proceeds of $229 million are a fantastic five-year result for a little company with 2009 sales of under $20 million.

'Smart Equity' for the Startup Entrepreneur and Industry Giant

MidMarket Capital has borrowed this model combining the Cisco smart equity investment experience with our investment banking experience to offer this unique investment banking service. MMC can either represent the small entrepreneurial firm looking for the smart equity investment with the appropriate growth partner, or the large industry player looking to enhance their new product strategy with this creative approach. This model has successfully served the technology industry through periods of outstanding growth and market value creation. Many of the same dynamics are present today in the information technology and software industries and these same transaction structures can be similarly employed to create value.

Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To learn more about our services for technology business sellers click to visit our Web Site MidMarket Capital

Monday, June 13, 2016

For High-Tech M&A, Strategic Value is Not Automatic

Our latest article posted on Divestopedia:  https://www.divestopedia.com/2/7864/valuation/enterprise-value/for-high-tech-ma-strategic-value-is-not-automatic 
Wow did I get a real world demonstration of the saying, "Beauty is in the eyes of the beholder," recently. If I could rephrase that to the business sale situation it could be, "Strategic value is in the eyes of each unique buyer." We were representing a small company that had an online hospital information system - specifically, a nurse staffing and shift bidding and scheduling application. They had received a handful of sales from some of the early adapters in the hospital industry.

Raising Capital vs. Selling

The owner was at a crossroads. To keep up with their very well funded competitor (some of the Web MD investors launched a competing product), they recognized that they would require a substantial capital investment. They understood that they had a window of opportunity to achieve a meaningful footprint before their much better capitalized competitor established market dominance. They realized that their ability to scale was critical to their ultimate success and felt their best route was to sell out to a strategic buyer.
The good news is that the owner made a very sound decision going this route rather than trying to raise capital. Speed to market was critical and he reasoned that the strategic acquirer route would be more expeditious than the capital raise approach. He recognized that his company, standing alone would not be able to overcome the conservative hospital decision process of going with the well-known, branded, larger vendor.

Identifying the Perfect Buyer

The ideal company buyer is a larger company that provides information technology and software products in the human resources and staffing departments within hospitals. They could plug this software capability into their existing product line and distribution channel and immediately drive additional sales. They would strengthen their position within their accounts and prospects by offering an additional productivity enhancing product that would promote companion product sales. It would also provide a unique door-opener to other major accounts that would want this high ROI product.
With the input from our clients, we located a handful of companies that fit this profile. We were pretty excited at the prospects of our potential buyers recognizing all of these value drivers and making purchase offers that were not based on historical financial performance. The book, memorandum, confidential business review, executive summary, or whatever your investment banker or merger and acquisition advisor calls it, will certainly point out all of the strategic value that this company can provide the company that is lucky enough to buy it.
As part of the buying process, we usually distribute the "book" and then get a round of additional questions from the buyer. We submit those to our client and then provide the answers to the buyer with a request for a conference call. We had moved the process to this point with two buyers that we thought were similar strategic buyers. The two conference calls were surprisingly totally different.

Option #1: The Financial Buyer

The first one included the M&A advisor and the Chief Financial Officer. Their questions really indicated that they were used to analyzing potential acquisitions strictly from a financial perspective. They focused on our client's EBITDA, gross margin, growth rate, cost of customer acquisition and other historical financial metrics. We had a very bad vibe from these guys. They were refusing to recognize that this was a high gross margin product growing in sales to more than 200% year-over-year, and had a higher level of selling and promotional expense than a mature commodity software application. We couldn't determine if they just didn't get it or were being dumb like a fox to dampen our value expectations.

Option #2: The Strategic Buyer

The second call from the other company included the M&A advisor and the HR systems product manager. The whole tone of the questioning was different. The questions focused on growth in sales, pricing power, new client potential, growth strategy, their status at the major accounts, and ownership of intellectual property.

Differences in Purchase Offers

Well, we got the initial offers and they could not have been more different. The first company could not get beyond evaluating the acquisition as if it were moving forward in the hands of the current owner and with his ability to grow the business. Their offer was an EBITDA multiple bid without taking into consideration that the product sales had grown to more than 200% year-over-year and the marketing and promotional expenses were heavily front end loaded. In spite of our efforts to convey that this was a competitive bid situation and that we were in front of their competitors, they refused to be moved off this financial approach to the valuation of this high-potential product.
The second company understood the strategic value and they reflected it in their offer. We had done a good deal of strategic positioning with this buyer. We discussed with them the tremendous potential growth rate they could achieve with this product being incorporated into their product portfolio and being sold into their install base, and prospects through their highly developed distribution channels. We recognized that they would not pay for this potential with all cash at closing. So, we encouraged them to include a significant portion of transaction value in an earnout based on product sales over the next three years.
The financial buyer's first offer was all cash at close. When we compared that offer to the conservative mid-point of our strategic buyer's combined cash and earnout offer, our transaction value was 300% higher with the strategic buyer. This was the biggest disparity between offers I have ever experienced, but it was quite instructive as to the necessity to get multiple opinions by the market of potential buyers. This is especially important where a meaningful percentage of the company's value is contained in their technology and intellectual property.

Establish Strategic Value

There are some companies that, no matter how hard we try, will not be perceived as a strategic acquisition by any buyer and they are going to sell at a financial multiple. Those companies are often Main Street type companies like gas stations, convenience stores and dry cleaners that are acquired by individual buyers. If you are a B2B company, software, high-tech, health care technology company, have a competitive niche, and are not selling into a commodity type pricing structure, it is important to get multiple buyers involved and to get at least one of those buyers to acknowledge the strategic value.

Dave Kauppi is a Merger and Acquisition Advisor and Managing Director of MidMarket Capital, providing business broker and investment banking services to owners in the sale of information technology companies. To learn more about our services for technology business sellers click to visit our Web Site MidMarket Capital