Image courtesy of randalldsmith
As we move into 2017, industry pundits are almost unanimously calling for a strong year for both M&A and IPO markets.
According to Global Capital Confidence Barometer conducted by E&Y, the general consensus among corporate executives is buoyant and full of optimism on the prospects for 2017 with 57% of executives expecting to pursue acquisitions within the next 12 months and 49% of those surveyed already having more than five deals in the pipeline.
While we certainly look forward to 2017 being a very positive year, we’re thinking that for companies north of the border “interesting” and “unsettling” may turn out to be better descriptors.
On the positive side:
- 2016 finished on a very strong note with M&A announcements fueling expectations for a very strong 2017;
- Certainly moving into 2017 capital market sentiment continues to be bullish;
|Down Jones Industrial Average (Trailing 5 Year to January 15, 2017)
||NASDAQ Composite Index (Trailing 5 Year to January 15, 2017)
|S&P 500 Index (Trailing 5 Year to January 15, 2017)
||S&P/TSX Composite Index (Trailing 5 Year to January 15, 2017)
- Stock prices continue to trade close to record-high levels, in large part due to the potential of: lowered US capital gains and estate taxes; the possibility of reduced taxes to incentivize US corporations to repatriate offshore cash holdings; a less restrictive regulatory environment; and, future stimulus spending;
- Cash balances continue to grow on strategic buyers’ balance sheets, there is plenty of undeployed capital at private equity funds and debt financing is readily available;
- While the stock markets drive higher, overall GDP growth 0f 3.0% will continue to drive the necessity for companies to make strategic acquisition to maintain competitive positioning and meet market expectations. Acquisition drivers will include increasing digitalization, changing business models (SaaS, Blockchain), entering new markets and pursing product extensions;
- Interest rates, despite the forecast for an increase, remain near or at historic lows;
- CAD/USD exchange rate continues to make Canadian companies attractive to US acquirers;
So how do we see the upcoming year unfolding?
- The uncertainty experienced during the run-up to the US election ended in November. Unfortunately, a new type and level of uncertainty is now beginning to take hold. Only time will tell as to the ultimate impact of the new Trump presidency, regime and GOP majorities but I’m pretty confident that you can count on three things: Canadian exporters could find it a very rough go during the next four years; markets hate uncertainty and associated risk so we can expect to see increased volatility, and traders are going to make tons of money in volatile markets.
- It’s anyone’s guess as to the near and long-term impact of impending NAFTA discussions. While it appears that the main focus could be on the US/Mexico relationship it is difficult to see where there is any upside for Canadian companies in any renegotiation.
- Probably more important than any NAFTA discussion, the possibility of the US implementing a “border adjusted tax” which would apply to goods imported by US companies would present huge challenges for Canadian exporters. Not only would such a policy have a devastating impact on Canadian exporters, I believe that it would also reduce US acquirer interest in Canadian companies while at the same time forcing more Canadian companies to look south of the border to acquire companies to protect market share and revenues. In effect, the pool of potential buyers of Canadian companies could get smaller.
- Large private companies and their institutional (VC and Corporate) investors have been sitting on the sidelines waiting impatiently for the right “market” to take their companies public. The first pure technology company out of the box in 2017 would have been AppDynamics (APPD-Nasdaq), an application performance management software company looking to complete a US$132 million offering priced in the $10 to $12 range. Founded in 2008, AppDynamics reported revenues of $206 million for the 12-months ending October 31 2016 and is looking to value the firm on IPO at $1.76 billion or 8.5X trailing revenues. Unexpectedly, Cisco stepped in just the day before AppDynamics was to set its IPO pricing and acquired the business for US$3.7B or approximately 18X trailing revenues. So much for our first technology IPO test case of the year…
- IPOs in both the US and Canada should rebound but we would expect to see valuations moderated towards the lower end of company and the bankers’ expectations, but this may change as a result of the large premium to IPO price that strategic buyers, like Cisco, was willing to pay for AppDynamics.
- With the current S&P 500 PE Ratio in the range of 26.1 (historical mean 15.6), the Price to Sales Ratio in the 2.0 range (historical mean 1.4) and the Price to Book Value at 2.97 (historical mean 2.75) valuations for the broader market are high relative to historical levels. Near term valuations appear poised to rise but in longer term one should expect to see valuation levels decline closer to “normal” levels.
|S&P 500 Price to Earnings Ratio
|S&P 500 Price to Sales Ratio
- Cybersecurity will become a “more” dominant theme in 2017 (duh!)
- Sub-$50 million acquisitions will continue to dominate the number to M&A transactions;
- Sluggish growth for companies competing in the small to mid-markets may lead to owner fatigue and accelerate their interest in looking for an exit;
- The “biological imperative” (read – getting older) will continue to drive baby boomers to look for exits;
- Slow organic growth rates drive buyer’s acquisition strategy.
And lastly, let’s go out on a limb!
The Canadian public markets appear to have an appetite for strong technology companies à la Shopify, less so for public tech companies like ViXS Systems (VXS-T). There is a dearth of large cap Canadian public technology companies and I’m pretty sure that many investors want to see if Hootsuite, Vision Critical, Desire2Learn and BuildDirect present great investment opportunities. Looking into my crystal ball I see Hootsuite filing for an IPO but at a valuation less than $1 billion, BuildDirect, which has drawn the attention of Goldman Sachs with Co-founder Jeff Booth being named one of Goldman’s 100 Most Intriguing Entrepreneurs of 2016 also filing for an IPO, Vision Critical taking additional steps to prepare for an IPO but not in 2017 and Desire2Learn not going the public market route but is instead acquired.
Shopify, the Ottawa-based ecommerce platform that is one of the biggest success stories in the Canadian technology sector these days, announced that it is acquiring San Francisco-based Kit, which offers an online marketing assistant for ecommerce portals. Terms of the deal were not disclosed.
Kit was founded in 2013 and had raised an undisclosed amount of seed capital from Technicolor Ventures and Visionnaire Ventures in 2014. Its tools allow online retailers to utilize Facebook to market their products and communicate with customers.
Shopify has been around since 2004 and is regarded as one of the leading Canadian tech companies. Its platform offers a simple way to set up and maintain an online store with a full suite of ecommerce tools that enable things like payment processing and inventory management. The company went public last year on the NYSE and TSX, raising over $130 million. This is the company’s third acquisition but its first since becoming publicly-listed.
To read more about the transaction, click here.
Aimetis, a Waterloo-based company that developed a suite of software products to manage security surveillance, is being acquired by Senstar for a reported US$14 million. Aimetis was founded in 2001 and received $5 million in growth capital from Covington Capital in 2010. Its software is used in sectors such as retail, government, transportation, and healthcare and enables users to analyze their surveillance video footage and supports camera networks and other security infrastructure.
Senstar is the Canadian division of Magal Security Systems, a provider of security, safety, and site management platforms for airports, seaports, borders, prisons, and other institutions in over 75 countries. It is based in Yehud, Israel and is publicly traded on the NASDAQ and Tel Aviv Stock Exchange.
For more information, click here.
Kanata-based middleware company Solace Systems has sold a majority stake to Bridge Growth Partners, a private equity firm in New York City that makes investments in the technology and financial services sectors. Terms of the transaction were not disclosed.
Solace Systems was founded in 2001 and manufactures and sells networking software and hardware equipment that enables cloud computing, e-commerce, big data, and other capabilities. According to the company’s founder, it has raised $80 million in growth capital from institutional investors since its inception. It plans to use the new capital from Bridge Growth to fund its international expansion strategy and its sales initiatives in the transportation, aviation, and gaming industries.
You can read more about the transaction here.
Toronto-based emoji maker Bitstrips is being acquired by Snapchat, the popular photo and video sharing mobile app, for a reported $100 million.
Bitstrips allows users to create personalized emojis and avatars that can be inserted into short comic strip sand shared via social media. It was founded in Toronto in 2007 and raised over $18 million in capital from investors that included Kleiner Perkins Caufield & Byers and Horizons Ventures, the investment fund belonging to Hong Kong billionaire Li Ka-shing. The Bitstrips app has been downloaded over 11 million times.
This is fantastic news for one of Toronto’s best known tech companies in the social media space. It will be interesting to see if Snapchat keeps the current team and office in place and uses this acquisition to create a presence in Toronto.
To read more about the transaction, click here.
Hootsuite, the Vancouver-based social media management company, announced it will be making its tenth acquisition since its founding in 2008. The company plans to buy Sales Prodigy, a mobile app that assists corporate clients with their sales efforts by monitoring the social media activities of their sales leads.
Sales Prodigy is also based in Vancouver and was founded in 2014. It does not appear to have raised any significant growth capital. Terms of the transaction were not disclosed.
Hootsuite is one of the best known and most highly regarded Canadian tech companies these days. It has raised almost $250 million in growth capital from some of the largest and most infuential VC funds in the US and Canada. It is nice to see that it has been deploying some of this capital towards acquisitions, especially considering at least half of the companies it has acquired have been Canadian.
To learn more, click here.
Influitive, a Toronto-based company that has built a software platform for customer advocate marketing, made two acquisitions in March. At the beginning of the month, the company announced that it was acquiring Ironark Software, a company that developed apps for home organizing and business task management. Less than three weeks later, Influitive announced that it is acquiring Triggerfox, which has built a mobile platform for relationship management. The financial details of both transactions were not disclosed. Both of the acquired companies are also based in Toronto.
Influitive is one of Toronto’s hottest new tech companies. It was founded by Mark Organ, who previously founded the marketing automation software company Eloqua, which was sold to Oracle for over $870 million in late 2012. The company has raised close to $50 million in growth capital from an array of Canadian and US venture capital funds.
After raising an $8.2 million Series B round at the end of February, Mr. Organ indicated that some of this capital would be deployed as acquisitions, and in March he made good on that promise. It was encouraging to see that Influitive targeted other Toronto-based companies rather than seeking out software and talent further afield.
To read more about these transactions, click here and here.
gShift Labs, which has developed a web analytics platform for digital marketers, announced that it is acquiring Halifax-based InNetwork, an influencer marketing technology platform. Terms of the deal were not discussed.
Founded in 2009, gShift is based in Barrie, Ontario, just north of Toronto, and has raised $2.1 million in venture capital from GrowthWorks Capital and Brightspark Ventures in addition to $1 million in seed catpial from the MaRS Investment Accelerator Fund and the Ontario Centres of Excellence. The company’s technology monitors and provides insights into a brand’s web presence and search engine optimization efforts. It is used by over 10,000 brands in 22 countries.
InNetwork was founded in 2012 and has raised just under $700,000 from angel investors and Innovacorp. It’s technology allows users to create and oversee influencer marketing campaigns, in which companies engage people with strong social media presences to become ambassadors for their brands online.
To read more, click here.
Ampifii, a Toronto-based company whose software platform enables users to manage their own sponsored social amplification campaigns, has been acquired by Postmedia Network Canada Corporation, the Canadian media company that includes the newspaper properties once owned by the former Canwest Global Communications Corporation and the Sun Media Corporation.
Details of the transaction were not disclosed. Ampifii was about a year and a half old at the time it was acquired and had not raised any significant growth capital. It was formed as part of a native ad campaign project for Postmedia, so this transaction seems to make perfect sense and may represent more of an “acqui-hire” in order to formally bring the team and the technology in-house.
To read more about the transaction, click here.
Talentbuddy, a Vancouver-based platform that assists and trains programmers using problem solving challenges and other techniques, has been acquired by Udemy, a San Francisco-based online learning platform that offers thousands of courses in a wide variety of topics and disciplines to millions of students around the world.
Talentbuddy, through its parent company Sunnytrail Insight Labs, had previously raised a seed round of capital from BDC Venture Capital, HIGHLINEvc, InitioGroup, and VersionOne Ventures after it was founded in 2013. Udemy, founded in 2010, has raised $113 million from a wide array of investors, including VCs such as Insight Venture Partners and Norwest Venture Partners. Despite this impressive sum, this is Udemy’s first acquisition to date. The financial details were not disclosed.
To read more, click here.