Posts Tagged Mergers and Acquisitions

IPO Downturn May Have Benefits for Tech M&A

Last week saw the first IPO of 2016 for a US-based, VC-backed company as Editas Medicine, a Cambridge, MA-based biotech company went public on the NASDAQ, with its share price climbing 13.8% in the first day of trading (click here for more information).

While this was a welcome development, the turmoil in the markets and the underperformance of several recent tech IPOs have made this a less-than-auspicious time for technology companies to go public.  In fact, January 2016 was the first month without an American VC-backed company going public since September 2011.  This is all the more problematic given the number of VC-backed companies that have raised vast sums of money – becoming so-called “unicorns” in the process – and viewed an IPO as the next logical step.

Nizar Tarhuni of PitchBook wrote an article in which he presented a list of concerns for investors given these circumstances.  One thing that we found particularly interesting was his commentary regarding the effect of the market turmoil and the IPO difficulties on the tech M&A market.  In his view, some private, investor-backed tech companies will look to strategic acquirers to achieve liquidity as an alternative to the public markets.  Furthermore, some larger companies that have already gone public will look at making more acquisitions in order to boost their top-line revenue growth amid declining opportunities for organic user growth and slumping share prices.

We at Q1 Capital agree with many of these sentiments as we have noticed an increase in the level of interest in acquisitions among the strategic acquirers with which we are in contact.  It certainly seems possible that the turmoil in the markets may end up being beneficial to the tech M&A sector in 2016.

Posted in: M&A News

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Waterloo’s Navtech Acquired By Airbus

Waterloo-based aviation software company Navtech is being acquired by Airbus, the European aircraft manufacturing consortium based in France.

Navtech was founded in 1981 and develops and markets flight operations software for the commercial aviation industry.  Prior to the acquisition, it was generating an estimated $42 million in annual revenues and employed roughly 250 people.  The acquisition allows Airbus to move into the aviation software market, providing an opportunity for the company to sell Navtech software to its global customer base as well as to access its talented pool of engineers.  Financial details of the transaction were not disclosed.

To read more about the acquisition, click here.

Posted in: M&A News

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Mike’s Commentary – January 2016 Newsletter

The Report on Business (sourcing Bloomberg) reported that 2015 was another stellar year for M&A involving Canadian companies, with $281 billion of transactions completed, which represented a 34% year-over-year increase from 2014.   Of particular note is the fact that fully $205 billion, or 73%, of the dollar value involved Canadian companies acquiring foreign entities. In the segment of the market that we service ($5M to $75M) the total number of transactions has been declining since 2009, with the hardest hit category being transactions under $5 million.  Fortunately for us, 2015 turned out to be a good year, so no complaints here.

It’s easy to misinterpret reported M&A numbers given that reported numbers for the Canadian M&A market are highly influenced by a small number of mega-deals such as the CPPIB announced acquisition of Homeplus Co. for $8.6 billion or the Brookfield Infrastructure Partners LP acquisition of Asciano Limited for $12.4 billion.

Interestingly, what we have not seen is a measurable uptick in M&A activity from the Baby Boomer founders of traditional businesses who should be looking seriously at making a move now.  (You can read more on this on our website by clicking here.)

As always, the past twelve months saw some interesting developments:

Tier II Brokerage and Accounting Firms Come Downmarket

During the year we saw an increase in the number of larger Tier II brokerage and accounting firms participating in bake-offs for companies with less than $10 million sale values.  As the result of continued stagnation in the public markets it was interesting to see Tier II and Tier III bankers – associates in tow – pitching for private company sale mandates and touting their firms’ deep experience in SaaS M&A transactions and the deep resources that they bring to the table.

Having spent almost 10 years working in Bay Street brokerage firms I know only too well the pressure that partners are under to “cover the nut” when public markets get bumpy.  I also know the vast differences between working and successfully completing a private company transaction versus a public company transaction and patience has never been a virtue of investment bankers.  And last I looked, their clients were not jumping up and down to buy or invest in small cap private companies.

Preparation Continues To Be an Afterthought

Not surprisingly, I would say that almost without exception most of the business owners who approach us about selling their companies are not close to being prepared to start a sale process.  Of course that’s to be expected since these individuals are spending every day running their businesses and preparation for a sale is mostly an afterthought.  Unfortunately, there are no positives to be gained from a lack of preparation so the sooner business owners understand the requirements necessary in time and resources to consummate a successful transaction, the better.  (Again, you can refer to our website to learn more about our thoughts on this matter.)

Everyone is SaaSy!

With the continued shift to SaaS models and the valuation premiums awarded successful companies implementing this delivery model, it’s not surprising that we continued to see two developments:

  1. Small and mid-market companies misunderstanding publicly available information related to valuation metrics in the SaaS space.  Unfortunately, there is a dearth of valuation information on private company capital raises or sale transactions, so sellers look to public company information as comparables.  And while the information can be determined from a close and comprehensive review of data, most buyers and their advisers find it just too easy to use large, public, and liquid SaaS company metrics as the basis for their company’s valuation.  I can tell you that there is a significant difference between revenue multiples applied to a public company generating $500 million in revenue and a private company generating $3.5 million!
  2. Some companies who receive monthly payments from customers as opposed to one time annual payments are attempting to classify these revenues as recurring and SaaS, as though they were  one and the same.  No matter how many times we point out that “monthly billings of revenue” is a revenue recognition methodology and SaaS is a software delivery model, the explanation falls on deaf ears.  Obviously I’m missing the point: Monthly revenue billing equates to SaaS, which equates to a higher valuation, probably in the range of that attributed to  Yeah, now I get it. There’s the door.

Culling the Herd

I believe that 2016 is going to be the year of the “culling of the herd” and valuations for many tech unicorns are going to hit the ground with a very loud and resounding thud, but I’m guessing that’s not news to anyone reading this newsletter.  Unfortunately, the eventual demise will not be pretty, although it will be very much less a public spectacle than the bursting of the 1997–2000 dot-com bubble.

Interestingly, I’ve come across a couple of articles recently stating that a significant devaluation of unicorns is nothing to worry about since, unlike in 2000 when market-crazed retail investors (my words) saw their dreams and savings vaporized, this time it’s really only wealthy venture capitalists who are going to take the hit.  Yes, there is a difference but ultimately losses by venture firms directly impact returns to the Limited Partners who invest on behalf of pension funds, mutual funds, corporations, and ultimately individual investors.  No matter how you look at it, eventually the poor returns flow downhill.

Secondly, venture firms that experience losses on their unicorn investments will become extremely gun-shy.  In fact, we are already seeing a moderate pullback in early stage investing as VCs start to think about keeping their powder dry for what could be a fund raising dry spell while GPs, LPs, and tech CEOs play a game of “pin the blame on the donkey”.  With very choppy public markets and mixed results from recent tech IPOs, taking the companies public, particularly given that there are over 130 unicorns with massive valuations, is simply not going to happen.  Unfortunately for the VCs there probably aren’t enough retail investors willing to be the “greater fool” to monetize their unsupportable valuations.

Furthermore, at current valuation levels, how many public company CEOs will be willing to step in and acquire the new disruptive tech leaders?  Can anyone say “just one more time, let’s replay the AOL/Time Warner deal of the century?” NOT!

For technology companies looking to raise VC capital, the eventual fall of the unicorns will negatively impact the flow of investment capital not unlike mid-2000, the fall of 2001, and late 2007 through 2008.  The cash taps get turned off while everyone retrenches.  If you’re a company looking to raise growth capital, I would suggest doing it sooner rather than later.

While the tone of my comment may appear negative, I actually find many of the developments or trends quite amusing.  Looking back on previous years we see the recurring themes of disruption, disbelief, scrambling, new business models, mining guys becoming tech guys, tech guys becoming mining guys…

Overall, I’m bullish on the state of M&A in Canada, especially for small and mid-sized companies.  Demand for new acquisitions by strategics and private equity groups remains strong, not just based on what we read in the papers but from speaking directly with such acquirers in the course of our work on behalf of our clients.

If you have any questions about the state of M&A, please don’t hesitate to pick up the phone and give us a call.

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Canadian VC Funding in October and November 2015

Courtesy of Techvibes and, here are the lists of Canadian companies that disclosed new rounds of venture capital funding in October and November.

In October, 22 Canadian companies raised a combined $168 million in venture capital, including an impressive $60 million investment in the Waterloo-based drone company Aeryon Labs, which is already backed by the MaRS Investment Accelerator Fund.  Click here for the full October 2015 list.

In November, 19 Canadian companies disclosed a total of $92 million in VC funding, the most prominent of which was a $34 million investment in Toronto’s VarageSale, a platform that allows customers to sell their unused clothing, toys, and household items.    Click here for the full November 2015 list.

Posted in: PE/VC News

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Attributes of Winning SaaS Companies

Over the years we have met and worked with many software companies.  As the software-as-a-service business model has come to dominate the landscape, more and more of them have been SaaS companies.

For those companies that are in the earlier stages of developing and/or rolling out their product or are in the process of transitioning from a licensed or on-premises platform to a SaaS platform, we see a wide range of business models, breadth of management skills, engineering and sales expertise, and industry and domain knowledge.  And while these attributes are wide ranging, they all have one thing in common: valuation expectations are high.  But when we come across companies who have gotten it right, their company or product exhibit many attributes that are common with best-of breed market leaders.  The following list of winning attributes is certainly not all-inclusive, but it’s a good start:

  • The management team is experienced in the industry vertical with a reasonable split of both engineering and sales/marketing talent. Serial entrepreneurs increase the probability of success and we like to see at least 80% of the domain expertise and required background/experience in the hands of the current team.
  • The Company’s product:
    • Has been well designed, is user friendly, comprehensive, and addresses a significant pain;
    • Is a “must have” as opposed to a “nice to have”;
    • Is “sticky” and, once it becomes embedded in a user’s daily routine, makes it difficult to switch away from, either due to cost or convenience…churn is a killer;
    • Has quantifiable customer acquisition costs that are well below the lifetime value of the customer;
    • Is proven to be scalable and robust;
    • May allow outside software developers who see value in the product and the Company’s user base to access APIs that allow them to develop value-add applications to complement and enhance the value of the core product; and
    • Has at least a North American focus with capability of being easily being adapted for international markets.
  • The Company’s market is defined, large, and growing.
  • While competitors in the market can provide market validation, the product is not the fourth or fifth player in an established market. Coming late to the party with a “me too” offering is a recipe for disaster.
  • Management has not predicated its business plan on being acquired by a large, deep-pocketed competitor looking to acquire customers or geographical presence. Companies that were established on being a “local” version of Groupon, expecting to be acquired by Groupon at a premium based on the build or buy rationale, generally learned a tough lesson.

The ability to expand into new verticals can substantially increase the value of the business.  A good example of this would be a content management platform that is initially targeted at social media but can also morph into a valuable tool in the financial services, lead management, or customer engagement space.

More often than not, companies that attract the highest premiums are those where a customer is willing to pay for the product.  Freemium models should have a clear path and strategy of moving users towards a paid, premium model. Obviously, companies like Facebook and WhatsApp prove the value of users versus paying subscribers, but in Canada scale is a huge issue.  We see too many Canadian companies that are simply not growing fast enough and attracting a large enough user base to attract the amount of capital required to be a global player.  Take a look at Brad Feld’s blog The Rule of 40% For a Healthy SaaS Company for some additional thoughts.

Business models based on advertising revenues run the risk of being disintermediated by changes in ad server algorithms or new advertising modalities.  Remember the days of pop-up ads and eyeballs?  We recently met with an app company that saw its daily visits drop by over 70% when Facebook made certain changes to its algorithms and it took almost six months to recover.  Don’t be one of these companies.

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AppCarousel Acquired by AppDirect

September 24, 2015

Congratulations to the AppCarousel management team on their acquisition by San Francisco-based AppDirect.

Having worked with the team at Wmode (now renamed AppCarousel) since 2002, it’s great to see them realize a very profitable exit. We had the privilege of being Wmode’s exclusive banker for a $5 million financing with Teleglobe in 2004 and a $6 million financing with Wellington Financial LP in October 1996.  During the summer of 2015, Q1 Capital was engaged by the Wmode Board of Directors to provide an assessment of two alternative liquidity options that were being considered and was ultimately engaged to provide the Board with a formal Fairness Opinion.

Founded in 2000 as a Mobile Content Distribution Service that facilitated the management, delivery, and payment of mobile internet media, privately held and Calgary-based Wmode licensed its platform to carriers in the US, Canada, and Europe and, with management foresight, adapted to the fast changing mobile content space and moved aggressively into the mobile app management space for cars, TV, and connected devices with the launch of AppCarousel in late 2011.

About AppDirect:  AppDirect offers a cloud service marketplace and management platform that enables companies to distribute web-based services. The global network of AppDirect-powered marketplaces allows businesses to find, buy, and manage the best applications the cloud has to offer. (

Posted in: M&A News

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Chango Sold to Rubicon Project for $122 Million

Chango, the Toronto-based programmatic ad-buying platform with 150 employees, has been sold to Rubicon Project for $122 million, mostly in stock.

This is great news not only for Chango’s founders but also for its investors, who had put $18.6 million into the company since 2010. Canadian funds Mantella Venture Partners, Extreme Venture Partners, Rho Canada, and iNovia Capital had invested in Chango alongside New York-based Metamorphic Ventures.

Rubicon Project has now made seven acquisitions in the ad-tech space.  This deal will give it more capabilities in the “intent marketing” sector, in which ad buying platforms focus on users search queries, behaviour, and contextual data to target them with appropriate online and mobile advertisements.

To read more about the transaction, click here.

Posted in: M&A News

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LinkedIn Buys Careerify

LinkedIn has acquired Toronto-based startup Careerify.  A portfolio company of the technology incubator OneEleven, Careerify’s software platform taps into the social networks (LinkedIn, Facebook, and Twitter) of its users to help identify potential candidates for job openings at the companies for which they work.  Careerify has signed up a number of large clients, including SunGard and Good Technology, and it appears as though LinkedIn is eager to roll out Careerify’s technology to its vast user base.  Terms of the deal were not disclosed.

With this transaction as well as last week’s news of Square buying Kili Technology, it appears as though Toronto-based tech companies are on a roll and attracting the attention of some pretty large and prominent strategic acquirers.

To read more about this deal, click here.

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Square Buys Toronto-based Kili Technology

Square – the mobile payments and merchant services company that has raised nearly $600 million in venture capital since its founding in 2009 by Twitter co-founder Jack Dorsey – has acquired Toronto-based payment processing and authentication solutions company Kili Technology.

Kili was founded by fintech veteran Greg Wolfond and Afshin Rezayee as a spin-out from SecureKey, an identity authentication technology company based in Toronto that was also founded by Mr. Wolfond.  Follow the acquisition, Kili’s operations will remain in Toronto and its office there will become Square’s second Canadian location, after having previously opened an office in Waterloo.  Financial details of the transaction were not disclosed.

To read more, click here.

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IntelliResponse Sold to [24]7

Congratulations to David Lloyd and the rest of the team at IntelliResponse on the sale of their company to [24]7.  Based in Toronto, IntelliResponse was founded in 2000 and is a leading provider of customer experience management solutions for enterprise clients, with a focus on chat messaging and support tools.  [24]7 is also in the customer experience management space and generates roughly $250 million in revenue.  Financial details of the transaction were not made public.

For further information, click here.

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